MANAGEMENT PRINCIPLES
T Brevis and M Vrba
(editors)
CONTEMPORARY
MANAGEMENT
PRINCIPLES
Editors
5#SFWJTr.7SCB
Contemporary management principles
First edition 2014
Print fourth edition 2014
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Contents
Preface .......................................................................................................................................................
About the authors ................................................................................................................................
viii
ix
PART I: INTRODUCTION
Chapter 1 The evolution of management theory ..........................................................................
1.1 Why managers need to study the history of management theory .................................
1.2 The classical approach to management ............................................................................
1.3 The behavioural approach ................................................................................................
1.4 Quantitative management theory .....................................................................................
1.5 The quality movement .......................................................................................................
1.6 Systems approach ..............................................................................................................
1.7 Contingency theory ...........................................................................................................
1.8 The information revolution ...............................................................................................
1
3
4
10
14
15
17
20
21
Chapter 2 The management process ................................................................................................
2.1 Managers and management ...............................................................................................
2.2 Management and the management process .....................................................................
2.3 Levels and areas of management ......................................................................................
2.4 The role distribution of managers .....................................................................................
2.5 Managerial skills ..................................................................................................................
2.6 Learning to manage successfully ........................................................................................
28
29
30
36
39
40
43
Chapter 3 Features of contemporary organisations and new management challenges .........
3.1 The changing face of contemporary organisations ..........................................................
3.2 Variables influencing contemporary organisations to change ..........................................
3.3 The classic model of the formal organisation ...................................................................
3.4 The new organisation model .............................................................................................
46
48
49
55
56
PART II: MANAGEMENT IN A CHANGING ENVIRONMENT
Chapter 4 Composition of the management environment ..........................................................
4.1 The importance of the management environment and its impact on managerial
decision-making ..................................................................................................................
4.2 Management theories and the management environment ..............................................
4.3 The structure and dynamics of the management environment ......................................
4.4 Analysis of the management environment .......................................................................
69
71
72
74
83
iii
Chapter 5 Managing organisational change and individual stress .................................................
5.1 Forces of organisational change ........................................................................................
5.2 The dimensions of change .................................................................................................
5.3 Resistance to change ..........................................................................................................
5.4 Overcoming resistance to change .....................................................................................
5.5 Approaches to change .......................................................................................................
5.6 Areas of organisational change ..........................................................................................
5.7 Managing work stress ....................................................................................................
90
92
96
97
98
101
103
104
Chapter 6 Corporate culture ..............................................................................................................
6.1 The concept of culture ......................................................................................................
6.2 Organisational culture ........................................................................................................
6.3 The levels of culture ..........................................................................................................
6.4 The different cultures evident in a business organisation .................................................
6.5 The elements of culture ....................................................................................................
6.6 Types of culture .................................................................................................................
6.7 Changing organisational culture .........................................................................................
116
118
118
120
122
124
126
128
Chapter 7 Power, politics, conflict resolution and negotiation ....................................................
7.1 Power ..................................................................................................................................
7.2 Interests ..............................................................................................................................
7.3 Influence tactics and taking political action ........................................................................
7.4 Conflict management .........................................................................................................
7.5 Negotiation ........................................................................................................................
134
137
144
145
148
152
Chapter 8 Business ethics, corporate social responsibility and corporate governance .........
8.1 The components of ethical business .................................................................................
8.2 Business ethics ...................................................................................................................
8.3 Corporate social responsibility .........................................................................................
8.4 Corporate governance ......................................................................................................
8.5 The King Report on Governance for South Africa ..........................................................
159
162
163
168
173
175
Chapter 9 Workforce diversity ..................................................................................................
9.1 Dimensions of diversity .....................................................................................................
9.2 Misconceptions of diversity ...............................................................................................
9.3 What is diversity? ...............................................................................................................
9.4 What is workforce diversity? .............................................................................................
9.5 Reasons for the increased focus on managing workforce diversity .................................
9.6 The need for diversity management in South Africa .......................................................
9.7 Managing diversity ..............................................................................................................
9.8 Diversity training ................................................................................................................
185
187
189
192
194
196
197
199
204
iv
CONTEMPORARY MANAGEMENT PRINCIPLES
Contents
PART III: PLANNING
Chapter 10 Principles of planning .............................................................................
10.1 The nature and importance of planning ............................................................................
10.2 The benefits and costs associated with planning ..............................................................
10.3 Types of plan ......................................................................................................................
10.4 Barriers to effective planning .............................................................................................
10.5 Overcoming barriers to effective planning ........................................................................
211
213
218
220
226
227
Chapter 11 Strategic management ..........................................................................
11.1 Strategy and strategic management ..................................................................................
11.2 The strategic management process ..................................................................................
233
235
237
Chapter 12 Decision-making ....................................................................................
12.1 Decision-making and the management process ...............................................................
12.2 The relationship between problems, problem-solving and decision-making ..................
12.3 Types of managerial decisions ...........................................................................................
12.4 Decision-making conditions ...............................................................................................
12.5 Decision-making models ....................................................................................................
12.6 Group decision-making ......................................................................................................
12.7 Techniques for improving group decision-making ............................................................
12.8 Tools for decision-making under various decision-making conditions ............................
259
261
262
262
263
266
269
270
274
Chapter 13 Information management .....................................................................
13.1 Information management and the decision-making process ............................................
13.2 Managing information for sustaining competitive advantage ............................................
13.3 The basic functioning of an information system ...............................................................
13.4 Characteristics and costs of useful information ................................................................
13.5 Organising information systems .........................................................................................
13.6 Classification of information systems ................................................................................
13.7 Developing an information system ....................................................................................
282
284
286
287
289
290
291
298
Chapter 14 Project management .............................................................................
14.1 The philosophy and meaning of project management .....................................................
14.2 Perspectives of project management ................................................................................
14.3 Key role players in project management ...........................................................................
14.4 The project management process .....................................................................................
305
306
309
312
314
CONTEMPORARY MANAGEMENT PRINCIPLES
v
PART IV: ORGANISING
Chapter 15 Principles of organising .........................................................................
15.1 Organising, organisation and organisational structure .....................................................
15.2 The importance of organising ...........................................................................................
15.3 Designing an organisational structure ...............................................................................
15.4 Principles of organising ......................................................................................................
15.5 Authority ............................................................................................................................
15.6 The departmentalisation approach to organisation structure .........................................
15.7 Designing jobs that motivate .............................................................................................
15.8 Delegation ..........................................................................................................................
339
342
343
344
345
349
354
361
363
Chapter 16 Value chain and e-business ....................................................................
16.1 The internal value chain .....................................................................................................
16.2 Optimising the value chain ................................................................................................
16.3 Industry-specific value chains ............................................................................................
16.4 The value system ...............................................................................................................
16.5 E-business ...........................................................................................................................
373
374
377
378
379
381
PART V: LEADING
Chapter 17 Individual behaviour in organisations ...................................................
17.1 Individual personalities .......................................................................................................
17.2 The Big Five personality dimensions .................................................................................
17.3 Concepts about personality and work .............................................................................
17.4 Perceptions .........................................................................................................................
17.5 Emotional intelligence ........................................................................................................
17.6 Values ..................................................................................................................................
17.7 Attitudes .............................................................................................................................
17.8 Mars model of individual behaviour and results ...............................................................
17.9 Individual output ................................................................................................................
393
396
398
399
401
403
405
407
408
411
Chapter 18 Work groups and teams .......................................................................
18.1 Groups and teams ..............................................................................................................
18.2 Reasons why people join groups ......................................................................................
18.3 Types of organisational group ...........................................................................................
18.4 Stages in group and team development ............................................................................
18.5 Variables that influence group and team behaviour .........................................................
18.6 Organisational teams .........................................................................................................
18.7 Reasons why organisations use teams ..............................................................................
420
421
422
422
424
426
434
437
vi
CONTEMPORARY MANAGEMENT PRINCIPLES
CONTENTS
18.8 Types of team ....................................................................................................................
18.9 Developing individuals into team members .....................................................................
438
439
Chapter 19 Principles of leading ...............................................................................
19.1 Towards a definition of leadership ....................................................................................
19.2 Leadership and management ............................................................................................
19.3 The components of leadership .........................................................................................
19.4 Leadership approaches ......................................................................................................
19.5 Contemporary approaches to leadership .........................................................................
445
446
448
449
450
457
Chapter 20 Workforce motivation ...........................................................................
20.1 The nature of motivation ..................................................................................................
20.2 The motivation process .....................................................................................................
20.3 The motivation theories ....................................................................................................
20.4 Money as a motivator ........................................................................................................
20.5 Designing jobs that motivate .............................................................................................
468
469
469
471
485
486
PART VI: CONTROLLING
Chapter 21 Principles of control ...............................................................................
21.1 A definition of control .......................................................................................................
21.2 The importance of control ...............................................................................................
21.3 The control process ...........................................................................................................
21.4 The levels of control ..........................................................................................................
21.5 Functional area control systems ........................................................................................
21.6 Characteristics of an effective control system .................................................................
493
496
497
497
499
507
513
Index .............................................................................................................................................
517
CONTEMPORARY MANAGEMENT PRINCIPLES
vii
Preface
Contemporary management principles comprises 21 chapters covering a wide range of traditional and
contemporary management principles and concepts and many examples illustrating how successful
managers of 21st century business organisations apply theory to practice in their organisations. The
underlying themes of the book are the changes and challenges facing modern organisations and the
functions that managers perform to manage their organisations in an environment characterised by
major, on-going change. Relevant opening case studies illustrate the practical application of the theoretical
concepts discussed in the book and specific learning objectives provide a map of the essential management
concepts that business management students need to understand and apply in the organisations where
they work.
The first chapter in Part I sets the stage for the remaining chapters, tracing the development of
management theory from the Industrial Revolution to the Information Revolution, which paved the way for
globalisation and the emergence of a global economy. In the second chapter, we introduce the reader to
the management process and the concept of the organisation as an open system, in continuous interaction
with its environment. The last chapter in Part I describes the emergence of new forms of organisation,
which are developing in response to a rapidly changing business environment and are characterised as
being flatter, more flexible, networked, global and more diverse than the traditional bureaucratic form of
organisation. The business environment is the topic of discussion in Part II, which comprises six chapters,
each focusing on a different aspect of managing organisations in a changing environment. The reader is
first introduced to the components of business management and then to the different variables in the
internal (micro-) environment of organisations, such as corporate culture, the role of power, politics,
conflict resolution and negotiation, managing business ethics, corporate social responsibility, corporate
governance and sustainability and the managing of workforce diversity. Parts III, IV, V and VI focus on
the traditional management functions of planning, organising, leading and control, with the emphasis on
how managers apply these functions in contemporary organisations in order to achieve organisational
goals. In addition to the traditional topics of planning, strategic planning, decision making and information
management, a chapter on project management enhances the discussion on the various aspects of goal
setting and planning. A chapter on value chain and e-business adds further value to the book as it promotes
an understanding of the many aspects of contemporary business organisations.
The authors
December 2013
viii
About the authors
Prof Tersia Brevis is an associate professor in Business Management and the Chair of the Department of
Business Management in the College of Economic and Management Sciences at the University of South
Africa.
Mari Vrba is a senior lecturer in Business Management in the Department of Business Management at the
University of South Africa.
Louis Botha is the founder and managing director of Davis & Dean South Africa, a rapid skills development
company registered with the Project Management Institute.
Prof Hellicy C. Ngambi is a professor in Business Leadership and the Vice-chancellor at Malungushi
University in Zambia.
Dr Minka Woermann is a lecturer in Business Ethics and Philosophy in the Department of Philosophy
and the Head of the Unit for Business Ethics and Public Integrity in the Centre for Applied Ethics at
Stellenbosch University.
ix
x
PART I
Introduction
Chapter 1
The evolution of
management theory
Mari Vrba
PART I: Introduction
OPENING CASE
The capitalist philosophers
Through the ages, relatively few individuals rose
above their contemporaries to shape the course of
history in the context of the specific social, scientific
and political settings of their time. Albert Einstein,
Franklin Roosevelt – and closer to home, Nelson
Mandela – are just a few individuals who achieved
such status.
Frederick Winslow Taylor is another example
of an achiever whose name appears in history
books. Taylor is widely considered to be the father
of scientific management and although others
made substantial contributions to this approach to
management, it is Taylor’s name that is closely linked
to the metaphor of a factory as a ‘machine’ and
the mission to find the ‘one best way’ to manage.
‘Taylorism’ captivated the attention of management
theorists in the United States of America, where
Taylor’s influence was (and still is) substantial, but
also in countries ranging from Germany and the
Soviet Union to India and China1.
Taylor was an engineer and a colourful
personality who, by the time of his death in 1915
had gained the reputation of being an ‘enemy of
the working man’2. A committee of the United
States House of Representatives summoned him to
defend his system of management in 1911.
Conversely, in the context of the historical
setting at the time, when the average educational
level in the USA workforce was three years, Taylor’s
ideas instigated a revolution that enabled workers
to earn middle-class wages and achieve middle-class
status. His ideas resulted in greater productivity,
greater purchasing power, and the highest standard
of living ever seen in the world3.
Supporters of Taylor and his ideas say that he
is the most popular target of modern management
theorists to criticise. One critic described him as
the ‘epitome of anachronistic management studies
and dehumanising time-motion studies’4. This is an
unfortunate presentation of Taylor’s work because
the fundamental aim of his philosophy was to
replace rule-of-thumb opinions with scientific study
in a search for the best way to manage complex
organisations. Ironically, this is precisely the goal
2
CONTEMPORARY MANAGEMENT PRINCIPLES
that contemporary managers strive to achieve.
The human problems resulting from Taylor’s
scientific method have been obvious ever since its
inception. Taylor himself recognised the limitations
of the scientific knowledge at his disposal and he
understood that he was dealing with a human
problem as well as with materials and machines.
He readily admitted that ‘… the motives which
influence men warrant serious studying’5.
Viewed in their historical context and judged
with reference to the intellectual framework
and assumptions of the period in which he lived,
Taylor’s ideas still have relevance for contemporary
managers6. One example is fast-food chains that
serve hamburgers and other standardised products.
The food chains organise work in the smallest
detail; they analyse the total process of production,
determine the most efficient procedures, and
allocate specialised duties to people trained to
perform them in a very precise way7.
It is true that scientific management discounted
the value of human creativity. What sets current
thinking apart from earlier management trends is
the recognition that people are the source of the
competitive advantage and the heart of the survival
instinct that drives the most successful organisations
in the twenty-first century. Outside units, including
remote divisions, suppliers, and even customers,
influence the decisions of top management, and
teams or work groups are an integral part of
organisational activity8.
Globalisation, the increasing complexity of
markets and production systems, and the exchange
of ideas across cultures have all helped the
converging of the humanistic and scientific tracks
of management9. This trend is meaningful as it also
recognises that, for capitalism to succeed globally,
it must be bearable for society – markets are
sustainable because social and political institutions
underpin them. The success of capitalism will
continue to rest on the example set by business
organisations, and increasingly by that of global
organisations. A new band of twenty-first
century managers are shaping and developing
these organisations’ views and leadership10.
CHAPTER 1 Evolution of management theory
LEARNING OBJECTIVES
The purpose of this chapter is to provide an overview of the history of management theory, from the
Industrial Revolution to the point where the world has entered another revolution, the Information
Revolution, which developed in the context of a global economy. The objective of studying this
chapter is to enable you to:
1. Explain why managers need to study the history of management theory.
2. Discuss the important contributions made by Frederick W Taylor, Max Weber and Henri Fayol to
management theory.
3. Distinguish between human relations, human needs, motivation, and the integration phases of the
behavioural approach to management.
4. Explain why the quantitative approach to management emerged and how it led to the focus on
quality.
5. Discuss the contributions of W Edwards Deming, Joseph M Juran and Philip B Crosby to the
quality approach to management.
. Discuss the systems approach to management and explain how systems thinking inƃuenced the
Ƃeld of cybernetics and Peter 5engeos ideas on the learning organisation.
. Discuss the contributions of Tom Burns, )eorge M 5talker, Paul .awrence, Jay .orsch, Joan
Woodward, and Alfred Chandler to the contingency approach to management.
8. Describe the three revolutions that took place since the late eighteenth century and explain how
the Information Revolution changed the business environment of organisations.
1.1 WHY MANAGERS NEED TO STUDY THE
HISTORY OF MANAGEMENT THEORY
When studying the evolution of management theory, one recurring
theme is that management theorists have developed numerous
responses to the same basic management question: What is the best
way to manage an organisation? The reason why this question elicited
so many different responses is that one should see the proposed ‘best’
ways to manage organisations in the context of the social, political,
economic, technological, international and ecological forces that affect
organisations (and society) at any specific time. As these forces change,
so do the theories on management, adjusting to changing circumstances
in the environment.
This chapter reviews the major approaches to management since the
beginning of the twentieth century. A study of these approaches is the
basis for understanding the practice of management today.
Management theorists distinguish between six various approaches
to management that had evolved since the 1890s, namely the classical,
behavioural, quantitative, systems, contingency and quality approaches
to management. Many of these major approaches still influence
management thinking today, but towards the end of the previous
century, new approaches emerged because of the major changes
occurring in the environment since then.
LEARNING OBJECTIVE 1
Explain why managers
need to study the history of
management theory.
CONTEMPORARY MANAGEMENT PRINCIPLES
3
PART I: Introduction
8IZEPXFTUVEZIJTUPSZ ‘Today is not like yesterday, nor will tomorrow be like
today, yet today is a synergism of all our yesterdays,
and tomorrow will be the same. There are many
LEARNING OBJECTIVE 2
Discuss the important
contributions made by
Frederick W Taylor, Max
Weber and Henri Fayol to
management theory.
lessons in history for management scholars, and
the most important one is the study of the past as
prologue’11.
1.2 THE CLASSICAL APPROACH TO
MANAGEMENT
The Industrial Revolution had a considerable impact on the development
of management theory. The Industrial Revolution created extraordinary
growth, resulting in the development of unique problems in Europe and
the United States. In response to these problems, three management
theories emerged, collectively known as the classical approach to
management. The premise of the classical approach to management is
that organisations are rational systems that should operate in the most
efficient manner possible. The three management theories are scientific
management, bureaucratic management and administrative (or process)
management and they focus on different aspects of the organisation:
1. Scientific management – production efficiency
2. Bureaucratic management – the structure of organisations
3. Administrative management – the process and principles of
management.
1.2.1 Scientific management
UEKGPVKƂEOCPCIGOGPV
scientific management focused
on production efficiency
A few individuals had a strong influence in the TDJFOUJųDNBOBHFNFOU
area: Frederick Taylor, Frank and Lillian Gilbreth, Henry Gantt, Harrington
Emerson and Morris L Cooke.
Frederick W Taylor (1856–1915)
Theorists often credit Taylor as the originator of the scientific
management era, where in fact his crucial role in the development of
scientific management was that he was the personification of an idea:
‘Scientific management was not an invention; it was a synthesis, a
stage in evolving management theory. Taylor became the focal point
for an idea. Scientific management was more than methods and
time study; it was a much deeper philosophy of managing human
and physical resources in a technologically advanced world where
people had gained greater control over their environment than
ever before. The Industrial Revolution had provided the impetus;
Taylor provided the synthesis.’12
Taylor advocated five simple principles13:
1. Managers should carry the responsibility for the planning, design
and organisation of work and workers should implement the work.
This principle of separating the planning and design of work from its
execution is the most criticised and far-reaching element of Taylor’s
approach to management.
2. Use scientific methods to establish the most efficient way of doing
work and design jobs by specifying the exact way the worker should
do it.
4
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 1 Evolution of management theory
3. Select the best person to do the work.
4. Provide training to the worker to do the work.
5. Monitor the performance of the worker to make sure that it is in
accordance with the prescribed procedures and that the worker
achieves the specified results.
Organisations first applied Taylor’s principles on the factory floor, but
it spread to offices where the implementation of organisation methods
and work-study projects were used to design work into specialised jobs
and frequent performance evaluation.
Although opponents of his ideas often accused Taylor of dehumanising
and misusing workers because of his focus on designing jobs to strict
performance standards, it remains the foundation of modern industrial
engineering. At the heart of Taylor’s philosophy was his belief that
organisations and their employees benefit from better designed jobs,
more systematic work methods, higher productivity and efficient
management processes. Underpinning his ideas of linking performance
to reward, Taylor introduced the concept of piece-rate work whereby
the organisation pays a worker for each piece of work the worker
completes. The underlying principle of this idea is that workers who
work harder earn more money and therefore are motivated to be more
productive.
Taylor’s contributions include the development of job analysis; time
and motion studies; standardisation of processes; efficiency techniques
and productivity measurements to track labour costs. He also advocated
the provision of rest periods for workers and introduced the idea of
training for both managers and employees.
Henry L Gantt (1861–1919)
Gantt, a consulting industrial engineer, focused his research on control
systems for production scheduling and developed the still relevant Gantt
chart for scheduling multiple overlapping tasks over a specific period.
Gantt emphasised the importance of people and their motivation at
work and developed motivational schemes that emphasised the greater
effectiveness of rewards for good work (rather than penalties for poor
work). He developed a pay incentive system with a guaranteed minimum
wage and bonus system for people on fixed wages. Gantt was one of the
first to recognise the role of the quality of leadership and management
skills in effective industrial organisations.
Frank Bunker Gilbreth (1868–1924)
Frank Gilbreth was a pioneer in the field of motion study. His research
focused on eliminating waste, reducing fatigue, and increasing worker
productivity by finding ‘the one best way to work’. He identified 17 work
elements and called them therbligs (his surname spelled backwards).
His rules for motion economy and efficiency provide guidelines on planning
jobs for maximum achievement by using minimum effort, through the
effective interaction between job, worker and working environment14.
CONTEMPORARY MANAGEMENT PRINCIPLES
5
PART I: Introduction
Lillian Evelyn Moller Gilbreth (1878–1972)
While her husband Frank was doing motion studies, Lillian Gilbreth, an
industrial psychologist, studied individual workers and their performance
under stressful conditions. She advocated standard working days,
scheduled breaks and normal lunch periods. She brought about the
cooperation between scientific management and applied psychology – a
crucial step in the evolution of management thinking and practice15.
Morris L Cooke (1872–1960)
Morris L Cooke introduced the concept of efficiency to educational and
municipal organisations and added fresh ideas to scientific management
to develop cooperation between labour and management. He
advocated more participation by workers and he appealed to leaders to
assist organised labour16.
While Taylor and people such as Gantt, the Gilbreths, and Cooke
concentrated their work on improving the efficiency of individual
workers, another pioneer of management theory during the scientific
management era, Max Weber, focused his attention on organisational
design.
1.2.2 Bureaucratic management
DWTGCWETCVKEOQFGN
a rational method of structuring
complex organisations
EJCTKUOCVKEQTICPKUCVKQP
organisations with charismatic
leaders who have exceptional
powers or qualities
6
Max Weber (1864–1920) was born in Germany. He qualified in law and
then became an academic. He remained an academic for the rest of
his life, having an interest in the historical development of civilisations
through studies of the sociology of religion and the sociology of
economic life.
Weber developed the CVSFBVDSBUJD NPEFM which is a rational
method of structuring complex organisations. His aim was to define an
ideal system where positions were well defined, the division of labour
was clear, objectives were explicit, and a clear chain of authority existed.
Weber’s major contribution to the study of organisations and their
management was his theory of authority structures, which led him to
characterise organisations in terms of the authority relations within
them. This stemmed from his interest in the question of why individuals
in organisations obey commands. Weber made a distinction between
power (the ability to force people to obey) and authority (where those
who receive orders obey them voluntarily).
Under a system of authority, subordinates perceive the issuing
of orders by superiors as legitimate. Weber distinguished between
organisational types according to the way in which they ‘legitimise’
authority.
He identified three pure types of legitimate (ie socially acceptable)
authority, which he labelled charismatic, traditional and rational-legal17.
Charismatic organisations
The first pure type of organisation, according to Weber, is the
DIBSJTNBUJDPSHBOJTBUJPO. These are organisations with charismatic
leaders who have exceptional powers or qualities. Weber used the
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 1 Evolution of management theory
Greek term ‘charisma’ to mean any quality of individual personality
whereby the leader is set apart from ordinary people by possessing
exceptional power or qualities. In this type of organisation, the authority
in the organisation stems from the characteristics of one person, which
is the basis of command. According to Weber, organisations managed
by a charismatic leader have a built-in instability because the question
of succession always arises when the leader leaves the organisation. It
is unlikely that another charismatic leader will be present, and so the
organisation loses its charismatic form and has to revert to one of the
remaining types18.
Despite Weber’s sketchy outline of charismatic leadership, his ideas
so fascinated researchers, scientists and sociologists that they still explore
the sources of a leader’s charisma. Research on the topic culminated
over four decades to reveal what we know today about charismatic and
transformational leaders (see Chapter 19).
Traditional organisations
Weber’s USBEJUJPOBM PSHBOJTBUJPO is one where subordinates obey
people who occupy a formal position of authority. In such organisations,
the basis of authority is a belief in the legitimacy of the status of the
people who exercise authority and implies that because a person
occupies a formal position of authority, subordinates should obey him
or her. In Weber’s view, this type of authority is not efficient because it
is based on custom and not on competence.
Rational-legal organisations
The concept of rational analysis led to Weber’s third type of authority
system, the SBUJPOBMMFHBM one, with its bureaucratic organisational
form. As a basis for his theory, Weber compared the bureaucracy with
the traditional organisation. He concluded that bureaucracies are more
powerful and more responsive to authority because of four elements,
namely differentiation, integration, constraints and incentives19:
1. Differentiation. An intensive division of labour, a hierarchy of
authority, and a clear separation of official duties from personal
interests and obligations.
2. Integration. Bureaucracies have written rules and regulations,
codified procedures for selection and advancement of officials, and
a specialised administrative staff charged with maintaining these
rules and procedures.
3. Constraints. Strict subordination requires all actions to be
justified in terms of the larger purposes of the organisation, the
norm of impersonality requires detachment and objectivity and
advancement is contingent on both seniority and performance.
4. Incentives. The prospect of a lifetime career, salaries paid in cash
rather than in kind, and social esteem attached to the status of the
official.
VTCFKVKQPCNQTICPKUCVKQP
an organisation where
subordinates obey people who
occupy a formal position of
authority
TCVKQPCNNGICN
rational-legal organisations have
a bureaucratic form
The major characteristics of a bureaucracy are summarised in Table 1.1
on the next page.
CONTEMPORARY MANAGEMENT PRINCIPLES
7
PART I: Introduction
Table 1.1: The major characteristics of a bureaucracy
Organisational activity
Related management activity
Formulating goals, decision-making
and using power
r
r
r
r
r
top-down goal-setting
centralised power
preHerence Hor larger units
leaders control, monitor and set oDLectiXes D[ using Hormal autJorit[
strict JierarcJ[
%ontrolling tJe ƃow oH resources
into and out oH tJe organisation and
estaDlisJing Doundaries
r
r
r
r
r
r
tJe organisation as a unit oH anal[sis
Doundaries are clearl[ speciƂed
reliaDle and replicaDle
Xertical
rule-Dased
assets linked to organisational units
&iHHerentiating Hunctions and roles,
estaDlisJing duties and rigJts including
goXernance
r
r
r
r
r
specialised roles
clear role deƂnitions
tJe remoXal oH uncertaint[
relatiXe permanence
eHƂcienc[-orientated
Source: Adapted from: Child, J. & McGrath, R.G. 2001. Organizations unfettered: organization form in an information-intensive
economy. Academy of Management Journal, 44(6):1135–1148.
Weber’s bureaucratic management theory made a substantial
contribution to the classical management approach. The bureaucracy
remains a popular form of organisation for organisations functioning
in a stable environment. However, in an environment characterised by
change and instability, the very strengths of the bureaucracy expose
its weaknesses. Max Weber himself, when describing the strengths of
the bureaucracy, unintentionally described precisely why it is not an
optimal form of organisation for organisations functioning in unstable
environments – characteristics such as hierarchical control and authority
relations, relatively fixed boundaries, and top-down authority render the
bureaucracy unsuitable for such environments20.
The bureaucracy, in the words of Max Weber:
‘The fully-developed bureaucratic mechanism compares with other
organisations exactly as does the machine with non-mechanical
modes of production. Precision, speed, no ambiguity, knowledge
of the files, continuity, discretion, unity, strict subordination,
reduction of friction and of material and personal cost – these are
raised to the optimum in the strictly bureaucratic administration’21.
1.2.3 Administrative (or process) management
The third classical theory is administrative management developed
the functions of managers within by Henri Fayol. This is the first attempt to define the functions of
managers within a framework of clear guidelines or principles. The
a framework of clear guidelines
significant contribution of administrative management is to define the
or principles
general duties or functions of managers within a framework of clear
guidelines or principles.
Henri Fayol (1841–1925), a French engineer, was one of the most
influential management thinkers of the early twentieth century. Fayol’s
administrative management
8
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 1 Evolution of management theory
work complements that of Taylor as it contains the first significant
attempt to develop principles for top-level management, and to analyse
the different activities that comprise the managerial role22.
Fayol used the term ‘administration’, which is often translated into
English as ‘management’. He viewed administration (or management) as
one of six functional areas of management, the others being technical
operations, commercial operations, financial operations, security and
accounting. Fayol considered administration to be the most crucial
element for the success of the organisation.
Fayol was among the first to see administration as a process rather
than just a set of rules or structures. He identified five activities (or
management functions, in today’s management language, as we explain
in Chapter 2), comprising the administrative (or managerial) role:
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Fayol considered these activities as the work of the administrator (or
manager, as we use the term today) rather than specific actions in
themselves. He focused on the organising activity and divided it into
16 duties, most of which could be classified in today’s language as the
human resources responsibilities of line management. He proposed that
14 principles of administration govern the five activities of management
and the 16 duties of the organising activity. Fayol’s 14 principles of
administration are23:
1. Division of work. By dividing the work into smaller elements and
assigning specific elements to specific workers, they can perform the
work more productively.
2. Authority and responsibility. Authority is necessary to carry out
managerial responsibilities. Managers have the authority to give
orders to subordinates to do the work.
3. Discipline. Members of the organisation should respect the rules of
the organisation to ensure its smooth operation.
4. Unity of command. Each employee should report to one manager
only.
5. Unity of direction. Only one manager should coordinate and direct
similar activities in the organisation.
6. Subordination of individual interests to general interests. The goals
of the organisation should take precedence over the interests of
individual employees.
7 . Fair remuneration of personnel. Financial compensation for work
done should be fair to both the employees and the organisation.
8. Centralisation of power and authority. Power and authority should
be concentrated at the upper levels of the organisation, with
managers maintaining final responsibility. However, managers should
give their subordinates enough authority to enable them to do their
work.
CONTEMPORARY MANAGEMENT PRINCIPLES
9
PART I: Introduction
9. Scalar chain. A single, uninterrupted chain of authority should
extend from the top level to the lowest position in the organisation.
10. Order. Material should be in the right place at the right time, and the
organisation should assign workers to do the work best suited to
them.
11. Equity. Managers should display friendliness and fairness towards
their employees.
12. Stability of tenure of personnel. A high turnover of personnel leads
to the loss of organisational knowledge and a loss in the return on
investment of human capital.
13. Initiative. Subordinates should have freedom to take initiative in
carrying out their work.
14. Esprit de corps (union is strength). Team spirit and harmony should
be promoted among workers to create a sense of organisational
unity.
LEARNING OBJECTIVE 3
1.3 THE BEHAVIOURAL APPROACH
Distinguish between the human
relations, human needs,
motivation, and the integration
phases of the behavioural
approach to management.
The CFIBWJPVSBM BQQSPBDI developed because of the research
by behavioural scientists, including sociologists, psychologists and
anthropologists. They attempted to find ways to change individual and
group behaviour to improve organisational efficiency. The behavioural
approach developed during the 1920s when research inspired the
beginning of the human relations movement and during a second phase
in the post-World War II period, when theorists focused on human
needs and motivation.
A number of prominent thinkers contributed to the behavioural
approach, notably Hugo Münsterberg, Mary Parker Follett, Chester
Barnard, Elton Mayo, Kurt Lewin, Abraham Maslow and Douglas
McGregor. We shall discuss their contributions briefly.
beJaviQWral aRRrQaEJ
focused on changing individual
and group behaviour to improve
organisational efficiency
1.3.1 Human relations movement
The human relations movement focuses on individuals who work in
organisational groups. The research of contributors to the movement,
some of whose contributions are still relevant in contemporary
organisations, established that by improving workers’ satisfaction with
their jobs, organisations could increase productivity. They encouraged
managers to be supportive of workers, improve the social environment
at work and to help individual employees to improve their self-esteem.
Hugo Münsterberg, (1863–1916)
Theorists often cite Hugo Münsterberg, a German psychologist and
philosopher, as the founder of applied psychology. In 1913, he published
Psychology and Industrial Efficiency, a textbook in which he offered new
ideas in industrial psychology and showed the linkage between scientific
management and human effort in working environments24.
10
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 1 Evolution of management theory
Kurt Lewin (1890–1947)
Kurt Lewin originated the concept of group dynamics, a construct for
analysing group behaviour. In addition to generating group dynamics,
Lewin initiated and contributed to the study of subordinate participation
in decision-making and the use of the group to achieve changes in
behaviour25.
Chester Barnard (1886–1961)
Chester Barnard was a manager. He studied economics at Harvard,
but failed to obtain his degree when he did not complete one minor
course – but he received seven honorary doctorates for his lifelong
contributions to the body of knowledge on the nature and purpose of
organisations. Barnard started his career by working for the American
Telephone and Telegraph system and in 1927, he became president of
New Jersey Bell. At the height of his career, in 1938, he published a
book that had a huge impact, The functions of the executive, in which
he described the importance of employee training, group processes
and management practices that could improve cooperation between
employees and supervisors.
Barnard made three significant contributions to management theory:
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support of employees to be effective.
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interaction between the organisation and its external environment.
We examine each of these contributions briefly:
1. The organisation as a social system. According to Barnard,
organisations are social systems that need the support of employees
to be effective and in this regard, managers should perform three
functions:
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goals.
Closely related to the functions of a manager, Barnard believed that
subordinates choose if they want to accept or reject a manager’s
authority.
2. The theory of the acceptance of authority. Managers have as much
authority as employees allow them to have, and each person has a
range within which he or she would willingly accept orders without
purposefully questioning authority. Employees will choose to follow
orders if they:
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CONTEMPORARY MANAGEMENT PRINCIPLES
11
PART I: Introduction
Barnard maintained that organisations should provide sufficient
incentives to satisfy these criteria.
3. The importance of the organisation and its environment. Barnard
was one of the first to look at an organisation as a system because
of the interrelatedness of the various parts of an organisation.
Barnard introduced the following ‘new’ ideas26:
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relationships with the people and institutions it interacts with
outside the organisation on a regular basis.
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the environment to align the organisation and its resources with
opportunities and threats that occur because of changes in the
environment.
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effective27.
Barnard’s ideas on the interaction between the organisation and
its environment created much interest and debate. In many ways,
Barnard was ahead of his time and many of his ideas are still relevant
in contemporary strategic management theory especially regarding the
unstable and dynamic nature of the business environment.
Mary Parker Follett (1868–1933)
Mary Parker Follett was another pioneer of the human relations
movement. She graduated in economics, government, law and
philosophy and brought to management theory her knowledge and
experience from these fields.
Follett wrote about the basic questions that lie behind all human
relations: authority, power, conflict, leadership and control. Her work
formed the basis of many contributions to the theory of industrial
psychology and sociology. She promoted the idea of integration in
all her work. She was an early advocate of the systems approach to
organisations and maintained that organisations should emphasise
interdependence among their parts, activities and functions28.
Follett based her philosophy on two concepts. Her ‘universal goal’
implies that group ethics rather than individualism should form the basis
of organisation and her ‘law of the situation’ states that it is impossible
for a manager to achieve success unless there is unity and cooperation
among all elements, material and people, in a given situation’29.
Follett’s two laws clearly separated her from the classical theorists’
view that there is only ‘one best way’ to manage. Her ideas have much in
common with more recent management theories, such as contingency
theory and systems theory, although management theorists seldom
mentioned her after her death in 1933. It was only since the late 1980s
that prominent management theorists such as Peter Drucker30 began
to credit her for her farsighted ideas. It is because Mary Parker Follett’s
philosophy of organisation opens up the possibility of such identification
that it is the most important contribution to the business literature of
our time31.
12
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 1 Evolution of management theory
George Elton Mayo (1880–1949)
George Elton Mayo pioneered experimental research on human
behaviour in work settings. Mayo and a Harvard research team
conducted a series of experiments at the Western Electric Company’s
Hawthorne plant in Illinois. The experiments began in 1924 and
spanned several years. The first experiment focused on changing the
physical lighting in the company’s Relay Assembly Test Room. Mayo
hypothesised that he could find one best method of illumination that
would result in optimal productivity. What his team found, however,
was that every change in illumination resulted in higher productivity.
They conducted another experiment with the plant’s bank wiring
room employees where they implemented several types of piece-rate
incentive pay systems, hypothesising that they would discover one best
pay system for motivating employees. Instead, they found that workers
were equally motivated under a variety of pay systems. Mayo realised
that the Hawthorne employees did not react to illumination or incentive
pay, but to attention and recognition. Subsequent experiments by
Mayo confirmed that employees felt good about themselves and the
value of their jobs because of the interventions of the researchers.
Mayo concluded that improved human relations, social contacts
and behavioural rewards (such as recognition), were important for
motivating employees.
1.3.2 Human needs and motivation
The second era of behavioural research emphasised motivation. This
research focused on employees’ personal needs and how these needs
influence performance. Contributions to motivation theory by several
important scholars immediately after World War II inspired greater
efforts to understand individual behaviour in work environments. This
focus led to a field of study called organisational behaviour. We mention
only two theorists here, namely Douglas McGregor and Abraham
Maslow, but many others contributed to the study of organisational
behaviour.
Douglas McGregor (1906–1964)
Douglas McGregor brought a fresh perspective to management by
challenging leaders to think of employees as responsible, capable,
creative individuals. McGregor formulated his theories by considering
two different views of people: a negative view, which he termed Theory
X, and a positive view, which he termed Theory Y.
McGregor studied the behaviour of managers towards their
subordinates and concluded that managers base their behaviour on a
specific set of assumptions and beliefs about human nature. The basis of
5IFPSZ9 is a set of assumptions that take a command and control view
of management, underpinned by five beliefs that many managers hold
about their employees. These assumptions are that people are lazy by
nature; lack ambition, dislike responsibility and prefer that managers lead
them; they are inherently self-centred and indifferent to organisational
needs; and by nature resistant to change, gullible and not very bright.
TJeQr[ :
based on a set of assumptions
that take a command and
control view of management,
underpinned by a negative view
of human nature
CONTEMPORARY MANAGEMENT PRINCIPLES
13
PART I: Introduction
Theory Y
a mixture of assumptions
and underlying beliefs based
on a positive view of human
nature, taking a leadership
and empowering view of
management
McGregor argued that managers need a different view when managing
employees. He proposed Theory Y, a mixture of assumptions and
underlying beliefs based on a positive view of human nature, taking a
leadership and empowering view of management. These beliefs are the
following:
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needs, but their experiences in organisations cause them to become
that way.
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the readiness to achieve organisational goals, but management is
responsible for ensuring that people recognise and develop these
characteristics.
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conditions so that people can achieve their own goals best by
directing their own efforts to achieve organisational objectives32.
McGregor’s major contribution is his conviction that managers could be
better if they changed their assumptions about people. He argued that
the way a manager treats employees is largely a self-fulfilling prophecy;
if the manager assumes that people are lazy and treats them as if they
were, they would be lazy. However, if the manager assumes that people
want challenging work and provided opportunities for them to do
such work, employees would in fact respond positively and seek more
responsibility. Theory Y is consistent with the emphasis in contemporary
organisations on employee participation, involvement, empowerment
and self-management33.
Abraham Maslow (1908–1970)
A contemporary of McGregor, Abraham Maslow, also a psychologist,
based his theory of human behaviour on the idea that individuals work
to satisfy unfulfilled needs. Maslow developed one of the most widely
recognised theories of motivation, the hierarchy of needs theory. He
proposed that every person has a hierarchy of five needs: psychological
needs, security needs, social needs, esteem needs and self-actualisation
needs and that only unsatisfied needs can motivate people. We discuss
Maslow’s theory in Chapter 20.
LEARNING OBJECTIVE 4
Explain why the quantitative
approach to management
emerged and how it led to the
focus on quality.
14
1.4 QUANTITATIVE MANAGEMENT THEORY
During the late 1950s and early 1960s, the typical business school
curriculum in the United States fell short in terms of mathematics
content. An influential report on higher education emphasised this
shortcoming34 and business schools responded by adding quantitative
methods in the curricula. This resulted in new management specialties.
1SPEVDUJPO NBOBHFNFOU UFYUCPPLT FNFSHFE IFBWJMZ JOŴVFODFE CZ
operations research techniques. Techniques such as statistics, linear
programming, waiting line or queuing theory, game theory, decision
trees, the transportation method, Monte Carlo methods, and simulation
devices became the new vocabulary. The United States Navy, the
Lockheed Missile System Division, and the consultants Booz, Allen
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 1 Evolution of management theory
and Hamilton devised the Program Evaluation and Review Technique
(PERT). This is an operations research technique that uses statistical
probability theory for planning and controlling larger projects. This
technique used statistical probability theory to furnish three time
estimates (pessimistic, most probable, and optimistic) for planning and
controlling large projects35.
2'4T
1.5 THE QUALITY MOVEMENT
LEARNING OBJECTIVE 5
The challenge for improved productivity, mainly in response to the
Japanese ‘productivity miracle’, interrupted the American preoccupation
with the application of quantitative methods to the solution of managerial
problems. Joseph M Juran and W Edwards Deming were two of the
major contributors to the quality movement in the USA.
8 &EXBSET %FNJOH (1900–1993) is often associated with total
quality management (TQM), but he never used the term because he
had a low regard for both the term and the application of a quality
management practice that differed substantially from his own36.
Juran and Deming’s working lives were similar in many ways. Both
started their careers by working at Western Electric’s Hawthorn plant
in Chicago, where the work of statistician Walter Shewhart influenced
them both. While working at Western Electric as head of industrial
engineering, Juran conceptualised the Pareto principle. After the war,
the Union of Japanese Scientists and Engineers invited both Juran and
Deming to Japan. Juran delivered lectures in Japan about managing for
quality, while Deming taught Japanese engineers and top management
statistical methods and how to view production as a system that
included suppliers and consumers. The Japanese greatly appreciated
their teachings and the Emperor of Japan presented both men with
medals as high awards for their assistance37.
The productivity achievements of the Japanese paved the way for the
advent of Japanese management with its distinctive philosophy and style.
As the Japanese management approach evolved, it combined elements
of work simplification, lifetime employee participation, statistical
quality control and value analysis. The most distinctive characteristic
of Japanese management was the formation of small problem-solving
groups of workers, supervisors and specialists to improve the quality
of task performance. These groups epitomised group decision-making
by consensus, mentoring and training on a continuous basis, open
communication and group loyalty.
The success of the Japanese management style inspired management
researchers to determine what Western organisations could learn from
the Japanese.
an operations research
technique that uses statistical
probability theory for planning
and controlling large projects
Discuss the contributions of
W Edwards Deming, Joseph
M Juran and Philip B Crosby
to the quality approach to
management.
1.5.1 The Deming approach to quality management
Deming kept his contacts with the Japanese from 1950 until his death
in 1993. Initially he focused his clients’ attention on statistics, but then,
upon requests from the Japanese, he gave them advice on how to
improve actual results. As his contacts with the Japanese continued
during the 1950s, Deming formalised his ideas about good management
CONTEMPORARY MANAGEMENT PRINCIPLES
15
PART I: Introduction
practices. From 1946 to 1980, he primarily worked as a consultant in
statistical studies. From 1980, after gaining fame as the world’s leading
expert on quality, until his death 13 years later, he focused his attention
on transforming the ways of Western management.
Deming advocated continual improvement through lifelong
learning. He provided a new and comprehensive theory for managing
organisations. His description of production as a system of interrelationships between consumer research, design, suppliers, materials,
production, assembly, inspection, distribution, and consumers added
significantly to the body of knowledge of management theory38.
Deming developed a new approach to management – his ‘system of
profound knowledge’ – based on the following: appreciation for a system,
knowledge about variation, theory of knowledge, and psychology.
‘Deming was the unlikeliest of management gurus to rise to
prominence in the United States. A physicist and statistician by
training, he had the single-focused personality of an Einstein. Both
the humanistic and scientific strands of his quality philosophy can
be traced to the same root idea, a profoundly simple statistical
observation about how processes work: all processes are subject to
some level of variation that is likely to diminish quality. Variation is
the enemy of quality; yet it is inevitable and ubiquitous as gravity’39.
1.5.2 Total quality management
By the 1950s, the realisation dawned on the top managers of huge
American corporations that they could not achieve improvements in
quality by using a variety of tools and techniques in a disorganised way.
It was necessary to apply the knowledge, techniques and tools of quality
throughout their organisations, to all functions and at all levels, and to
do so in a coordinated way – total quality management (TQM).
total quality management
Two people who deserve recognition as major contributors to the TQM
(TQM)
movement are Joseph M Juran and Philip B Crosby40.
to apply in a coordinated way
Joseph M Juran was the most important contributor to the TQM
the knowledge, techniques and
movement.
He made three notable contributions to the field: the Juran
tools of quality throughout an
trilogy,
the
tripol
concept, and organisation-wide quality management.
organisation, to all functions and
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at all levels
to manage quality: quality planning, control and improvement.
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in an organisation, as customer, processor, or supplier. According
to Juran, the idea of the tripol is to consider systems rather than
individual functions.
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could result in substantial increases in quality. Another major theme
of Juran is company-wide quality management – organisations need
an all-inclusive, systematic approach to set and meet quality goals
throughout the company41.
Philip B Crosby was another popular figure in the TQM movement
and the creator of the zero defect concept – the only performance
standard is zero defects.
16
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 1 Evolution of management theory
1.5.3 In search of excellence
During the height of the Japanese successes, Peters and Waterman
published In search of excellence42, a book welcomed by many Western
managers because it showed American corporations in a more positive
light. Peters and Waterman both worked at McKinsey as researchers.
The basis of the research and the theorising in their book rested on the
.D,JOTFZ4NPEFM. The model comprises seven elements:
r
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r
r
Mc-inseyos 5s
ME-insey 5 model
comprises the seven Ss:
structure, strategy, systems,
style, skills, staff and shared
values
structure
strateg[
s[stems
st[le management
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Peters and Waterman analysed the best performing McKinsey clients
in terms of the 7-S performance measures with the view to selecting
the best amongst them. The result was lessons from 42 of the best-run
companies in the United States. The research of Peters and Waterman
justified the strengths of American corporations in relation to Japanese
corporations and provided an effective counterbalance to the obsession
with Japanese productivity achievements in the West.
1.6 SYSTEMS APPROACH
LEARNING OBJECTIVE 6
A theoretical biologist -VEXJH WPO #FSUBMBOŲZ observed that
certain similar characteristics appeared in all disciplines:
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Greek and Latin roots as the word organisation because both deal
with function, structure and relationship of parts to a whole
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equilibrium
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its environment and also affects its environment.
Discuss the systems
approach to management
and explain how systems
thinking inƃuenced the Ƃeld
of cybernetics and Peter
5engeos ideas on the learning
organisation.
The TZTUFNT BQQSPBDI asserts that the whole is greater than
the sum of its individual parts. How do the systems approach and
Ludwig von Bertalanffy’s observations of organisms contribute to our
understanding of management thinking? Organisations, similar to other
organisms, comprise many parts, including for example, individuals,
groups and teams, systems, processes and structure. All these parts
are interdependent to achieve organisational goals. Another feature
of a system is that the whole is greater than the sum of its individual
parts. Thus, by combining the efforts of all the individuals, sections and
departments in an organisation, managers can achieve more than those
individuals and the sections, groups, teams and departments to which
they belong can achieve on their own. Every department or section of
an organisation fits into the rest of the organisation and together, as a
whole, they achieve the goals of the organisation.
systems aRRroaEh
43
asserts that the whole is greater
than the sum of its individual
parts
CONTEMPORARY MANAGEMENT PRINCIPLES
17
PART I: Introduction
Organisations are open systems because the environment outside an
organisation has an influence on the organisation and the organisation
influences the outside environment. The environment influences the
organisation because it does not function in isolation. The organisation
procures its resources such as raw materials, human resources, capital
and information from suppliers outside the organisation. Inside the
organisation, through various systems and processes and the human
resources, managers transform resources into outputs such as products
and services and sell them to customers outside the organisation.
Thus, the organisation is open to influences coming from the external
environment.
In order to understand this approach to management it is crucial
to understand the interaction between the organisation and its
environment. The environment can range from stable to turbulent and
gradual or rapid economic, social, political, and technological changes
influence it (see Chapter 4).
1.6.1 Systems and information
A relatively new interdisciplinary science based on general systems theory,
which influences management theory, is cybernetics. The research into
cybernetics focuses on information, communication and control.
Cybernetics: learning and learning to learn44
Complexity is inherent in dynamic systems (such as organisations)
because their processes are often non-linear and hard to view and
control. However, the only way to address complexity is to acknowledge
its existence in the first place. Cybernetics is about the knowledge of
applying regulation, controlling and communicating in a system. In an
organisational context, such an approach can help managers understand
complex situations and attempt to deal with them.
Developments in cybernetics and cybernetic technology have
contributed much to the body of knowledge of how systems learn. A
core insight that emerged through research into cybernetics is that the
ability of a system to engage in self-regulatory behaviour depends on
processes of information involving negative feedback. An analogy to
negative feedback can be a skipper and a boat. If the skipper steers the
boat off course by taking the rudder too far in one direction, he can get
back on course by moving it in the opposite direction.
Research based on the idea of negative feedback led to a theory of
communication and learning underpinned by four key principles. Systems
should be able to:
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behaviour
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If these conditions are satisfied, it creates a continuous process of
information exchange between the system and its environment and the
18
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 1 Evolution of management theory
system can monitor changes and initiate responses, thus operating in an
intelligent, self-regulating manner.
The downside is that, because the system can maintain only the
courses of action allowed by the guiding operating norms or standards,
it limits the learning abilities. When the guiding standards are not
appropriate for dealing with the changes the system come across, its
intelligence breaks down because the process of negative feedback
attempts to maintain an inappropriate pattern of behaviour. The term
used for this type of learning is ‘single-loop learning’ because it is an ability
to detect and correct error only in relation to a given set of standards.
‘Double-loop’ learning (the process of learning to learn), depends on
being able to take a ‘double look’ at the situation by questioning the
relevance of operating standards.
The ideas associated with cybernetics, single-loop learning and
double-loop learning have important implications for organisations and
provide a framework for the development of the concept of learning
organisations.
Learning organisations
Writers of management theory often use the term ‘organisational
learning’ interchangeably with the term ‘learning organisation’. The
difference is that ‘organisational learning’ describes certain types of
activity in an organisation while the ‘learning organisation’ refers to a
particular type of organisation. However, there is a simple relationship
between the two – a learning organisation is one that is good at
organisational learning45.
Many organisations have become good at single-loop learning by
developing the ability to scan the environment, set objectives, and
monitor the general performance of the system in relation to the
objectives. Organisations often institutionalise this basic skill in the form
of information systems designed to keep the organisation on course by,
for example, using budgets. Double-loop learning is often more difficult
to implement – not many organisations have systems that review
and challenge basic models and operating standards. Bureaucratic
organisations in particular actually obstruct the learning process46.
1FUFS4FOHF popularised the concept of learning organisations
in his book The fifth discipline. He challenged linear, cause-and-effect
thinking about organisational behaviour and identified five new
‘competent technologies’47:
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organisations.
The competent technologies join to form innovative learning
organisations. Each provides a vital dimension for building organisations
that can learn and continually enhance their capacity to realise their
goals.
CONTEMPORARY MANAGEMENT PRINCIPLES
19
PART I: Introduction
Senge maintained that learning organisations must develop capacities
that allow them to do the following48:
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significant variations.
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standards and assumptions.
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to emerge.
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The ideas on system thinking paved the way for management
practitioners to break free from bureaucratic thinking and encouraged
them to consider the possibilities of organising their organisations
according to the requirements of the environment.
LEARNING OBJECTIVE 7
1.7 CONTINGENCY THEORY
Discuss the contributions of
Tom Burns, )eorge M 5talker,
Paul .awrence and Jay .orsch,
Joan Woodward and Alfred
Chandler to the contingency
approach to management.
As one of the major strands of thinking about organisations, contingency
theory proposes that there is no one best way of organising; instead,
the best organisation structure depends on a number of contingency
factors. Rather than accepting an approach that all organisations should
be the same or that all organisations should be different, contingency
theorists argue that it is possible to analyse the variation in organisations
in a systematic way by considering the contingencies, or situational
factors, for every organisation. The major contingency factors include
environmental complexity, technology, organisational strategy and
organisation size49.
5PN#VSOT and (FPSHF.4UBMLFS conducted one of the most
influential studies to establish the credentials of the DPOUJOHFODZ
BQQSPBDI to organisation in the 1950s. The contingency approach
analyses the variation in organisations in a systematic way by considering
the contingencies, or situational factors for every organisation. Their
work is famous for establishing the distinction between mechanistic
and organic approaches to organisation and management. Focusing
on organisations in a variety of industries (eg manufactured fibres,
engineering and electronics), Burns and Stalker illustrated that when
conditions in the environment are relatively stable with predictable
technological and market conditions, the mechanistic organisation
structure is suitable. However, when the environment becomes highly
unpredictable, with rapid technological advances and boundless market
opportunities, open and flexible styles of organisation and management
are required50.
In their study of American organisations in the container, food and
plastics industries, 1BVM -BXSFODF and +BZ -PSTDI concluded that
environmental conditions surrounding the organisation had a significant
effect on their choice of structure.
In her study of manufacturing firms in England, +PBO8PPEXBSE
(1965) was the first to look into the effect of technology on the design
of organisations. She classified organisations by the complexity of the
EontingenEy aRRroaEh
this approach analyses the
variation in organisations in a
systematic way by considering
the contingencies, or situational
factors, for every organisation
20
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 1 Evolution of management theory
technology they use in producing goods and found that technology
influences the choice of structure in organisations. She categorised
organisations as less complex to more advanced, in terms of their
production operations as small batch, large batch and long-run
continuous-process production. Woodward found that the more
successful organisations in each category had the same structures51.
A group of researchers from the 6OJWFSTJUZ PG "TUPO in
England found that the size of the organisation best explained many
of the characteristics of its structure. They found that the larger the
organisation, the more important the standardisation as a coordinating
mechanism became52.
"MGSFE$IBOEMFS53 conducted a study of the influence of strategy
on structure and maintained that ‘structure follows strategy’. He argued
that different strategies create different administration needs; therefore,
organisational structure will eventually change to accommodate these
needs.
While contingency theory still has its followers, there is a shift in
emphasis in the literature towards an integration of approaches and
the many environmental and structural variables that interact to create
superior performance, rather than one or two primary contingencies.
However, contingency theory still offers insight into the relationship
between certain contingency variables and organisation structure.54
1.8 THE INFORMATION REVOLUTION
LEARNING OBJECTIVE 8
Historians55 argue that there have been at least two Industrial
Revolutions. The first started at the end of the eighteenth century when
new technology resulted in developments such as the steam engine,
the spinning jenny and machines replacing traditional hand tools. The
second Industrial Revolution, about 100 years later, produced electricity,
the internal combustion engine, science-based chemicals, efficient steel
casting and the beginning of communication technologies with the
invention of the telephone.
The first two revolutions had certain features in common, which
offer valuable insights into the nature of technological revolutions56:
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technological change.
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changes moved power to those countries able to master the new
technologies.
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an isolated instance and that technological breakthroughs come
in clusters, interacting with each other in a process of increasing
returns.
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relationship between the sites of innovation, production and the use
of new technology, and results in more innovation.
Describe the three revolutions
that took place since the late
eighteenth century and explain
how the Information Revolution
changed the business
environment of organisations.
Both revolutions brought a whole array of new technologies that formed
and transformed an industrial system in successive stages57.
CONTEMPORARY MANAGEMENT PRINCIPLES
21
PART I: Introduction
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revolutions, for example, the invention of the steam engine in
the first revolution and the invention of electricity in the second
revolution.
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preceded the third revolution. The invention of the first
programmable computer, the transistor and the discovery of the
source of microelectronics followed.
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telephony.
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of transmission technologies, which were adapted to a whole
range of uses, and enabled extensive communication between
mobile users. Each leap and bound in a specific technological field
amplified the effects of related information technologies.
The third revolution, the Information Revolution, emerged in the
1970s when a ‘great technological divide’ took place and resulted in
rapid technological advances, including the following58:
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Projects Agency set up a new, electronic communication network
that would develop into the internet.
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NJET
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matrix of many software technologies developed during the 1990s.
The Information Revolution changed the world and the way in which
organisations function and resulted in the emergence of a global
economy. Organisations have changed fundamentally since the first
revolution, the pace of change accelerated rapidly since the Information
Revolution and there is no slowing down. The Information Revolution
and the emergence of globalisation are two factors that, in tandem,
forced business organisations to change fundamentally in order to be
able to function in a fast-changing, dynamic environment.
22
CONTEMPORARY MANAGEMENT PRINCIPLES
Copyright © 2014. Juta and Company. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S.
or applicable copyright law.
Chapter 1 Evolution of management theory
Information technology and globalisation are the two major factors
responsible for the emergence of new organisation forms, the topic
of discussion in Chapter 3.
CHAPTER SUMMARY
1. Explain why managers need to study the history of management theory.
• The proposed ‘best’ ways to manage organisations through history took place in the context
of the social, political, economic, technological, international and ecological forces that affect
organisations at any specific time. As these forces change, so do the theories on management,
adjusting to changing circumstances in the environment. Managers need to be aware of the
influence of environmental factors on the development of management theory.
• There are many lessons in history for management scholars. The most important one is the
study of the past as an introduction (prologue) to the study of contemporary organisations.
2. Discuss the important contributions made by Frederick W Taylor, Max Weber and Henri Fayol
to the management theory.
• Frederick W Taylor was the father of scientific management with the emphasis on efficiency.
• Max Weber focused on how to structure organisations and developed the bureaucracy.
• Henri Fayol pioneered administrative management with the focus on the process and
principles of management.
3. Distinguish between the human relations, human needs and motivation and the integration
phases of the behavioural approach to management.
• The human relations movement focuses on individuals working in group environments.
• The human needs and motivation phase of the behavioural approach to management focuses
on personal needs and their influence on performance.
• The integration phase is about searching for concepts that integrate various theories.
4. Explain why the quantitative approach to management emerged and how it led to the
focus on quality.
During the mid-1960s, business schools in the United States began to teach more statistics and
mathematics to their students in response to the increasing complexity of managerial problems.
This resulted in the qualitative approach to management. However, the challenge for improved
productivity, mainly in response to the Japanese superior productivity, interrupted the American
preoccupation with the application of quantitative methods to the solution of managerial problems
and led to the focus on quality.
5. Discuss the contributions of W Edwards Deming, Joseph M Juran and Philip B Crosby
to the quality approach to management.
• Edwards W Deming’s basic philosophy was continual improvement through lifelong learning.
He provided a new and comprehensive theory for managing organisations. His description of
production as a system of interrelationships between consumer research, design, suppliers,
materials, production, assembly, inspection, distribution, and consumers added significantly
to the body of knowledge of management theory. His ‘system of profound knowledge’ – based
on appreciation for a system, knowledge about variation, theory of knowledge, and psychology
was an important contribution to the quality movement.
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Part I: Introduction
• Joseph M Juran was the most important contributor to the TQM movement. He made three
notable contributions to the field: the Juran trilogy, the tripol concept, and organisation-wide
quality management.
• Philip B Crosby was a popular figure in the TQM movement and the creator of the zero defect
concept – the only performance standard is zero defects.
6. Discuss the systems approach to management and explain how systems thinking
influenced the field of cybernetics and Peter Senge’s ideas on the learning organisation.
• Systems researchers observed that organisations, similar to other ‘organisms’, comprise
many ‘parts’ including for example, individuals, groups and teams, systems, processes and
structure. All these ‘parts’ are dependent on each other (interdependent) in order to achieve
the goals of the organisation. Another characteristic of a system is that the whole is greater
than the sum of its individual parts. By combining the efforts of all parts of the organisation,
managers can achieve more than what those individuals and the sections, groups, teams and
departments to which they belong can achieve on their own.
• Organisations are also open systems because the environment outside an organisation has
an influence on the organisation and the organisation influences the outside environment.
• Cybernetics entails knowledge on how to apply regulation, control and communication in
a system. In an organisational context, such an approach can help managers understand
complex situations and to deal with them more effectively.
• Developments in cybernetics and cybernetic technology have contributed much to the
body of knowledge of how systems learn. A core insight that emerged through research into
cybernetics is that the ability of a system to engage in self-regulatory behaviour depends on
processes of information involving negative feedback.
• Peter Senge popularised the concept of learning organisations. He challenged linear, causeand-effect thinking about organisational behaviour and identified five new ‘competent
technologies’ which, in his opinion, were gradually converging to form innovative learning
organisations. Each provided a vital dimension of building organisations that can truly ‘learn’
and that could continually enhance their capacity to realise their aspirations.
7. Discuss the contributions of Tom Burns, George M Stalker, Paul Lawrence, Jay Lorsch,
Joan Woodward and Alfred Chandler to the contingency approach to management.
• Tom Burns and George M Stalker conducted one of the most influential studies to establish
the credentials of the contingency approach to organisation. Their work is famous for
establishing the distinction between mechanistic and organic approaches to organisation
and management.
• Paul Lawrence and Jay Lorsch found that environmental conditions surrounding the
organisation had a significant effect on the choice of structure.
• Joan Woodward was the first researcher to study the effect of technology on the design
of organisations. She classified organisations by the complexity of the technology used in
producing goods and found that technology influenced the structure of organisations.
• Alfred Chandler conducted a study of the influence of strategy on structure and asserted that
strategy determines structure. He argued that different strategies create different administration
needs; therefore, organisational structure will eventually change to accommodate these
needs.
24
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or applicable copyright law.
Chapter 1 Evolution of management theory
8. Describe the three revolutions that took place since the late eighteenth century and explain
how the Information Revolution changed the business environment of organisations.
• The first started at the end of the eighteenth century and was characterised by new
technologies such as the steam engine and the spinning jenny and the replacement of hand
tools by machines.
• The second Industrial Revolution, about 100 years later, entailed the development of
electricity, the internal combustion engine, science-based chemicals, efficient steel casting
and the beginning of communication technologies, with the diffusion of the telegraph and the
invention of the telephone.
• The Information Revolution, as a revolution, started in the 1970s. During this time, a great
‘technological divide’ took place.
• The Information Revolution changed the world and the way in which organisations
function and resulted in the emergence of a global economy. Organisations have changed
fundamentally since the first revolution, the pace of change accelerated rapidly since the start
of the Information Revolution and there is no slowing down.
KEY TERMS
administrative approach
bureaucratic approach
behavioural approach
charismatic organisations
classical approaches
contingency theory
double-loop learning
cybernetics
globalisation
human relations movement
human needs and motivation
Information Revolution
internationalisation
learning organisations
quantitative management theory
quality movement
rational-legal organisations
scientific management approach
single-loop learning
systems approach
systems and information
the learning organisation
total quality management
traditional organisations
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PART I: Introduction
REVIEW QUESTIONS
1. Why are the three theories comprising the classical approach to management still relevant today?
2. Which shortcomings of the classical approach led to the emergence of the behavioural approach to
management?
3. What were the contributions of Chester Barnard and Mary Parker Follett to the human relations
movement?
4. How did Douglas McGregor challenge managers to think differently about their employees as was
previously done?
5. W Edwards Deming is the pioneer of TQM (total quality management). Is this statement correct?
Substantiate your answer.
6. What is the difference between a learning organisation and organisational learning?
7. What are the differences between single-loop learning and double-loop learning?
8. Contingency theory proposed that there is no ‘best way’ of organising. Discuss how the contributions
of Burns & Stalker, Lawrence & Lorsch, Woodward and Chandler substantiated this premise.
END NOTES
1
Gabor, A. 2000. The Capitalist Philosophers. New York: Three Rivers Press, p xi.
2
Morgan, G. 1997. Images of organization. London: Sage, p 22.
3
Gabor, 2000, op. cit., p xi.
4
Bedeian, A.G. 1998. Exploring the past. In Journal of Management History, 4(1), pp 4–16, quote on p 6.
5
Taylor, F.W. 1911. The principles of scientific management. New York: Harper Collins, p 119.
6
Bedeian, 1998, op. cit., p 6.
7
Morgan, 1997, op. cit., p 24.
8
Ibid., p 327.
9
Ibid., p 329.
10
Ibid., p 330.
11
Wren, D.A. 1994. The evolution of management thought. 4th edition. New York: John Wiley & Sons, p 442.
12
Ibid., p 230.
13
Morgan, 1997, op. cit., p 23.
14
Warner, M. (ed). 2002. International encyclopaedia of business & management. Vol 3, 2nd edition. Thompson Learning,
p 2297.
15
Ibid., p 2303.
16
Wren, 1994, op. cit., p 153.
17
Pugh, D.S., Hickson, D.J. & Hinings, C.R. 1996. Great writers on organizations. Cornwall: Ashgate.
18
Conger, J.A .1989. The charismatic leader: behind the mystique of exceptional leadership. San Francisco: Jossey-Bass.
19
Cooper, G.L. & Argyris, C. (eds).1998. The concise Blackwell encyclopaedia of management. London: Blackwell.
20
Ibid., p 1137.
21
Weber, M. 1946. The theory of social and economic organisation, translated by T. Parson, New York: Free Press. In The
concise Blackwell encyclopaedia of management. Edited by Cooper, G.L. & Argyris, C. London: Blackwell.
22
Campbell, A. 2002. Fayol, Henri (1841–1925). In M Warner (ed) International encyclopaedia of business & management,
3(2), London: Routledge: Thompson Learning, pp 38–59.
23
Fayol, H. 1984. General and industrial management (translated by I. Gray). New York: David S Lake. In International
encyclopaedia of business & management. Edited by Warner, M. Vol. 3. 2nd edition. Thompson Learning, p 59.
24
Robbins, S.P. 2003. Organizational behavior. 10th edition. Upper Saddle River, NJ: Prentice Hall, p 599.
25
Moreno, J.L. 1924. Who shall survive: a new approach to human interrelations. In The evolution of management thought.
4th edition. New York: John Wiley & Sons.
26
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 1 Evolution of management theory
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CONTEMPORARY MANAGEMENT PRINCIPLES
27
Chapter 2
The management process
Tersia Brevis
OPENING CASE
MTN South Africa: Best large-sized
employer in South Africa: 2010/2011
Since 1991, the Corporate Research Foundation
(CRF) Institute has developed and run a BEST
Employers methodology in South Africa, with the
aim to identify and rate employers that are among
the best in the country and create the best working
conditions for their employees. In order to be
certified as one of the country’s BEST Employers,
organisations must exceed the objective rating
standards in an in-depth benchmarked assessment
of their policies in terms of the following areas:
organisational strategy; the human resources
function; communication; diversity management;
corporate social responsibility; knowledge
management; talent management and engagement;
employee development; performance management;
and rewards and recognition.
The CRF publishes best employer rankings in the
following categories: Best 10 Overall Employers;
Best 10 Large-sized Employers; Best 10 Mediumsized Employers; Best 10 Small-sized Employers;
Best Employers in Industry; and Best Empowered
Employers. In the Best 10 Large-sized Employers,
MTN South Africa was ranked first.
MTN is a telecoms service provider, headquartered in South Africa and operates across 24
countries, predominantly in the developing world.
MTN offers voice, data and internet solutions to
clients. It employs 4 583 permanent staff with an
annual turnover of R34 billion in 2009. Although
MTN is still a relatively young company – it opened
its doors in 1994 – it has 110 million subscribers
across Africa and the Middle East, of which 17
million reside in South Africa. The company’s flair
for innovation is seen to be its biggest advantage.
MTN’s simplified solutions allow people from all
areas, no matter how remote, to have access to
communication. MTN is a company that gives its
employees every opportunity to realise their full
potential. Like many companies in South Africa,
MTN is affected by the skills shortage, particularly
within the Information Communications Technology
(ICT) industry. There is a scarcity of engineers to
configure modern society.
MTN was one of the main sponsors of the 2010
FIFA World Cup and this opportunity has opened
a number of doors for its employees. 2010 gave
them the opportunity to enhance their broadband
capabilities and improve the network. For example,
they had to ensure that people would be able to
watch the games from their handsets if desired.
Their World Cup sponsorship provided the impetus
to develop new technology and infrastructure that
will be maintained after the event. For example, the
company has built 3G stations across the country
which will need continued maintenance and upkeep.
Executive managers, general managers and
senior managers are provided with mentors and
coaches. These mentors come from outside the
company and are seasoned executives who have
CHAPTER 2 The management process
retired from other businesses and are willing to
lend MTN their skills and expertise. They assist
managers in various areas such as their approach
to market, business-related problems and issues
associated with behaviour in the organisation. This
provides a valuable input from individuals who have
practical, independent experience.
MTN makes various career opportunities
available to potential employees. The backbone
of the organisation comprises high-level engineers.
From there, frontline positions include solutions
consultants who take the specifications for product
design to the engineers, as well as IT, sales and
customer service. MTN also has a retail division,
which is growing at a rapid rate. In 2009, the number
of retail shops increased from 18 to 235.
MTN’s main objective for the near future is to
position the South African business strategically in
the broadband space. Essentially, the voice telecoms
market has been saturated. Consumers are no
longer using their mobile phones exclusively for
voice communication but also for news, banking,
internet and the like. Therefore, the company will
be targeting this market and making opportunities
available for people to work within these specialist
fields.
LEARNING OBJECTIVES
The purpose of this chapter is to provide a comprehensive contemporary view of general
management principles and their application in modern organisations. The objective of studying this
chapter is to enable you to:
1. Understand the importance of managers and management in modern society.
. &eƂne management and eZplain the management process.
3. Identify and explain the different levels and areas of management in an organisation.
4. Explain the role distribution of managers.
5. Expound on the various skills needed by managers.
6. Explain how one can learn to manage successfully.
2.1 MANAGERS AND MANAGEMENT
LEARNING OBJECTIVE 1
Managers experience more pressure today than any other time in
history. Changes in the world that are impacting on managers include the
growing globalisation of economies, technological innovations, trends
towards democratisation and increasing social imbalances. The nature of
management is to cope with these diverse and far-reaching challenges.
Managers have to keep pace with ever-advancing technology and find
ways to incorporate the internet and e-business into their strategies and
business models. They must strive to remain competitive in the face of
increasingly tough global competition, uncertain environments, cutbacks
in personnel and resources and massive economic, political and social
shifts. The diversity of the workforce creates other dynamics: How can
managers maintain a strong corporate culture while supporting diversity,
balancing work and family concerns, and coping with the conflicting
demands of all employees for a fair chance at power and responsibility?
Understand the importance of
managers and management in
modern society.
CONTEMPORARY MANAGEMENT PRINCIPLES
29
PART I: Introduction
The field of management is undergoing a revolution that demands
managers have to do more with less, to see change rather than stability
as the nature of things, and to create a vision and cultural values that
allow people to create a truly collaborative and enabling workplace.
Successful organisations don’t just happen; they are managed to be that
way. To be successful under such circumstances, every organisation
needs skilled managers. In our opening case, we saw that MTN proved
itself as the best South African employer in the large-sized employers’
category. MTN is a relatively young company. It opened its doors in
1994 and boasts 110 million subscribers across Africa and the Middle
East, 17 million of which reside in South Africa. During this short period
of time, management at MTN succeeded in fostering a highly enabling
environment and culture for their employees. It is a modern company,
conceived in a modern age. MTN’s management also succeeded in
integrating the company in both developed and developing countries.
To navigate the turbulence of today’s world, managers need to shift
their mindsets. Making a difference as a manager today and tomorrow
requires integrating tried-and-tested management skills with new
approaches that emphasise the individual, enhance flexibility, and involve
employees’ hearts and minds as well as their bodies. In our opening
case, we saw MTN using mentors from outside the company to coach
their executive managers, general managers and senior managers.
These mentors are willing to share their skills and expertise with MTN’s
management in various areas.
A company is only as good as its management. Managers have the
most direct influence on the performance of the company’s employees
and have the primary responsibility for inculcating the values, beliefs,
norms and values of top management for the long-term sustainability of
the organisation.
LEARNING OBJECTIVE 2
&eƂne management and
explain the management
process.
30
2.2 MANAGEMENT AND THE MANAGEMENT
PROCESS
MTN’s management proved their ability to steer the company
successfully through many changes and challenges, especially the global
economic turbulence of the past few years. Taking into consideration
how broad the concept of management is, as it was exercised by MTN,
it is important to define the term ‘management’. For the purposes of
this book, management is defined as the process of working with and
through others to achieve organisational objectives as efficiently and
effectively as possible within a changing environment. This definition
of management essentially has six components which require closer
examination:
1. management is a process
2. working with and through others
3. achieve organisational goals and objectives
4. balance effectiveness and efficiency
5. make the most of limited and scarce resources
6. coping with a changing environment.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 2 The management process
2.2.1 Management is a process
A process is a structured, interrelated set of activities designed to
produce a specific output. The management function in an organisation
can also be viewed as a process, as illustrated in Figure 2.1.
PLANNING
CONTROL
ORGANISING
LEADING
Figure 2.1: The management process
Managers need certain inputs (or resources) to deliver certain outputs
(or performance). Managers need people (human resources); capital
(financial resources), physical resources, raw materials, components,
information and entrepreneurial skills to produce products and/or
services, create jobs, make a profit, achieve organisational goals and
contribute to the wealth of society. The transformation of inputs to
outputs requires management to perform certain activities or functions.
All managers, regardless of the type of organisation, the level at which
they are involved, their designated role(s) or specific skills, engage in
some manner in four fundamental, interrelated activities, also called the
management functions, in order to achieve some or other goal(s):
r QMBOOJOH
r PSHBOJTJOH
r MFBEJOH
r DPOUSPMMJOH
The management functions
Planning (setting an organisation’s goals and finding the best way to
achieve them) is one of the management functions that determines
the organisation’s mission and goals. It involves identifying ways of
reaching the goals and finding the resources needed for the task within
a complex environment. Hence the activities of the organisation cannot
be performed in a random fashion, but should follow a specific, logical,
scientific method or plan. Plans are mostly made by top management
and they vary from one to five or even ten years. These are called
‘strategic plans’. Tactical plans are made by functional managers (such as
financial, human resources, research and development, marketing and
management functions
managers engage in four
fundamental functions of
management, namely planning,
organising, leading and
controlling
planning
setting an organisation’s goals
and finding the best way to
achieve them
CONTEMPORARY MANAGEMENT PRINCIPLES
31
PART I: Introduction
operations managers) to support the organisation’s long-term plans.
Operational plans are made by lower management (often called ‘firstline’ or ‘supervisory’ management) to plan for short periods ahead.
0SHBOJTJOH is the second step in the management process. Once
organising
the
goals and plans have been determined, management has to allocate
developing an organisational
the
organisation’s resources to relevant departments or individuals.
structure that indicates how
Tasks,
roles and responsibilities have to be defined and policies and
people and other resources
procedures
established to achieve the goals. Thus organising involves
should be deployed to achieve
developing
a
framework or organisational structure to indicate how
organisational goals
people and other resources should be deployed to achieve the goals.
The success of an organisation lies in directing the different resources
towards the achievement of a common set of goals. The better the
resources are coordinated and organised, the more successful the
organisation will be. Because organisations have different goals and
resources, it stands to reason that each one should have an organisational
structure that will accommodate its particular needs. Management must
match the organisation’s structure to its strategies. This process is called
‘organisational design’.
-FBEJOH refers to directing the human resources of the organisation
leaFing
and motivating them in such a way that their actions are aligned with
directing human resources and
previously formulated goals and plans. Managers are responsible for
motivating them in such a way
getting things done through other people – they collaborate with their
that their actions are aligned
with previously formulated goals superiors, peers and subordinates, with both individuals and groups,
to attain the goals of the organisation. Leading the organisation means
and plans
making use of influence and power to motivate employees to achieve
organisational goals. Leading means communicating goals through the
organisation and motivating departments, sections and individuals to
perform as well as they possibly can.
controlling
$POUSPMMJOH means that managers should constantly make sure
that
the organisation is on the right course to attain its goals. Control
monitoring the organisation’s
also
enables
management to identify and rectify any deviations from the
progress towards the attainment
plans,
and
to
take into account factors which might oblige them to revise
of its goals
their goals and plans.
It is important to realise that the functions of management do not
occur in a tidy, step-by-step order. At any given time, a manager is likely
to be engaged in several management functions simultaneously.
resources
inputs that are utilised
by managers to achieve
organisational goals
Inputs or resources
3FTPVSDFT are the inputs that are utilised by managers to achieve
organisational goals. The following basic resources can be found in all
organisations:
r QFPQMF IVNBOSFTPVSDFT
r NPOFZ DBQJUBMPSųOBODJBMSFTPVSDFT
r SBXNBUFSJBMT QIZTJDBMSFTPVSDFT
r LOPXMFEHF JOGPSNBUJPOSFTPVSDFT
r UFDIOPMPHZ
r JOGPSNBUJPO
r DPNQPOFOUT
These are the resources utilised by management to achieve the goals
32
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 2 The management process
of the organisation as efficiently and effectively as possible. Resources
are usually scarce and management’s biggest challenge is to utilise its
resources as productively as possible. Managers have the task of bringing
resources together, deciding which resources are necessary for a specific
situation or specific circumstances, and in what quantities, to achieve the
organisation’s goals. The success with which an organisation achieves
its goals and satisfies the ever-increasing needs of society depends
on the competence of its managers in utilising its scarce resources. If
managers utilise resources well, the organisation will be successful. If a
country’s organisations are all competitive and successful, the country as
a whole will prosper because successful organisations satisfy needs not
only by producing products and services, but also by providing jobs and
contributing to the wealth of society.
Like many companies in South Africa, MTN is affected by the skills
shortage, particularly within the ICT industry. There is a scarcity of
engineers to configure modern technology. MTN’s managers utilise
its scarce skilled human resources by making use of a proactive model
to identify high performers within the company, known as ‘Leadership
Talent Management’. According to this model, management sits down
with the individual and look at his or her developmental talent path. The
path is confirmed collaboratively and once all parties are in agreement,
MTN will make the necessary investment, financially or otherwise, to
make sure that the individual’s development is actioned. The company
also practices job rotation. Via the Leadership Talent Management
programme, employees are moved across positions, within the
various countries in order to gain the necessary exposure for further
progression2.
Outputs or performance
Inputs or resources are transformed in the organisation to realise certain
outputs, of which goal achievement, products, services, profit, job
creation, efficiency and effectiveness are the most important outputs.
This is called the organisation’s performance.
2.2.2 Working with and through others
Managers get things done by working with and through other people.
MTN’s management, for example, needs various people with various
skills to achieve the company’s goals and objectives, such as high-level
engineers, solutions consultants, IT specialists, and sales and customer
service specialists.
Management is, above all else, a social process. Many collective
purposes bring individuals together – building houses and cars, publishing
books, offering tertiary education, providing personal financial services
and so on. The activities that are needed to build a house or a car, publish
a book, offer tertiary educational programmes and to provide advice on
personal finances, cannot happen on their own. In all cases, managers
are needed for getting things done by working with and through other
people and other organisations.
performance
the outputs realised by
transforming or utilising
resources
CONTEMPORARY MANAGEMENT PRINCIPLES
33
PART I: Introduction
The ability to work with and through others is therefore an important
skill that managers should have in order to be successful. Problems with
interpersonal relationships and failure to build and lead a team are often
the reasons why managers fail. However, the ability to work with and
through others is not the only important skill that managers should
have in order to be successful. Learning Objective 5 will focus on other
important managerial skills.
2.2.3 Achieving organisational goals and objectives
An objective can be described as a target to be strived for. A university
student, for example, can set an objective for himself or herself to
graduate with a specific degree by a given date. All actions taken or
activities performed by the student will be with the view of achieving
this target. As with individuals, organisations formulate organisational
objectives. Organisations will also be more successful when their
activities are guided by challenging, yet realistic and achievable objectives.
Nokia’s target, for example, is to increase their net sales of $41.0 billion
in 2009 by 10 per cent by the end of 2015. This goal will require Nokia’s
managers to work with and through their 123 553 employees (as at the
end of 2009) as they strive to increase their market share among diverse
customers around the world3.
Organisational goals and objectives serve later as measuring sticks for
performance. Without goals and objectives, the management process
would be aimless and wasteful. The formulation of organisational goals
will be addressed in more detail in Chapter 10, Principles of planning.
2.2.4 Balancing effectiveness and efficiency
It is important to distinguish between the concepts of effectiveness and
efficiency. Effectiveness is achieved when the organisation formulates
and pursues appropriate (or stated) goals. For example, Nokia needs
to meet their sales objective. Effectiveness in essence means ‘doing the
right things’.
Given the reality of limited resources, effectiveness alone is not
enough. An organisation also needs to be efficient. Efficiency enters
the picture when the resources required to achieve an objective are
weighed against what was actually accomplished. The organisation will
be more efficient if the ratio between benefits (outputs or performance)
and costs (inputs or resources) is more favourable. Efficiency essentially
means ‘doing things right’. Efficiency is achieved by using the fewest
inputs (such as the number of people employed or the amount of capital
utilised during the financial year) to generate a maximum amount of
output (such as number of products produced or the profit realised
within a financial year).
Managers are responsible for balancing effectiveness and efficiency.
Too much emphasis on either effectiveness or efficiency leads to
mismanagement. On the one hand, managers must be effective by
getting the job done. On the other hand, managers need to be efficient
by reducing costs and not wasting resources. Too much emphasis on
effectiveness will mean that the job gets done, but limited resources
34
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 2 The management process
are wasted. Too much emphasis on efficiency will mean that the job
doesn’t get done because available resources are underutilised. Thus,
the answer lies in a balanced emphasis on effectiveness and efficiency –
the job gets done and limited resources are not wasted.
2.2.5 Making the most of limited and scarce
resources
We live in a world of scarcity and limited resources. Like many
companies in South Africa, MTN is challenged by the skills shortage. In
fact, all resources and inputs needed by an organisation are scarce and,
in some countries more than in others, very expensive.
Although experts and non-experts alike may quibble over exactly
how long it will take to exhaust our non-renewable resources or come
up with clever new technological alternatives, one fact remains: our
planet is becoming increasingly crowded. For South Africa, Statistics
South Africa (Stats SA) estimated the 2010 mid-year population as 49.99
million4. Table 2.1 illustrates the estimated annual population growth
rates in South Africa for the period 2001 to 2010.
TaDle 2.1: 5outh #fricaos estimated annual population growth rates 1s1
2001–
2002
2002–
2003
2003–
2004
2004–
2005
2005–
2006
2006–
2007
2007–
2008
2008–
2009
2009–
2010
Male
1.53
1.43
1.34
1.30
1.27
1.25
1.26
1.25
1.18
Female
1.29
1.18
1.08
1.03
1.00
0.99
1.00
1.01
0.94
Total
1.40
1.30
1.21
1.16
1.13
1.11
1.13
1.12
1.06
Source: www.statssa.gov.za/keyindicators/mye.asp. Accessed on 6 February 2011.
Table 2.1 shows the South African annual population growth rate as a
positive figure, yet there are fewer resources to sustain this growing
population. South Africa is already experiencing increasing pressure to
divide limited resources more equitably.
In productive organisations, managers are the custodians of limited
and scarce resources and it is their job to see that the basic factors of
production are used efficiently and effectively.
2.2.6 Coping with a changing environment
Successful managers are those who anticipate and adjust to changing
circumstances rather than those who are passively swept along or
caught unprepared. Management at MTN South Africa has proved an
ability to anticipate and adjust to the opportunities of being one of the
main sponsors of the 2010 FIFA World Cup.
Chapter 4 (Composition of the management environment), provides
detailed coverage of important changes and trends in management’s
social, political, legal, economic, international and technological
environments. For now we can conclude with Business Week’s amusing
but challenging profile of tomorrow’s managers:
‘The next generation of corporate leaders will need the charm
CONTEMPORARY MANAGEMENT PRINCIPLES
35
PART I: Introduction
of a debutante, the flexibility of a gymnast, and the quickness of
a panther. A few foreign languages and a keen understanding of
technology won’t hurt either’5.
LEARNING OBJECTIVE 3
2.3 LEVELS AND AREAS OF MANAGEMENT
Identify and explain the
different levels and areas of
management in an
organisation.
The management process and functions of management as explained
earlier only provide us with a starting point for understanding what
management entails. To add to the complexity of the process,
management takes place at different levels and in different areas within
organisations. While managers at each level and in each area must
generally possess planning, organising, leading and controlling skills,
certain job-specific activities and skills are more important at one level
than at another.
2.3.1 Levels of management
leXels of management
differentiation of managers into
three basic layers: top-level;
middle-level and lower-level
managers
36
Managers function at various levels in the organisational hierarchy. A
small organisation may have only one layer of management, whereas
a large organisation may have several layers. In general, relatively large
organisations (especially governmental organisations) have threeMFWFMT
PG NBOBHFNFOU: top-level managers, middle-level managers and
lower-level managers.
5PQ NBOBHFNFOU represents the relatively small group of
managers who control the organisation as a whole and with whom the
final authority and responsibility for executing the management process
rests. Top management is usually responsible for determining the
organisation’s mission, goals and overall strategies. Top management is
concerned mainly with long-term planning, designing the organisation’s
broad organisational structure, leading the organisation (through the
top executive) and controlling it. Top management also influences the
corporate culture. The annual reports of organisations usually depict
their top management structure. This level of management usually
comprises the board of directors, partners, the managing director, chief
executive officers and management committees.
.JEEMFNBOBHFNFOU is responsible for specific departments of the
organisation and is primarily concerned with implementing the policies,
plans and strategies formulated by top management. It normally includes
the functional heads, such as the marketing manager, the purchasing
manager and the human resources manager. Middle management is
concerned with the near future and is therefore responsible for mediumterm and short-term planning, organising functional areas, leading by
means of the departmental heads, and controlling the management
activities of the middle managers’ own departments. Middle managers
also continually monitor environmental influences that may affect their
own departments. The trend in recent years of corporate restructuring,
delayering, downsizing and decentralisation of decision-making has
been responsible for many of middle managers becoming redundant.
Electronic technology has reduced the need for middle management
in some organisations. It is in the area of information management, in
particular, that computers have replaced the information-gathering tasks
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 2 The management process
of middle managers. Middle managers are, however, still necessary to
link the upper and lower levels of the organisation and to implement the
strategies developed at the executive level.
Lower-level management (also called first-line management) is
responsible for even smaller segments of the organisation, namely the
different subsections. The managerial functions of first-line managers
are centred on the daily activities of their departments or sections,
on short-term planning, and on implementing the plans of middle
management. Their primary concern is to apply policies, procedures and
rules in order to achieve a high level of productivity, to provide technical
assistance, to motivate subordinates and to accomplish day-to-day
goals. Typically, they spend a large portion of their time supervising the
work of subordinates. Because of this, first-line management is a vital
force in the organisation. These managers hold the power to increase
or decrease the productivity and output of most organisations. They
also maintain the crucial interface between management and the major
body of employees in the organisation. This level of management usually
comprises titles such as office manager, shift supervisor, advertising
manager, debtors’ clerk or a section manager.
Figure 2.2 summarises the various levels of management, the
responsibilities of managers at each level of management and the titles
that are normally associated with each.
Top-level management
Responsible for determining the vision, mission, goals and
strategies of the organisation. Managerial titles such as board
of directors, partners, managing directors, chief executive ofƂcer
and management committees are used.
Middle-level management
Responsible for implementing policies, plans and strategies
developed by top management. Managerial titles are usually
functional head, such as marketing manager, Ƃnancial managers,
and so on.
Lower-level management
Responsible for short-term planning, applying policies, procedures
and rules, providing technical assistance and executing day-today activities. Managerial titles are usually ofƂce manager, shift
supervisor, section manager and so on.
Figure 2.2: The levels of management, management responsibilities
and managerial titles
CONTEMPORARY MANAGEMENT PRINCIPLES
37
PART I: Introduction
areas of management
2.3.2 Areas of management
managers can be differentiated
into finance, operations, human
resources, procurement,
research and development,
public relations and marketing
At each managerial level, different functional areas can also be
distinguished. These functional areas may include finance, operations,
human resources, procurement, research and development, public
relations and marketing.
r 5IFųOBODJBMGVODUJPOJTSFTQPOTJCMFGPSPCUBJOJOHUIFOFDFTTBSZ
finances for an organisation at the lowest cost, investing these
finances in assets that would earn greater returns than the cost of
capital as well as managing the profitability, liquidity and solvency of
the organisation.
r 5IFPQFSBUJPOTGVODUJPOJODMVEFTUIBUHSPVQPGBDUJWJUJFT
concerned with the actual provision of goods and services to the
organisation’s clients. Operations management systematically
designs, directs and controls the process that transforms inputs
into products and services for internal and external customers.
r 5IFIVNBOSFTPVSDFTGVODUJPOFOUBJMTUIFBQQPJOUNFOU development and maintenance of the human resources of the
organisation. To enable the organisation to operate at optimum
levels, the human resources manager must appoint the right people
and provide them with the right training in order to make the best
use of them.
r 5IFQSPDVSFNFOUGVODUJPOJTDPODFSOFEXJUICVZJOHUIFNBUFSJBMT
and resources needed to create products and services. The
manager responsible for procurement needs to balance a number
of constraints. He or she needs to ensure that the right product
is available, at the right time, in the right quantity and of the right
quality, at the best possible price.
r 5IFSFTFBSDIBOEEFWFMPQNFOUGVODUJPOJTSFTQPOTJCMFGPS
developing new products and services and improving old products
and services. This function plays a crucial role in organisations
that operate in fast-changing environments, such as information
technology, communications, etc.
r 5IFQVCMJDSFMBUJPOTGVODUJPOPGBOPSHBOJTBUJPOJTSFTQPOTJCMFGPS
creating a favourable, objective image of the organisation and to
establish good relations with those directly or indirectly concerned
with the business and its products or services.
r 5IFNBSLFUJOHGVODUJPOJTSFTQPOTJCMFGPSHFUUJOHUIFųOBMDVTUPNFS
or client to buy the organisation’s products or services. The
marketing function is concerned with new product development,
promotion and distribution.
While these are specialised areas of management which require more
specific and specialist skills, managers in each area still plan, organise,
lead and control. A financial manager, for example, is responsible for
determining the financial goals of the organisation, thus performing
the planning function of management. Sappi Limited, for example, set
specific financial goals in terms of two key financial measures, namely
return on capital employed (ROCE) and cost of capital. For the year
38
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 2 The management process
2010, Sappi’s financial goal was to achieve their ROCE target of greater
than 12 per cent and to exceed their cost of capital. The financial
goal is in accordance with the overall strategic goal of the company6.
The financial manager needs to organise financial activities by allocating
financial tasks to people so that financial goals can be achieved. The
financial manager also needs to take the lead in financial activities,
motivate and direct members of staff in the financial section to perform
their duties in pursuit of the financial targets. Lastly, financial managers
need to ensure that financial goals are accomplished. In the case of Sappi
Ltd, the financial manager needs to determine whether their target to
achieve a ROCE of greater than 12 per cent was achieved.
2.4 THE ROLE DISTRIBUTION OF MANAGERS
Regardless of the managerial level or the management area in which
a manager works, the manager is also required to perform certain
managerial roles. Professor Henry Mintzberg followed five American
Chief Executive Officers, shadowing each for a week and analysing their
mail, their conversations and their actions. He concluded that managers
play ten different but highly interrelated roles that can be grouped under
three overlapping primary headings, namely information, decisionmaking and interpersonal roles7. In other words, managers talk to
people, gather and give information and make decisions.
LEARNING OBJECTIVE 4
Explain the role distribution of
managers.
managerial roles
managers fulfil three major roles
while performing their jobs:
interpersonal, informational and
decision-making roles
2.4.1 Interpersonal role
More than anything else, management jobs are people-intensive.
Evidence shows that managers spend most of their time in face-to-face
communication with others8. In fulfilling the interpersonal role of
management, managers perform three sub-roles. All managers have
to perform duties that are ceremonial and symbolic in nature. For
example, managers may have to appear at community functions, attend
social events or host luncheons for important customers. In doing so,
managers fulfil their role as figureheads. Second, all managers have a
role as a leader. In this capacity, managers work with and through their
employees to ensure that organisational goals are met. The third sub-role
within the interpersonal role is that of liaison, which aims at maintaining
good relations within and outside the organisation. Managers must
be politically sensitive to important organisational issues so that they
can develop relationships and networks both within and beyond their
organisations.
interpersonal role
the role that includes the
sub-roles of figurehead, leader
and liaison
2.4.2 Information role
A manager’s information role enables him or her to obtain information
from colleagues, subordinates and departmental heads, as well as
outside individuals and organisations. He or she can use this information
for making decisions. The information role of the manager involves
monitoring or gathering information on trends and passing on relevant
data or information to their superiors and subordinates. The manager is
therefore a vital link in the organisation’s communication process. The
information role
the role of monitor, disseminator
and spokesperson
CONTEMPORARY MANAGEMENT PRINCIPLES
39
PART I: Introduction
manager’s information role also entails acting as a spokesperson for the
department or for the whole organisation.
2.4.3 Decision-making role
decision-making role
the role of entrepreneur,
problem solver, resource
allocator and negotiator
The third set of managerial roles is grouped into what is known as the
decision-making role. A manager is regarded as an entrepreneur.
As an entrepreneur, the manager initiates projects that capitalise on
opportunities that have been identified in the monitoring role. This
may involve developing new products, services or processes. A second
decisional role that managers play is that of problem-solver. Regardless
of how well an organisation is managed, things do not always run
smoothly. Managers must cope with conflict and resolve problems as
they arise. This may involve dealing with an irate customer, negotiating
with an uncooperative supplier or intervening in a dispute between
employees. Managers must also make decisions about the resources
available to the organisation. Resource allocation, or deciding to whom
resources such as money, people and equipment are to be assigned, is
often a critical management decision. In his or her role as negotiator, a
manager often has to negotiate with individuals, other departments or
organisations, and trade unions about goals, standards of performance
and resources. Figure 2.3 summarises Mintzberg’s managerial roles and
sub-roles.
Managerial roles
Interpersonal role
Information role
Decision-making role
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The environment in which managers perform their main functions and
their roles is complex. Its fast-changing and uncertain nature means
that managers need to have a flexible managerial style with certain
essential skills and competencies in order to survive. These skills and
competencies are explored further in Learning Objective 5.
LEARNING OBJECTIVE 5
2.5 MANAGERIAL SKILLS
Expound on the various skills
needed by managers.
Each level, area and management role requires different knowledge,
skills and competencies for the performance of the management
task. Clark L Wilson did 30 years of research involving thousands of
managers, and thereby provides a very clear picture of what it takes
to be an effective manager. Wilson identified three skill categories –
40
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 2 The management process
technical, teambuilding and drive – where each category branches into
various specific managerial skills.
2.5.1 Technical skills
Technical skills refer to the manager’s ability to apply his or her
education, training and experience to effectively and efficiently
organise a task, job or project. The first branch of technical skills is
technical expertise, which refers to the skills that have been acquired
by a manager through education and/or actual experience of the task
at hand. A knowledge of accountancy or logistics are examples of a
technical expertise that can be used to perform a task. The second
branch of technical skills is the clarification of goals and objectives. A
manager should have the ability to determine what actual activities need
to be performed in order to meet established targets. These activities
should then be organised and scheduled. The third branch of technical
skills is problem solving, which refers to the manager’s ability to resolve
issues confronted within his or her day-to-day work as well as the
development of team collaboration. Lastly, technical skills also involve
a manager’s ability to use imagination and creativity. This is the ability to
originate ideas and to correct and develop ways to improve the overall
productivity of the organisation.
technical skills
ability or apply education,
training and experience to
organise a task, job or project
2.5.2 Teambuilding
Teambuilding refers to the ability or skill of a manager to listen
carefully to others, to communicate effectively with others and to
develop and coordinate an effective group or team. The first branch of
teambuilding is listening for insights. The manager should keep aware
of team activities by listening to team members. The second branch
is directing and coaching. Directing refers to the manager’s ability to
work through and with team members to achieve organisational goals
and objectives. A directive manager lets team members know what
is expected of them and gives specific guidance as to how the work
should be done. Coaching focuses on the improved performance of a
less experienced individual and imparts skills that this individual needs
to accept new responsibilities. Coaching in a business sense is very
similar to that in sport, where a tennis coach will direct the learning of
his or her pupil. The third branch of teambuilding is solving problems
as teams. An efficient manager should have the ability to help his or her
team to contribute ideas and solutions to improve their performance
in the organisation. Lastly, teambuilding branches into coordinating and
cooperating. Coordination is an important principle in organising.
Coordination means that all departments, sections and individuals within
an organisation should work together to accomplish strategic, tactical
and operational goals and objectives of the organisation. Coordination
will be discussed in more detail in Chapter 15 (Principles of organising).
Cooperation means the willingness to work with others, be it your team,
other teams or units close to you.
teambuilding
ability to listen and
communicate with others and
to develop and coordinate a
group or team
CONTEMPORARY MANAGEMENT PRINCIPLES
41
PART I: Introduction
2.5.3 Drive
drive
ability to set goals, maintain
standards and evaluate
performance
The third category of skills needed by managers is drive. Having the
skill to drive an organisation, team or unit successfully, means that a
manager should have the ability to set goals, maintain standards and
evaluate performance in order to achieve effective outcomes. In this
sense, outcomes refer to costs, output, product quality and customer
service. The first branch of the skill to drive is setting standards of
performance. Managers should have the skill to keep that part of the
organisation for which they are responsible and for moving and aiming
towards new accomplishments. The second branch refers to control
of details, which refers to the ability to oversee the performance of
work in detail in order to meet overall goals and objectives. The third
branch of the driving skill of a manager is energy. Successful managers
demonstrate the willingness and ability to work with their team and they
expect cooperation from others. The last branch of this category of
managerial skills is exerting pressure. This refers to the manager’s ability
to urge others to perform, without dominating.
According to Wilson’s research, about one third of managers at
all levels do not achieve an appropriate balance between technical,
teambuilding and drive skills and are thus ineffective. The answer lies
in finding a balance in all three categories of managerial skills, fit for the
manager’s specific situation. Figure 2.4 summarises the three categories
of managerial skills.
Technical skills
Teambuilding
Drive
r technical expertise
r listening for insights
r clariƂcation of goals and
objectives
r directing and coaching
r set standards of
performance
r control of details
r problem solving
r solving problems as
teams
r imagination
r coordinating
r exerting pressure
r creativity
r cooperating
r energy
Figure 2.4: Managerial skills
Source: Wilson, C.L. 2003. How and why effective managers balance their skills: technical,
teambuilding and drive. Rockatech Multimedia Publishing: Columbia, p 13, 18–20 and
Kreitner, R. 2009. Principles of management. 11th edition. Arizona: Cengage Learning,
p 1415.
42
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 2 The management process
2.6 LEARNING TO MANAGE SUCCESSFULLY
Managers acquire management skills through management training and
development, as well as through practical experience.
LEARNING OBJECTIVE 6
Explain how one can learn to
manage successfully.
2.6.1 Management training and development
In South Africa, management and entrepreneurship training and
development is obtained in schools, business colleges, technical
universities and academic universities. Some institutions and
organisations provide in-house management training and development.
It is important that the management training and development offered
by these institutions is aligned with the NQF (National Qualifications
Framework). This ensures that the training is accredited. Non-formal
management training and development, often called ‘continuous
learning’, refers to non-degree programmes offered by universities,
organisations and in-house training facilities set up by business
organisations themselves. Management training and development is of
major importance to the South African economy. The economy must
grow at a rate of well above three per cent per year to reverse spiralling
economic stagnation and impoverishment. This will be possible only if
there are enough skilled managers to drive the economy. It is widely
recognised that a moderate real economic growth rate of 2.7 per cent
per year will require an additional 100 000 managers each year for the
foreseeable future. In order to provide for this need, significant levels of
management training and development are required. In order to create
equitable representivity and empowerment, these managers cannot be
white males (as has traditionally been the case).
2.6.2 Practical experience
A second source of managerial competence is practical experience.
There is no doubt that a natural aptitude for management, self-motivation
and ambition plays a decisive role in the development of managerial
competence. Most managers have advanced to their present positions
from other jobs. Through experience, and by facing and meeting a variety
of managerial challenges, the individual develops insights that cannot be
learnt from training alone. Efficient managers, however, develop their
skills through a combination of training, development and experience.
Management is a science, a profession and an art. The growing body
of knowledge around management and organisational performance
is acquired through scientific research and is disseminated through
teaching, textbooks and articles. Management is also often viewed as
an art because many of the skills cannot be learnt from a book or in a
classroom. Management requires practice, and many of the required
skills – especially interpersonal and conceptual skills – are learnt through
experience. Becoming a successful manager, therefore, requires a blend
of formal learning and practice of science and art. Practice alone used to
suffice when learning how to manage, but this is no longer the case. The
study of management enables managers to see and understand aspects
of organisations that others cannot.
CONTEMPORARY MANAGEMENT PRINCIPLES
43
Copyright © 2014. Juta and Company. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S.
or applicable copyright law.
Part I: Introduction
CHAPTER SUMMARY
1. Understand the importance of managers and management in modern society.
• Managers need to cope with diverse and far-reaching challenges from inside as well as
outside the organisation.
• Managers have the most direct influence on the performance of its employees and have
the primary responsibility for inculcating the values, beliefs, norms and values of the top
management for the long-term sustainability of the organisation.
2. Define management and explain the management process.
• Management can be defined as a process of working with and through others to achieve
organisational goals and objectives as effectively and efficiently as possible within an everchanging environment.
• Managers need certain resources or inputs to deliver outputs or performance.
3. Identify and explain the different levels and areas of management in an organisation.
• Managers can be differentiated between three basic layers, namely top-, middle- and lowerlevel management.
• At each of these levels, different functional areas can be distinguished, which include finance,
operations, human resources, procurement, research and development, public relations and
marketing.
4. Distinguish between the role distribution of managers.
Professor Henry Mintzberg concluded that managers play ten roles that can be grouped into
three primary headings: interpersonal, informational and decision-making roles.
• The interpersonal role has three sub-roles, namely the role of figurehead, leader and liaison.
• The informational role has three sub-roles, namely the role of monitor, disseminator and
spokesperson.
• The decision-making role has four sub-roles namely entrepreneur, problem solver, resource
allocator and negotiator.
5. Expound on the various managerial skills and competences needed by managers.
Clark L Wilson identified three skill categories, where each category has various branches:
• The technical skills category branches into technical expertise, clarification of goals and
objectives, problem solving and imagination and creativity.
• The teambuilding category branches into listening for insights, directing and coaching,
solving problems as teams, and coordinating and cooperating.
• The drive category branches into standards of performance, control of detail, energy and
exerting pressure.
6. Explain how one can learn to manage successfully.
Managers can acquire management skills through management training and development, as
well as practical experience.
44
Contemporary Management Principles
EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 5/3/2018 12:41 PM via UNISA
AN: 707010 ; Vrba, M. J., Brevis, Tersia.; Contemporary Management Principles
Contemporary.indb 44
Account: s7393698
2013/11/20 4:23 PM
CHAPTER 2 The management process
KEY TERMS
controlling
decision-making role
drive
education in management
effectiveness
efficiency
finance
goals
human resources
informational role
inputs
interpersonal role
leading
lower-level management
management
management environment
management process
managerial experience
managers
marketing
middle management
objectives
operations
organising
outputs
planning
procurement
public relations
research and development
teambuilding
technical skills
top management
REVIEW QUESTIONS
1. Why are managers and management so important in modern society?
2. Define the term ‘management’.
3. Explain the management process and illustrate your answer diagrammatically.
4. Identify the various levels of management that can be found in most medium- to large-sized
organisations.
5. Explain the various areas of management that can typically be found in large-sized organisations.
6. Explain the various categories of roles that managers fulfill according to Professor Henry Mintzberg.
7. Identify and explain the various categories of managerial skills identified by Clark L Wilson. In your
answer you also need to discuss the branches of each skill category.
8. Explain how a manager and potential managers can acquire managerial skills.
END NOTES
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CONTEMPORARY MANAGEMENT PRINCIPLES
45
Chapter 3
Features of contemporary
organisations and new
management challenges
Mari Vrba
OPENING CASE
WL Gore & Associates, Inc.1
WL Gore & Associates, Inc. is a privately held
company that was founded in 1958 with its
headquarters in Newark, Delaware, USA. For
more than 50 years, Gore has built a worldwide
reputation for ethics and integrity in its dealings
with customers, suppliers, and employees, and for
taking a long-term view when assessing business
situations.
Gore employs approximately 9 000 associates.
They are located in 30 countries worldwide,
with manufacturing facilities in the United States,
Germany, Scotland, Japan and China, and sales
offices around the world.
Gore’s fluoropolymer products provide
innovative solutions for many industries, in nextgeneration electronics, for medical products,
and with high-performance fabrics. While their
best-known product is GORE-TEX® fabrics, their
products are all distinguished in their markets.
Their technologies and fluoropolymer expertise
are unsurpassed.
Gore also has a unique – and successful –
management style. In 2013, for the fifteenth
consecutive year, WL Gore & Associates, Inc.
earned a position on Fortune magazine’s annual list
of the U.S. ‘100 Best Companies to Work For’.
Its European operations have also earned similar
honours. An important factor in this recognition
is Gore’s unique culture, which evolved from the
company’s success with small teams during its
early years. This approach to business emerged
from founder Bill Gore’s experience with task
force teams while he worked at the DuPont
Company. DuPont formed such groups on an ad
hoc basis to attack problem situations. They were
usually multidisciplinary and typically operated for
short periods outside of the company’s formal
management hierarchy.
Bill Gore first presented the concept of a
‘lattice’ organisation to the company in 1967.
Unlike the traditional management structure
that Bill Gore had experienced at DuPont,
he proposed a flat, lattice-like organisational
structure where everyone shares the same title of
‘associate’. There are neither chains of command
nor predetermined channels of communication.
Leaders replace the idea of ‘bosses’. Associates
(not employees) work in general work areas.
With the guidance of their sponsors (not bosses)
and a growing understanding of opportunities
and team objectives, associates commit to
projects that match their skills. All of this takes
place in an environment that combines freedom
with cooperation and autonomy with synergy.
Associates choose to follow leaders rather than
have bosses assigned to them and peers review
and rate associate contributions.
A leader’s job at Gore is not to take individual
decisions, but rather to act as the representative
of the ten-or-so member team that is the basic
management unit at Gore. Everyone can earn the
credibility to define and drive projects. Sponsors
CHAPTER 3 Features of contemporary organisations and new management challenges
help associates plan their career choices in the
organisation that will offer personal fulfilment
whilst maximising their contribution to the
organisation. Leaders may be appointed, but
‘followership’ defines them. More often, leaders
emerge naturally by demonstrating special
knowledge, skills, or experience that advances a
business objective.
It can be confusing for new people who
are used to looking to their line managers for
guidance, but because people choose their own
leaders, they are committed to meet objectives.
Leadership at Gore is truly participatory, for
example, the team, not the leader, will decide to
accept or reject a new product innovation.
In this lattice organisation, associates
communicate directly with each other and are
accountable to fellow members of their teams.
At Gore, hands-on product innovation and
prototyping are encouraged. Teams typically
organise around opportunities, new product
concepts, or businesses. As teams evolve, leaders
frequently emerge as they gain followership. This
unusual organisational structure and culture is
a significant contributor to associate satisfaction
and retention.
Bill Gore articulated four principles that define
the culture at Gore. He calls them freedom,
fairness, commitment and waterline.
1. Associates have the freedom to encourage,
help, and allow other associates to grow in
knowledge, skill and scope of responsibility.
2. Associates should demonstrate fairness to
one another and everyone with whom they
come into contact.
3. Associates choose their own commitments
and they should keep them.
4. A waterline situation involves consultation
with other associates before undertaking
actions that could influence the reputation or
profitability of the company and otherwise
‘sink the ship’.
Gore ignores the conventional wisdom when
it comes to production. Although the company
manufactures a vast range of products ranging from
medical devices to guitar strings, it limits the size
of the employee base at a plant to approximately
250 workers – small for a company comprising
9 000 employees. The underlying philosophy is
that the cost savings from large plants cancels out
the loss of efficiency and productivity that is a
consequence when employees do not know one
another well.
Committees at Gore determine performance,
following a comprehensive review process. Every
year, each team ranks every member relative to
all of the others by asking them who has made the
biggest impact on the organisation. They leave the
question deliberately undefined, to allow people
to interpret it as they wish. Special committees
sort through the rankings and use it as the basis
for decisions on compensation. The process
works because associates perceive it as being fair.
All associates are part owners of the company
through a stock plan; therefore, Gore associates
expect much more from one another in terms of
innovation and creativity, high ethics and integrity,
and making commitments and delivering on them.
Gore is more informal than most workplaces.
Relationships between associates are open and
informal, and everyone is treated respectfully
and fairly. This type of environment naturally
promotes social interaction and many associates
have made lifelong friends with those they met
working at Gore. Because the organisation views
its associates as their most valued asset, they try
to provide tools and resources to allow flexibility
in balancing work/life needs. This includes
internal training, continuous learning, and external
education, resource and referral programmes for
childcare, adoption assistance, domestic-partner
benefits, and flexible work hours.
While all of these processes sound very
complex, the feeling at Gore is that it contributes
to a freer, more innovative and flexible workforce.
Bill Gore once commented that the aim of the
organisation is to make money and to have fun
doing so, and the results seem to bear this out.
Although Gore is private, it has been growing
revenues consistently for the last decade.
Voluntary turnover at the company is only five
per cent. This is a strikingly low number for an
industrial company with many manufacturing units.
CONTEMPORARY MANAGEMENT PRINCIPLES
47
PART I: Introduction
LEARNING OBJECTIVES
The purpose of the chapter is to examine the emergence of organisations that differ substantially
from traditional organisations because of on-going and turbulent environmental change. The
objective of studying this chapter is to enable you to:
1. Cite reasons why organisations change.
. +dentify nnewo variables in the business environment of contemporary organisations.
3. Defend the statement that bureaucracy fails to provide for the needs of modern organisations.
4. Expound on the features of the new, emerging organisation.
LEARNING OBJECTIVE 1
Cite reasons why organisations
change.
48
3.1 THE CHANGING FACE OF CONTEMPORARY
ORGANISATIONS
We use the words ‘change’ and ‘challenge’ often in this book. In this
chapter, we focus on the challenges that managers face to meet the
radical changes occurring in the world, the business environment and
the workplace.
In Chapter 1, we explained why the Information Revolution changed
the entire world and the world of work. The Information Revolution
and the emergence of globalisation are two factors that, in tandem,
forced organisations to change fundamentally. These factors enabled
organisations to function in a fast-changing, dynamic environment. Some
of these changes are so revolutionary that some authors in influential
journals refer to ‘new organisation forms’ emerging. However, another
faction of prominent authors has unresolved issues with the use of the
concept ‘new organisation forms’. Palmer and Dunford2, for example,
ask if ‘new’ relates to new in time (the first time we have seen it) or
new in context (the first time we have seen it here). Ambiguity also
exists regarding the word ‘form’ – the question is whether the concept
is interchangeable with ‘structure’ or ‘design’. These ambiguities
notwithstanding, there is a high degree of consistency in the nature of
organisational practices attributed to the ‘new organisation form’: flat,
flexible, networked, global and diverse. For the purposes of this chapter,
we focus on these features.
WL Gore & Associates Inc., the organisation discussed in the
opening case study, meets the challenges presented by a fast-changing
environment in an innovative manner. Admittedly, not all organisations
change as dramatically as this organisation, but many exhibit one or more
of the features of the ‘new’ organisation and differ fundamentally from
the traditional model of formal bureaucratic organisations discussed in
Chapter 1.
The key features of emerging ‘new’ organisations are that they are
flatter and leaner, flexible, networked internally and externally, diverse,
and global in orientation and operations3.
The discussion in this chapter sometimes overlaps with topics and
issues we shall deal with in the rest of the book because the parallel
themes of change and challenge are prevalent throughout the book.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 3 Features of contemporary organisations and new management challenges
However, in this chapter, we introduce the ‘new’ organisation, we
expand on the challenges contemporary managers face, and explain
how these changes and challenges affect management theories.
3.2 VARIABLES INFLUENCING
CONTEMPORARY ORGANISATIONS TO
CHANGE
LEARNING OBJECTIVE 2
+dentify nnewo variables in
the business environment of
contemporary organisations.
In Chapter 1 we introduced you to the concept of systems thinking and
why organisations, as open systems, are in continuous interaction with
their environment. Organisations worldwide have to deal with a number
of variables in their environment that emerged during the last decade or
so, including:
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3.2.1
Globalisation and the global economy
Previously, international organisations operated in many countries, but
they kept their operations in each country separate, with little interaction
or interdependence between them. In contrast, being global means
operating without the constraints or traditions of national boundaries,
and seeking to compete in any high-potential marketplace on Earth4.
At its most basic, globalisation refers to the worldwide integration of
markets, and cultures, the removal of legal and political barriers to
trade, the ‘death of distance’ as a factor limiting material and cultural
exchanges’5.
The global organisation is a consequence of several new and
sophisticated forces influencing the world economy6.
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cheaper. For example, China and Korea manufacture clothes that
sell at competitive prices in other markets in the world.
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because they possess a highly educated workforce, technological
and managerial capabilities, and advanced telecommunications and
transportation infrastructures. On the one hand, this intensifies
international competition but, on the other, it increases the
available strategic options of individual organisations in such areas
as purchasing components or finding markets for products or
services.
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acquiring a taste for foreign products.
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for organisations to take advantage of lower-cost locations for
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CONTEMPORARY MANAGEMENT PRINCIPLES
49
PART I: Introduction
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expanding their capabilities, for example by building networks into
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Globalisation is the catalyst for the worldwide merging of economic
and social forces, interests and commitments, values and tastes, and
challenges and opportunities.
Manuel Castells places global organisations in the context of a global
economy. He defines the global economy as follows:
‘It is an economy with the capacity to work as a unit in real time
on a planetary scale. ...[W]hile the capitalist mode of production
is characterized by its relentless expansion, always trying to
overcome limits of time and space, it is only in the late-twentieth
century that the world economy was able to become truly global
on the basis of the new infrastructure provided by information
and communication technologies … it is informational because the
productivity and competitiveness of units or agents in this economy
(be it firms, regions or nations) fundamentally depend upon their
capacity to generate, process, and apply efficiently knowledgebased information. It is global because the core activities of
production and circulation, as well as their components (capital,
labour, raw materials, management, information, technology,
markets) are organised on a global scale, either directly or through
a network of linkages between economic agents’7.
Not so long ago, the international scope of South African companies
was limited. Sanctions, political isolation and legislative constraints
during the apartheid years made anything beyond normal trade relations
almost impossible. After the release of Nelson Mandela in 1992, both
business and diplomatic relations with the rest of the world began to
expand slowly. However, the democratic elections of 1994 provided the
impetus for South African corporations to move rapidly into the rest of
Africa and beyond.
3.2.2 Advances in technology
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the Information Revolution and
other technological advances
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dramatically changed the world of work and will continue to do so in
the future. Modern managers need to appreciate and understand the
power of technology and must be able to use it in the best interests
of the organisations where they work. The Information Revolution was
discussed in Chapter 1. The way in which technological advances force
organisations to change will be discussed in Chapter 5.
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South Africa has the best internet access in Africa.
One in 65 people has direct access to the internet.
50
CONTEMPORARY MANAGEMENT PRINCIPLES
Elsewhere in Africa, the average is nearer to one in
4 000 people. Zimbabwe ranks third in Africa with
CHAPTER 3 Features of contemporary organisations and new management challenges
one in 1 000 people boasting direct access, while
approximately 700 000 of the estimated one million
people in Africa with public access to the internet
reside in South Africa. E-mail access, although often
too expensive, too slow, and hampered by phone
lines that are inadequate in both number and quality,
is spreading rapidly in Africa. There are only a few
countries without known connectivity. Internet
access is limited, but it is also spreading rapidly.
On the continent, South Africa is comparable to
most European countries at the level of connectivity.
In general, Southern Africa is the most advanced
region, but countries all over the continent are in
the process of being connected. Africa continues
to lag far behind the developed world where, for
example, an estimated one in six people in North
America and Europe use the internet regularly.
Internet and e-mail are essential in assisting African
businesses to overcome the traditional constraints
to economic development, such as distance from
markets. High internet access charges are also a
serious problem. Other problems include a severe
shortage of skilled technology personnel, the high
cost of computer and communication equipment,
inadequate telecommunications infrastructure and
unreasonable regulatory environments in many
countries.
One of the most serious problems in Africa is
teledensity – the number of telephone lines per 100
people. There are more telephone lines in New
York or Tokyo alone than in the whole of Africa.
The state control and monopoly model adopted
by African countries and the fact that governments
have concentrated their telecommunication
drives in urban areas while 89 per cent of Africa’s
population lives in rural areas are responsible for
this state of telecommunication. The only solution
to the problem is for governments to embrace
privatisation. This does not necessarily mean
handing the telecommunication industries entirely
over to multi-national companies. South Africa has
proved that local investors are more than willing to
invest in potentially lucrative markets either directly
or through the stock exchange.
3.2.3 Radical transformation of the world of work9
The world of work has transformed – moving from the total quality
management efforts (TQM) through the re-engineering processes of
the 1990s to the radical transformation of the workplace itself in the
2000s. Organisations have moved from focusing on reducing defects
and streamlining business processes to focusing on managing continuous
and radical change. Today the emphasis is on creating organisations in
which work is re-organised, redesigned, or re-engineered to improve
performance.
The biggest difference between the old work and the new is the
pressure to do it all better, faster, and cheaper10. Organisations are
focusing and organising around what they do best – they structure
according to core competencies, instead of according to product or
market. Autonomous work teams and strategic alliances are becoming
more important. They outsource work that is not part of the core
work or hire temporary and contract workers as needed. New ways of
viewing the organisation are emerging as more organisations realise that
the key resources of business are knowledge, information and ideas.
Organisations are restructuring, creating integrated organisations, global
networks, and leaner and more flexible structures. They are becoming
more fluid, shifting in size, shape and arrangement. (We consider these
characteristics in more detail when we discuss the unique features of
contemporary organisations.)
CONTEMPORARY MANAGEMENT PRINCIPLES
51
PART I: Introduction
3.2.4 Increased power and demands of the
customer
New communication, transportation and information technologies
allow customers to compare prices, quality, availability and so forth
between local organisations and organisations abroad. When buying
a book, buyers no longer have to buy from a local bookshop – or
even a South African-based bookshop. Buyers can access the website
of the South African organisation Kalahari.net or the website of
Amazon.com to do so. Both organisations can deliver ordered books to
one’s doorstep within as little as two days, or one can have the book of
one’s choice available on an Amazon Kindle within minutes.
Consumers’ awareness of possible products and services has
increased because of global competition – a greater variety and higher
quality of choice is available to them. Consumers are now able to choose
the products and services they want according to the criteria they set in
terms of the following:
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r RVBMJUZmCFTURVBMJUZ NFFUJOHBOEFYDFFEJOHUIFDVTUPNFST
expectations
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r TFSWJDFmCFTUTFSWJDFQPTTJCMF
r JOOPWBUJPOmTPNFUIJOHOFX OPUZFUFOWJTJPOFECZUIFDVTUPNFS
r DVTUPNJTBUJPOmUBJMPSFEUPUIFTQFDJųDOFFETPGFBDIDVTUPNFS
The needs of customers are determining how organisations set strategies
and carry out operations. The prime focus of twenty-first century
managers is to serve customers better through continuous innovation
of products and services.
3.2.5 The growing importance of intellectual capital
and learning
KPVGNNGEVWCNECRKVCN
the sum and synergy of the
knowledge, relationships,
experience, discoveries,
processes, innovations, market
presence, and influence of an
organisation on the community
52
The critical factors of production previously were land, labour and
raw materials. The challenge to managers was to use these production
factors to create products that were more valuable than the sum of
their parts. The key factors of production have changed dramatically in
the recent past – JOUFMMFDUVBMDBQJUBM has become the critical resource
for the organisation of today. Fewer people are doing physical work and
more are doing knowledge-based work. This trend is likely to continue in
the future – many employees will work in knowledge organisations, and
the value of their knowledge, as both input and output, will determine
their value to the organisation. Intellectual capital is the sum and synergy
of the knowledge, relationships, experience, discoveries, processes,
innovations, market presence, and influence of an organisation on the
community12.
The three major categories of intellectual capital are as follows:
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the organisation, represented by its copyrights, trademarks and
patents, systems, and proprietary databases
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suppliers and customers
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 3 Features of contemporary organisations and new management challenges
r )VNBODBQJUBMmUIFDPNCJOFETLJMMTBOELOPXMFEHFPGUIF
employees in the organisation.
Many management theorists stress that contemporary organisations
must develop, measure and manage their intellectual assets if they
are to be successful – the term coined for this process is ‘knowledge
management’. Knowledge management is an integrated, systematic
approach to identifying, managing and sharing the information assets
of an organisation. These include databases, documents, policies, and
procedures, as well as previously unarticulated expertise and experience
available to individual knowledge workers, who are responsible for using
it wisely and for replenishing the stock13. This ongoing cycle encourages
a learning organisation, stimulates collaboration and empowers people
continually to enhance the way they perform at work.
We discuss the learning organisation in detail in Chapter 1. Successful
learning organisations exhibit a number of distinctive features: individual
learning is continuous; employees share knowledge; the organisational
culture supports learning; employees are encouraged to think critically
and to take risks with new ideas; and all individuals are valued for their
contributions to the organisation.
Organisational learning is the process that enables an organisation to
adapt to change and move forward by acquiring new knowledge, skills,
or behaviours, and thereby to transform itself.
Knowledge management and organisational learning will have
an increasing impact on organisations in the future because they can
enhance the potential of an organisation to increase productivity, quality
and innovation.
3.2.6 New roles and expectations of workers
As society moves from the Industrial Era to the Knowledge Era, job
requirements are changing, as illustrated in Table 3.1. From this table
it is clear that the profile of the workforce will rapidly change to fit
the job requirements of the Knowledge Era. This is significant, as a
disproportionate number of jobs are already originating from the
knowledge and service industries, and this trend will continue. Many of
these jobs require a much higher level of technical skill than the jobs they
are replacing, especially in resource-based and manufacturing industries.
For South African leaders this has special significance.
6CDNGThe changing job requirements of workers
Industrial Era
Knowledge Era
TGRGVKVKXGUMKNNU
MPQYNGFIGVQFGCNYKVJVJGWPGZRGEVGF
FGRGPFKPIQPOGOQT[CPFHCEVU
DGKPIURQPVCPGQWUCPFETGCVKXG
TKUMCXQKFCPEG
risk taking
HQEWsing Qn RQNitiEs anF RrQEGFWrGs
EQNNaDQrating YitJ RGQRNG
Source: Adapted from Marquardt, M.J. & Berger, N.O. 2000. Global leaders for the twenty-first century. New York: University of
New York Press, p 17. And Ancona, D., Kochan, T.A., Scully, M., Van Maanen, J. & Westney, D.E. 2005. Managing for the future:
Organisational behaviour and processes. 2nd edition. Cincinnati: South-Western College Publishing, p M1–12.
CONTEMPORARY MANAGEMENT PRINCIPLES
53
PART I: Introduction
An interesting aspect of knowledge workers is that they actually own the
means of production. In other words, if they leave the organisation, they
take the knowledge with them. In this respect, managers face another
challenge: to attract and retain knowledge workers and to provide a
fulfilling structure in which they can apply their knowledge.
Another new element in the environment is coping with
‘temporariness’, as indicated by the following14:
r 5IFBDUVBMKPCTUIBUXPSLFSTQFSGPSNBSFJOBQFSNBOFOUTUBUF
of flux, so workers need to update their knowledge and skills
continually to stay on top of new job requirements.
r 8PSLHSPVQTBSFBMTPJODSFBTJOHMZJOBTUBUFPGŴVY*OUIFQBTU workers were part of specific work groups, which were relatively
permanent and offered a considerable amount of job security.
Temporary work groups replaced permanent work groups. Teams
include members from different departments and the members
change all the time to meet changing work assignments.
r 0SHBOJTBUJPOTUIFNTFMWFTBSFBMTPJOŴVYmUIFZDPOUJOVBMMZ
reorganise their various divisions, downsize, unbundle, outsource
and replace permanent employees with temporaries.
Yet another change in the expectations of workers emanates from
the different generations of people working in most contemporary
organisations15:
r 5IFATJMFOUHFOFSBUJPO CPSOCFUXFFOBOE XFSF
children of the Depression.
r #BCZCPPNFST CPSOCFUXFFOBOE XFSFSFTQPOTJCMF
for major social changes worldwide while they were teenagers;
they became ‘yuppies’ (in midlife) and are nearing retirement.
r (FOFSBUJPO9 CPSOCFUXFFOBOEHSFXJOUPBEVMUIPPE
with a sense of world-weariness and many of them earn more in
real terms than their parents.
r A5IF.JMMFOOJBMT BMTPLOPXOBT(FOFSBUJPO:BSFOPXJOUIFJS
early careers in the midst of a slow global economic recovery and
high unemployment.
An article in Time focuses on Generation Y and their influence on the
world of work. The following is an excerpt from the article.
‘The Industrial Revolution made individuals far more powerful
– they could move to a city, start a business, read and form
organizations. The Information Revolution has further empowered
individuals by handing them the technology to compete against huge
organizations: hackers vs. corporations, bloggers vs. newspapers,
terrorists vs. nation states, YouTube directors vs. studios, and
app-makers vs. entire industries. ….. [T]om Brokaw, champion of
the Greatest Generation (Generation Y) loves millennials. He calls
them the Wary Generation, and he thinks their cautiousness in life
decisions is a smart response to their world. “Their great mantra
has been: Challenge the convention. Find new and better ways of
54
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 3 Features of contemporary organisations and new management challenges
doing things. And so that ethos transcends the wonky people who
are inventing new apps and embraces the whole economy”, he
says’16.
The world that most managers and workers work in today is one of
permanent temporariness.
3.3 THE CLASSIC MODEL OF THE FORMAL
ORGANISATION
To study the features of the new organisation in the proper perspective,
it is necessary to take another brief look at the traditional model of the
organisation. In Chapter 1 we discussed the work of Max Weber, the
German sociologist who, at the turn of the last century, developed the
model of ‘rational-legal bureaucracy’, based on his studies of Germany’s
government bureaucracy17.
Weber was one of the first researchers to identify systematically a
set of characteristics shared by many ‘modern’ large-scale organisations
in both the private and the public sectors. Based on his research, Weber
developed a model, which, at the time, served to analyse the key
elements of a complex social phenomenon – the bureaucracy18.
The emphasis here is on the word ‘model’ – not all real-life
organisations described as bureaucracies embody all the characteristics
identified in Weber’s model.
Weber’s model provided the conceptual base for many further
studies of the ‘modern’ organisations of the twentieth century.
Generations of organisational researchers expanded the model of
bureaucracy, moving beyond his focus on the organisation’s internal
factors to include the analysis of its relationships with the external
environment. In addition to the characteristics of the bureaucracy which
we discussed in Chapter 1, the organisation’s environment is analysed in
terms of one country, even in multinational organisations. Multinational
organisations are organised into country subsidiaries19, linked to the
rest of the organisation through specified departments, such as an
international division.
The traditional model of organisation has many strong points,
including its predictability and reliance, impartiality, expertise through
specialisation and clear lines of control. The expected benefits of a
bureaucracy are efficiency and consistency. The bureaucracy functions
best when the organisation performs many routine tasks because lowerlevel employees take care of the bulk of the work by simply following
rules and procedures. Furthermore, employment is a lifelong career
commitment; both the employee and the organisation view themselves
as being committed to each other over the working life of the employee20.
Bureaucracies also have many weaknesses, such as rigid rules and red
tape, the protection of authority, slow decision-making, incompatibility
with changing technology and incompatibility with workers’ values.
Despite its weaknesses, however, the bureaucracy is still widely used in
many organisations, especially where:
LEARNING OBJECTIVE 3
Defend the statement that
bureaucracy fails to provide
for the needs of modern
organisations.
CONTEMPORARY MANAGEMENT PRINCIPLES
55
PART I: Introduction
r MBSHFBNPVOUTPG TUBOEBSEJTFEJOGPSNBUJPOIBWFUPCFQSPDFTTFE
and an efficient processing method is in operation
r UIFPSHBOJTBUJPOJTGBNJMJBSXJUIUIFOFFETPGJUTDVTUPNFSTXIJDI
are relatively stable
r UIFUFDIOPMPHZJTSPVUJOF
r UIFPSHBOJTBUJPOEFMJWFSTBTUBOEBSEJTFEQSPEVDUPSTFSWJDF21.
Whilst the bureaucracy still works well for many organisations, the very
strengths of the model became weaknesses for organisations operating
in dynamic and turbulent environments because such organisations have
to respond to increased competition in terms of customer service,
continuous improvement in manufacturing, and greater diversity of
products, services and customers. For these organisations, the strengths
of predictability and stability of the bureaucracy turns into weaknesses22.
Contemporary organisations23 operate in a world of changing markets,
technologies, customers and products. Economists call it a secular shift
– a big, broad increase in uncertainty and volatility. The transition is a
result of globalisation, the digital revolution and the information-based
economy it creates. By freeing companies from their physical assets, it
has made them more flexible and more vulnerable to competitors. For
example, Microsoft can get into and out of many businesses – internet
search, online advertising, mapping and electronic payment – at virtually
a moment’s notice, but so can any other organisation.
The digital revolution also makes business more chaotic by shifting
information and power toward customers. Moreover, it changes
products in every industry, new or old. Modern cars are essentially
computers on wheels. Credit cards have chips in them. Computer chips
transformed industries and will transform more industries every day
as the cost of computing power, telecommunications and data storage
continues to plunge.
Modern organisations created strategies and structures to buffer
them against the forces of change. This strength, so desirable in a
stable environment, is turning into a weakness in the current business
environment.
LEARNING OBJECTIVE 4
3.4 THE NEW ORGANISATION MODEL
Expound on the features of the
new, emerging organisation.
The new organisation model has characteristics that differ substantially
from those embodied in the bureaucracy. The features of the new
organisation we examine in this chapter are not typical of all modern
organisations but serve as a guide to analyse the trends of change in
contemporary organisations24. Table 3.2 on the next page shows the
differences between the features of traditional organisations and those
of organisations emerging because of change in the environment.
56
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 3 Features of contemporary organisations and new management challenges
6CDNGDifferences between traditional and nnewo organisations
Dimension
Traditional
New
critical tasks
RJ[sical
OGntal knQYlGFgG
rGlatiQnsJiRs
JiGrarcJical
lateral
inHQrOatiQn ƃQY
Xertical
JQri\Qntal anF Xertical
decision-making
top-down
wJere inHormation resides
s[stems and processes
inƃeZiDle
ƃeZiDle
leXels
man[ tall strWctWre
Hew ƃat strWctWre
DoWndaries
ƂZed
permeaDle
competitiXe tJrWst
Xertical integration
networked
management st[le
autocratic
participatiXe
culture
compliance
commitment and results
mindset
etJnocentric
gloDal
workHorce
Jomogeneous
diXerse
strategic Hocus
eHƂcienc[
innoXation
Source: (i) Adapted from Marquardt, M.J. & Berger, N.O. 2000. Global leaders for the twenty-first century. New York: State University
of New York Press, p 17. (ii) Ancona, D., Kochan, T.A., Scully, M., Van Maanen, J. & Westney, D.E. 2005. Managing for the future:
Organisational behaviour and processes. 2nd edition. Cincinnati: South-Western College Publishing, p M1–12.
In the following sections, we discuss the specific features of the new
organisation and outline the unique managerial challenges inherent in
each feature.
3.4.1 Global
The new organisation is effective at operating in an increasingly global
economy. We have explained the reasons for the emergence of the
global economy and the importance for organisations to be part of it in
Section 3.2.1. The global business environment is more complex than
the domestic environment and managers of organisations operating in
the international marketplace have to deal with a much broader set of
environmental forces.
Management challenges
The managers of organisations competing in the complex global
environment require global leadership skills. For example, managers
should establish networks with suppliers and customers in other
countries in order to compete worldwide and that requires international
management skills25.
It is vitally important for the managers of any organisation competing
in the global marketplace to understand the diverse cultures of the
individuals involved. Whether managing culturally diverse individuals
within a single location or communicating with diverse individuals at
CONTEMPORARY MANAGEMENT PRINCIPLES
57
PART I: Introduction
remote locations around the globe, an appreciation of the differences
among cultures is crucial and training in cross-cultural communication is
essential for managers26.
Finally, the ability to think and operate globally is one of the major
challenges for the managers of new organisations. Lane and DiStefano27
identified a profile of effective global managers after reviewing a wide
range of literature dealing with global leadership. According to them,
managers of global organisations should have the ability to:
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r EFTJHOBOEGVODUJPOJOŴFYJCMFPSHBOJTBUJPOTUSVDUVSFT
r XPSLXJUIPUIFSTBOEJOUFBNT
r DPNNVOJDBUFFŲFDUJWFMZ
r MFBSOBOEUSBOTGFSLOPXMFEHFJOBOPSHBOJTBUJPO
%PJOHCVTJOFTTJO"GSJDB28
The key to successful business dealings elsewhere in
Africa is a good understanding of African business
culture. Success or failure in doing business in Africa
depends on the ability to understand and adjust to
Africa’s dynamic market. The complex and changing
African environment requires business people to
have a degree of flexibility. In addition, the potential
for turbulence requires them to monitor and assess
the political risks in the countries with which they are
doing business. Some aspects to consider include the
following:
r People are sensitive about how you pronounce
their names.
r Business people should avoid patronising and
condescending behaviour or demonstrating
prejudice, bias, or stereotypical beliefs.
r In Senegal and Ghana, parents teach children not
to look adults in the eye since they consider it an
act of defiance or a lack of respect. This means
that eye contact, considered as a mark of trust or
truthfulness elsewhere in the world, may have a
different meaning in some African countries.
r In most African cultures, greeting is very important
and it is common to see the same greeting, such
as a welcome, repeated several times. Africans
often shake hands to greet people and the greeting
could range from a simple handshake to prolonged
and sometimes vigorous forms of handshaking. It
is common to find younger people, women, or
subordinates offering both hands as a mark of
respect.
58
CONTEMPORARY MANAGEMENT PRINCIPLES
r In many African countries, using the left hand to
receive or give a gift is considered impolite and
therefore, unacceptable.
r Africa’s considerable cultural diversity is not an
impediment to successful business operations. To
manage cultural differences, one must understand
the need for personal relations and the role that
connections play in African business and the
African respect for hierarchy, titles and age.
r One must also comprehend the concept of
‘African time’ and make provision for it when
arranging business meetings and to ensure that
there is considerable follow-up.
r When practices, not tolerated or permitted in
one’s own country, are rampant in another country,
business people should follow the rule of thumb,
which is to do what is legal and avoid what is illegal.
It is essential to know the rules and to realise that
laws are often openly broken because of lack of
enforcement.
r Africans tend to be communal, emphasising
collectivism instead of individualism. The tendency
is to take decisions more slowly, looking for
unanimity before acting and a reluctance to
contradict or challenge the system.
Inter-cultural business is always a challenge; African
business is no different, but if one keeps an open
mind, you should be able to proceed with confidence
and could reap the many profitable rewards the
dynamic African market offers.
CHAPTER 3 Features of contemporary organisations and new management challenges
3.4.2 Networked
There is interdependence between individuals, groups and sub-units
within the contemporary organisation:
r 5FBNTBSFFNQIBTJTFEBTGVOEBNFOUBMVOJUTPGBDUJWJUZ SBUIFSUIBO
individual jobs.
r $SPTTGVODUJPOBMUFBNTEFWFMPQ DPNQSJTJOHQFPQMFGSPNEJŲFSFOU
departments or sections of the organisation.
r *OGPSNBUJPOJTXJEFMZTIBSFE
WL Gore & Associates, Inc. (see opening case study) is a prime example
of how the interdependence between employees can achieve successful
results. Teams are the fundamental units of activity, to the point where a
ten-or-so member team is the basic management unit. Gore ‘associates’
are encouraged to communicate directly with each other and are
accountable to fellow members of their teams. Teams typically organise
around opportunities, new product concepts, or businesses.
The boundaries of the networked organisation are permeable or
semi-permeable. This allows for frequent movement of information and
people across the boundaries of the organisation.
r 5IFPSHBOJTBUJPOGPSHFTDMPTFSFMBUJPOTIJQTXJUIJUTTVQQMJFST TIBSFT
much more information with suppliers and develops higher levels
of interdependence with them. For example, when an organisation
integrates suppliers into the manufacturing process, the suppliers
could deliver parts or products as needed by the organisation,
eliminating the need to keep high levels of inventory.
r 5IFGVODUJPOBMBSFBTPG UIFPSHBOJTBUJPOUIBUEFWFMPQBOE
produce products and services are in direct contact with certain
customers – rather than relying on specialised departments such
as marketing or customer service – to mediate between customer
and organisation.
r 0SHBOJTBUJPOTCVJMEDPBMJUJPOTUPXPSLUPHFUIFSXJUIDFSUBJO
stakeholders, such as community groups, government agencies,
or labour unions, rather than adopting a defensive or aggressive
stance.
r 0SHBOJTBUJPOTCVJMEBMMJBODFTBOEDPPQFSBUJWFOFUXPSLTXJUIPUIFS
organisations.
Management challenges30
Network organisations rely on teams, meaning that individual managers
must develop their skills as team members and as team leaders.
These skills include understanding the dynamics of team interaction,
developing observation skills to examine team dynamics and learning
how to diagnose team problems. Switching to teams requires processes
within the organisation to facilitate the formation of effective teams.
This means that organisations should develop team structures and
processes for each kind of team in the organisation – and everybody
in the organisation should clearly understand how the processes work.
As far as the organisation’s interactions with its environment are
CONTEMPORARY MANAGEMENT PRINCIPLES
59
PART I: Introduction
concerned, networks with outside organisations involve forming
alliances with them. Forming and maintaining alliances with customers,
suppliers and competitors often requires a delicate balancing between
cooperation and competition, which poses challenges for managers. An
organisation must, therefore, develop systems to manage information
flows with the organisations with which it forms alliances. Long-term
alliances with supplier or key customers require different systems for
management than short-term alliances.
Developing and continuously adapting these information systems
is one of the major managerial challenges of operating an external
network.
3.4.3 Flatter and leaner
The most common characteristic of the new organisation is that it is
flat, which is considered the best practice today. The trend in recent
years has been for large organisations to remove several layers of
management, resulting in much flatter organisations. By employing fewer
people (becoming leaner) and by improving their turnover in sales,
organisations can significantly improve productivity.
Flattening of the hierarchy causes changes in the authority
relationships of new organisations. Decision-making takes place at
the level where the information resides. The unit responsible for the
implementation of a decision has the authority to make the decision
or, at the very least, to participate in the decision-making process. WL
Gore & Associates Inc., for example, has a flat, lattice-like organisational
structure where there are neither chains of command nor predetermined
channels of communication.
Reasons for the shift to flatter and leaner organisations are many and
varied, depending on the environmental factors influencing change, but
the following factors may influence the decision of some organisations
to opt for a flatter structure:
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the environment and flatter organisations are more agile.
r 5IFUSBEJUJPOBMSPMFPG NJEEMFNBOBHFNFOUUPDPMMFDUBOE
disseminate information and to control the activities of employees
at the operational level are replaced by information systems that
enable organisations to monitor and adjust operational activities
continuously.
r *ODSFBTFEHMPCBMDPNQFUJUJPOBOEQSFTTVSFGSPNTIBSFIPMEFSTGPS
improved financial performance force organisations to cut costs
and retrenching managers can cut costs significantly.
Management challenges32
In the flat organisation, managers cannot rely on the authority
relationships created by the traditional organisational hierarchy, such as
chain of command and unity of command. Instead, they must work with
individuals, groups and teams who report to various managers, have
different priorities, and are motivated by different incentives.
In the flat organisation, managers must develop negotiating skills
60
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 3 Features of contemporary organisations and new management challenges
to enable them to negotiate win-win situations for all involved in the
different organisational processes.
In addition, the flat organisation does not allow for the normal
progress up the organisational ladder – there are fewer opportunities
for promotion. The organisation must provide alternative incentive
systems and new concepts of career planning involving more horizontal
than vertical movement.
In flat organisations, more individuals are working across the external
boundaries of the organisation, interacting with customers, suppliers and
other stakeholders. It can be difficult to remain committed to one’s own
organisation while cooperating with other organisations. Organisations
with flat structures need to manage the interaction between employees
and suppliers, customers and competitors to maintain cooperation but
also to keep employees committed to the interests of the organisation.
The drift worldwide towards flatter and leaner organisations
requires more frequent and effective communication between senior
and junior managers. In South Africa, a widening skills gap often prevents
effective communication. Experienced managers are in short supply,
and affirmative action is rapidly changing career patterns and corporate
cultures, often causing a hindrance to effective communication. This
presents a major challenge for South African managers.
3.4.4 Flexibility
Flexibility is a key feature of new organisations because organisations
need to respond to changes in their environment, changing customer
needs, intense competition and the needs of a diverse workforce.
Organisations have to be innovative and creative to respond to these
challenges and they may actively encourage initiatives for innovation
and change on the part of employees. The systems and processes in
flexible organisations respond differently to different situations. Flexible
organisations have fewer rules and standard operating procedures.
WL Gore & Associates, Inc. is a flexible organisation where hands-on
product innovation and prototyping are encouraged and teams typically
organise around opportunities, new product concepts, or businesses.
This is a good example of an organisation where employees configure
according to challenges and opportunities in the environment.
Part of the flexibility in new organisations is the growing use of
temporary or contingent workers, which relates to diversity in the
workforce – another characteristic of the new organisation.
Management challenges
Managers in flexible organisations need to work on more than one
project simultaneously. They are also members of various teams at
any given time. Developing managers’ skills in multi-tasking is crucial if
organisations want them to work productively at several tasks. Flexible
organisations must also have flexible labour practices to deal with their
flexible working practices. Employees, independent knowledge workers,
and prospective work applicants need to33:
CONTEMPORARY MANAGEMENT PRINCIPLES
61
PART I: Introduction
r
r
r
r
r
r
CFŴFYJCMFBOEQSPBDUJWFJOJNQSPWJOHUIFJSQFSGPSNBODF
MFBSOUPBEBQUUPDIBOHF
CFJOOPWBUJWF
CBMBODFXPSLBOEOPOXPSLBDUJWJUJFT
NBJOUBJOBTFOTFPG SFTQPOTJCJMJUZGPSUIFJSDBSFFST
BEBQUUPBOFXQTZDIPMPHJDBMDPOUSBDUXIFSFMJGFMPOHFNQMPZNFOU
with one organisation is unlikely
r BDDFQUUIBUFNQMPZNFOUDPOUJOVJUZmSBUIFSUIBOKPCTFDVSJUZ
– means continuous development, retraining and renewal of
knowledge.
The flexible organisation is a learning organisation and its wealth lies in
how it uses knowledge. Organisations that use information and ideas
intelligently govern by consent and participation rather than by command,
as is the case at WL Gore & Associates, Inc., where leadership is more
about recognising and communicating a decision already made than
barking out orders. When it comes to new product innovation, teams
decide whether to go ahead with the project or not.
Legitimised authority in flexible organisations insures that people
contribute because they identify with the core values and exciting work
opportunities existing at the organisation. For managers who aspire to
advance in flatter, more agile organisations, technical skills and financial
acumen are not enough. Leadership, people skills, a positive attitude and
maturity are critical for personal progress.
-FUFNQMPZFFTDIPPTFXIFSFUIFZXPSL34
Not so long ago, occupying the corner office was
a sign that a manager has ‘made it’ to the top.
However, all that is changing as the permission for a
manager to work from home signals greater power
and autonomy within the organisation.
‘In this sense, Yahoo CEO Marissa Mayer’s ban
on working from home was viewed as much as an
attack on individual freedom as an attack on the
family. Paradoxically, FastCompany.com published an
article that same week about how “employees work
beyond the cube”, showcasing Plantronics’ decision
to give its employees the choice of working from
home, commuting to headquarters or joining one
of three San Francisco Bay locations of NextSpace
(shared workspaces). The decision was heralded
as a win-win for workers and their companies,
with proximity, diversity and choice of location all
stimulating creativity.’
62
CONTEMPORARY MANAGEMENT PRINCIPLES
Google then joined the conversation stating that
it does not even have a policy that says when and
where people need to work because if a workplace
is comfortable, healthy and inviting, people would
want to be there.
These examples illustrate the principle of
autonomy – control of employers over how
employees use time and space. Working from home,
employees have total control over time and space.
Another solution is to create private and common
spaces at work. Private spaces are where people
can work uninterruptedly and common areas where
they might share ideas and critical ‘face time’. Every
organisation has to find its own balance between
private and common spaces and the balance will
depend on the organisation’s unique goals and
challenges.
CHAPTER 3 Features of contemporary organisations and new management challenges
3.4.5 Workforce diversity
One of the most important and broad-based challenges currently facing
organisations is adapting to the diversity of their employees. In South
Africa, the Employment Equity Act gives legal weight to the requirements
of XPSLGPSDFEJWFSTJUZ. Workforce diversity is a term that describes
the fact that organisations are becoming more heterogeneous in terms
of gender, race and ethnicity. We examine diversity in Chapter 9; our
discussion here focuses only on the reasons for workforce diversity in
the new organisation.
A characteristic of the traditional organisation is the ‘corporate
man’ – a male executive, committed to serving the interests of the
organisation in return for lifelong employment. Employment contributes
to the incumbent’s social identity and by a style where a predetermined
and standardised set of rules governs every situation35.
In contemporary organisations exhibiting the features of new
organisations, the workforce is heterogeneous in terms of gender, race,
and ethnicity, and it includes people who are part of the organisation,
but in unconventional ways, such as full-time contract workers or
former employees working as consultants (especially in South Africa).
There is part-time work and home-based telework, and various other
forms of employment, which may depend on employees’ own interests
and family situations.
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a term that describes the fact
that organisations are becoming
more heterogeneous in terms of
gender, race and ethnicity
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Workforce diversity has crucial implications for managers because
they need to shift their philosophy from treating everyone alike to
acknowledging differences and responding to those differences in
ways that will ensure employee retention and greater productivity.
This includes, for example, training in diversity and developing listening
skills36. Managers need to focus on creating environments that utilise the
potential of all sources of difference within an organisation’s workforce.
By listening to diverse perspectives in their organisations, for example,
managers can rethink their approaches to tasks and markets, gaining
competitive advantage in the process.
The organisation must also develop systems for conflict resolution.
Diversity, when positively managed, can increase creativity and
innovation. When an organisation does not manage diversity properly,
there is the potential for ineffective communication and interpersonal
conflict37. We discuss conflict and conflict resolution in Chapter 7.
People with different needs and expectations present challenges
to the human resources policies of organisations. Working parents
with children often require adaptations to work schedules or day care
facilities. Disabled people may require special access to buildings and
specially designed work areas. Part-time workers may need to arrange to
share jobs so that organisations can benefit from their skills and abilities.
The global environment adds another layer of complexity to
workforce diversity. To be effective, managers should understand
cultural differences around the world.
In addition, workforce diversity in organisations causes their culture
CONTEMPORARY MANAGEMENT PRINCIPLES
63
PART I: Introduction
to change in terms of values, rituals and assumptions to support the
heterogeneous values of the diverse groups working in modern
organisations. For example, social activities that are rituals in male
cultures will need to change to allow ready access by female members
of the workforce38. We examine organisational culture in Chapter 6.
This concludes our discussion on the features of emerging
organisation forms and the challenges managers of contemporary
organisations face. Some South African organisations already feature
many of the characteristics discussed in this chapter – they understand
the challenges of the new world of work. Others do not. Whichever
way organisations look at it, change is part of the South African business
environment, and managers will have to deal with it in order for their
organisations to survive.
64
CONTEMPORARY MANAGEMENT PRINCIPLES
Copyright © 2014. Juta and Company. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S.
or applicable copyright law.
Chapter 3 Features of contemporary organisations and new management challenges
CHAPTER SUMMARY
1. Cite reasons why organisations change.
Organisations are open systems. They influence their environments and vice versa. During
the previous century, the environment was much more stable and the traditional form
of organisation, the bureaucracy, worked well. Contemporary organisations function in
an environment characterised by major, ongoing change, hence the emergence of ‘new’
organisation forms.
2. Identify and discuss the forces that stimulate change in organisations.
The forces that stimulate change are:
• globalisation and the global economy
• advances in technology
• radical transformation of the world of work
• increased power and demands of the customer
• growing importance of intellectual capital and learning
• the learning organisation
• new roles and expectations of workers.
3. Defend the statement that bureaucracy fails to provide for the needs of modern
organisations.
While the bureaucracy still works well for many organisations, the very strengths of the model
became weaknesses for organisations operating in dynamic and turbulent environments.
• Organisations operating in turbulent environments have to respond to increased competition
in terms of customer service, continuous improvement in manufacturing, and greater diversity
of products, services and customers. For these organisations, the strengths of predictability
and stability of the bureaucracy turned into weaknesses.
• The Total Quality Management development in the 1980s contrasted with the quest for
specialisation – a feature of the bureaucracy. The strict division between departments made
it difficult to implement quality initiatives, which depend on cooperation between functions
and departments.
• New information technology changed the information channels in organisations, moving
away from the traditional chain of command.
• Finally, international competition and expanding global markets demand more effective
ways to manage the international operations of the organisation than those provided by the
specialised ‘international’ managers.
4. Expound on the features of the new emerging organisation.
To answer this question, you need to study the sections in the chapter dealing with the features
of the new organisation:
• global
• networked, internally and externally
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or applicable copyright law.
Part I: Introduction
• flat and lean
• flexible
• diverse.
5. Identify and discuss the challenges faced by managers of the new organisation.
Each of the possible features of contemporary organisations poses difficult challenges
to their managers. In the text, we described these challenges under the heading of each
feature. The table below provides a summary of the challenges managers of contemporary
organisations face.
Features
Management challenges
Develop and use global strategic skills to manage change and transition
Manage cultural diversity
Design and function in flexible organisational structures
Work with others and in teams
Communicate effectively
Learn and transfer knowledge in an organisation
Global
•
•
•
•
•
•
Networked,
internally and
externally
• Individual managers must develop their skills as team members and team leaders
• Team structures and processes must be developed for each kind of team in the organisation
• Networks with outside organisations involve forming alliances with customers,
suppliers and competitors and an organisation must develop systems to manage
information flows with the organisations with which it forms alliances
Flat and lean
• Managers must develop negotiating skills, to enable them to negotiate win-win
situations for all involved in flat structures
• The organisation must provide alternative incentive systems and new concepts of
career planning that involve more horizontal than vertical movement
• More frequent and effective communication between senior and junior managers
Flexible
• Multi-tasking
• Flexible labour practices
Diverse
• Managers will need to shift their philosophy from treating everyone alike to
recognising differences and responding to those differences in ways that will
ensure employee retention and greater productivity
• Training in diversity
• Developing listening skills
Source: Adapted from: Ancona D., Kochan D.A., Scully M., van Maanen J. & Westney, D.E. 2005. Managing for the future:
Organisational behaviour and processes. 2nd edition. Cincinnati: South-Western College Publishing, p M1–12.
66
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CHAPTER 3 Features of contemporary organisations and new management challenges
KEY TERMS
bureaucracy
customer capital
distributed computing
diversity
globalisation
Generation Y
flat structure
flexible organisations
human capital
intellectual capital
knowledge management
networked organisations (internal and external)
organisational learning
outsourcing
structural capital
systems thinking
teams
temporariness
REVIEW QUESTIONS
1. Consider the opening case study on WL Gore & Associates, Inc. Explain how the features of the new
organisation are evident at the organisation.
2. Explain why WL Gore & Associates, Inc. is so successful.
3. Do an internet search on one of the global South African organisations. Write an essay describing
the major changes faced by the organisation during the last decade and describe the challenges these
changes presented to the managers of the organisation.
4. Write an essay on Generation Y, people born between 1980 and 2000, and the possible changes they
may bring about in organisations when they join the workforce.
END NOTES
1
(i) The case study is adapted from: Reingold, J. 2007. A job that lets you pick your own boss. Fortune, October 8, 2007.
[Online] Available from: http://money.cnn.com/2007/10/08/magazines/fortune/goretex.fortune/index.htm. Accessed on
12 August 2010. (ii) http://en.wikipedia.org/wiki/W._L._Gore_and_Associates. Accessed on 22 August 2011; http://www.
gore.com/en_xx/aboutus/culture/index.html. Accessed on 21 August 2011.
2
Palmer, I. & Dunford, R. 2009. New organization forms: the career of a concept. In Barry, D. & Hansen, H. 2009. The
Sage handbook of new approaches in management and organization. London: Sage, pp 567–568.
3
Ancona, D., Kochan, T.A., Scully, M., Van Maanen, J. & Westney, D.E. 2009. Managing for the future: organizational
behavior and processes. 3rd edition. Cincinnati: South-Western College Publishing, p M1–13.
4
Lane, H.W. & DiStefano, J.J. 1992. International management behavior. 2nd edition. Boston: PWS-Kent, p 73.
5
Burnes, B. 2009. Managing change. 5th edition. Essex: Prentice Hall, p 597.
6
Ancona et al, op. cit., pp M1–12 to M1–13.
7
Castells, M. 1996. The rise of the network society. Oxford: Blackwell, pp 92–93.
8
Excerpts from: Africa Business Pages. Business guide internet Edition. Africa joins the internet bandwagon. [Online]
Available from: http://www.africa-business.com/features/internet.html. Accessed on 5 August 2010.
9
Marquardt, M.J. & Berger, N.O. 2000. Global leaders for the twenty-first century. New York: State University of New York
Press, p 17.
10
Reich, R.B. 2000. The future of success: Work and life in the new economy. London: William Heinemann, p 25.
11
Reich, op. cit., p 10.
12
Lewis, P.S., Goodman, S.H. & Fandt, P.M. 2001. Management: Challenges in the 21st century. 3rd edition. Cincinnati:
South-Western College Publishing, p 17.
13
Hackett, B. 2000. Beyond knowledge management: New ways to learn. The Conference Board Research Report
1262–00RR. New York: The Conference Board Inc, pp 10–11.
CONTEMPORARY MANAGEMENT PRINCIPLES
67
PART I: Introduction
14
Robbins, S.P. & Judge, T.A. 2009. Organizational behavior. 13th edition. Upper Saddle River: Prentice-Hall, p 57.
15
Stein, J. The new greatest generation. Time, May 20, 2013, pp 30–35.
16
Ibid., p 30, p 35.
17
Hellriegel, D., Jackson, S.E. & Slocum, J.W. 2002. Management: A competency-based approach. 9th edition. Ontario:
South-Western College Publishing, p 46.
18
Ancona et al, op. cit., p M1–11.
19
Ancona et al, op. cit., p M1–7.
20
Hellriegel et al, op. cit., p 47.
21
Hellriegel, op. cit., p 49.
22
Ancona et al, op. cit., pp M1–12 to M1–13.
23
Managing on the edge. 2009. Fortune, 9 October, 17: 28–32.
24
Ibid.
25
Lewis et al, op. cit., p 2.
26
Nelson, D.L. & Quick, J.C. 2002. Understanding organizational behavior: A multimedia approach. Cincinnati: SouthWestern College Publishing, p 34.
27
Lane & DiStefano, op. cit., p 50.
28
Adapted from: The changing face of Africa. Business Guide: internet edition: [Online] Available: http://www.africabusiness.com/features/changing.html. Accessed on 5 August 2010.
29
Ancona et al, op. cit., p M1–8.
30
Ancona et al, op. cit., p M1–14.
31
Ibid., p M1–14.
32
Ibid., p M1–15.
33
Paul, op. cit., p v.
34
Folkman, J. 2013. Let employees choose where they work. Harvard Business School Publishing Corp. Distributed by
The New York Times Syndicate and accessed in Finweek, 18 April, 2013, p 38.
35
Ancona et al, op. cit., p M1–15.
36
Robbins & Judge, op. cit., pp 52–54.
37
Ibid., p 54.
38
Champoux, J.E. 2000. Organizational behavior: Essential tenets for a new millennium. Ontario: South-Western College
Publishing, p 24.
68
CONTEMPORARY MANAGEMENT PRINCIPLES
PART II
Management in
a changing
environment
Chapter 4
Composition of the
management environment
Tersia Brevis
PART II: Management in a changing environment
OPENING CASE
Vodacom1
Vodacom is the leading cellular network in South
Africa with an estimated market share of 58
per cent and more than 23 million customers.
Vodacom was born in the new South Africa and
started commercial operations in 1994 after it
was awarded one of two available GSM licences
in South Africa. Since 1994, the company has
become an important agent of change, not only in
this country, but also in Africa. The group has built
networks in Lesotho, the Democratic Republic of
Congo, Tanzania and Mozambique, putting cell
phones in the hands of well over 35 million people.
Millions more have gained meaningful access to
telephones through thousands of Vodacom phone
shops in these countries. Vodacom has been
certified as one of South Africa’s Best Employers
GPSCZUIF$3'*OTUJUVUF*OEFQFOEFOU
research into their employee offerings showed
this company is outstanding for being a:
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Initially, Vodacom was owned on a 50:50 basis
by the South African telecommunications group
Telkom and the British mobile phone operator
Vodafone. On November 6, 2008, Vodafone
announced that it had agreed to increase its stake
to 65 per cent and Telkom listed its remaining
holding on the Johannesburg Securities Exchange.
The introduction of the Electronic Communications Act in South Africa has enabled Vodacom
to widen its scope far beyond telecommunications
to make cellular telephones essential lifestyle tools
beyond just voice communications. It has the
potential to democratise the internet and e-mail in
Africa on the same scale that telephone access has
been made available. Vodacom’s global alliance
with ‘Vodafone live’ has put mobile television,
internet access, e-mail and entertainment on cell
phones.
70
CONTEMPORARY MANAGEMENT PRINCIPLES
Vodacom’s culture is shaped by a winning spirit,
a passion for the job and an unwavering belief
in the Vodacom team. Vodacom is a company
that demands the best from the people who
work for it and special effort and dedication are
accepted as the norm. The group’s progressive
human resources policies are designed to nurture
its human capital. Potential restrictions on the
company are the regulatory environment in which
Vodacom operates, as well as legislation such as
the Registration of Information Act.
Due to the huge demand worldwide for ICT
(Information, Communication and Technology)
skills in what is still a relatively young industry, it
is one of the Vodacom Group’s human resources
priorities to meet this challenge, especially as
the company prepares to enter the new spheres
opened up by the Electronic Communications
Act. The company is in the fortunate position to
cherry pick the best ICT talent in South Africa.
At the same time, the company acknowledges
the importance of nurturing and developing their
growing pool of skilled and competent workforce.
At the same time, Vodacom is striving to address
the challenges of transformation. Empowerment,
and by extension gender empowerment, is a top
priority for Vodacom. Top managers are aware of
the need to ensure that women and previously
disadvantaged individuals (PDIs) are recognised
and fill strategic positions within the company and
not just support roles.
The ICT workforce is young, which means
that they are mobile and eager to find the next
big career opportunity. For this reason, Vodacom
has devised a retention programme that hinges
on providing staff stretching assignments and
encouraging learning and growth – factors which
are just as important as an impressive salary when
it comes to holding onto top talent. For example,
employees are able to spend time with Vodacom’s
equipment suppliers, such as Motorola and
Siemens, learning about the latest technologies
and devices. This has the additional benefit of
giving talented staff international exposure,
which in turn will benefit Vodacom. Furthermore,
CHAPTER 4 Composition of the management environment
rewards and benefits to employees are constantly
reviewed. This includes addressing issues that
BŲFDU UIFJS XPSLMJGF CBMBODF JNQMFNFOUJOH
incentive programmes as well as high level
recognition to top performers. The company has
a comprehensive skills development framework in
place, with training programmes targeting various
occupational levels within the organisation.
Depth of management and long term succession
planning is underpinned by various initiatives
such as the Vodacom Executive Programme and
Conversations in Leadership. Vodacom strives to
be an employer of choice. It participates in annual
remuneration surveys and benchmark salaries
above the fiftieth percentile. It is essential that
employees share the company’s values, which are
summarised in ‘The Vodacom Way’, a powerful
statement of Vodacom’s ethical intents of being a
fair company with a winning attitude. It is Vodacom’s
belief that government alone cannot address the
vast need for social development. A pan-African
company like Vodacom is well placed to join hands
with governments to help create stable, peaceful
and socio-economically healthy communities. The
Vodacom Foundation was established in 1999 to
achieve this objective and its cumulative corporate
social investment to date totals millions of Rands
in various social development areas, especially in
disadvantaged communities. These activities focus
on education, health, safety and security.
Vodacom is following the worldwide trend
of cellular networks entering the fixed line
market. It has established a new company called
Vodacom Converged Solutions, which will build
infrastructure to create additional capacity for the
huge demand for data, especially in the corporate
market. Projects such as these will ensure the long
term survival and sustainability of the company.
LEARNING OBJECTIVES
The purpose of the chapter is to provide an overview of the composition of the management
environment. The objective of studying this chapter is to enable you to:
1. Understand the importance of the management environment when making management
decisions.
2. Depict diagrammatically and explain the concepts of the process, systems and contingency
approaches in management.
3. Understand the structure and dynamics of the management environment.
4. Conduct a basic analysis of the management environment.
4.1 THE IMPORTANCE OF THE MANAGEMENT
ENVIRONMENT AND ITS IMPACT ON
MANAGERIAL DECISION-MAKING
With the end of the Cold War in the late 1980s, the management
environment became increasingly complex and interdependent, with
change becoming more rapid, discontinuous and turbulent. The fall
of the Berlin Wall and the advent of globalisation signalled a radical
transformation of the world that is continuing daily. According to
Angell2, this change is not closely related to the kind and magnitude
of the changes of the past, but rather a severe and total dislocation
with the past. Information technology and other new technologies have
provoked profound structural changes in the world economy and these
are resulting in unimaginable levels of complexity. Furthermore, the
LEARNING OBJECTIVE 1
Understand the importance of
the management environment
when making management
decisions.
CONTEMPORARY MANAGEMENT PRINCIPLES
71
PART II: Management in a changing environment
environment is characterised by a growth in interdependence and linkages
between politics, economics, the social dimension and technology
at the global, regional and national levels, providing powerful threats
and exciting opportunities for any organisation and its management.
The pace of events and the speed with which effects are transmitted
between parts of the management environment create difficulties in
terms of the manager’s comprehension due to the sheer scale of it all.
In this environment, everything can appear relevant and the manager’s
task of sorting that which is important to his or her specific organisation
from that which is not, can appear to be almost impossible. Taking into
account the increasing costs of management mistakes and failures, it
is essential to provide managers with the means to identify strengths,
weaknesses, opportunities and threats within the environment correctly
to empower them to make better critical choices and choose more
feasible courses of action in executing their planning, organising, leading
and controlling functions.
LEARNING OBJECTIVE 2
Depict diagrammatically
and explain the concepts of
the process, systems and
contingency approaches in
management.
process approach to
management
performance of the planning,
organising, leading and
controlling functions within an
organisation is circular and
continuous
systems approach to
management
a system is a set of interrelated
and interdependent parts
arranged in a manner that
produces a unified whole
contingency approach to
management
the application of management
principles depends on the
specific situation that managers
face at a given point in time
72
4.2 MANAGEMENT THEORIES AND THE
MANAGEMENT ENVIRONMENT
In Chapter 1, the evolution of management theories was discussed
in detail. Understanding the evolution of management theories helps
managers to make sense of realities that they face, within the business
environment, on a daily basis. In this chapter, and throughout this book,
we focus on some of the more contemporary management theories. The
process approach, the systems approach and the contingency approach
are used to describe and explain the complexity of the modern business
organisation in relation to the environment in which it functions.
The process approach to management is based on the
four main functions of management. According to this approach,
the performance of the planning, organising, leading and controlling
functions within the organisation is seen as circular and continuous.
The systems approach to management views a system as a
set of interrelated and interdependent parts. Systems can be either
closed or open. Closed systems do not interact with its environment,
whereas open systems recognise the dynamic interaction of the system
with its environment. The organisation, which is a system in its own
right, is therefore in constant interaction with its environment and is
influenced by both the industry-specific and general environments which
we discuss in the following section in greater detail. The contingency
approach to management is based on the systems approach. The
basic premise of the contingency approach is that the application of
management principles depends on the specific situation that managers
face at a given point in time. The contingency theory acknowledges
that every organisation, even every department or unit within the same
organisation, is unique. Every organisation exists in a unique environment
with unique goals and strategies. By combining these three approaches,
Figure 4.1 on the next page illustrates the relationship between the
modern business organisation and its environment.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 4 Composition of the management environment
EXTERNAL ENVIRONMENT
ORGANISATION AND ITS INTERNAL ENVIRONMENT
INPUT
TRANSFORMATION
OUTPUT
Organisation receives
inputs from the
environment such as
human resources,
capital, technology and
information
Organisation transforms inputs
to outputs by means of
technology, operating systems,
administrative systems, control
systems and the management
process
Organisation makes
outputs such as
products/services,
proƂts/losses, jobs,
available to the
environment
Figure 4.1: The organisation and its environment
4.2.1 The environment
Viewed at an elementary level, the management process entails
inputs from the external environment into the organisational system,
the conversion of these inputs within the organisational system
and subsequent outputs/outcomes fed back into the external
environment. Inputs include human resources, capital, technology and
information. The transformation process turns these inputs into finished
products and/or services (the principles of the systems approach to
management). The success of the system is largely determined by the
efficiency and effectiveness illustrated by its management in performing
planning, organising, leading and controlling functions (the principles
of the process approach to management). Furthermore, the system’s
success depends on successful interactions with its environment. In
this context, the environment includes other sub-environments such as
suppliers, labour unions, financial institutions, customers and so on. The
organisation is dependent on its external environment. Management
must therefore understand the structure and dynamics of the unique
management environment of their organisations and, even more
important, the unique strengths, weaknesses, opportunities and threats
pertaining to the environment that impact directly or indirectly on the
success of the organisation (the principles of the contingency approach
to management).
CONTEMPORARY MANAGEMENT PRINCIPLES
73
PART II: Management in a changing environment
5IFNBOBHFNFOUPGUBMFOUJODPOUFNQPSBSZPSHBOJTBUJPOT
Human resources play a pivotal role in an
organisation’s ability to attain its vision, mission,
goals and objectives. The management of human
resources talent has become an essential element in
sustainable organisational performance. Leonardo da
Vinci used his talent to further the world which just
emerged from the period called the Dark Ages3.
Considered today as one of the most talented
people in the world, da Vinci was born in 1452
as the illegitimate son of a minor public figure
in Florence. He was apprenticed at the age of
fourteen to the artist Verrocchio, who had one of
the finest workshops at that time in Florence. His
close association with Verrocchio can be seen as
part of his future success as he was exposed to
theoretical training and a vast range of technical skills
such as drafting, chemistry, carpentry, mechanics
and various artistic skills. He was called an Italian
Renaissance polymath, painter, sculptor, architect,
musician, scientist, mathematician, engineer, inventor,
anatomist, geologist, cartographer, botanist and
writer. In his life Leonardo’s talent was identified
by various role players such as Verrocchio and
Lorenzo de Medici who was the de facto ruler of the
Florentine Republic. He later worked for the Count
of Milan, Lodiwicko il More. His talent was later used
by the son of Pope Alexander VI to protect Rome
LEARNING OBJECTIVE 3
Understand the structure and
dynamics of the management
environment.
from outside forces and helped to establish what is
today called modern Italy. This shows that talent can
be a sustainable competitive advantage.
In the twenty-first century, executives and top
management should view their talent strategies
as a top priority in order to build and sustain
businesses with superior performance. Having
aligned and engaged talent is crucial to achieving
strategic objectives. The days of fragmented talent
management systems, processes and practices are
long gone. Too many companies are not sufficiently
focused on building talent management capabilities
across the organisation. As competition for talent
increases in the market, especially in South Africa,
such companies are increasingly facing shortfalls in
critical workforce segments. Truly talent-powered
organisations are adept at defining the talent needs
of their organisation, discovering diverse sources of
talent, developing individual and collective talents
and deploying talent in ways that align people with
the vision, mission and strategic objectives of the
organisation.
Talent is not a rare commodity – people are
talented in many ways. However, managers need
to release people’s talents and give it strategic and
holistic attention to obtain sustainable organisational
performance.
4.3 THE STRUCTURE AND DYNAMICS OF THE
MANAGEMENT ENVIRONMENT
As a first step to a better understanding of the management
environment, its opportunities and threats, it is important for the
manager to take account of its structure and dynamics. Without
such an understanding, no realistic strategising and planning can take
place. Structurally, the management environment can be divided into
the micro-environment, the market environment and the remote
environment.
4.3.1 The micro- or internal environment
The NJDSPFOWJSPONFOU can also be referred to as the internal
the organisation itself over which environment and includes the organisation’s functions, policies,
strategies, goals, objectives and resources available. From the opening
management has full control
case, various factors can be identified that originate from the microenvironment of Vodacom, for example:
microenXironment
74
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 4 Composition of the management environment
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Figure 4.2: Composition of the micro-environment
4.3.2 The macro- or external environment
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macro-environment
area outside of the organisation
over which management has no
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CONTEMPORARY MANAGEMENT PRINCIPLES
75
PART II: Management in a changing environment
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Figure 4.3: Composition of the market environment
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customer
the people or organisations
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76
The customer
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CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 4 Composition of the management environment
customer. On the other hand, owing to their annual budget allocations
from government, public-service entities’ survival does not depend on
their products or services to their customer, which is the community.
Poor service may, however, negatively influence their credibility within
the community, making their performance extremely difficult, especially
those departments whose success depends on good relationships with
the community, for example, a police service that is seen to be inefficient
or partisan in its dealings with the public; or a clinic at which staff is rude
and repeatedly administers inappropriate treatments. Ultimately the
community’s sentiment may be reflected in election results. Therefore,
even for public-sector organisations, it is imperative to have an in-depth
understanding of the characteristics, needs and expectations of the
organisation’s customers.
Customers also portray buyer behaviour, which is influenced
by variables in the macro-environment. For example, demographic
trends affect the number of customers, economic trends influence the
purchasing power of consumers and cultural values can influence the
buying behaviour of most customers.
Customers for products and services try to force prices down, they
obtain more or higher quality products and they increase competition
among sellers by playing the one seller against the other. Customers’
bargaining power is likely to be relatively high under the following
circumstances:
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purchased by the customers
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customer
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suppliers as a cost-cutting or quality enhancing strategy
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service.
Competition
Aside from customers, competitors are the single most important
day-to-day force facing an organisation. $PNQFUJUJPO in the market
environment can be defined as a situation in which different organisations
with more or less the same product or service compete for the business
patronage of the same consumers. Every organisation that tries to market
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against existing competition. In the case of business organisations, it is
other businesses currently active in the same market sector competing
for a share of the market.
New entrants refer to the relative ease with which new organisations
can compete with established organisations in the same market. The
following factors create barriers to new entrants:
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can achieve economies of scale when increased volume lowers the
unit cost of a product or service produced by an organisation. The
higher the economy of scale, the greater the entry barrier for new
entrants.
competition
a situation in which different
organisations with more or less
the same product or service
compete for the business
patronage of the same
consumers
CONTEMPORARY MANAGEMENT PRINCIPLES
77
PART II: Management in a changing environment
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labour market
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intermediaries
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78
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CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 4 Composition of the management environment
role and affect the organisation directly and indirectly. Intermediaries act
as middlemen between the manufacturer of products and services and
the final consumer thereof. Intermediaries include wholesalers, retailers,
agents and brokers, all of which play a role in bringing a product or service
from manufacturer to the final consumer. Financial intermediaries, such
as banks, insurers and other financial institutions, play a role in providing
an organisation with the necessary capital to start up and run a business
successfully.
Suppliers
In Section 4.2 and Figure 4.1 of this chapter, the systems and process
approaches to management were discussed, where the organisation is
regarded as a system that attracts inputs from its external environment.
The inputs that an organisation requires were identified as human
resources, capital, technology and information. The organisation
depends on suppliers to provide regular supplies of these inputs.
Most of the inputs used by the organisation form part of a valuecreation process manifested in the value chain. The value chain can
be described as a chain of activities that an organisation, operating in
a specific industry, performs in order to deliver a valuable product or
service for the market that it serves. The value chain will be discussed
in more detail in Chapter 16. In the case of public-sector organisations
the final consumer is represented by the community. Through the use of
a value chain, value can be created for all role-players and a sustainable
competitive advantage created for the organisation. The concentration
of suppliers and the availability of substitutes are, on the one hand, of
extreme importance to the effective functioning and survival of the
organisation, and, on the other, also significant factors in determining
supplier bargaining power.
The bargaining power of suppliers often controls how much they can
raise prices of their products or services above their costs or reduce
the quality of goods and services they provide before losing customers.
From the opening case, various factors can be identified that
originate from the market environment of Vodacom, for example the
high demand for ICT skills in their labour market and an ICT workforce
that is young, mobile and eager to advance their careers to higher levels.
These factors will influence the strategies and activities of Vodacom to
a large extent.
The remote environment
The remote environment refers to the broader environment
within which the organisation must function. It surrounds the market
environment and includes all external influences that do not fall directly
within the sphere of influence of the organisation, but which do have
a bearing on its activities. When analysing the remote environment
the emphasis falls on the changes that the uncontrollable variables at
the macro-level cause and the strategic implications these hold for the
organisation. For the purpose of systematic analysis a number of subenvironments can be distinguished within the remote environment,
namely the political/legislative, economic, cultural, technological and
suppliers
provide regular supplies of
necessary inputs to produce
outputs
value chain
chain of activities that an
organisation, operating in a
specific industry, performs
in order to deliver a valuable
product or service for the
market that it serves
remote environment
the broader environment within
which the organisation functions
and that surrounds the market
environment
CONTEMPORARY MANAGEMENT PRINCIPLES
79
PART II: Management in a changing environment
ecological/physical environments. Figure 4.4 below illustrates the
composition of the remote environment.
Ecological/
physical
environment
Technological
environment
Remote
environment
Cultural
environment
Political/
legislative
environment
Economic
environment
Figure 4.4: Composition of the remote environment
Each of the sub-environments of the remote environment will be
discussed in more detail in the next section.
Technological environment
The technological environment is primarily responsible for changes in
the remote environment. Technology can be defined as the knowledge,
tools, actions and techniques that are used to transform ideas,
information, raw materials and components into finished products and
services. Furthermore, technology encapsulates the physical elements
of human invention and innovation.
Many new technologies are radical enough to force organisations,
especially in high tech industries, to reconsider their vision, purpose
and methods of operation or face extinction. Consider the following
examples:
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can determine profit and loss positions of their organisations on a
daily basis, which was impossible with manual methods and earlier
stages of computer technology.
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functions from remote locations, reducing banking costs and fees
considerably.
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probably higher productivity. The ability of an organisation to produce
80
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 4 Composition of the management environment
more and better products poses a threat to competitors, compelling them
to reassess their strategic plans, organisational structures, production
methods, markets and other functional strategies. Effective management
of technology and innovation can be an extremely important source of
competitive advantage for an organisation.
Economic environment
After technology, the economic environment plays a huge role in the
remote environment. Organisations are influenced by factors such as
business cycles, interest rates, inflation, unemployment, trends with
regard to the gross national product (GNP) and economic growth
rate, monetary and fiscal policy, trends in the balance of payments, the
current and provisional status of the economy in terms of recession
and depression, the influence of resources, and so on. The economy,
in turn, is affected by technology, politics, the ecology, social trends and
the international environment. These cross-influences constantly cause
changes in the economy, affecting organisations and its management.
Economic changes and trends therefore demand constant vigilance from
management and may require them to revisit the organisation’s vision,
mission statement, goals and strategies.
Political/legislative environment
The state is a major role player in the remote environment of an
organisation, since it influences the organisation primarily as a regulating
force. The state enforces laws, directly affecting the way that organisations
operate. Tax regulations, for instance, have a direct influence on each
and every organisation. Value added taxes in South Africa, for instance,
are currently 14 per cent. Besides value-added taxes, companies are also
influenced by companies’ taxes. Individuals need to pay individual taxes
on income earned. Changes in income tax laws will have a direct effect
on the purchasing power of an organisation’s customers, consequently
also affecting the sales figures of organisations.
Cultural environment
Cultural forces, underlying a society and surrounding an organisation,
are often not as visible as other general environmental forces. Culture
refers to the unique pattern of shared characteristics, such as values, that
distinguish the members of one group of people from another group.
A value can be defined as the basic belief about a certain condition that
has considerable importance and meaning to individuals. People’s values
are relatively stable over time. A value system comprises multiple beliefs
that are compatible and supportive of one another. Managers need to
appreciate the significance of the values and value systems of themselves
and of others. Values and value systems greatly affect how a manager:
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personal relationships and the relationships between other people)
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CONTEMPORARY MANAGEMENT PRINCIPLES
81
PART II: Management in a changing environment
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Internal environment
resources
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goals and objectives
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customers
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ecological/physical environment
political/legislative environment
economic environment
cultural environment
technological environment
Figure 4.5: The composition of the management environment
82
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 4 Composition of the management environment
LEARNING OBJECTIVE 4
4.4 ANALYSIS OF THE MANAGEMENT
ENVIRONMENT
Conduct a basic analysis of the
management environment.
A key element in the effective management of an organisation is to
determine the ideal alignment between the environment and the
organisation and then working to achieve and maintain that alignment. In
order to do so, an analysis of the management environment is necessary.
Conducting an analysis of the management environment in such a
manner that it contributes to the management process in a meaningful
way, requires an understanding of the theory of the environment as
explained above, as well as an appreciation of where and how the analysis
fits into the management process. The phases involved in conducting an
environmental analysis are the identification of the key environmental
variables, an evaluation and selection of a technique for analysing the
environment, the development of an environmental profile, and the
continuous control over the variables, trends and the environment.
These phases are discussed below.
Phase 1: Identify key environmental variables. When we speak of
conducting an analysis of the environment, the contingency approach
(discussed in Chapter 1) becomes applicable. The contingency approach
states that since organisations are diverse in terms of the specific
industry that the organisation is competing in, its objectives, size and so
on, it would be surprising to find that there would be large numbers of
universally applicable variables within the environment that would apply
to all organisations and in all situations. The same variables, especially
variables from the external environment, will in many instances
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organisations. Thus, managers are required to take into account the
unique nature and characteristics of the organisation they serve and to
identify key variables that will specifically apply to the organisation or
have bearing on it within a specific situation. This is usually the task of
top management, partly because of their assumed experience over a
number of years within a specific industry or organisation and also the
fact that they are responsible for the organisation as a whole, its vision,
mission and long-term survival strategies.
Phase 2: Evaluate and select a technique for analysing the environment.
The next step in conducting an analysis of the environment is the
evaluation and selection of a technique or techniques that will assist
the manager in conducting the analysis. There are literally hundreds, if
not thousands, of methods and techniques to choose from. In order to
assist the manager in this process the following criteria are important in
the evaluation and selection process:
r Explicitness. Explicitness applies when a technique is so completely
specified that any individual can apply the method without having
to make independent judgements and come up with the same
results4. The technique can be taken apart, its components
examined for the plausibility of underlying assumptions and their
consistency checked. This has a number of advantages, namely:
CONTEMPORARY MANAGEMENT PRINCIPLES
83
PART II: Management in a changing environment
i.
r
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r
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84
it allows the initial user of the technique to go on to other
tasks, leaving his or her knowledge embedded in the technique
so that others can apply it, thereby saving time and money
ii. no hidden biases of the user can be introduced, because all
of the assumptions are expressed within the steps of the
technique (except if the method conveys its own hidden biases
or preconceptions)
iii. it tends to raise the level of discussion and by so doing
enhances the quality of decision-making.
$PNQSFIFOTJWFOFTT$PNQSFIFOTJWFOFTTSFGFSTUPUIFEFHSFFPG
inclusion and integration of the interactions within and between
all the dimensions within the internal and external environments,
whether mathematically or judgementally derived, without
reverting to unfounded speculation. Taking into consideration the
constraints of time, money and personnel, the technique must
allow an overview of the maximum number of factors potentially
relevant to the problem, so that the manager can decide which,
and how many, he or she deems necessary to consider in order to
make an informed decision.
4JNQMJDJUZ"TDIFSBOE0WFSIPMU5 stress three aspects that should
be kept in mind in terms of practicality when selecting a technique.
The first is that complicated methods are often difficult to employ.
They are cumbersome, difficult to ‘debug’, and intimidating to
their users and even their creators. Second, simplicity eases the
understanding of the method and of the real-life situation. The
usefulness of complicated techniques is often negated by a lack
of understanding on the part of the manager. The third aspect
relates to the fact that the simpler the technique, the easier it is to
assess in terms of consistency and the plausibility of the underlying
assumptions.
4FOTJUJWJUZUPOVBODFT"UFDIOJRVFBMMPXJOHGPSTFOTJUJWJUZUP
nuances with regard to a particular situation is another criterion
that should be considered. Subtle differences in the meaning of the
on-going events, or in the configuration of factors or variables, can
have a substantial effect on the results achieved and may result in
misinformed decisions and incorrect options being implemented.
5JNFMJOFTT*OUFSNTPG UIFUJNFJUUBLFTUPQSPEVDFUIFSFRVJSFE
information, the methodology of the technique must be able to
provide the manager with the required information within the
deadline that has been set. Information that is made available after
a decision should already have been taken is rarely of any use.
Incomplete information that is known before the decision-making
stage but which reduces the level of ‘uncertainty’ partially, is better
than complete information that reduces ‘uncertainty’ totally but is
obtained too late6.
$PTUFŲFDUJWFOFTT5IFVTFPG BOZUFDIOJRVFNVTUBMTPCFKVEHFE
in terms of its cost-effectiveness. Time, equipment (such as
computer hardware and software) and techniques as inputs must
be related to the potential value of the information as output.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 4 Composition of the management environment
Efficiency and effectiveness are achieved where the relation of
input to output is optimised7.
Examples of two simple, yet powerful, techniques that comply with the
above criteria are the classic linear trend estimation (a form of time
series analysis) and a SWOT analysis. -JOFBS USFOE FTUJNBUJPO is
a technique that uses regression analysis to project future trends. It is
based on the analysis of numerical values (for example, interest rate
figures, crime statistics, sales figures, and so on) collected at multiple
points in time (current and historical) and presented chronologically.
4805BOBMZTJTis one of the most common and simple, yet powerful,
techniques to aid analysis of the environment. SWOT stands for: S
– strengths; W – weaknesses; O – opportunities and T – threats. It
involves identifying the most important opportunities and threats in
the organisation’s external environment and the key strengths and
weaknesses in its internal environment. A SWOT analysis is based on the
assumption that an effective strategy derives from a sound ‘fit’ between
an organisation’s internal resources (strengths and weaknesses) and its
external situation (opportunities and threats). A good fit maximises an
organisation’s strengths and opportunities and minimises its weaknesses
and threats8. Understanding the key opportunities and threats facing an
organisation is essential when managers are identifying realistic options in
terms of strategising and planning9. The four elements of the acronym can
CFEFųOFEBTGPMMPXT4USFOHUITBSFUIFSFTPVSDFTBOEPSDPNQFUFODJFT
available to an organisation which represent distinctive advantages
(relative to its competitors) that allow it to achieve its objectives10.
A high market share, good financial position, low staff turnover rate,
and a skilled and competent human resource team are all examples of
organisational strengths. Weaknesses, in contrast, are the limitations
or deficiencies in one or more resource or competency (relative to
competitors) that impede an organisation’s effective performance and
may prevent it from achieving its objectives11. A poor financial position,
high staff turnover rate, shortage in skilled and competent human
resources, low productivity and obsolete production techniques are all
examples of organisational weaknesses. Opportunities are favourable
situations12 or trends13 in an organisation’s external environment upon
which it can capitalise and improve its position. Economic growth, low
interest rates, low inflation rates, political stability, government incentives
and legislation supporting an organisation’s growth are examples of
opportunities originating from an organisation’s external environment.
Threats are unfavourable situations or trends in an organisation’s
external environment that are key impediments to its current or desired
position14. Examples of threats include terrorism, political instability,
nationalisation of strategic assets by newly constituted governments,
new or revised legislation or industry regulations, poor government
administration and service delivery, slowing economic growth, high
inflation, increasing interest rates, rising oil prices, pandemics such
BT )*7"JET IJHI DSJNF SBUFT JOBEFRVBUF USBOTQPSU BOE FMFDUSJDJUZ
infrastructure, climate change, new competitors entering the market,
revolutionary technological innovations by competitors and poor service
delivery by suppliers or suppliers going out of business.
linear trend estimation
uses regression analysis to
project future trends
S9OT analysis
identifies opportunities
and threats in the external
environment and strengths
and weaknesses in the internal
environment
CONTEMPORARY MANAGEMENT PRINCIPLES
85
PART II: Management in a changing environment
The previous two techniques are often used by organisations when
analysing the environment. It provides a basis upon which more
sophisticated techniques can be executed.
Phase 3: Develop an environmental profile. An environmental profile
entails summarising the results of the analysis of the management
environment in a useful and user-friendly way. In terms of the SWOT
analysis technique this means summarising opportunities and threats,
together with their potential impact on the organisation, as well as
strengths and weaknesses in a useful and user-friendly way.
Phase 4: Monitor the variables, trends and environment continuously.
Once the environmental profile has been completed, the key variables
identified have to be continuously monitored to ensure they are still
valid, providing timeous warning as to changes in trends, and identifying
potential new opportunities, threats, strengths and weaknesses so that
strategies and plans can be proactively implemented if required. Figure
4.6 summarises the basic framework for conducting an analysis of the
environment.
Phase 1
Identify key environmental
variables
Phase 4
Monitor the variables,
trends and environment
continuously
Phase 2
Evaluate and select a
technique for analysing the
environment
Phase 3
Develop an environmental
proƂle
Figure 4.6: Framework for conducting an environmental analysis
86
CONTEMPORARY MANAGEMENT PRINCIPLES
Copyright © 2014. Juta and Company. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S.
or applicable copyright law.
Chapter 4 Composition of the management environment
CHAPTER SUMMARY
1. Understand the importance of the management environment when making management
decisions.
• The management environment is complex and interdependent.
• Change is becoming more rapid, discontinuous and turbulent.
• Management mistakes are becoming increasingly costly.
• Managers need a means to identify strengths, weaknesses, opportunities and threats within
the environment to empower them to make better critical choices and choose more feasible
courses of action in executing planning, organising, leading and controlling functions.
2. Depict diagrammatically and explain the concepts of the process, systems and
contingency approaches in management.
• The process approach to management is based on the four main functions of management.
According to this approach, the performance of the planning, organising, leading and
controlling functions within the organisation is seen as circular and continuous. The process
approach focuses on managing the total organisation.
• The systems approach to management defines a system as a set of interrelated and
interdependent parts arranged in a manner that produces a unified whole. The organisation,
which is a system in its own right, is therefore in constant interaction with its environment and
is influenced by both the industry-specific and general environments.
• The contingency approach to management is based on the systems approach. The basic
premise of the contingency approach is that the application of management principles
depends on the specific situation that managers face at a given point in time.
The concepts of the process, systems and contingency approaches are depicted in Figure 4.1.
3. Understand the structure and dynamics of the management environment. The management
environment can be divided into the micro-environment, the market environment and the
remote environment.
• The micro-environment can also be referred to as the internal environment and includes the
organisation’s functions, policies, strategies, goals, objectives, resources available and also
designate the area over which the manager has total or full control.
• The market environment is the environment that surrounds the organisation in which
competition within a specific industry takes place.
• The broader environment within which the organisation functions and that surrounds the
market environment is called the remote environment.
4. Conduct a basic analysis of the environment.
The phases involved in conducting an environmental analysis are the following:
Phase 1: Identify key environmental variables.
Phase 2: Evaluate and select a technique for analysing the environment.
Phase 3: Develop an environmental profile.
Phase 4: Monitor the variables, trends and environment continuously.
Contemporary Management Principles
EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 5/3/2018 12:43 PM via UNISA
AN: 707010 ; Vrba, M. J., Brevis, Tersia.; Contemporary Management Principles
Contemporary.indb 87
Account: s7393698
87
2013/11/20 4:24 PM
PART II: Management in a changing environment
KEY TERMS
bargaining power of customers
bargaining power of suppliers
competitors
contingency approach to management
cultural environment
customer needs
customers
FDPMPHJDBMQIZTJDBMFOWJSPONFOU
economic environment
environmental analysis
environmental profile
existing competitors
goals and objectives
intermediaries
labour market
labour unions
linear trend estimation
macro-environment
management environment
market environment
micro-environment
new entrants
opportunity
organisational functions
policies
QPMJUJDBMMFHJTMBUJWFFOWJSPONFOU
process approach to management
purchasing behaviour of customers
remote environment
resources
strategies
strength
substitutes
suppliers
SWOT analysis
systems approach to management
technological environment
threat
weakness
REVIEW QUESTIONS
1. Differentiate between the process, systems and contingency approaches to management.
2. Explain the importance of management in a changing environment.
3. Discuss the micro-environment as well as the variables in this environment.
4. Explain the market environment as well as the sub-environments within it that have an influence on the
management of organisations.
5. Discuss the remote environment with an explanation of all the sub-environments in this environment
affecting the organisation and its management.
6. Depict the management environment diagrammatically.
7. Discuss the various phases that a manager should follow in conducting an environmental analysis.
88
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 4 Composition of the management environment
END NOTES
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CONTEMPORARY MANAGEMENT PRINCIPLES
89
Chapter 5
Managing organisational
change and individual stress
OPENING CASE
Mari Vrba
OPENING CASE
The reinvention of Pick n Pay1
Raymond Ackerman listed his seven Pick n Pay
supermarkets at 4 cents a share on the (then)
Johannesburg Stock Exchange ( JSE) in 1968.
The event marked the beginning of the rise of a
company that grew into the largest food retailer
in South Africa. Pick n Pay, a household name in
the country, was a winner – the darling of food
retailing, a tough competitor, with loyal customers
and satisfied shareholders – and its magic lasted for
40 years. In the year that ended in February 2009,
Pick n Pay reported a headline profit of R989m
– a massive return on equity (RoE) of 132.7 per
cent for its shareholders. Then suddenly the magic
ended – by February 2011 the RoE dropped to
47.2 per cent and by March 2013 it was the worst
in three years of consecutive decline.
What went wrong?
Ironically, the phenomenal return on equity it earned
for its shareholders was the first sign that Pick n Pay
was not investing enough2 in its sustainability. Pick
n Pay was raking in the profits3 for management
and shareholders, but failed to reinvest in the
company. Meanwhile competitors Shoprite, Spar
and Woolworths were eroding Pick n Pay’s market
share in both the lower LSM (lifestyle measure)
and the upper LSM respectively. The booming
economy during the previous 17 years gave a false
sense of performance to Pick n Pay in respect of
its market share because it showed substantial year
on year increases. However, the recession of 2009
revealed the weaknesses in its business model. Pick
n Pay was steadily losing market share and it failed
to follow its major competitors in adopting central
distribution. It had a bloated labour force and a
fragmented corporate structure. In addition, Pick
n Pay’s acquisition of Australian retailer Franklins
in 2001 was a drain on its capital resources and
management time and the acquisition was not
a success. The retailer needed to embark on a
complex reinvention programme to regain what
was lost during years of complacency.
Reinventing Pick n Pay
Pick n Pay appointed Nick Badminton as CEO
in 2007 – analysts described him as a key driver
of change – and in 2011 appointed Richard van
Rensburg as his Deputy CEO and the head of a
transformation team responsible for implementing
the change programme. The first change they
implemented was an initiative by the previous
CEO Sean Summers, in the pipeline since 2005. It
entailed replacing the company’s old technology
platform (an in-house developed system) with a
SAP fully integrated system providing improved instore disciplines, more efficient business processes
and more timely information thus enabling better
and more rapid decision-making across the
organisation. This was a costly process.
CHAPTER 5 Managing organisational change and individual stress
A second area that needed attention was Pick
n Pay’s labour policies. The retailer and the SA
Commercial, Catering & Allied Workers Union
reached an agreement in 1995 to implement a
9 am to 5 pm working-hour arrangement for their
labour force. This resulted in an expensive increase
in staff, which the company could have mitigated
if the labour union was prepared to be more
flexible – which they were not. Pick n Pay returned
to the negotiation table and an arbitration process
of which the findings were largely in favour of the
retailer. At the end of 2011, Pick n Pay retrenched
3 137 employees and decreased their labour costs
substantially.
Yet another change intervention involved
the consolidation of the company’s fragmented
corporate structure to a more centralised structure
resulting in lower costs, but also in a more efficient
structure.
The biggest challenge was changing Pick n
Pay’s outdated approach to procurement and
distribution. Analysts attributed some of the
company’s loss in market share to its lagging
behind Shoprite and other competitors in adopting
centralised distribution. This hampered Pick n
Pay’s ability to meet the demand for large numbers
of smaller shops – only 15 per cent of Pick n Pay
shops were in areas where customers wanted
them. In contrast, its competitors could place up
to 60 per cent of their stores in locations where
their customers prefer to shop.
In a 2011 interview, Raymond Ackerman4
defended Pick n Pay’s position arguing that its
management realised as early as the 1970s that
direct store delivery was inefficient and that
centralisation was a better option. However,
key suppliers opposed such a change. Shoprite,
however, switched to centralised distribution – in
the face of strong opposition from the major food
producers, but CEO Whitey Basson persevered
and soon Shoprite’s market share grew and the
retailer gained a decisive advantage in this respect.
Pick n Pay embarked on the costly process
of adopting centralised distribution. The retailer
implemented operational improvements at
Longmeadow, its Gauteng distribution centre,
which became operational in mid-2010. In
2012, the Cape Town and Durban centralised
distribution centres came into operation and the
R2b centralised distribution system, including an
inland facility, will become operational in 2014.
Another Pick n Pay strategy to win back market
share was the launching of its Smart Shopper
loyalty programme, which, according to Pick n Pay
management would help to stabilise the retailer’s
market share and provide valuable information
regarding its customer’s needs and preferences.
A new CEO
In February 2013, Richard Brasher, with 26 years
of experience at Tesco in the United Kingdom,
replaced Badminton as CEO of Pick n Pay. Once
South Africa’s largest food retailer, Pick n Pay is still
trailing its competitors despite spending billions on
its massive change programme.
The new CEO has plans to convert the capital
expenditure of the last few years into profit. He
stated that the pace of change at Pick n Pay has
been rapid and he wants the management team
to shift their focus on what they have and to make
it work rather than initiate more change. The
retailer’s future rests on the skills and leadership of
its new CEO to help it rebound.
CONTEMPORARY MANAGEMENT PRINCIPLES
91
PART II: Management in a changing environment
LEARNING OBJECTIVES
The purpose of this chapter is to investigate the management of change in organisations. The
objective of studying this chapter is to enable you to:
1. Identify and discuss the forces of change.
2. Discuss the dimensions of change.
3. Explain why organisations and individuals resist change.
4. Provide advice to managers on how to overcome resistance to change.
5. Discuss the approaches to managing change.
6. Identify the areas of organisational change.
7. Discuss the nature of stress.
8. Identify the sources of managerial stress.
LEARNING OBJECTIVE 1
Identify and discuss the forces
of change.
92
5.1 FORCES OF ORGANISATIONAL CHANGE
Organisations need to anticipate and react to changes in their business
environment. The ‘frog and boiling water’ metaphor illustrates this
well. When you put a frog in a pot containing very warm water, it will
immediately react and jump out; if you fill the pot with cold water and
gradually turn up the heat, the frog will stay in the water, not noticing
that its environment is changing and that it will perish. Similarly, some
organisations change when their environment changes, they ‘jump out
of the pot’, others fail to react to the change and cease to exist or they
implement radical change interventions in order to survive.
The opening case study illustrates how Pick n Pay, the successful
South African food retailer, failed to react to important changes in
its business environment. The management and shareholders of the
retailer became complacent and did not reinvest in the sustainability of
the organisation operating in a changing environment. The company lost
market share because it did not implement crucial changes timeously,
such as an advanced information system, centralised distribution and
a centralised corporate structure. These changes were required to
maintain its competitive position in the food retailing industry.
Change in the environment of an organisation can emanate from
forces within the organisation or outside the organisation. You may
want to revisit Chapter 4, where we describe the organisation as an
open system, in continuous interaction with its market- and macroenvironments. When change occurs in the external environment, it
affects the internal (micro-) environment of an organisation.
In Chapter 3, we discuss the unique variables that cause organisations
to adapt to new forms of organisation, such as becoming flatter,
more flexible, networked, diverse and global. In the current chapter,
we identify and discuss additional external and internal variables that
force organisations to change. The primary focus of the chapter is on
how organisations implement change: the dimensions of change, why
organisations and their employees resist change and how managers
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 5 Managing organisational change and individual stress
could overcome barriers to change. The approaches to change are many
and varied, but we limit our discussion to two well-known approaches,
those of Kurt Lewin and John Kotter. We conclude the chapter with a
discussion on the consequences of change on individuals, namely stress,
and how to manage personal stress.
5.1.1 Internal forces of change
The reasons for individual organisations to change are different for
every organisation and emanate from the specific context of the change
initiative in an organisation. We discuss a few internal forces for change
in the section below5.
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organisation would inadvertently cause change in any or all of the
following areas: structure, culture, the balance of power or the
technology it uses. We discuss the areas of change in more detail
elsewhere in the chapter.
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organisations. After delivering spectacular results for 40 years, Pick
n Pay’s performance declined and management realised that they
had to embark on a change programme to put the retailer back on
track.
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organisations to initiate change efforts in order to stimulate
growth. Pick n Pay implemented a change programme in order
to function more efficiently, regain the market share it had lost to
competitors and to stimulate growth.
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organisation to change, for example, by entering into a favourable
agreement with the labour union representing its workforce to
save on labour costs as Pick n Pay did, enabling it to retrench more
than 3 000 employees.
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technology may force organisations to change in order to remain
competitive. (We discuss this in Chapter 3.) Implementing new
technology may bring about much change and resistance to change
from employees.
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organisations often lead to change within organisations because a
new CEO or a new management team often ring in the changes
soon after they take office. This is sometimes referred to as the
‘new broom’ effect6.
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sources and political struggles within organisations. The opening
case study in Chapter 7 describes the events that led to the
appointment and resignation of a powerful CEO at the helm of a
giant manufacturing organisation. The case study illustrates how a
shift in power can lead to internal conflict and change.
CONTEMPORARY MANAGEMENT PRINCIPLES
93
PART II: Management in a changing environment
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exploitation and application of ideas, services and inventions.
A lack of innovation in an organisation may result in stagnation
and will become a force for the organisation to change. This
is especially true in industries where continuous innovation is
required in order to compete in that industry and to survive. An
example is Silicone Valley in California, where organisations have to
offer new innovative products and services in order to compete in
an environment characterised by innovation and change7.
5.1.2 External forces of change
OCTMGVGPXKTQPOGPV
comprises consumers,
competitors, suppliers of
resources and intermediates
such as banks
OCETQGPXKTQPOGPV
comprises several subenvironments, including the
technological, economic,
social, political, ecological and
international environments
94
External forces for change in organisations mainly stem from the NBSLFU
FOWJSPONFOU and macro-environments of organisations. Changes in
the needs and behaviour of consumers, the offerings of competitors, or
the changes in the availability of key suppliers may force the organisation
to change its products or services to meet the demands of the market.
The NBDSPFOWJSPONFOU comprises several sub-environments,
including the technological, economic, social, political, ecological
and international environments. A change in any one of these subenvironments may cause change in the other sub-environments, in the
market environment and in the internal (or micro-) environment of
an organisation. The sources of change emanating from the external
macro- sub-environments include:
r /FXUFDIOPMPHZDSFBUFTUIFBWBJMBCJMJUZPGOFXQSPDFTTFT systems, materials and equipment and accelerates change and
innovation because it enables organisations to develop new and
innovative products and services. Advanced information systems
can disseminate essential information faster and more efficiently
and new processes can increase the productivity of organisations.
New technology results in increased competition and forces
organisations to use the latest technology in order to remain
competitive. You may want to revisit the discussion in Chapter
1 on the Information Revolution and the changes it brought to
profoundly influence how contemporary organisations function.
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FYBNQMFIFSFJTUIFSFDFTTJPOJO XIJDIBŲFDUFEDPOTVNFS
behaviour and forced organisations to adapt to the changing needs
of their customers.
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environments affect people such as employees and consumers,
which in turn, forces organisations to change. Demographic trends,
levels and quality of education, ethical, gender and race issues, and
changes in lifestyle are variables that act as forces for organisations
to change. Technological advances in medicine and medical care
enable people to live longer, which in turn can affect organisations
such as insurance companies, forcing them to change the products
UIFZPŲFS0OUIFPUIFSIBOE IFBMUIJTTVFTTVDIBT)*7"JETBOE
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 5 Managing organisational change and individual stress
antibiotic-resistant tuberculosis force organisations to change their
human resources policies and practices.
r &DPMPHJDBMBOEQIZTJDBMGPSDFTPGDIBOHFQFSUBJOUPUIFOBUVSBM
resources from which organisations obtain raw materials and the
environment into which organisations discharge their waste. In
recent years, issues such as climate change and sustainability are
enjoying a prominent place on the agendas of international forums.
This in turn forces countries to promulgate legislation to govern
the impact of organisations on the environments where they
operate. In South Africa, there is a call for organisations to report
on their sustainability and their impact on the environment (see
Chapter 8). Clearly, the worldwide interest in environmental issues
forces organisations to change their operations and this trend will
continue in the future.
r 1PMJUJDBMGPSDFTPGDIBOHFJODMVEFUIFQPMJUJDBMSJTLHPWFSONFOUT
create by their actions, governance (such as corruption and
grafting) and the integrity of courts, policies and laws that affect
the stability and thus the level of direct foreign investment in a
country. It also influences the decisions of existing organisations
pertaining to plans to expand, decrease or cease their operations
in the country. Labour and other laws that govern economic
activity in the private sector could determine whether it is a
suitable environment for local and international entrepreneurs
to do business in a country. In South Africa, laws that govern the
employment decisions of organisations, such as the Employment
Equity Act and various other labour laws have a crucial impact
on organisations and the way they operate, forcing them to
change their labour components and investigating alternative
(technological) production methods.
r &WFOUTUIBUPDDVSJOPOFDPVOUSZNBZBŲFDUBOEMFBEUPDIBOHF
in organisations operating in other countries because of the
integration and interdependence of world markets. The financial
crises in the United States of America and elsewhere in the world
had a direct impact on most economies and many organisations in
the world. The two variables that had the most profound impact
on organisations since the late 1990s are advances in information
technology and globalisation (see Chapter 3). Globalisation has
changed the way in which organisations are operating across
national boundaries because of the threats posed by the increase
in competition but also because of the opportunities the expanded
markets could offer. Furthermore, the benefits of international
cooperation agreements such as the European Union, Nepad and
the Commonwealth of Nations, enable organisations to trade
under favourable conditions in other countries.
CONTEMPORARY MANAGEMENT PRINCIPLES
95
PART II: Management in a changing environment
LEARNING OBJECTIVE 2
Discuss the dimensions of
change.
5.2 THE DIMENSIONS OF CHANGE
Change in organisations takes many forms. Figure 5.1 depicts four
dimensions of change in the form of a continuum. The process of
change ranges from carefully planned to reactive change; the scope
of change varies from incremental to revolutionary change; the source
of change ranges from top down to bottom up; and the nature of the
pace of change varies from punctuated to continuous change.
PROCESS
SCOPE
SOURCE
PACING
Planned
Revolutionary
Top down
Punctuated
Reactive
Incremental
Bottom up
Continuous
Figure 5.1: The dimensions of change
Source: Adapted from: Ancona, D., Kochen, T.A., Scully, M., Van Maanen, J. & Westney, D.E.
2005. Managing for the future: organizational behavior and processes. 3rd edition. Cincinnati,
OH: South-Western College, p M8–16.
5.2.1 Planned change versus reactive change
planned change
reactive change
Managers initiate and implement planned change8 to solve problems,
to adapt to changes in the environment, to improve performance or to
prepare the organisation for future changes.
Reactive change takes place in the course of events or when
external forces inflict change on organisations. Organisations react to
these changes in order to minimise the negative effects of change, limit
disruption, maintain the status quo or improve on the current situation.
takes place when organisations
react to change in their
environments
5.2.2 Revolutionary change versus incremental
change9
change that is planned and
implemented by managers to
adapt to or prepare for change
in the environment
revolutionary change
involves major, radical, strategic,
transformational and rapid
change
incremental change
a process whereby individual
and other parts of the
organisation deal incrementally
with one problem at a time
96
Revolutionary change involves major, radical, strategic,
transformational and rapid change. Changes such as downsizing, reengineering and restructuring may change the characteristics of the
organisation and are transformational in nature.
Incremental change is a process whereby individual and other
parts of the organisation deal incrementally with one problem at a time.
In response to pressures in the internal and external environments, the
organisation transforms over time. The underlying idea is that change
will take place through consecutive, limited and negotiated shifts in
systems, processes or structures.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 5 Managing organisational change and individual stress
change
incremental change
punctuated change
continuous change
time
Figure 5.2: Incremental change, punctuated change and continuous
change
5.2.3 Punctuated change versus continuous
change10
Punctuated change implies that organisations evolve through
relatively long periods of stability (equilibrium periods), but these are
interrupted by relatively short bursts of fundamental change. These
revolutionary periods disrupt activity patterns and create the basis for
new equilibrium periods. The triggers for change usually include changes
in the internal or external environment, for example, new technologies,
process redesign, or industry deregulation.
Continuous change entails a pattern of uninterrupted adjustments
in work processes and social practices driven by organisational instability
and cumulative reactions to daily events. For organisations in industries
with short product cycles in highly competitive markets, the ability to
change rapidly and continuously is a core competency, entrenched in
their culture and comprises a crucial capability for survival.
punctuated change
5.3 RESISTANCE TO CHANGE
LEARNING OBJECTIVE 3
5.3.1 Organisational barriers to change
Explain why organisations and
individuals resist change.
Change initiatives in organisations often encounter some form of
resistance. One barrier to change is organisational inertia (inactivity).
Organisations resist change because the forces for and against change
are equally strong and therefore the organisation remains in the same
position.
Another organisational barrier to change is the unforeseen
consequences11 of implementing change initiatives because of the
interdependencies in organisations. Change in one part of the
organisation may lead to (sometimes unwanted) change in other parts
of the organisation.
an organisation evolves through
relatively long periods of stability
interrupted by relatively short
bursts of fundamental change
continuous change
a pattern of uninterrupted
adjustments in work processes
and social practices driven by
organisational instability and
cumulative reactions to daily
events
organisational inertia
organisations resist change
because the forces for and
against change are equally
strong and therefore the
organisation remains in the
same position
5.3.2 Individual resistance to change
The general view is that the natural human aversion to change results
in the resistance of people to change. However, a contrary view is that
people may resist change initiatives because managers impose it on
them rather than involve them to improve their own work experience
CONTEMPORARY MANAGEMENT PRINCIPLES
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PART II: Management in a changing environment
by implementing the change initiatives. We shall discuss this and other
methods to overcome resistance to change elsewhere in this chapter.
People in organisations may resist change for a number of reasons12:
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that they may have to give up something because of a change
initiative may cause people to resist change. In Chapter 20
(Workforce motivation), we explain that individual behaviour
is mostly motivated by self-interest and in the chapter on
organisational power and politics (Chapter 7), we discuss how
individuals will use their power to protect their own interests and
the interests of the groups to which they belong. If an individual
or group of individuals perceive that a change initiative may pose a
threat to their interests, they will resist the change.
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to convey the implications, benefits and disadvantages of
change initiatives to employees, it may cause misunderstanding,
confusion, rumours and eventually resistance to change. Similarly,
if employees do not trust the management of the organisations
where they work, attempts to implement change may be met with
resistance from the employees.
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cause resistance to change. People fear that they will not be able
to learn a new skill, understand and operate a new information
system or change their behaviour to meet the challenges of a new
job. They may feel that they cannot change soon enough and are
emotionally unable to change. Kotter and Schlesinger13 remarked
that if changes are significant and the individual’s tolerance for
change is low, the person will resist the change even if he or she is
not sure why. In addition, a person may be reluctant to admit that
a previous decision or action was wrong, or succumb to pressure
from peers to resist change.
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between an individual’s ethical convictions and the nature of the
change.
LEARNING OBJECTIVE 4
5.4 OVERCOMING RESISTANCE TO CHANGE
Provide advice to managers on
how to overcome resistance to
change.
Managers could deal with their employees’ resistance to change in a
number of ways. Managers should understand the various methods at
their disposal to address resistance to change initiatives. Different factors
cause different forms of resistance, as explained in the previous section.
This requires that managers use the correct method when dealing with
the resistance in the most effective manner.
5.4.1 Methods to deal with resistance to change
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a lack of information, or the wrong information, education and
communication regarding the change initiative can be an effective
way to overcome the resistance. Precise communication of the
98
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 5 Managing organisational change and individual stress
r
r
r
r
r
extent and consequences of a change initiative can eliminate
the barriers of misinformation regarding the logic and need for
change. Education can take many forms, including focus groups,
information sessions, one-to-one discussions, documents posted
on the intranet, or e-mails.
1BSUJDJQBUJPOBOEJOWPMWFNFOU0OFPGUIFNPTUFŲFDUJWFXBZT
to get buy-in and commitment for a change initiative is to allow
the people whom the change initiative will affect to participate in
the design and implementation of the initiative. The downside of
this method is that it may not obtain the optimum solution and it
could be time consuming, therefore managers need to manage the
process carefully.
'BDJMJUBUJPOBOETVQQPSU5IJTNFUIPEJTFŲFDUJWFXIFOGFBSBOE
anxiety is the cause of resistance to change and involves facilitating
individuals and offering them support such as training, time off
work or emotional support. The condition for using this method is
that the managers should be prepared to invest time, money and
patience to deal with the resistance and they should be prepared
to accept failure despite their best efforts.
/FHPUJBUJPOBOEBHSFFNFOU.BOBHFSTSFTPSUUPOFHPUJBUJPOBOE
agreement when someone stands to lose something because of
the change initiative, but has enough power to resist the change.
This entails the offering of incentives or negotiating a deal with
the person. As we explain in Chapter 7, the aim of negotiation is
that the parties reach an agreement that is mutually acceptable,
but managers should be careful to avoid agreements that violate
their organisation’s ethical code of conduct by thinking that the
‘end justifies the means’, as such thinking can lead to undesirable
consequences.
.BOJQVMBUJPOBOEDPPQUBUJPO.BOJQVMBUJPOBTBNFUIPEUP
overcome resistance involves the ‘selective use of information and
the conscious structuring of events’15. The purpose of co-opting
an individual or the leader of the group by giving him or her a role
in the design or implementation of a change initiative is, in this
context, not to obtain the participation of the individual, but rather
to secure his or her endorsement of the initiative. The problem
that could occur with using this method is that the resistance will
increase if the individual or group leader perceives that his or her
co-optation happened under false pretences.
&YQMJDJUBOEJNQMJDJUDPFSDJPO.BOBHFSTVTFUIJTNFUIPEXIFO
time is of the essence for the change. It involves managers
forcing people to accept change by threatening them and by using
their power (see Chapter 7) to withhold promotion, rewards,
retrenchment and so on. This is a risky method and may not
achieve the desired outcome or even have the opposite effect.
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PART II: Management in a changing environment
5.4.2 The situational factors that influence the
strategic choices of managers when planning a
change effort16
When they design and implement change, managers make certain
strategic choices and they encounter various forms of resistance to the
anticipated change efforts. To this end, a number of situational factors
could influence such choices. The variables are the:
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r QPTJUJPOPG UIFDIBOHFJOJUJBUPSJOUFSNTPG QPXFSXIFODPNQBSFE
to the resistors
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and commitment from others to help design and implement the
change effort
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of the potential short-term risks to the performance of the
organisation and its survival.
5BCMFTIPXTXIJDIPQUJPOTBSFBWBJMBCMFGPSNBOBHFST
Table 5.1: The situational factors that inƃuence choices when designing and implementing a change effort
Situational Anticipated strength of
factors resistance
Available
options
Pace of
the change
process
Position of change
initiator vis-à-vis
resistors in terms of
power
Need for information
and commitment from
others by the change
initiator/s
Potential for risks
to short-term
organisational
performance and
survival
Weak
Strong
Weak
Strong
Little
Lots
Little
Great
rapid
slow
slow
rapid
rapid
slow
rapid
slow
clear plan
not a clear
plan
not clearly
preplanned
clear plan clear plan
not clearly clear plan not clearly
prepreplanned
planned
Involvement little
of others
lots
lots
little
little
lots
little
lots
Dealing with attempt to
overcome any
resistance
resistance –
fait accompli
reduce
resistance
to a
minimum
reduce
resistance
to a
minimum
attempt to
overcome
any
resistance
– fait
accompli
attempt to
overcome
any
resistance
– fait
accompli
reduce
resistance
to a
minimum
attempt to
overcome
any
resistance
reduce
resistance
to a
minimum
Extent to
which the
change is
planned
Source: Adapted from Kotter, J.P. & Schlesinger, L.A. 1979. Choosing strategies for change. Harvard Business Review, March–April,
p 112.
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5.5 APPROACHES TO CHANGE
LEARNING OBJECTIVE 5
One of the major theories of planned change is Kurt Lewin’s three-step
change model, which focuses on implementing planned change. The
model entails three steps: unfreezing, moving (or change) and refreezing.
Discuss the approaches to
managing change.
5.5.1 Lewin’s change model
Lewin’s model provides a general framework for understanding
organisational change and researchers have used, modified and
elaborated upon the model since Lewin published his model17.
4UFQ Unfreezing. Lewin asserted that the basis of stability of human
behaviour is a RVBTJTUBUJPOBSZFRVJMJCSJVN, which is the inability
of organisations or groups to change in step with the environment in
which they operate. The more successful an organisation or group
has been in the past, the greater the inertia to change will be. Pick n
Pay, for example, was highly successful for 40 years before large-scale
change in the food retail environment forced it to embark on a major
change programme. Lewin argued that, in order for an organisation
to change, the forces of inertia (equilibrium) need to be destabilised
(‘unfreeze’) before the old behaviour will be unlearned and discarded.
4UFQChange. This step requires individuals and groups to move
towards a more acceptable set of behaviours. It involves interventions
to bring about change in behaviour, values and attitudes through
changes in processes, systems and structures.
4UFQRefreeze. The last step, ‘refreezing’ seeks to establish a new
quasi-equilibrium to ensure that the new behaviours do not regress
to the previous behaviours. Refreezing often requires changes in
organisational culture, norms, policies and practices.
Suasistationary eSuilibrium
an equilibrium supported by a
field of driving and restraining
forces causing inertia
5.5.2 Kotter’s Eight Step Process of successful
change
John Kotter is a renowned expert in the management of change. He
developed the Eight Step Process18 emphasising that it is a change process
and not a checklist. He emphasised that successful change of any scale
should go through the steps in the correct sequence without omitting
any one of the steps. Kotter and Holger Rathgeber19 also wrote the
popular bestseller Our iceberg is melting – a fable about a penguin colony
in Antarctica. They used the Eight Step Process to vividly illustrate how
organisations could manage change initiatives effectively.
Kotter identified eight errors, which in his opinion, cause
organisations to fail in their change efforts20. The errors include allowing
too much complacency, failing to create an effective guiding team to lead
change, underestimating the power of vision and not communicating it
sufficiently, failing to remove the obstacles that block the new vision,
failing to celebrate short-term wins, declaring victory too soon and
failing to change the culture to support the new vision.
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The consequences of these errors are serious, because organisations
fail to implement new strategies effectively because of the mistakes they
make. Kotter identified several strategies and linked the failure of some
organisations to implement the strategies successfully to the negative
consequences of the errors they make, for example:
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Kotter’s Eight Step Process for successful change includes the following
steps21:
4UFQ Create a sense of urgency. Create urgency in others by
stressing the need for change and explain to them that it is essential to
act immediately. This step also involves examining the market and macro
environments to identify threats and opportunities.
4UFQ Form a guiding team. It is essential to form a guiding team
to lead change. This team should have enough power to lead the
change and should be able to work together in a cohesive manner. The
team should have ‘leadership skills, credibility, communication ability,
authority, analytical skills and a sense of urgency’22.
4UFQCreate a change vision and strategy. Create a desirable picture
of the future. Clarify how the future will differ from the past and explain
the steps towards making such a future a reality. Develop strategies to
make the vision a reality.
4UFQ Communicate the vision. Ensure that others understand and
accept the vision and strategy. The guiding team should set the example
for teaching new behaviours.
4UFQ Empower others to act. It is crucial to remove any barriers
in order to empower those who want to embrace the change such as
changing systems and processes. This step also involves encouraging risk
taking (if appropriate) and encouraging people to offer innovative ideas
and perform activities to achieve the new vision.
4UFQProduce short-term wins. Plan and create visible performance
improvements. Recognise and reward those employees who make the
improvements.
4UFQ Consolidate improvements and produce more change. Do
not give up and maintain the pace and the strength of the change
initiative until the vision is a reality. Use the credibility earned through
implementing the previous steps to change more systems, structures
and policies that do not comply with the new vision. Hire, promote and
develop employees to implement the vision. Initiate new projects and
themes to reinforce the new vision.
4UFQCreate a new culture. Work to maintain the new behaviours
until they become ‘the way we do things here’. Communicate the
relatedness of new behaviours and organisational success. Develop a
process of leadership development and succession.
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5.6 AREAS OF ORGANISATIONAL CHANGE
In this chapter, we have dealt with many aspects of organisational
change, but the question arises where in the organisation these changes
take place. In general, organisations affect change in four areas, namely
in strategy, structure, technology and people. As explained elsewhere in
the chapter, organisations are open systems and when they implement
change in one part of their organisations, in general it will affect the
other parts of the organisations and cause change there as well. We
examine the four areas of change more closely23.
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aligning the organisation’s resources (internal environment) with
threats and opportunities caused by changes in the external
environment’24.
Furthermore, a change in strategy inevitably results in change
in other areas of the organisation. In Chapter 11, we discuss the
process of strategic planning and explain how the top managers
of an organisation formulate strategies to compete with other
organisations in the same industry through their competitive
advantage to use opportunities and avoid threats in their market
and macro-environments. Pick n Pay’s strategy, for example, was
to regain their lost market share in the food retailing industry. The
strategy involved a restructuring process, implementing a new
information system and reaching an agreement with the labour
union representing the organisation’s labour force.
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structure of an organisation may involve a complete restructuring
of the organisation, or focus on the grouping of functions
(departmentalisation), the linking mechanisms that coordinate the
activities of individuals and groups in an organisation (cooperation
mechanisms), or the alignment of the design with organisational
systems and processes, such as incentive schemes and training
programmes. In Chapter 15, we discuss organisation structure and
design and in Chapter 3, we explain that organisations are opting
for flatter and more flexible structures to cope with large-scale
change in their environments. Pick n Pay, for example, opted for
a centralised structure to replace its fragmented decentralised
structure and reaped the benefits of lower costs and a more
efficient structure.
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might involve changes in the use of information technology, for
example, Pick n Pay replaced the company’s old technology
platform (an in-house developed system) with a SAP fully
integrated system providing improved in-store disciplines, more
efficient business processes and more timely information thus
enabling better and faster decision-making across the organisation.
Other forms of change in the technological area include switching
to new technologically advanced equipment and changing work
processes or work sequences because of the availability of new
technology. For an organisation wishing to improve the quality
LEARNING OBJECTIVE 6
Identify the areas of
organisational change.
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PART II: Management in a changing environment
of its products, the implementation of new control systems may
improve the quality of an organisation’s products and thus its
completive position.
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organisation as they are the activators of the other resources.
In other words, people activate the financial, physical and
informational resources of organisations by organising finance,
operating the information system or operating the equipment.
Changes in the human resources of an organisation may involve
initiatives to change the abilities and skills of employees by
providing training programmes. Changing the values and attitudes
of organisational members may be difficult as we explain in
Chapter 17, but organisations can implement initiatives to align
individual values and attitudes with the espoused values of the
organisation. Organisations can attempt to change the perceptions
and expectations of organisational members by, for example,
being transparent about their remuneration and incentive systems
and educating employees about the rationale behind their
compensation packages. Lastly, organisations may implement
programmes to improve the performance of their employees by,
for example, incentive schemes linked to performance.
LEARNING OBJECTIVE 7
5.7 MANAGING WORK STRESS
Discuss the nature of stress.
Change is stressful and managers and other employees working in
contemporary organisations have to deal with constant change in their
work environments and in their lives outside the office. In this final
section of the chapter on organisational change, we focus on the effects
of change and its consequence, namely stress, on the human resources
and specifically the managers of contemporary organisations.
The right amount of stress could enhance job performance and
personal welfare, but too much stress reduces both satisfaction and
performance. Since the work individuals perform connects with their
identity, stress in the workplace inevitably spills over into their private
MJWFT5IFPWFSBMMSFTVMUJTBDPNQMJDBUFEBOEJOUFSDPOOFDUFEXPSLMJGF
existence where one component of life directly influences the other.
For some people the price of professional success is high with
distressing consequences such as divorce, estranged children, ulcers or
coronary heart disease. Yet, others maintain effectiveness and lead a full
and satisfactory life outside the office. What is the difference?
Research indicates that the explanation lies in the quality of stress
that spills over from one sphere of an individual’s life into the other and
the extent to which the person has a sensitivity valve capable of shutting
off the pressures of work while at home and vice versa.
Furthermore, the phase of a person’s career also plays an important
role because people tend to cope with the conflicts that are inherent
in their lifestyles by concentrating predominately on one of them in
each phase. In general, people in their twenties concentrate on their
careers; by their late thirties spouse and family come to the fore, and in
their forties and beyond they take one of two paths: either they have
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CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 5 Managing organisational change and individual stress
an integrated professional and private life or they are patching up peace
between those factions.
5.7.1 The nature of stress
‘Stress’ is a term derived from science and is used to describe an
excessive detrimental overloading of an object. For example, a steel
object will have a certain strain capacity and under stress, when the
strain exceeds a certain level, a rupture or a fracture will occur. The
same concept emerged in medical terminology at the beginning of the
twentieth century referring to the overloading of the human body.
Physicians related the stress concept to balance in the body. For
example, when extreme coldness or great excitement activates the
sympathetic nervous system and the endocrine system, an individual
endures stress.
The endocrinologist Selye26 adapted this theory to describe the
human body’s response to emotions, such as fear and anger, as stress.
Selye was interested in the common features relating to the response
of the body to any demand placed upon it. These features constituted
what Selye termed the General Adaptation Syndrome, or GAS27, the
syndrome by which the body manifests stress. The GAS consists of the
following three phases:
r First phase: An alarm response. The non-specific response of
the body to an environmental demand or stressor such as a germ,
an overload on a group of muscles, a loud noise, extreme heat
or cold, or conflict at work and involves the body’s endocrine
system. The pituitary, a cherry-sized organ resting on the base of
the brain, signals the alarm stage of the body by sending a chemical
messenger in the form of a hormone ACTH to the adrenals.
During this stage, the body is, in a sense, in retreat, experiencing
a temporary, minor loss of efficiency until it can rally its forces of
resistance.
r Second phase: A resistance phase. The adrenals, in response
to ACTH, signal the second stage of the GAS, the resistance
stage, by secreting its own hormones, adrenaline and noradrenalin,
collectively called ‘catecholamines’. These enter the bloodstream
and trigger a succession of changes in the body chemistry, such
as the level of fatty acids in the blood and the blood’s clotting
chemistry and alter the digestive process. During the resistance
phase, these processes eventually have the effect of enabling the
organism to neutralise, isolate or minimise the damage to the
integrity of the organism as a whole; the body seems to adapt to
the demand.
r Third phase: Exhaustion or recovery. Selye believed that any
organ has, since birth, only a fixed, limited amount of adaptation
energy. Every stress response of the body uses some of this
precious asset. Whatever is used, the body cannot replace. Thus,
the resistance phase of the GAS cannot continue indefinitely.
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PART II: Management in a changing environment
When subjected to environmental stressors of sufficient strength
for a sufficiently long time, the adaptive energies of the organism
deplete and exhaustion or collapse follows. The exhaustion may
take the form of depression, bed rest, or some other temporary
lapse. This appears to allow the body to transfer some of its fixed
store of adaptation energy from long-term reserves to a shortterm supply. The body, however, cannot replace this transfer, and
if the process continues, eventually the entire stock of adaptation
energy drops to nothing and life ends.
STRESSOR
Pituitary send ACTH
to adrenals
Life ends
Adaptation energy
depleted
ALARM
Body in retreat
Environmental
stressors present for
prolonged period
Adrenals secrete
catecholamine
EXHAUSTION
RECOVERY – return
to normal
RESISTANCE
Body chemistry
neuralises/isolates/
minimises damage
Figure 5.3: The nature of stress
5.7.2 Emotional stressors28
A series of Selye’s experiments has a more direct bearing on
organisations. When he held a rat so it could only struggle without a
chance to escape, Selye found that although he did not injure the rat,
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CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 5 Managing organisational change and individual stress
it had the same physiological responses (the GAS). Selye concluded
that strong emotions such as anger or frustration activated the stress
response of the adrenals. An organisational example is a manager
who lashes out at a subordinate. The words, tone of voice and facial
expressions of the manager provide cues that evoke strong emotional
responses in the subordinate such as anger, fear or anxiety, which
triggers the body’s stress response. The body’s stress response enables
it to fight or run, but neither response is appropriate in this context.
The quickened pulse, increased sugar and fat levels in the blood,
quickened clotting time of the blood and the constriction of the blood
vessels do no good, but are actually a waste of the body’s fixed store
of adaptation energy.
5.7.3 Eustress versus distress and performance
A certain amount of stress is essential to well-being. Selye remarked that
‘complete freedom from stress only comes with death’29. In fact, most
people perform well when they endure an optimum amount of stress.
Selye referred to the optimal amount and type of stress as eustress.
When people experience eustress, it results in positive outcomes for
themselves and the organisation. The right amount of adrenalin may
enhance problem-solving abilities and creativity because the right
amount of adrenalin and other hormones appear in the blood and guide
the individual towards maximum performance.
However, even a positive form of stress, if experienced over a
prolonged period, can have negative consequences. It often results in
disease as it breaks down the body’s mental and physical systems and
weakens and deters performance30. Figure 5.4 illustrates the relationship
between stress and job performance.
eustress
the optimum amount and type
of stress and is a positive force
in our lives
High
Eustress
Job
performance
Low
High (Distress)
Level of stress
Figure 5.4: The relationship between stress and job performance
Source: Schemerhorn, J.R., Hunt, J.G. & Osborne, R.N. 1985. Managing organizational
behaviour. New York: John Willey & Sons, p 652.
5.7.4 Stress and health
Excessive stress can lead to health problems such as heart attack, stroke,
hypertension, ulcers, drug, alcohol or tobacco dependency, muscle
aches and many other diseases. The symptoms of stress are multiple
CONTEMPORARY MANAGEMENT PRINCIPLES
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PART II: Management in a changing environment
and varied and can be categorised into three areas that chronic stress
affects: the body, the emotions and thoughts, as Figure 5.5 illustrates.
THOUGHTS …
r lacM of concentration
EMOTIONS …
r daydreaming
Feelings
Relationships
r suicidal tendencies
r irritable
r withdrawn
r low selfesteem
r depressed
r Ƃght with friends
r helplessness
r uptight
r Ƃght with colleagues
r doubting future
r tired
r Ƃght with spouse
r loser mentality
r rundown
r feeling alienated
r chronic anger
r insensitive
r urge to cry
r urge to run
r feels alone
BODY …
r feels helpless
Physical
Behaviour
r diseases of the heart
r eat too much
r diseases of the stomach
r eat too little
r diseases of the sMin
r smoMing
r sweaty palms
r drinMing
r di\\iness
r drugs
r nightmares
r sleep more/less
r hyperventilation
r increase/decrease in sex
r startled by small sounds
r lethargic
r anxiety
r accident prone
r impulsive behaviour
r irritable
Figure 5.5: Areas affected by chronic stress
Source: Adapted from Scott, D. 1985. Managing stress: a workbook designed for a seminar
held by Whitehead Morris (Pty) Ltd, October 1985.
LEARNING OBJECTIVE 8
5.7.5 The sources of managerial stress
Identify the sources of
managerial stress.
The cost of managerial stress is twofold. A highly stressed individual
cannot work effectively. Managers especially cannot work productively
under excessive stress. They have lots of interaction with people
and their work often requires creative and intensive capacity, which
diminishes when individuals experience excessive stress. Furthermore,
highly stressed managers hinder organisational efforts to achieve goals.
108
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 5 Managing organisational change and individual stress
The second cost of stress manifests in unhappy personal lives. Stress
causes a reduction in the quality of interpersonal relationships with family
and friends. Stressed people are tired, and uninterested in interpersonal
relationships, hobbies and sporting activities.
The sources of managerial stress are job overload, role ambiguity,
role conflict, job fit, too much responsibility, bad relationships at
work, career development and career disappointments, organisational
structure, organisational culture, an inability to change and life changes.
r +PCPWFSMPBEDBOUBLFUXPGPSNT"OJOEJWJEVBMDPVMEIBWFUPP
much work to do, or a promotion could lead to job overload if
the organisation promotes an individual to a level above his or her
competence. Both types of job overload could produce symptoms
of psychological and physical stress.
r 3PMFDPOŴJDUFYJTUTXIFOBOJOEJWJEVBMJOBQBSUJDVMBSXPSLSPMF
experiences conflicting job demands, or must do things he or she
does not want to do, or does not consider them as part of his
or her job description. We discuss job conflict in more detail in
Chapter 18.
r +PCųU31 is one of the major causes of negative emotional spill-over
from managers’ professional lives into their private lives. A perfect
fit between an individual and his or her job occurs when the
person feels competent, enjoys his or her work and feels that his
or her work and moral values coincide. If these feelings are absent,
managers experience stress and tension.
r .BOBHFSTSFMBUJPOTIJQTBUXPSLTUFNGSPNGPVSEJSFDUJPOTGSPN
superiors, juniors, peers and people outside the organisation32.
Managers must bring all four components into balance to enable
them to deal with the stress inherent in managerial work. If these
relationships are out of balance, managers will experience stress.
r 5IFUXPNBKPSDMVTUFSTPGQPUFOUJBMTUSFTTPSTBSFBMBDLPG KPC
security, emanating from fear of retrenchment or fear of being
forced into early retirement; and status incongruity, which includes
under or over-promotion or having to deal with the frustration at
having reached one’s career ceiling.
r 0SHBOJTBUJPOBMTUSVDUVSFBOEDVMUVSFDBOUISFBUFOBOJOEJWJEVBMT
freedom, autonomy and identity and could cause stress. Little or
no participation in decision-making, no sense of belonging, a lack
of effective consultation and communication, excessive restrictions
on behaviour and office politics are potential sources of stress33.
r 1FPQMFXPSLJOHJODPOUFNQPSBSZPSHBOJTBUJPOTNVTUDPQFXJUI
much more change in their lives than previous generations. Toffler34
points out that as the rate of change increases, people who cannot
adjust to new jobs, a mobile lifestyle and impermanent working
conditions will experience stress. Managers, who must often
perform new and varied tasks, experience a higher proportion of
risk on this dimension of stress than other occupational groups.
r 5IFNBOZDIBOHFTQFPQMFIBWFUPEFBMXJUIJOUIFJSFWFSZEBZMJWFT ranging from the death of a family member to moving house or
CONTEMPORARY MANAGEMENT PRINCIPLES
109
PART II: Management in a changing environment
going on holiday, result in stress, which could influence a manager’s
effectiveness at work.
5.7.6 Managing stress
The most resilient individuals are those who obtain a life balanced by
participating in activities in each segment of the circle. Well-balanced
people who engage in cultural, physical, spiritual, family, social and
intellectual activities in addition to work, are more productive and less
stressed than workaholics who live only to work35.
Stress is unavoidable, but good habits should help to keep the
damage to a minimum. These include breathing deeply, taking holidays,
socialising, exercising regularly, eating plenty of fruit and vegetables,
developing a regular sleeping routine and doing what one loves36. In
addition37, improving one’s work habits, developing positive self-talk
and demanding less than perfection from oneself, are techniques to help
people cope with stress.
110
CONTEMPORARY MANAGEMENT PRINCIPLES
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or applicable copyright law.
ChaPter 5 Managing organisational change and individual stress
CHAPTER SUMMARY
1. Identify and discuss the forces of change.
Internal forces for change:
•
•
•
•
•
•
•
•
a change in the strategic direction of an organisation
poor performance
pressure from stakeholders to grow
workforce problems
the availability of new technology
changes in the top management of organisations
pressure to change
a lack of innovation.
External forces for change:
• changes in market environment
• new technology
• economic forces
• social forces
• ecological and physical forces
• political forces
• globalisation.
2. Discuss the dimensions of change.
• Planned change is the response of organisations to anticipated changes in their environments.
• Reactive change takes place when organisations react to changes in the environment to
minimise the negative effects of the change, limit disruption, maintain the status quo or
improve on the current situation.
• Revolutionary change involves major, radical, strategic, transformational and rapid change.
• Incremental change is a process whereby individuals and other parts of the organisation deal
incrementally with one problem at a time in response to pressures in the internal and external
environments.
• Punctuated equilibrium change implies that organisations evolve through relatively long
periods of stability (equilibrium periods) maintaining their basic activity patterns, interrupted
by relatively short bursts of fundamental change.
• Continuous change entails a pattern of uninterrupted adjustments in work processes
and social practices, driven by organisational instability and cumulative reactions to daily
eventualities.
3. Explain why organisations and individuals resist change.
Organisational barriers to change:
• organisational inertia
• unforeseen consequences of implementing change initiatives.
Contemporary management prinCiples
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111
Copyright © 2014. Juta and Company. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S.
or applicable copyright law.
Part II: Management in a changing environment
Individual barriers to change:
• Perceived threat to individual or group interests occur because people have the perception
that they may have to give up something and therefore they resist change.
• Misunderstanding and lack of trust become barriers to change when management fails to
convey the implications, benefits and disadvantages of change initiatives to employees and
if employees do not trust the management of the organisations where they work.
• Low tolerance for change pertains to the human fear of the unknown, which may cause
resistance to change.
• Ethical convictions may be a cause of resistance to change when a clash exists between an
individual’s ethical convictions and the nature of the change.
4. Provide advice to managers on how to overcome resistance to change.
•
•
•
•
•
•
education and communication
participation and involvement
facilitation and support
negotiation and agreement
manipulation and co-optation
explicit and implicit coercion.
5. Discuss the approaches to managing change.
Lewin’s change model:
• Step 1: Unfreezing
• Step 2: Change
• Step 3: Refreeze.
Kotter’s Eight Step Process of successful change:
• Step 1: Create a sense of urgency
• Step 2: Form a guiding team
• Step 3: Create a change vision and strategy
• Step 4: Communicate the vision
• Step 5: Empower others to act
• Step 6: Produce short-term wins
• Step 7: Consolidate improvements and produce more change
• Step 8: Create a new culture.
6. Identify the areas of change.
•
•
•
•
112
strategic change
changes in organisation structure and design
change in technology
changing people.
Contemporary management prinCiples
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Copyright © 2014. Juta and Company. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S.
or applicable copyright law.
ChaPter 5 Managing organisational change and individual stress
7. Discuss the nature of stress.
• First phase: An alarm response
• Second phase: A resistance phase
• Third phase: Exhaustion or recovery.
8. Identify the sources of managerial stress.
•
•
•
•
•
•
•
•
job overload
role conflict
job fit
relationships at work
job security and status incongruity
organisational structure and culture
coping with change
life changes.
KEY TERMS
alarm phase
change
change in technology
change process
changes in organisation structure and design
changing people
continuous change
coping with change
distress
education and communication
emotional stressors
ethical convictions
eustress
exhaustion phase
explicit and implicit coercion
external forces for change
facilitation and support
general adaptation syndrome (gas)
incremental change
internal forces for change
job fit
job overload
job security
life changes
low tolerance for change
manipulation and co-optation
misunderstanding and lack of trust
negotiation and agreement
organisational culture
organisational structure
pace of change
participation and involvement
perceived threat to individual or group
interests
planned change
punctuated equilibrium change
reactive change
recovery phase
refreezing
relationships at work
resistance phase
revolutionary change
role conflict
scope of change
source of change
strategic change
unfreezing
Contemporary management prinCiples
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113
PART II: Management in a changing environment
REVIEW QUESTIONS
1. Consider the opening case study on Pick n Pay and describe the internal and external variables that
forced the retailer to implement a change programme.
2. Discuss the circumstances under which each of the methods that managers could use to overcome
resistance to their change initiatives would be appropriate to use and mention why each of the
methods may fail.
3. Discuss the situational factors that influence the strategic choices of managers when planning a
change effort.
4. Discuss Lewin’s change model.
5. Explain why organisations fail to implement new strategies effectively because of the specific errors
they make when preparing for and implementing change interventions.
6. Consider the sources of managerial stress and discuss those that apply to you and your work
environment.
END NOTES
1
(i) Adapted from Thomas, S. 2011. The big rejig. Financial Mail, 26 August, pp 32–36. (ii) Thomas, S. 2013. Pick n Pay:
Burst packet. Financial Mail, 3 May, pp 48–4.
2
Gareth Ackerman as quoted in Financial Mail, 26 August 2013, pp 32–33.
3
Nick Badminton as quoted in Financial Mail, 26 August 2013, p 32.
4
Raymond Ackerman as quoted in Financial Mail, 26 August 2013, p 35.
5
Palmer, I., Dunford, R. & Akin, G. 2009. Managing organizational change. 2nd edition. Singapore: McGraw-Hill,
pp 65–68.
6
Ibid., p 67.
7
Smith, D. 2010. Exploring innovation. 2nd edition. Berkshire: McGraw-Hill, p 6.
8
Cummings T.G. & Worley, C.G. 2001. Essentials of organization development & change. Ohio, Cincinnati: SouthWestern College Publication, p 17.
9
Burnes, B. 2009, Managing change. 5th edition. Edinburgh: Pearson Education Limited, p 351.
10
Ibid.
11
Ancona, op. cit., pp. M8–6 to M8–7.
12
Kotter, J.P. & Schlesinger, L.A. 1979. Choosing strategies for change. Harvard Business Review, March–April,
pp 106–114.
13
Ibid., p 109.
14
Ibid., p 111.
15
Ibid., p 110.
16
Ibid., pp 112–113.
17
Lewin, K. 1947. Frontiers in group dynamics: concept, method, and reality in social science; social equilibria and
social change. Human Relations, (1)5: 5–41.
18
Kotter, J. 1996. Leading change. Boston: Harvard Business School Press.
19
Kotter, J. & Rathgeber, H. 2006. Our iceberg is melting, changing and succeeding under any conditions. Oxford:
Macmillan Press, pp 130–131.
20
Kotter op. cit., 1996, p 16.
21
(i) Kotter, J.P. 1995. Leading change: why transformation efforts fail. Harvard Business Review, March–April, p 61.
(ii) Kotter and Rathgeber, 2006, pp 130–131.
22
Kotter and Rathgeber, op. cit.
23
Griffen, R.W. 2011. Management principles and practices. 10th edition. China: South Westerm Cengage Learning,
pp 551–556.
114
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 5 Managing organisational change and individual stress
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CONTEMPORARY MANAGEMENT PRINCIPLES
115
Chapter 6
Corporate culture
OPENING CASE
Mari Vrba
OPENING CASE
Boeing1
0WFSWJFX
Boeing has been the leading manufacturer of
commercial jetliners for more than 40 years. In
1997, Boeing merged with McDonnell Douglas
Corp. The distinct cultures of the two companies
never integrated and the differences caused rivalries
and infighting.
In 2006, Boeing appointed a new CEO Mr WI
McNerney. Boeing was at an all-time low, wracked
by a series of serious ethical scandals, including the
jailing of Boeing’s former Chief Financial Officer and
the judicial finding that Boeing had abused attorneyclient privilege. Scandals involving various forms of
misconduct in various locations and in nearly every
division at Boeing, led McNerney to conclude that
the renowned company had a ‘poisonous culture’2.
Having spent his first six months as CEO in a
sense-making exercise of the company, McNerney
came to believe that the ‘internal rivalry caused
by the merger was at the root of the company’s
ethical scandals and it prevented managers
from cutting costs and sharing good ideas’3. His
remedies to change the Boeing culture included
exerting effective central leadership over Boeing’s
three divisions, changing the way executives were
paid and encouraging managers to use the huge
manufacturer’s cost-cutting competitive advantage
to the full. More importantly, he encouraged
managers to ‘talk more openly about Boeing’s
severe ethical lapses’4. McNerney believed that
the company could do better. He believed that the
ethical scandals and bitter infighting had adversely
influenced the company’s performance. ‘If we can
get the values lined up with performance, then
this is an absolutely unbeatable company’5, said
McNerney.
However, for all of Boeing’s internal problems,
McNerney still inherited a company that was
flourishing because the aerospace industry started
to recover during 2005. Its first new aircraft in ten
years highlighted Boeing’s success: the lightweight
787 Dreamliner, which carries 220 passengers
and burns 20 per cent less fuel than similar-sized
airplanes.
5IF%SFBNMJOFS
Touted as the aircraft of the future – a revolutionary
plane that would use new technology to bring
aircraft design into the twenty-first century – the
Dreamliner is made of ‘carbon-fibre reinforced
plastic composite and Boeing replaced pneumatic
and hydraulic systems with electric systems’. Boeing
delivered the first Dreamliner planes to Nippon
Airways in 2011. However, the aircrafts were years
late and billions of dollars over budget.
Although Boeing could have expected teething
problems with the new technology, a series of
serious problems plagued the Dreamliner aircrafts.
Towards the beginning of 2013, Boeing faced a
huge challenge as regulators around the world
grounded all fifty Dreamliner aeroplanes after
battery fires occurred in two of them. Ray LaHood,
the U.S. Transportation Secretary, declared that the
CHAPTER 6 Corporate culture
Dreamliner would not fly again in the United States
of America until regulators are sure of its safety6.
8IBUXFOUXSPOH
The main reason cited for the serious problems
the Dreamliner aircraft encountered, was Boeing’s
decision to increase the percentage of parts it
sourced from outside contractors on a massive
scale, which in turn emanated from the clashing
sub-culture of engineers and finance people at
Boeing.
To understand why Boeing embarked on
a strategy of outsourcing the manufacturing
of crucial aircraft parts, one needs to revisit
the merger between Boeing and McDonnell
Douglas. Technically, Boeing bought McDonnell
Douglas but, as a noted industry analyst remarked
to the New Yorker, ‘McDonnell Douglas in effect
acquired Boeing with Boeing’s money’7. McDonnell
Douglas executives became key players in the
merged company and the McDonnell Douglas
culture, averse to risk and passionate for cost
cutting, weakened Boeing’s historical commitment
to making big investments in new products. The
analyst added that after the merger, there was
an internal rivalry between the engineers and the
finance and sales people. The finance and sales
people increasingly marginalised the engineers8.
Under these conditions, getting the company
to commit to a major project like the Dreamliner
was difficult. According to the New Yorker, the
Dreamliner’s supporters at Boeing came up with
a development strategy that was supposed to be
cheaper and quicker than the traditional approach
– outsourcing. Boeing did not outsource just the
manufacturing of parts but also the engineering,
and the manufacture of entire sections of the
plane. Boeing built less than forty per cent of the
plane9.
The finance people loved the outsourcing
strategy since it meant that Boeing had to put
up less money. However, the strategy presented
a problem for the engineers; they did not like it
because it meant that they lost control of the
manufacturing process, as they had to work with
approximately fifty ‘strategic partners’10. Boeing
had far less control than it would have if more of
the operation had been in-house. The outsourcing
parts led to three years of delays as parts did not
fit together, shims used to bridge small parts were
not attached properly and Boeing had to rework
the tails of many of the planes extensively. In an
attempt to remedy the situation, Boeing took over
some of their suppliers, in order to resume control
over the supply of the parts for the aircraft11.
The case study highlights the strong influence
of organisational culture in the success or failure of
strategies such as a merger and the development
of a major new product. The two rival sub-culture
at Boeing, after the merger with McDonnell
Douglas Corporation, may have contributed to
the implementation of a strategy that led to the
temporary grounding of fifty Boeing aircraft.
LEARNING OBJECTIVES
The purpose of the chapter is to examine organisational culture.The objective of studying this chapter
is to enable you to:
1. Describe the concept of culture.
. DeƂne organisational culture.
3. Explain the levels of culture.
4. Differentiate between the various types of cultures in organisations.
5. Discuss the elements of culture.
6. Compare the different types of culture.
7. Explain how organisations change their culture.
CONTEMPORARY MANAGEMENT PRINCIPLES
117
PART II: Management in a changing environment
LEARNING OBJECTIVE 1
6.1 THE CONCEPT OF CULTURE
Describe the concept of culture. The common understanding of the word ‘culture’ has connotations with
proper behaviour and good education. Indeed, the only definition of
culture cited in an early version of the (South African) Oxford Pocket
Dictionary is that it is ‘a refined understanding of the arts and other
human intellectual achievement’12. The implication of this definition is
that, for example, a person who can distinguish between the paintings
of two sixteenth century artists and who is able to comment on their
artistic styles, ‘has culture’!
However, from a social sciences perspective, the word ‘culture’ has
a far broader meaning. Social scientists see culture as a fundamental
aspect of life. According to them, all people ‘have culture’ and the only
requirement for ‘being cultured’ is to be human13. In Webster’s Third
New International Dictionary one of the definitions of culture is:
‘the total pattern of human behaviour and its products embodied
in thought, speech, action and artefacts and dependent on man’s
capacity for learning and transmitting knowledge to succeeding
generations through the use of tools, language and systems of
abstract thought’14.
Many studies, dating back from as early as the 1930s until today, focused
on the distinctive cultures of organisations, which are considered to be
communities with their own cultures. According to Morgan:
‘Organizations are mini-societies that have their own distinctive culture
and sub-culture. … [S]uch patterns of belief or shared meaning,
fragmented or integrated, and supported by various operating
norms and rituals can exert a decisive influence on the overall ability
of the organization to deal with the challenges that it faces’15.
History plays a crucial part in the culture of societies, and as ‘minisocieties’, history shapes the cultures of organisations. To a large extent,
the current culture of an organisation is the heritage of its history. An
analysis of key historical events that shaped the direction, successes or
failures of an organisation, the environmental challenges that affected
the organisation and the ways in which the organisation responded to
threats and opportunities provide clues of how the current culture of
the organisation developed16.
How people speak about the history of an organisation also relates to
the organisational culture. People in an organisation are ‘meaning makers,
identity carriers, moral actors, users of symbols and storytellers’17 and
their narratives form part of the shared assumptions of organisational
members, based on the organisation’s own history.
LEARNING OBJECTIVE 2
6.2 ORGANISATIONAL CULTURE
DeƂne organisational culture.
The roots of the conceptual formulation of organisational culture stem
from diverse fields, such as anthropology, sociology and the work of
many management scientists, of which the work of Edgar H Schein
is prominent18. Many of the subsequent definitions of organisational
culture derive from his definition of the concept:
118
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 6 Corporate culture
‘Organizational culture is the pattern of basic assumptions, that a
group has invented, discovered or developed in learning to cope
with its problems of external adaptation and internal integration,
and that have worked well enough to be considered to be valid,
and, therefore, to be taught to new members as the correct way to
perceive, think, and feel in relation to those problems’19.
According to Schein, external adaptation tasks20 include developing
consensus on:
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external adaptation tasks
Schein further explained the meaning of internal integration tasks21
as developing consensus on:
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of time and space
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and religion.
internal integration tasks
developing consensus on the
mission, functions and tasks,
the goals and resources of
the organisation, the criteria
for measuring results and the
corrective actions (strategies)
used if goals are not met
include the language and
conceptual system, group
boundaries and criteria for
inclusion, allocating status,
power and authority, intimacy,
friendship and love, allocating
rewards and punishments and
the concepts for managing
ideology and religion
Drawing from the work of Schein and other researchers, various
theorists attempted to offer more simplified definitions of the concept
of organisational culture. The definition of Achua and Lussier is typical
of the numerous definitions of corporate culture found in management
textbooks: according to them, culture is ‘the aggregate of beliefs, norms,
attitudes, assumptions and ways of doing things that members of an
organisation share and teach to new members’22.
Burnes23 summarises the central ideas of a variety of definitions by
stating that organisational culture:
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context
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individual organisational members judge their own actions and also
by which others judge their actions
r MFHJUJNJTFTDFSUBJOGPSNTPG BDUJPOBOEQSPIJCJUTPUIFSGPSNTPG action.
Consider the opening case in terms of the definitions of organisational
culture. Boeing’s culture was a significant factor in the scandals that
plagued the company in the late 1990s and early 2000s. The new CEO,
CONTEMPORARY MANAGEMENT PRINCIPLES
119
PART II: Management in a changing environment
Mr WI McNerney, described the culture of the company as ‘poisonous’
and blamed the clashing cultures of the two merged companies,
McDonnell Douglas Corporation and Boeing, as the main contributing
factor to the development of the culture of ‘rivalry and infighting’ that
developed. It seems as if this culture affected the functioning of the
entire organisation and resulted in Boeing being at an all-time low point
by the time McNerney took the helm at the company.
According to a KPMG study of 700 deals over a
two-year period, ‘83 per cent of all mergers and
acquisitions failed to produce any benefit for the
shareholders and over half actually destroyed
value’24. Interviews of over 100 senior executives
involved in these 700 deals revealed that the
overwhelming cause for failure involved people and
cultural differences25.
LEARNING OBJECTIVE 3
6.3 THE LEVELS OF CULTURE
Explain the levels of culture.
The literature on organisational culture often illustrates Schein’s view of
organisational culture by using the metaphor of the organisation as an
iceberg floating in the ocean to illustrate the levels of culture. According
to Schein, when one observes an organisation’s culture, it has three
distinct levels26.
The first level (the tip of the iceberg) comprises artefacts – what
one feels and observes when entering an organisation. Artefacts are
visible, but not always understandable. Artefacts include visible aspects
of the organisation, from the dress code, the manner in which people
communicate with one another and the physical layout of the premises
to the emotional intensity, feel and smell of the place. It also includes the
permanent archives of company records, statements of philosophy and
annual reports27.
An organisation will often publish their values in their annual
statement or on their websites28. Values are the goals, ideals, norms,
standards, moral principles and other premises which the organisation
chooses to promote. Boeing, for example, currently uses words such as
integrity, quality, people working together and good corporate citizenship
on their website to describe their values29. Norms are the unwritten
rules of behaviour in an organisation. Examples of norms include ‘do
not argue with your manager’, or ‘on Friday afternoons we do not work
too hard’. Most employees are able to identify the norms of their work
groups when they have time to consider it. In our metaphor, the part of
the iceberg just below the water surface represents this level.
The core of the culture at an organisation (represented by the
bulk of the iceberg far below the surface of the water) can only be
distinguised by observing behaviour carefully, noting differences,
contradictions or occurrences that remain unexplained and by trying to
prompt from organisational insiders their underlying assumptions. These
assumptions often have historical roots, but over time, they become
taken-for-granted assumptions. An example of this phenomenon
is ‘strategic drift’30, which is the tendency of organisations to develop
strategies incrementally based on historical and cultural influences, but
failing to keep pace with changes in the environment. They keep to the
artefacts
visible aspects of the
organisation
values
the goals, ideals, norms,
standards, moral principles
and other premises which
the organisation chooses to
promote
taken-for-granted
assumptions
form the core of an
organisation’s culture and often
have historical roots
120
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 6 Corporate culture
familiar strategies, which have worked in the past (taken-for-granted
assumptions) and only make incremental changes to the same strategies
to meet environmental challenges. By focusing on erstwhile unique
capabilities, which may not fit new circumstances, an organisation may
become inflexible and unable to change to face current challenges.
To illustrate the concepts of artefacts, values and assumptions and the
way in which they manifest in a specific culture at any given organisation,
Schein31 cited two examples of organisations that both claim to be ‘one
big family’, but with very different cultures.
Table 6.1 illustrates how the culture differs at two organisations in the
same sector.
Table 6.1: The organisational culture at two organisations
Artefacts
Values and
beliefs
AssuOptions
ORGANISATION A
A ten-year old rapidly growing South African
private business school
ORGANISATION B
A Ƃfty-year old South African university
r open ofƂce landscape
r high degree of inforOality
r high degree of positive conƃict resulting froO
different perspectives
r total lacM of status syObols
r sense of high energy
r strong identiƂcation with the organisation
– lecturers are involved and expressing
exciteOent about the developOent of an
innovative curriculuO
r
r
r
r
individual ofƂces closed doors
forOal dress code
high degree of forOality
Oany status syObols people are
addressed by their titles
r politeness in Oeetings adhering strictly to
the agenda and using forOal language
r lecturers iOpleOent decisions Oade by
OanageOent
r dynaOic cutting-edge educational offerings
r innovation and creativity
r traditional approach to tuition and learning
r worMing according to the nsysteOo that
stood the test of tiOe
r individual lecturers are the source of
innovation
r individual lecturers Oust challenge one
another in order to Ƃnd the best solution
r collaborative research is encouraged
r staff are OeObers of a nbig faOilyo – loud
bicMering positive creative
r highly coOpetitive – Oust be able to coOpete
against other private business schools
r good ideas are derived froO professors
– Lunior staff are expected to follow liMe
ngoodo soldiers
r individual research is encouraged
r staff are OeObers of nfaOilyo –
authoritarian and paternalistic systeO
of eliciting loyalty and coOpliance in
exchange for econoOic security
r worM within a bureaucratic systeO
Source: Adapted from Schein, E.H. 1990. Organizational culture. American Psychologist,
45(2): 113–114.
The two examples clearly differentiate between the two ‘big family’
organisations in terms of their artefacts and values, but especially
between the entrenched, taken-for-granted assumptions that determine
their unique cultures.
These examples emphasise the taken-for-granted assumptions as
the core of the culture of an organisation and comprise aspects of
CONTEMPORARY MANAGEMENT PRINCIPLES
121
PART II: Management in a changing environment
organisational life that people find difficult to identify and explain, but
they represent the ‘collective experience of organisational members
in dealing with the problems of external adaptation and internal
integration’32.
LEARNING OBJECTIVE 4
Differentiate between the
various types of cultures in
organisations.
6.4 THE DIFFERENT CULTURES EVIDENT IN A
BUSINESS ORGANISATION
Against the background of the levels of culture in organisations, it is
necessary to investigate the variables that influence the development of
organisational culture at a given organisation. Organisations do not have
a single, uniform organisational culture because various internal and
external variables influence the development of organisational culture,
such as national and regional cultures, industry cultures and various subcultures within organisations.
National and regional cultures
In the globalised world of today, organisations operate across national
borders in various different countries. National and regional
national and regional
cultures have an influence on the culture of organisations at their
cultures
plants,
factories, offices or sites as they operate in different countries.
differ in terms of attitudes
National
and regional cultures differ in terms of attitudes towards work,
towards work, authority and
authority
and equality. Variables that influence the development of a
equality and are influenced by
national
culture
include history, religion and even climate33.
history, religion and even climate
Table 6.2: Hofstede’s dimensions of national culture
National culture
dimension
Explanation of the dimension
Power distance (PDI)
r the degree to which the less powerful OeObers of a society accept and expect that
power is distributed unequally
IndividualisO (I)
versus
%ollectivisO (IDV)
Individualism (‘Me’):
r a preference for a non-cohesive social fraOeworM in which individuals are expected
to taMe care of theOselves and their iOOediate faOilies only
Collectivism (‘We’):
r a preference for a cohesive fraOeworM in society in which individuals have the
expectation that relatives or OeObers of a particular in-group will taMe care of
theO in exchange for absolute loyalty
Masculinity
versus
(eOininity (MAS)
Masculinity
r a preference in society for achieveOent heroisO assertiveness and Oaterial
reward for success
r the society is Oore coOpetitive
Femininity
r a preference for cooperation Oodesty caring for the weaM and quality of life
r the society is Oore consensus-oriented
Continued on the next page
122
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 6 Corporate culture
National culture
dimension
Explanation of the dimension
Uncertainty
Avoidance (UAI)
Uncertainty avoidance
r the degree to which the OeObers of a society feel uncoOfortable with uncertainty
and aObiguity
r strong UAI societies Oaintain rigid codes of belief and behaviour and are intolerant
of unorthodox behaviour and ideas
r weaM UAI societies Oaintain a Oore relaxed attitude in which practice counts Oore
than principles
.ong-terO
versus
Short-terO orientation
(LTO)
(this diOension deals
with societyos search for
virtue)
Short-term orientation societies
r have a strong concern with establishing the absolute ntrutho
r are norOative in their thinMing
r exhibit great respect for traditions
r have a relatively sOall propensity to save for the future
r a focus on achieving quicM results
Long-term orientation societies
r believe that ntrutho depends on the situation context and tiOe
r are able to adapt traditions when conditions change
r have a strong propensity to save and invest
r thriftiness and perseverance in achieving results
Indulgence
versus
Restraint (IVR)
Indulgence
r a society that allows relatively free gratiƂcation of basic and natural huOan drives
related to enjoying life and having fun
Restraint
r a society that suppresses gratiƂcation of needs and regulates it by Oeans of strict
social norOs
Adapted from: The Hofstede Centre. [Online] Available from: http://geert-hofstede.com/
organisational-culture-dimensions.html. Accessed on 3 March 2013.
Other factors that influence national culture are the standards, values
and expectations of workers. The research of Geert Hofstede made a
significant contribution to our understanding of the differences between
national cultures. He identified six dimensions of national culture, listed
in Table 6.2, according to which the national culture in one country may
differ from the national culture in another country34.
The research of Hofstede suggests that cultural differences between
nations seem to appear on the deepest level, on the level of the values of
a society, which is hard to change. The culture of the country and region
where an organisation operates seem to influence its organisational
culture.
Another variable that influences an organisation’s culture is the
industry in which it operates.
The industry culture
Shared assumptions based on the technological and social histories of
its industry influence the organisational culture of a given organisation.
CONTEMPORARY MANAGEMENT PRINCIPLES
123
PART II: Management in a changing environment
An organisational field35 is a community of organisations that interact
frequently with one another, such as an industry or a sector. Organisations
operating in the same organisational field are ‘entrenched in a social
system of expectations, taken-for-granted ways of doing things, status
and legitimacy, which exert a powerful influence on organisations and
actors in organisations. The environment is a source of beliefs and
values, rules of the game, interpretations and mindsets, fads and fashions
shared across organisations that occupy the same social space’36.
Organisations working in the private sector, for example, tend to have
different cultures than organisations operating in the public sector. The
organisational culture of companies such as Boeing, operating in the
aviation industry, will differ in many ways from that of organisations in
the agricultural industry; one reason for this is that their organisational
fields are different.
Organisational sub-cultures
Within organisations, there is no uniform, single culture. According
to Morgan37, many of the major cultural differences and similarities
in organisations are occupational rather than national. The likenesses
and differences associated with being a factory worker, a government
official, a banker, a store assistant, an accountant or an engineer are
as significant as those associated with national identity. Occupational
groups within organisations may develop strong sub-cultures based on
the work they do. At universities, for example, different sub-cultures
often exist amongst the administrative and academic groups, based on
differences stemming from their occupations.
Sub-cultures may also form when groups are geographically isolated
from the rest of the organisation. One can imagine that the sub-culture
of an oil company at the oilrigs at sea is different from the culture at the
headquarters of the same company in a major city.
Professional or functional sub-cultures form in organisations and
can create problems for the effective functioning of an organisation.
In the opening case study, we saw how the clashing cultures between
the engineers and the sales and finance people at Boeing might have
contributed to the temporary grounding of the Dreamliner aircraft,
presumably causing great financial losses to the company.
LEARNING OBJECTIVE 5
6.5 THE ELEMENTS OF CULTURE
Discuss the elements of
culture.
Employees learn culture in many ways.
symbol
represents an idea, a process,
or a physical entity
124
Symbols
A symbol represents an idea, a process or a physical entity. The
purpose of a symbol is to communicate meaning. For example, wearing
a pink ribbon is a symbolic action that communicates support and an
awareness of breast cancer. A company logo can convey a specific
message about the company, such as quality products (for example the
well-known Mercedes Benz logo), good service (the Avis logo and red
colour), status (the Rolls Royce emblem) or value for money (Pick n Pay
logo and blue and white colours).
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 6 Corporate culture
The interpretation of symbols is at the core of organisational culture.
Organisations use material symbols (for example layout of offices,
furniture or buildings) and ideological symbols (values and norms) to
convey meaning. Symbols convey certain messages such as status (who
is important), or what kind of behaviour is acceptable. Organisational
members create symbols for specific purposes, and thus people and
groups inside and outside the organisation must understand the intents
of the originator or originators of symbols.
Stories
Stories about the organisation often reflect the core beliefs and
assumptions held by organisational members. How stories about an
organisation are told to newcomers relates to the specific strengths,
weaknesses, successes, and failures of the organisation and it often
reflects the prevailing culture. Furthermore, the way in which narrators
describe ‘idols’ and ‘rogues’ and the norms and values attributed to
them serve to convey elements of the organisational culture, such as
risk taking or risk aversion. Another topic of stories often relate to
legendary founders who had a significant impact on the organisation and
its culture. Such stories serve to reinforce the culture at an organisation
(see the example in the box on the next page).
Peters and Waterman38, authors of the best-selling management
book In search of excellence, recalled that when they did their research
on excellent companies, the dominant use of the story, slogan and
legend were evident as people tried to explain the features of their
organisations. The authors found that the excellent companies were rich
tapestries of anecdote, myth and fairy tale. (Fairy tales because most
people who told the stories did not know, have not met or seen the
‘legends’ they were describing with such conviction.)
Language
Language is a strong conveyor of organisational culture and includes
the unique terms for offices, people, suppliers, rituals and so on. Only
members of the organisation understand these terms and newcomers
are often overwhelmed when confronted by organisation-specific
abbreviations and terminology. However, once they are familiar with the
organisational language, language becomes a binding factor and unites
members of a specific culture or sub-culture39.
Metaphors are often used to describe an organisational culture
concisely, for example, scandals involving various forms of misconduct
in various locations and in nearly every division at Boeing prompted the
new CEO McNerney to conclude that the renowned company had a
‘poisonous’40 culture.
Rituals
Organisational members assimilate the culture of the organisation by
observing which rituals play key roles in the organisation and what
behaviour the rituals encourage or discourage. A ritual is a set of
actions, performed mainly for their symbolic value. In organisations,
rituals often underpin the central values of the organisation. An example
stories
often reflect the core beliefs
and assumptions held by
organisational members
language
a strong conveyor of
organisational culture because
organisational members create
unique terms for offices, people,
suppliers, rituals and so on
rituals
sets of actions, performed
mainly for their symbolic value
CONTEMPORARY MANAGEMENT PRINCIPLES
125
PART II: Management in a changing environment
of a ritual is the graduation ceremony at a university where one of the
most senior members at the university confers degrees to students who
have successfully completed their degrees. The ceremony serves to
reinforce the academic values of the university and many of the actions
that take place during the ceremony have historical roots and symbolic
meaning, such as the academic procession, the specific music and the
‘tapping on the head’ action delivered to each graduate by the presiding
figurehead representing the university.
The Brown Earth Company: A mini case study to illustrate the elements of
organisational culture
An adventurer named Tiny Brown, whose exploits
in Africa were legendary, established the Brown
Earth Company in 1950. Older employees at Brown
Earth like to tell stories to new employees about
Tiny’s many African adventures. People at Brown
Earth Company still identify with Tiny’s colourful
personality, his respect for nature and his active
involvement in nature conservation [stories reinforce
culture]. Every year on arbour day, all the employees
participate enthusiastically in a tree-planting event
[ritual]. Many of the company’s products are
‘green’ and sustainable and the company’s strong
identification with indigenous fauna and flora is
evident in, for example, the names of the conference
room (the Acacia Room) and the cafeteria (The
Baobab) [language]. The interaction between senior
managers and employees is informal but respectful
[the way we do things]. The company is planning to
launch an innovative new product that will require
substantial changes in the production and marketing
departments of Brown Earth Company. In line with
the changes the company wants to implement, its
name will change to Green Planet Company. The
new corporate colour will be green and a new
logo, depicting a green ‘tree of life’ will appear on all
packaging and company stationery [symbols].
LEARNING OBJECTIVE 6
6.6 TYPES OF CULTURE
Compare the different types of
culture.
Various experts on organisational culture classify the types of culture
found in organisations differently. The best-known, and perhaps the
most enduring, category of organisational culture is offered by Charles
Handy41 who typifies culture in terms of the norms, values and beliefs
that reflect in different structures and systems of an organisation. Deal
and Kennedy42 link culture to the risk and feedback characteristics of
the specific market in which the organisation functions. Quinn and
McGrath43 use various variables, such as leadership style, authority,
and the goal and risk orientation of employees to identify four types of
culture. Jones, Dunphy, Fishman, Larne and Canter44 categorised culture
based on the influence of culture on the behaviour of individuals and
groups in the organisation. Table 6.3 on the next page summarises these
organisational culture typologies. It highlights the ideas of a few experts
on categorising organisational culture, many others are not included in
this discussion. The categories are all very different from one another,
highlighting the difficulty of describing and categorising organisational
culture. In addition, in a globalised world, the categories summarised in
the table are Western culture-bound45 because they pertain mainly to
organisations in the developed Western world and do not necessarily
provide a framework to describe the cultures in, for example, Japanese,
Chinese, Middle-Eastern or African organisations.
126
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 6 Corporate culture
Table 6.3: Organisational culture typologies
Charles Handy (1993)
Sets of values and norms
and beliefs – reƃected in
different structures and
systems
Deal and Kennedy (2000)
revised by Trompenaars
and Prud’homme (2004)
Links to external
environment (market) of
the organisation
r The tough guy macho
r The power culture a
culture high risk
single person or group
rapid feedback (police
dominates
department sports and
r The role culture work
entertainment)
by logic and rationality
r
The work hardplay hard
r The task culture project
culture low risk quick
work associated with
feedback on actions
matrix-type structures
(sales organisations)
r The person culture
r $et-your-company
servicing the needs
culture risks are high
of the participating
and feedback on actions
members such as
and decisions is slow
advocateso chambers
(companies investing
doctorso medical centres
heavily in projects that
take a long time)
r The process culture low
risk and slow feedback
on actions and decisions
(public and government
organisations)
Quinn and McGrath
(1985)
Jones et al (2006)
IdentiƂed four types of
culture
Attempts to group types
of culture by how they
impact on the behaviour of
individuals and groups in
an organisation
r The Market rational
decision-making and
goal-centred employees
r The Adhocracy
risk-orientated and
charismatic leaders
and value-driven
organisations
r The %lan participation
consensus and concern
for others
r The *ierarchy
hierarchical rule-based
authority that values
stability and risk
avoidance
r %onstructive cultures
members are encouraged
to interact with others
and approach tasks in
ways that will help them
meet their higher-order
satisfaction needs
r PassiveDefensive
cultures members believe
that they must interact
with others in ways that
will not threaten their own
security
r AggressiveDefensive
cultures members are
expected to approach
tasks in vigorous ways in
order to protect their own
status and security
Source: Adapted from Burnes, B. 2009, Managing change. 5th edition. Edinburgh: Pearson Education Limited, p 114 and Senior B. &
Swailes, S. 2010, Organizational change. 4th edition. Edinburgh: Pearson Education Limited, pp 143–146.
Peters and Waterman (In search of excellence) on the importance of culture
‘Without exception, the dominance and coherence
strong cultures, too, but dysfunctional ones. They are
of culture proved [in the companies the authors
usually focused on internal politics, rather than on
researched] to be an essential quality of excellent
the customer, or they focus on ‘the numbers’ rather
companies. Moreover, the stronger the culture and
than on the product and the people who make and
the more it was directed towards the marketplace,
sell it. The top companies, on the other hand, always
the less need was there for policy manuals,
seem to recognize what the companies that only set
organization charts, or detailed procedures and rules. financial targets don’t know or don’t deem important.
In these companies, people way down the line know
The excellent companies seem to understand that
what they are supposed to do in most situations
every man seeks meaning (not just the top fifty who
because the handful of guiding values is crystal clear.
are ‘in the bonus pool)’46.
… [P]oorer-performing companies often have
CONTEMPORARY MANAGEMENT PRINCIPLES
127
PART II: Management in a changing environment
LEARNING OBJECTIVE 7
6.7 CHANGING ORGANISATIONAL CULTURE
Explain how organisations
change their culture.
Changing the culture of an organisation is difficult because culture
develops over a long time. Thus, cultural change interventions often focus
on the surface elements of culture such as norms and artefacts, because
they are easier to change than values and basic assumptions. However,
as we have seen in the discussion on the levels of culture, the core of
an organisation’s culture is at the level of entrenched assumptions. The
definition of culture by Schein (see Section 6.2) informs us that culture
enables organisational members to ‘cope with problems of external
adaptation and internal integration’47. Employees may resist attempts to
change the culture as their basic assumptions provide them with defence
mechanisms that have worked in the past to deal with difficult internal
and external situations.
However, it may become crucial for an organisation to change its
culture in order to remain competitive or even to survive. A major event
that had a serious impact on the organisation can trigger the need to
change the culture of an organisation. For example, in the aftermath
of the collapse of Enron and the demise of the accounting firm Arthur
Anderson (see Chapter 8), the four major accounting firms worked hard
to change their cultures to become more risk averse. Likewise, after
the financial crisis in 2008, financial institutions worldwide attempted to
change their cultures to fit the austerity measures imposed on them.
Furthermore, mergers and acquisitions often result in changed cultures
and organisations have to manage these changes. The well-documented
merger between Absa and Barclays Bank is a case in point. The culture
at the merged organisation had to change to reflect changes in the
management, the balance of power and the processes and systems of
the organisation.
The opening case on Boeing illustrates how culture may become a
liability for an organisation and why it may be crucial for the organisation
to change its culture. In addition to a culture that may have become a
liability, an organisation may also need to change its culture because it
does not ‘fit’ with the size or the structure of the organisation, or it is
out of step with a changing environment.
The discussion of culture in this chapter underscores that
organisational culture is an abstract concept and that different
organisations face different sets of variables affecting the fit between
their cultures and their environments, such as key historical influences
that shaped their cultures, national and regional cultures, industry
cultures, the sub-culture present in a given organisation and many other
factors. Because of these differences, experts offer general and not
specific guidelines for organisations to follow to change their cultures.
The authors of an often-quoted book on organisational development
and change, Cummings and Worley48 offer the following practical advice
to serve as guidelines for cultural change:
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the strategy. This vision should guide the purpose and direction of
the intended culture change.
128
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 6 Corporate culture
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CONTEMPORARY MANAGEMENT PRINCIPLES
129
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or applicable copyright law.
Part II: Management in a changing environment
CHAPTER SUMMARY
1. Describe the concept of culture.
Culture is the total pattern of human behaviour and its products personified in thought, speech,
action and artefacts, and is dependent on man’s capacity for learning and transmitting knowledge
to succeeding generations using tools, language and systems of abstract thought.
2. Define organisational culture.
(See Edgar H Schein’s definition in Section 6.2.)
One of the shorter definitions of organisational culture is that it comprises the aggregate
of beliefs, norms, attitudes, assumptions and ways of doing things that members of an
organisation share and teach to new members.
The central ideas of a variety of definitions of organisational culture:
• defines how organisational members should behave in a given context
• is inclusive of all organisational members
• sets the yardstick for expected norms of behaviour against which individual organisational
members judge their own actions and also by which others judge their actions
• legitimises certain forms of action and prohibits other forms of action.
3. Explain the levels of culture.
One can distinguish between three levels of organisational culture, namely the first level
comprising artefacts, the second level comprising values, including the goals, ideals, norms,
standards and moral principles and lastly, basic assumptions. (See Section 6.3.)
4. Differentiate between the various types of cultures in organisations.
The different types of culture evident in organisations derive from national and regional cultures,
industry cultures and include various sub-cultures.
• National and regional cultures differ in terms of attitudes towards work, authority and equality.
Variables that influence the development of a national culture include history, religion and
even climate.
• Industry cultures form within an ‘organisational field’, which is a community of organisations
that interact frequently with one another. Organisations operating in the same organisational
field function in a social system of expectations, taken-for-granted ways of doing things,
status and legitimacy, which exert a powerful influence on organisations and actors in them.
• Within organisations, there is no uniform, single culture. Sub-cultures form based on
occupational shared assumptions and sub-group histories. Many of the major cultural
differences and similarities in organisations are occupational. Occupational groups within
organisations may develop strong sub-cultures based on the work they do. Sub-cultures
may also form when groups are geographically isolated from the rest of the organisation.
Professional or functional sub-cultures form in organisations and can create problems for the
effective functioning of an organisation.
5. Discuss the elements of culture.
• A symbol is something that represents an idea, a process, or a physical entity. The purpose
of a symbol is to communicate meaning and organisations use specific symbols to convey
meaning.
130
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or applicable copyright law.
Chapter 6 Corporate culture
• Stories about the organisation often reflect the core beliefs and assumptions held by
organisational members. How the stories told to newcomers relate to the specific strengths,
weaknesses, successes, and failures of the organisation, often reflect the prevailing culture.
• Language is a strong conveyor of organisational culture because organisational members
create unique terms to refer to various items and aspects of the organisation and only
members of the organisation understand these terms. Newcomers are often overwhelmed
when confronted by organisation-specific abbreviations and terminology.
• A ritual is a set of actions, performed mainly for their symbolic value. In organisations, rituals
often underpin the central values of the organisation. Organisational members assimilate
the culture of the organisation by observing which rituals play key roles in the organisation
and what behaviour the rituals encourage or discourage.
6. Compare the different types of culture.
Various experts on organisational culture classify the types of culture found in organisations
differently. In this chapter, a few of them were discussed:
• Charles Handy typifies culture in terms of the norms, values and beliefs that reflect in
different structures and systems of an organisation.
• Deal and Kennedy link culture to the risk and feedback characteristics of the specific market
in which the organisation functions.
• Quinn and McGrath use various variables, such as leadership style, authority, and the goal
and risk orientation of employees to identify four types of culture.
• Jones, Dunphy, Fishman, Larne and Canter categorised culture based on the influence of
culture on the behaviour of individuals and groups in the organisation.
7. Explain how organisations change culture:
• formulate a clear strategic vision
• firm commitment of top management to the espoused values and the need for culture
change
• model culture change at the highest level
• modify the organisation to support organisational change
• select and socialise newcomers and terminate deviants.
KEY TERMS
artefacts
assumptions
culture
industry culture
language
national and regional cultures
organisational culture
organisational field
organisational sub-culture
rituals
strategic drift
stories
symbols
values
Contemporary management prinCiples
EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 5/3/2018 12:45 PM via UNISA
131
PART II: Management in a changing environment
REVIEW QUESTIONS
1. Consider the opening case study on Boeing. Use the levels of organisational culture to analyse why
culture played such a big role in the misfortunes of Boeing.
2. Discuss the elements of organisational culture and use South African business examples from the
business media to illustrate these elements.
3. National and regional cultures influence the organisational culture of organisations. One of the
major characteristics of South African organisations is the diversity of their employees. In your view,
what influence does the national culture in South Africa likely have on the organisational culture of
international organisations operating in South Africa?
4. Do an internet search on the Absa and Barclay’s Bank merger. Write an essay describing how the
merger between this British organisation and the South African Absa influenced the culture at the
merged organisation.
END NOTES
1
Adapted from: (i) Holmes, S. 2006. Cleaning up Boeing. Business Week, 12 March 2012. [Online] Available from: http://
www.businessweek.com/stories/2006-03-12/cleaning-up-boeing. Accessed on 22 February 2013. (ii) Surowiecki, J.
2013. Requiem for a Dreamliner? New Yorker, February 4, 2013. [Online] Available from: http://www.newyorker.com/
talk/financial/2013/02/04/130204ta_talk_surowiecki#ixzz2LK6vzWvP. Accessed on 22 February 2013.
2
Holmes, op. cit.
3
Ibid.
4
Ibid.
5
Ibid.
6
Surowiecki, op. cit.
7
Aboulafia, R. cited by Surowiecki, op. cit.
8
Ibid.
9
Ibid.
10
Ibid.
11
Boeing 787 Dreamliner Grounded. Guardian, 18 January 2013. [Online] Available from: http://www.guardian.co.uk/
business/2013/jan/18/boeing-787-dreamliner-grounded. Accessed on 22 February 2013.
12
The South African Pocket Oxford Dictionary. 1987. Cape Town: Oxford University Press, p 181.
13
Ferrar, G.P. 1994. The cultural dimensions of international business. 2nd edition. NJ: Englewood Cliffs: Prentice-Hall,
p16. In Business Leadership and culture: national management styles in the global economy. Bjerke, B., p 4.
14
Webster’s Third New International Dictionary. 1993. Cologne: Könemann Verlagsgesellschaft MBH, p 552.
15
Morgan, G. 1997. Images of organization. 2nd edition. London: Sage.
16
Johnson, G., Whittington, R. & Scholes, K. 2011. Exploring strategy: text and cases. 9th edition. Financial Times.
Prentice Hall, p 184.
17
Ancona, D., Kochen, T.A., Scully, M., Van Maanen, J. & Westney, D.E. 2005. Managing for the future: organizational
behavior and processes. 3rd edition. Cincinnati, OH: South-Western College, p M2–57.
18
Achua, C. & Lussier, R.N. 2013. Effective Leadership. 5th edition. Canada: South Western, Gengage Learning, p 338.
19
Schein, E.H. 1990. Organizational culture. American Psychologist, 45(2): 111.
20
Ibid., p 113.
21
Ibid.
22
Achua & Lussier, op. cit., p 338.
23
Burnes. B. 2009. Managing change. 5th edition. Edinburgh: Pearson Education Limited, p 200.
24
Gitelson,G., Bing, J.W. & Laroche, L. The Impact of Culture on Mergers & Acquisitions P.E. [Online] Available from:
http://www.itapintl.com/facultyandresources/articlelibrarymain/the-impact-of-culture-on-mergers-a-acquisitions.html.
Accessed on 22 February 2013.
25
Ibid.
132
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 6 Corporate culture
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CONTEMPORARY MANAGEMENT PRINCIPLES
133
Chapter 7
2QYGTRQNKVKEUEQPƃKEV
resolution and negotiation
OPENING CASE
Mari Vrba
OPENING CASE
Power games
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On a cold day in December, in an impersonal
conference room in an airport, John Paterson
met with three sombre directors representing the
board of one of the world’s largest manufacturing
companies. They called the company’s CEO for a
highly controversial purpose: he had to convince
them that he should remain the CEO of the
company. The directors listened as the CEO,
formally a successful trial lawyer, argued his case. The
board members sought answers as to why a revolt
had erupted against Paterson among his executive
leadership team. As the meeting progressed, it
was obvious that Paterson was losing his case. A
day later, the company released an announcement
stating that the 55-year-old CEO had retired from
the company, with immediate effect.
1BUFSTPOKPJOTUIFDPNQBOZ
Paterson had an outstanding résumé. He graduated
from top universities and then joined a prestigious
law firm where he became a formidable litigator.
At the age of 40, he became general counsel at a
top USA company where he rapidly climbed the
corporate ladder. The manufacturing company
took notice and recruited him for the position of
general counsel, overseeing the more than 300
company’s lawyers worldwide.
5IFFY$&0XIPTUBZFEPOGPSNPSFUIBO
BEFDBEF
The executive who led the company during a
decade of phenomenal growth – while it grew into
a giant in its industry – was Josh Brown, a quiet
man who did not like conflict and helped to shape
a corporate culture that discouraged open conflict.
However, in his own way, Brown had a strong ability
to build alliances and to influence people.
5IFDBTU
When he reached the mandatory retirement
r +PTI#SPXO BGPSNFS$&0XIPDPVMEOPU
age of 64, Brown stepped down as CEO. He had
relinquish his power and quietly schemed to
handpicked his colleague and friend Mark Lewis as
undermine his two successors.
r +VEJUI+BDLTPO UIFIVNBOSFTPVSDFTDIJFGXIP his successor. Although Brown had to relinquish his
position as CEO, he remained a visible presence
divided and ruled.
and strong influence in the company for more than
r +FŲ1BUFSTPO UIF$&0XIPTFMFBEFSTIJQTUZMF a decade, eventually outlasting both his successors.
resulted in a revolt.
The company contracted him as a consultant and
r 5IFNFNCFSTPG 1BUFSTPOTFYFDVUJWF
he had his own office and secretary at the company
leadership team whose loyalty he had lost.
headquarters. He received the title of Chairman
Emeritus and thus retained his seat on the company
CHAPTER 7 Power, politics, conflict resolution and negotiation
board. (Note: Any governance expert would
regard such an arrangement as a potential source
of conflict.)
The company had reached its peak after a
decade of remarkable growth and, although not
evident at the time, it faced a period of decline.
The company’s pipeline of new products could not
support the growth the company had promised
investors. Lewis, the new CEO, responded to
these challenges by acquiring another massive
manufacturing company. As the huge and ballooned
company started to falter, Lewis seemed to spend
more and more time away from headquarters,
instead heading up industry trade groups, funding
an institute in Africa to fight Aids and writing a
book about reforming health care.
The ex-CEO Josh Brown seemed willing and
able to fill the resultant power void. He was a
regular at the company’s headquarters, where he
often joined his former colleagues for lunch in the
cafeteria. Brown was always willing to listen and to
participate quietly in conversations. Although not
overly evident, his influence was substantial. The
perception at the company headquarters was that
he knew the company inside out and people held
his opinion in high esteem.
As the company slowed down, infighting at
headquarters erupted. Lewis became convinced
that Brown was undermining him and he attempted
to end his consulting contract, a move that Brown
could defend because of the support he enjoyed
from the board. Brown and Lewis became bitter
enemies.
In anticipation of his eminent retirement, Lewis
identified two veteran company ‘stars’ as possible
candidates to succeed him. There was also a third
candidate: Paterson. He had been at the company
for three years and was a newcomer to the
manufacturing industry. However, Paterson held
a trump card namely Brown, who supported him
and helped him to outmanoeuvre both rivals.
The race for a new CEO divided the company
into three camps. Each contender regularly met
with a group of supporters to formulate their
campaign strategy and defence strategies.
Paterson conducted his campaign aggressively
and meticulously with a single purpose: to become
the next CEO.
When the time came for Lewis to go, the board
met to decide who would succeed him. Prior to
their meeting the board received two anonymous
letters from ‘senior staff members’ warning them
against appointing Paterson, citing reasons such as
micromanagement, constant reorganisation, and
a muddled decision-making process. The board
dismissed the warnings and selected Paterson as
the new CEO.
The company falters
When Paterson took the helm as CEO, the
company was still generating billions in profits but
its business model was failing and its share price
was falling. Paterson had worthy goals, such as
promising to transform almost every aspect of the
business in order to modernise the company and
to develop new products.
However, the company and its CEO faced many
challenges. For example, when Paterson took over
from his predecessor, there were two major new
products in the pipeline – but rolling them out would
end in disaster. Paterson had to retract a promising
new product and consumers rejected another new
product because of its awkward design. In response
to the serious problems it faced, the company,
under the leadership of Paterson, embarked on a
huge downsizing exercise and 20 per cent of the
workforce was retrenched. Ironically, even as he
was making massive cuts, Paterson also made new
acquisitions, first a handful of smaller purchases
then acquiring another massive manufacturing
company. In addition, the company’s R&D model
was not working – bigger did not prove to be
better when it came to producing new products –
and Paterson instigated a messy R&D restructuring.
Enter Judith Jackson
Paterson was struggling to find answers in a
complex industry where his own experience was
limited. His leadership team changed constantly.
Veterans departed and a prominent new appointee
resigned suddenly citing personal reasons for her
resignation. Paterson did not seem to trust the
CONTEMPORARY MANAGEMENT PRINCIPLES
135
PART II: Management in a changing environment
old hands at the company and often turned to
outsiders, especially consultants, to advise him. The
only exception in this regard was Judith Jackson, the
head of human resources (HR) who would become
Paterson’s most trusted confidant and accrue much
power in her own right.
When Jackson took over the company’s
human resources group, two years after Paterson’s
appointment as CEO, the company was preparing
for massive retrenchments and Jackson’s job was
crucial. Although she immediately downsized the
bloated HR group, Jackson did not seem overly
concerned about the details of how the reorganised
group would actually function. It was impossible
for her staff to arrange a meeting with her and
her preferred style of communication was to send
e-mails. Jackson’s primary focus was on the CEO.
She became Paterson’s shield and representative;
she controlled access to him and was the messenger
of his blunt directives. Paterson indulged her.
Jackson was overheard using derogative terms to
refer to senior executives, such as ‘not an A player’,
‘too ambitious’ and ‘a baby’ in his presence.
Life at the top of the company became
increasingly stressful. Paterson increased pressure
on his deputies by demanding immediate responses
to all his requests, without distinguishing between
urgent matters and routine ones. Vacations became
a vague memory for most of the senior executives.
There were incidents where Paterson berated his
deputies; on occasion, he could reduce senior staff
members to tears. His decision-making style was
erratic as he drilled down to the smallest details
only to overturn approved decisions.
The executive leadership team falls apart
The main reason for Paterson’s departure from
the company was that members of his executive
leadership team were no longer loyal to him. One
reason for the alienation was the influence of Judith
Jackson over Paterson. She had his support, she was
powerful and people inside the company feared
her. Paterson seemed blind to her shortcomings,
which created a split in the executive leadership
team. One executive summed it up by saying that
Paterson and Jackson were in one camp and the
rest of them in another.
136
CONTEMPORARY MANAGEMENT PRINCIPLES
One incident set the process of Paterson’s
departure in motion. The HR director had recently
received the results of a survey of Jackson’s direct
reports, which she sent to Jackson. The survey
revealed that a third of the managers reporting
to Jackson rated her performance out of 5 in key
areas as 1 or 2. Jackson sent her response to all
participants by e-mail expressing how sad and
embarrassed she was with the outcome of the
survey. She added that she was also sad for them
because it was obvious that they worked in an
environment that made them very unhappy.
Someone forwarded Jackson’s e-mail to both
Paterson and to the board, with an anonymous but
detailed cover note identifying Jackson’s leadership
as the real issue. The writer urged the board to do
a thorough investigation into the matter, conducted
by an independent party because Jackson’s deputies
feared retaliation.
The board appointed a lawyer to investigate
Jackson and the HR group. After interviewing all
of Jackson’s direct managers, the lawyer did not
find anything illegal, but he concluded that HR
was thoroughly ‘dysfunctional’, and fragmented
by ‘inept management’. In his view, this was a
‘simple case of incompetence’. After receiving
this report, Paterson accepted the resignation of
his controversial HR chief, but he sweetened her
departure with a generous severance package.
The problems associated with the company’s
HR chief focused the board’s attention on the CEO
himself. How could he ignore the trouble Jackson
was causing? His confidant’s issues had escalated
into a crisis for Paterson.
The company’s board resolved to conduct a
survey among the members of Paterson’s executive
team. Paterson sensed what was going on and
he made his own calls to assess support for him.
Tellingly, Brown, his long-time ally, did not return
his calls.
The results of the survey indicated that not one
executive supported Paterson fully. All expressed
the view that the situation was indefensible. A few
of the executives expressed the view that the CEO
needed to resign. The directors agreed to summon
Paterson for a private meeting.
CHAPTER 7 Power, politics, conflict resolution and negotiation
LEARNING OBJECTIVES
6Je purpose of tJis cJapter is to inXestigate tJe concepts of power interest inƃuence and political
action in conteOporar[ organisations. 9e also eZaOine conƃict resolution tecJniSues and tJe
negotiation process. The objective of studying this chapter is to enable you to:
. &eƂne and discuss power and organisational sources of power.
2. Explain the relationship between power and interest.
. &iscuss how people use inƃuence tactics and political action to protect their interests.
. Explain the various sources of organisational conƃict and identify the conƃict OanageOent
strategies.
5. Provide guidelines on how to apply the two phases of the negotiation process: planning and the
actual process.
7.1 POWER
LEARNING OBJECTIVE 1
The case study offers rare insight into the inner workings of a ‘real’
organisation and narrates the specific sequence of events during a
stressful period in its history. It brings into sharp focus the use and abuse
of power by senior executives of the organisation to satisfy their own
personal needs.
Bear in mind that many examples from the same organisation during
the same period, would probably illustrate how executives and senior
managers used their power to achieve various goals of the organisation
effectively. This is because managers use their power to get things done
in the organisation on a day-to-day basis. They also need power to
secure scarce resources and to bring about change. A renowned expert
on the subject, Jeffrey Pfeffer notes:
‘Any new strategy worth implementing has some controversy
surrounding it and someone with a counter agenda fighting it.
When push comes to shove, you need more than logic to carry the
day. You need power’2.
&GƂPGCPFFKUEWUURQYGT
and organisational sources of
power.
7.1.1 Defining power
The question of what constitutes QPXFS has received much research
interest. In the literature, definitions of power abound, as evident from
the following definitions:
‘[t]he medium through which conflicts of interest are resolved …
influences who gets what, when and how’3 – Morgan.
‘[t]he potential ability to influence behavior, to change the course
of events, to overcome resistance, and to get people to do things they
would not otherwise do’4 – Pfeffer.
‘[t]he ability of individuals or groups to persuade, induce or coerce
others into following certain courses of action’… [I]t is rooted in control
over or access to resources of a wide variety5 – Johnson, Whittington
and Scholes.
‘[t]he ability to get one’s way in a social situation’6 – French & Bell.
RQYGT
the potential to influence
behaviour, to change the
cause of events, to overcome
resistance, and to get people
to do things they would not
otherwise do
CONTEMPORARY MANAGEMENT PRINCIPLES
137
PART II: Management in a changing environment
The different definitions of power capture the key terms associated with
power: interest, influence and ‘to get people to do what they would not
otherwise do’. Despite the slightly ‘dark’ connotations of the words that
appear in the definitions of power, the use of power in organisations has
a positive as well as a negative ‘face’. McClelland7 is one theorist who
distinguishes between personal power (an individual who has a ‘me’
orientation) and social power (an individual who has a ‘we’ orientation).
People with a personal power orientation may use power for their own
purposes and to protect their own interests, in other words, they may
use their power to pursue their own goals, as illustrated succinctly by
the opening case study. French and Bell comment that ‘the negative
face of power is characterised by a primitive, unsocialised need to have
dominance over submissive others’8.
McClelland9 describes the ‘good face’ of power (social power) as
characterised by an individual’s concern for group goals, for helping the
group to formulate goals and providing the means to attain the goals
by empowering people to work hard to achieve the goals. Senior and
Swailes describe positive power as deriving from a ‘more socialized need
to initiate, influence and lead and to recognize other people’s needs to
achieve their own goals as well as those of the organization’10.
Despite the conflicting views of power, it is clear that power and
people using their power are unavoidable occurrences in contemporary
organisations.
Machiavellian behaviour in organisations
At the end of his career as a diplomat, Niccoló
Machiavelli compiled his masterpiece The Prince
in 1513. It was a study of power and politics and
a manual of ruthlessness for any ambitious ruler.
Today his ideas are as relevant as five centuries ago
when Machiavelli wrote the book in conflict-ridden
Italy. His book influenced major historical figures
such as Napoleon and Frederick the Great. The
Prince has become a foundation of modern political
thought and made Machiavelli’s name synonymous
with manipulative scheming11.
The term Machiavellian is often used in modern
organisations to refer to colleagues who have a high
need for power (see the chapter on motivation)
and believe that the end justifies the means. A
recently published book, How to thrive in a world of
lying, backstabbing and dirty tricks (published in 2013
by Vermillion) deals with Machiavellian behaviour in
organisations. The author, Oliver James, views the
Machiavellian type in organisations as a ‘game player’
… ‘[T]hey are often very compulsive and only feel
comfortable if there is some kind of game going on
where they can play and try to win’12.
7.1.2 The sources of power
In the next section we investigate why some people in organisations
have power and others are powerless.
French and Raven (1959)
French and Raven13 identified five sources of organisational power
in 1959 that are still relevant today and cited in most discussions on
the topic in management literature. The five sources derive from an
individual’s hierarchical position, the ability to reward others or to
138
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 7 Power, politics, conflict resolution and negotiation
punish others, charisma and expertise – and are either personal or
formal sources of power14.
Formal power
Organisations confer GPSNBM QPXFS on individuals in terms of their
positions in the organisational hierarchy.
r -FHJUJNBUF QPXFS 1FPQMF HBJO MFHJUJNBUF QPXFS CFDBVTF PG UIFJS
formal positions in organisations, which allow them to make
decisions pertaining to resource allocation, information flows,
performance evaluations, task alignment and conflict resolution.
r 3FXBSE QPXFS 3FXBSE QPXFS SFTUT XJUI BO JOEJWJEVBM TVDI BT B
manager in an organisation who has the ability to give rewards to
reward or reinforce desirable behaviour. In an organisational context,
managers can use many ‘currencies’ to reward subordinates, such as
salary increases, promotions, interesting assignments, admission to
‘in’ groups, access to crucial information, feedback and praise, to
mention but a few. The flipside of this power source is that the
recipients of the rewards must perceive the rewards as being of
value to them. As we will see later on in Chapter 20 on workforce
motivation, a reward is a motivator only if the recipient values the
reward15.
r $PFSDJWF QPXFS "O JOEJWJEVBM XIP DBO PŲFS PS SFTUSJDU CFOFųUT
or inflict punishment or control the behaviour of another person
has coercive power. This type of power is often associated with
the negative face of power. Fear is the basis of coercive power
because the person with power has the ability to inflict punishment
or take action with adverse consequences for the other person. In
an organisational context, managers can retrench people, withhold
rewards such as promotions or directly or indirectly threaten
subordinates with punishing actions.
HQTOCNRQYGT
formal power includes
legitimate, reward and coercive
power
Personal power
1FSTPOBMQPXFS stems from the unique characteristics of an individual, RGTUQPCNRQYGT
with or without formal power based on hierarchical position.
includes referent and expert
r 3FGFSFOU QPXFS 3FGFSFOU QPXFS SFGFST UP UIF QPXFS PG BO power
individual because of his or her personal characteristics or charisma.
People will follow and obey such an individual because they like and
respect him or her and they accept that the person has power. In an
organisational context the manager who depends on referent power
must be ‘attractive’ to subordinates in the sense that they would
want to identify with the manager, regardless of the other bases of
power (legitimate power or power of reward) the manager may
possess. (We discuss charisma in Chapter 1.)
r &YQFSU QPXFS &YQFSU QPXFS SFGFST UP BO JOEJWJEVBMT QPXFS UIBU
stems from the possession of scarce and valued expertise. Expertise
is a source of power if it is the perception in the organisation that the
individual possesses knowledge and understanding pertaining to a
specific defined area. For example, the only professor at a university
CONTEMPORARY MANAGEMENT PRINCIPLES
139
PART II: Management in a changing environment
with expert knowledge of the latest ground-breaking treatment for
cancer may possess expert power. It is important that the recipients
of a person’s expert power must perceive the person with expert
power as credible, trustworthy and relevant16. Credibility means
that the person has the right credentials in terms of knowledge and
experience and must be able to show concrete evidence of this. In
our example, the professor may prove her credibility by referring
to the number of research articles she has published in accredited
international medical journals, earning the respect of her colleagues.
Trustworthiness means that the person with expert power must
be honest and forthright. Finally, the knowledge or expertise of the
person must have relevance in the context of his or her expertise.
The professor in our example will have expert power as far as a
specific cancer treatment is concerned, but not in respect of the
latest breakthrough in nuclear science research.
Morgan (1997)
In addition to the sources mentioned above, Morgan17, in his influential
book Images of organization (1997), argues that power influences
‘who gets what, when and how’ in organisations. In his view, power in
organisations stems from a number of sources and we discuss these
sources briefly in the following sections.
r 'PSNBM BVUIPSJUZ 'PSNBM BVUIPSJUZ JT B GPSN PG MFHJUJNBUF QPXFS
first described by the sociologist Max Weber18 (see Chapter 1) and
still referred to by management theorists. Weber was interested
in answering the question of why individuals in organisations obey
commands. Weber made a distinction between power (the ability to
force people to obey) and authority (where the recipients of orders
obey them voluntarily). He distinguished between three types of
legitimised (socially acceptable) authority: charismatic, traditional
and rational-legal authority. Weber used the Greek term ‘charisma’
(gift of grace) to describe the individual personality attributes of
people with charismatic authority, which define their right in the
eyes of others to act on their behalf. In modern organisations,
there are many examples of charismatic leaders who accrue great
power based on their personal characteristics. Traditional authority
rests on a belief in long standing traditions and the legitimacy of the
authority of people who occupy a traditionally sanctioned position
of authority. In a modern organisation, for example, when the son
or daughter of the founding member of a family business takes
over the reigns when their parent retires they acquire traditional
authority. Individuals with rational-legal or bureaucratic authority
gain their authority through their position in the organisation, such as
a manager or a CEO (same as legitimate power). Authority attained
through any of the three types serves as a form of power as long as
the recipients respect and accept the nature of that authority: if they
do not, the person will not have power.
r $POUSPM PG TDBSDF SFTPVSDFT 0SHBOJTBUJPOT USBOTGPSN UIFJS
resources into the products they produce or the services they
render. Organisations are thus dependent – for their success and
140
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 7 Power, politics, conflict resolution and negotiation
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survival – on the resources they need and on the suppliers of these
resources. Those in the organisation who control and allocate
resources such as financial, human, physical and informational
resources (see Chapter 2), accrue power. The scarcer the resources
and the more dependent an individual or a group in the organisation
is on its availability, the more resource power the individuals or
groups who control the resources accumulate.
0SHBOJTBUJPOBM TUSVDUVSF 5IF DIPJDF BOE VTF PG PSHBOJTBUJPOBM
structure may be the outcome of a political process rather than the
application of rational analysis and decision-making. Managers have
significant scope when it comes to choices regarding organisational
design, which they can exercise when deciding about aspects such
as differentiation or integration, centralisation or decentralisation
and departmentalisation. These choices may entail hidden
agendas related to the power autonomy and interdependence of
departments and individuals. Viewed from a political perspective,
such decisions may become products of political action, which may
enhance the power positions of the decision-makers.
$POUSPMPG EFDJTJPOQSPDFTTFT5IFBCJMJUZPG BOJOEJWJEVBMUPDPOUSPM
the outcomes of organisational decision-making processes can build
power. Such outcomes include:
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preventing or promoting the appearance of a specific decision
on the agenda)
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will be made, who will make the decision and when the decision
will be made)
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contributing to the discussion underpinning the decision).
$POUSPM PG LOPXMFEHF BOE JOGPSNBUJPO *OEJWJEVBMT XIP DPOUSPM
the knowledge and information that define the reality of decisionmaking processes, accrue power. Many principles of organising, such
as the chain of command, division of work and the coordinating of
sections and departments, enable individuals to control information
flows, open and close channels of communication, filter, analyse and
summarise information before disseminating it and consequently
modelling information to suit their own views on issues and to
advance their own interests.
$POUSPM PG CPVOEBSJFT #Z DPOUSPMMJOH PSHBOJTBUJPOBM CPVOEBSJFT
which form the interface between the different elements of the
organisation internally (boundaries between different groups)
and externally (boundaries between the organisation and its
environment, including suppliers, customers, intermediaries and
competitors), a person can accumulate considerable power. An
individual with control of boundaries may be able to access crucial
information regarding eminent changes and be in a position to plan
to avoid or facilitate changes. People in leadership positions, project
coordinators and organisational liaison officers can gain power by
controlling organisational boundaries.
CONTEMPORARY MANAGEMENT PRINCIPLES
141
PART II: Management in a changing environment
r
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142
The ability to cope with uncertainty. The ability to cope with
environmental or operational uncertainty provides an individual,
group or sub-unit with power because of the interdependencies that
exists in organisations. Environmental uncertainties refer to issues
such as the availability of resources, while operational uncertainties
may include issues such as the breakdown of essential machinery,
the closing of a plant and so on. Interdependencies, changes and
uncertainties in one part of the organisation create uncertainty
in other parts of the organisation (refer to Chapter 1 where we
discuss the systems theory). The ability of an individual or a group
to anticipate, plan for and control uncertainties, could be a source
of power for them. People with this power base may attempt to
preserve it by ensuring that the uncertainty lingers, or even by
controlling situations to make them seem more uncertain than they
actually are.
$POUSPM PG UFDIOPMPHZ 5IF JOUSPEVDUJPO PG OFX UFDIOPMPHZ GPS
example, the use of new machinery for the production of core
products, the introduction of new computer hard- or software,
or the implementation of a new information system, can affect
the balance of power in organisations and can become the source
of conflict. Individuals or groups who have expert knowledge of
the new technology accumulate power. The control of technology
relates to a crucial organisational objective, namely to increase
productivity. Individuals or groups who control technology can
manipulate this power by influencing productivity either directly or
indirectly.
*OGPSNBMJOUFSQFSTPOBMBMMJBODFTBOEOFUXPSLT5IFTFBSFFNFSHJOH
sources of power, as we discussed elsewhere in the chapter.
$POUSPM PG DPVOUFS PSHBOJTBUJPOT *OUFSBDUJPO BOE MJBJTPO XJUI
significant counter organisations, such as labour unions or lobby
groups, enhances the personal power of those who deal with such
groups on behalf of the organisation.
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leaders are effective users of cultural tools as discussed in Chapter 6
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and stories to help others make sense of events in an organisation.
In so doing, the leader wields symbolic power because he or she
influences the way others think about and act regarding specific
situations.
(FOEFS BOE UIF NBOBHFNFOU PG HFOEFS SFMBUJPOT 5IF HFOEFS
balance in many organisations is changing as more women go
through the ‘glass ceiling’ that previously prevented them from
PDDVQZJOHQPTJUJPOTPG QPXFS*O4PVUI"GSJDB MFHJTMBUJPOSFMBUJOHUP
equal opportunities in the workplace makes provision for women
and other previously disadvantaged people to have access to top
positions in organisations, thus enabling them to accumulate power.
5IF EFFQ TUSVDUVSF PG QPXFS %FFQ TUSVDUVSFT VOEFSQJO QPXFS
relations and may prevent individuals from using the power they
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 7 Power, politics, conflict resolution and negotiation
accrue. An analogy for deep structure19 is the ‘design of the playing
field and the rules of the game’ at organisations. Deep structure
is the set of major choices a system (in this case, an organisation)
has made of basic parts into which its units will be organised and
the basic patterns of activity that will maintain its existence. For
example, a manager may have access to various sources of power,
but could be unable to draw on and use those sources of power
because deep structural factors prevent him or her from using the
power. Deep structures are very stable because the trail of choices
made by a system (an organisation) rules out many options at the
same time as it rules in mutually contingent options. Deep structure
includes factors such as economics, race and social class relations
and determines the roles we occupy in organisations and thus the
type of power we accrue.
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more power, so the power one already has is a source of power.
Social networks as a source of power
Recently, a new source of power is emerging in organisations, stemming
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any formal or personal power, are accumulating power based on the
TUSFOHUI PG UIFJS TPDJBM OFUXPSLT 5IF LFZ GBDUPST UIBU EFUFSNJOF UIF
power an individual can obtain from his or her social network includes
the following20:
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of people in the network influences the strength of a network.
An individual with a substantial number of contacts in his or her
social network within an organisation will be privy to much more
information when compared to a person with a small or no social
network.
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QPXFS5IFOVNCFSPG DPOUBDUTCFUXFFOBOJOEJWJEVBMBOEUIFQFPQMF
in the organisation who make the significant decisions determines
the power obtained by the person. Consider the example of the
secretary of the CEO, who has no formal or personal power, but
because she has access to information intended for top managers,
she becomes a powerful person and (maybe unethically) her
network of friends may benefit from the information she accesses.
In the opening case study, we have seen how the director of human
resources became a very powerful person due to her close working
relationship with the CEO.
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much power an individual can gain from his or her social network. An
individual whose network includes people in different departments
and positions in the organisation, has more power than a person
whose network only includes people who work in one’s own
department.
CONTEMPORARY MANAGEMENT PRINCIPLES
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PART II: Management in a changing environment
LEARNING OBJECTIVE 2
7.2 INTERESTS
Explain the relationship
between power and interest.
What people want and what is at stake for them is the essence of the
political perspective of organisations. In organisations, individuals will
try to protect their own and their group or teams’ interests, and if
they have power, they will use it to defend their interests. Employees
have individual JOUFSFTUT as well as collective interests. Their own selfinterest is the primary motivator of people’s behaviour (see Chapter
20 on workforce motivation). For example, individuals may look at a
change intervention and consider how the change may affect their own
position relative to, for example, better remuneration, advancement in
the organisation or perhaps obtaining more power and influence. The
opening case study articulated the manoeuvres Judith Jackson and Josh
Brown had made to protect their own interests.
Collective interests derive from organisational design, which defines
the ‘boxes’ in the organisation to which organisational members belong
such as demographic areas, functional areas and one’s profession. In
other words, the organisational structure and the positions of power
created by the structure create groups who share and will protect their
collective interests. Organisational members typically belong to more
than one collective interest group and will support or block decisions
that affect their interests in their various groups. The bases for collective
interests include the following21:
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demographic groups. An example here may be a group of people
at an organisation approaching the mandatory retirement age of
60. This group of people may have the same interest in extending
the retirement age to 65 and may take political action, such as
sending a petition and negotiating with decision-makers to further
their interests.
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time workers may create different interest groups who will protect
their collective interests in the organisation.
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groups – workers at the South African plant of an automobile
manufacturer will probably have different interests to protect
when compared with their counterparts in Europe.
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engineers, accountants, managers and executives share the same
interests and will form interest groups to protect their interests in
the organisation. (Refer to the executive management team in the
opening case study.)
interests
people have individual and
collective interests
Having distinguished between individual and collective interests, the
question arises of how an individual or a group can persuade other
people or groups to act in a specific way. Interpersonal interaction
involves attempts to influence others and lies at the core of the political
perspective of organisations.
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CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 7 Power, politics, conflict resolution and negotiation
7.3 INFLUENCE TACTICS AND TAKING
POLITICAL ACTION
LEARNING OBJECTIVE 3
Influential people have power, but not all people with power have
influence22. Influence involves gaining the agreement of others to work
with you to achieve a specific goal. Many powerful people cannot do
that, for a variety of reasons. The opening case study relates how John
Paterson lost the loyalty and support of his executive leadership team
and he had no more influence over them, despite being the CEO with
substantial power at the company.
Discuss how people use
inƃuence tactics and political
action to protect their interests.
5IFQPXFSPGJOŴVFODF23
A journalist from the Financial Times asked the
Archbishop of Canterbury how, ‘particularly as such
a young man, he was able to deal with the power of
his position?’ “I have no power, I have influence,” he
responded, with humility and insight.
‘Some powerful people have influence. Many
religious leaders, like the Archbishop of Canterbury
have extraordinary influence – far more than elected,
powerful, world leaders.’
‘Archbishop Desmond Tutu has influence –
acquired and growing as it does with every act,
giving further evidence that he is not partisan in the
criticism of wrongdoing.’
‘Influence trumps power. Influence usually takes
time to manifest, based as it often is on example –
but it can begin overnight (as it does for new-found
rock stars).’
Influence cannot be taken away, ‘but it can
certainly be lost in an instant.’ Ask Lance Armstrong,
Bernard Madoff or Dominique Strauss-Kahn.
‘Influence is usually sustained, but power and
leadership change hands.’
When does power convert to influence? Suppose person A is the person
with power (the agent) and person B is the target. When B consents to
behave according to the wishes of A, power has converted to influence.
Power involves a reciprocal relationship between the agent and the
target and the characteristics of the recipient may explain the strength of
the agent’s influence over the recipient24. Characteristics of the recipient
such as dependency on the agent; uncertainty regarding the proper way
to behave in a specific situation; personality, including self-esteem and
vulnerability; and intelligence, where highly intelligent people may be
more willing to listen, but more resistant to influence, may determine to
what extend the agent can influence the recipient.
People with power in organisations use specific influence tactics to
obtain compliance. Some of these tactics may seem to be manipulative
or dishonest, but the purpose of this section is not to encourage you as
a student of business management to use an influence tactic with which
you are uncomfortable, but rather to inform you of the tactics that
people in organisations use to influence others.
CONTEMPORARY MANAGEMENT PRINCIPLES
145
PART II: Management in a changing environment
7.3.1 Influence tactics
Suppose person A (the agent) wants to influence person B (the recipient).
Person A may use the following tactics to influence person B25. Table 7.1
summarises the influence tactics.
Table 7.1: +nƃuence tactics
Tactic
Actions of A (the agent)
Pressure
Threatening, intimidating B or demanding that he or she complies
Upward appeals
Persuading B that higher levels of management approved the request, or appealing
to higher levels of management for assistance in B’s compliance
Exchange
Promising s explicitl[ or implicitl[ s that B will receive rewards or tangiDle DeneƂts
if he or she complies, or reminding B of a prior favour that he or she should return
Coalition
Seeking the aid of others to persuade B to do something or using the support of
others as an argument to convince B to agree
Ingratiating
Using friendliness, humour or ƃatter[ Defore making a request to B
Rational persuasion
Using logical arguments and factual evidence to persuade B that a proposal or
request is viable and likely to result in the achievement of objectives
Inspirational appeals
Appealing to B’s values and ideals and arousing enthusiasm by making an
emotional request or proposal or by boosting person B’s conƂdence that he or she
can do it
Consultation tactics
Seeking B’s participation in making a decision or planning how to implement a
proposed policy, strategy, or change
Source: Adapted from: Yukl, G. & Falbe, C.M. 1990. Influence tactics and objectives in upward, downward, and lateral influence
attempts. Journal of Applied Psychology, 75(2): 132–140.
Contextual factors, especially the hierarchical level of B, should influence
A’s selection of the most effective tactic to use26.
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organisational levels (upward, downward and lateral).
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influence is downward (to subordinates).
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7.3.2 Taking political action
Morgan27 argues that the idea of rational organisations where
organisational members seek common goals, and where politics
and politicking are considered to be dirty words, prevents us from
recognising that the latter are essential aspects of organisational life.
Indeed, he cites Aristotle in ancient Greece who advocated politics as
a means of reconciling the need for unity in the Greek state. Politics for
Aristotle entailed the process of creating order from diversity to avoid
authoritarian rule. Political science originated from this idea, favouring
146
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 7 Power, politics, conflict resolution and negotiation
politics and the recognition and interaction of competing interests as a
means of creating a non-intimidating form of social order28.
Pfeffer29, an expert on the subject of the use of power and politics
in organisations, argued in a recent Harvard Business Review article
that effective managers know that in order to succeed, they need two
competencies or skills: substantive business acumen (to know what to
do) and organisational or political skills to get it done.
When employees in organisations convert their power into influence
and action, they are engaging in politics. Those with good political skills
can use their bases of power effectively30. We have already described
influence and influence tactics that individuals and groups in organisations
use to get others to help them achieve their goals, which are political
actions; in this section we elaborate further on the concept of politics
and political actions.
1PMJUJDBM CFIBWJPVS in organisations are activities that are not
required as part of an employee’s formal role, but are activities that
are performed to influence or attempt to influence the distribution of
advantages or disadvantages in the organisation31.
Legitimate political behaviour refers to actions that occur on a
daily basis in organisational life such as forming alliances or coalitions,
using one’s networks and so on. Illegitimate political behaviour includes
extreme and damaging behaviour that infringes the rights of the
organisation and its members, for example sabotage. Table 7.2
summarises the different political actions that may take place in
organisations.
RQlitiEal beJaXiQWr
includes activities that are
not required as part of an
employee’s formal role, but
are performed to attempt to
influence the distribution of
advantages or disadvantages in
the organisation
Table 7.: .egitiOate and illegitiOate political behaviour in organisations
Vertical
.egitimate
.ateral
Vertical
Illegitimate
.ateral
Internal
r complain to supervisor
r bypassing chain of command
r creating obstructions
External
r lawsuits
r
r
r
r
forming coalitions and alliances
exchange of favours
retaliations
using networks
r
r
r
r
r
sabotage
symbolic protests
revolts
riots
threats
r contact with counterpart from another
organisation to gain access to information
and other power sources
r professional activity outside the
organisation
r whistleblowing media releases on internal
organisational activities
r organisational disloyalty membership to
other organisations and disloyalty to the
organisation
r defections moving to a competitor
organisation or starting own business and
taking clients with them
Source: Adapted from Farrell, D. & Petersen, J.C. 1982. Patterns of political behavior in organizations. Academy of Management Review,
7(3): 407.
CONTEMPORARY MANAGEMENT PRINCIPLES
147
PART II: Management in a changing environment
Any form of major change, such as strategic or structural change, will
inspire various forms of political action from various actors across the
organisation. Mobilising support requires an understanding of interests
and power and using one’s knowledge of it to your advantage to achieve
the desired outcomes. Consider a scenario where an individual manager
is promoting a major change intervention in an organisation and needs
to get buy-in from various other managers before proceeding with the
intervention. The manager can attempt to secure the approval of the
other managers by taking these political actions32.
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and groups who oppose the idea and find ways to unite them to
produce advantages to all.
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map their interest and their sources and bases of power.
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intervention.
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the decision by finding supporters who will act together to back
the decisions, policies and activities and build coalitions to change
the distribution of power.
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horizontally.
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(see the next section on conflict management).
Although power and politics often have negative connotations, many
effective actions in organisations have at the very least a political element.
Critical organisational issues often require individuals (often managers)
to mobilise the support from individuals or groups with the resources to
achieve the desired outcomes.
To obtain outcomes beneficial to all parties, it is essential for managers
to have conflict management and negotiating skills.
LEARNING OBJECTIVE 4
7.4 CONFLICT MANAGEMENT
Explain the various sources
of organisational conƃict
and identify the conƃict
management strategies.
$POŴJDU is a process in which one party perceives that another party
opposes or negatively influences its interests33. Note that in the definition
of conflict, the word ‘perceives’ signifies that the sources of conflict may
be real or imagined, although the subsequent conflict remains the same
– people’s perceptions are their realities.
EQnƃiEt
Paradoxically, conflict can be beneficial for the attainment of
a process in which one party
organisational goals, although too much conflict can harm the
perceives that another party
organisation. When there is too little conflict, employees may become
opposes or negatively influences
complacent and lazy, and innovation and creativity may be absent
its interests
because employees do not express fresh ideas and opposing viewpoints
for fear of conflict. On the other hand, too much conflict may lead to
lack of teamwork, political infighting, aggression and even violence. Thus,
148
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 7 Power, politics, conflict resolution and negotiation
conflict can be ‘functional’, meaning it is constructive and through this
conflict the organisation benefits. Dysfunctional conflict is the opposite
and may become destructive. So, when is conflict optimal?
High
Performance
Optimum level
QH EQnƃiEt
Low (Functional)
High (Dysfunctional)
.eXeN of conƃKcV
Figure 7.1: The relationship between the intensity of conƃict and the level
of organisational performance
7.4.1 The causes of conflict34
There are many causes of conflict in organisations and we categorise
them as interpersonal sources of conflict or sources of conflict emanating
from the interaction between various groups in the organisation.
Interpersonal conflict
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working in the same organisation stem from demographical factors
such as background, race and culture, age, levels of education,
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give rise to interpersonal conflict.
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information result in individuals or groups having the wrong
perceptions of other individuals and groups in the organisation.
This source of conflict can be resolved quickly if it was caused by
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withhold information intentionally as part of a political action, it
can jeopardise trust between them and lead to continuing conflict.
The opening case study relates how the human resources manager
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executives, which led to immense conflict and eventually cost him
his job.
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that are interdependent in contemporary organisations. This
interdependency may lead to conflict, as the roles of the managers
may be incompatible. The marketing manager at an organisation
may promise a valued customer the delivery of a specified
number of products, while, due to labour and other constraints,
the production manager may not be able to supply the products.
Their role incompatibility may thus lead to conflict between the two
managers.
CONTEMPORARY MANAGEMENT PRINCIPLES
149
PART II: Management in a changing environment
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of an organisation can lead to interpersonal conflicts. In highly
competitive industries, the raised stress levels of employees inside
organisations may lead to conflict between individuals. The internal
environment of an organisation can be stressful for many reasons,
such as a looming downsizing intervention, shrinking resources
resulting from demotions and many other factors that may create
dysfunctional conflict between employees. Organisations such as
management consulting firms and accounting firms may have high
interpersonal conflict levels as tired employees do their best to
meet non-negotiable deadlines.
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conflict is the organisational reality that individuals compete for
the same scarce positions in the organisation. For example, most
organisations have one CEO and one manager for each of their
divisions, departments and sections. Individuals compete with
one another to secure the positions they desire, but organisations
are becoming flatter (fewer levels of management) and fewer
opportunities exist to ‘climb the corporate ladder’ leading to intense
competition for the positions that become available, sometimes
resulting in bitter conflict.
Intergroup behaviour and conflict
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resources is at the centre of a political perspective on organisations.
Divisions, departments, sections and teams compete for the same
resources (financial, human, information and physical) and they and
their managers have to succeed in the ensuing political battles and
conflicts to secure their rightful portion of resources.
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group, may lead to intergroup conflict, especially where substantial
differences exist between them in terms of goals, priorities and
staff. For example, the goal of the R&D team at an organisation
is to develop an innovative new product using their diverse and
complementary skills to complete the project. The R&D team has
to cope with many setbacks during the development phase of the
product and may not be able to deliver the blueprint on time. But the
members of the production department face their own problems:
they have to keep to time and budget limits in order to deliver a
profitable product. Obviously, this scenario has the potential to
become a major source of conflict between the two groups.
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and responsibilities are not well defined. When group tasks and
responsibilities are unclear, groups may disagree about which group
has responsibility for specific tasks and a claim on resources. On the
other hand, when there is a clear delimitation of boundaries the
potential for serious conflict diminishes.
150
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 7 Power, politics, conflict resolution and negotiation
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Assertive
Competition
Focus on self
Unassertive
Collaboration
Compromise
Avoidance
Uncooperative
Accommodation
Cooperative
Focus on others
Figure 7.2: /anaging conƃict
Source: Adapted from Thomas, K.W. 1976. Conflict and conflict management. In
Organisational behaviour Brooks, I. (ed.) 2009. 4th edition. London: Pearson Education
Limited, p 252.
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CONTEMPORARY MANAGEMENT PRINCIPLES
151
PART II: Management in a changing environment
5. Collaboration: differences are met and addressed, resulting in a
win-win solution for the parties.
Various contingency variables influence the selection and use of a conflict
management strategy such as the time available, how critical the issue
is, the preferred style of the various parties involved in the conflict, the
circumstances under which the conflict takes place and the presence or
lack of commitment, motivation and information36.
In reaching an agreement, two or more parties need to negotiate
with each other. Negotiating skills are essential for managers to have
when they engage in political action or try to resolve conflict.
LEARNING OBJECTIVE 5
7.5 NEGOTIATION
Provide guidelines on how to
apply the two phases of the
negotiation process: planning
and the actual process.
/FHPUJBUJOH is a process in which two or more parties are in conflict
and attempt to reach an agreement37. During the negotiating process,
conflicting parties frequently use power and influence tactics and resort
to political action. Negotiating takes place if there is no fixed outcome
to a problem. Thus, negotiation involves a process of communication
between parties to reach a lasting agreement that supports shared
interests, despite vast differences, by establishing common ground and
creating alternatives.
Collective bargaining between the management of an organisation
and the labour union representing its employees is a familiar scenario
that calls for two parties to negotiate a mutually acceptable outcome.
The survival of the organisation is important to both parties but
management may argue that wage increases will negatively affect the
financial results of the organisation and thus the shareholders, whereas
the labour union may assert that the welfare of the employees should
be the first priority of the organisation and not the shareholders. As the
survival of the organisation depends on the input of both parties, they
need to negotiate an acceptable outcome.
negQtiating
a process in which two or
more parties are in conflict and
attempt to reach agreement
7.5.1 The negotiating process
Negotiation need not be a process in which one party’s loss is the other
party’s gain, but rather a process of helping each other get what they
want. Learning how to negotiate is an essential skill for managers to
obtain in order to protect their individual and collective interests. A
typical negotiation process comprises two phases: the planning phase
and the actual negotiation process38.
7.5.2 The planning phase
In the following sections, we provide guidelines to a potential negotiator
who enters into a negotiation process with another party on how to
reach a negotiated agreement.
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about the other party. It may involve getting more information about
the personality or personalities that will participate in the process
152
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 7 Power, politics, conflict resolution and negotiation
and the goals they want to achieve by negotiating. This step may
include fostering a working relationship with the other party prior
to the beginning of the negotiation process.
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formulate the goals you aim to achieve through the negotiation
process. Formulate three objectives during this planning phase. The
objectives should relate to:
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to get
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want to achieve
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you are prepared to entertain before walking away from the
negotiations.
Bear in mind that the other party will also set the same kinds of
objectives, so you should try to anticipate what your opponents’
three targets are.
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and take, so it is necessary for you to plan what you are prepared
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trade-off.
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answers. Before entering into negotiation, a negotiator must be fully
prepared to answer any questions the other party or parties may
ask. It is necessary to anticipate all possible questions that may come
up and it is essential to have a good understanding of all the issues at
hand. In addition, one needs to prepare the questions you want to
ask the other party.
7.5.3 The negotiation phase
4UFQFocus on the issues, not on the individual or individuals.
During the actual negotiation process, a negotiator should try to create
a good impression. The other party should perceive their opponent as
being honest and trustworthy. If a negotiator creates the impression
of being a bully, being dishonest, or patronising, the chances of
reaching an agreement are likely to diminish. The golden rule in any
conflict situation also applies in the negotiation process: concentrate
on the issue, not on the person. Effective negotiators avoid personal
comments and name-calling at all costs. A negotiator’s aim should
be to establish a congenial atmosphere to conclude the negotiations
successfully.
4UFQAllow the other party to make the first offer. By allowing the
other party to make the first offer, a negotiator can gain an advantage
or even close the agreement if the opening offer is equal to or more
than the target objective. However, if the opening offer is lower than
your target objective, one has to negotiate for a better agreement. If
the other party insists on you making the first offer, fend them off by,
for example, encouraging them to make their best offer and assuring
CONTEMPORARY MANAGEMENT PRINCIPLES
153
PART II: Management in a changing environment
them that you will consider their offer. If the parties cannot agree
during this step, the process proceeds to the next step.
4UFQMake sense of the other party’s needs. During the planning
process prior to the negotiation, you anticipated and prepared
answers to the crucial issues on the table. Now you have to listen to
the other party, ask questions and be prepared to make concessions
to meet their needs or maybe come to the realisation that it will be
impossible to come to an agreement. The other party may also want
to ask questions during this stage of the negotiations, offering you the
opportunity to stake your claims.
4UFQDo not rush into agreement and ask for something in return.
One should not give up easily; try to get the best possible deal from
the negotiations by asking for something in return for everything
you have to give up, by referring back to the trade-offs that you
have planned. Sometimes it may be better to walk away without an
agreement than to get a poor agreement. It is essential not to appear
as being desperate, but rather as a bargaining party who has other
options available. Beware of intimidation and stick to your three
objectives if it is at all possible.
The negotiation process may conclude with an agreement that
satisfies the objectives of all the parties around the negotiating table,
which is the best outcome possible. However, sometimes the outcome
is less favourable, ending in a stalemate or one or both parties agree to
postpone the negotiations. Sometimes it may be wise to postpone an
agreement and to take the pressure off the party that wants to delay the
outcome and to review what transpired during the negotiating process
before re-entering or abandoning the negotiations. Yet another outcome
is that the parties do not reach an agreement. How a manager responds
to such failure is important because those who will do better the next
time learn from their mistakes and continue to work on their political,
influence, conflict management and negotiation skills.
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CONTEMPORARY MANAGEMENT PRINCIPLES
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or applicable copyright law.
ChaPter 7 Power, politics, conflict resolution and negotiation
CHAPTER SUMMARY
1. Define and discuss power and organisational sources of power.
Power is the potential to influence behaviour, to change the course of events, to overcome
resistance, and to get people to do things they would not otherwise do. The different
definitions of power capture the key terms associated with power: interest, influence and ‘to
get people to do what they would not otherwise do’.
The sources of power can be categorised into formal power and personal power.
Formal power includes:
• legitimate power because of an individual’s formal position in an organisation
• reward power rests with an individual, such as a manager in an organisation who has the
ability to give rewards to reward or reinforce desirable behaviour
• coercive power is when an individual can offer or restrict benefits or inflict punishment or
control the behaviour of another person.
Personal power includes:
• referent power
• expert power.
Other sources of power include:
• formal authority
• control of scarce resources
• organisational structure
• control of decision processes
• control of knowledge and information
• control of boundaries
• the ability to cope with uncertainty
• control of technology
• interpersonal alliances, networks, and control in informal organisations
• control of counter organisations
• symbolism and the management of meaning
• gender and the management of gender relations
• the deep structure of power
• the power one already has.
2. Explain the relationship between power and interest.
People have individual and collective interests and they will use their power to protect their
interests.
3. Discuss how people use influence tactics and political action to protect their interests.
Power is a prerequisite for influence. Influential people have power, but not all people with
power have influence. Influence involves gaining the agreement of others to work with you
to achieve a specific goal. Many powerful people cannot do that, for a variety of reasons.
Power converts to influence when person B (the target) consents to behave according to the
Contemporary management prinCiples
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155
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or applicable copyright law.
Part II: Management in a changing environment
wishes of person A (the agent). Power involves a reciprocal relationship between the agent
and the target and the characteristics of the recipient may explain the strength of the agent’s
influence over the recipient.
Influence tactics include:
• pressure
• upward appeals
• exchange
• coalition
• ingratiating behaviour
• rational persuasion
• inspirational appeals
• consultation tactics.
4. Explain the various sources of organisational conflict and identify the conflict
management strategies.
Interpersonal conflict:
• Personal differences between individuals working in the same organisation stem from their
backgrounds and cultures, levels of education, worldviews, and value systems and give rise
to interpersonal conflict.
• Poor communication and misinformation result in an individual having the wrong perceptions
of another individual in the organisation.
• Managers have different functions and roles that are interdependent in contemporary
organisations, which may lead to conflict, as their roles may be incompatible.
• The internal and external environments of an organisation can lead to interpersonal conflicts.
• Individuals compete for the same scare positions in the organisation leading to intense
competition and conflict.
Intergroup behaviour and conflict:
• Competition for scarce resources (financial, human, information and physical) is a major
source of conflict.
• Task interdependence between groups, where the output of one group becomes the input
of another group, may lead to intergroup conflict.
• Conflict emerges when group boundaries and responsibilities are not well defined.
• Power and status differences occur when one group has a disputable influence over the
other.
• People may pursue conflicting goals, which may lead to conflict. Goal differences are
natural in organisations.
The five conflict management strategies resulting from the two management style dimensions
entail:
• avoidance
• accommodation
• compromise
• competition
• collaboration.
156
Contemporary management prinCiples
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ChaPter 7 Power, politics, conflict resolution and negotiation
5. Provide guidelines on how to apply the two phases of the negotiation process: planning
and the actual negotiating process.
The planning phase:
• research the other party
• develop options and trade-offs
• anticipate the issues that the other party might raise and prepare answers.
The negotiation phase:
Step 1: Focus on the issues, not on the individual or individuals.
Step 2: Allow the other party to make the first offer.
Step 3: Make sense of the other party’s needs.
Step 4: Do not rush into agreement and ask for something in return.
KEY TERMS
charisma
coalitions
coercive power
collective interest
conflict
conflict resolution
consultation tactics
exchange
expert power
formal power
individual interest
influence
ingratiating
inspirational appeals
interests
legitimate power
machiavellian
negotiation
organisational politics
personal power
political action
power
pressure
rational persuasion
referent power
reward power
upward appeals
REVIEW QUESTIONS
1. the following questions pertain to the opening case study:
1.1 identify the sources of power of the three ‘cast members’.
1.2 Use evidence from the case study to discuss the concept of influence.
1.3 Describe how people used influence tactics to protect their interests.
1.4 identify and discuss the political actions that the executive leadership team used to protect their
collective interest.
2. What political actions could you take before a meeting, where your innovative idea is on the agenda,
to ensure the highest level of buy-in for the idea at the meeting?
Contemporary management prinCiples
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PART II: Management in a changing environment
END NOTES
1
37
38
Adapted from: Elkind, P., Reingold, J. & Burks, D. Inside a palace coup. Fortune, 15 August 2011. Available [Online]
from: http://features.blogs.fortune.cnn.com/2011/07/28/. Accessed on 12 April 2013.
Pfeffer, J. 2010. Power play, Harvard Business Review, July–August, p 87.
Morgan, G. 1997. Images of organization. Thousand Oakes: Sage, p 170.
Pfeffer, J. 1992. Managing with power: politics and influence in organizations. Boston: Harvard Business Press, p 30.
Johnson, G., Whittington, R. & Scholes, K. 2011. Exploring strategy: text and cases. 9th edition. Financial Times.
Prentice Hall, p 160.
French, W.L. & Bell, C.H. 199. Organization development; behavioural science interventions for organization
improvement. 5th edition. Englewood Cliffs, NJ: Prentice Hall, p .
Luthans, F. 2011. Organizational behaviour. 12th edition. New York: McGraw-Hill International Edition, p 322.
French & Bell, op. cit., p 280.
Luthans, op. cit., p 322.
Senior, B. & Swailes, S. 2010. Organizational change. 4th edition. Essex: Prentice Hall, p 208.
Machiavelli, N. 2009. The prince. Richmond, Surrey: Oneworld Classics Limited, translated by J.C. Nichols. 2009.
Fagan, G. & Bolger, K. 2013. Cunning colleagues and dirty tactics. Pretoria News, 17 April: 14.
(i) French, J.R.P. & Raven, B.H. 1959. The bases of social power. In Senior and Swailes, 2010, p 181. (ii) Luthans, 2010,
pp 314–318.
Robbins, S.P. & Judge, T.A. 2009. Organizational behavior. 13th edition. NJ: Upper Saddle River: Pearson Education,
p 486.
Luthans, op. cit., p 317.
Ibid.
Morgan, op. cit., pp 170–199.
Pugh, D.S., Hickson, D.J. & Hinings, C.R. 1996. Great writers on organizations. Cornwall: Ashgate.
Gersick, C.J.G. 1991. Revolutionary change theories: a multilevel exploration of the punctuated equilibrium paradigm.
Academy of Management Review: 19(1).
Ancona, D., Kochen, T.A., Scully, M., Van Maanen, J. & Lewisney, D.E. 2005. Managing for the future: organizational
behavior & processes. 3rd edition. Cincinnati: South-Western College, pp M2-38–40.
Ibid., pp M2-34–M2-36.
Whetton, D.A. & Cameron, K.S. Developing management skills. 7th edition. NJ: Upper Saddle River: Prentice-Hall,
p 302.
Excerps from: Barnes, M. 2013. On staying one jump ahead of the competition. Business Day, 27 May. [Online]
Available from: http://www.bdlive.co.za/opinion/columnists/2013/05/27/on-staying-one-jump-ahead-of-thecompetition. Accessed on 31 May 2013.
Luthans, op. cit., p 319.
Yukl, G. & Falbe, C.M. 1990. Tactics and objectives in upward, downward, and lateral influence attempts. Journal
of Applied Psychology, 75( 2): 132–140. Available [Online] from: Albanyhttp://www.communicationcache.com/
uploads/1/0/8/8/10887248/influence_tactics_and_objectives_in_upward_downward_and_lateral_influence_attempts.
pdfInfluence. Accessed on 24 April 2013.
Adapted from: Yukl, G. & Falbe, C.M. 1990. Influence tactics and objectives in upward, downward, and lateral influence
attempts. Journal of Applied Psychology, 75(2): 132–140.
Morgan, op. cit., p 154.
Ibid., p 155.
Ibid., p 92.
Robbins & Judge, op. cit., p 495.
Ibid.
Ancona et al, op. cit., pp. M2-41–M2-45.
Buelens, M., Sinding, K., Waldstrøm, C., Kreitner, R. & Kinicki, A. 2011. Organisational behaviour. 4th edition. Berkshire:
McGraw-Hill Higher Education, p 374.
Luthans, op. cit., pp 292–293.
Brooks, I. 2009. Organisational behaviour. 4th edition. Essex: Pearson Education Ltd, p 252.
Thomas, K. W. 1976. Conflict and conflict management. In Organisational behaviour. Edited by Brooks, I. 2009.
4th edition. London: Pearson Education Limited, p 252.
Lussier, op. cit., p 164.
Ibid., pp 166–169.
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Chapter 8
Business ethics, corporate
social responsibility and
corporate governance
Minka Woermann
OPENING CASE
Enron
The Enron case signifies a historical marker:
whereas business ethics received little attention
in the period prior to the Enron debacle, this
case (along with other similar cases, including
WorldCom) ushered in a new era of business
ethics management and regulation. The Enron
case remains instructive, and as such continues to
receive attention in the business ethics literature.
In a 2012 media roundup on Enron, Edward
Freeman, academic director of the Business Ethics
Roundtable Institute for Corporate Ethics, described
Enron’s enduring significance as follows:
‘Enron remains an iconic scandal. It defines what
is wrong with our current narrative about business.
When business focuses only on shareholder value,
executive compensation and narrow views of selfinterest, value creation just cannot be sustained.
Every viable business creates value for customers,
employees, suppliers, communities, as well as
investors. Enron is a symbol for companies that
have not paid attention to this fact, and still stands
as a warning’1.
This chapter therefore opens with a short
overview of the problems that plagued Enron,
and the ethical lessons that we can draw from this
case2.
Overview
Enron was founded in 1985 as an energy delivery
company, but by 1988 the deregulation of the
energy markets in the United States had taken
place and the company had redefined itself as an
energy broker. Enron rapidly expanded its market
and operations and Fortune magazine named Enron
America’s most innovative company for six years
running between 1996 and 2001. Enron was also
on Fortune’s ‘100 best companies to work for’ list
in 2000. By October 2001, however, the cracks
started showing and credit agencies downgraded
Enron’s credit rating because it had drawn the bulk
of its available credit. The Security and Exchange
Commission (SEC) started a formal investigation
of Enron and Arthur Anderson (Enron’s auditing
firm). Enron was subpoenaed and filed for
bankruptcy in December 2001. Enron shares,
which were priced at $81.39 in January 2001, were
worthless by the end of the year. In 2002, Arthur
Anderson voluntarily surrendered its licence to
practise as certified public accountants.
Key figures3
The former chairman and CEO of Enron was
Kenneth Lay. He was briefly replaced by his deputy,
Jeffery Skilling, who served as CEO of Enron for
six months before mysteriously resigning in August
2001. Lay then returned to the helm until the
court-appointed creditors committee requested
his resignation in January 2002. Lay was initially
credited with Enron’s success, but both he and
PART II: Management in a changing environment
Skilling played a big role in the company’s downfall.
Another key figure was Andrew Fastow, Enron’s
Chief Financial Officer and the mastermind behind
Enron’s fraudulent accounting schemes, which
were used to disguise Enron’s debt and liabilities.
The aftermath4
Skilling, Lay and Fastow were brought to trial
in 2006, and all three men were found guilty on
charges of conspiracy and fraud. Lay died of a heart
attack in July 2006 before his sentencing. Fastow
took a plea bargain, and cooperated with the state
to build a criminal case against Enron in exchange
for a lighter prison sentence (six years). Skilling,
who was found guilty of 19 of the 28 counts against
him, was sentenced to 24 years and four months in
prison. He appealed the conviction, but the appeal
court affirmed the conviction in 2008.
What went wrong?
The company, which fared exceptionally well during
the mid to late 1990s, was faced with a growth crisis
by the end of the decade. Enron executives wished
to continue the company’s explosive growth, even
though they knew that it was not possible. In order
to avoid a negative earnings outlook and retain
investor confidence and their credit rating, Enron
executives employed increasingly questionable
accounting practices and crafted a deceiving web of
partnerships. These partnerships were referred to
as special purpose entities (SPEs). Profits generated
by these entities were moved to the official Enron
balance statement; whereas the debts on the
official balance statement were transferred to the
SPEs, in order to artificially inflate the bottom line.
These SPEs were presented as partnerships, but
in practice, they were subsidiaries. The reason for
this misrepresentation is that partnerships are not
audited, making it possible for Enron to hide its
financial situation from investors. Moreover, many
of the recorded profits had not yet been generated.
Booking anticipated earnings and shuffling around
debts were seen as timing issues rather than ethical
issues. Enron employees were overly-confident
and believed that over the long term they would
160
CONTEMPORARY MANAGEMENT PRINCIPLES
be able to set things right. In a company in which
one was encouraged to show profits at all costs,
such behaviour also represented the path of least
resistance.
Ethical analysis: culture matters more
than codes
One of the most perplexing aspects of the Enron
case is that Enron looked like an excellent company,
and was awarded both for its business success and
its ethicality. Enron had all the necessary business
ethics tools in place and presented itself as a
socially responsible corporate citizen. Yet, despite
the presence of cultural artefacts such as a code
of conduct and a corporate social responsibility
(CSR) policy, unethical and illegal activities
were condoned and even encouraged. Enron
therefore had a ‘deep’ culture that systematically
gave precedence to profit over ethics. Enron’s
leadership – in part – shaped this culture.
According to Edgar Schein5, leadership is essential
in creating, maintaining, or changing a company’s
culture, and some dimensions of leadership that
impact significantly on a company’s culture include
attention, role modelling, allocation of rewards,
the criteria for selection and dismissal, and the
handling of crisis situations.
Leaders act as role models for their employees
and employees tend to also focus attention on
those aspects that are seen as important by leaders.
Enron’s leaders were poor moral role models for
employees, because their attention was focused
solely on profit, power, greed and influence. In
fact, Fastow twice suspended the company’s code
of conduct so that he could personally benefit
from the partnerships, which prompted business
journalist Michael Miller6 to say that ‘Enron’s ethics
code reads like fiction’. In the absence of moral
leadership, Enron’s code and CSR policy became
a form of window dressing ethics (in other words,
Enron used ethical artefacts to disguise their rotten
corporate culture).
Not only did leadership set a bad example,
but their philosophy of ‘profit at all costs’ was
strengthened by the rewards or incentives structure
CHAPTER 8 Business ethics, corporate social responsibility and corporate governance
and their labour policies. As regards incentives,
top performing employees were rewarded
with extravagant bonuses such as luxury sports
cars, and executives routinely played favourites.
Those who did not perform adequately were
retrenched or redeployed. Employee reviews
took place in a public forum, and the bottom
performers were publicly humiliated by being
sent to the retrenchment/redeployment office,
which was dubbed ‘the office of shame’. Lay
and Skilling had a reputation for hiring only the
best and the brightest employees, who showed
a willingness to transgress rules, and who were
focused on greed and instantaneous gratification.
The reward, selection and dismissal processes at
Enron promoted greed, selfishness and jealousy
within the company.
When the crisis finally came to light, the
leaders’ values were clearly revealed. Instead
of admitting to the imminent downfall of the
company, executives denied problems, shifted
blame to others and fired scapegoats, and sold off
their Enron shares whilst encouraging employees
to continue investing in the company. Arthur
Anderson responded to the crisis by shredding
a significant number of Enron-related documents
that could implicate them. Enron and Arthur
Anderson therefore did not react to the crisis in
an ethically accountable manner, which further
contributed to the harm done to shareholders
and stakeholders.
Conclusion
The Enron case proves that, in the first instance,
business ethics is about being guided by a set of
values. At the media round-up on the significance
of Enron today, Andrew Wick7, academic advisor
for the Business Roundtable Institute for Corporate
Ethics, argued that although money and success
are important, corporate goals and norms should
be embedded in a larger values framework,
because without these values, it will only be a
matter of time before the company steers off
course. Business ethics artefacts such as codes
and CSR policies can support and reinforce a
company’s values, but at the end of the day, good
ethics is about good people making the decisions,
and not about well-written codes or CSR policies.
LEARNING OBJECTIVES
The purpose of this chapter is to provide an overview of ethics, corporate social responsibility and
governance. The objective of studying this chapter is to enable you to:
1. Describe the interplay between business ethics, corporate social responsibility and corporate
governance.
. DeƂne Oorality, ethics and business ethics at the hand of eZaOples.
. 'Zplain the three diOensions of ethical analysis relevant to business ethics.
. DeƂne the three Oost coOOon approaches to norOative ethics.
. DeƂne and Ootivate the case for the narrow and broad view of corporate social responsibility.
. Discuss conteOporary approaches to corporate social responsibility.
. %oOpare the statutory with the voluntary approach to corporate governance.
. DeƂne and discuss the three value diOensions that forO the basis for the -ing +++ 4eport.
CONTEMPORARY MANAGEMENT PRINCIPLES
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PART II: Management in a changing environment
LEARNING OBJECTIVE 1
8.1 THE COMPONENTS OF ETHICAL BUSINESS
Describe the interplay between
business ethics, corporate
social responsibility and
corporate governance.
Brian Moriarty, another director of the Business Roundtable Institute for
Corporate Ethics argues that:
‘Enron continues to be part of the conversation because it
demonstrated the broader impact of corporate malfeasance on
stakeholders beyond just investors… Fortunately, the opposite is
also true – corporate exemplary behaviour also has impacts beyond
just a strong stock price. Robust, strong and ethical corporations
– the majority of companies today – are the leading engines of
employment and economic support in the communities in which
they operate’8.
governance of ethics
concerns the management
of stakeholder relations and
of a corporation’s social
responsibilities
ethics of governance
concerns the development,
promotion and direction of an
organisation’s ethical culture
162
As is clear from the above citation, ethical business is currently viewed
as integral to achieving business success and fostering sustainable
business practices. A large part of ethical business practices concern
the management of stakeholder relations, where stakeholders are
defined as those groups who affect or are affected by the corporation’s
activities. Indeed, South Africa’s new Companies Act (Act 71 of 2008)
requires that state-owned and public businesses institute social and
ethics committees, in order to ensure that stakeholder and societal
interests are addressed. Deon Rossouw, executive director of the
Ethics Institute of South Africa (Ethics SA), stated in a media release that
this new legislation ‘is a welcome recognition of the fact that social and
ethical responsibility is integral to good governance – and ultimately
a lever of business success’9. However, Rossouw also argued that
the legislation falls short of the ideal, since the emphasis is solely on
business responsibility towards society, social transformation, and the
promotion of employees’ rights in the workplace. What is lacking is
a focus on the importance of ‘a strong, ingrained ethical foundation’,
which forms the basis of good corporate governance, defined as ‘the
system by which companies are directed and controlled’10. The King
Report on Governance for South Africa (King III) supplements this lack
in the Companies Act, and advocates a more comprehensive approach
to addressing business responsibilities, as is clear from principle 1.3,
which states that: ‘The board should ensure that the company’s ethics
are managed effectively’11. Rossouw advises ‘companies to look beyond
the letter of the law and to integrate the ethics management component
into the committee’s mandate, as proposed in King III’12. In other words,
Ethics SA advocates a holistic approach to business ethics management,
in which attention is given to managing both the company’s impact on
stakeholders and society (the governance of ethics13) and to the
development and promotion of an ethical organisational culture (the
ethics of governance14).
An important lesson gleaned from the Enron case is that a valuesdriven culture is essential for effective business ethics management.
Without such a culture, policies, programmes and ethics committees
are unlikely to be effective, especially since socially responsible decisions
often require moral judgements that fall beyond the scope of prescribed
laws and procedures. Indeed, in the worst case scenario, these business
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 8 Business ethics, corporate social responsibility and corporate governance
ethics tools may even be employed as a form of window-dressing
ethics, as was the case in Enron. However, when employed in a valuesdriven culture, legislation and ethical artefacts can help to strengthen
a company’s ethical culture, and can constitute an important source
of ethical guidance for employees. Therefore, effective corporate
governance is about using business ethics tools to support company
values, and to direct and control companies in a manner that promotes
an ethical culture, as well as compliance to legislation and best practices
in the responsible management of stakeholder and societal interests.
Sound governance practices also hold business benefits, and
McKinsey research cited in King II indicates:
‘that 84 per cent of global institutional investors would pay a
premium for the shares in a well governed company over one
considered poorly governed but with a comparable financial record.
This premium is highest in emerging markets or markets perceived
to have poor governance practices’15.
Good governance practices are therefore also good for business,
and in order to develop a grasp of what constitutes successful and
ethical business practices, it is important to explore the related themes
of business ethics and CSR in more detail, as well as to develop our
understanding of corporate governance systems.
corporate governance
entails directing and controlling
a company’s operations and
relationships in an effective and
ethical manner
8.2 BUSINESS ETHICS
LEARNING OBJECTIVE 2
8.2.1 Morality, ethics and business ethics
DeƂne Oorality, ethics and
business ethics at the hand of
eZaOples.
Morality refers to a person or group’s standards for determining right
and wrong, good and bad, and what deserves respect and what does
not, whereas ethics refers to the evaluation of these moral standards16.
In other words, ethics constitutes a type of meta-activity, in which we
try to analyse our moral beliefs objectively and critically, in order to
determine whether they are based on sound or unsound principles.
From birth onwards, we internalise moral principles through a process
of socialisation and enculturalisation. Legal, educational, religious and
familial institutions are thus important sources of morality. However,
since humans govern these institutions, they are vulnerable to human
failure and prejudice, and may reflect ethically unsound principles. For
example, during apartheid, the social institutions of the day reflected
unsound beliefs regarding the inferiority of certain races. Ethical scrutiny
is therefore vital, since beliefs that reflect unsound principles may cause
a lot of harm to others.
As with the definition of ethics, business ethics also concerns the
evaluation of the standards that we employ to distinguish between right
and wrong, good and bad, and what deserves respect and what does
not, but within the specific context of business operations17. Most, if not
all, business decisions have a moral dimension, and business ethics – as a
field of study – investigates this moral dimension of business operations.
Examples of typical themes in business ethics include the ethical issues
related to the manufacturing and marketing of products, financial
disclosure, employer-employee relations, stakeholder management,
business ethics
evaluation of the standards
that we employ to distinguish
between right and wrong, good
and bad, and what deserves
respect and what does not,
within the specific context of
business operations
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PART II: Management in a changing environment
LEARNING OBJECTIVE 3
'Zplain the three diOensions
of ethical analysis relevant to
business ethics.
LEARNING OBJECTIVE 4
DeƂne the three Oost coOOon
approaches to norOative
ethics.
externalities, loyalty and whistle-blowing. Although it is beyond our scope
to examine all these themes in detail, it is important to note that the
ethical issues arising from these themes are often quite complex. Issues
such as competing obligations to stakeholders, uncertain consequences
arising from business operations, and changing legal and governance
requirements can present a challenge to the ethical management of
companies. Moreover, managers are often not even aware of the ethical
dimensions of business decisions; since, as Trevino and Brown18 note:
‘Rarely do decisions come with waving red flags that say, “Hey, I am an
ethical issue. Think about me in moral terms!”’ In this regard, the study
of business ethics can help us to better identify, analyse and propose
solutions for the ethical challenges that we face in the everyday practice
of business, in order to ensure that companies are managed ethically.
There are three dimensions of ethical analysis that are especially
important areas of study in business ethics. These dimensions are the
normative dimension, which is focused on the normative foundations
and justifications for individual and group behaviour; the organisational
dimension, which is defined by the tacit and explicit norms and rules that
characterise a company’s culture, and that direct individual behaviour;
and the macro ethical dimension in which institutions that constrain and
shape our business practices are investigated. These three dimensions
are investigated in more detail below.
8.2.2 Normative ethical theories and moral decisionmaking
An important dimension of business ethics concerns the normative
foundation of, and justification for, our individual and group decisions. In
this regard, knowledge of influential normative ethical theories can
normative ethical theory
help us in our decision-making. These theories, which are introduced
defines and systematises the
in moral philosophy, define the principles that we should employ
principles that we employ when
when making moral judgements. Different normative ethical theories
making moral decisions and
prescribe different principles for morally correct action, but the three
judgements
most common approaches to normative ethics are consequentialism
(where the morality of an action is judged according to the positive
homo economicus model
long-term consequences that the action holds); deontology (where the
humans are rational beings who
morality of an action is judged according to the action’s adherence to a
seek to maximise both monetary
rule or set of rules); and virtue ethics (where the morality of an action is
and non-monetary utility
the outcome of the moral agent’s virtuous nature).
Enron’s executives and employees were guided
by egoism in their decisions and actions. Egoism is
a consequentialist approach, in which an action is
deemed morally right if it promotes the long-term
interests of an individual or organisational agent.
Enron’s philosophy of ‘profit at all costs’ shows that
they were only interested in enriching themselves,
even if it was at the expense of others. The irony,
however, is that in focusing solely on their own
164
CONTEMPORARY MANAGEMENT PRINCIPLES
interests, they eventually caused their own downfall.
Although egoism informs the homo economicus
model of human nature, as employed by Adam
Smith19 in his theory on the ‘invisible hand of the
market’ it is not, however, viewed as a theoretically
sound position. The reasons for this are that egoism
is not a reliable basis for distinguishing between right
and wrong because it does not limit self-interest, it
does not promote cooperation (since everyone only
CHAPTER 8 Business ethics, corporate social responsibility and corporate governance
acts in self-interest), and it ignores blatantly wrong
actions20. Although at times we are guided by selfinterest, human nature is complex, and altruism
(ie concern for the well-being of others) often
informs our judgements and decisions.
Normative
ethical
approaches
Consequentialism
Deontology
Virtue ethics
Morality =
consequences of
an action
Morality = action’s
adherence to a set
of rules
Morality = character
of a good person
Consequences
for whom?
Egoism
Utilitarianism
Altruism
Morality =
self-interest
Morality =
interests of
everyone involved
Morality =
interests of others
Figure 8.1: Normative ethical approaches
Although it is beyond the scope of this chapter to treat these three
approaches in any detail, it is important to note that that which is
deemed as ethically acceptable, is contingent on the specific normative
theory that one adheres to. In order to illustrate this point, consider the
example of a manager who has to decide whether to continue with a
multinational company’s operations in a corrupt context. She may decide
to base her decision on utilitarianism, which is also a consequentialist
approach. However, unlike egoism, the morally appropriate action
under utilitarianism is the one that holds the most positive long-term
consequences for the majority of people affected by a specific action.
Using utilitarianism, the manager may reason that the benefits arising
from the company’s passive compliance with a corrupt regime are
greater than the benefits that will result from ceasing operations, since
a number of primary stakeholders such as employees, suppliers and
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PART II: Management in a changing environment
consumers are directly dependent on the company for their livelihoods,
and will suffer greatly if the company closes office. Therefore, according
to utilitarianism, the moral course of action in this specific instance may
well be to continue with operations, even though the rights of a number
of people may be indirectly harmed by this decision.
In contrast, if the manager were to argue according to a deontological
approach – which informs human rights-based approaches to ethics
– continuing with operations would be deemed immoral. Passive
compliance with a corrupt regime contributes to the infringement of
citizens’ fundamental rights and freedoms (which, in the case of human
rights-based approaches, constitute the set of rules that should inform
moral action). Therefore, no matter how many good consequences
result from the company’s enduring operations, these operations can
never be morally justified from a deontological human rights-based
approach.
If the manager acted according to virtue ethics, she would have to
ask herself: ‘What would a good person do in this situation?’ There is
no one answer to this question, but a virtuous person would try to
determine the right grounds for a moral course of action. Such a person
could, for example, argue that one should try to reduce or prevent
harm to stakeholders, whilst campaigning for the fundamental rights
and freedoms of the country’s citizens. According to this argument, a
virtuous manager may recommend that the company continue with its
operations for the time being, but that the company should also use its
economic clout to pressurise government to act democratically.
The fact that competing normative ethical theories lead to conflicting
outcomes proves that, although useful in guiding our moral decisionmaking, these theories cannot dictate right action. In other words,
normative ethical theories should not be applied as moral recipes.
Rather, individual interpretation, judgement and evaluation should
always inform the decision-making process.
8.2.3 Contextual and systemic influences
organisational culture
the tacit and explicit
organisational norms and rules
that direct individual behaviour
166
Moral standards (and the ethical evaluation of these standards) pertain
to the beliefs held by individuals or groups of individuals; however, the
contexts in which decisions are enacted also affect our perceptions of
appropriate or inappropriate behaviour. We tend to reserve ethical
judgement for individual or group decisions, and although this is an
important task, both the internal and external operating environments
should also be subjected to ethical scrutiny.
With regard to the internal operating environment, organisational
goals, incentive structures and the behavioural example of leaders
contribute to the tacit and explicit norms and rules that define
organisational culture, which in turn directs individual behaviour.
As is clear from the Enron case, these contextual factors are critical in
determining what is viewed as appropriate behaviour within a particular
organisational setting. Corporate goals (such as profitability) are often
not moral in nature and may even be immoral (as was the case with
Enron’s ‘profit-at-all-costs’ orientation). Moreover, organisational
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 8 Business ethics, corporate social responsibility and corporate governance
members are encouraged to conform to these goals and norms, and
many organisations do not promote critical thought, or may even punish
those who speak out against morally dubious organisational practices.
(For example, Enron’s whistle-blower, Sherron Watkins, stated that
she was not comfortable confronting Skilling or Lay with her concerns,
as she believed that ‘[t]o do so… would have been a job-terminating
move’21.) In such contexts specifically, ethical scrutiny is essential, since
without a critical attitude we risk being complicit in unethical, and even
illegal, corporate actions.
With regard to the external operating environment, macroinstitutions determine the appropriate ‘rules of the game’ that direct
business activities. These rules change over time, and are themselves
subject to ethical scrutiny. This task falls under the domain of macroethics which is defined as the study and evaluation of the social,
economic, political, environmental and cultural systems (and the
interrelations between these systems), which enable and constrain
business activities, and which shape our practices. In order to illustrate
the importance of macro-ethical analyses, consider the example of the
2008 financial crisis. Although greedy individuals certainly carry some
blame, the crisis is largely attributed to unsound economic policies and
loose regulations.
When asked about the similarities between Enron and the financial
crisis, Andrew Wick22 responds that in both instances we see ‘systemic
failures [and] lots of stakeholders and firms that participated or turned
a blind eye’. He however argues that one of the big differences between
Enron and the market participants who contributed to the financial crisis
is that ‘these [Enron] folk knew what they were doing’. In contrast,
‘some firms that contributed to the financial crisis had no idea what they
were doing or the risks they were taking – whether from ignorance,
hubris, or failure to understand a highly complex system (or all three)’.
The complexities that business managers face today are greater
than ever before, and often it is difficult to know what the responsible
course of action is. However, at the very least, business (especially big
business), should recognise that, because they wield immense economic
influence, they have to take responsibility for the influence that they
exert on the external operating environment. Turning a blind eye and
pleading ignorance cannot serve as an excuse. In this regard, one could
argue that market players are also responsible for the financial crisis to
the degree that they defined systemic risk outside of their sphere of
influence and responsibility, and uncritically enforced unsound policies
and regulations.
From the above, it should be clear that business ethics involves three
levels or dimensions of ethical evaluation, namely an analysis of individual
or group decisions and actions, an analysis of the tacit and explicit rules
and norms that constitutes a company’s culture, and an analysis of the
institutions that define the rules of the game in which business operates.
All three dimensions are crucial for understanding the nature of business
decisions and actions, since these decisions and actions are the outcome
of individual, group, cultural and systemic considerations.
macro-ethics
the study and evaluation of
the social, economic, political,
environmental and cultural
systems (and the interrelations
between these systems), which
enable and constrain business
activities, and which shape our
practices
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PART II: Management in a changing environment
LEARNING OBJECTIVE 5
8.3 CORPORATE SOCIAL RESPONSIBILITY
DeƂne and motivate the case
for the narrow and broad
view of corporate social
responsibility.
Ethical business is constituted by a solid values-based foundation (which,
as gleaned from the above, is influenced by individual, contextual and
systemic factors), and by the effective and ethical management of
corporate responsibilities to stakeholders and society. In this section, we
shall investigate the scope of business responsibilities, as well as explore
contemporary approaches to managing CSR.
8.3.1 The narrow view of CSR
In the narrowest sense, a corporation’s responsibilities are limited to
making profits for its shareholders. The conservative economist, Milton
Friedman, is the main advocate of this view of CSR, and he gives a
detailed defence of his position in his book entitled, Capitalism and
Freedom (1962). Herein, Friedman argues that:
‘There is one and only one social responsibility of business – to use
its resources and engage in activities designed to increase its profits
as long as it stays with the rules of the game, which is to say, engage
in open and free competition, without deception or fraud’23.
Friedman gives an economic, rather than a moral, justification for the
‘rules of the game’. Without adherence to elementary moral rules to
rule out deception, force or fraud, the market cannot function properly,
which, in turn, diminishes the efficiency of the economic system.
Anything that interferes with the market mechanism should therefore
be prohibited, and for Friedman this includes the acceptance of more
social responsibilities by business. In this regard, Friedman explicitly
argues that:
‘Few trends could so thoroughly undermine the very foundations
of our free society as the acceptance by corporate officials of a
social responsibility other than to make as much money for their
stockholders as possible’24.
promissory relation
the agreement that executives
will act in the economic interest
of shareholders
168
Apart from hampering the market mechanism, Friedman also argues that
if corporate executives were to accept more social responsibilities, they
would, in effect, violate the promissory relation. According to Friedman,
this promissory relation exists between executives (or managers)
and shareholders (or owners) and amounts to the agreement that
executives will act in the economic interests of shareholders. Extending
CSR obligations diverts business from its proper goal (i.e. making profits
for shareholders) and, in effect, turns business into an arm of the state
(because business is now fulfilling government’s duties). Not only does
CSR undermine business, but Friedman also argues that it is unethical.
This is because, in accepting social responsibilities and using shareholder
money to achieve these social objectives, executives effectively impose
a ‘tax’ on shareholders. However, unlike government officials, executives
are not democratically elected, and therefore do not have the right to
make decisions regarding the allocation of funds for social objectives.
Although Friedman’s argument is still considered significant,
many shareholders today believe that sound ethical practices and the
responsible management of stakeholders is good for business, and thus
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 8 Business ethics, corporate social responsibility and corporate governance
view an extended notion of CSR as consistent with their long-term
interests. Furthermore, the diversification of corporate equity holding
patterns resulted in a shift in the meaning of shareholder interests, and
today it is widely believed to be in the interest of shareholders to spread
social expenditure across companies25. Apart from the potential gains
that may arise from good CSR practices and the changing nature of
shareholding patterns, many would argue that business also has a moral
duty to accept a broader view of CSR.
8.3.2 The broad view of CSR
The proponents of the broad view of CSR argue that, at the very least,
business has a negative duty to refrain from harming society. Business
transactions often result in externalities, which are the unintended
positive or negative consequences that an economic transaction
between two parties can have on a third party26. An example of a
negative externality is industrial pollution, since often communities have
to bear the costs of pollution, but are not a recognised party in the
transaction between consumers and the polluting company. In such a
situation, fairness demands that the responsible business or industry
either absorbs the costs (by, for example, installing filters to lessen the
pollution) or compensates the community for damages. The problem
of negative externalities therefore constitutes the first good reason
for extending the scope of CSR beyond profit making. However, many
feel that CSR should be even further extended to also include positive
duties, understood as business’ responsibilities to actively and directly
contribute to the welfare of society, either through core business or
through philanthropic activities.
A second argument for extending our view of CSR can be made
with reference to the social contract. The social contract expresses
the implicit relation between business and society, whereby society
grants business the ‘licence to operate’ through public consent, in the
expectation that business will address certain societal needs. Thomas
Donaldson27 explains the motivation behind the social contract as
follows:
‘Corporations considered as productive organizations exist
to enhance the welfare of society through the satisfaction of
consumer and worker interests, in a way which relies on exploiting
corporations’ special advantages and minimizing disadvantages.’
social contract
the implicit agreement whereby
society grants business the
‘licence to operate’ through
public consent, in the
expectation that business will
address certain societal needs
The exact content of the social contract is contingent on the specific
context in which businesses operate. Whereas in Friedman’s day,
economic returns and sound business practices might have constituted
the main terms of the social contract, Melvin Anschen28 already noted
in 1970 that soon ‘it will no longer be acceptable for corporations to
manage their affairs solely in terms of the traditional internal cost of
doing business, while thrusting external costs on the public.’
A third justification for the broader view of CSR concerns
businesses’ economic influence. Keith Davis29, a contemporary of
Anschen, argued in 1975 that businesses’ social responsibility arises from
social power. Today, business (especially big multinational companies)
CONTEMPORARY MANAGEMENT PRINCIPLES
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PART II: Management in a changing environment
stakeholder theory
a theory of the moral
management of organisational
stakeholders
wields enormous socio-economic power, and the influence that these
companies have in the world should not be underestimated. Indeed, in
many cases, the annual revenue of multinational corporations exceeds
the gross domestic product (GDP) of a number of countries. For
example, for the fiscal year 2010, Wal-Mart30 reported revenue of $421
849 billion, Exxon Mobil’s31 revenue was $370 125 billion, and Royal
Dutch Shell’s32 revenue was $368 056 billion. In contrast, South Africa’s
GDP for the year 2010 was $525 806 billion, and according to the
International Monetary Fund (IMF)33, South Africa ranks as the world’s
25th largest economy. From the IMF’s list of the 183 economies, 155
reported a lower 2010 GDP than Wal-Mart’s 2010 revenue. This fact
alone serves as a strong justification for the broader view of CSR, since
corporations cannot ignore the effects that they have on society, nor the
responsibilities that they have towards society.
A fourth justification for extending CSR concerns businesses’
responsibility towards stakeholders. Stakeholder theory is viewed as an
important way in which to flesh out and materialise the broad notion
of CSR. Narrowly defined, stakeholders constitute those groups that
are vital to the success and the survival of the organisation and include
employees, managers, suppliers, consumers and shareholders; whereas
in broad terms, stakeholders are defined as any group who affects or is
affected by the organisation and can include the government, society and
competitors. The father of stakeholder theory, Edward Freeman, argues
that the goal of business is to create value for its stakeholders, and that,
in order to do so, one should integrate ‘business and ethics within a
complex set of stakeholder relationships rather than treating ethics as
a side constraint on making profits’34. The challenge in stakeholder
theory is to manage conflicting claims and minimise trade-offs between
stakeholders. This will only be possible if companies recognise that
they have a responsibility towards stakeholders, and not only towards
shareholders. Indeed, Freeman argues that strengthening business
relations with stakeholders is essential for restoring the public’s trust in
business, and in this regard, he states that:
‘We need to focus on the value that businesses create for its
customers, suppliers, employees, communities, and its financiers.
Government needs to lift up examples of companies like Whole
Foods, Google, and others who have put value creation for
stakeholders ahead of a narrow view of profits. Great companies
have great purposes, and we need to realize that and demand it of
our business’35.
The harm inflicted on both shareholders and other stakeholders by
unethical practices, and the collapse of big companies such as Enron, is
proof of the importance of good CSR practices. Companies must realise
that they not only have a fiduciary duty towards their shareholders, but
that their operations often have a profound impact on society. Business
should not be viewed in isolation from the environments in which they
are embedded. We are all interconnected in numerous and complex
ways and responsible business demands that we look beyond our own
interests and try to account for the nature, and degree, to which our
business practices affect others.
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CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 8 Business ethics, corporate social responsibility and corporate governance
NARROW VIEW
BROADER VIEW
Advocate: Keith
Davis; Melvin
Anschen; Thomas
Donaldson; Edward
Freeman
,ustiƂcation: Social
contract (Anschen;
Donaldson) Social
power (Davis)
Stakeholder value
creation (Freeman)
Stakeholders:
Owners, managers,
employees,
customers, suppliers,
communities,
environment
CSR paradigm:
Stakeholder model
Advocate: Milton
Friedman
CSR
POSITIVE
RESPONSIBILITIES
NEGATIVE
RESPONSIBILITIES
,ustiƂcation:
Promissory relation
Shareholder value
creation
Stakeholders:
Owners, managers
CSR paradigm:
Shareholder model
PROFIT
nFirst do no harmo
eZternalities
Actively contributing to
the common good
Figure 8.2: Corporate social responsibility – two views
8.3.3 Approaches to CSR36
Not only are there different views regarding the scope of, and justification
for, CSR, but differences also prevail with regard to how CSR should be
operationalised, especially when CSR obligations are extended beyond
the profit motive. Since first being coined in 1953, the concept of CSR
has gradually converged with corporate performance, and, as MingDong Paul Lee notes, this trend has worked in both directions:
‘On the one hand, the concept of CSR has expanded to envelop
both economic and social interests on macro-political as well as
organizational levels. On the other hand, the concept of corporate
performance also broadened to cover economic as well as social
interests on institutional as well as organizational levels’37.
LEARNING OBJECTIVE 6
Discuss contemporary
approaches to corporate social
responsibility.
The effects of this trend are particularly evident in terms of the content
of CSR practices. Whereas in the past, corporate philanthropy was
most often associated with good CSR practices, today core business
or competencies are increasingly being harnessed for developmental
impact. This shift signifies a greater integration of CSR with business
practices. In the voluntarism-model, core business continues to deliver
shareholder value, whereas philanthropy or isolated CSR-practices
deliver stakeholder value. In the core-business model, companies seek
to deliver both shareholder and stakeholder value through corporate
activities.
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PART II: Management in a changing environment
Caroline Ashley38 notes that initiatives to adapt core business for
developmental impact have only started developing in the last ten years,
and include concepts such as ‘Bottom of the Pyramid’ (BOP) (where
companies market and develop products for billions of poor consumers,
in order to make profits whilst reducing poverty); ‘Creative Capitalism’
(which was coined by Bill Gates, and which refers to capitalism that works
by generating profits whilst solving social inequalities); ‘Social Business’
(in which profitable business reinvests in companies that seek to help the
poor); ‘Ethical Trade’ (which is concerned with decent labour standards);
and, ‘Inclusive Business’ (which has fewer ethical connotations than CSR
and embraces wider concepts, such as marketing for the poor).
In Kenya, UK tour operator involvement
helped secure government backing for
an initiative to secure fair returns for
Masai villagers
Standard Chartered Bank’s professional staff
contribute their time to community programmes
Staff and
expertise
A Sri Lanka beer company used
its plant to produce clean water for
Oxfam to distribute after the
tsunami
Physical
resources
Core
competencies
Google Earth uses its cutting
edge technology to help
Amazonian Indians monitor
and convey forest destruction
Convening
power
Virgin supports
entrepreneurial
incubation in
South
Africa,
Entrepreneurial
aiming to
talent
share
its own
expertise
Technology
Distribution
networks
Access to
consumers
British Airways has raised £25 million for UNICEF since
1994 by providing customers with opportunities to
donate currency
Mexico’s
largest banking
company delivers its
products to retailers
accompanied by microcredit loan advisors who make a
presentation to retailers while the
driver unloads the products
Figure 8.3: Harnessing core competencies
Source: Ashley, C. 2009. Harnessing core business for development impact, background note,
Overseas Development Institute (ODI), February 2009.
Ashley39 argues that the core business approach extends traditional
CSR practices, but also excludes certain traditional CSR elements,
and therefore overlaps, but is not synonymous with, what is generally
considered as CSR. The main argument for the core business approach
is that, unlike certain CSR practices, it is not an add-on but integral to
business. In addition, although traditional CSR practices are often only
associated with the fulfilment of negative duties, the core business
approach moves beyond problem mitigation to embrace and develop
opportunities for the previously excluded. In practice, however, Ashley
172
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 8 Business ethics, corporate social responsibility and corporate governance
argues that the clear distinction between CSR and the core business
approach is problematised, in that this approach often incorporates
standards of responsible business practices, which are key to CSR; the
core business approach is viewed as one type of CSR practice; and, to
initiate projects related to core business often requires the expertise of
staff in the CSR department, who have experience with developmental
projects beyond mere operational deliverables. In the future, we are
likely to see an increasing emphasis on the core business approach as a
means for companies to meet their CSR obligations.
8.4 CORPORATE GOVERNANCE
Combining sound business ethics practices (the ethics of governance)
with the effective management of CSR obligations (the governance
of ethics) is, as stated in Section 8.1, indicative of good corporate
governance practices. It is argued that ‘[c]orporate governance provides
the basis to protect shareholders, to treat stakeholders fairly, and ensure
transparency and accountability for managers’40. According to the World
Bank41, corporate governance should be based on four pillars, namely
responsibility, accountability, fairness and transparency (the ‘RAFT’
values). How these values are promoted in practice is contingent on
the specific governance framework that is adhered to. Broadly-speaking,
there are two approaches for formalising good governance, namely the
statutory and voluntary approaches to corporate governance.
‘Good corporate governance increases the integrity
and effectiveness of the private sector and helps
markets to operate more effectively. This matters for
many reasons, including:
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8.4.1 The statutory approach to corporate
governance
LEARNING OBJECTIVE 7
One of the most significant developments following from the Enron
case and other similar cases of corporate accounting fraud at the time
was the passing of the Sarbanes-Oxley Act of 2002 (SOX), which
is the United States’ corporate governance report. Ira Millstein, a
prominent figure in the corporate governance debate, argues that
SOX constitutes an attempt to institutionalise best practice through
legislation. In Millstein’s43 words: ‘Sarbanes-Oxley simply turned
what you should do into what you must do’. Millstein further argues
Compare the statutory with
the voluntary approach to
corporate governance.
CONTEMPORARY MANAGEMENT PRINCIPLES
173
PART II: Management in a changing environment
comply or else model
the legislative approach to
corporate governance, in which
compliance with requirements is
a prerequisite
that SOX reversed the paradigm of lax governance by placing ‘total
responsibility for good corporate behaviour and good fiscal reporting
back with the board of directors’. This is because SOX requires that
chief executives and chief financial officers personally sign off on their
companies’ financial statements.
The statutory approach, which is sometimes referred to as the
comply or else model, is a quantitative box-ticking approach to
corporate governance, and complying with the requirements is a
prerequisite. This model has been criticised for being too draconian, and
has been likened to ‘using a sledgehammer to kill an ant’44. Furthermore,
complying with Sarbanes-Oxley can be a very time-consuming and
costly exercise, and many companies have shifted their listings to more
relaxed jurisdictions. It is stated in the King III Report that ‘[t]he total
cost to the American economy of complying with SOX is considered
to amount to more than the total write-off of Enron, WorldCom
and Tyco combined’45. Nonetheless, many are of the opinion that
strict regulations are essential for restoring public trust and promoting
responsible business. Journalist Jesse Eisinger46 argues that SOX has led
to a decrease in the size and number of accounting scandals, and to an
improvement in the oversight of the accounting industry.
In the United States, the trend to legislate governance is on the
increase and in July 2010 the Dodd-Frank Wallstreet Reform and
Consumer Protection Act was enacted. This law – which aims to
regulate the financial industry, break up companies that are ‘too big
to fail’, and strengthen whistle-blower protection47 – is described by
Eisinger as ‘more sweeping, more pilloried and more complicated’ than
SOX. Whereas many feel that such an act is necessary to prevent a crisis
similar to that of 2008, others say that the act is far too draconian.
8.4.2 The voluntary approach to corporate
governance
In contrast to the statutory approach, the voluntary approach is
followed in both the United Kingdom and South Africa. The voluntary
approach is a qualitative, principle-based approach, which means that
good governance practices are recommended, but companies can
choose whether to comply with the principles or not. Judge Mervin King,
chairman of the committee responsible for South Africa’s King Report
on Governance for South Africa (King III), argues that a principle-based
approach to corporate governance is superior to a rule-based approach
because it promotes intellectual honesty. In this regard, he states that:
‘[y]ou can have all the bloody rules in the world, but you cannot
legislate honesty. And, I’ll tell you, as a corporate lawyer, I’ve found
it’s much easier to get around a rule than a principle’48.
According to the voluntary model, a company has a choice to comply
with the governance recommendation or principles. If the company
chooses not to comply, the board must motivate their decision to
shareholders. As stated in the UK Corporate Governance Code of
201049, companies must explain why ‘they believe that their existing
174
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 8 Business ethics, corporate social responsibility and corporate governance
arrangements ensure proper accountability and underpin board
effectiveness.’ For this reason, the voluntary approach is often referred
to as the comply or explain approach. The King I and King II
Reports were based on the ‘comply or explain’ approach, but the ‘apply
or explain’ approach is followed in the King III Report. This approach,
which was also adopted in the Netherlands Code, is motivated in the
King III Report as follows:
‘The ‘comply or explain’ approach could denote a mindless response
to the King Code and its recommendations whereas the ‘apply or
explain’ regime shows an appreciation for the fact that it is often
not a case of whether to comply or not, but rather to consider how
the principles and recommendations can be applied’50.
comply or explain approach
a voluntary approach to
corporate governance, in which
directors can choose whether to
comply with the principles and
guidelines that are advocated,
as long as their explanation for
non-compliance meets with
shareholder approval
The apply or explain approach thus better encapsulates the principlebased approach (which, as stated above, is based on intellectual honesty)
and signifies a shift from mindless compliance to mindful application. This
approach to corporate governance is similar to the ‘comply or explain’
model, but it demands a more serious engagement with, and application
of, the recommended principles and guidelines.
The voluntary approach, however, has also been criticised, because –
although it aims to promote intellectual honesty – it cannot guarantee
ethical behaviour. Furthermore, because corporate governance is not
legislated, the prosecution rate under this model is also low. In South
Africa, the Companies Act legislates many of the recommendations made
in the King III Report (especially as concerns the duties and responsibilities
of directors). Although critics argue that the Companies Act makes
the King III Report redundant, a more fruitful approach is to view the
King III Report as ‘a valuable guide to directors and other office bearers
to ensure compliance with the provisions of the Companies Act’51.
Regardless of whether one supports a statutory or voluntary
approach to corporate governance, it is important to remember that
good governance is about sound business practices. Charles Elson,
another expert in the field of corporate governance, summarises this
point as follows: ‘Good governance isn’t really innovative – it’s just going
back to basics. It’s going back to the fact that the key to business is that
operations drive accounting, not the other way round’52.
apply or explain approach
8.5 THE KING REPORT ON GOVERNANCE FOR
SOUTH AFRICA
LEARNING OBJECTIVE 8
The King III Report (henceforth referred to as the Report), became
effective on 1 March 2010. The Report (which is accompanied by a
comprehensive Code) applies to ‘entities incorporated in and resident
in South Africa’53, and spells out the framework for governance
compliance. In the introduction to the Report, it is stated that ‘[t]he
philosophy of the Report revolves around leadership, sustainability and
corporate citizenship’54, and in this final section, these value dimensions
of the Report will be briefly investigated.
a voluntary approach to
corporate governance, which is
similar to the ‘comply or explain’
model, but which demands
a more serious engagement
with, and application of, the
recommended principles and
guidelines
DeƂne and discuss the three
value dimensions that form the
basis for the King III 4eport.
CONTEMPORARY MANAGEMENT PRINCIPLES
175
PART II: Management in a changing environment
8.5.1 Corporate citizenship
According to Malcolm McIntosh55, an international figure working in the
field of corporate citizenship, the term ‘corporate citizenship’ implies
a concern for the social, environmental and economic performance
of companies; and a concern for the role, scope and purpose of
companies. In the Report, it is explicitly stated that responsible
corporate citizenship
corporate citizenship involves ‘social, environmental and economic
issues’56 (the so-called ‘people, planet and profit’ issues). Companies
a concern for the social,
are accordingly encouraged to report on all three these dimensions,
environmental and economic
performance of companies; and and not only on their financial bottom-line. Corporate citizenship also
necessitates that companies acknowledge, and take responsibility for,
a concern for the role, scope
their status and role in society. In the Report it is stated that the concept
and purpose of companies
of corporate citizenship ‘flows from the fact that the company is a
person and should operate in a sustainable manner’57. Companies are
defined as ‘social entities with both rights and responsibilities, and as
such, the Bill of Rights applies to them in a manner that goes beyond
mere financial considerations’58. The Report therefore endorses a view
of companies as both legal and moral entities; and, in this regard, it is
argued that companies have ‘social and moral standing in societies, with
all the responsibilities attached to that status’59; and, that ‘[r]esponsible
corporate citizenship implies an ethical relationship between the
company and the society in which it operates’60.
The argument put forward in the Report in support of treating
companies as responsible corporate citizens seems to be that, because
companies are powerful public actors, they have a responsibility to
respect the rights of natural citizens in society61. In practice, corporate
citizenship therefore operates as a synonym for CSR. How these
responsibilities are enacted is dependent on the unique operating
context; which, as stated in the Report, means that ‘[t]here is no
uniform or universally applicable approach to responsible citizenship
programmes… each company should develop its own policies to define
and guide its activities’62.
The Report places responsibility for the ethical and effective
governance of the company on the board of directors, and it is explicitly
stated that ‘[t]he board should ensure that the company is and is seen
to be a responsible corporate citizen’63. In order to achieve this end,
the board has two over-arching responsibilities: ‘first it is responsible
for determining the company’s strategic direction (and, consequently, its
ultimate performance); and second, it is responsible for the control of
the company’64.
8.5.2 Ethical leadership
ethical leadership
directing and controlling
a company in a way that
promotes good corporate
governance
176
In order for the board to exercise its responsibilities successfully and
ensure that the company is a good corporate citizen, strong ethical
leadership is needed. Ethical leadership is where a company is directed
and controlled in a way that promotes good corporate governance. As
stated in the Report: ‘Good corporate governance is essentially about
effective, responsible leadership’65. According to the Report66, this
involves building sustainable business; reflecting on the role of business
in society; doing business ethically (which also implies valuing personal
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 8 Business ethics, corporate social responsibility and corporate governance
and institutional ethical fitness, and practising corporate statesmanship);
not compromising the natural environment or intergenerational welfare;
and, embracing a shared future with all the company’s stakeholders.
As advocated in the Report, the board should accept the following
additional responsibilities, in order to achieve the above-mentioned
goals67:
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company’s stakeholders in the board’s deliberations, decisions and
actions.
Board members should set the example for ethical conduct in an
organisation, but are also responsible for promoting an ethical
organisational culture and looking after stakeholder interests. As such,
boards play an important leadership role.
8.5.3 Sustainability
In the Report, it is stated that ‘[a] key challenge for leadership is to
make sustainability issues mainstream. Strategy, risk, performance
and sustainability have become inseparable’68. Sustainability issues are
presently at the forefront of the global agenda, and the significance of
sustainable action is described in the Report as follows:
‘Sustainability is the primary moral and economic imperative of
the 21st century. It is one of the most important sources of both
opportunities and risks for business. Nature, society, and business
are interconnected in complex ways that should be understood by
decision-makers. Most importantly, current incremental changes
towards sustainability are not sufficient – we need a fundamental shift
in the way companies and directors act and organise themselves’69.
sustainability
the long-term maintenance
of systems according to
environmental, economic and
social considerations
At a very basic level, sustainability is concerned with systems maintenance,
which means that our actions should not impact on a system in ways that
threaten its long-term viability. In other words, sustainability shows a
concern for intergenerational equity, in that present actions should not
hamper the ability of future generations to satisfy their needs. Although
the term has its roots in environmental management and analysis,
the sustainability concept has been extended to include social and
economic aspects. The reason for this is that it is impossible to consider
environmental sustainability ‘without also considering the relevant
communities and their activities’70. Another reason for the extension
of the term is that, if sustainability implies a concern for the equity of
future generations, then, logically, it should also imply a concern for
current generations. In taking the above into consideration, Andrew
CONTEMPORARY MANAGEMENT PRINCIPLES
177
PART II: Management in a changing environment
Crane and Dirk Matten71 offer the following definition of sustainability:
‘Sustainability refers to the long-term maintenance of systems according
to environmental, economic and social considerations.’
Environmental sustainability concerns ‘the effective management of
physical resources so that they are conserved for the future’72. Biosystems
and natural resources are finite, and are negatively impacted by a number
of human activities, including industrialisation, the continued use of nonrenewable resources, and the use of damaging environmental pollutants.
Not only do these activities threaten the sustainability of biosystems,
but they also pose a threat for economic sustainability. In South Africa
specifically, environmentally-sustainable operations have become
imperative. In this regard, the former Minister of Environmental Affairs
and Tourism in South Africa, Martinus van Schalkwyk, is referenced in
the Report as stating that ‘if South Africa continued with business as
usual, greenhouse gas emissions would quadruple by 2050 and, in the
process, South Africa would become an international pariah’73.
As explained by Crane and Matten74, economic sustainability ‘initially
emerged from economic growth models that assessed the limits
imposed by the carrying capacity of the earth’. This led to a focus on the
impact that our activities have on future generations, and an attempt to
mitigate this impact. In terms of business ethics, economic sustainability
can be narrowly interpreted as a concern for the long-term economic
performance of a company, or more broadly interpreted as a ‘company’s
attitude towards and impact upon the economic framework in which it is
embedded’75. This broader view of economic sustainability is supported
in the Report, and is underscored by the focus on both corporate
citizenship and integrated reporting (in which market capitalisation is
defined in terms of a company’s economic, as opposed to book, value)76.
The youngest, but arguably most influential, sustainability
development is social sustainability. The debate on social sustainability
– which gained prominence in the 1990s – ‘marked a significant shift in
the way that notions of sustainability were conceptualized’77. According
to Crane and Matten78, the key issue in this debate is social justice,
particularly the implications for justice resulting from income disparities,
the gap between richer and poorer countries, and the under-provision
and deterioration of basic services in many countries across the world.
In South Africa particularly, social transformation remains imperative to
achieving social sustainability, and in the Report it is specifically argued
that ‘[s]ocial transformation and redress from apartheid… should be
integrated within the broader transition to sustainability… in a strategic
and coherent manner [which] will give rise to greater opportunities,
efficiencies, and benefits, for both the company and society’79.
It is also argued in the Report that the ‘[i]nclusivity of stakeholders
is essential to achieving sustainability and the legitimate interests and
expectations of stakeholders must be taken into account in decisionmaking and strategy’80. In this regard, it is interesting to note that mention
is made in the Report of the unique African philosophy of Ubuntu, as
a way of respecting the fundamental dignity and rights of stakeholders.
Ubuntu, which is captured in the expression ‘uMuntu ngumuntu
178
CONTEMPORARY MANAGEMENT PRINCIPLES
Copyright © 2014. Juta and Company. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S.
or applicable copyright law.
Chapter 8 Business ethics, corporate social responsibility and corporate governance
ngabantu’, ‘I am because you are; you are because we are’, promotes
‘mutual support and respect, interdependence, unity, collective work
and responsibility’81, and can become an important framework for
promoting corporate citizenship and sustainability in South Africa.
Apart from focusing on corporate citizenship, ethical leadership,
sustainability, stakeholder governance and integrated reporting, the King
III Report also describes the board’s responsibilities in terms of internal
audits and audit committees, risk governance, information technology
governance, and compliance. As previously mentioned, the Report is
an important supplement to the Companies Act, and a useful guide for
Directors to ensure compliance with the Companies Act.
CHAPTER SUMMARY
1. Describe the interplay between business ethics, CSR and corporate governance.
• CSR pertains to the responsible management of stakeholder and societal interests, whereas
business ethics concerns the institutionalisation of a values-driven corporate culture.
• Corporate governance combines CSR management (the governance of ethics) and business
ethics management (the ethics of governance), in order to promote the ethical and effective
direction and control of a company’s operations and relationships.
2. Define morality, ethics and business ethics at the hand of examples.
• Morality refers to a person’s or group’s standards pertaining to right and wrong, good and
bad, and what deserves respect and what does not (for example, it is commonly believed that
it is morally wrong to lie).
• Ethics refers to an evaluation of moral standards (for example, apartheid beliefs pertaining to
the superiority of one race over another are unsound and therefore ethically wrong).
• Business ethics refers to the evaluation of moral standards in the context of business
operations (for example, a business ethical issue concerns the degree of loyalty that one
should have towards your company).
3. Explain the three dimensions of ethical analysis relevant to business ethics.
• The first dimension concerns the normative foundation of, and justification for, individual and
group decisions.
• The second dimension concerns the tacit and explicit norms and rules that define a company’s
culture, and that direct individual behaviour.
• The third dimension concerns the social, economic, political, environmental and cultural
systems, which enable and constrain business activities, and which shape our practices.
4. Define the three most common approaches to normative ethics.
• According to consequentialism, the morality of an action is either judged according to the
positive long-term consequences that an action holds for oneself (egoism) or for everyone
affected by the situation (utilitarianism).
• According to deontology, the morality of an action is judged according to the action’s
adherence to a set of rules, for example a list of commonly accepted human rights.
Contemporary management prinCiples
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179
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or applicable copyright law.
Part II: Management in a changing environment
• According to virtue ethics, the morality of an action is the outcome of the moral agent’s
virtuous nature.
5. Define and motivate the case for the narrow and broad view of corporate social
responsibility.
• The narrow view of CSR states that the only responsibility of business is to make profit, as
long as it stays within the rules of the game.
• The narrow view is justified on the basis of the superiority of an unrestricted market, the nature
of the promissory relation, and the proper separation and legitimisation of government and
business responsibilities.
• The broad view of CSR states that business has both a negative duty to refrain from harming
society, and a positive duty to contribute actively to the welfare of society.
• The broad view is justified on the basis of the costs of negative externalities, the social
contract (which exists between business and society), the size and power of business, and
the importance of managing stakeholder relationships.
6. Discuss contemporary approaches to corporate social responsibility.
Whereas philanthropic activities characterise traditional CSR, the core business approach
(which links corporate performance and social interests) is gaining traction. Examples of this
approach include bottom of the pyramid, creative capitalism, social business, ethical trade and
inclusive business.
7. Compare the statutory with the voluntary approach to corporate governance.
• The statutory approach to corporate governance is quantitative and rule-based, and complying
with requirements is a prerequisite. An example of this approach, which is also referred to as
the ‘comply or else’ model, is the Sarbanes-Oxley Act of 2002.
• The voluntary approach to corporate governance is qualitative and principle-based. Directors
can choose whether to implement the principles or not, and if they decide not to, they must
motivate their reasons to the shareholders. This approach characterises both the ‘comply or
explain’ model (adopted in the UK Corporate Governance Code of 2010) and the ‘apply or
explain’ model (adopted in the King III Report and the Netherlands Code).
8. Define and discuss the three value dimensions that form the basis for the King III Report.
• The three dimensions are corporate citizenship, ethical leadership and sustainability.
• Corporate citizenship is a concept that draws attention to the social, economic and
environmental performance of companies; as well as to the role, scope and purpose of
companies. The term is often used synonymously with CSR.
• The King III Report advocates triple-bottom line reporting, and argues that companies have
responsibilities beyond financial considerations. According to the King III Report, companies
have moral and social standing in societies, and the board is responsible for ensuring that the
company acts as a responsible corporate citizen.
• Ethical leadership has to do with directing and controlling a company in a way that promotes
good corporate governance.
• The King III Report lists the board’s additional responsibilities as cultivating an ethical culture,
ensuring that the company operates with integrity, ensuring that leaders’ and managers’
conduct are aligned with company values, and considering stakeholders in decisions and
actions.
180
Contemporary management prinCiples
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or applicable copyright law.
Chapter 8 Business ethics, corporate social responsibility and corporate governance
• Sustainability refers to the long-term maintenance of systems according to environmental,
economic and social considerations.
• In the King III Report, sustainability is defined as the moral and economic imperative of the
twenty-first century. The Report emphasises the importance of environmental sustainability
(which, in South Africa, is threatened by high levels of greenhouse gas emissions); economic
sustainability (which, according to the King III Report, means that market capitalisation
should be defined in terms of a company’s economic, as opposed to book, value); and,
social sustainability (which, according to the King III Report, means addressing stakeholder
issues and issues pertaining to social transformation).
KEY TERMS
apply or explain model
business ethics
Companies Act
comply or else model
comply or explain model
consequentialism
core business for developmental impact
corporate citizenship
corporate governance
corporate social responsibility (CSR)
deontology
Dodd-Frank Act
Enron
ethical leadership
ethics
the ethics of governance
the governance of ethics
homo economicus model
King III Report (2010)
macro-ethics
Milton Friedman
morality
negative duty
normative ethical theory
organisational culture
positive duty
promissory relation
Sarbanes-Oxley Act (2002)
social contract
stakeholder theory
sustainability
virtue ethics
REVIEW QUESTIONS
1. Using the Enron case, explain why good governance cannot only be a matter of ethical artefacts.
2. Why is it necessary to subject our moral standards and beliefs to ethical scrutiny?
3. Why should ethical analyses be extended beyond the examination and justification of individual and
group decisions?
4. Would prosecuting the only doctor at a rural hospital for stealing supplies be morally justifiable?
Motivate your answer from a utilitarian, deontological human rights-based and virtue ethics
perspective.
5. Critically compare the narrow and broad view of corporate social responsibility, and form an opinion
as to which approach is more suited to our current business context.
6. Discuss contemporary approaches to corporate social responsibility.
7. What are the differences between the statutory and voluntary approaches to corporate governance?
8. Discuss the concept of sustainability and motivate why sustainability is a moral and economic
imperative of the twenty-first century.
Contemporary management prinCiples
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PART II: Management in a changing environment
END NOTES
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CONTEMPORARY MANAGEMENT PRINCIPLES
Chapter 9
Workforce diversity
OPENING CASE
Hellicy Ngambi
OPENING CASE
Nike Inc.
Imagine working in an environment where
everyone thinks the same, acts the same, maybe
even looks the same. Nobody and nothing gets
challenged and the status quo is maintained in
absolute peace and tranquillity. Appointments
at such an organisation can be seen as cloning.
Thankfully we have Nike Inc. as an example to use
as an opening case to this chapter where none of
this holds true.
History
Nike Inc. was founded in 1954 by Bill Bowerman
and Phil Knight. Initially, it was named Blue Ribbon
Sports. Their business inspiration was to provide
sportsmen with high quality shoes, which started
from selling shoes from the trunk of a car after
sporting events. In 1978, Blue Ribbon ended its
relationships with its prime supplier Onitsuka
Tiger and officially became Nike Inc. In 1980,
Nike gained 50 per cent of the market share.
Today, the company is the world’s largest athletic
footwear and apparel supplier. Nike has a huge
global presence, employing 30 000 employees
representing many parts of the globe with the
mission ‘To bring inspiration and innovation
to every athlete in the world’. The company
harnesses diversity and inclusion to inspire ideas
and ignite innovation.
Strategic values
According to Nike’s human resources management
policy, diversity and inclusion is what drives
creativity and innovation in the company. It takes
every one of over 30 000 employees working at
the top of their ability, for Nike to reach its highest
potential. The company realises that outstanding
teams are composed of diverse people, with
diverse opinions, diverse backgrounds, diversity
of perspective and diverse skills sets.
In order to achieve their mission, Nike has put
various strategies into action:
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world-class, high performing teams.
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conversations around diversity, inclusion and
innovation.
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dialogue, diverse opinions and a multitude of
perspectives.
Defining diversity at Nike Inc.
The central idea of managing diversity is that
organisational improvement is achieved through
recognising, valuing, promoting and utilising
diversity where diversity refers to all sorts of
differences between individuals.
PART II: Management in a changing environment
At Nike, diversity is categorised into two types:
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orientation.
Nike Inc. benefits from diversity
Nike has enjoyed great benefits from having a
strategy and policies governing the management of
diversity, such as:
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implementation of the Nike diversity
principles not only affected the company’s
turnover and market share, but also the
overall reputation of the organisation.
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strong belief that diversity creates competitive
advantage, both in attracting, developing and
leveraging diverse talent inside the company
as well as building strong brand relationships
with diverse consumers world-wide. This has
led to the appointment of the company’s first
Vice President of Diversity in 2006. The global
diversity and inclusion team that was formed
shortly afterwards focused on engaging
employees, providing business consultation
and developing innovative tools, models and
designs.
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to change is reduced, and the company’s
workforce readily embrace broader believes
and ideas.
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diversified company receives the benefits of
a diverse market and thus also a greater than
normal market share.
186
CONTEMPORARY MANAGEMENT PRINCIPLES
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diversity extends beyond its employee
base to the work that they undertake with
their suppliers. Their supplier diversity
programme supports purchases from women
and minority business owners. For three
consecutive years, the company has been
rated by diversitybusiness.com as America’s
top organisation for multicultural business
opportunities.
Nike’s success in developing and maintaining a
diverse workforce under a single platform can be
ascribed to the fact that it was driven from the
top of the organisation, embraced as a strategic
value and intent, deployment of mature and
well-structured diversity training at management
and workforce level, and finally the establishment
and employment of a Vice President of Diversity,
focusing on engaging employees, providing business
consultation, and developing innovative tools,
models and designs.
The opening case illustrates the management of
diversity at Nike Inc., as a mechanism to improve
the company’s effectiveness. This is also the
focus of this chapter, which aims at equipping the
learner with knowledge to create an environment
that allows all workers to contribute optimally
to organisational goals and experience personal
growth. This includes allowing all employees to have
access to jobs as well as facilitating fair and positive
treatment in the workplace. Skills and competencies
are introduced to develop employees so that they
are comfortable working with others from a wide
variety of ethnic, racial, religious, and various other
backgrounds.
CHAPTER 9 Workforce diversity
LEARNING OBJECTIVES
The purpose of this chapter is to provide an overview of diversity in the workplace. The objective of
studying this chapter is to enable you to:
. &eƂne and eZplain the various dimensions of diversity.
2. Provide reasons for the increased focus on managing workforce diversity.
. 'Zplain the need for diversity management in 5outh #frica.
4. Recommend strategies for managing diversity.
. 5uggest ways to perform diversity training in an organisation.
9. 1 DIMENSIONS OF DIVERSITY
LEARNING OBJECTIVE 1
9.1.1 The realities of diversity
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dimensions of diversity.
We South Africans refer to ourselves as the ‘rainbow nation’ because our
nation includes people of many different races, languages and religions.
While we all share the important dimensions of the human species,
biological and environmental differences separate and distinguish us
as individuals and groups. This vast array of differences constitutes a
spectrum of human diversity and causes us to perceive and interpret
similar situations differently.
One of the most fundamental aspects of managing people with
different life experiences is the fact that they may interpret reality very
differently. By the time people enter organisations, the way they perceive
and respond to the world around them will largely have been determined
by the environment in which they were brought up. One’s family, friends,
type of school attended, as well as the culture in which one was brought
up, shape one’s cognition and influence one’s perceptual bias.
One of the major challenges facing South African organisations
is workforce diversity. Working with people whose values, attitudes,
beliefs, perceptions, languages, and customs are very different from
one’s own can make for costly misunderstanding, miscommunication,
misperception, misinterpretation, and misevaluation.
Many countries in the world can be described as radically pluralist
societies. Such societies comprise practically every conceivable kind
of human plurality; their populations are extremely heterogeneous in
terms of race, ethnicity, culture, language, sexual orientation, religion,
conceptions of good or bad, etc. Safeguarding such a society from
the potentially destructive conflicts that arise so easily in radically
pluralist or diverse societies is a complex task2. South African society
can at best be described as a radically pluralist society, therefore
the potential for destructive conflicts exists if the design of its social
institutions does not ensure fairness to all its members3. Table 9.1
on the next page illustrates ethnic, gender, employment and linguistic
diversity in South Africa.
CONTEMPORARY MANAGEMENT PRINCIPLES
187
PART II: Management in a changing environment
Table 9.1: South African demographics
Estimates for South Africa by population group and gender, 2010
Male
Population
group
African
Female
Per cent
of total
population
Number
Total
Per cent
of total
population
Number
Per cent
of total
population
Number
19 314 500
79.4
20 368 100
79.4
39 682 600
79.4
2 124 900
8.7
2 299 200
9.0
4 424 100
8.8
646 600
2.7
653 300
2.5
1 299 900
2.6
White
2 243 000
9.2
2 341 700
9.3
4 584 700
9.2
Total
24 329 000
100
25 662 300
100
49 991 300
100
Coloured
Indian/Asian
Source: www.statssa.gov.za
South Africa is a nation in the midst of a profound transformation.
Diversity in South Africa is all the more dynamic and complicated as
the result of a history of legislated race separation. South Africa is
experiencing demands by black people and women for inclusivity in
decision-making and in the sharing of wealth in the workplace. Under
the former apartheid system, South African organisations operated in an
environment of protectionism propped up by government support. The
best jobs were reserved for white employees. There was, therefore,
limited workforce diversity to be managed. In 1994, apartheid ended
with the adoption of a new constitution and South Africa redefined itself
as a democratic, non-racial society. More recently, Parliament passed
the Employment Equity Act, which seems to have spurred greater
debate on the issue of transforming the country’s business organisations
towards true diversity.
Table 9.2: Employment representation by occupational level, race and gender (percentages)
Operational level
Male
A
Female
C
I
Top management
12.9 2.9
Senior management
12.6 4.3
Professionall[ SualiƂed eZperienced specialists
middle management
W
Other
nationals
A
C
I
W
M
5.0
58.4 5.9
1.0
1.1
9.8
2.8
5.8
50.0 5.5
1.8
2.4
15.2 1.9
0.4
15.5 5.3
5.6
38.7 8.6
3.2
3.1
18.5 1.0
0.4
Skilled, technical, junior management
30.5 7.2
4.0
20.3 13.6 5.6
2.7
15.3 0.8
0.1
Semi-skilled
44.3 6.7
2.1
3.7
22.6 8.1
2.3
6.2
4.2
0.1
Unskilled
55.5 6.0
0.8
0.8
25.4 5.8
0.5
0.3
4.8
0.1
Non-permanent employees
39.6 6.0
4.0
4.7
31.8 5.6
1.8
5.7
0.6
0.1
Source: Department of Labour. Commission for Employment Equity Report 2007/2008, pp 7–10.
188
CONTEMPORARY MANAGEMENT PRINCIPLES
F
0.03
CHAPTER 9 Workforce diversity
Despite the new constitution and government legislation mandating
employment equity, most South African organisations remain white
male-dominated, as indicated in Table 9.2. White men still occupy the
bulk of empowered and well-paid management positions.
The above might provide an explanation for the pressure that
organisations are receiving from the South African government to address
the imbalances. In certain cases, this pressure has created resentment
and dysfunctional conflict, which pose unique diversity challenges for
South Africa. The implication of this is that managing diversity in South
Africa is not only the right or profitable thing to do, as for example in the
USA, but is also a necessity for survival.
9.2 MISCONCEPTIONS OF DIVERSITY
Because of all the early misconceptions about diversity, it would
probably be easier to understand what diversity is by first ascertaining
what it is not.
9.2.1 Diversity is not culture
A crucial mistake many people make in defining diversity is to equate it
with culture. They think diversity training means teaching people about
‘what Asians are like’, ‘characteristics of blacks’, or ‘what women want’.
While this approach may appear sound on the surface, it is inherently
flawed because all it does is reinforce stereotypes. That is what we
are trying to overcome by valuing diversity in our organisations. This
approach reinforces an ‘us versus them’ mentality. It focuses only on
the ways we are different, without including the ways in which we are
alike. It is exclusive, not inclusive. Valuing diversity extends far beyond
culture to include all the primary and secondary dimensions illustrated
in Figure 9.1.
SECONDARY DIMENSIONS
education
religious
beliefs
marital
status
PRIMARY DIMENSIONS
age
gender
parental
status
ethnicity
Person
physical
ability
sexual
orientation
military
experience
race
work
background
geographic
location
income
Figure 9.1: Dimensions of diversity
Source: Smit, P.J., Cronje G.E., Brevis T. & Vrba M.J. 2011. Management Principles: A contemporary edition for Africa.
5th edition. Cape Town: Juta Publishing.
CONTEMPORARY MANAGEMENT PRINCIPLES 189
PART II: Management in a changing environment
Figure 9.1 explains how we are all similar and different in a wide variety
of dimensions. The primary dimensions include variables such as race,
age, ethnicity, physical qualities, gender, and sexual orientation. These
are variables that people cannot change. The secondary dimensions of
diversity are not as fixed, and they include variables such as education,
religious beliefs, and work background, to name but a few. Thus culture
is only one of the dimensions of diversity. By recognising that diversity is
a phenomenon that applies to everyone, we can realise that it is a quality
that we can all value and support.
9.2.2 Diversity is neither equal employment
opportunities nor affirmative action
People tend to assume that diversity is just a repackaging of equal
employment opportunities (EEO) and affirmative action (AA), which are
mainly about ‘quota filling’. This is a detrimental and divisive view. While
EEO and AA are necessary steps and have their place in correcting past
imbalances, they are distinctly different from valuing diversity as shown
in Table 9.3.
Both EEO and AA are laws that are imposed on people and create an
adversarial environment. Also, there is the belief that these two concepts
mean that less qualified people should be given jobs, instead of more
qualified, ‘traditional’ employees. The insinuation is that we have to help
the designated classes of people because they are not really qualified
enough to succeed on their own merits. This only adds to the conflict,
reinforces stereotypes, and destroys the very same people it is meant
to serve by having them promoted to levels of incompetence if not
accompanied with appropriate training and development to empower
them to do their jobs.
Table 9.3: The major differences between EEO/AA and diversity
EEO/AA
Diversity
government initiated
voluntary (organisation driven)
legally driven
productivity driven
quantitative
qualitative
problem focused
opportunity focused
assumes assimilation
assumes integration
internally focused
internally and externally focused
reactive
proactive
Source: Cascio, W.F. 2003. Managing human resources. Boston: Irwin, p 121.
As shown in Figure 9.2 on the next page, unless management responds
effectively to these reactions, the organisations will continue to
experience a decline in productivity, increased retrenchments, and
unemployment, which would result in a poor economy.
190
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 9 Workforce diversity
AfƂrmative action in a slump economy
Reaction of previously
disadvantaged workers
Reaction of previously
privileged workers
Organisational/management response
If not managed properly
If managed properly
$itterness, antagonistic fear, anger,
guilt and aggression.
Shared will to survive, valuing of
differentness.
.eads to decline in productivity, increase
in retrenchment and unemployment.
*ence, poor economy.
.eads to productive, supportive,
transparent and effective organisations.
*ence, prosperous economy.
Figure 9.2: AfƂrmative action in a slump economy
Source: Smit, P.J., Cronje G.E., Brevis T. & Vrba M.J. 2011. Management Principles: A
contemporary edition for Africa. 5th edition. Cape Town: Juta Publishing.
Valuing diversity, on the other hand, affirms that people’s differences are
seen as an asset rather than a burden to be tolerated. In valuing diversity,
we acknowledge that we may have preconceived ideas that can blind us
from seeing the value that non-traditional employees bring. Only the
most qualified candidate is given the job; but we have to transcend our
biases about what is ‘most qualified’. An organisation that emphasises
quota filling as part of its diversity effort will undermine the true intent of
valuing diversity; instead emphasis should be put on accelerated training
and development of the previously disadvantaged groups to equip them
with competences, which will enable them to do the job effectively.
9.2.3 Diversity is not an absence of standards
People sometimes believe that valuing diversity means, ‘anything goes’
– that we give up our standards for hiring and promoting people. In fact,
diversity is the very opposite. Because we are removing our preconceived
ideas about who is qualified for a job, we must create better definitions
of actual job requirements. For true equality to happen, there needs to
be less emphasis on race, gender, and other differences, and an increased
focus on a person’s capabilities, and system adjustments that support
diversity. Only this approach will create a process that is naturally equal
for everyone.
CONTEMPORARY MANAGEMENT PRINCIPLES
191
PART II: Management in a changing environment
9.2.4 Diversity is not a vendetta against white males
To some, diversity symbolises a more enlightened society, a reflection
of our future as global citizens. To others, it breeds resentment. These
two extreme views are at the heart of the issue of diversity – and are
the reasons why efforts to promote diversity so often fail. Although well
intentioned, a focus on only culture, race, and gender, which ignores
ability and competence – and which blames the white male for past
injustices – only intensifies the division between groups, instead of
bringing them together to create a more productive workplace.
Understandably, the historical, homogeneous group of white male
workers created the South African workplace on the bases of their
own similar backgrounds, styles, perspectives, values, and beliefs. But
the changes in the international and national management environment
regarding diversity have forced organisations to change, and now even
the needs of the original homogeneous group have changed.
Unfortunately, the people who created the system are often labelled
‘the bad guys’ when the system needs updating. In effect, positioning
diversity so that one group must take continuous blame for the past
makes the ultimate goal – greater unity – impossible. While it is important
to acknowledge the past wrongs, it is critical to look to the future by
addressing the past imbalances without blaming one group.
9.3 WHAT IS DIVERSITY?
Now that we’ve explored the misconceptions about diversity and what
it is not, let us look at what it is.
9.3.1 Diversity is about demographics
Major demographic changes have occurred in South Africa during the
past decade. We have moved from a situation in which the law regulated
where people could live, what kind of work they could do, and with
whom they could socialise, to a situation where the human rights of
people are protected by a modern constitution. These changes have
had a major impact on the way organisations function, on whom they
employ, and with whom they do business. In the opening case we saw
Nike Inc.’s success in developing and maintaining a diverse workforce as
a diverse group of suppliers – all playing a major role in the success of
the company.
9.3.2 Diversity is about profitability
While affirmative action focuses on eliminating discrimination or righting
past wrongs, valuing diversity is a bottom-line issue about increasing
productivity and profitability. In fact, valuing diversity is one of the few
social issues in which the business community is actually leading the
way. Why? Because it is profitable, it fosters teamwork, and it helps
organisations identify and meet the needs of their customers and
consumers. The organisations that have understood and used their
understanding of diversity innovatively have found that they have
a competitive advantage in the marketplace. Nike Inc. has a strong
192
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 9 Workforce diversity
belief that diversity creates competitive advantage, both in attracting,
developing and leveraging diverse talent inside the company as well as
building strong brand relationships with diverse consumers worldwide.
9.3.3 Diversity is about values
Having said that diversity is a business issue, we must also affirm that
it relates to people’s values. Although people are sometimes more
comfortable in keeping this an impersonal issue, diversity has to do with
human rights, civil rights, and deeply-held beliefs. It forces people to
question years of social conditioning to which they have been subjected
since birth. For some people, diversity is even related to their religious
beliefs. How do we balance people’s rights to their personal values with
the organisation’s right to create a productive workplace? We do so
delicately, tactfully, respectfully, and also firmly, openly, and persistently.
We admit that valuing diversity is a personal decision; we focus on
diversity as a business decision. Diversity and inclusion are cornerstones
of Nike Inc.’s strategic values, and it is what drives creativity and
innovation in the company.
9.3.4 Diversity is about behaviour
Regardless of our personal beliefs, our organisations expect us to work
in the most productive manner possible, and valuing diversity is much
more productive than not valuing it. At Nike Inc., observable differences
like nationality and age, as well as underlying differences like values and
sexual orientation, are recognised, valued, promoted and utilised.
9.3.5 Diversity is a long-term process
Diversity is a large-scale change effort that extends far beyond training,
and must therefore be viewed as a long-term process. Organisations
that make a long-term commitment to a comprehensive strategy, which
includes training, will not be disappointed and will be able to see lasting
benefits.
It should not be seen as a problem but rather a mixture of people
with different group identities within the same social system. It is an
opportunity.5
Diversity is everyone’s responsibility and not just that of the human
resource department. It is not just about race and gender, nor the
previously disadvantaged groups in the workplace. It is about internal
customers (employees) and external customers (prospective clients).
Diversity is not exclusive but inclusive – it is about all of us. It is about
creating a culture where each individual can thrive and contribute to the
organisation. Diversity is not another fad. If you look at your workforce
today and compare it to five or ten years ago and then try to imagine
it five or ten years into the future, you will see that diversity is not a
fad. Do the same analyses for your customer base. The changes we see
happening now will continue for the foreseeable future. At Nike Inc.,
diversity is a strategic value, focusing on the long-term vision and mission
of the company.
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PART II: Management in a changing environment
9.4 WHAT IS WORKFORCE DIVERSITY?
Many people in South African organisations are experiencing difficulty
in meeting the challenge of adapting to people who are different from
themselves. The term used to describe this challenge is ‘workforce
diversity’ which means that organisations are becoming more
heterogeneous in terms of gender, race, ethnicity, ability, age, and other
aspects of differentness, as shown in Tables 9.1 and 9.2 on page 188 and
Figure 9.1 on page 189.
9.4.1 Diversity defined
%JWFSTJUZ is defined as the mosaic of people who bring a variety of
backgrounds, styles, perspectives, values, and beliefs as assets to the
the mosaic of people who bring
groups and organisations with whom they interact. This definition has
a variety of backgrounds, styles,
three notable points. First, it describes diversity as a mosaic, which
perspectives, values, and beliefs
is different from the traditional idea that diversity is a melting pot. A
as assets to the groups and
mosaic enables people to retain their individuality while contributing to
organisations with whom they
a collectively larger picture. Second, this definition of diversity applies to
interact
and includes everyone; it is not exclusionary. According to this definition,
we are all diverse. Finally, this definition describes diversity as an asset,
as something desirable and beneficial. We may be different, but being
different is not wrong.
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9.4.2 The platinum rule
RlaViPuO rule
treat others as they want to be
treated
gQlFeP rule
treat people as you want to be
treated
A key component of ‘what diversity is’ revolves around the use of the
QMBUJOVNSVMF, which is an extension of the well-known HPMEFOSVMF.
While the golden rule is to treat people as you want to be treated, the
platinum rule goes further and says: ‘Treat others as they want to be
treated’.
The platinum rule is the cornerstone of diversity behaviour, as
presented in this chapter because it demonstrates respecting and
honouring our differences by assuming others may want to be treated
differently from us. It also implies that we need to ask others what
they want, and tell others what we want. Using the platinum rule takes
diversity beyond culture, and ensures that everyone is included and
everyone wins.
9.4.3 General dimensions of diversity
The world-wide shift in demographics, changing immigration patterns,
and social change are all factors that affect the work environment. In
the USA, for example, the population, and therefore the workforce, is
growing more slowly than at any time since the 1930s, the average age
of the population is rising, more women are entering the workforce,
and immigrants will represent the largest share of the increase in
the workforce5. South Africa is exposed to similar variables that impact
on the productivity of the workforce, transforming it into a diverse
workforce that necessitates the management of diversity. A brief
overview of the following general dimensions of diversity will help
explain the need for its management:
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CHAPTER 9 Workforce diversity
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Gender issues
Women are entering the labour market in increasing numbers every
year. This means that organisations must deal with issues such as workfamily conflicts, childcare, dual-career couples, and sexual harassment.
Seven out of ten women in the labour force have children. This means
that organisations should take some responsibility for childcare. One
issue surrounding gender as a dimension of diversity is the ‘glass ceiling’
syndrome, which refers to the difficulty women have in advancing
themselves. Only a handful of women reach top management positions
in organisations. In the USA it is estimated that men hold 97 per cent of
the top positions. In South Africa, as shown in Table 9.2 on page 188,
men hold 87 per cent of the top positions.
Age
In the USA, the supply of younger workers is dwindling, with the result
that older workers represent a significant component of the labour
force. This is the same in South Africa in respect of whites, but in the
case of young black workers the number of entrants is at an all-time
high. Both older and younger workers present management with
challenges. Older workers are more cautious, less likely to take risks,
and less open to change, though their experience makes them high
performers. Young entrants into the South African labour force often
present challenges in the fields of communication and management
training.
Marital status
Marital status is a variable that adds to the complexity of diversity in
organisations, with the increase, for instance, of single-parent families.
The challenge for management is to recognise these differences and use
them as strengths.
Physical ability
People with disabilities are also subject to stereotyping, prejudice, and
discrimination. These people prefer managers to focus on abilities,
rather than on disabilities.
Language
Having eleven official languages in South Africa poses a great challenge
to organisations. Sensitivity needs to be shown in the choice and the
use of language policy within organisations. Managers should have the
knowledge and skills to deal with the general dimensions of diversity as
discussed above. However, especially in the South African context, they
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PART II: Management in a changing environment
need to know in particular, how to manage the cultural dimension of
diversity.
LEARNING OBJECTIVE 2
Provide reasons for the
increased focus on managing
workforce diversity.
9.5 REASONS FOR THE INCREASED FOCUS ON
MANAGING WORKFORCE DIVERSITY
Why do South African organisations such as Microsoft South Africa
currently spend vast amounts of money on programmes to sensitise
their workforce to diversity issues? While many of the issues surrounding
diversity have been around for some time, many organisations have
adopted a renewed concern as new trends in the workforce are surfacing.
As we have also seen in the opening case, organisations worldwide are
becoming increasingly diverse along many different dimensions, including
cultural diversity. Several different factors account for these trends and
changes. A brief overview of each factor will put the renewed focus on
diversity in perspective.
The single biggest challenge surrounding the issue of diversity and
multicultural management is the changing composition of the labour
force. Changing demographics in the labour force, together with
legislation on affirmative action in some countries, are major forces
contributing to increased diversity. In South Africa the female component
of the workforce is increasing. Women currently make up nearly half of
the labour force in South Africa, and the trend is likely to continue. It is
particularly among black women that this trend is occurring.6
.JDSPTPGU4PVUI"GSJDB
Microsoft South Africa7 has been nominated and
voted numerous times by the National Research
Foundation as one of South Africa’s top companies
to work for. Microsoft is a subsidiary of the world’s
largest software company which was started
by Bill Gates and Paul Allen back in the 1970s.
The South African office was opened in 1992.
Microsoft produces software that is suitable for
large and small businesses, project managers,
schools, gamers, cellular devices, media, and more.
It has an enormous range of applications and tools
which businesses can build into custom-made
solutions. It competes in industries from mining
and manufacturing to retail and banks. Microsoft
has huge resources for research, development,
expansion, and internal staff programmes. The
company culture in the South African office is one
that has a strong sense of community spirit and
embraces diversity.
Another factor contributing to increased diversity in organisations is the
globalisation of business and the use of ICTs which can bring a diverse
group of people together in a virtual environment. More and more
organisations are entering the international marketplace, including South
African organisations which are moving into Africa and the rest of the
world. Many multinational corporations today have more employees
outside of their home base country than within it. Apple, for example,
though based in the USA, has most of its hardware manufactured
elsewhere by the workforce in those countries. This improves the
awareness of diversity and ability to value differences. Ford, for example,
today employs less than half its total workforce on US soil.
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CHAPTER 9 Workforce diversity
This brief overview of the issues of diversity in international management
confirms the importance of examining the influence of culture on
management. South African business can now freely do business with
the rest of the world, including the rest of Africa. This means that
managers must develop new skills and awareness to handle the unique
challenges of global diversity: cross-cultural understanding, the ability to
build networks, and the understanding of geopolitical forces.
Most, if not all, South African organisations operating in a period
of sweeping transformation should implement strategies to deal with
diversity issues, since valuing workforce diversity has a positive impact
on productivity.
IBM
IBM8 had a long history of progressive management
when it came to civil rights and equal opportunity
employment. IBM wasn’t taking full advantage of a
diverse market for talent, nor was it maximising the
potential of its diverse customer and employee base.
So in 1995, Louis V Gerstner launched a diversity
task force initiative to uncover and understand
differences among people within the organisation
and find ways to appeal to an even broader set of
employees and customers. Gerstner established a
task force for each of eight constituencies: Asians;
blacks; the gay, lesbian, bisexual, and transgendered
community;
Hispanics; white men; Native Americans; people
with disabilities; and women. He asked the task
forces to research four questions: What does your
constituency need to feel welcome and valued at
IBM? What can the corporation do, in partnership
with your group, to maximise your constituency’s
productivity? What can the corporation do to
influence your constituency’s buying decisions so that
IBM is seen as a preferred solution provider? And
with which external organisations should IBM form
relationships to better understand the needs of
your constituency? The answers to these questions
became the basis for IBM’s diversity strategy.
9.6 THE NEED FOR DIVERSITY MANAGEMENT
IN SOUTH AFRICA
In addition to the reasons for the present world-wide interest in diversity
and multicultural management, are the complexities of the South African
situation. South Africa has already been described as a radically pluralist
society where race and ethnicity are the most visible dimensions of its
diversity. Many cultural differences exist between ethnic groups such
as Euro-Africans, coloureds, Asian-Africans, and black Africans. There
are also differences within each group. Each of these groups share a
common history, while at the same time maintaining a uniqueness.
LEARNING OBJECTIVE 3
Explain the need for diversity
management in South Africa.
9.6.1 Imbalances in the South African business
world
The imbalances between the different ethnic groups in South Africa
result in managerial and economic imbalances. We can identify three
categories of management problems relating to the South African
workplace that create an urgent need for research and education in this
regard.
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PART II: Management in a changing environment
1. The first issue that relates to the imbalances in South African
organisations, and which forms an integral part of any policy or
strategy on diversity management, is the question of affirmative
action. This is an employment policy that aims to ensure that South
African institutions reflect the character of the country as a whole.
Many business organisations are developing policies to correct this
imbalance.
2. The second management issue is the question of economic
empowerment. Pressure for the transfer of economic power is
evident. The government is being blamed for not doing enough to
make black economic empowerment possible. Organisations such
as the African Federated Chamber of Commerce (NAFCOC),
the Black Management Forum (BMF), and some labour unions
proposed the 3-4-5-6 policy whereby 30 per cent of directors,
40 per cent of senior management, 50 per cent of middle
management, and 60 per cent of the workers of all businesses
should have been black by the year 20009. The capital base of
black organisations could provide only a fraction of what would
be needed for substantial economic empowerment. The stokvel
movement could provide only about R1 billion for this purpose.
More and more black consumers are, however, buying insurance
policies not only from the black-controlled insurance corporations
such as African Life and Metropolitan Life, but also from the mutual
insurance giants Sanlam and Old Mutual. Change in the control
of these giants could change the ownership of the economy
overnight10. The other question surrounding the transformation
of economic power has been whether black people have the
entrepreneurial and managerial expertise to make such an urgent
transformation feasible.
3. The third management issue in the debate on managerial and
economic transformation in South Africa is the quest for a
new management philosophy. Activated by the affirmative and
empowerment movements, and supported by a rich diversity of
articles, books, and conference papers, this issue is challenging the
theoretical foundations of South Africa’s Euro-American-Asian
management theories, approaches, and practices. Based on the
premise that the environment of organisations in developing
countries is different from that of Western and Asian industrialised
countries, management theories and practices from the developedcountry context may have only limited applicability in the context
of a developing country such as South Africa and a developing
continent such as Africa.
The above discussion on the reasons for the present focus on the
management of diversity – including a brief overview of the complex
South African situation – shows how imperative it is for South African
managers to implement diversity management.
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CHAPTER 9 Workforce diversity
9.6.2 The benefits of diversity management
Organisations in South Africa have generally not been highly successful
in managing women and cultural diversity in the workplace. Proof of this
is the fact that women and black people in South Africa are clustered at
the lower management levels. This indicates that they are not progressing
and that their full potential is not being utilised. Managing the issues of
diversity and multiculturalism is crucial to organisational success.
When organisations such as Microsoft decided to invest in diversity
management training programmes for their managers and employees,
top management expected certain benefits from this investment. Table
9.4 on the next page lists six arguments that support the belief that
managing diversity can improve organisational performance.
Organisations which manage diversity and multiculturalism will have
a competitive edge in the market, because they create higher morale
and better relationships in the workplace. Research has shown that
diverse groups tend to be more creative than homogeneous groups.
The presence of cultural and gender diversity in a group leads to freer
discussion and reduces the risk of ‘groupthink’. Moreover, the simple
act of learning about other cultural practices enables organisations to
expand their thinking in other fields as well. South African organisations
can certainly expand their thinking on the advantages of diversity
management.
9.7 MANAGING DIVERSITY
LEARNING OBJECTIVE 4
Managing diversity is different from valuing diversity because it addresses
the organisational processes that can reinforce – or hinder – the ability
to create an environment that values diversity. These organisational
processes include hiring, promotion, communication, and power
allocation in organisations.
In the past, most organisations used what is called the ‘melting
pot’ approach to managing diversity in the workplace. This assumes
that people who are different would somehow automatically want to
assimilate. Now organisations have realised that employees do not set
aside their cultural values and lifestyle preferences when they come to
work. The challenge for a manager is to create a work environment
in which different lifestyles, family needs, and work styles are
accommodated. The melting pot assumption is being replaced by the
mosaic approach, which recognises and values differences. In the next
sections we shall look briefly at some of the approaches to managing
diversity in organisations. Managing diversity can yield enormous results
in innovation, new ideas and improved productivity11.
All of the arguments for the management of diversity, have been
illustrated in the Nike Inc. opening case.
Recommend strategies for
managing diversity.
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PART II: Management in a changing environment
Table 9.4: The beneƂts of managing diversity
Six arguments for managing diversity
Cost
argument
As organisations become more diverse, the cost of a poor job in integrating workers
will increase. Those who handle this well will create cost advantages over those who
don’t.
Resource
acquisition
argument
Organisations develop favourable reputations as prospective employers for women
and previously disadvantaged groups. Those with the best reputations for managing
diversity will win the competition for the best personnel. As the labour pool shrinks
and changes composition, this edge will become increasingly important.
Marketing
argument
For multinational organisations, the insight and cultural sensitivity that members with
roots in other countries bring to the marketing effort should improve these efforts
in important ways. The same rationale applies to marketing to sub-populations with
domestic operations.
Creativity
argument
Diversity of perspectives and less emphasis on conformity to norms of the past
(characterising the modern approach to management of diversity) should improve the
level of creativity.
Problem-solving
argument
Heterogeneity in decision-making and problem-solving groups potentially produces
better decisions through a wider range of perspectives and more thorough critical
analysis of issues.
System
ƃexibility
argument
An implication of the multicultural model for managing diversity is that the system
will become less determinant, less standardised, and therefore more ƃuid. The
increased ƃuidity should create greater ƃexibility to react to environmental changes
(reactions should be faster and at lower cost).
Source: Noe, R.A., Hollenbeck, J.R., Gerhart, B. & Wright, P.M. 2000. Human resource management. New York: McGraw-Hill, p 23.
9.7.1 Approaches to managing diversity
The idea that diversity should be managed originated in the 1960s, and
since then the following three approaches have been identified:
The golden rule approach
According to this approach, it is best to treat everyone in the same
way: ‘Treat others as you want to be treated’. Good intentions of not
treating other people badly inspired this theory. However, people from
the dominant culture – who have the good intentions – assume that they
should treat people according to their own standards and consequently
individual differences are ignored.
The ‘right the wrongs’ approach
This approach takes the form of affirmative action. ‘We don’t have
enough of the previously disadvantaged people, such as black people
and women – we’d better hire some, to make up for all these years
of negligence’. This approach creates a backlash, because ‘traditional’
employees feel that they will be overlooked so that ‘a quota can be
filled’. It creates an ‘us versus them’ mentality, which is unproductive.
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CHAPTER 9 Workforce diversity
The ‘value of differences’ approach
This approach recognises differences and acknowledges that they exist,
but does not require people to be assimilated into the dominant culture.
It allows for the individual mosaic of people to create the aggregate
picture of an organisation.
When you join an organisation and become an employee, you carry
your ‘differentness’ with you. When you are faced with a situation
that involves managing others different from yourself, your reaction or
solutions will depend on how much you know, understand, and value
the ‘differentness’ of others.
Managing diversity is a management orientation that is not limited to
one department or to a specific management level of the organisation.
It is an overall approach, which seeks the commitment of the whole
organisation if any success is to be achieved. There is also no one
particular policy which necessarily guarantees the required results.
Organisations differ in the ways in which they implement a policy of
diversity management, as Table 9.5 illustrates. This table shows the
range of diversity management policies which organisations implement.
Research in South Africa indicates that alternative work schedules
like flexitime, job sharing, and the compressed work week could be
used to respond to diverse needs of the workforce. Flexitime increases
employee autonomy and responsibility, in choosing the schedule that
meets individual needs. Job sharing meets the needs of those employees
who cannot work on a full-time basis, but require a permanent career
job. The compressed work week is a week of four ten-hour days, which
allows employees more leisure and private time12.
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Vusi, one of your employees, comes to you with a
request to take off three days’ work to attend his
father’s funeral. You recall that he had exactly the
same request the previous year and took two days
off to attend his father’s funeral.
1. What is your initial reaction?
2. What do you say to Vusi?
When managing a diverse workforce you encounter
challenges with regard to all the different dimensions
of diversity. In Vusi’s case your assumptions, and
hence your decision on the matter, will depend on
your cultural background and that of the employee.
Vusi is a black African, therefore it could well be that
one of the dead fathers was his biological father,
while the other one was his father’s brother. All the
brothers of a father are regarded as fathers to his
offspring, and all the sisters of a mother are called
‘mother’ by her children. If you are not aware of this
custom, you could immediately assume that Vusi is a
liar and therefore untrustworthy. Such an assumption
could destroy your working relationship and
therefore have an adverse effect on an employee’s
performance. This example indicates that we need
to understand each other’s ‘differentness’ to be able
to manage diversity effectively.
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PART II: Management in a changing environment
Table 9.: The organisational diversity continuum
No diversity efforts:
r non-compliance with afƂrmative action policies
r belief in a monoculture organisation
r no policies on managerial and economic empowerment
Diversity efforts based on:
r compliance with afƂrmative action
r inconsistent enforcement of diversity policies
r very little is done in the area of managerial and economic empowerment
r no organisational support with respect to education and diversity training
r inconsistent or poor managerial commitment
Broad-based diversity efforts based on:
r effective implementation of afƂrmative action policies
r managerial commitment to managerial and economic empowerment s
r culture of enabling employees
r ongoing education and diversity training programmes
r managerial commitment tied to organisational rewards
r organisational assessment of diversity policies to create an organisational
r culture that supports diversity
Source: Adapted from Certo, S.C. 1992. Modern management. Boston: Allyn & Bacon,
p 586.
9.7.2 Diversity paradigms: strategies for diversity
management
In the last few years in America, managing diversity has become an
increasingly significant research and organisational issue. Yet, the meaning
of managing diversity has remained elusive13. However, Thomas and
Ely have recently developed a theoretical paradigm of three different
perspectives on how organisations perceive the task of managing
diversity14. They classify the perspectives as discrimination and fairness,
access and legitimacy, and learning and effectiveness.
They found that, while most organisations in the USA have applied
the first two perspectives, very few organisations were using the third
perspective. Ely and Thomas suggest that it is only the third perspective
that will enable organisations to benefit adequately from managing
diversity15. Table 9.6 on the next page shows the focus of diversity efforts,
human resources practices, effectiveness measures, and strengths and
weaknesses of each of the three paradigms.
In South Africa, with the legacy of apartheid still entrenched in the
minds of leadership, management, and workers, most organisations are
‘trapped’ in the first paradigm of managing diversity. The emphasis is on
the discrimination-and-fairness perspective or what can be termed as
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CHAPTER 9 Workforce diversity
‘righting the wrongs’. The legal mandate, as expressed in the Employment
Equity Act, has led to conflict and dissension since virtually every
organisation in South Africa is under pressure to transform its worker
and leadership profiles rapidly. Diversity initiatives implemented in South
Africa and other countries indicate that organisations have a long way to
go before they can apply the learning-effectiveness paradigm. In these
countries diversity efforts are still centred on the first two paradigms
where diversity initiatives are not linked to productivity.
Table 9.: Diversity paradigms
Discrimination – fairness
Access – legitimacy
Learning – effectiveness
Focus
Creating equal opportunity,
assuring fair treatment,
and compliance with equal
opportunity laws.
Match internal
employee demographics
to customer and
marketplace served.
Incorporate diversity
into the heart and
fabric of the mission,
work, and culture of the
organisation.
Human resource
practices
Recruitment of women and
previously disadvantaged
groups (PD)s). Mentoring
and career development for
women and PDGs.
Recruitment of
employees from diverse
groups to match external
demands.
Redesigned and
transformed to enhance
performance of all
employees.
Effectiveness
Recruitment numbers.
Retention rates of women and
PDGs.
Niche markets captured.
Degree of diversity
among employees.
All employees feel
respected, valued, and
included.
Weaknesses –
Strengths
Does not capitalise on
diversity of all employees.
'mphasis on assimilation.
Does not affect
mainstream of company
business diversity
conƂned to speciƂc
market segments.
All employees respected,
valued, and included.
Source: Adapted from: Thomas, D.A. & Ely, R.J. 1996. Marketing differences matter: A
new paradigm for managing diversity. Harvard Business Review. (September–October),
pp 79–90.
9.7.3 The most and least frequently implemented
initiatives
Research conducted in the UK, Ireland, the USA, and South Africa in a
management of diversity study reveals that emphasis is put on selection,
induction, and communication initiatives in all countries except the USA,
which emphasises flexibility and the individual. These three countries
are also similar in terms of least frequently implemented initiatives. In
particular, training staff and managers in diversity, and adopting a strategy
approach to managing diversity, are low priorities for their organisations.
Mentoring schemes for staff are low on the list of priorities for all four
of the countries. Literature on diversity frequently presents mentoring
in relation to diversity, yet the results of this survey suggest that it is not
being implemented16.
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PART II: Management in a changing environment
9.7.4 The most and least successful initiatives
For the UK and Ireland, the most successful initiatives relate to objective
and fair processes (as in terms of selection, induction, and open criteria),
and to creating a culture that empowers. For North America, the most
successful initiatives relate to flexibility and an individual focus. However,
for South Africa the most successful initiatives relate to fair process (as
in terms of selection), but they then focus on flexibility (as in benefits or
uniforms)17.
There is considerable overlap across all four countries with regard
to those initiatives that are viewed as least successful. There is a
common difficulty regarding decision-making within organisations from
all four countries. In addition, for South Africa, the UK, and North
America, there is concern regarding the success of ‘open criteria’. This
is interesting, as the survey suggests that open criteria are frequently
being implemented, but not succeeding. This leads us to question the
commitment of organisations to the success of appraisal training. South
African organisations are also struggling with defining diversity as a
business goal and with strategies for managing diversity. It is interesting
that, in South Africa, developing a diversity policy and publicising the
organisation as a diversity-oriented organisation is very low on the list.
In addition, the main focus of South African organisations is compliance
with new legislation18.
What managers need to keep in mind while conducting the first
diversity initiative:
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LEARNING OBJECTIVE 5
Suggest ways to perform
diversity training in an
organisation.
204
9.8 DIVERSITY TRAINING
The above discussion on the complex dimensions of diversity, explains
why organisations worldwide focus on the management of diversity.
The following reasons can be singled out as to why organisations are
designing and implementing diversity training and development initiatives:
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responsibility.
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CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 9 Workforce diversity
Many South African organisations are grappling with transformation.
Although the challenges posed by the diversity of the workforce have
been the focus of researchers and writers on the subject, they have met
with mixed reactions from South African practitioners. Some organisations
simply ignore the situation and treat their diverse workforce as if it were
homogeneous. The results are usually reflected in poor performance of
individuals as well as the organisation. They urgently need to implement
policies and strategies to deal with both the cultural and the non-cultural
dimensions of diversity. We shall now briefly consider how management
should approach these two categories of diversity.
9.8.1 Approaches to diversity training
Diversity training is specifically designed to better enable members of an
organisation to function in a diverse and multi-cultural workforce.
In order for managers to respond to the challenges of working with
diverse populations, they must recognise the difficulties that employees
may have in coping with diversity. These difficulties include resistance to
change, racism, and a lack of knowledge about other groups, as well as
prejudices, biases, and stereotypes. Some employees lack the motivation
to understand cultural differences, often because of the lack of reward
for doing so. Diversity training should therefore focus on:
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awareness about differences in values, attitudes, patterns of
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awareness training.
9.8.2 Management support
Training employees in the issues and attitudes involved in valuing
diversity must be complemented from the top by managerial example
and support through:
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diversity issues
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competencies
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organisational diversity goals.
CONTEMPORARY MANAGEMENT PRINCIPLES
205
PART II: Management in a changing environment
Diversity training and managerial support from the top can do much to
create cultural synergy and to contribute to higher productivity. To this
end, diversity training needs to have a new focus that facilitates positive
and productive working relationships.
9.8.3 Summary of spheres of activity for diversity
management
Successful diversity management depends on the commitment of the
whole organisation. Many spheres of management activity are involved
in preparing an organisation to accommodate diversity.
Once a vision for a diverse workplace has been formulated,
management can analyse and assess the current culture (prevailing value
system, cultural inclusion, differences, and systems such as recruitment,
training, and promotion) within the organisation, as indicated by the
various spheres of management activity in Figure 9.3.
Mindsets about
diversity
r problem or
opportunity!
r challenge met or
barely addressed!
r level of majority
culture buyin
(resistance or
support)!
Organisation culture
r valuing differences
r prevailing value
system
r cultural inclusion
Cultural differences
HR management
systems (bias-free?)
r recruitment
r training and
development
r performance appraisal
r compensation and
beneƂts
r promotion
Greater career
involvement of women
r promoting knowledge
and acceptance
r dualcareer families
MANAGEMENT
OF
DIVERSITY
r taking advantage of
the opportunities that
diversity provides
r sexual harassment
r worksfamily conƃict
Heterogeneity in race/ethnicity/nationality
r effects on cohesiveness, communication,
morale
r effects of group identity on interaction (eg
stereotyping)
r prejudice (racism, ethnocentrism)
Education problems
r improve state schools
r educate management on
valuing differences
Figure 9.3: The spheres of activity for managing diversity
Source: Smit, P.J., Cronje G.E., Brevis T. & Vrba M.J. 2011. Management Principles: A
contemporary edition for Africa. 5th edition. Cape Town: Juta Publishers.
206
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 9 Workforce diversity
This assessment is followed by a willingness (by the leadership cadre of
management) to change whatever systems and ways of thinking need to
be modified. Throughout this process people need top management’s
support in dealing with the many challenges and conflicts they will face.
Training and support (in the form of delegated power and rewards)
are important for the people in pioneering roles. Once management
accepts the need for a strategy to develop a truly diverse workplace,
three major steps are involved in implementing such a major change:
1. Building a corporate culture that values diversity.
2. Changing structures, policies, and systems to support diversity.
3. Providing diversity awareness and cultural competency training.
For each of these efforts to succeed, top management’s support is
critical, as is holding all managerial ranks accountable for increasing
diversity.
The implementation of these steps to bring about the necessary
change that will ensure inclusive diversity in the organisation is anchored
in the four basic management functions of planning, organising, leading,
and controlling. Planning applies to management’s role in developing
strategies to promote diversity, while organising, leading, and controlling
apply to the implementation phases as we have discussed them in
previous chapters.
CONTEMPORARY MANAGEMENT PRINCIPLES
207
Copyright © 2014. Juta and Company. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S.
or applicable copyright law.
Part II: Management in a changing environment
CHAPTER SUMMARY
1. Define and distinguish diversity from what it is not.
Many misconceptions about diversity exist. First, we explain what it is not:
• diversity is not culture
• diversity is neither equal employment opportunities nor affirmative action
• diversity is not an absence of standards
• diversity is not a vendetta against white males.
Then we explain what diversity is:
• Diversity is about demographics
• diversity is about values
• diversity is about behaviour
• diversity is a long-term process.
Workforce diversity is then defined as the mosaic of people who bring a variety of
backgrounds, styles, perspectives, values and beliefs as assets to the groups and
organisations with whom they interact.
A key component of what diversity is revolves around the use of the platinum rule, an
extension of the golden rule. While the golden rule is ‘to treat people as you want to be
treated’, the platinum rule goes further and says ‘treat others as they want to be treated’.
2. Provide reasons for the increased focus on managing workforce diversity
• changing composition of the labour force
• legislation on affirmative action
• globalisation of business
• cultural diversity improves the quality of the workforce.
3. Explain the need for diversity management in South Africa
The following contributes to the need for diversity management in South Africa:
• imbalances in the South African business world
• diversity management has major benefits.
4. Recommend strategies for managing diversity
Various approaches to managing diversity exist, namely:
• the golden rule approach
• the ‘right the wrongs’ approach
• the ‘value the differences’ approach.
Four strategies for managing diversity are:
• focus strategy
• human resource practice strategy
• effectiveness strategy
• weaknesses/strengths strategy.
208
Contemporary management prinCiples
EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 5/3/2018 1:14 PM via UNISA
Copyright © 2014. Juta and Company. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S.
or applicable copyright law.
ChaPter 9 Workforce diversity
5. Suggest ways to perform diversity training in an organisation.
An organisation can implement various approaches to diversity training, for instance:
• programmes designed to raise participants’ consciousness and awareness about
differences in values, attitudes, patterns of behaviour, and communication that may exist
across cultures
• programmes designed to develop new skills and competencies, including communication
competence. Training in diversity should always be complemented by top management
support.
KEY TERMS
dimensions of diversity
diversity
diversity continuum
diversity paradigms
diversity training
golden rule
management support
platinum rule
‘right the wrongs’ rule
value the differences rule
workforce diversity
REVIEW QUESTIONS
1. explain the misconceptions about diversity.
2. explain what diversity is.
3. explain the general dimensions of diversity.
4. provide reasons for the increased focus on the management of workforce diversity.
5. explain the benefits of diversity management.
6. Distinguish between the various approaches to managing diversity.
7. propose various strategies for diversity management in organisations.
8. explain the concept of ‘diversity training’ and propose approaches to diversity training.
END NOTES
1
Anon. No date. [Online] Available at: http://nikeinc.com/pages/diversity-inclusion. Accessed on 30 June 2013.
2
Lötter, H. 1993. Pluralism, liberal values, and consensus: Like dancing with wolves? Acta Academia, 25(4): 13–29.
3
Lotter, op. cit., p 14.
4
Nkomo, S.M. & Cox, T. 1996. Diverse identities in organisations In Handbook of organisation studies. Clegg, S., Hardy,
C. & Nord, W. (eds). London: Sage Publications, pp 338–356.
5
Certo, S.C. 1994. Modern management: Diversity, quality, ethics and the global environment. Boston: Allyn & Bacon,
p 578.
6
Bureau of Market Research. 1993. Report no 199. Pretoria: Unisa.
7
Anon. No date. [Online] Available at: http://www.topemployers.co.za/BESTEmployers20122013.aspx. Accessed on
1 July 2013.
Contemporary management prinCiples
EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 5/3/2018 1:14 PM via UNISA
209
PART II: Management in a changing environment
8
Anon. No date. [Online] Available at: http://harvardbusinessonline.hbsp. harvard.edu/b01/en/common/item_detail.
jhtml?id=R0409G.
9
Finansies en Tegniek, 19 May 1995, p 11.
10
Ibid.
11
Gentile, M. 2003. Managing across difference. Harvard Business CD.
12
Ngambi, H.C. 2001. Job-sharing: An alternative to lay-offs and unemployment in South Africa. South African Journal of
Labour Relations. 25(1): 2.
13
Nkomo & Cox, op. cit., pp 338–356.
14
Thomas, D.A. & Ely, R.J. 1996. Making differences matter: A new paradigm for managing diversity. Harvard Business
Review, (September–October), pp 79–90.
15
Ely, R.J. & Thomas, D.A. 2001. Cultural diversity at work: The effects of diversity perspectives on work group processes
and outcomes. Administrative Science Quarterly, 46: 229–273.
16
Martins, N. 1999. Managing Diversity in South Africa: How do we compare? People Dynamics, (August): 30–33.
17
Ibid.
18
Ibid.
19
Certo, op. cit., p 591.
210
CONTEMPORARY MANAGEMENT PRINCIPLES
PART III
Planning
Chapter 10
Principles of planning
Tersia Brevis
PART III: Planning
OPENING CASE
The Global Positioning System (GPS)1
One of the world’s most innovative advancements
in navigation technology is the Global Positioning
Systems (or GPS). The GPS is a space-based global
navigation satellite system (GNSS). The GNSS
provides location and time information which can
be accessed in all weather, anywhere on earth (or
even near the earth). The only requirement for
access to location and time information is that there
should be an unobstructed line of sight to four or
more GPS satellites.
The design of the GPS originated in the early
1940s with similar ground-based navigation systems
that were used in World War II. The GPS project was
developed in 1973 to overcome the limitations of
previous navigation systems. The GPS was created
and realised by the United States Department
of Defence. It is maintained by the United States
government. The GPS became fully operational in
1994 and is freely accessible by anyone with a GPS
receiver.
The GPS has three basic components: absolute
location, relative movement, and time transfer.
A GPS receiver calculates its absolute location
or position by precisely timing the signals sent by
GPS satellites high above the Earth. Each satellite
transmits messages, on a continuous basis, that
includes the following:
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all GPS satellites.
The receiver uses the messages it receives in order
to determine the transit time of each message. It
then computes the distance to each satellite. These
distances, together with the satellites’ locations are
used to determine the absolute position or location
of the receiver. This position is then displayed on
the GPS, for example by a moving map display.
212
CONTEMPORARY MANAGEMENT PRINCIPLES
Many GPS receivers also show derived information,
for example direction and speed, calculated from
position changes; time transfer, traffic signal timing
and synchronisation of cellular phone base stations.
Although the GPS was originally a military
project, it is considered a dual-use technology,
meaning that the GPS has significant military and
civilian applications. Examples of civilian applications
of the GPS are the following:
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GPS time signals is second only to the atomic
clock upon which they are based.
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facilitate inter-cellular handoff and support
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mobile emergency calls.
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services depend on the GPS for timing and
location capabilities.
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person, pet or vehicle. Devices are attached to
the person, pet or vehicle and the application
then provides continuous tracking. Mobile or
internet updates are given should the person,
pet or vehicle leave a designated area.
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content to display, for example, information
about an approaching community service,
school or medical facility.
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extensively in map-making.
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provided by the GPS to draw maps and
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extensively to identify, locate and maintain
contact reports with fleet vehicles in real-time.
CHAPTER 10 Principles of planning
LEARNING OBJECTIVES
The purpose of this chapter is to provide an overview of planning as a management function. The
objective of studying this chapter is to enable you to:
1. Explain the nature and importance of planning.
. &emonstrate an understanding of the beneƂts and costs associated with planning.
3. Differentiate between the various types of plan.
4. Explain the barriers to effective planning.
5. Explain ways to overcome barriers to effective planning.
10.1 THE NATURE AND IMPORTANCE OF
PLANNING
LEARNING OBJECTIVE 1
All managers, regardless of their skills, the levels at which they are
involved or their field of specialisation, engage in certain interrelated
activities or functions to achieve the goals and objectives of the
organisation. These interrelated functions were identified in Chapter 2
as planning, organising, leading and controlling.
The GPS allows a motor car driver to specify a planned destination,
determine a road map to follow in order to arrive at the planned
destination and to determine the time it will take to reach the destination.
Having this information, the motor car driver can then determine how
much petrol will be needed for the trip, whether he or she needs to
sleep over, and to calculate the costs involved in undertaking the trip.
In the same fashion, the management of an organisation needs to
determine the destination or future for their organisation, determine the
best possible way to reach its destination, and determine the resources
that the organisation will need to reach their destination. This is called
planning.
Planning essentially has three components which require closer
examination:
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environment.
Explain the nature and
importance of planning.
10.1.1 Determine the organisational vision, mission
and goals
The organisational vision
For an organisation to be lead to success in the future, an inspiring vision
is needed. This is a statement of what the organisation wants to become
and where it wants to be in the future. It needs to be one that every
individual in the organisation, as well as all stakeholders, shares and is
excited about. The vision should be an anchor for decision-making in
the organisation. The vision statement is the end, not the means to the
end. For example, a university providing tertiary education (the means)
vision
a statement of what the
organisation wants to become
and where it wants to be in
future
CONTEMPORARY MANAGEMENT PRINCIPLES
213
PART III: Planning
should see their business as cultivating mindful and soulful graduates (the
end). When formulating a vision statement, the means should not be
confused with the end. The success of a vision statement depends largely
on how well it is shared. Inputs from all stakeholders should be gathered
to ensure buy-in from all individuals and sections in the organisation.
mission statement
aligns the organisation with its
vision in terms of its products
and/or services, market and
technology
The mission statement
The vision statement of an organisation reflects the perfect future, the
dream that the organisation has for itself. Similar to a real dream, a vision
statement does not necessarily need to be realistic in terms of what
the organisation can or cannot become. The vision statement translated
into reality is a mission statement and aligns the organisation with its
vision in terms of its products and/or services, market and technology.
A well-written mission statement does the following things for an
organisation2:
1. A mission statement defines the organisation for key stakeholders
in terms of its product and/or services, market and technology.
2. It outlines how the vision is to be accomplished.
3. A mission statement establishes key priorities for the organisation.
In other words, the mission statement enables an organisation
to identify key performance areas – those areas critical to the
attainment of organisational goals and objectives.
4. A mission statement states a common goal and fosters a sense of
togetherness.
5. It creates a philosophical anchor for all organisational activities.
6. It generates enthusiasm, buy-in and a ‘can do’ attitude amongst all
stakeholders.
7. A mission statement empowers present and future members
of the organisation to believe that every individual is the key to
success.
In addition to the key components of a mission statement mentioned
above (product and/or service, market and technology), a mission can
also set out the philosophy of the organisation in terms of its values,
ethics and beliefs.
goals/objectives
commitment to achieve a
measurable result within a given
timeframe
Goal setting
Just as a car driver enters a planned destination in his or her GPS, an
organisation also needs to specify its destination (or goals). Goals are
the targets that an organisation drives toward. Although some theorists
distinguish between goals and objectives, managers typically use the
terms interchangeably. Goals/objectives are a commitment to achieve a
measurable result within a given timeframe.
It is important for managers to be able to formulate good objectives,
to be aware of their importance and to understand how objectives
combine to form a means-ends chain.
What makes a good objective?
When using a GPS, a car driver should be specific in terms of the planned
destination. GPS coordinates, or the exact country, town, street and
street number can be used for this purpose.
214
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 10 Principles of planning
A GPS receiver calculates its position by precisely
timing the signals sent by GPS satellites high above
the Earth. Three satellites might seem enough
to determine position, since space has three
dimensions and a position close to the Earth’s
position can be assumed. However, even a very
small clock error multiplied by the speed of light
(this is also the speed at which satellite signals
move) results in a large positional error. For this
reason, GPS receivers use four or more satellites
to determine the receiver’s location and time. A
GPS therefore computes time very accurately.
In terms of an organisation, many experts agree that a good objective
should, as far as possible, be expressed in quantitative, measurable,
concrete or specific terms, in the form of a written statement of
desired results to be achieved within a given period of time. A good
objective should state what is to be accomplished and when it is to be
accomplished.
A good objective will meet the following criteria:
1. Objectives should be expressed in quantitative terms. This means
that objectives should be measurable so that it can be evaluated or
quantified objectively.
2. Objectives should be expressed in specific terms. Objectives
should indicate what they are related to.
3. Objectives should state desired results. This means that objectives
should focus on the key performance areas of the organisation –
those areas that are crucial in the accomplishment of organisational
goals.
4. Objectives should be attainable. Objectives should be realistic, but
also provide a challenge for management and all employees.
5. Objectives should be acceptable. People tend to pursue goals
that are consistent with their preferences and perceptions.
The collaboration of managers at all levels of an organisation is
therefore important in goal formulation.
6. Objectives should state results to be achieved within a given time
period. The timeframe for accomplishing objectives should be
clearly stated.
7. Objectives should be congruent with one another. Congruency
means that the attainment of one goal should not preclude the
attainment of another goal. Incongruent objectives often lead to
friction, uncertainty and conflict.
8. Objectives should be flexible. Business organisations function in
a turbulent and dynamic environment, which makes it necessary
to allow for objectives to be modified. Flexibility means that
organisations should adapt their objectives when the conditions on
which the objectives were based, change.
CONTEMPORARY MANAGEMENT PRINCIPLES
215
PART III: Planning
#$% RTioTit[ s[stem
A-B-C priority system groups
objectives in three categories
according to its priority
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a minority of causes, inputs
or effort tend to produce the
majority of results, outputs or
rewards
Prioritising goals and objectives
An important principle to consider when determining organisational
goals, is the ranking of goals, objectives or activities in order of
importance. Priorities play a special role in the planning process. By
listing long-term organisational objectives in order of their priority, top
management prepares to make later decisions regarding the allocation
of resources. Resources need to be channeled into more important
endeavors and away from other areas in proportion to the relative
priority of the areas. The establishment of priorities is a key factor in
managerial and organisational effectiveness. Strategic priorities give
external and internal stakeholders answers to the questions such as ‘Why
does the organisation exist?’ and ‘How should it act and react during a
crisis?’. Various techniques can be used to prioritise organisational goals
and objectives. Two of the most widely-used techniques are the A-B-C
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grouped into three categories, namely the A-group, B-group and
C-group. The A-group objectives, called the ‘must-do’ objectives are
those objectives that are critical to the successful performance of the
organisation. The B-group, called the ‘should-do’ objectives, is necessary
for improved performance. Lastly, the C-group objectives are called the
‘nice-to-do’ objectives, which are desirable for improved performance,
but not critical to survival or improved performance.
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approximation. Managers can leverage their time by focusing on the few
people, resources, opportunities and strengths with the greatest impact.
5IF'PSE.PUPS$PNQBOZ3
Ford Motor Company was founded in 1903 by
Henry Ford in Detroit, Michigan. Not only did Ford
revolutionise the development of the automobile
as a product, he was also the visionary behind the
idea of mass production. Ford’s ability to make
automobiles affordable for the masses is cited as a
driving force behind both the automobile industry
and the creation of a middle class in America.
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‘To become the world’s leading consumer company
for automotive products and services.’
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‘We are a global family with a proud heritage,
passionately committed to providing personal
mobility for people around the world. We anticipate
consumer needs and deliver outstanding products
and services that improve people’s lives.’
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‘People working together as a lean, global enterprise
for automotive leadership, as measured by
customer, employee, dealer, investor, supplier, union/
council, and community satisfaction.’
Identify ways of reaching goals
A GPS enables a car driver to determine the shortest or fastest possible
route to a planned destination. Management also needs to identify ways
of reaching an organisation’s goals. This is often referred to as ‘the ends216
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 10 Principles of planning
Top-level
management
Middle-level management
Lower-level management
Ends-means chain of objectives
Means-ends chain of objectives
means chain of objectives’. The setting of objectives is a top-to-bottom
process – top management sets broader organisational objectives with
longer time horizons than lower levels of management. This downward
flow of objectives creates a means-ends chain. The accomplishment of
organisational goals, as formulated by top management, is a bottom-up
approach. Working from bottom to top, lower management objectives
provide the means for achieving middle-level objectives (ends) that, in
turn, provide the means for achieving top-level objectives (ends). The
ends-means chain of objectives is illustrated in Figure 10.1.
Figure 10.1: The ends-means chain of objectives
The organisational hierarchy in Figure 10.1 has been simplified and
narrowed down to three managerial levels for illustrative purposes.
There may be more managerial layers involved between top and middle
levels of management as well as between middle and lower levels of
management.
The determination of the best possible route to a planned destination,
allows a car driver to determine what resources are needed for the trip.
For example, what type of vehicle is needed (in some instances an offroad vehicle will be needed to access dirt roads or unpaved paths), how
much petrol will be needed, and the total costs involved in the journey.
In terms of an organisation, planning is not complete without finding the
resources needed to attain organisational goals and objectives. Time;
talent; financial, information and physical resources are needed to attain
goals. Because of the scarcity of all resources, managers should realise
the importance of finding all needed resources. The prioritisation of goals
and objectives that we have discussed earlier can assist management
in finding the most crucial resources for the realisation of the most
important goals and objectives.
Planning takes place in a complex environment
Managerial planning takes place in a complex, turbulent environment.
Virtually all organisations face a rapidly changing environment and
should adapt to these changes. The management environment is
CONTEMPORARY MANAGEMENT PRINCIPLES
217
PART III: Planning
contingenc[ Rlanning
develop multiple plans based
on different environmental
conditions
LEARNING OBJECTIVE 2
Demonstrate an understanding
of the beneƂts and costs
associated with planning.
discussed in detail in Chapter 4 (The composition of the management
environment). In a rapidly changing environment, managers can benefit
from a DPOUJOHFODZQMBOOJOHapproach which is where multiple plans
are developed based on different environmental conditions.
Contingency planning requires flexibility. There are at least two
variations of how this can be achieved4. One variation is the development
of two or more plans (the idea of ‘plan B’) each of which is based on a
different set of strategic or operating conditions that could occur. Which
plan is implemented is determined by the specific circumstances that
come to pass. For example, an organisation may plan to begin production
at a new plant facility in June 2020, but managers should develop a
contingency plan that ensures uninterrupted production in the event
that the plant opening is being delayed for some reason (for example
a labour strike). A second variation of contingency planning rests on
the skill and ability of people in the organisation to think strategically
and flexibly. This means that people must be informed continuously and
understand the important trends, causes and effects, and interactions
of the conditions in both the external and internal environments of the
organisation. This skill is called having ‘prepared minds’ by some. This
does not rule out having ‘plan B’, rather it probably includes having a
second plan.
Because planning affects all downstream management functions, it has
been called the primary management function. Planning enables humans
to achieve great things by envisioning a pathway from concept to reality.
1MBOOJOHFOBCMFTPSHBOJTBUJPOTUPEFMJWFSOFFETBUJTGZJOHQSPEVDUTBOE
or services to its customers, create jobs, and contribute to the wealth of
the community. Planning done properly also enables organisations to be
sustainable over the long term.
Planning is a never-ending process because of constant change,
uncertainty, new competition, unexpected problems and emerging
opportunities. In the next section, we will focus on the benefits and
costs of planning in an organisation.
10.2 THE BENEFITS AND COSTS ASSOCIATED
WITH PLANNING
It has often been said that ‘organisations that fail to plan are planning
to fail’. However, most experienced managers recognise that there are
benefits as well as costs associated with planning.
10.2.1 The benefits of planning
Ideally, planning leads to superior performance for the organisation.
Planning done properly will lead to a sustainable organisation. From
a general perspective, planning offers the following benefits to the
organisation:
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managers to focus on forward thinking. When all organisational
members know where the organisation is going and what they
must contribute to attain the objectives, they can begin to
218
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 10 Principles of planning
r
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coordinate their activities and cooperation and teamwork are
fostered. Managers are also compelled to think ahead and to
consider resource needs and potential opportunities or threats
that the organisation may face in the future.
1MBOOJOHMFBETUPBQBSUJDJQBUPSZXPSLFOWJSPONFOU0SHBOJTBUJPOBM
plans should be developed and implemented by a wide range of
organisational members. This will lead to a more participative
working environment, where organisational members are more
likely to ‘buy in’ to a plan that they have helped develop.
1MBOOJOHSFEVDFTUIFJNQBDUPG DIBOHF*OBDIBPUJDFOWJSPONFOU planning enables managers to anticipate change and to develop
appropriate responses. Planning also clarifies the consequences of
the actions managers might take in response to change.
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When means and ends are clear, the overlapping and duplication
of activities and wasteful activities become obvious.
1MBOOJOHTFUTUIFTUBOEBSETCZXIJDIUPGBDJMJUBUFDPOUSPM
In planning, objectives are set and plans are formulated to
achieve objectives. In the controlling function of management,
performance is compared against the established objectives. If
significant deviations occur, corrective steps can be taken. Without
planning, control cannot take place – thus, a cyclical relationship
between planning and control exists. This is illustrated in
Figure 10.2.
Planning
Planning
&etermine objectives
Formulate Rlans
%arr[ Rlans out
#cJieve results
%omRare results YitJ objectives
Control
6aMe corrective action
Control
Figure 10.: The cyclical relationship between planning and control
5IF JOJUJBM QMBOOJOHDPOUSPM DZDMF CFHJOT XJUI UIF EFUFSNJOBUJPO PG objectives, after which plans are formulated to achieve objectives. Plans
are then carried out and results are achieved. The control process then
CONTEMPORARY MANAGEMENT PRINCIPLES
219
PART III: Planning
begins when results are compared with objectives. Corrective action
is necessary whenever final results deviate from objectives. Corrective
BDUJPO UIFO TFSWFT BT BO JOQVU UP UIF OFYU QMBOOJOHDPOUSPM DZDMF BOE
contributes to improved future plans. The control process will be
discussed in more detail in Chapter 21 (Principles of control).
10.2.2 The costs associated with planning
Despite the benefits of planning, it also involves some costs:
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changing environment, managers and their subordinates may
continue to do what is required in order to achieve the original
objectives.
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a substantial amount of managerial time, energy and financial costs.
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planning process can easily be reduced to a programmed routine,
replacing intuition and creativity in the organisation. This can spell
disaster for an organisation.
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the focus towards evaluating, rather than doing. This can delay
the organisation’s response to changes in its external and internal
environment, such as changes in industry, the marketplace or
internal operations.
Despite the costs that can be associated with planning, no organisation
can afford not to plan for its future. Our attention now turns to the
various types of plans that an organisation can formulate.
LEARNING OBJECTIVE 3
10.3 TYPES OF PLAN
Differentiate between the
various types of plan.
Plans can be described in terms of their breadth, timeframe, specificity
and frequency of use. When described in terms of their breadth,
strategic, tactical and operational plans can be distinguished. Plans
described in terms of their timeframe refer to long-term, intermediate
and short-term plans. When plans are described in terms of their
TQFDJųDJUZ EJSFDUJPOBM QMBOT BOEPS TQFDJųD QMBOT DBO CF VTFE -BTUMZ when the frequency of use is the basis, single-use plans, standing plans
and individual plans can be identified.
10.3.1 Strategic, tactical and operational plans
strategic Rlans
4USBUFHJD QMBOT apply to the entire organisation. A strategic plan
establishes the organisation’s overall long-term objectives, it seeks to
establish the organisation’s
position the organisation in terms of the environment and it drives the
overall long-term objectives,
seek to position the organisation organisation towards attaining its broad, overall goals.
Top-level managers develop strategic plans. Planning at strategic level
in terms of the environment and
includes:
drive the organisation towards
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attaining overall goals
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CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 10 Principles of planning
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vision, mission and long-term goals.
Strategic plans have the following characteristics:
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However, the timeframe depends on the type of industry and may
be longer or shorter than five years.
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weaknesses with threats and opportunities in the external
environment.
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the organisation.
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efforts of departments and individuals to contribute towards the
attainment of the overall goals and objectives of the organisation.
Strategic plans filter down in the organisation to form the basis for
tactical plans. 5BDUJDBMQMBOT specify the details of how the mediumterm objectives of the organisation are to be achieved. The focus of
tactical plans could be on the functional areas in an organisation, such
as marketing, finance, operations, human resources and so on. Tactical
plans are more specific than strategic plans. Tactical plans should take
synergy into consideration, in other words, they should contribute to
the attainment of the organisation’s overall goals. Middle- and first-line
managers usually develop tactical plans.
0QFSBUJPOBMQMBOTfocus on carrying out tactical plans to achieve
operational goals and are developed by middle-level and lower-level
managers. Operational plans are narrowly focused and have relatively
short time horizons (monthly, weekly, day-to-day). Lower-level
managers normally formulate operational plans.
tactical Rlans
specify the details of how the
medium-term objectives are to
be achieved
oRerational Rlans
focus on carrying out tactical
plans to achieve operational
goals
10.3.2 Long-term, medium-term and short-term
plans
-POHUFSN QMBOT are developed by top management and are
developed to achieve the overall goals of the organisation. The time
span for strategic planning varies from one organisation to the next. In
the case of an aircraft manufacturer, long term could be 20 years. For
an organisation in the information technology industry, long term could
be 12 months.
*OUFSNFEJBUFPSNFEJVNUFSNQMBOT are carried out by middle
management for the various functional departments in an organisation
and are developed to realise the tactical goals derived from the overall
goals.
4IPSUUFSNQMBOT are normally plans that cover less than one year.
They are developed by lower management and are concerned with the
day-to-day activities of an organisation and the allocation of resources
to particular individuals in accordance with particular projects, budgets
and so on.
longterm Rlans
developed to achieve the overall
goals of the organisation
intermeFiate or meFium
term Rlans
developed to realise the tactical
goals derived from overall goals
sJortterm Rlans
developed to achieve
operational goals
CONTEMPORARY MANAGEMENT PRINCIPLES
221
PART III: Planning
10.3.3 Specific and directional plans
Plans are classified as specific when they have clearly defined objectives
and leave no room for misinterpretation. Directional plans, on the other
hand, are flexible and set out general guidelines.
Table 10.1 summarises the key differences between plans in terms of
their breadth, timeframe and specificity.
Table 10.1: The various kinds of plan in terms of breadth, timeframe and speciƂcity
Breadth
Strategic plans
Seek to position the organisation in terms of the environment
and drive the organisation towards attaining its broad, overall
goals.
Tactical plans
Focus on the functional areas in an organisation and deal with
people and action to implement strategic plans.
Operational plans
Focus on smaller segments of the functional areas in an
organisation and carrying out tactical plans to achieve
operational goals.
Timeframe
5peciƂcit[
long term
broad
intermediate
more speciƂc than
strategic plans
short term
narrowly focused
10.3.4 Single-use, standing and individual plans
single-use plans
used once to meet the need of
a particular or unique situation
programme
describes a set of activities
designed to accomplish a
specific objective over a period
of time
There are three basic forms of operational plans, namely single-use,
standing and individual plans.
Examples of single-use plans are programmes, projects and
budgets used once to meet the need of a particular or unique situation.
A programme is a type of single-use plan that describes a set of
activities designed to accomplish a specific objective over a period of
time. Such plans outline the major steps and specific actions necessary to
implement the activities prescribed by the programme. The timing and
sequencing of the efforts of individuals and units are articulated in the
plan. For example, an organisation can implement a diversity programme
designed to recruit and hire a more diverse workforce as well as to
educate employees on issues related to diverse work environments.
SAP is the world’s leading provider of business
software. One of the biggest challenges facing
SAP South Africa, is that of skills. SAP South
Africa developed a programme to attract, retain
projects
the efforts of individuals or work
groups toward the achievement
of specific, well-defined goals
222
and develop a diverse portfolio of skills, race and
gender to SAP South Africa. Their approach is ‘to
find them and farm them’5.
A programme can consist of different projects. These are the efforts
of individuals or work groups toward the achievement of specific, welldefined goals. A programme manager manages a portfolio of projects
and is responsible for the programme meeting its deadlines. Projects
are less comprehensive and narrower in focus than programmes and
usually have predetermined target dates for completion.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 10 Principles of planning
SAP South Africa has identified various projects to
ensure a diverse portfolio of skills, race and gender
in the company. For example, they are striving to
create product awareness at school level through
its First Lego League programme which attracts
pupils between the ages of nine and 16 years, so that
potential employees have an affinity for the brand
from a young age. In addition, SAP is actively involved
with supporting career expos. The company also
institutionalised a graduate programme to create an
additional avenue for broadening the talent pool, and
has created more than 120 jobs. The company has
also introduced more than 12 000 e-learning courses
which can be completed on-line with the aid of
webcam or teleconferencing, or with the support of
learning circles6.
A CVEHFU is a numerical plan for allocating resources to specific activities.
Budgets can be used to plan the allocation of human, physical and
information resources. SAP South Africa would undoubtedly establish
a budget to support the implementation of the programme to ensure a
diverse portfolio of skills, race and gender in the company.
4UBOEJOH QMBOT provide guidance for repeatedly performed
actions in an organisation. They are on-going and designed to deal with
organisational issues or problems that occur frequently. Examples of
standing plans are policies, procedures and rules.
1PMJDJFT provide general actions to be followed in order to achieve an
objective. Human resources departments maintain policies concerning
sick leave, vacation leave and benefit options. Purchasing and supply
chain departments establish policies for procurement and inventory
management. A university’s administration has policies about admittance
to certain academic programmes, exemptions and so on. These policies
all provide a framework for decision-making that guides the decision
maker in evaluating specific circumstances surrounding each individual
case. It is important to note that policies do not state specifically what
the decision should or will be. Rather, they state the boundaries of the
EFDJTJPOBOEPSXIBUNVTUCFDPOTJEFSFEJOUIFEFDJTJPO
1SPDFEVSFT are sequences of actions to be followed in order to
achieve an objective. They are more specific and action oriented than
policies. Procedures are designed to give explicit instructions on how to
complete a recurring task. For example, a human resources department
may have a procedure for filing benefit claims or applying for vacation
leave. Production departments establish procedures for identifying
and evaluating suppliers and ordering supplies, operating the inventory
management system and identifying and implementing specific quality
control criteria.
3VMFT provide detailed and specific regulations for actions and state
exactly what should and what should not be done. A rule is the strictest
type of standing plan found in organisations. They are not intended
to serve as guidelines for making decisions. For example, a human
resources management department may have rules governing the
number of sick days an employee may take with full pay, the months
in which vacation leave can be scheduled, and the length of time an
organisational member must be employed before qualifying for benefits.
The production department may have rules governing the percentage
of supplies that can be purchased from a single supplier, the method in
buFget
numerical plan for allocating
resources to specific activities
stanFing plan
provide guidance for repeatedly
performed actions in the
organisation
polic[
provide general guidelines to be
followed when making decisions
proceFure
sequences of actions to be
followed in order to achieve an
objective
rule
provide detailed and specific
regulations for actions
CONTEMPORARY MANAGEMENT PRINCIPLES
223
PART III: Planning
management b[ objectives
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a process in which managers
and their subordinates jointly
set objectives for the individual
employee, derived from
broader organisational goals,
and periodically evaluate the
performance and reward them
according to the results
which inventory must be accounted for, and the way in which products
of sub-standard quality must be handled.
Increasingly, organisations are looking for ways to translate broader
organisational goals and plans to the level of individual employees. One
approach of doing so is NBOBHFNFOUCZPCKFDUJWFT .#0 .
MBO is a special planning process on individual level of an organisation.
It is a process in which managers and their subordinates jointly set
objectives for the individual employee, derived from broader
organisational goals, and periodically evaluate the performance and
reward them according to the results. Individual objectives and plans
are derived from broader organisational goals and plans (remember
the words goals and objectives are used interchangeably). The MBO
approach to planning helps managers balance conflicting demands by
focusing the attention of the manager and the subordinate on the tasks
to be completed and the performance to be achieved at an individual
level. MBO mainly involves the following steps:
4UFQ Setting individual objectives and plans. The manager and
subordinate jointly set objectives and plans for the individual. The
organisation’s vision, mission, long-term goals and plans should guide
them in setting these objectives.
4UFQIdentify criteria for assessing work performance. Once a set of
mutually agreeable objectives has been determined, criteria for assessing
the work performance of the individual are determined.
4UFQ Individual employees formulate and implement action plans.
Next, employees formulate and implement the action plans that are
necessary to achieve their individual goals and review their progress
with their managers on an intermittent basis.
4UFQCompare the performance of employee with goals. During this
step of the MBO process, the actual performance of the employees
is compared with the objectives established at the beginning of the
planning period.
4UFQReward performance. Performance rewards should be based
on the extent to which the objectives have been achieved.
4UFQPreparation of next period’s objectives by the employee. Once
the MBO cycle is complete, employees begin formulating goals to drive
the next MBO-planning period. The MBO process is self-renewing in
nature.
The MBO process can provide three primary benefits7:
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orientated approach to planning. The implementation of an MBO
programme forces managers to examine how the activities of each
individual in a group contribute to the achievement of the overall
goals of the group. As the MBO programme works its way up the
organisational hierarchy, it provides a system-wide coordinating
mechanism. The importance of coordination will be discussed in
more detail in Chapter 15 (Principles of organising).
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employees and their managers because they need to agree
on the objectives and plans for the employee. More frequent
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CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 10 Principles of planning
communication often serves to build stronger relationships
between managers and their employees.
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environment. Employees may have a better understanding of
where they fit into the broader organisation. They may also feel
they have a voice and can provide input into how their jobs should
be designed and what their performance targets should be.
At the same time, however, a number of potential disadvantages may
GPMMPXGSPNUIFJNQMFNFOUBUJPOPG UIF.#0QSPDFTT
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managerial activities.
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complicates the administrative process within the organisation.
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rather than on issues that are relevant to the long-term survival
and success of the organisation.
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operation.
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management when used selectively.
MTN is using a form of MBO quite effectively in
the company. Managers sit down with individuals to
discuss their individual goals. The goals and career
path of the individual are confirmed collaboratively
and once all parties are in agreement, MTN will
make the necessary investment, financially and
otherwise, to make sure that the individual’s
development is auctioned to the benefit of the
company and the individual.
For managers to formulate realistic operational plans, they need clear
guidance from strategic and tactical plans. Only if the different kinds of
plan are understood will lower-level managers be able to derive their
sections’ plans from plans at a higher level. This is called the hierarchy of
plans and is illustrated in Figure 10.3.
Strategic
plans
Tactical plans
Operational plans
Individual plans
Figure 10.3: The hierarchy of organisational plans
CONTEMPORARY MANAGEMENT PRINCIPLES
225
PART III: Planning
Although most managers will admit that they need to plan, many would
also admit that they do much less planning than they should. This
situation is a result of a number of barriers to effective planning.
LEARNING OBJECTIVE 4
10.4 BARRIERS TO EFFECTIVE PLANNING
Explain the barriers to effective
planning.
Why do managers sometimes do less planning (or less effective planning)
than they should? Managers fail to plan effectively because of four main
reasons.
10.4.1 Planning is time consuming
Managers often feel as though they face a continuous stream of problems
from the time that they arrive at work, until the time they leave. Through
better planning and the implementation of policies, procedures, rules
and the like, managers can develop operational systems that are more
effective and less problematic and demanding of their time.
10.4.2 Resistance to change
Almost by definition, planning involves changing one or more aspects
in an organisation to enable it to adapt to a turbulent and everchanging environment. Organisational changes may be required in one
or more elements of the organisation, for example the organisational
structure, the reward system, the standard operating procedures, office
administration and so on. In planning for implementing change, managers
almost inevitably encounter resistance from subordinates. Managers
themselves may also be resistant to change. Given the importance
of focusing on quality, continuous improvement and a total quality
approach, resistance to change can have very detrimental results for the
organisation over the long term.
10.4.3 Environmental complexity and volatility
Complex environments make it very difficult to implement planning
processes and to develop plans. However, organisations that operate
in rapidly changing and complex environments often find that planning
provides a mechanism for coping with such conditions.
10.4.4 Reluctance to establish goals
Managers may not always understand the principles for and importance
of formulating goals. They may also have a lack of confidence in their
own ability and the ability of their subordinates to formulate effective
goals. Furthermore, managers may also experience a fear of failure – by
not setting goals for their units or departments, managers cannot be
accused of not attaining their goals.
The barriers to effective planning almost seem insurmountable.
However, there are guidelines that managers can use to overcome these
barriers.
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CHAPTER 10 Principles of planning
10.5 OVERCOMING BARRIERS TO EFFECTIVE
PLANNING
Achieving success through planning requires the participation of a broad
range of organisational members. Managers should therefore develop
and maintain a culture that enables planning and reward those who plan
effectively. The following guidelines can help managers in this process.
LEARNING OBJECTIVE 5
Explain ways to overcome
barriers to effective planning.
10.5.1 Planning should start at the top
Planning should start at the top management of an organisation.
Without long-term planning for the organisation as a whole, middle
managers will not be able to plan for their departments for the medium
and short term. Without planning executed by middle managers, lower
managers will not be able to plan for the sections for the short term.
Top management’s sincere involvement sets the scene for subsequent
planning at middle and lower levels of management.
Top management should develop an organisational culture that
encourages strategic and results-oriented thinking – this will lead to more
effective planning. Employees should be provided with training necessary
to develop strategic thinking skills and even be given the opportunity to
practice those skills in their work environment. Furthermore, individuals
can also be rewarded for thinking strategically when developing their
plans.
The following history describing the fate of LeisureNet illustrates
the importance of the commitment of top management to the planning
process in an organisation.
%&"5)0'"#64*/&448
For a few weeks in September and October 2000,
Peter Flack was interim chief executive of the ill-fated
LeisureNet. He had been called in as a turnaround
specialist. He found that the company had deteriorated
so far and so fast that all that could be done for it was
to close it. LeisureNet was a large business, but the
lessons Flack draws from the LeisureNet failure need
to be learned by every entrepreneur and manager. This
is his account of one of South Africa’s most spectacular
corporate failures.
Every organisation, whether it be a club, church,
company or country, requires four basic ingredients
for it to be successful. They are leadership, a strategic
plan, a management team capable of implementing
the strategy, and an action plan which breaks the
strategic plan down into measureable bite-size bits.
This is the basis against which a business is measured.
LeisureNet, a successful and profitable company,
invited one of the directors of Coronation FRM to sit
on their board. A brief look at the results for the year
to December 1999 showed a group which turned
over in excess of R1bn and which made in excess
of R100m after tax. As a rough rule of thumb, we
have always said, ‘show us a company which produces
after-tax profits equal to 10 per cent of gross revenue
and we will show you a healthy business’.
The company operated 85 Health & Racquet
Clubs in South Africa and employed some 4 500
people who provided an excellent service to nearly
one million members. In addition, the company had
recently expanded offshore and had built 22 H&R
Clubs in Australia, Britain, Germany and Spain, with a
number in the process of construction.
On the surface, LeisureNet was a company with
strong leadership, a clear strategy and an obviously
competent management team.
At the first board meeting that we attended,
accusations were levelled at executive and nonexecutive directors alike and it appeared as if the
board had become dysfunctional. The previous joint
CONTEMPORARY MANAGEMENT PRINCIPLES
227
PART III: Planning
CEOs of LeisureNet had been transferred recently
to Healthland International Limited (again as joint
chief executive) and the young managing director of
the South African operations had been approached
to take the job as CEO of LeisureNet. However, he
had not accepted the position and the terms of his
appointment had not been finalised. So clearly there
was a question of leadership. The previous leaders
had sold almost all their interests in LeisureNet and
had been awarded a substantial and meaningful
stake, free of charge, in Healthland International
Limited.
Part of the conflict at board level was due to
the fact the LeisureNet had been used to fund, staff
and train employees of Healthland. The H&R Club
business had been pillaged to establish Healthland’s
operations and all available cash had been invested
in Healthland and little, if any, in the H&R Club
business. Some R370m of this available cash had
come from selling shares. The result was a lack of
maintenance and refurbishment at H&R Clubs.
On closer examination, there was no strategic
plan. A strategy, which is not reduced to writing, is a
hope, wish or prayer but not a plan. A strategic plan
requires that its participants go through a procedure
which, at the very least, identifies and analyses the
various internal and external issues which affect the
business.
The lack of a coherent strategic plan in
LeisureNet can be seen from the fact that over the
last five years the company has, in addition to the
health and fitness business, embarked on a food
business, golfing business, an education business,
a casino bid, a gymnasium equipment supplier, a
restaurant and the six member IMAX theatre chain.
Despite the fact that LeisureNet owned only half the
equity of the IMAX group, the company guaranteed
100 per cent of the leases of the purpose built
facilities housing the theatres and which extended
over 13–20 years.
Structure follows strategy and the lack of strategy
manifested itself in the composition of the board
of directors of LeisureNet. Instead of the various
disciplines inherent in a company being represented
on the board of directors, for example finance,
information systems, human resources and the line
operations, the board consisted of two former joint
CEOs, the MD of the local operations and a host of
non-executive directors.
Although the management information system
was home grown and, in many instances, required
a duplication of effort, the accounting system, sales
system, marketing and human resources procedure
were well thought out. In moving offshore, the
business there had adopted the best of the local
operating systems, acquired a standard management
information system and had recruited the most
senior of the local managers. The glaring omission,
however, related to the position of chief financial
officer and the treasury and cash management
functions for this massively cash hungry growth
business in a state of rapid development. Ultimately,
this gap in the management structure caused the
downfall of Healthland. Finally, there was no action
plan of any kind.
The group, with the notable exception of the
H&R Club business, did not meet, let alone pass, any
of the standards required by the four components
for any successful business, namely leadership,
strategic planning, management and action planning.
There were two other glaring omissions in the
field of corporate communications and corporate
governance.
The group could have been saved had it been
possible to raise sufficient money to complete the
building of the Healthland clubs under construction,
or if the sale of these offshore clubs could have
been concluded in a way which would have released
LeisureNet from its obligations to the Healthland
group. In the end, both attempts failed. Both these
failures can be traced back to fundamental flaws
in the issues of leadership, strategy, and corporate
communications.
10.5.2 Involve employees in decision-making and
planning processes
The role that line and functional managers play in the planning process
cannot be overemphasised. They are responsible for executing plans
formulated by higher levels of management and their involvement in
the planning process should be obvious. People are generally more
228
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 10 Principles of planning
committed to plans that they helped to shape. Therefore, employees at
all levels of an organisational hierarchy should be involved in planning.
For example, managers should seek information from employees and
keep them informed about expectations. Managers should also solicit
the opinions and views of their employees when formulating plans
and they should encourage individual members of the organisation
to communicate about the planning efforts of their sections and the
organisation.
Managers should also take advantage of diverse views and
perspectives of employees – it may lead to a broader assessment and
evaluation of organisational problems and opportunities. Organisations
that encourage a wide range of different ideas and views and have
learned to manage diverse groups are more likely to produce plans that
are comprehensive and fully developed. It is imperative to learn how to
manage diverse work groups. This issue is dealt with in detail in Chapter
9 (Workforce diversity).
10.5.3 Communicate throughout the planning
process
Communication plays a vital role in the effectiveness of planning.
Planning initiated at the top should be communicated to all other levels
in the organisation. Managers and all other employees should have a
clear understanding of the overall organisational strategy, functional
strategies and individual strategies, and how they are interrelated.
10.5.4 Plans should not be cast in stone
Any change or changes in the management environment, may lead to the
revision of plans. Also, in a turbulent environment contingency planning
may be very useful. Contingency planning was defined previously as the
development of two or more plans based on different environmental
conditions.
This chapter addressed planning as the first managerial function that
an organisation needs to address. Without proper planning, management
cannot proceed to any of the other managerial functions.
CONTEMPORARY MANAGEMENT PRINCIPLES
229
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or applicable copyright law.
Part III: Planning
CHAPTER SUMMARY
1. Explain the nature and importance of planning.
Planning can be defined as the managerial function that determines the organisational vision,
mission and goals, identifies ways of attaining the goals and finds the resources needed
for the task within a complex environment. Planning done properly enables an organisation
to create need-satisfying products and/or services to its customers, to create jobs and to
contribute to the wealth and living standard of the community.
2. Demonstrate an understanding of the benefits and costs associated with planning.
Planning:
• provides direction and helps managers as well as non-managers to focus on forward
thinking
• leads to a participatory work environment
• reduces the impact of change
• reduces the overlapping and duplication of activities
• sets the standard to facilitate control.
The costs associated with planning are:
• planning may create rigidity
• management time
• formal plans cannot replace intuition and creativity
• delay in decision-making.
3. Differentiate between the various types of plan.
Planning can be described in terms of i. breadth; ii. timeframe; iii. specificity; and iv.
frequency of use. When described in terms of its breadth, we can distinguish between
strategic, tactical and operational plans. If we describe plans in terms of its timeframe, longterm, intermediate (or medium-term), and short-term plans can be distinguished. When plans
are described in terms of their specificity, directional plans and/or specific plans can be
used. Based on the frequency of use, single-use plans, standing plans and individual plans
can be distinguished.
4. Explain the barriers to effective planning.
Effective planning in organisations is often hindered by:
• its time consuming nature
• a resistance to change
• environmental complexity and volatility
• reluctance to establish goals.
5. Explain ways to overcome barriers to effective planning.
Managers can follow various guidelines to enhance the planning process in their
organisations by:
• realising that planning starts at the top
230
Contemporary management prinCiples
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Copyright © 2014. Juta and Company. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S.
or applicable copyright law.
ChaPter 10 Principles of planning
• involving employees in decision-making and in the planning process
• communicating throughout the planning process
• ensuring flexibility.
KEY TERMS
a-B-C priority system
budget
contingency planning
directional plan
environmental complexity and volatility
goals
individual plan
long-term plan
management by objectives
medium-term plan
mission
objectives
operational plan
pareto principle
planning
policy
priorities
procedure
programme
project
rule
short-term plan
single-use plan
specific plan
standing plan
strategic plan
tactical plan
values
vision
REVIEW QUESTIONS
1. explain the nature of planning in contemporary organisations.
2. Defend the importance of effective planning in an organisation.
3. Compare the benefits and costs that can be associated with planning.
4. Differentiate between the various types of plans, based on their breadth.
5. explain the various types of plans based on their timeframe.
6. identify and discuss the various types of plans based on their specificity.
7. Use ‘frequency of use’ to distinguish between the various types of plans.
8. ‘managers fail to plan effectively because of mainly four reasons.’ Discuss this statement.
9. explain how managers can overcome the barriers to effective planning in an organisation.
Contemporary management prinCiples
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231
PART III: Planning
END NOTES
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232
CONTEMPORARY MANAGEMENT PRINCIPLES
Chapter 11
Strategic management
Tersia Brevis
OPENING CASE
Jack Welch at General Electric (GE)1
General Electric (GE) traces its beginnings to
Thomas A Edison, who established Edison Electric
Light Company in 1878. In 1892, a merger of
Edison General Electric Company and ThomsonHouston Electric Company created General
Electric Company and the company’s stock began
trading on the New York Stock Exchange. In 1894,
Edison sold all his shares in the company, remaining
a consultant to General Electric.
Jack Welch joined GE in 1960 as a chemical
engineer in the company’s Plastics division in
Pittsfield, Massachusetts. He was elected the
company’s youngest Vice President in 1972. In
1979, he became GE’s Vice Chairman. In December
1980, he succeeded Reginald H Jones, and in
April 1981 he became the eighth Chairman and
CEO. He served in that position until he retired in
September 2001. During his 20 years of leadership
in this position, radical changes took place at GE
and Welch increased the value of the company
from $13 billion to several hundred billion. In 1980,
the year before Welch became CEO, GE recorded
revenues of roughly $26.8 billion; in 2000, the year
before he left, they were nearly $130 billion. The
company went from a market value of $14 billion
to one of more than $410 billion at the time of
his retirement, making it the most valuable and
largest company in the world, up from America’s
tenth largest (based on market capitalisation) in
1981. Under his leadership, GE was listed as the
world’s most respected company in 1998 and
2002 (shortly after his retirement).
As CEO of GE, Mr Welch’s management
skills became almost legendary. He had little time
for bureaucracy and archaic ways of conducting
business. In his time, he gave managers free reign
as long as they followed the GE ethic of constant
change and striving to do better. He ran GE
like a small dynamic business able to change as
opportunities arose or when a business became
unprofitable. Soon after his appointment as CEO,
Welch realised that it had cost GE more to make
a television than it cost to buy a Japanese-made
set. GE was in a business that had no technological
advantage and where entry barriers were low.
Foreign competitors could quickly and easily enter
their market. In 1981, Welch began his crusade
to eliminate the company’s weak links before
they could drag down the entire organisation. His
goal was a radical restructuring of the company
that would get rid of problem products and
focus on profitable businesses immune to foreign
competition, particularly in the financial, high-tech,
and service sectors. His biggest challenge was
to change a company, which the outside world
thought was perfect, to face the realities of global
competition in the 1980s and 1990s. He launched
his controversial restructuring by ordering GE
managers to fix, sell or close down businesses
that were not first or second in their markets.
In all, GE made 1 700 acquisitions and divested
408 businesses while Welch was CEO. The most
prominent milestones for GE during the Jack
Welch era are briefly discussed below.
The GE Credit Corporation, founded in
1943, doubled its assets between 1979 and 1984,
primarily due to its expansion into new markets
such as the leasing and selling of heavy industrial
products, inventories, real estate and insurance.
Furthermore, the leasing operations provided by
the GE Credit Corporation, provided the parent
company with tax shelters from accelerated
depreciation on equipment developed by GE and
PART III: Planning
then leased by the credit corporation.
During the 1980s, factory automation became a
major activity at GE. Apart from many acquisitions
in this period, GE entered into an agreement with
Japan’s Hitachi, Ltd. to manufacture and market
Hitachi’s industrial robots in the United States. The
company also spent $300 million to robotise its
locomotive plant in Pennsylvania. The company’s
aircraft engine business also participated in an air
force plant modernisation programme and GE later
manufactured the engines for the controversial
B-1B bomber.
In 1986, GE made several extremely important
purchases, the biggest of which was the $6.4 billion
purchase of the Radio Corporation of America
(RCA). RCA’s National Broadcasting Company
(NBC) was at the time the leading US television
network and it brought GE into the broadcasting
business in full force. The purchase enabled GE
to shift from manufacturing into service and
high technology. During this time GE divested
itself of RCA’s David Sarnoff Research Center
because GE’s laboratories made it redundant. In
1987, GE also sold its own and RCA’s television
manufacturing business to the French company
Thomson in exchange for Thomson’s medical
diagnostics business.
In 1986, the company broadened its financial
services division by the purchase of the Employers
Reinsurance Corporation (a financial services
company), an 80 per cent interest in Kidder
Peabody and Company (an investment banking
firm). GE owned 100 per cent of the latter by
1990, but the unit was liquidated in 1994 due to its
poor financial performance.
During the early 1990s, GE’s operations
were divided into three business groupings,
namely technology, service and manufacturing. Its
manufacturing operations were traditionally the
core of the company. During this time period,
however, manufacturing accounted for roughly
one-third of the company’s earnings. However,
GE still continued to invest more than $1 billion
annually into the research and development of
manufactured goods. Much of this investment was
directed towards energy conservation, for example
more efficient light bulbs, jet engines and electrical
power transmission methods.
During 1992, the company continued the
234
CONTEMPORARY MANAGEMENT PRINCIPLES
restructuring of its existing operations with the aim
to become more competitive in all of its business.
For example, GE reduced its engineering workforce
from 10 000 to 4 000, resulting in a reduction of
nearly 50 per cent of its overall Aircraft Engine
Group payroll. Its restructuring activities paid off in
the form of excellent profit margins in many of its
major product divisions.
In the late 1990s, GE reached a number of
milestones. In 1996, the company celebrated its
hundredth year as part of the Dow Jones Industrial
Index – GE was the only company remaining from
the Index’s original list. In the same year, NBC
joined with Microsoft Corporation in launching
MSNBC, a 24-hour cable television news channel
and internet news service. Overall revenues
exceeded the $100 billion mark for the first time
in 1998. The company also grew tremendously
by means of further acquisitions centered on two
growth initiatives: services and globalisation. In
1999 magazine recognised Jack Welch’s success as
Manager of the Century. Under Welch’s leadership,
the company also adopted ‘six sigma’, a quality
control and improvement initiative pioneered
by Motorola, Inc. and AlliedSignal Inc. The aim
of the programme was to cut costs by reducing
errors or defects. GE claimed that six sigma was
yielding $1 billion in annual savings by 1998. During
this time, the company continued restructuring
their business. Redundant facilities were closed
and production was shifted to cheaper labour
markets. During 1999, GE adopted a fourth growth
initiative, namely e-business (the other three were
globalisation, services, and six sigma). Like many
other companies, GE reacted cautiously when
the internet began its late 1990s explosion. Once
Welch was convinced of the internet’s potential,
he quickly adopted e-commerce as a key to the
company’s future growth.
During the late 1999s, Welch announced his
planned retirement. At the time, GE was one of
the world’s fastest growing and most profitable
companies with a market capitalisation of $505
billion, second to only Microsoft Corporation.
He eventually retired in September 2001, leaving
behind an advanced technology, services and
financial company, taking on the world’s biggest
challenges and dedicated to innovation in energy,
health, transportation and infrastructure.
CHAPTER 11 Strategic management
LEARNING OBJECTIVES
The purpose of this chapter is to provide an overview of the strategic management process. The
objective of studying this chapter is to enable you to:
. Differentiate between the terms nstrategyo and nstrategic managemento.
2. Discuss the various phases in the strategic management process.
11.1 STRATEGY AND STRATEGIC
MANAGEMENT
LEARNING OBJECTIVE 1
Differentiate between the
terOU nUtrateI[o anF nUtrateIiE
OanaIeOento
11.1.1 Strategy
All organisations, large or small, profit-seeking or not-for-profit, private
and public sector, have a purpose, a reason for its existence. The
purpose of an organisation may or may not be articulated in the form
of a vision and mission statement. In the preceding chapter, we have
explained the vision as a statement of what the organisation wants to
become and where it wants to be in future. The mission statement aligns
UIFPSHBOJTBUJPOXJUIJUTWJTJPOJOUFSNTPG JUTQSPEVDUTBOEPSTFSWJDFT market and technology. 4USBUFHJFT relate to the pursuit of this purpose.
Strategies must be created and implemented. Strategies are relevant for
the organisation as a whole, for the individual businesses (or strategic
business units), the various functions that comprise the organisation
(such as the marketing, finance, operations and supply chain functions)
and for the individual in the organisation.
Organisations succeed when their strategies are appropriate for the
circumstances. In other words, there must be a fit between organisational
strategies and the circumstances in its external and internal environment.
Jack Welch is a legendary leader and strategist. In our opening case we
saw how Welch, as CEO of General Electric, aligned organisational
strategies with the vision and mission of the organisation and the
circumstances in the company’s managerial environment. Mr Welch ran
GE like a small dynamic business able to change as opportunities arose
or when a business became unprofitable. He launched his controversial
restructuring by ordering GE managers to fix, sell or close down
businesses that were not first or second in their markets. As a result,
GE made 1 700 acquisitions and divested 408 businesses while Welch
was CEO.
Strategies should also be feasible in respect of organisational
resources, skills and capabilities. In Chapter 2, we identified various
resources (or inputs), skills and capabilities that an organisation needs in
order to attain its goals and objectives. Resources, skills and capabilities
are scarce, and it is therefore important to formulate strategies that are
feasible in terms of the scarcity of these inputs. Managers should also
ensure that organisational strategies are desirable to all stakeholders.
Stakeholders are those individuals and groups, internally as well
as externally, who have a stake in or an influence over the business.
Organisations fail when their strategies do not meet the expectations
UVTCVGI[
helps to explain the things that
managers and organisations do
in order to fulfill the purpose of
the organisation
CONTEMPORARY MANAGEMENT PRINCIPLES
235
PART III: Planning
of stakeholders or when the organisation does not produce outcomes
that are desirable. To succeed and to ensure sustainability, organisations
must compete effectively and outperform their rivals in a dynamic and
turbulent environment. Managers should formulate ‘winning strategies’
to compete effectively and to outperform rivals.
11.1.2 A winning strategy
What is a winning strategy? A winning strategy is a strategy that2:
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opportunities and threats from its external environment
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A competitive advantage can be defined as the ability of an
organisation to add more value for its customers than its rivals, and
thereby attain a position of relative advantage. The real challenge
for a winning strategy is to sustain any advantage once achieved
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Performance refers to aspects such as profits, job creation,
organisational goals and objectives and so on
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11.1.3 Strategic management
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entails strategic analysis,
strategy formulation, strategy
implementation and strategic
control
236
First, TUSBUFHJD NBOBHFNFOU is about the strategy itself, the
establishment of a clear direction for the organisation and for every
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This is called the strategic analysis phase in the strategic management
process. Second, strategic management also entails the creation of a
means of getting to the required end, called strategy formulation. This
requires the creation of strong competitive positions. Third, strategic
management requires excellence in the implementation of strategies in
order to yield performance. This is referred to as strategy implementation
in the strategic management process. Strategic management is also
about strategic change. Creativity and innovation are needed to ensure
that the organisation is responsive to pressures for change and that
strategies are improved and renewed. Current and past successes are
no guarantee of success in the future. Organisations need to adapt and
change in a dynamic environment. Lastly, strategic management entails
strategic control. Strategic control is necessary in order to determine
the organisation’s success in attaining its vision, mission, objectives and
goals. The results of a comparison between actual results and intended
or planned outcomes, may lead to strategic change.
A clear vision and mission statement and a winning strategy can
provide an organisation with enormous success, as illustrated by the
Vanguard Group example on the next page.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 11 Strategic management
Vanguard Group3
By the turn of the twenty-first century, the Vanguard
Group had become the largest mutual fund family
in the world. The reason for their success lies in the
vision, winning strategy and steadfastness of John C
Bogle, the founder and now retired chairman.
As a student in 1950, Bogle was intrigued by the
management of mutual funds. At that time, all mutual
funds were sold with sales commissions, often eight
per cent of the amount invested, which was taken
off the top as a front-end load. This meant that if
you invested R1 000, only R920 would be earning
you money (the R80 goes towards management fees
and commissions). In addition, these funds also had
high yearly overheads or expense ratios and spent a
lot on advertising costs. Bogle wondered why funds
could not be bought without salespeople or brokers
and their steep commissions, and whether growth
could not be maximised by keeping overhead costs
down.
These ideas lead to the launch of Bogle’s own
company, the Vanguard Group of Investment
Companies in 1974. Bogle’s company changed the
entire structure under which mutual funds were
operated into a fund-distribution company mutually
owned by shareholders. The Vanguard company was
based on the principle of a reduction in overhead
costs, management fees and commissions and service
to customers. This strategy led to an enormous
success for the company. Twenty-five years after
its launch, the Vanguard company had more than
$92 billion in assets and had beat 86 per cent of all
actively managed stock funds in 1998 and an even
higher percentage over the past decade.
Bogle followed a low-cost investment strategy,
with the focus on customer service. He believed
in funds being bought and not sold; thus reducing
commissions to salespeople and brokers. He also
believed in word-of-mouth and spent the minimum
on advertising costs. The results gain by this strategy
are evident – the Vanguard Group of Investment
Companies’ equity and bond funds dominated Best
Buys, which are the yearly selected few funds that
analysts judge to ‘invest wisely, spend frugally, and
you get what you paid for’, and that have performed
best in shareholder returns over both up and down
markets.
11.2 THE STRATEGIC MANAGEMENT PROCESS
LEARNING OBJECTIVE 2
The management of the strategic process is usually built around four
important phases, where each phase consists of a number of steps.
The first phase of the strategic management process (strategic analysis)
answers the question ‘What is the current position of the organisation?’
It involves the development of a vision, a mission statement and an
analysis of the management environment. The second phase (strategy
formulation) answers the question ‘Where does the organisation
want to be?’ It involves setting goals and objectives and formulating
corporate and business strategies. Phase 3 (strategy implementation)
answers the question ‘How can the organisation get to where it wants
to be?’ It involves formulating functional strategies and institutionalising
them. Lastly, Phase 4 (strategic control) answers the question ‘How
will the organisation know when it has arrived?’ It involves an analysis
of results, comparison with the objectives and goals of the organisation
and corrective action.
It is important to note that the strategic management process is not
simply linear from Phases 1 to 4 which then ends. Managers need to
return to prior steps and make changes as an on-going process. Each of
these steps will now be discussed in more detail.
Discuss the various phases
in the strategic management
process.
CONTEMPORARY MANAGEMENT PRINCIPLES
237
PART III: Planning
UVTCVGIKECPCN[UKU
11.2.1 Strategic analysis
the determination of the current Figure 11.1 illustrates the phases of the TUSBUFHJDBOBMZTJT process.
position of the organisation by
formulating a vision, mission
and analysis of the management
environment
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In order to analyse the current position of the organisation, a vision
and a mission statement need to be formulated. An analysis of the
organisation’s internal and external environments is also conducted
during this phase. Although the vision and mission have been discussed
in Chapter 10, a more detailed explanation of these terms is provided
below.
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a statement of what the
organisation wants to become
and where it wants to be in
future
238
Develop a vision
The first step in the strategic management process is the development
of a clear WJTJPO, which requires managers to think about ways to
carry their organisations into the future. For top managers to lead the
organisation to success in the future, an inspiring vision is required that
everybody in the organisation – internal as well as external stakeholders
– shares in and is excited about. Effective visions push organisations and
individuals working in the organisation to look outside themselves to
see not what or where they are now, but where and what they can be in
future. The vision should provide a clear sense of what the organisation
hopes to become – an anchor for decision-making in the organisation.
A clear vision statement:
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external stakeholders.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 11 Strategic management
When top management effectively communicates the organisation’s
vision statement, there is a significantly higher level of motivation, job
satisfaction, commitment, loyalty, pride, clarity of the organisation’s
values and productivity.
Develop a mission statement
An organisation’s mission is its reason for being or its reason for
existence. The vision statement of an organisation guides the formulation
of the mission; the mission in turn provides strategic direction for
organisational members. Although NJTTJPO TUBUFNFOUT can vary
among organisations, every mission statement should answer at least
the following critical questions:
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services that we offer to our market)?
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be used to provide the primary products and services)?
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reflects an organisation’s reason
for being (it has three core
components: products and/or
services, market and technology
of the organisation)
The answers to these three questions should clearly set the organisation
apart from similar organisations.
In addition to the three core components of a mission statement
discussed above, organisations should also address the following
components, or state them in an addendum to the mission statement:
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survival, growth, market share and profit. Financial soundness is
an important factor in terms of the sustainability and long-term
survival of the organisation.
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beliefs form the basis of the way in which business is conducted, or
should be conducted, in the organisation.
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social obligations above and beyond making profit. Organisations
are also expected to obey the law, be ethical in their conduct and
be a good global corporate citizen. Social responsibility is discussed
in more detail in Chapter 8 (Business ethics, corporate social
responsibility and corporate governance).
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include the image that the organisation wants to portray to its
stakeholders.
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statement should clearly underline the organisation’s concern for
its external and internal stakeholders.
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competitors. This refers to the competitive advantage of the
organisation.
CONTEMPORARY MANAGEMENT PRINCIPLES
239
PART III: Planning
The components listed on the previous page are also referred to as the
PSHBOJTBUJPOBMQIJMPTPQIZ. The philosophy of International Business
Machines Corporation (IBM), as expressed by their current chairman,
the organisation’s concern
president and CEO, Samuel J Palmisano, is given below. The Computingfor financial soundness, the
Tabulating-Recording Company (CTR) was created on June 16, 1911,
values, ethics, beliefs of the
organisation, social responsibility by the merger of three nineteenth century companies (the Tabulating
Machine Company, the International Time Recording Company and
of the organisation, public
the Computing Scale Company of America). CTR was the precursor
image of the organisation,
to IBM. In 1914, Thomas J Watson Sr. joined CTR and played a major
organisation’s concern for
role in transforming the company over the following two decades into
all stakeholders and the
a growing leader of innovation and technology and a prototype for the
competitive advantage of the
newly emergent multinational corporation. In 1924 the company’s name
organisation
changed to International Business Machines Corporation (IBM). IBM is a
pioneer in the information technology industry. The company produces
innovative IT solutions to meet modern business needs4.
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0VSWBMVFTBUXPSLPOCFJOHBO*#.FS5
We’ve been spending a great deal of time thinking,
debating and determining the fundamentals of this
company. It has been important to do so. When
IBMers have been crystal clear and united about our
strategies and purpose, it’s amazing what we’ve been
able to create and accomplish. When we’ve been
uncertain, conflicted or hesitant, we’ve squandered
opportunities and even made blunders that would
have sunk smaller companies.
It may not surprise you, then, that last year we
examined IBM’s core values for the first time since
the company’s founding. In this time of great change,
we needed to affirm IBM’s reason for being, what
sets the company apart and what should drive our
actions as individual IBMers.
Importantly, we needed to find a way to engage
everyone in the company and get them to speak
up on these important issues. Given the realities of
a smart, global, and independent-minded, twentyfirst century workforce like ours, I don’t believe
something as vital and personal as values could be
dictated from the top. So, for 72 hours last summer,
we invited all 319 000 IBMers around the world to
engage in an open ‘values jam’ on our global intranet.
IBMers by the tens of thousands weighed in. They
were thoughtful and passionate about the company
they want to be a part of. They were also brutally
honest. Some of what they wrote was painful to
read, because they pointed out all the bureaucratic
and dysfunctional things that get in the way of
serving clients, working as a team or implementing
new ideas. But we were resolute in keeping the
240
CONTEMPORARY MANAGEMENT PRINCIPLES
dialog free-flowing and candid. And I don’t think
what resulted – broad, enthusiastic, grass-roots
consensus – could have been obtained in any other
way. In the end, IBMers determined that our actions
will be driven by these values:
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the world.
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I must tell you, this process has been very meaningful
to me. We are getting back in touch with what IBM
has always been about – and always will be about
– in a very concrete way. And I feel that I’ve been
handed something every CEO craves: a mandate,
for exactly the right kinds of transformation, from an
entire workforce.
Where will this lead? It is a work in progress, and
many of the implications remain to be discovered.
What I can tell you is that we are rolling up our
sleeves to bring IBM’s values to life in our policies,
procedures and daily operations. I’ve already
touched on a number of things relating to clients
and innovation, but our values of trust and personal
responsibility are being managed just as seriously
– from changes in how we measure and reward
performance, to how we equip and support IBMers’
community volunteerism. Our values underpin our
relationships with investors, as well.
In late February, the board of directors approved
sweeping changes in executive compensation. They
CHAPTER 11 Strategic management
include innovative programs that ensure investors
first receive meaningful returns – a 10 per cent
increase in the stock price – before IBM’s top 300
executives can realise a penny of profit from their
stock option grants. Putting that into perspective,
IBM’s market value would have to increase by $17
billion before executives saw any benefit from this
year’s option awards. In addition, these executives
will be able to acquire market-priced stock options
only if they first invest their own money in IBM stock.
We believe these programs are unprecedented,
certainly in our industry and perhaps in business.
Clearly, leading by values is very different from
some kinds of leadership demonstrated in the past
by business. It is empowering, and I think that’s much
healthier. Rather than burden our people with
excessive controls, we trust them to make decisions
and to act based on values – values they themselves
shaped.
To me, it’s also just common sense. In today’s
world, where everyone is so interconnected and
interdependent, it is simply essential that we work
for each other’s success. If we’re going to solve the
biggest, thorniest and most widespread problems
in business and society, we have to innovate in ways
that truly matter. And we have to do all this by taking
personal responsibility for all of our relationships –
with clients, colleagues, partners, investors and the
public at large. This is IBM’s mission as an enterprise,
and a goal toward which we hope to work with
many others, in our industry and beyond.
Samuel J. Palmisano; Chairman, President and Chief
Executive Officer
The statement above from IBM’s chairman, president and CEO,
addresses most of the ingredients of a philosophy as we have discussed
it theoretically:
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and united about their strategies and purpose, including their
concern for financial success in the industry.
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in their policies, procedures and daily operations.
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and beyond making profit and management equips and supports
community volunteerism of their employees.
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client’s success.
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relationship between management and subordinates. Rather
than burden their people with excessive controls, they trust
them to make decisions and to act based on values – values they
themselves shaped. IBM values good relationships with investors.
They implemented innovative programs that ensure that their
investors first receive meaningful returns before IBM’s top 300
executives can realise profit from their stock option grants. In
addition, these executives will be able to acquire market-priced
stock options only if they first invest their own money in IBM
stock.
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a strong focus on innovation and their concern for all stakeholders
places them in a good competitive position.
CONTEMPORARY MANAGEMENT PRINCIPLES
241
PART III: Planning
A mission statement should be used as a strategic tool in an organisation.
Figure 11.2 illustrates how this should be done.
Formulate the vision
Formulate the mission statement
Identify the key performance areas
Ensure buy-in from all stakeholders
Base individuals’ performance agreements
on key performance areas
Figure 11.2: The mission statement as a strategic tool
Smit, P.J., Cronjé, G.J. de J, Brevis, T., Vrba, M.J. 2007. Management Principles: A
Contemporary Edition for Africa. Cape Town: Juta Publishers, p 90.
First, top management should formulate the organisation’s vision and
mission statement. In a modern managerial environment, executive
managers (such as Mr Palmisamo from IBM), are rethinking their role
in the formulation of an organisation’s mission and philosophy. In some
instances, the involvement of subordinates in the formulation of mission
statements can be very fruitful. Second, management should formulate
key performance areas (KPAs) for the organisation as a whole. Third,
organisations should seek buy-in from all stakeholders. Fourth, the KPAs
should be cascaded down all the way to the performance appraisal level
of each individual in the organisation. Finally, if each individual achieves
his or her goals, the organisation will achieve its overall goals.
Analyse the environment
To create value, an organisation’s mission should be congruent with its
internal capabilities and its external environment. Therefore, the internal
242
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 11 Strategic management
as well as the external environment should be analysed. The purpose
of the internal environmental analysis is to identify assets, resources,
skills and processes that represent either strengths or weaknesses of
the organisation.
Strengths can be defined as aspects of the organisation’s operations
that represent a potential competitive advantage, while weaknesses
can be defined as areas that are in need of change or improvement.
Key areas to be assessed in the internal environmental analysis are:
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These areas are evaluated in terms of the extent to which they support
the competitive advantage sought by the organisation. Managers will
then use this information to formulate strategies that capitalise on the
organisation’s strengths and remedy its weaknesses.
The purpose of the external environmental analysis is to identify
opportunities and threats in the organisation’s external environment.
Opportunities can be described as those environmental variables
on which the organisation can capitalise and improve its competitive
position.
Threats are conditions that jeopardise the organisation’s ability
to survive and be successful in the long term. In Chapter 4, several
external environmental variables were discussed. These forces should
be analysed to identify threats and opportunities.
The analysis of the internal and external environments will indicate to
management whether the mission statement is realistic. This will lead to
the second phase of the strategic process, namely strategy formulation.
strength
aspects of organisational
operations that represent a
potential competitive edge
weakness
area of organisational operations
that are in need of change or
improvement
opportunities
environmental variables that
can improve an organisation’s
competitive position
threats
environmental variables that
hinder an organisation to survive
or be successful
11.2.2 Strategy formulation
Figure 11.3 illustrates the phases of the strategy formulation process.
Strategy formulation involves setting long-term goals for the
organisation and then formulating corporate and business strategies that
will lead to the realisation and the long-term goals.
Set
long-term
goals
Formulate
corporate
and business
strategies
r )eneric strategy
r )rand strategy
Figure 11.3: Strategy formulation
CONTEMPORARY MANAGEMENT PRINCIPLES
243
PART III: Planning
balanced score card (BSC)
measurement of organisational
performance in four areas of
equal importance, namely
financial performance, customer
service, internal business
performance and learning and
growth performance
244
Set long-term goals
In the previous chapters, the terms ‘goals’ and ‘objectives’ were used
interchangeably. However, in this chapter we make a clear distinction
between these two concepts. Goals state general targets to be
accomplished.
Objectives, on the other hand, state what is to be accomplished in
singular, specific and measurable terms with a target date. Goals are
often translated into objectives. Goals and objectives should flow from
the organisation’s mission statement to address strategic issues and
problems identified through the strategic analysis phase. Successful
strategic management requires a commitment to a defined set of
strategic objectives by management.
Kaplan and Norton have developed a tool that can be used to
ensure that the organisation is achieving its mission. They suggest that
organisations focus their efforts and activities on a limited number of
specific, critical performance measures which reflect stakeholders’ key
success factors. In this way, organisations can concentrate on those
issues which are essential for long-term success, sustainability and
competitiveness. Kaplan and Norton used the term balanced score
card to describe a framework of four groups of performance measures,
and argue that organisations should select critical measures for each of
these areas. Examples of possible measures of each of these are given
below6:
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question ‘Is the organisation’s performance resulting in increased
shareholder value?’ The financial performance of an organisation
is normally evident from its key financial statements, such as the
income statement, balance sheet, and cash flow statement. The
income statement of an organisation is often referred to as the
‘profit and loss statement’ that shows the organisation’s income,
expenses and net profit for a specific financial period, usually one
year. A ‘balance sheet’ provides a snapshot of an organisation’s
financial position at a certain point in time, showing its assets,
liabilities and equity. An organisation’s ‘cash flow statement’
reflects the amounts of cash moving in and out the organisation.
By themselves, none of these financial statements portray the full
financial picture of an organisation. The income statement, balance
sheet and cash flow statement must be used together when
assessing an organisation’s financial performance. In addition, an
organisation can use its financial statements to calculate financial
ratios such as return on capital employed, economic value added
and so on. In our opening case, we saw the positive effect of
choosing and implementing a winning strategy on the financial
performance of General Electric under the leadership of Jack
Welch.
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the question ‘Is the organisation’s performance resulting in an
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stakeholders of an organisation. One measure of customer service
is customer satisfaction, which is often used by organisations. It is
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 11 Strategic management
also important for organisations to monitor customer defections,
that is, by identifying which customers are leaving the organisation
and measuring the rate at which they are leaving.
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answers the question ‘Are the internal processes effectively aligned
to drive and deliver improved performance?’ It focuses on the
processes, decisions, and actions that managers and workers make
within the organisation that add value to the organisation. The
internal perspective of the balanced scorecard typically focuses
on quality. Quality can be measured in various ways, for example
producing a product or service with unsurpassed performance and
features, offering a product with excellent quality for the price or
offering a product that conforms to customers’ expectations.
r -FBSOJOHBOEHSPXUIQFSTQFDUJWF5IFMBTUQFSTQFDUJWFPGUIF
balanced scorecard addresses the question ‘Does the organisation
have the necessary human capital, technology and culture to drive
the strategy?’ Thus, the learning and growth perspective involves
continuous improvement in products and services, continuous
learning, and continuous designing and redesigning of processes by
which products and services are created.
All four dimensions of the scorecard are of equal importance, and
results relate to one another through the systems effect. The BSC is
discussed in more detail in Chapter 21 (Principles of control).
Formulating corporate and business strategies
After the vision and mission have been formulated, the situation analysis
has been completed and strategic goals and objectives have been set,
corporate and business strategies should be developed.
Generic strategies
When choosing a strategy, strategic planners decide on a core idea
about how the organisation can best compete in the marketplace. The
term used in strategic planning for this core idea is ‘HFOFSJDTUSBUFHZ’.
Michael Porter, a well-known Harvard professor, identified generic
strategies that can be used to describe the strategy of most organisations.
Porter originally identified three generic strategies, namely:
r DPTUMFBEFSTIJQstrategy
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An overall cost leadership strategy attempts to maximise sales of the
organisation by minimising costs per unit and hence prices. Several things
can be done to minimise costs. First, as workers gain more experience
in producing a particular product, productivity increases and unit costs
decrease. This is called a ‘learning curve’ or ‘experience curve’. Second,
an organisation can expand the size of its operations. As the size of
the operations increases, the total costs per unit decrease because the
fixed costs (for example the costs pertaining to buildings, machinery,
generic strateg[
core idea about how the
organisation can best compete
in the marketplace
cost leadership
the first generic strategy, which
attempts to maximise sales of
the organisation by minimising
costs per unit
CONTEMPORARY MANAGEMENT PRINCIPLES
245
PART III: Planning
equipment and others) are shared by a larger number of products.
This is referred to as ‘economies of scale’. An example of this is the
reduction in the price of pocket calculators over the years as a result of
economies of scale.
Differentiation is the second generic strategy, which distinguishes
differentiation
an organisation’s products or services from those of its competitors.
the second generic strategy,
The rationale for differentiation is that the organisation can charge
which distinguishes an
higher prices (and make more profit per unit) for a product that
organisation’s products or
customers perceive to be different from similar products offered by
services from those of its
rivals. Differentiation may be in terms of quality, production process,
competitors
design, reputation or any number of other attributes.
The third generic strategy is to focus on a specific product line
or a segment of the market that gives an organisation a competitive
focus
edge. Initially the focus strategy was anchored in focused low-cost and
the third generic strategy, which
focused differentiation strategies. Porter suggested that organisations
attempts to focus on a specific
had to choose either low cost or differentiation; to attempt both would
product line or a segment of the
cause an organisation to achieve neither and be ‘stuck in the middle’.
market that gives an organisation
The three generic strategies developed by Porter are usually thought
a competitive edge
of as separate strategies now, in other words, an organisation needs to
choose between the following generic strategies:
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Over time, many industries have changed, requiring organisations to
accomplish the benefits of both low cost and differentiation strategies.
Some organisations have actually used the low-cost approach as a way
to differentiate themselves from competitors. A best-cost provider
strategy usually refers to strategy that combines the advantages of both
low cost and differentiation7.
Once an organisation has chosen a generic strategy – or core idea –
it should decide on a more specific grand strategy for each business.
These are referred to as grand or overall corporate-level strategies.
Grand strategy
A grand strategy can be described as the overall corporate-level strategy
of growth and decline. Figure 11.4 depicts the choice of corporate
growth strategies.
Corporate
growth
strategy
r
r
r
r
r
r
r
concentration growth
market development
product development
innovation
integration
diversiƂcation
corporate combination
Figure 11.4: %orporate growth strategies
246
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 11 Strategic management
$PSQPSBUFHSPXUITUSBUFHZ
With a DPSQPSBUF HSPXUI TUSBUFHZ, the organisation makes
aggressive attempts to increase its size through increased sales. In our
opening case, we saw how Jack Welch implemented various corporate
growth strategies, increasing the value of General Electric from
$13 billion to several hundred billion during his 20 years of leadership.
At his retirement, GE was the most valuable and largest company in the
world, up from America’s tenth largest (based on market capitalisation)
in 1981. The successful implementation of various growth strategies led
GE to be listed as the world’s most respected company in 1998 and
2002.
The organisation that wants to grow has seven major options, namely
concentration, market development, product development, innovation,
integration, diversification and corporate combinations.
r $PODFOUSBUJPOHSPXUITUSBUFHZ8JUIBDPODFOUSBUJPOHSPXUI
strategy, the organisation grows aggressively in its existing line(s)
of business. In other words, the organisation continues to be in the
same line of business as far as products, markets and technology
are concerned.
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is closely related to a concentration growth strategy. It involves
selling present products (using present technology) in new markets
by opening new outlets or attracting other market segments.
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involves a substantial change in existing products or additions to
present products. These products are sold in existing markets by
using the existing technology.
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development of new products, services or technologies that
completely replace the existing products, services or technologies
in an industry. Organisations choosing this strategy continually
search for original or novel ideas.
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enters a forward, backward or horizontal line or business.
‘Forward integration’ occurs when an organisation enters a line
of business closer to the final customer. In other words, when an
organisation takes control of aspects related to its distribution,
transport or selling. ‘Backward integration’ occurs when the
organisation enters a line of business further away from the final
customer to get increased control over its supply sources. In
other words, the organisation produces what it previously bought
in. ‘Horizontal integration’ refers to the acquisition or merger
of organisations at the same stage in the supply chain. Such
organisations may be direct competitors or they may focus on
different market segments.
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organisation can go into a related or unrelated line of business.
‘Related diversification’ is also called ‘concentric diversification’,
and it involves the addition of related business in terms of product,
corporate growth strategy
the organisation makes
aggressive attempts to increase
its size through increased sales
CONTEMPORARY MANAGEMENT PRINCIPLES
247
PART III: Planning
market and technology. ‘Unrelated diversification’ is also called
‘conglomerate diversification’. It involves the addition of unrelated
business in terms of product, market and technology.
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grow by means of a corporate combination, which includes
mergers, acquisitions, takeovers, joint ventures and strategic
alliances. A ‘merger’ occurs when two organisations form one
new organisation by pooling all their resources. In a merger, the
two organisations simply agree to come together as one new
organisation. An ‘acquisition’ occurs when one organisation buys
all or part of another organisation for either cash or equity in
the parent organisation. One business becomes part of another
existing business. When management of the target business rejects
the purchasing company’s offer, the purchasing company can make
a bid to the target company shareholders to acquire the company
through a ‘takeover’. In the case of a takeover, the acquisition is
hostile. A ‘joint venture’ is created when two or more businesses
join resources to form a separate new business in which they share
ownership. Equity positions are usually taken by participants. A
‘strategic alliance’ is an agreement between organisations but does
not necessarily involve shared ownership.
4USBUFHZJOBDUJPOBU(FOFSBM&MFDUSJD8
In our opening case, we saw General Electric
implementing numerous corporate growth strategies
successfully while Jack Welch was CEO, for example:
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of market development and doubled its assets
between 1979 and 1984. The company entered
into new markets such as the leasing and selling
of heavy industrial products, inventories, real
estate and insurance.
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purchase of the Radio Corporation of America
(RCA), which brought GE into the broadcasting
business in full force. This purchase is an example
of implementing a diversification strategy which
enabled GE to shift from manufacturing into
service and high technology.
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with Japan’s Hitachi Ltd. to manufacture and
market Hitachi’s industrial robots in the United
States.
Corporate decline strategy
A corporate growth strategy is not the only or always the most
appropriate strategies to follow
appropriate strategy to follow. A DPSQPSBUFEFDMJOFTUSBUFHZ is an
when an organisation needs to
appropriate strategy to follow when an organisation needs to regroup
regroup its activities to improve
its activities to improve efficiency after a period of fast growth, where
efficiency after a period of
long-term growth and profit opportunities are unavailable, where other
fast growth, where long-term
opportunities are more attractive or where there is a period of economic
growth and profit opportunities
uncertainty. At General Electric, the successful implementation of
are unavailable, where other
appropriate decline strategies at the right time, also contributed to the
opportunities are more attractive
enormous success of the company.
corporate decline strategy
or where there is a period of
economic uncertainty
248
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 11 Strategic management
Corporate
decline
strategy
r turnaround
r divestiture
r harvesting
r liSuidation
Figure 11.5: Corporate decline strategies
We can distinguish between various corporate decline strategies, of
which the most prominent ones are turnaround, divestiture, harvesting
and liquidation strategies.
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assets, and so on.
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component of the business to achieve a permanent change in the
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divisions or business units of the organisation.
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it and move on.
General Electric’s restructuring process
Our opening case provides numerous examples of
the successful implementation of corporate decline
strategies. Jack Welch’s primary goal was a radical
restructuring of the company that would get rid
of problem products and to focus on profitable
businesses immune to foreign competition,
particularly in the financial, high-tech and service
sectors. He launched his controversial restructuring
process by ordering GE managers to fix, sell or
close down businesses that were not first or second
CONTEMPORARY MANAGEMENT PRINCIPLES
249
PART III: Planning
in their markets. As a result, GE divested 408
businesses under his reign. The most prominent of
these were:
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Corporation of America’s (RCA) David Sarnoff
Research Center because GE’s laboratories
made it redundant.
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television manufacturing business to the French
company Thomson.
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Kidder Peabody and Company, of which they
owned 100 per cent by 1990. This unit was
liquidated in 1994 due to its poor financial
performance.
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workforce from 10 000 to 4 000, resulting
in a reduction of nearly 50 per cent of its
overall Aircraft Engine Group payroll. These
restructuring activities contributed to excellent
profit margins in many of its major product
divisions.
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production shifted to cheaper labour markets.
Select a corporate strategy
An organisation now needs to select a corporate strategy or a
combination of corporate strategies to implement. Various techniques
are available for this purpose. Of the most widely used techniques are
the SWOT analysis, the business portfolio analysis, the product portfolio
analysis and the Boston Consulting Group (BCG) growth-share matrix.
The first phase of the strategic management process (earlier defined
as the strategic analysis phase), involves an analysis of the organisation’s
environment and we have named the SWOT analysis. An organisation’s
resources (which constitute its strengths and weaknesses) should
match the demands from its external environment (manifested in a set
of opportunities and threats) as effectively and efficiently as possible.
Over time, both the internal and external environments can change,
leaving the challenge to management to keep this match in dynamic and
turbulent times.
The CVTJOFTTQPSUGPMJPBOBMZTJTcan be described as a technique
business portfolio analysis
for
determining which line or lines of business the organisation will
the process of determining
be
in
and how it will allocate resources among them. A business line,
which line or lines of business
also
referred
to as a ‘strategic business unit’ (or SBU), is a distinct
the organisation will be in and
business
with
its
own customers and is managed independently of other
how it will allocate resources
businesses
within
the organisation.
among them
Figure 11.6 on the next page illustrates the Boston Consulting Group
(BCG) growth-share matrix. In the #PTUPO $POTVMUJOH (SPVQ
Boston Consulting )roup
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business units is plotted on a matrix according to its relative market
a technique used to plot an
growth rate and relative market share.
organisation’s strategic business
The relative market growth rate of a SBU is plotted on the vertical
units (or SBUs) according to its
axis and it represents the annual growth rate of the market in which
relative market growth rate and
the organisation operates and competes. The relative market share of a
relative market share
SBU (on the horizontal axis of the matrix) indicates the market share in
relation to the largest competitor in the market.
250
CONTEMPORARY MANAGEMENT PRINCIPLES
High
CHAPTER 11 Strategic management
QUESTION MARKS
STARS
Market growth rate
SELECT FEW
REMAINDER
DIVESTED
Net users of
resources
Net suppliers of
resources
DOGS
Low
CASH COWS
High
HARVESTED/LIQUIDATED
Relative competitive position (market share)
Low
Figure 11.6: The Boston Consulting Group growth-share matrix
The growth-share matrix is divided into four quadrants, where each
quadrant represents a particular type of business:
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CONTEMPORARY MANAGEMENT PRINCIPLES
251
PART III: Planning
SBUs falling into the various quadrants of the BCG matrix, call for
various strategies, for example9:
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An organisation in a single line of business cannot conduct a business
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product portfolio analysis GPSXIJDIUIF#$(HSPXUITIBSFNBUSJY
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product portfolio analysis
the process of determining
which product line or lines of
business the organisation will
be in and how it will allocate
resources among them
11.2.3 Strategy implementation
strategy implementation
formulate medium- and shortterm goals and objectives and
institutionalise strategy
Set
functional
goals and
objectives
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Once goals and objectives have been formulated for the medium
term, strategies for the medium and short term also need to be
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Formulate
medium- and
short-term
strategies
Institutionalise
strategies
through:
Figure 11.7: Strategy implementation
252
CONTEMPORARY MANAGEMENT PRINCIPLES
r strategic leadership
r organisational culture
r organisational
architecture
CHAPTER 11 Strategic management
Secondly, the strategy should be institutionalised within the
organisation.
Institutionalising a strategy means that every member, work group,
department and division of the organisation subscribes to and supports
the organisation’s strategy with its plan and actions. There must be a
fit between the organisational strategy and its strategic leadership,
organisational culture and organisational architecture, if the strategy is
to be institutionalised.
4USBUFHJDMFBEFSTIJQis often stated as the key driver of strategy
implementation. In Chapter 2, leadership was defined as directing the
human resources of the organisation and motivating them in such
a way that their actions are aligned with previously formulated goals
and plans. Strategic leadership requires managers to understand the
entire organisation and the environment within which they operate.
Furthermore, strategic leaders should use their understanding of the
environment to create strategic change through other people in order
to position their organisation in the environment for organisational
stability over the short term and organisational sustainability over the
long term10. Effective strategic leadership involves tasks such as:
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combination of strategies
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implementation
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organisation
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and strategies
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0SHBOJTBUJPOBMDVMUVSF needs to be aligned with the vision, mission
and strategy of the organisation in order to realise organisational goals
and objectives. Organisational culture can be described as the values,
beliefs, norms and attitudes that bind people together and help them
make sense of the systems within an organisation. The beliefs, values
and norms tell people ‘what is to be done’ and ‘how it is to be done’.
Organisational culture determines how people act in an organisation,
the way people relate to each other, to customers, to shareholders
and to their business partners. Some of the most obvious displays of
organisational culture are rituals, ceremonies, language, metaphors,
symbols, stories and sagas. In an organisation with a strong culture, shared
values and believes create a setting in which people are committed to
one another and to the overriding vision, mission and strategic goals of
the organisation11.
strategic leadership
leading the entire organisation
organisational culture
the values, beliefs, norms and
attitudes that bind people
together and help them make
sense of the systems within an
organisation
CONTEMPORARY MANAGEMENT PRINCIPLES
253
PART III: Planning
organisational architecture
an integrated model of how the
organisation is doing business
Organisational architecture
Organisational architecture can be defined as the integrated
strategic response which draws together the key dimensions of the
organisation. These dimensions are for example, the organisational
structure, its leadership, culture, policies and strategies. Organisational
architecture’s purpose is to guide strategic formulation, the alignment
of strategies with the vision, mission and goals of the organisation and
the effective implementation of strategies. Organisational architecture
provides a model of the organisation’s way of doing business. An
organisational architecture should:
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organisation is about
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organisation itself, thus creating a blueprint which is unique and
specific to the organisation
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in order to attain maximum strategic impact
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11.2.4 Strategic control
r
Strategic
control
r
r
organisational
performance
productivity
management
effectiveness
Figure 11.8: Strategic control
strategic control
involves monitoring the
implementation of the strategic
plan and ensuring quality and
total effectiveness in terms of
organisational performance,
productivity and management
effectiveness
254
The last phase of the strategic process is strategic control, which
involves monitoring the implementation of the strategic plan and
ensuring quality and total effectiveness in terms of organisational
performance, productivity and management effectiveness. This
is illustrated in Figure 11.8. An effective strategic control process
identifies problems and signals to the organisation that a change may
be needed. The chief concern when examining an organisation’s total
effectiveness is determining the extent to which it attains its mission and
goals. This is often referred to as an organisation’s total effectiveness.
The productivity of an organisation, as a strategic control instrument,
refers to an economic measure of efficiency that summarises what is
produced (output) relative to what resources the organisation used
(input) to produce the output. Lastly, management effectiveness refers
to a management audit of an organisation’s main success factors, such
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 11 Strategic management
as profitability, the organisational structure, research and development,
financial policy, and market share. These factors should be measured on
a regular basis, providing feedback to management that can be used as
input for the next cycle of strategic planning. The strategic management
process is therefore an on-going process, with the output of strategic
control used as an input for the following strategic management process.
The formulation and implementation of successful strategies is a
complex managerial task, which is affected by numerous factors and
variables. This chapter identified a logical process for conducting the
strategic management process, which is summarised in Figure 11.9.
Strategic
analysis
r develop a
vision
r formulate the
mission
statement
r analyse the
environment
r set long-term
goals
r formulate
corporate and
Strategy
business
formulation
strategies
r select corporate
and business
level strategies
Strategy
implementation
r set functional
goals and
objectives
r formulate
medium- and
short-term
strategies
r institutionalise
strategies
Strategic
control
r organisational
performance
r productivity
r management
effectiveness
Outputs of the control phase serve as input to the next strategic management process
Figure 11.: Summary of strategic management process
CONTEMPORARY MANAGEMENT PRINCIPLES
255
Copyright © 2014. Juta and Company. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S.
or applicable copyright law.
Part III: Planning
CHAPTER SUMMARY
1. Differentiate between the terms ‘strategy’ and ‘strategic management’.
• A strategy is a means to an end.
• Strategic management is a process that entails various phases, namely strategic analysis,
strategy formulation, strategy implementation and strategic control.
2. Discuss the various phases in the strategic management process.
• Strategic analysis. Determine the current position of the organisation by formulating a vision,
mission statement and analysing the external and internal environment of the organisation.
• Strategy formulation. Involves the setting of long-term goals and objectives and the selection
of corporate and business strategies. A generic strategy is the core idea about how the
organisation can best compete in the marketplace. Porter identified generic strategies,
namely cost leadership strategy, differentiation strategy, focused low cost strategy and a
focused differentiation strategy. After the identification of a generic strategy, the organisation
needs to select a grand strategy. A grand strategy is the overall corporate-level strategy of
growth and decline. With a corporate growth strategy, the organisation makes aggressive
attempts to increase its size through increased sales by implementing one, or a combination
of more than one of the following strategies: concentration growth, market development,
product development, innovation, integration, diversification or corporate combination. A
corporate decline strategy is the appropriate strategy to follow when the organisation needs
to regroup its activities to improve efficiency. Corporate decline strategies can be categorised
as turnaround, divestiture and liquidation strategies. Various techniques are available to assist
management in the selection of a corporate strategy or a combination of corporate strategies,
namely the SWOT analysis, the business portfolio analysis, the product portfolio analysis
and the Boston Consulting Group growth-share matrix. Once corporate-level strategies are
formulated, business-level strategies need to be developed for each business unit.
• Strategy implementation. Involves the formulation of medium- and short-term goals and the
institutionalisation of the strategy, where the latter refers to strategic leadership, organisational
culture and organisational architecture.
• Strategic control. This phase involves the determination of the total effectiveness, productivity
and management effectiveness of the organisation.
KEY TERMS
acquisition
Boston Consulting group growth-share matrix
business portfolio analysis
concentration growth strategy
corporate combination
corporate decline strategy
corporate growth strategy
cost leadership strategy
differentiation strategy
diversification strategy
256
divestiture
environmental analysis
focus strategy
generic strategy
goal
grand strategy
harvesting
innovation strategy
integration strategy
liquidation
Contemporary management prinCiples
EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 5/3/2018 12:48 PM via UNISA
CHAPTER 11 Strategic management
management effectiveness
market development strategy
merger
mission
objective
opportunity
organisational architecture
organisational culture
overall effectiveness
product development strategy
product portfolio matrix
productivity
strategic analysis
strategic business unit
strategic control
strategic leadership
strategic management
strategy
strategy formulation
strategy implementation
strength
takeover
threat
turnaround
vision
weakness
winning strategy
REVIEW QUESTIONS
1. Differentiate between the terms ‘strategy’ and ‘strategic management’.
2. Identify the characteristics of a winning strategy.
3. Define ‘strategic analysis’ and discuss the various steps involved in it.
4. Explain the term ‘strategy formulation’.
5. Differentiate between the terms ‘goal’ and ‘objective’.
6. Discuss the various generic strategies developed by Michael Porter.
7. Define the term ‘grand strategy’.
8. Explain the various corporate growth strategies that an organisation can follow.
9. Discuss the various corporate decline strategies that an organisation can implement.
10. Various techniques are available to assist management in the selection of a corporate strategy or a
selection of strategies. Discuss these techniques.
11. Explain the various steps to follow when institutionalising organisational strategies.
12. Discuss strategic control.
END NOTES
1
Adapted from (i) [Online] Available: http://www.fundinguniverse.com/company-histories/General-Electric-CompanyHistory.html. Accessed on 19 October 2011. (ii) Anonymous. Strategic direction; Jul/Aug 2002, 18(8):4–7.
(iii) http://www.answers.com/topic/jack-welch. Accessed on 19 October 2011.
2
Louw, L. & Venter, P. 2006. Strategic Management: Winning in the Southern African workplace. Cape Town: Oxford
University Press, p 35.
3
Hartley, R.F. 2011. Management mistakes and successes. 10th edition. Cleveland: Wiley, pp 179–189.
4
[Online] Available: http://www-03.ibm.com/ibm/history/interactive/ibm_ohe_pdf_13.pdf. Accessed on 11 April 2011.
5
[Online] Available: http://www.ibm.com/ibm/values/us. Accessed on 1 January 2011.
6
(i) Kaplan, R. & Norton, D. 2004. The strategy map: guide to aligning intangible assets. Strategy and leadership,
32(5):10–17. (ii) Williams, C. 2011. Principles of management. 6th edition. South-Western Cengage Learning, pp
507–519. (iii) Louw, L. & Venter P. 2006. Strategic Management: Winning in the Southern African workplace. Cape Town:
Oxford University Press, p 437.
CONTEMPORARY MANAGEMENT PRINCIPLES
257
PART III: Planning
7
Goodman, S.H., Fandt, P.M., Michlitsch, J.F. & Lewis, P.S. 2007. Management: Challenges for tomorrow’s leaders.
Mason: Thomson South-Western, p 93.
8
(i) [Online] Available: http://www.fundinguniverse.com/company-histories/General-Electric -Company-History.html.
Accessed on 19 October 2011. (ii) Anonymous. Strategic direction; Jul/Aug 2002; 18(8):4–7. (iii) [Online] Available:
http://www.answers.com/topic/jack-welch. Accessed on 19 October 2011.
9
Thompson, J. & Martin, F. 2005. Strategic management. 5th edition. London: Thomson, p 322.
10
Louw et al, op. cit., p 355.
11
Goodman et al, op. cit., pp 230–235.
258
CONTEMPORARY MANAGEMENT PRINCIPLES
Chapter 12
Decision-making
Tersia Brevis
OPENING CASE
OPENING CASE
Disney’s Euro Disneyland venture1
The Walt Disney Company (Disney) is known
around the world for bringing decades of
entertainment, fun and fantasy to families through
amusement parks, television series and numerous
classic live-action and animated motion pictures.
The founder of the company, Walt Disney, was
born in 1901 in Chicago and raised in a humble,
middle-class family. Together with Ub Iwerks,
Walt Disney formed Iwerks-Disney Commercial
Artists in 1919, and in 1923 Walt created Disney
Bros. Studios with his brother Roy. In 1955, the
first theme park was opened by the company in
Anaheim, California. In 1966, Walt Disney died
of lung cancer. Shortly after Walt’s death, his
brother Roy issued a statement pledging that
Walt Disney’s philosophy and genius would be
carried on by his employees – a pledge that was
fulfilled. In 1971, Walt Disney World opened near
Orlando, Florida. In 1983, Disney was one of many
American organisations to expand on foreign soil
by opening Tokyo Disney. This theme park was
an instant success. In fact, Disney’s executives
believed that they had learned so much about
opening a theme park in another country, and
since Tokyo Disneyland was an instant success,
they immediately began to search for a site for a
fourth park. Disney decided on Paris, France and
opened Euro Disney (later named Disneyland
Paris) in 1992.
Why Paris?
To find a site for their fourth theme park, Disney
considered Europe where Disney films historically
had done better than in the United States. From
1983 until 1987, Disney searched for sites in the
United Kingdom, France, Germany, Spain and Italy.
Finally, they decided on Paris, France for various
reasons.
France had a large population with a spectacular
transportation network. The very successful Tokyo
Disneyland was located in a cold-weather climate
and virtually the same latitude as Paris. For this
reason, Disney executives assumed they would
be able to operate in similar weather conditions
in Paris.
The French government sold Disney the 4 400acre site at a fraction of its market value in a
region called Marne-la-VallŽe. Marne-la-VallŽe is
located in an ideal geographical location since it is
32 kilometers due east of the centre of Paris, and
halfway between the two international airports
Orly and Roissy-Charles-de-Gaulle. Disney assumed that Paris would offer Euro Disneyland a wealth
of potential guests and employees.
The agreement
In the agreement between Disney and the
French government, the latter promised Disney
favourable loan terms, an extended railway system
from Paris to the theme park, two additional
interchanges linking Euro Disney with a main
highway and a special station for high-speed trains
at the theme park. Disney agreed to offer new
jobs and contracts to local suppliers. In a region
that suffered from a high unemployment rate,
Disney executives believed that they could provide
economic benefits to the region.
Once the decision had been taken to open
Euro Disney in Paris, Disney executives had to
integrate American risk management techniques
into a French environment. They needed to cope
with language barriers and an unfamiliar French
legal framework.
PART III: Planning
0QFOJOHEBZ
Euro Disney opened its doors on April 12, 1992,
with the hope of attracting eleven million guests
per year, more than twice the number that visits
the Eiffel Tower. Half were expected to be French.
Disney’s dream of achieving at least the same
success that they had in Japan did not become a
reality. Why?
The problems
Euro Disney reported a loss of $905 million in
their first year in operation and by December
1993, they had accumulated a loss of $1.03 billion.
Various factors can be attributed to their poor
financial performance. First and foremost, Disney
was overly ambitious in their estimated sales and
profit figures. Strategic and financial miscalculations
were made and they relied on debt during a period
when European interest rates were beginning
to increase. Disney also miscalculated European
habits which impacted negatively on their sales and
profit figures. Disney also displayed no regard for
bottom-line construction cost – over expenditure
also impacted negatively on sales and profit figures.
Labour costs were also underestimated – Disney
Executives estimated that labour costs would be
13 per cent of revenue. In 1992, the actual figure
was 24 per cent and in 1993 it increased to 40 per
cent, contributing even further to Euro Disney’s
debt. Furthermore, Euro Disney opened during
a European economic recession, where the real
estate market collapsed.
Operational problems were also experienced.
For example, Euro Disney had difficulty in allocating
staff effectively and efficiently, problems were
experienced with bus drivers in terms of the size
of the designated space for buses and insufficient
restroom facilities for bus drivers. To add to the
operational problem is the difference in employee
acceptance of conditions of employment. In
Orlando, cast members are accustomed to and
have learned to accept being sent home if they are
not needed. However, French cast members feel
irritated by and have a very difficult time accepting
flexible time schedules. Lastly, operational errors
were also made by Disney that involved the
computer stations at the hotels. Disney executives
estimated that guests would stay at the park for
several days but this did not happen. Many guests
260
CONTEMPORARY MANAGEMENT PRINCIPLES
arrived early in the morning, spent the day at the
park, checked into the hotel late night, and then
checked out early the next morning. Since so many
guests checked in and out, additional computer
stations had to be installed at the hotels to decrease
the time the guests stood in lines.
Human resources estimates were made and
Disney needed to recruit, hire, train and house
12 000 cast members 12 months before the
opening of the park. This is a challenge for any
company, but even more complex for Disney,
whose cast members become more like members
of a theatre troupe. Language and cultural barriers
complicated the process even further.
Miscalculations in terms of per capita spending
are probably the biggest detrimental factor to Euro
Disney’s poor financial performance. Disney had
assumed that guests visiting Euro Disneyland would
spend large amounts of money as they did in the
US and Tokyo. Actual spending was 12 per cent
less than predicted. Further, European’s per capita
income is lower than the Japanese, and they are
likely to spread their money over long vacations,
not four-day spending sprees.
The total construction cost of Euro Disney
was $4 billion, of which $2.9 billion was borrowed
at high interest rates. Thus, from the offset, the
project was highly leveraged. Euro Disney made
a huge mistake not considering the views of the
French when developing their marketing strategies.
The Walt Disney Company agrees there may
have been marketing mistakes, but they blame
the mistakes on a lack of data on how Europeans
would react to the ‘Disney Magic’. Investors, on
the other hand, believe that they are the victims
of Euro Disney since the Walt Disney Company
communicated its difficulties poorly.
Paris winters also contributed to the financial
difficulties of Euro Disney. Lastly, the Magic
Kingdom concept, successful in California and
Tokyo, is apparently not compelling enough for
Europe.
The future
The park’s future will be shaped by many outside
influences over time, requiring Disney executives
to learn from past mistakes and closely monitor
the main events that will impact on its future
performance and success.
CHAPTER 12 Decision-making
LEARNING OBJECTIVES
The purpose of this chapter is to provide an overview of creative problem solving and managerial
decision-making. The objective of studying this chapter is to enable you to:
1. Contextualise decision-making in terms of the management process.
2. Explain the relationship between problems, problem-solving and decision-making.
3. Compare the different types of managerial decisions.
4. Compare the various decision-making conditions.
5. Explain the various decision-making models.
6. Discuss group decision-making.
. 5uggest techniSues for improving group decision-making.
8. Recommend tools for decision-making under the various decision-making conditions.
12.1 DECISION-MAKING AND THE
MANAGEMENT PROCESS
LEARNING OBJECTIVE 1
Managers at all levels of an organisation are constantly faced with
problems, opportunities and threats and they need to evaluate
alternative courses of action to deal with them. In other words, they
need to make decisions. This chapter explores creative problem-solving
and managerial decision-making as well as models and techniques that
can assist managers in these processes.
All managers, regardless of their skills or the level at which they
are involved perform the four fundamental management functions of
planning, organising, leading and controlling. While performing these
functions, managers are constantly faced with opportunities and threats
that need to be addressed and decisions that need to be made. When
planning, a manager must make decisions about goals and when, where
and how they will be realised. When controlling, the manager may
notice that these goals have not been realised. Thus a problem exists
that needs to be solved and the manager needs to decide on the most
appropriate corrective action to take. When organising, managers must
make decisions that involve the creation of an organisational structure
and the deployment of resources that will enable the organisation to
attain its goals. When leading, a manager must decide how to influence
and direct the behaviour of subordinates so that they will work willingly
to pursue the goals of the organisation. Decision-making is therefore
a central aspect of all four fundamental management functions. When
managers perform these functions with skilled decision-making, they will
have fewer problems to solve2.
Regardless of its goals, the organisation’s long-term survival depends
on its managers’ ability to solve problems and make decisions. It
depends on theirEFDJTJPONBLJOHTLJMMT. The decision-making skills
of managers refers to their ability to make better decisions than their
competitors, to make these decisions faster than their competitors and
have the ability to implement their decisions effectively and efficiently.
A decision implies that managers are faced with a threat, a problem
or an opportunity. Various courses of action are proposed and analysed,
Contextualise decision-making
in terms of the management
process.
FGEKUKQPOCMKPIUMKNNU
the ability of managers to make
better decisions than their
competitors, make decisions
faster than competitors and
implement decisions effectively
and efficiently
CONTEMPORARY MANAGEMENT PRINCIPLES
261
PART III: Planning
and a choice is made that is likely to move the organisation in the
direction of its mission and goals. In making a choice, a manager comes
to a conclusion and selects a particular course of action that he or she
feels might enhance the success of the organisation.
In our opening case, the Walt Disney Company saw an opportunity
to open a fourth theme park in Europe, mainly based on their successes
in the US and Japan. Disney executives needed to take extremely
important decisions with vast consequences. First, they needed to
decide on the most appropriate location for the park. They also needed
to decide on the agreement entered into and between the Walt Disney
Company and the French government. Important decisions also needed
to be made in terms of the management of risk in a foreign country and
projections needed to be made in terms of the financial performance of
the European theme park. Environmental influences needed to be taken
into account. The success of the new venture depended mostly on the
effectiveness of the decisions taken by executives and top management
of the Walt Disney Company.
Certain principles can be applied to help managers, such as the
management of the Walt Disney Company, when they are faced with
a problem or opportunity and need to make a major decision. These
principles will be addressed later in this chapter. First, we need to make
a distinction between problems, problem-solving and decision-making.
LEARNING OBJECTIVE 2
Explain the relationship
between problems, problemsolving and decision-making.
RTQDNGO
whenever managers perceive
a difference between what has
actually happened and what
they planned to happen
RTQDNGOUQNXKPI
the process of taking corrective
action that will solve a problem
FGEKUKQPOCMKPI
a process of selecting an
alternative course of action that
will solve a problem
LEARNING OBJECTIVE 3
Compare the different types of
managerial decisions.
262
12.2 THE RELATIONSHIP BETWEEN PROBLEMS,
PROBLEM-SOLVING AND DECISION-MAKING
Managers at all managerial levels are responsible for setting goals.
Whenever these goals are not being met, a QSPCMFN exists. In other
words, a problem exists whenever managers perceive a difference
between what has actually happened and what they planned to happen.
1SPCMFNTPMWJOH is the process of taking corrective action that will
solve a problem and it realigns the organisation with its goals. %FDJTJPO
NBLJOH is the process of selecting an alternative course of action that
will solve a problem. Managers need to make a decision whenever
they are faced with a problem. Although certain problems cannot be
solved and others do not deserve the time it would take to solve them,
managers are responsible for achieving the goals of the organisation.
Therefore, they need to attempt to solve most problems. This can be
done by applying a decision-making model, which is discussed in Section
12.5.
12.3 TYPES OF MANAGERIAL DECISIONS
Although managers in large organisations, government offices, hospitals
and schools may be separated by background, lifestyle and distance,
they must all make decisions involving several options and outcomes.
These decisions vary in terms of their content and uniqueness. In
general, the decisions made by managers are either programmed or
non-programmed. Rather than being distinct categories, these types of
decisions represent a continuum, with highly programmed decisions at
one end and highly non-programmed decisions at the other.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 12 Decision-making
12.3.1 Programmed decisions
The managers of most organisations face large numbers of repetitive
and routine programmed decisions in their daily operations. These
decisions do not have to be investigated anew each time they occur as
there are usually definite methods for obtaining a solution. Such decisions
should be made without spending unnecessary time and effort on them.
Examples of programmed decisions include the processing of payroll
vouchers in an organisation, the processing of graduation candidates at
a university, and processing the admission of athletes to a sports club.
Managers can usually handle programmed decisions by means of
policies, standard operating procedures and rules. These enable the
decision-maker to eliminate the process of identifying and evaluating
options and making a new choice each time a decision is required.
While programmed decisions do, to some extent, limit the flexibility of
managers, they free the decision-maker to devote attention to other,
more important decisions.
programmed decisions
programmed decisions are
repetitive and routine
12.3.2 Non-programmed decisions
Decisions are non-programmed to the extent that they are novel and
unstructured. Non-programmed decisions have never occurred
before, they are complex and elusive, and there is no established
method for dealing with them. Managers at all levels of an organisation
make non-programmed decisions. Non-programmed decisions made
by lower management in an organisation will include firing an employee
or changing the workflow procedures in a section. Decisions such as
these are complex to make and require the use of creative problemsolving. Techniques to encourage creative problem-solving are discussed
in Section 12.7.
In our opening case, a number of problems were identified that
caused a barrier to Disney’s dream of achieving the same degree of
success in Europe as they had in Japan. Miscalculations in terms of per
capita spending in Europe are stated as the biggest detrimental factor to
Euro Disney’s performance. Furthermore, a huge amount of capital was
borrowed at high interest rates, the views of the French were not taken
into consideration when marketing strategies were developed, Disney
displayed no regard for bottom-line construction cost, labour costs
were underestimated and operational problems were experienced.
These are examples of non-programmed decisions taken by Disney’s
executives in an uncertain environment. Disney’s Euro Disneyland
venture illustrates the complexity of the management environment and
the difficulty that top management often face when taking decisions in
such an environment.
non-programmed decisions
non-programmed decisions are
novel, unstructured and have
not occurred before
LEARNING OBJECTIVE 4
12.4 DECISION-MAKING CONDITIONS
By identifying the type of decision (programmed or non-programmed),
as well as the conditions under which it will be made, managers should be
in a position to make better decisions. Decision-making conditions
such as certainty, risk and uncertainty are depicted in Figure 12.1 on the
next page.
Compare the various decisionmaking conditions.
decision-making conditions
certainty, risk and uncertainty
CONTEMPORARY MANAGEMENT PRINCIPLES
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PART III: Planning
Certainty
Risk
Uncertainty
Figure 12.1: Decision-making conditions
Source: Smit, P.J., Cronje G.E., Brevis T. & Vrba M.J. 2011. Management Principles: A
contemporary edition for Africa. 5th edition. Cape Town: Juta Publishers.
12.4.1 Certainty
certainty
available options and the
benefits and costs associated
with each option are known
A decision is made under conditions of certainty when the available
options and the benefits and costs associated with each option are
known. No element of change intervenes between the option and its
outcome. Under conditions of certainty, managers are simply faced
with identifying the consequences of available options and selecting
the outcome with the greatest potential benefit. As we may expect,
managers rarely make decisions under conditions of certainty, because
the future is rarely known with perfect reliability. The purchase of a
government treasury bill, however, is made under at least near certainty.
Barring the fall of the government, R1 000 invested in a treasury bill for
one year at ten per cent will yield R100 in interest. Similarly, knowing
that income taxes are due on 15 April, a financial manager can also make
decisions under conditions of near certainty.
12.4.2 Risk
Decisions under conditions of risk are perhaps most common when
when managers make decisions the outcomes of alternatives are not known in advance, but a probability
can be assigned to each. Probability falls into two categories: objective
under conditions of risk, the
and subjective. Objective probability is based on historical evidence. It
outcomes of alternatives are
refers to the likelihood that a particular state of things will occur, based
not known in advance, but a
on hard facts and figures. Managers cannot be sure that certain events
probability can be assigned to
will occur, but, by examining past records, they can determine the likely
each
outcome of an event. The probability of obtaining either heads or tails
on the toss of a fair coin is 50 per cent: the coin is equally likely to land
face up or face down. Thus, there is a condition of risk. In many cases,
historical evidence is not available, so a manager must rely on a personal
estimate and belief, or subjective probability, of the situation outcome.
risk
uncertainty
when managers make decisions
under conditions of uncertainty,
the outcomes of alternatives are
unpredictable and probabilities
cannot be determined
264
12.4.3 Uncertainty
A decision is made under conditions of uncertainty when there is a
lack of information, the outcomes of alternatives are unpredictable and
probabilities cannot be determined. Decisions made under conditions
of uncertainty are unquestionably the most difficult. In such situations, a
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 12 Decision-making
manager has no knowledge on which to base an estimate of the likelihood
of various outcomes. No historical data are available from which to
infer probabilities, or the circumstances are so novel and complex that
it is impossible to make comparative judgements. Although managerial
intelligence and competence are widely available, the ability to deal with
uncertainty is rare3. Perhaps the most common occasions for decisions
to be made under conditions of uncertainty are those involving the
introduction of new technology or new markets, as in the case of the
Walt Disney Company. In such instances, management has to rely on its
‘gut feelings’.
Many factors may be sources of uncertainty and high risk for
organisations and its management. These factors may fall into seven
categories, namely4:
r FDPOPNJDSFDFTTJPOT TUPDLNBSLFUDSBTIFT IPTUJMFUBLFPWFST
r physical industrial accidents, supply breakdowns, product failure
r personnel strikes, workplace violence
r criminal theft of money and goods, product tampering
r theft of information, tampering with company records, cyber
attacks
r reputation rumour mongering, defamation
r natural disasters: fires, floods, earthquakes.
The Walt Disney Company mainly used historical evidence of their
existing parks in making decisions in terms of the envisaged European
park. Disney’s executives believe they should learn from past mistakes
and not to repeat them. Tokyo Disneyland presented them with one
past mistake to learn from. When a Japanese company first proposed
this park to Disney, Disney opted for the security of royalty payments in
lieu of the risks of ownership. In 1992, Tokyo Disneyland earned more
than $200 million during the worst recession in modern Japanese history.
That same year, the entire Walt Disney Company earned only $299
million. From this one misstep, Disney has possibly sacrificed billions
of dollars in profits to date. Thus in France, Disney bought far more
land than it needed to eventually build 700 000 square meters of office
space, a 750 000 square meter corporate park, 2 500 individual homes, a
95 000 square meter shopping mall, 2 400 apartments and 3 000 time
share apartments. Euro Disney planned to develop the land and then
sell it to prospective buyers, making a huge profit. Unfortunately, this
revenue generating plan never materialised due to the collapse of the
real estate market. This example may lead us to the conclusion that the
more successful a company, the greater the need to ensure objectivity in
new venture calculations. Success can in some cases breed a false sense
of security, especially when a whole new operating environment can
radically change the game, as Disney unfortunately discovered5.
Table 12.1 on the next page summarises decision-making conditions
and the various levels of certainty.
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265
PART III: Planning
Table 12.1: Summary of decision-making conditions and levels of certainty
Certainty
Risk
Uncertainty
Decision-maker has complete
certainty
Decision-maker has some certainty
Decision-maker has complete
uncertainty
#XailaDle options anF the DeneƂts
or costs of each are known
Outcome of each alternative is not
known in advance
Outcome of each alternative is
unpredictable
No element of change intervenes
between the option and its outcome
Probability can be assigned to each
alternative outcome
Probability cannot be assigned to
each alternative outcome
Decision is a sure thing
Decision is a ‘gamble’
Decision requires ‘guts’
LEARNING OBJECTIVE 5
12.5 DECISION-MAKING MODELS
Explain the various decisionmaking models.
After looking at the type of decision and the conditions under which
the decision has to be made, managers also need to consider the two
primary decision-making models: the rational model and the boundedrationality model. In the case of the rational model, the decision-maker
should select the best possible solution. This is known as optimising.
In the case of the bounded-rationality model, the decision-maker uses
satisficing and selects the first possible solution to a problem that
meets the minimal criteria.
Managers need to know which model to use, and when. They
should optimise – apply the rational model – when they are making
non-programmed, high-risk decisions (caused by the factors identified in
Section 12.4.3) in conditions of uncertainty. This process is explained in
the section below. When managers are making programmed low-risk,
or certain decisions, they should select the first option that meets the
minimal criteria, in other words, they should satisfice.
optimising
decision-maker selects the best
possible solution to a problem
satisƂcing
decision-maker selects the first
possible solution to a problem
that meets the minimal criteria
12.5.1 The decision-making process
The decision-making process describes a set of phases that individual
decision-makers or decision-making teams should follow in order to
increase the probability that their decisions will be optimal. Optimal
decisions will lead to maximum achievement of goals and objectives.
In most decision-making situations, managers go through a number
of stages that help them think through the problem and develop
alternative solutions. Figure 12.2 on the next page summarises each
stage in the normal progression that leads to an optimal decision. Note
that these steps are more applicable to non-programmed decisions than
to programmed decisions. Problems that occur infrequently with a great
deal of uncertainty require the manager to utilise the entire process. In
contrast, problems that occur frequently with a great deal of certainty
are often handled by policies, standard operating procedures, and rules,
making it unnecessary to develop and evaluate alternatives each time
these situations arise.
266
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 12 Decision-making
5tage 1: Recognise classiHy and deƂne tJe problem or opportunity
5tage 2: 5et goals and criteria
5tage : )enerate creatiXe alternatiXe courses oH action
5tage : 'Xaluate alternatiXe courses oH action
5tage : 5elect tJe best option
5tage : +mplement tJe cJosen option
5tage : Conduct HolloY-up eXaluation
Figure 12.2: The decision-making process
Stage 1: Recognise, classify and define the problem or opportunity.
5IFųSTUTUBHFJOEFDJTJPONBLJOHJTSFDPHOJTJOHUIBUUIFSFJTBQSPCMFN
threat or an opportunity. The problem or opportunity may be classified
in terms of the type of decision (programmed or non-programmed)
that needs to be made, the decision-making condition (certainty, risk or
uncertainty) and the decision-making model (the rational or boundedrationality model) used6. After the problem or opportunity has been
classified, it should be accurately defined. An important part of defining
the problem or opportunity is to distinguish the symptoms from the cause
of the problem. For example, a conscientious worker who suddenly
starts arriving late for work should not be defined as an ‘absenteeism
situation’. Being late is a symptom of the problem, not the cause. The
cause could be illness, personal problems, transport problems, or
something else entirely. Management should recognise and look into the
cause. If the situation is incorrectly classified or defined, any decisions
made will be directed towards solving the wrong problem. A lack of
motivation is not always the cause of poor work performance. Poor
work performance may be a symptom of poor training, of a mismatch
between the organisation’s culture and the values of its employees, or
of outdated equipment, and so on.
Stage 2: Set goals and criteria. Generally, in programmed decisions,
Stages 2 to 5 need not be followed as criteria have been set for these
decisions. However, in the case of non-programmed decisions, no goals
or criteria have been set. The manager will be responsible for this task.
He or she can make an individual decision or involve a group in decisionmaking (group decision-making and the techniques associated with it,
will be discussed in Sections 12.6 and 12.7).
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PART III: Planning
The foundation of the decision-making process lies in the organisational
goals that give it purpose, direction and continuity. A given goal represents
an end point towards which management directs its decision-making.
Several recent studies place the setting of well-defined goals at the top
of the list of chief executives’ responsibilities7. A goal should state what
the decision should accomplish.
Stage 3: Generate creative alternative courses of action. Once a
problem or an opportunity has been recognised and goals and criteria
have been set, the next stage is to identify various courses of action
to deal with the situation. Bear in mind that it is impossible to identify
all available options. However, a systematic effort should be made to
identify as many courses of action as possible.
Innovation and creativity play a major part in generating various
courses of action. Using groups to generate solutions could enhance this
process. The availability of information (see Chapter 13) and technology
should also be considered. South African managers are fortunate in that
they can tap into the creativity of a diverse workforce.
The number of available options identified is limited by certain
constraints – mainly time and the cost associated with the decision.
Rarely do managers have enough time or money to identify, let alone
evaluate, an unlimited number of options. Indeed, there may be times
when doing something immediately may be more important than taking
a different course of action at a later date. Managers often need to
balance time and expense against identifying additional options. During
this stage managers need to decide whether they want to consider all
options and optimise their decision (rational model) or search only until
a satisficing option (bounded rationality) has been reached.
Stage 4: Evaluate alternative courses of action. Once various
courses of action have been identified, the next step is to evaluate the
options. Each option should be evaluated in terms of its strengths and
weaknesses, advantages and disadvantages, benefits and costs. Because
each option is likely to have both positive and negative features, most
evaluations involve balancing anticipated consequences. The evaluation
of options may either be intuitive or follow a more scientific approach.
Some of these approaches are discussed in Section 12.8.
Stage 5: Select the best option. In the previous two stages, options
were identified and evaluated. The next stage is to select the best option.
The success rate of the average manager in selecting the best option is
rarely more than 50 per cent: this is only slightly better than deciding on
the toss of a coin8. Therefore, this step requires a manager to evaluate
each option carefully against the goals and criteria set during the second
stage, with a view to ranking the options in order of priority. In practice,
selecting an option is often subjective: the manager’s experience, values,
internal politics, and so on influence this choice.
Stage 6: Implement the chosen option. Once an option has been
selected, appropriate steps should be taken to ensure that it is
properly implemented. A decision is only an abstraction and needs to
be put into action. It is possible for a good decision to be damaged by
poor implementation, while a poor decision may be helped by good
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CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 12 Decision-making
implementation. Therefore, implementation may be just as important as
the activity of selecting an option.
Decisions should be explained in such a way that all the relevant
parties understand them. Those concerned should understand not only
the logic behind a decision, but also what they are supposed to do. A
suitable organisational structure, good leadership, a strong organisational
culture, and a fair reward system will enhance the implementation of
decisions.
Stage 7: Conduct follow-up evaluation. Once a decision has been set
in motion, evaluation is necessary to provide feedback on its outcome.
Adjustments are invariably needed to ensure that actual results compare
favourably with planned results – as determined in Stage 2 of the
decision-making process.
The process of evaluation closes the feedback loop shown in Figure
12.2. The soundness of a decision may be evaluated against planned
results. If necessary, modifications can be made and further options
identified and evaluated. This should be seen as an opportunity for
acquiring new knowledge in order to improve future decisions.
12.6 GROUP DECISION-MAKING
LEARNING OBJECTIVE 6
Stages 2 and 3 of the decision-making process, namely the setting of
goals and criteria and the generation of creative alternative courses of
action, rely heavily on creativity and innovation. Group decision-making
can enhance this process, especially in the case of non-programmed
decisions where there is usually a great deal of uncertainty about the
outcome. The complexity of many of these decision-making situations
requires specialised knowledge in a number of fields.
Whether groups make better decisions than individuals working alone
has been the topic of extensive discussion. Groups are subject to social
factors when making decisions. These factors include social conformity,
levels of communication skill, dominance by a specific group member,
and so on. While groups often make better decisions than those made
by the average group member, their decisions consistently fall short of
the quality of decisions made by the best individual member. Group
decision-making, therefore, has certain advantages and disadvantages.
Advantages of group decision-making are the following:
r (SPVQNFNCFSTDPOUSJCVUFBWBSJFUZPGTLJMMTBOETQFDJBMJTFE
knowledge that can be used to define and solve a problem or
recognise an opportunity. This will lead to an improvement in the
quality of decisions taken.
r Group members may have multiple and conflicting views, which
can be taken into account in order to improve the quality of
decisions.
r The different beliefs and values of group members can be
transmitted and aligned.
Discuss group decision-making.
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269
PART III: Planning
r Group decision-making may lead to improved commitment
to decisions by organisational members, since they will have
participated in the decision-making process.
r Participation in problem-solving and decision-making will improve
the morale and motivation of employees.
r Allowing participation in problem-solving and decision-making may
contribute to people’s ability to work effectively and efficiently in
groups and teams.
On the other hand, group decision-making also has some potential
disadvantages:
r Group decision-making may be more time-consuming than
individual decision-making.
r Groups are more likely to choose the first possible option or
solution to a problem that meets the minimal criteria. Individuals
tend to put more effort into the decision-making process and work
towards the best possible solution to a problem.
r One group member, or a sub-group, may dominate the group’s
decision-making process and nullify the group decision.
r Group decision-making may inhibit creativity and lead to
conformity and ‘groupthink’.
We now go on to examine techniques for improving group decisionmaking.
LEARNING OBJECTIVE 7
Suggest teSniSues for
improving group decisionmaking.
270
12.7 TECHNIQUES FOR IMPROVING GROUP
DECISION-MAKING
In order to overcome the disadvantages and to capitalise on the
advantages of group decision-making, techniques have been suggested
to make group decision-making more creative. We shall discuss four of
these techniques, namely brainstorming, the nominal group technique,
the Delphi technique, and group-decision support systems (GDSS).
These techniques are illustrated in Figure 12.3 on the next page. It
indicates where the different techniques are mainly used. However, the
techniques can be used at any managerial level.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 12 Decision-making
Top management
Delphi technique
Middle management
nominal group
technique
Lower management
brainstorming
Figure 12.3: Techniques for improving group decision-making
12.7.1 Brainstorming
One of the problems of decision-making groups is that group norms
develop over time, and group members tend to conform to dominant
group opinions. As a result, the creativity of a decision-making
group declines after having peaked early in the forming of the group.
Brainstorming is a technique used to stimulate creative or imaginative
solutions to organisational problems. Group participants informally
generate as many ideas as possible without evaluation by others. This
prohibition should encourage contributions from members who are
particularly shy, have divergent ideas, or have low status within the
group. During idea generation, group members are encouraged to build
on, but not criticise, ideas produced by others. This cross-fertilisation
is assumed to produce a synergistic effect. The objective is to generate
as many ideas as possible in the belief that the more ideas that are
conceived, the greater will be the likelihood of one outstanding idea
emerging. The following rules govern brainstorming sessions:
r $SJUJDJTNJTQSPIJCJUFE5IFQSJNBSZQVSQPTFPGCSBJOTUPSNJOHJT
to generate as many possible solutions to a problem as possible.
Judgement of the creative or imaginative solutions to organisational
problems should be withheld until all the solutions have been
generated.
r No ‘Yes, but ...’ comments are allowed.
r Imaginative solutions are welcome. The wilder and more ‘farfetched’ the solution, the better.
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271
PART III: Planning
r Quantity is important. The greater the number of solutions, the
greater the likelihood that there will be an outstanding solution to
the problem.
r 5IFDPNCJOBUJPOPG WBSJPVTTPMVUJPOTUPBQSPCMFNBOEUIF
improvement of the suggested solutions, are encouraged.
Brainstorming sessions usually last from 30 minutes to an hour. A
one-hour session can generate up to 150 ideas. Typically, most of the
ideas will be impractical, but a few will merit serious consideration.
Brainstorming has been used effectively in the fields of advertising,
new product development and by organisations following an innovative
strategy.
It is important to note that brainstorming is merely a process
for generating ideas. The next two techniques go further by offering
methods of actually arriving at a preferred solution.
12.7.2 Nominal group technique
This is a structured group decision-making technique. The nominal
group technique restricts discussion or interpersonal communication
during the decision-making process. Group members are all physically
present, as in a traditional committee meeting, but members operate
independently. A problem is usually presented, with the following steps
taking place:
r Seven to ten members meet as a group. Before any discussion
takes place, each member independently writes down his or her
ideas on the problem.
r The group leader systematically gathers information from all
participants. Each member presents one idea to the group. No
discussion takes place until all the ideas have been recorded.
r The ideas are clarified through a guided discussion.
r The group leader then instructs participants to vote on their
preferred solutions.
r Each member silently and independently ranks the ideas.
r The process may conclude with an acceptable solution.
The nominal group technique is appropriate for situations in which
groups may be affected by a dominant person, conformity or ‘group
think’ because it minimises these effects.
12.7.3 Delphi technique
Decisions often have to be made by experts in different geographical
areas. In this case neither brainstorming nor the nominal group technique
can be used, as both techniques require the presence of participants.
The Delphi technique is a process of decision-making that does not
require the physical presence of the participants.
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CHAPTER 12 Decision-making
Origin of the Delphi technique
This technique gets its name from Delphi, a place
that was famous in ancient times as the seat of the
most important temple of the Greek god Apollo.
Kings and other powerful rulers from all over the
ancient world came to Delphi to consult with Apollo
through his priestesses, whom they believed could
foretell the future.
The Delphi technique involves using a series of confidential
questionnaires to refine a solution. In this technique the group’s
members never meet face to face. The following steps characterise the
Delphi technique:
r The problem is identified and members are asked to provide
potential solutions through a series of carefully designed
questionnaires.
r Each member anonymously and independently completes the first
questionnaire.
r The results of the first questionnaire are compiled at a central
location, transcribed and reproduced.
r Each member then receives a copy of the results.
r After viewing the results, members are again asked for their
solutions. The results typically trigger new solutions or cause
changes in the original position.
r The last two steps are repeated as often as necessary until
consensus is reached.
Brainstorming, the nominal group technique, and the Delphi technique
should not be seen as competing choices, but as complementary
techniques.
12.7.4 Group-decision support systems
Group-decision support system (GDSS) is a generic term that refers to
various kinds of computer-supported group decision-making systems.
Most of the GDSSs can be used to support face-to-face groups as well
as groups that communicate through electronic media.
When the process of brainstorming is supported by sophisticated
computers, it is called ‘electronic brainstorming’. In an electronic
brainstorming session, the participants have at their disposal networked
workstations. Instead of contributing their ideas in a round-robin fashion,
they simply type in their suggestions. These ideas are disseminated to
the other group members without an identifying mark. Thus anonymity
is preserved and the group members can respond more freely than in a
conventional brainstorming session.
This technique blends the nominal group-technique with sophisticated
computer technology. Group members sit around a horseshoe-shaped
table, empty except for a series of computer terminals. Issues are
CONTEMPORARY MANAGEMENT PRINCIPLES
273
PART III: Planning
presented to participants and they type their responses onto a computer
screen. Individual comments, as well as aggregate votes, are displayed on
a projection screen in the room. Electronic meetings can be as much as
55 per cent faster than traditional face-to-face meetings.
In real-time Delphi, a computer conference is substituted for the
mail questionnaires of the conventional Delphi. This allows participants
to respond immediately to the comments anonymously entered by the
other members of the group. In this way the time required to complete
the Delphi is much reduced.
In deciding which of the techniques to use for improving group
decision-making, management should consider issues such as time and
money costs, the potential for interpersonal conflict and commitment to
the solution. In general, it can be said that top management commonly
uses the Delphi technique for a specific decision. Brainstorming and the
nominal group techniques are frequently used at middle- and lowermanagement where work groups are involved.
LEARNING OBJECTIVE 8
Recommend tools for decisionmaking under the various
decision-making conditions.
12.8 TOOLS FOR DECISION-MAKING UNDER
VARIOUS DECISION-MAKING CONDITIONS
Various tools are available to assist managers in performing Stages 4 (the
evaluation of alternative courses of action) and 5 (the selection of the
best option) of the decision-making process. In this section we discuss
quantitative tools for decision-making, the Kepner-Fourie method and
the cost-benefit analysis.
12.8.1 Quantitative tools for decision-making
Many of these techniques have their origin in the quantitative
management school (discussed in Chapter 1) and propagate the use of
mathematical relations in solving management problems.
Our objective in this section is to make you aware of these
techniques, not to make you a mathematician. For the same reason, we
use the dominant model in this chapter as a guide, that is, the conditions
of decision-making – certainty, risk and uncertainty. Figure 12.4 on the
next page will serve as the point of reference for our discussion in this
section.
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CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 12 Decision-making
Top management
r conditions of uncertainty
r simulation
r capital budgeting
Middle management
r
r
r
r
r
conditions of risk
break-even analysis
decision tree
pay-off matrix
probability analysis
Lower management
r conditions of near certainty
r queuing theory
r linear programming
Figure 12.4: Quantitative tools for decision-making
Source: Smit, P.J., Cronje G.E., Brevis T. & Vrba M.J. 2011. Management Principles: A
contemporary edition for Africa. 5th edition. Cape Town: Juta Publishers.
Decision-making tools in conditions of certainty
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CONTEMPORARY MANAGEMENT PRINCIPLES
275
PART III: Planning
balance between the cost of upgrading service and the amount of
time users of a service must wait in line. In such situations, queuing
theory can be used to identify an optimal solution for maximising
service while minimising costs.
Decision-making tools in conditions of risk and
uncertainty
In this section, probability analysis, the pay-off matrix, the decision tree,
break-even analysis, capital budgeting and simulation are discussed as
possible decision-making tools in conditions of risk and uncertainty.
r 1SPCBCJMJUZBOBMZTJT5IFUFSNAQSPCBCJMJUZSFGFSTUPUIFFTUJNBUFE
likelihood, expressed as a percentage, that an outcome will occur.
There are two complementary approaches to using probability
analysis, namely pay-off matrices and decision trees. Both are
among the most helpful quantitative tools available to a manager.
r 1BZPŲ NBUSJY5IFQBZPŲ NBUSJYJTBUFDIOJRVFGPSJOEJDBUJOH
possible pay-offs, or returns, from pursuing different courses of
action. Each option is pursued under different states of nature, or
circumstances beyond the control of the decision-maker.
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solutions available to solve a problem. It is designed to estimate the
outcome of a series of decisions. As the sequence of the major
decision is drawn, the resulting diagram resembles a tree with
branches.
r #SFBLFWFOBOBMZTJT"OPUIFSUFDIOJRVFUIBUDBOCFVTFEUP
evaluate alternative courses of action, and to select the best
option, is the break-even analysis. This technique involves the
calculation of the volume of sales that will result in a profit. It
requires a forecast of the sales volume and the cost of production.
The break-even point is then calculated as the level of sales where
no profit or loss results.
r $BQJUBMCVEHFUJOH$BQJUBMCVEHFUJOHJTBUFDIOJRVFUIBUDBOCF
used to evaluate alternative investments. It involves a process by
which each alternative investment is analysed in financial terms
and placed on the capital budget. Various methods exist to analyse
investments in financial terms. For example, the payback period
can be used to calculate the years it will take to recover the initial
cash invested. The alternative that offers the shortest payback
period (in years, months, etc) is then preferred. Another method
computes the average rate of return of each investment and
selects the investment with the highest average rate of return.
A more sophisticated technique is the net present value of an
investment, which is the present value of the future benefits less
the cost. It is the difference between what is to be received, in
current worth, and what will be paid for it.
276
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 12 Decision-making
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12.8.2 The Kepner-Fourie method
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TIPXTUIFVTFPG UIFNFUIPEUPEFDJEFXIJDIIPVTFUPCVZ
Table 12.2: Method to decide which house to buy using the Kepner-Fourie
method
‘Must criteria’
House 1
House 2
House 3
House 4
Cost under R500 000
Yes
Yes
No
Yes
Available within two months
Yes
Yes
Yes
No
House 1
WS**
House 2
WS**
‘Want criteria’
Meets criteria
Importance*
4 bedrooms
8x
5 = 40
10 = 80
2 bathrooms
7x
5 = 35
10 = 70
Double garage
10 x
9 = 90
9 = 90
Near schools
9x
10 = 90
6 = 54
Security
10 x
10 = 100
8 = 80
Pool
5x
6 = 30
9 = 45
385
419
Total weighted score
*Indicates the quantity of importance – on a scale of 10 (high) to 1 (low) assigned to each
‘want’ criterion as a weight.
**Indicates the weighted score awarded to each alternative.
Source: Smit, P.J., Cronje G.E., Brevis T. & Vrba M.J. 2011. Management Principles: A contemporary edition for Africa. 5th edition.
Cape Town: Juta Publishers.
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PART III: Planning
Step 1: Compare each alternative to the ‘must’ criteria listed in
Column 1. Eliminate any alternative that does not meet the ‘must’
criteria. Houses 3 and 4 do not meet all the ‘must’ criteria and are
eliminated.
Step 2: Rate each ‘want’ criterion (Column 1) on a scale of 1 to 10
(10 being most important). Note that the same number may be used
more than once (10, for example).
Step 3: Assign a value of 1 to 10 (10 being the highest) to how well
each alternative meets all the ‘want’ criteria. These values are shown
in the vertical columns labelled House 1 and House 2, and they can be
compared for each house. Again, factors can have equal weights, for
example 5.
Step 4: Compute the weighted scores (WS) for each alternative by
multiplying (horizontally) the importance value by the ‘meets criteria’
value for each house. Next, add these weighted scores vertically to
obtain the total weighted score for each house.
Step 5: Select the alternative with the highest total weighted score as
the solution to the problem. House 2 should be selected because it has
the highest weighted score.
12.8.3 Cost-benefit analysis
The quantitative tools for decision-making make maximum use of
objective mathematical approaches to compare alternatives. The
Kepner-Fourie method combines the objective quantitative approach
with some subjectivity. However, managers may be faced with situations
when the benefit received for the cost is uncertain, making these
methods unusable. In such situations, the cost-benefit analysis can be
used. It compares the costs and benefits of each alternative course of
action using subjective intuition and judgement. This method makes the
minimum use of mathematics to make the decision. The advantages
(which can be considered the benefits) and disadvantages (which can be
considered the cost) are identified for each alternative.
278
CONTEMPORARY MANAGEMENT PRINCIPLES
Copyright © 2014. Juta and Company. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S.
or applicable copyright law.
ChaPter 12 Decision-making
CHAPTER SUMMARY
1. Contextualise decision-making in terms of the management process.
While performing the fundamental functions of management (planning, organising, leading
and control) managers are faced with opportunities and threats that need to be addressed
and problems to be solved.
2. Explain the relationship between problems, problem-solving and decision-making.
• Problems exist whenever managers perceive a difference between what has actually
happened and what they planned to happen.
• Problem-solving is the process of taking corrective action.
• Decision-making can be defined as the process of choosing between various courses of
action.
3. Compare the different types of managerial decisions.
Decision-making can be classified by its relative uniqueness.
• Programmed decisions are decisions that are made by habit or policy and involve simple,
common, frequently occurring problems.
• Non-programmed decisions deal with unusual or novel problems and require creative
thinking.
4. Compare the various decision-making conditions.
Managers usually make decisions under conditions of certainty, risk or uncertainty.
• Under conditions of certainty, all available options and the benefits and costs associated
with each are known.
• When making a decision under the condition of risk, the manager does not know the
outcome of each alternative in advance, but can assign a probability to each outcome.
• A decision is made under conditions of uncertainty when the available options, the probability
of their occurrence, or their potential benefits or costs are unknown.
5. Explain the various decision-making models.
When using the rational decision-making model, the decision-maker selects the best possible
solution to a problem. The model involves seven stages:
Stage 1: Recognise, classify and define the problem or opportunity
Stage 2: Set goals and criteria
Stage 3: Generate creative alternative courses of action
Stage 4: Evaluate alternative courses of action
Stage 5: Select the best option
Stage 6: Implement the chosen option
Stage 7: Conduct follow-up evaluation
In the case of the bounded-rationality model, the decision-maker selects the first option that
meets the minimal criteria.
Contemporary management prinCiples
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279
Copyright © 2014. Juta and Company. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S.
or applicable copyright law.
Part III: Planning
6. Describe group decision-making.
Group decision-making can enhance creativity in the decision-making process, although
there are advantages and disadvantages associated with it.
7. Suggest techniques for improving group decision-making.
To overcome the disadvantages and to capitalise on the advantages of group decisionmaking, we have presented various ways of making this process more creative. The
techniques discussed are:
• brainstorming
• the nominal group technique
• the Delphi technique
• group-decision support systems.
8. Recommend tools for decision-making under the various decision-making conditions.
Tools for decision-making under various decision-making conditions can be categorised
as quantitative tools for decision-making, the Kepner-Fourie method and the cost-benefit
analysis. Quantitative tools can further be categorised as decision-making tools under
conditions of certainty, risk and uncertainty. Decision-making tools in conditions of certainty
are linear programming and queuing theory. Decision-making tools under conditions of
risk and uncertainty, are profitability analysis, the pay-off matrix, decision tree, break-even
analysis, capital budgeting and simulation.
KEY TERMS
bounded-rationality decision-making model
brainstorming
break-even analysis
capital budgeting
certainty
cost-benefit analysis
decision-making
decision tree
Delphi technique
group decision-making
group decision support systems
Kepner-Fourie method
linear programming
280
nominal group technique
non-programmed decisions
pay-off matrix
probability analysis
problem solving
problems
programmed decisions
queuing theory
rational decision-making model
risk
simulation
uncertainty
Contemporary management prinCiples
EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 5/3/2018 1:17 PM via UNISA
CHAPTER 12 Decision-making
REVIEW QUESTIONS
1. Contextualise decision-making in terms of the management process.
2. Define the terms ‘problems’, ‘problem solving’ and ‘decision-making’ and explain the relationship to
each other.
3. Compare the different types of managerial decisions and the various decision-making conditions.
4. Compare the various decision-making models.
5. Explain the meaning of group decision-making and refer to the advantages and disadvantages
associated with it.
6. Suggest various techniques that decision-makers can use to improve group decision-making in
organisations.
7. Recommend tools for decision-making by referring to specific tools under various decision-making
conditions.
END NOTES
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CONTEMPORARY MANAGEMENT PRINCIPLES
281
Chapter 13
Information management
Tersia Brevis
OPENING CASE
Steve Jobs: The man who created our
world1
The name Steve Jobs is synonymous with the
Macintosh-computer, iMac, iTunes, iPod, iPhone,
iPad and Toy Story, to name only a few. When he
died in October 2011, he left behind an information
technology world – a world in which he was a great
role player.
Steve Paul Jobs was born in 1955 in San
Francisco and adopted at birth by Paul Reinhold
Jobs and his wife Clara. Steve Jobs knew from
a very early age that he was adopted. In his
conversations with Walter Isaacson, author of his
exclusive biography Steve Jobs, he recalled sitting
on the lawn of his house when he was six or seven
years old, telling the girl who lived across the street
that he was adopted. ‘So does that mean your real
parents didn’t want you?’ she asked. ‘Lightning bolts
went off in my head’, Jobs explained. ‘I remember
running into the house, crying. And my parents
said, “No, you have to understand. We specifically
picked you out.”’ Abandoned. Chosen. Special.
These three words became part of who Steve Jobs
was and how he regarded himself. And indeed he
had a special life, with many high- and lowlights.
The most prominent of these are discussed below.
Jobs attended Monta Loma Elementary,
Mountain View, Cupertino Junior High and
Homestead High School in California. He
frequently attended after-school lectures at the
Hewlett Packard Company and was later hired
by the company. Here, he worked with Steve
Wozniak as a summer employee. Jobs graduated
in 1972 from high school and enrolled at Reed
College, Oregon. He dropped out after only one
semester.
The Apple Company
On April 1, 1976, Steve Jobs and Steve Wozniak
founded the Apple Inc. Company. From the Jobses’
garage, they produced the Apple I. The Apple II,
one of the first commercial lines of personal
computers, was engineered by Steve Wozniak. He
designed a computer terminal, with a keyboard and
monitor that had the ability to connect to a distant
computer. Using a microprocessor, Wozniak could
put some of the capacity of the minicomputer
inside the terminal itself, so it could become a
small stand-alone computer and desktop. Jobs was
responsible for the aesthetic design and marketing
of this personal computer, which they launched
in April 1977 at the West Coast Computer Faire.
Apple got three hundred orders at the show. It
was also at this show that Jobs met a Japanese
textile maker, Mizushima Satoshi, who became
Apple’s first dealer in Japan. During the same time
Jobs and Wozniak moved their company from the
Jobses’ garage into a rental office. An independent
developer hired by the Apple company came up
with the first spreadsheet and personal finance
programme for personal computers, called VisiCalc.
For some time, it was only available on the Apple
II personal computer. This made the Apple II into
something that business and individuals could justify
buying. For the next sixteen years, various models
of the Apple II was marketed, selling close to six
million machines. More than any other machine,
it launched the personal computer industry. Steve
CHAPTER 13 Information management
Wozniak deserves the credit for the design of its
circuit board and related operating software, but
Steve Jobs was the one who integrated the circuit
board into a friendly package, from the power
supply to its sleek case. Steve Jobs also created the
company that sprung up around Steve Wozniak’s
machine.
During the early 1980s, Jobs played a huge
role in recognising the commercial potential of
the Xerox PARC’s mouse-driven graphical user
interface. This led to the creation of the Apple Lisa.
One year later, an employee of Apple, Jef Raskin,
created the legendary Macintosh computer, which
was launched in 1984. After losing a power struggle
with the board of directors in 1985, Jobs left
Apple and almost immediately founded NeXT, a
computer platform development company. NeXT
specialised in the higher-education and business
markets.
The NeXT company
NeXT workstations were first released in 1990.
The NeXT workstation was known for its
technical strengths, of which the most important
was its object-oriented software development
system. It was on a NeXT computer that Tim
Berners-Lee invented the World Wide Web.
The NeXT workstation was followed by the
release of a second generation, characterised by
an innovative multimedia e-mail system, having
the ability to share voice, image, graphics, and
video in e-mail for the first time. This machine
allowed interpersonal computing to revolutionise
human communications and group work. In
1993, the company transitioned fully to software
EFWFMPQNFOU BOE SFMFBTFE /F9545&1*OUFM
In 1993, the company reported its first profit of
$1.03 million. In 1996, WebObjects, a framework
for Web application development, was released.
Back to the Apple company
In 1997, the NeXT company was acquired by Apple
Inc., bringing Steve Jobs back to the company he
co-founded almost 20 years before. In 1997, Jobs
was interim CEO of the company and from 2000
until his resignation in 2011, he was CEO. During this
time, the Apple company diversified, introduced
and improved upon other digital appliances. For
example, they introduced the iPod portable music
player, iTunes digital music software, and the
iTunes Store. In 2007, the company even entered
the cellular phone business with the introduction
of the iPhone, a multi-touch display cell phone,
which also included the features of an iPod and,
with its own mobile browser, revolutionised the
mobile browsing scene.
Pixar and Disney
In 1986, Steve Jobs bought The Graphics Group,
which was later renamed Pixar, from Lucasfilm’s
computer graphics division. Toy Story, the first
film produced by the new partnership and in which
Jobs was credited as executive producer, brought
fame to the studio when it was released in 1995.
Over the next 15 years, Pixar produced box-office
hits, such as A Bug’s Life, Toy Story 2, Monsters,
Inc., Finding Nemo, The Incredibles, Ratatouille,
WALL-E, Up and Toy Story 3.
In 2006, the Disney Company announced their
decision to purchase the Pixar company, making
Steve Jobs The Walt Disney Company’s largest
single shareholder with seven percent of the
company’s shares.
Losing a visionary and creative genius
In 2003, Jobs was diagnosed with a pancreas
neuroendocrine tumor. Initially, the disease was
treated. By 2009, his health further deteriorated
and he was diagnosed with a hormone imbalance.
He underwent a liver transplant, taking medical
leave for most of 2011. In August the same year,
he resigned as CEO of the Apple company. Hours
after his resignation was announced, Apple shares
dropped by five per cent and the Walt Disney
company’s shares dropped by 1.5 per cent in afterhours trading.
When Steve Jobs died of respiratory arrest
related to the tumor on October 5, 2011, the
world lost an amazing human being.
CONTEMPORARY MANAGEMENT PRINCIPLES
283
PART III: Planning
LEARNING OBJECTIVES
The purpose of the chapter is to provide an overview of information management in an organisation.
The objective of studying this chapter is to enable you to:
1. Contextualise information management in terms of the decision-making process.
2. Explain the importance of managing information for sustaining competitive advantage.
3. Explain the basic functioning of an information system.
4. Identify the characteristics and costs of useful information.
5. Explain the organisation of information systems in modern organisations.
6. Classify information systems in terms of their use in operational and managerial support.
7. Develop a generic information system for managers.
LEARNING OBJECTIVE 1
Contextualise information
management in terms of the
decision-making process.
284
13.1 INFORMATION MANAGEMENT AND THE
DECISION-MAKING PROCESS
In our opening case, we highlighted the contribution of Steve Jobs to the
modern computer and the role that he played in modern information
technology. His contributions are a far cry from the earliest dataprocessing devices which included fingers, stones and sticks for counting,
knots on a string, scratches on a rock, or notches in a stick. The
Babylonians wrote on clay tablets with a sharp stick, while the ancient
Egyptians developed written records on papyrus using a sharp-pointed
reed as a pen and organic dyes for ink. The earliest form of a manual
calculating device was the abacus. Pebbles or rods laid out on a lined
or grooved board were early forms of the abacus and were used for
thousands of years in many civilisations. Many people’s contributions
were necessary over the following centuries before practical, working
data-processing machines were developed2.
Today information is available at all times, and in every conceivable
format to almost everybody. This chapter deals with the ways of
managing information for use in the decision-making process, which was
described in detail in the previous chapter.
In the late 1940s, Herbert A Simon popularised the notion that
management was primarily a decision-making process. He later received
the Nobel Prize for economics for his work on managerial decisionmaking. He argued that all managerial activities involve the conscious or
unconscious selection of particular actions. In many cases, the selection
process consists simply of an established reflex action or habit. In other
cases, the selection is the product of a complex chain of activities. He
suggested that for any decision there are numerous possible solutions,
any of which may be selected. By applying the decision-making process,
the possible options are narrowed down to the one that is selected.
Essential to the process of narrowing down options is information –
which is provided by an organisation’s information system. The quality
of the decision is related to the quality of the information, whereas the
quality of the information depends on the accuracy with which data is
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 13 Information management
gathered, coded, processed, stored, presented and protected. These
are the main elements of an information system.
Electronic technology designed to process and transport data and
information has been developing at exceptional rates for more than four
decades. In our opening case, the enormous contribution of people
such as Steve Jobs, Steve Wozniak and Tim Berners-Lee to information
technology has been highlighted. This information technology (IT)
revolution has significantly affected employees, managers and their
organisations. It has created opportunities as well as challenges for
millions of organisations and individuals. The challenges facing managers
are extremely high – managers need to learn to maximise the advantages
offered by IT, while avoiding the many pitfalls associated with it.
The purpose of this chapter is to introduce and provide an overview
of information management. As managers, we need to understand
the uses of information systems in today’s business environment. We
discuss the fundamental concepts of information systems, identify
the characteristics of useful information and examine ways in which
information systems can support managerial activities. The many kinds
of information systems available are classified and described. To conclude
the chapter, we discuss the development of a generic information system
that can be used by most types of organisation.
In Chapter 4, the external and internal environments in which the
organisation operates were discussed. An information system transforms
data from an organisation’s external and internal environments into
information that can be used by managers in the decision-making
process. This process is illustrated in Figure 13.1.
Figure 13.1: The relationship between an organisation’s information system and decision-making
Source: Smit, P.J., Cronje G.E., Brevis T. & Vrba M.J. 2011. Management Principles: A contemporary edition for Africa. 5th edition.
Cape Town: Juta Publishers.
CONTEMPORARY MANAGEMENT PRINCIPLES
285
PART III: Planning
The environment in which management must operate today is becoming
increasingly complex. Managerial problems are also more complex and
this is likely to continue into the future. First, the number of available
options is much greater today than ever before, thanks to technological
and communication system improvements. Second, the cost of making
errors may be excessive, owing to the complexity and magnitude of
operations, automation and the domino effect of an error throughout
the organisation. By the same token, the benefits may be numerous, if
correct decisions are being made.
Because of these trends and changes, it is extremely unwise to
rely on a trial-and-error approach to decision-making. Managers need
to become more sophisticated – they must learn how to manage the
information for a sustainable competitive advantage.
LEARNING OBJECTIVE 2
Explain the importance
of managing information
for sustaining competitive
advantage.
competitive advantage
the ability to provide greater
value to customers than one’s
competitors (in the longer
term, this kind of competitive
advantage is called sustainable
competitive advantage)
286
13.2 MANAGING INFORMATION FOR
SUSTAINING COMPETITIVE ADVANTAGE
Competitive advantage can be defined as the ability of an
organisation to provide greater value to customers than its competitors.
A sustainable competitive advantage occurs when other organisations
tried unsuccessfully to duplicate an organisation’s competitive
advantage. In an ever-changing environment, information is as important
as capital for the sustainable success, competitive advantage and longterm survival of the organisation. It takes capital, entrepreneurial skills,
information and various other resources to start an organisation, but the
organisation will not be able to survive and grow without information.
In general, organisations need to address three questions in order to
sustain a competitive advantage through information technology3. First,
does the use of information technology create value for the organisation
by lowering costs or providing a better product or service? Should the
use of information technology not add value to the organisation, then
investing in it would put the organisation in a competitive disadvantage
relative to organisations that choose information technologies that will
add value.
Second, is the information technology the same or different across
competing organisations? If all organisations have access to the same
information technology and make use of it in the same way, then no
organisation will have an advantage over another.
Third, is it difficult for another organisation to create or acquire the
information technology used by the organisation? If so, the organisation
has succeeded in establishing sustainable competitive advantage over its
competitors through the management of information technology. If not,
the competitive advantage will only be temporary.
The key to establishing a sustainable competitive advantage is not in
having faster computers, more memory or more capacity but in using
and managing information technology to continuously improve and
support the core business and functions of the organisation.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 13 Information management
13.3 THE BASIC FUNCTIONING OF AN
INFORMATION SYSTEM
LEARNING OBJECTIVE 3
Explain the basic functioning of
an information system.
13.3.1 A definition of an information system
We tend to use the terms data and information interchangeably,
although there is a definite distinction between the two concepts. Data
refers to raw, unanalysed numbers and facts about events or conditions
from which information is drawn. Management information is
information that is timely, accurate and relevant to a particular situation.
It enables management to establish what should be done in a specific
situation. A system comprises sub-systems that form a whole. These
sub-systems are linked and interact in such a way that they achieve a
goal. An information system is defined as the people, procedures and
other resources used to collect, transform and disseminate information
in an organisation. An information system accepts data resources as
input and processes them into information products as output.
13.3.2 The basic components of an information
system
data
raw, unanalysed numbers and
facts about events or conditions
from which information is drawn
management information
information that is timely,
accurate and relevant to a
particular situation
information system
people, procedures and other
resources that collect, transform
and disseminate information in
an organisation
An information system uses hardware, software and human resources
to perform the basic activities of input, processing, output, feedback,
control and storage. This is illustrated in Figure 13.2.
Human resources
Hardware resources
Software resources
Control
Storage
Procedures
Figure 13.2: An information system model
Source: Smit, P.J., Cronje G.E., Brevis T. & Vrba M.J. 2011. Management Principles: A contemporary edition for Africa.
5th edition. Cape Town: Juta Publishers.
CONTEMPORARY MANAGEMENT PRINCIPLES
287
PART III: Planning
JardYare resources
a broad term referring to the
physical components of a
computer system
softYare resources
programs or detailed
instructions that operate
computers
Juman resources
required to operate an
information system, including
specialists and end-users
Information systems receive data as input. An information system
needs to process this data by organising and analysing it in a meaningful
way to provide information as output to managers. The information,
and not the data, should enable management to make decisions. This
information must then be stored. Storage refers to the activity by which
data and information are retained for subsequent use. Magnetic tape
cartridges, computer disks, or other means of storage can be used for
this purpose. Finally, an information system provides feedback on its
activities in order to determine whether the system meets established
performance standards.
Information systems include certain resources that contribute to
their information-processing activities. The four main categories of
IBSEXBSFSFTPVSDFT in a computer system are:
r *OQVUEFWJDFT TVDIBTLFZCPBSET PQUJDBMTDBOOJOHEFWJDFT BOE
magnetic ink character readers, which allow one to communicate
with one’s computer.
r A central processing unit (CPU), which consists of electronic
components that interpret and execute the computer program’s
instructions. The CPU can be seen as the ‘brain’ of the computer.
r Output devices, for example, printers, audio devices and display
screens.
r Auxiliary storage, for example, magnetic disks and tape cartridges
and optical disks.
4PGUXBSFSFTPVSDFT include:
r System software, which manages the operations of a computer.
r Application software, which performs specific data-processing or
text-processing functions, such as a word-processing package or a
payroll programme.
r Procedures that entail the operating instructions for users of an
information system.
)VNBO SFTPVSDFT are required to operate an information system
which include specialists and end-users – people who develop and
operate information systems, such as systems analysts, programmers
and computer operators. End-users are people who use the information
produced by a system. Managers, for example, are end-users of
information.
5IF,OPXMFEHF"HF4
The Knowledge Age is at hand, and with it, new
worldwide demands for the creation of a learning
society. Learning societies now need to learn with
information and communication technologies.
As people progress in their use of information
and communication technology for learning, they
normally go through some common stages:
288
CONTEMPORARY MANAGEMENT PRINCIPLES
r %JTDPOOFDUFEmQFPQMFVTFMPDBMPŶJOFXPSE
processing and possibly one or two other
productivity applications if these are available.
r /PWJDFTmUIFBCPWFTUBHFQMVTPOMJOF
research, uploading and downloading of online
information, online completion of documents
and transactions and simple online games.
CHAPTER 13 Information management
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and publishing documents and web pages,
interacting and sharing ideas online, participating
in standards-based online learning activities, and
collaborative interactions, forums, groups and
communities.
r &BSMZBEPQUFSTmUIFBCPWFTUBHFQMVTDSFBUJOH collaborating and sharing in online projects
including group multimedia productions and
websites, collaborating with asynchronous and
synchronous tools, taking facilitated courses
and seminars and use online simulations and
multiplayer games.
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global learning community projects, learning with
mentors, sharing journals, blogs and portfolios
of projects and work, creating and sharing
databases and data-based websites.
r .BWFSJDLTmUIFBCPWFTUBHFQMVTDSFBUJOHPOMJOF
tools and environments for others to create
learning games and simulations, to collaboratively
build complex interactive media productions,
and to build highly interactive communities of
learners that can work together on learning
projects and knowledge-building activities.
LEARNING OBJECTIVE 4
13.4 CHARACTERISTICS AND COSTS OF
USEFUL INFORMATION
Identify the characteristics and
costs of useful information.
Information must have certain benefits over raw data to be considered
a value-added resource to the organisation. There are certain
characteristics that information should have in order to be useful and of
value to the organisation:
r Quality (accuracy). Information is of high quality if it portrays
reality accurately. The more accurate the information, the higher
its quality.
r Relevance. Managers and employees often receive information
that is of little use. Information is relevant only when it can be used
directly in problem-solving and decision-making processes.
r Quantity (sufficiency). Managers and employees often complain
about an information overload. Quantity is the sufficient amount
of information available when users need it – more is not always
better.
r Timeliness (currency). Timeliness means the information is
received while it is current and before it ceases to be useful
for problem-solving and decision-making processes. Receiving
information too late can have a detrimental impact on an
organisation.
cJaracteristics of usefuN
information
useful information is information
of high quality, that is relevant,
of sufficient quantity and timely
*OGPSNBUJPOUFDIOPMPHZJOBDUJPO5
Portsmouth is a scenic city on the Southern coast of
England. It attracts nearly 6.5 million visitors per year,
mainly because of its historic role as the home of
the British Royal Navy. In order to manage the crush
of visitors, the city relies on 320 buses which are all
equipped with computers and quad-division multiple
access radio communication. Buses are networked.
Passengers who are waiting at bus stops can access a
weatherproof computer terminal to find out when
the next bus will arrive and what route that bus is
taking. Passengers can also access their electronic
mail, use trip planning software to determine which
bus routes to take, or swipe their credit card to
purchase bus tickets. The success of the system
depends on the accuracy, relevance, quantity and
timeliness of the information.
CONTEMPORARY MANAGEMENT PRINCIPLES
289
PART III: Planning
The four characteristics of useful information are interrelated and are
essential to the provision of information that serves as a value-added
managerial resource. However, the costs of useful information
costs of useful information
include:
useful information involves
acquisition, processing, storage, r Acquisition costs. The costs of obtaining data and/or information
that the organisation does not have.
retrieval and communication
r
Processing costs. The costs attached to receiving raw, unanalysed
costs
data and processing it into usable information. Likewise, an
organisation may also receive information, but not in the correct
format or combination that will be helpful in decision-making
processes. In such a case processing costs will also be involved.
r Storage costs. The costs of physical or electronic storage
(archiving) of the information for later retrieval and use.
r Retrieval costs. Data and information will not be usable if it cannot
be retrieved. Retrieval costs refer to the cost of accessing alreadystored and processed data and information.
r Communication costs. Data and information often need to be
communicated to different decision-makers in the organisation.
Communication costs are those costs involved in transmitting data
and information from one place to the other.
In the next section, we examine how organisations organise information
systems so that they can provide managerial end-users with information
that is accurate, relevant, sufficient and current.
LEARNING OBJECTIVE 5
13.5 ORGANISING INFORMATION SYSTEMS
Explain the organisation of
information systems in modern
organisations.
An organisation’s corporate or grand strategy feeds down, through
divisional or business unit strategies, into a number of functional
strategies, such as the marketing strategy, the financial strategy and
also the information systems (IS) strategy. Most organisations organise
information systems in such a way that it has similar status to other
functions of the organisation6. Figure 13.3 on the next page illustrates
the hierarchy of an organisation’s strategies.
As one of an organisation’s functional strategies, IS strategy may have
various sub-strategies. Examples are the IT strategy, the communications
strategy and the manual systems strategy. These sub-strategies can then
be developed into more detailed strategy elements. For example, IT
strategy can be developed into a hardware and software strategy; the
manual systems strategy can be developed into a planning and staffing
strategy and the communications strategy can be developed into a data
and voice strategy. In this way, the IS strategy is viewed as an element of
a system of strategies. In many organisations, the IT function operates
as a business within a business, supporting all the other functional units
in a variety of ways. Table 13.1 on the next page provides examples of
some functional units and the IT applications that typically support them.
Senior IS managers and most IS functions have both line and staff
responsibilities. Because of this shared responsibility, IS is a hybrid
organisation in most firms. The next section focuses on the classification
of IS in terms of their use in operations and management support
activities.
290
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 13 Information management
Corporate
strategy
Divisional or business
unit strategies
Functional strategies
Figure 13.3: Hierarchy of an organisation’s strategies
Source: Smit, P.J., Cronje G.E., Brevis T. & Vrba M.J. 2011. Management Principles: A contemporary edition for Africa.
5th edition. Cape Town: Juta Publishers.
Table 13.1: Organisational functions and IT supporting them
Function
Supporting IT applications
Product development
design automation and component catalogue
Manufacturing
materials logistics and factory automation
Distribution
warehouse automation, shipping and receiving
Sales
order entry, sales analysis and commission calculation
Service
failure analysis, call centres
Financing and accounting
recordMeeping and Ƃnancial planning
Administration
ofƂce systems and personnel records
Source: Frenzel, C.W. & Frenzel, J.C. 2004. Management of Information Technologies. Canada: Course Technology, p 10.
13.6 CLASSIFICATION OF INFORMATION
SYSTEMS
LEARNING OBJECTIVE 6
ISs perform operational and managerial support roles in organisations.
Figure 13.4 provides a conceptual classification of ISs.
Classify information systems in
terms of their use in operational
and managerial support.
Figure 13.4: The classiƂcation of information systems
Source: Smit, P.J., Cronje G.E., Brevis T. & Vrba M.J. 2011. Management Principles: A contemporary edition for Africa. 5th edition.
Cape Town: Juta Publishers.
CONTEMPORARY MANAGEMENT PRINCIPLES
291
PART III: Planning
13.6.1 Operations IS
operations information
system
Operations information systems process data generated by and
used in business operations. The major categories of these systems and
supports business operations by the roles they play are:
1. Transaction processing systems. Organisations use transactionprocessing data generated by
processing systems (TPSs) to record and process data resulting
and used in business operations
from business transactions, such as sales, purchases and inventory
changes. These systems produce a variety of documents and
reports for internal and external use. They also update the
databases used by an organisation for further processing by its
management information system.
2. Process control systems. Operations IS can make routine decisions
that control physical processes. The financial health and success
of the Coca-Cola Company’s bottling partners is a critical factor
in the company’s ability to create and deliver leading brands.
Coca-Cola may, for example, implement an automatic inventory
reorder system. Reordering from their bottling partners then
becomes a programmed decision. Decision rules outline the
actions to be taken when the IS is confronted with a certain set of
events. Information systems in which decisions adjusting a physical
production process are automatically made by computers are
called ‘process control systems’ (PCSs).
3. Office-automation systems. Office-automation systems
(OASs) transform traditional manual office methods and
paper communications media. These systems support office
communication and productivity. For instance, instead of
using typewriters to produce the company’s annual reports,
organisations can use word-processing systems. Other examples
of office-automation applications are electronic mail (e-mail),
desktop publishing and teleconferencing. Teleconferencing has
become very popular in South Africa because of the long distances
that managers and employers otherwise have to cover to attend
meetings.
13.6.2 Management information systems (MIS)
management information
system (MIS)
a management information
system supports the
decision-making needs at
the operational, tactical and
strategic levels of management
292
The term management information systems has several popular
meanings. Many writers use the term as a synonym for information
systems. In this text we use MIS to describe a broad class of IS, the goal
of which is to provide information on and support for decision-making
by managers.
At the operational level, decisions are mainly structured, and MIS
process transactions as they occur in order to update internal records
and provide reports and documents. At the tactical level, decisions are
semi-structured, and middle-level managers receive results from the
operational level. At this level, information is needed on important
matters such as problems with suppliers, abrupt sales declines or
increased consumer demand for a particular product line. In addition,
middle-level managers also access data from external sources to
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 13 Information management
support their own planning and control activities. At the strategic level,
decisions are unstructured. Top-level management needs information
from internal and external sources in order to gauge the organisation’s
strengths and weaknesses, as well as opportunities and threats in the
external environment. Information on the financial performance of the
organisation is derived from internal sources and is needed by top-level
management to make sound financial decisions. Management needs
information on quarterly sales and profits, on other relevant indicators of
financial performance (such as share value), on quality levels, on customer
satisfaction and on the performance of competitors. Information from
external sources is more difficult to obtain and to computerise than
internal information. Top-level management also needs information
on interest rates, possible changes in tax laws, the latest technological
breakthroughs, substitute products and other variables.
Providing information and support for managerial decision-making
at all levels of management is a complex task. Several major types of IS
are needed to support a variety of managerial end-user responsibilities,
indicated in Figure 13.4 on page 291. These are information-reporting
systems, decision-support systems and executive information systems.
Information-reporting systems (IRS)
Information-reporting systems provide managerial end-users
with the information reports they need for making decisions. These
systems access databases on internal operations containing information
previously processed by transaction-processing systems. Data on
the external environment is obtained from external sources. The IRS
processes provide end-users with information reports they need for
making decisions.
Decision-support systems (DSS)
Decision-support systems are a natural progression from
transaction-processing systems and information-reporting systems.
They are computer-based ISs that provide interactive information
support to managers during the decision-making process. Decisionsupport systems use:
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the making of semi-structured and unstructured decisions by the
individual manager.
information reporting
system (IRS)
provides managerial end-users
with information reports they
need for making decisions
decision-support system
(DSS)
provides interactive information
support to managers in the
decision-making process
Electronic spreadsheets and other decision-support software allow a
managerial end-user to receive interactive responses to ad hoc requests
for information posed as a series of ‘what-if ’ questions. When using a
DSS, managers are exploring possible options and receiving tentative
information based on different sets of assumptions.
CONTEMPORARY MANAGEMENT PRINCIPLES
293
PART III: Planning
eZecutive information
system (EIS)
a management information
system that supports business
operations by processing data
generated by and used in
business operations
Executive information systems (EIS)
&YFDVUJWF JOGPSNBUJPO TZTUFNT are management information
systems that are tailored to the strategic information needs of top
management. The function of computer-based executive information
systems is to provide top-level management with immediate and easy
access to information on the organisation’s critical success factors – that
is, the factors critical to accomplishing the organisation’s strategic goals.
13.6.3 Other classifications of information systems
There are several major categories of information systems that provide
unique or broader classifications compared to those just mentioned.
These are information systems that can support business operations
as well as managers at the operational, tactical, or strategic levels of
an organisation. Examples are expert systems, business function ISs,
the internet, the extranet, the intranet and electronic commerce (or
e-commerce).
Expert systems (ES)
When an organisation has a complex decision to make or problem to
solve, it often turns to experts for advice. These experts have specific
knowledge and experience in the problem area. They are aware of
the alternatives, the chances of success and the costs the organisation
may incur. Organisations engage experts for advice on matters such
as equipment purchases, mergers and acquisitions, and advertising
strategy. The more unstructured the situation, the more specialised
and expensive the advice is. An FYQFSUTZTUFN is a branch of applied
eZpert system
artificial
intelligence (AI). Expert systems are an attempt to mimic human
an attempt to mimic human
FYQFSUT
*U JT B EFDJTJPONBLJOH BOEPS QSPCMFNTPMWJOH QBDLBHF PG
experts consisting of a decisioncomputer
hardware and software that can reach a level of performance
making and/or problem-solving
comparable
to – or even exceeding that of – a human expert in some
package of computer hardware
specialised
and
narrow area. The logic behind expert systems is simple.
and software that can reach
Expertise
is
transferred
from the human being to the computer. This
a level of performance
knowledge
is
then
stored
in the computer and users call on the computer
comparable to – or even
for
specific
advice
as
needed.
The computer can make inferences and
exceeding that of – a human
arrive
at
a
specific
conclusion.
Then,
like a human consultant, it advises
expert in some specialised and
non-experts
and
explains
the
logic
behind
the advice.
narrow area
Expert systems are used today in thousands of organisations and
they support many tasks. Their capabilities can provide organisations
with improved productivity levels and increased competitive advantages.
&YQFSUTZTUFNJOBDUJPO7
In 2004, the Mayo Clinic and IBM announced a broad
collaboration to accelerate advances in patient care
and research with an aggressive set of technology
initiatives. The collaboration between the clinic
and IBM focuses on new techniques to harness
patient data in order to improve diagnoses, deep
computing power to model diseases to find cures,
294
CONTEMPORARY MANAGEMENT PRINCIPLES
and new devices to access information to transform
how patients and physicians interact, leading to
more individualised medical care. Under the
collaboration, the Mayo Clinic was the first medical
institution to tap into the power of IBM’s Blue Gene
supercomputer.
CHAPTER 13 Information management
Business function IS
#VTJOFTTGVODUJPO*4T support the functions of accounting, finance,
human resource management, administration, purchasing, marketing,
and operations management. Such ISs are needed by all business
functions. For example, marketing managers need information on sales
performance and trends – provided by marketing ISs; financial managers
need information on financing costs and investment returns – provided
by financial ISs.
The internet
Information on the JOUFSOFU is potentially available to almost everyone
in the world. It offers almost unlimited communication opportunities.
The internet can be defined as a web of thousands of international
corporate, educational and research knowledge and information bases
in the public domain that allows any person or institution with access
to a network point and a computer to view, extract and utilise the
information. One drawback in communication through the internet is
the limited privacy of information sent over it. As a result, finding methods
to make information secure is a high priority of both researchers and
users8.
Internet access usually provides four primary capabilities:
r &MFDUSPOJDNBJM FNBJM FOBCMFTVTFSTUPTFOE SFDFJWFBOEGPSXBSE
messages from people all over the world. Users can reply to, save,
file and categorise received messages. E-mail makes participation in
group decision-support systems such as electronic brainstorming,
electronic meetings and real-time Delphi possible.
r Telnet enables users to log in to remote computers and to
interact with them. Users’ computers are remotely connected
to computers at other locations, but act as if they were directly
connected.
r File transfer protocol (FTP) enables users to move files and data
from one computer to another. Users can download magazines,
books, documents, software, music, graphics and much more.
r World Wide Web (or ‘the Web’) is a set of standards and
protocols that enables users to access and input text, documents,
images, video, and sound on the internet. The Web is non-linear by
design and permits users to jump from topic to topic, document to
document, and site to site9.
business function IS
an information system directly
supporting the business
functions in an organisation
internet
web of thousands of
international corporate,
educational and research
knowledge and information
bases in the public domain
that allows any person or
institution with access to a
network point and a computer
to view, extract and utilise the
information
As Web-based systems began to flourish, businesses gained efficiency by
integrating the individual systems that supported their value chains. This
led to the introduction of enterprise resource planning (ERP) systems.
These complex, comprehensive systems cover most of the value-chain
elements and are used to purchase parts and supplies, accept customer
orders, maintain work-in-process inventories, service customers,
support sales people and help manage many other important activities10.
CONTEMPORARY MANAGEMENT PRINCIPLES
295
PART III: Planning
5IFOJOFUIFNFTPGEJHJUBMDJUJ[FOTIJQ
Due to the increased use of information technology
by all people all over the globe, our society has
become an electronic society. An electronic society
needs to demonstrate digital citizenship, which can
be defined as the norms of appropriate, responsible
behaviour in the use of technology. Digital citizenship
is based on nine themes:
1. Digital access. Technology users need to be
aware of and support electronic access for
all in order to create a foundation for digital
citizenship. All people should have fair access to
technology, no matter who or where they are.
2. Digital commerce. Users of technology need to
be aware that a large share of market economy
is being done electronically. Legitimate and
legal exchanges are occurring, but the buyer
and the seller need to be aware of the issues
associated with it. Unfortunately, goods and
services which are in conflict with the laws and
morals of some countries are also surfacing,
such as illegal downloading, pornography and
gambling. Technology users should learn how to
be effective and responsible consumers in a new
digital economy.
3. Digital communication. Digital communication
options, such as e-mail, cellular phones and
instant messaging, enable people to keep in
constant communication with anyone else.
Everyone has the opportunity to communicate
and collaborate with anyone from anywhere and
at anytime. Technology users need to be able to
make appropriate decisions when faced with so
many different digital communication options.
4. Digital literacy. People in a digital economy
need to learn about technology and the use of
technology. They must also have the ability to
learn anything, anytime and anywhere. As new
technologies develop, people need to learn how
to use that technology quickly and appropriately.
296
CONTEMPORARY MANAGEMENT PRINCIPLES
5. Digital etiquette. Digital etiquette refers to
appropriate electronic conduct. Technology
users should be responsible digital citizens in the
new society.
6. Digital law. Digital law deals with the ethics of
technology within a society. Ethical use manifests
itself in the form of abiding by the laws of
society. Technology users need to know that
causing damage to other people’s work, hacking
into other’s information, downloading illegal
music, plagiarising, creating destructive worms,
viruses or creating Trojan Horses, sending spam
or stealing anyone’s identity or property are
unethical.
7. Digital rights and responsibilities. There is a basic
set of rights extended to every digital citizen.
They have the right to privacy, free speech
and so on. However, with these rights come
responsibilities. Users must help define how
the technology is to be used in an appropriate
manner. In a digital society, these two areas must
work together for everyone to be productive.
8. Digital health and wellness. Eye safety, repetitive
stress syndrome and sound ergonomic practices
are issues that need to be addressed in a
new technological world. Beyond the physical
issues, psychological issues are also becoming
increasingly important, such as internet addiction.
Technology users should protect themselves
through education and training.
9. Digital security (self-protection). As in any
other society, there will also be people who
steal, deface or disrupt other people in a digital
community. Technology users are responsible
for their own digital security. Virus protection,
backups of data and surge control of equipment
are examples of self-protection.
CHAPTER 13 Information management
The extranet
The FYUSBOFU is a wide area network that links an organisation’s
employees, suppliers, customers and other key stakeholders
electronically. Unlike the internet, the general public does not have
access to an extranet. Its purpose is to provide vast, reliable, secure
and low-cost computer-to-computer communication for a wide variety
of applications, such as sales, marketing, product development and
employee communications.
The intranet
The JOUSBOFU is a semi-private internal network where access is limited
to an organisation’s employees. The intranet uses the infrastructure
and standards of the internet and the Web. It enables managers and
employees to communicate with one another and to access internal
information and databases for which they have been cleared, through
their desktop or laptop computers. Access to sensitive information,
such as employee salaries and performance appraisals, can be restricted
to particular authorised employees12.
Electronic commerce
&MFDUSPOJD DPNNFSDF FDPNNFSDF can be defined as the
process of buying and selling goods and services electronically by means
of computerised business transactions13. The internet has emerged as
the dominant technology for conducting e-commerce. Almost on a
daily basis we read in newspapers of some new organisation that will
sell its products or services online. Three types of e-commerce exist,
namely business-to-consumer, business-to-business and consumer-toconsumer. Business-to-consumer (B2C) e-commerce involves selling
products and services to customers over the internet. Although this may
be the most visible expression of e-commerce to the public, the fastestgrowing area of e-commerce is business-to-business (B2B) e-commerce,
which refers to electronic transactions between organisations. Many B2B
transactions take place over the internet. Lastly, consumer-to-consumer
(C2C) e-commerce is made possible when an internet-based business
acts as an intermediary between and among consumers. An example is
web-based auctions where consumers can buy and sell directly between
one another, often handling the entire transaction via the Web.
Figure 13.5 on the next page summarises the relationship between
management information systems and the various levels of management.
Top-level management mainly uses executive information systems
and expert systems in their decision-making and problem-solving
processes. Middle-level management will probably use decision support
systems and business function information management systems, while
lower levels of management will mainly need information reporting
systems, the internet, extranet, intranet and e-commerce. Lastly, on
operational levels, office-automation systems, transaction processing
systems and process control systems will be used to a larger extend
than other types of information systems.
eZtranet
a wide area network that links
an organisation’s employees,
suppliers, customers and other
key stakeholders electronically
intranet
a semi-private internal network
where access is limited to an
organisation’s employees
electronic commerce
(e-commerce)
the process of buying and
selling goods and services
electronically by means of
computerised business
transactions
CONTEMPORARY MANAGEMENT PRINCIPLES
297
PART III: Planning
Management
information
systems
Top-level
management
Middle-level
management
Lower-level
management
Business operations
Operations
information
systems
Other
classifications
executive
information
systems
expert
systems
decision
support
systems
business
function
systems
informationreporting
systems
internet,
extranet,
intranet,
e-commerce
office automation systems
transaction-processing
systems
process control systems
Figure 13.5: The relationship between management information systems
and levels of management
Source: Smit, P.J., Cronje G.E., Brevis T. & Vrba M.J. 2011. Management Principles: A
contemporary edition for Africa. 5th edition. Cape Town: Juta Publishers.
LEARNING OBJECTIVE 7
13.7 DEVELOPING AN INFORMATION SYSTEM
Develop a generic information
system for managers.
Most managers are not IS specialists. However, they are IS users in
line and staff departments, such as accounting, operations, marketing,
purchasing and so forth. Their performance will, in part, depend on the
quality of the IS support available. It is therefore imperative for endusers to have a say in the development efforts of IS specialists in order
to ensure that the system meets their information requirements.
An IS is usually conceived, designed and implemented through
a systematic development process in which end-users (managers)
and technical staff design systems based on an analysis of the specific
information requirements of an organisation, or of departments in an
298
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 13 Information management
organisation. In this way, a systems development life cycle emerges, as
illustrated in Figure 13.6. All the activities involved in the development
cycle are closely related and interdependent, with the result that several
development activities can, in practice, occur at the same time.
Figure 13.6: Information system development life cycle
Source: Smit, P.J., Cronje G.E., Brevis T. & Vrba M.J. 2011. Management Principles: A
contemporary edition for Africa. 5th edition. Cape Town: Juta Publishers.
13.7.1 Systems investigation
The first step in the IS development life cycle is systems investigation
which involves the determination of the nature and scope of the need
for information. If the need is incorrectly or incompletely defined, the
entire process could address the wrong issues. Management has to
define these needs clearly so that the systems specialist knows which
systems to use in order to generate the information.
Since the development process may be costly, systems investigation
frequently requires a preliminary study, known as a ‘feasibility study’,
to be conducted. The purpose of the feasibility study is to evaluate
different systems, to analyse the costs and benefits of each option,
and to propose the most feasible system for development. A feasibility
study therefore determines the information needs of prospective
users and the objectives, resource requirements, cost benefits and
feasibility of proposed projects. The findings of a feasibility study are
usually formalised in a written report and submitted to management for
approval before development begins.
systems investigation
determine the nature and scope
of the need for information
13.7.2 Systems analysis
Systems analysis involves many of the activities used when a
feasibility study is conducted but it is a more in-depth study of enduser requirements. The first step in systems analysis involves a study
of the information requirements of an organisation and its end-users.
The second step in systems analysis is to understand the current system
that is to be improved or replaced, and to determine the importance,
complexity, and scope of the problem at hand. Much of this phase
involves gathering information on what is being done in this regard, why
it is being done, how it is being done, who is doing it and what major
problems have developed. The third step is to determine the system
requirements for a new or improved IS. This means finding out an
end-user’s specific information requirements as well as the information-
systems analysis
an in-depth study of end-user
requirements
CONTEMPORARY MANAGEMENT PRINCIPLES
299
PART III: Planning
processing capabilities required for each system activity to meet these
information needs.
13.7.3 Systems design
Whereas systems analysis describes what a system should do to meet
the information requirements of end-users, TZTUFNTEFTJHOspecifies
how a system will accomplish this goal. The systems specialist plays
specifies how an information
system will meet the information the major role because the area now being focused on is seldom one
in which management plays an active part. Systems design involves
requirements of end-users
logical and physical design activities. Logical design activities involve the
development of a logical model of the proposed system. A logical dataflow diagram is used to depict the system, its procedures, and the flow
of information graphically. Physical design activities entail the process of
developing specifications for a proposed physical system. This process
includes the design of report layouts, screens and input documents,
forms and physical file structures. The design specifies the types of
hardware, software and human resources needed. Once the proposed
system has been designed, it is implemented.
systems design
13.7.4 Systems implementation, maintenance and
security
The TZTUFNT JNQMFNFOUBUJPO phase involves acquiring hardware
and
software, developing software, test programmes and procedures,
acquiring hardware and
developing
documentation and carrying out installation activities. It also
software, developing
involves
the
training of end-users and operations personnel.
software, testing programs
4ZTUFNT
NBJOUFOBODF involves monitoring, evaluating and
and procedures, developing
modifying
or
enhancing
a system once it is up and running. It includes
documentation and carrying out
a
post
audit,
which
establishes
whether a system satisfies the system
installation activities
specifications and how efficiently the system investigation activities were
conducted.
systems maintenance
4ZTUFNT TFDVSJUZ is the protection of all resources related to
monitor, evaluate, modify or
information systems in an organisation and is an issue that must be
enhance a system once it is up
addressed in the design and implementation stages. The goals of systems
and running
security are to:
r SFEVDFUIFSJTLPG JOGPSNBUJPOTZTUFNTDFBTJOHPQFSBUJPOT
systems security
r NBJOUBJOEBUBBOEJOGPSNBUJPODPOųEFOUJBMJUZ
the protection of all resources
related to information systems in r FOTVSFJOUFHSJUZBOEUIFSFMJBCJMJUZPGEBUB
r FOTVSFUIFVOJOUFSSVQUFEBWBJMBCJMJUZPGEBUBBOEJOGPSNBUJPO
an organisation
resources and online operations
r FOTVSFDPNQMJBODFXJUIQPMJDJFTBOEMBXTQFSUBJOJOHUPTFDVSJUZBOE
privacy.
systems implementation
300
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 13 Information management
1BTTXPSEEPTBOEEPOUT14
Any person with access to sensitive and/or
confidential information has the responsibility
to protect these data and information from
unauthorised access. One way of protecting
data and information, is by using passwords. The
following rules can be helpful in maintaining a strong
password system.
1. In creating a password, do not use any public
information such as a part of your name,
address, or date of birth.
2. Password software using ‘dictionary attacks’ is
freely available, therefore do not use complete
words that can easily be guessed.
3. Use eight or more characters and include
unique characters such as &*%$. The longer
the password and the more unique characters
used, the more difficult it is to guess.
4. Remember your password and do not write
it down on a sticky note attached to your
computer.
5. Change passwords every six weeks.
6. Do not reuse old passwords.
CONTEMPORARY MANAGEMENT PRINCIPLES
301
Copyright © 2014. Juta and Company. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S.
or applicable copyright law.
Part III: Planning
CHAPTER SUMMARY
1. Contextualise information management in terms of the decision-making process.
Computer-based ISs play a vital role in the operations, management and strategic success of
organisations. Information systems transform data obtained from an organisation’s external
and internal environments into information that can be used in decision-making.
2. Explain the importance of managing information for sustaining competitive advantage.
Competitive advantage is the ability of an organisation to provide greater value to customers
than its competitors. A sustainable competitive advantage occurs when other organisations
tried unsuccessfully to duplicate an organisation’s competitive advantage. Organisations need
to address three questions in order to sustain a competitive advantage through information
technology. First, does the use of information technology create value for the organisation by
lowering costs or providing a better product or service? Second, is the information technology
the same or different across competing organisations? Third, is it difficult for another
organisation to create or acquire the information technology used by the organisation?
3. Explain the basic functioning of an information system.
An IS uses the resources of hardware, software and people to perform input, processing,
output, storage and control activities that transform data resources into information products.
Data is first collected for processing (input), then manipulated or converted into information
(processing), stored for future use (storage), or communicated to the ultimate user (output),
according to the correct processing procedures (control).
4. Identify the characteristics and costs of useful information.
Useful information has the following characteristics:
• accurate
• relevant
• sufficient
• timely.
The costs of useful information are:
• acquisition costs
• processing costs
• storage costs
• retrieval costs
• communication costs.
5. Explain the organisation of information systems in modern organisations.
Most organisations organise information systems in such a way that it has similar status than
other functions in the organisation.
302
Contemporary management prinCiples
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Copyright © 2014. Juta and Company. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S.
or applicable copyright law.
ChaPter 13 Information management
6. Classify information systems in terms of their use in operational and managerial support.
Conceptually, an IS can be classified as either an operations or a management IS. Operations
ISs process data that is generated by and used in business operations. The major categories
of such systems are transaction-processing systems, process control systems, and officeautomation systems.
Management information systems constitute a broad class of ISs, the function of which is
to provide information and support decision-making by managers. The types of management
IS needed to support a variety of managerial end-user responsibilities include informationreporting systems, decision-support systems and executive ISs.
Several major categories of IS provide unique or broader classifications than operations
ISs and management ISs. Examples are expert systems, business function ISs, the internet,
the extranet, the intranet and e-commerce.
7. Develop a generic information system for managers.
An IS is usually conceived, designed and implemented through a systematic development
process comprising the following steps: systems investigation, systems analysis, systems
design, systems implementation, maintenance and security.
KEY TERMS
business-to-business e-commerce
business-to-consumer e-commerce
business unit strategy
competitive advantage
consumer-to-consumer e-commerce
corporate strategy
data
decision support system (Dss)
digital citizenship
electronic commerce (e-commerce)
electronic mail (e-mail)
executive information system (eis)
expert system (es)
extranet
file transfer protocol (Ftp)
functional strategy
hardware
information
information reporting system (irs)
information system (is)
information systems strategy
internet
intranet
management information system (mis)
operations information system
software
systems analysis
systems design
systems implementation
systems investigation
sustainable competitive advantage
telnet
World Wide Web
Contemporary management prinCiples
EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 5/3/2018 2:30 PM via UNISA
303
PART III: Planning
REVIEW QUESTIONS
1. Explain the link between information management and the decision-making process.
2. Explain the importance of managing information in sustaining competitive advantage.
3. Explain the basic functioning of an information system.
4. Identify the most important characteristics and costs of useful information.
5. Explain how information systems can be organised in modern organisations.
6. Classify information systems in terms of their use in operational support.
7. Classify information systems in terms of their use in managerial support.
8. Explain other information systems that cannot be classified as either operations or management
information systems.
9. Explain the steps to be followed in the development of an information system.
END NOTES
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304
CONTEMPORARY MANAGEMENT PRINCIPLES
Chapter 14
Project management
Louis Botha
OPENING CASE
The opening case is based on a fictitious international company, Management@ZA.
Management@ZA
Management@ZA with Managing Director Bheki
Sindane, is an international financial services
company that is well established in South Africa
with major offices in eleven South African cities.
The mother company, Management@Inc with
CEO Luke Hands, has acquired a decentralised
customer relationship management system that
requires local integration and desktop setup with
training in system support. South Africa is one of
the last countries to receive the system with the
result that the implementation specifications are
tried and tested.
As in other countries, Management@ZA
has adopted a matrix type organisation with a
dedicated project office and is managed by the
programme director, Carli Sunshine. The rollout of the customer relationship management
system forms part of a decentralised programme
aimed at improving total quality management in
Management@ZA offices internationally.
Jhan Louis is the programme manager appointed
at Management@ZA. His sole responsibility is
to realise the benefits from the total quality
management initiative. The customer relationship
management system roll-out in South Africa will
include integration with company information
systems at each site with training for a local support
team who will work with the visiting integration
specialist in order to familiarise themselves with the
system. The visiting integration specialist will lead
the local team in setting up all desktops as well as
coordinating initial user training.
The integration team will procure and
coordinate a specialist training company that will
develop and facilitate user training. A fixed fee
contract of R15 000 per site for user training has
been approved by management.
The roll-out plans include a project charter,
work breakdown structure, network (PERT)
diagram, bar chart (Gannt chart), stakeholder plan,
communication plan, change management plan,
human resources plan, cost management plan,
procurement plan, risk management plan and finally
a quality management plan.
The mother company sent a team of consultants
to develop and fine-tune the roll-out plans in close
working relation with the local implementation
team that consists of three integration specialists
of which one will take responsibility for project
management.
The Management@ZA team is given below,
indicating the roles, responsibilities and daily charge
rate of each team member.
Name
Role and responsibility
Charge rate (daily)
,QEM$WUJ
+PVGITCVKQP.GCF5RGEKCNKUV2TQLGEV/CPCIGT
R5 000
/GTT[ RKDDQPU
+PVGITCVKQP 6GCO /GODGT
R3 200
$CTT[ ,GEM[NN
+PVGITCVKQP 6GCO /GODGT
R3 200
PART III: Planning
The additional resource list of Management@ZA, also indicating roles, responsibilities and charge rates,
is given below.
Name
Role and responsibility
Charge rate (Total cost)
International team
Consult to Integration team
R250 000
Local Support team
Local System Support and training
R50 000 (per site)
All Star training
Specialist Training company
R15 000 (per site)
This information will be used in the chapter
to illustrate the implementation of a project
management process.
In Chapter 2, planning was identified as the first
fundamental managerial function. In Chapter 10,
various types of organisational plans were examined,
namely strategic, tactical and operational plans.
Further to this, organisational structures need to
be contemplated that will facilitate the realisation
of organisational goals and objectives. In the
context of planning and delivering on goals and
objectives, we will explore project management as
a management philosophy before considering how
best to take advantage of the tools and techniques
of project management.
LEARNING OBJECTIVES
The purpose of the chapter is to provide an overview of project management. The objective of
studying this chapter is to enable you to:
1. Explain the philosophy and meaning of project management.
2. Distinguish between the various perspectives of project management.
3. Identify the key role players in project management.
4. Lead and direct the implementation of the project management process and activities.
LEARNING OBJECTIVE 1
Explain the philosophy
and meaning of project
management.
306
14.1 THE PHILOSOPHY AND MEANING OF
PROJECT MANAGEMENT
In broad terms the application of project management as a management
philosophy greatly facilitates the deconstruction of work required to
deliver the organisation’s strategic intent. Work is deconstructed in a
top down process to a level that the organisation is willing and able
to manage. During the deconstruction process, work is categorised
at distinct levels starting at the top managerial level with strategy and,
depending on the size of the organisation strategy, is deconstructed to
portfolios that in turn are deconstructed to programmes, programmes
to projects and projects to activities. Final deconstruction of work to
activity level (lowest level of work depicted in the WBS) allows for
organisational resources and assets to be allocated in order to start the
bottom-up planning process. Estimating the total organisational assets
required to achieve the set objectives can then be calculated.
A prime example of where work is deconstructed from strategy and
which subsequently sets organisational structure is found in the South
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 14 Project management
African provincial government. Strategic service delivery requirements
are deconstructed to portfolios which, in this case, happens within the
individual government departments, for example education, health, and
housing. All departments are then made responsible to deliver benefits
from programmes which are aimed at contracted service delivery
objectives that are set at national level. These programmes are achieved
through projects with the required activities planned to a level of detail
sufficient to ensure project success. This structure ultimately facilitates
the allocation and management of the required financial resources that
will ensure the delivery of the strategy as contracted.
In Chapter 10, we defined a programme as a single-use plan that
describes a set of activities designed to accomplish a specific objective
over a specified period of time. A programme therefore consists of
related projects working collectively towards the achievement of a
common goal. A programme manager manages a portfolio of projects
and is responsible for the organisational benefits derived from the
programme, which is in contrast to a project manager whose sole
responsibility is bringing their project in on time, within budget and
meeting set project requirements.
Project management uses knowledge, skills, tools and resources
to execute activities and to meet clients’ needs and expectations. In
order to achieve this, a project manager needs to be in full control of
the project schedule, cost and requirements. Product and/or service
quality is achieved as a result of finding a systemic balance between the
interrelated constraints of project schedule, cost and requirements.
All sources of risk should be taken into consideration from inception
throughout project execution. Traditionally in project management
we speak of the ‘triple constraint’ which is made up of time, cost and
requirements. The triple constraint has been extended to also include
quality and risk.
Considering the triple constraint the project manager needs to be in
control of at least two of the three constraints at all times, in order to
ensure successful delivery as contracted with the stakeholders. These
constraints also serve to differentiate projects where the emphasis
is placed on a specific constraint. A typical example is where project
feasibility is negated by slim financial margins.
Personal values displayed by the project manager towards time, cost
and requirements will also largely influence team behaviour and attitude
in the achievement of quality project objectives. The influence of specific
professions with disparate and, at times, even opposing values should
also be considered. The project manager might be required to strike a
balance between an engineer who values technology and an accountant
who is cost conscious.
Managing any project entails planning, organising, coordinating
and controlling the associated project activities and resources. These
resources can include but are not limited to the following:
r IVNBOSFTPVSDFT
r money
r equipment
r machinery
project management
a management tool used to
plan, organise, implement and
control activities in order to
attain a predefined objective,
using knowledge, skills, tools
and resources to execute
activities to meet clients’ needs
and expectations
CONTEMPORARY MANAGEMENT PRINCIPLES
307
PART III: Planning
r information systems
r organisational processes
r time.
The identification of these resources should be done by taking a systems
approach whereby all the elements that will contribute toward ultimately
achieving the set objectives are identified, planned for and contracted.
All the elements of the system need to function optimally for the system
to work effectively. An example of an ineffective system could be where
state of the art technology has been deployed but insufficient training
has left the human resources wanting. This reduces the technology to a
white elephant.
In the event of service delivery issues arising, symptoms of poor
performance identified during performance reviews would lead to
analysis of the system elements in order to determine the actual causes.
An example of this would be where time delays are experienced.
Contributing factors could include skills, team conflict or poor planning
to name a few. The fishbone or Ishikawa diagram, also known as the
Cause and Effect diagram, serves as a good tool in undertaking a Root
Cause Analysis (RCA) to determine possible causes to the problem.
Project management can be used effectively in the following
situations:
r to effect improvements and change
r when a task is complex
r when a task requires the integration of activities across functional
lines
r when more resources are needed than are available
r when the task is a unique one-off task
r to implement a strategy
r in situations with a defined start and finish.
Apart from improvement, change and strategy listed above (which are
business objectives focused on throughout the project management life
cycle), the list addresses characteristics typical of project management.
An alternative to project management would typically be a process which
is continuous by nature such as a production line. Project management
has the following advantages:
r Control is exercised over all the activities of the project, which
leads to higher overall productivity.
r Effective project management may lead to a shorter completion
period for a defined project.
r The costs of each activity of the project can and should be
controlled.
r Effective project management can improve the quality of the
product or service.
r Transparency can be improved when all role players are involved.
308
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 14 Project management
Project management is characterised by the level of planning undertaken
prior to project implementation. During the planning phase projectspecific tools such as the Work Breakdown Structure (WBS), PERT
or Network Diagram and the project bar chart plus Key Performance
Indicators (KPIs) are developed. These project-specific tools and
techniques empower the project manager to effectively monitor
and control all aspects of the project relating to schedule, cost and
requirements during implementation. Project managers that understand
best how to take advantage of these tools and techniques consistently
produce the best results. They are consistent in delivering quality outputs,
at reduced costs, in acceptable timeframes but more importantly, with
increased stakeholder and customer satisfaction.
On completing a project, the project manager should ask the
following questions in order to determine the efficiency and/or
effectiveness of project management:
r Were the predetermined objectives attained?
r Was the project completed within the planned period of time?
r Was the project completed within the planned budget?
r Was the final product or service the quality that was planned for?
r Were all sources of risk addressed?
r Is the client happy with the final product or service?
PERT
Project Evaluation and
Review Technique – used for
estimating the delivery of project
constraints with improved
certainty
bar chart
a chart displaying scheduled
project work on a calendar to
a generally accepted project
standard
These questions form part of the activities undertaken during project
closure. Negative responses to these questions will call for analysis
and provide opportunities to learn. A major challenge facing project
managers, and one that usually catches them off guard, is the amount
of administration and resulting paperwork generated throughout the
project life cycle. Projects that have been administered well generally
prove to be easy to reconcile with minimal conflict between the project
manager and customer. Well-documented projects serve as benchmarks
for future projects specifically concerning risk management and they also
provide qualitative reflection on project achievements.
Most importantly the project closure process informs the
organisation’s knowledge base for future reference.
14.2 PERSPECTIVES OF PROJECT
MANAGEMENT
LEARNING OBJECTIVE 2
Project management has both an internal and an external perspective.
Distinguish between the
various perspectives of project
management.
14.2.1 Internal perspective of project management
Internal projects are those launched within an organisation to use
scarce resources more effectively, improve existing procedures and
methods, ensure more efficient service and improve the quality of the
final product and/or service. To launch internal projects, the project
manager needs to allocate resources, tasks and responsibilities to an
individual or group in order to complete the task within a certain time.
CONTEMPORARY MANAGEMENT PRINCIPLES
309
PART III: Planning
However, the project manager remains primarily responsible for the
successful execution of the project. Although the community should
benefit indirectly from effective project management, internal project
management has no direct benefits to the community. External projects,
on the other hand, affect communities directly. Generally the JOUFSOBM
KnternaN perUpectKXe
QFSTQFDUJWFof project management allows the organisation to focus
an inward perspective taken
on
efficiency in relation to system processes and procedures. Before an
on the efficiency of systems,
organisation
carries out a certain project, they should ask themselves
methods and procedures
the
following
questions:
employed by the organisation to
r
*TUIFPSHBOJTBUJPOŴFYJCMFNBUVSFFOPVHIUPJNQMFNFOUQSPKFDU
deliver quality products and/or
management?
services
r Will the organisation be able to handle the level of quantity
(project scale) and complexity required by the project(s)?
r Lastly, what are the requirements of the client or community?
These questions should be asked in context of the organisation’s level of
maturity in terms of the existence and adoption of project management
processes and organisational assets. Many organisations adopt the
International Standards Organisation (ISO) standards in documenting
their processes but maturity is found in the adoption and even consistent
exploitation of processes.
The level of project management maturity is further characterised
by the specific organisational structure adopted by organisations in
deploying project management. These structures will be discussed
in more detail in Chapter 15 (Principles of organising). At the lowest
level of maturity project management can be deployed in a traditional
functional organisation that is structured hierarchically. In such a case
the role of the project manager is reduced to one of coordination. This
makes their organisational and negotiation skills critical due to a lack of
authority.
Also discussed in Chapter 15 is the matrix type organisation where
the project manager works across functional boundaries. Although the
project manager’s authority is still an issue due to the allocated project
resources having dual reporting lines, this type of structure serves the
organisation better in terms of implementing more complex projects.
The project manager’s authority could be strengthened by the existence
of a Project Management Office (PMO) especially if the head of the
PMO reports directly to the highest authority in the organisation.
Chapter 15 also looks at projectised organisations which are the
most mature in the range of organisational structures. In this case only
the top structure of the organisation enjoys a sense of permanency,
UIF MPXFS MFWFMPSHBOJTBUJPOBM TUSVDUVSF JT GPSNFE BOE EJTNBOUMFE BT
dictated and required by the projects undertaken.
Internal project management has the following advantages:
r Undivided attention can be given to a specific project by every
person working on the project.
310
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 14 Project management
r The initial and final responsibility for successful execution of the
project can be given to an independent division.
r Although authority relations (which will be discussed in more detail
in Chapter 15) can become very complex, the flexibility of such
relations compensates for this, so that end results are still achieved
optimally.
Internal projects can be executed at three different levels within an
organisation, namely at the strategic, tactical and operational levels:
r At the strategic level, top managers consider the external and
internal environment of the organisation and formulate the overall
direction of the organisation with assurance of organisational
efficacy.
r At the tactical level, middle managers translate the direction of
the organisation into initiatives which will later become different
projects.
r At the operational level, line managers play the role of project
managers who are responsible for the actual planning, execution
and control of a project.
14.2.2 External perspective of project management
Any community strives to develop and improve its quality of life. Given
the inequalities between communities in a developing society such as
South Africa, upliftment and development programmes are needed.
Project management can be used to coordinate such development
programmes.
In the context of service delivery programmes (or improvement of
quality of life) in South Africa, projects with anFYUFSOBMQFSTQFDUJWF
cannot be managed in isolation. Different government departments
invariably have to collaborate to ensure the success of these projects.
An example of this would be a project aimed at crime prevention where
various departments like Social Development, Housing and Education
will need to collaborate with Safety and Security in order to ensure that
the system finds itself in balance and meets the strategic objective of the
project.
In a broader context, projects with an external perspective are
undertaken in a competitive environment where the work is acquired
through a bidding process through either quotations or tenders as
dictated by the procurement policy of the organisation. From a
government point of view, an internal project manager could be allocated
to oversee the delivery of this work thereby ensuring the achievement
of quality and stakeholder value.
External and internal projects require competent key role players in
order to be successful.
eZternaN perUpectKXe
an outward perspective taken to
determine the effectiveness of
the organisations’ products and/
or services in the market place
CONTEMPORARY MANAGEMENT PRINCIPLES
311
PART III: Planning
LEARNING OBJECTIVE 3
Identify the key role players in
project management.
Me[ roNe pNa[erU
in the project management
process these are the strategic
manager, the tactical or
programme manager, the
project sponsor and the
operational or project manager
14.3 KEY ROLE PLAYERS IN PROJECT
MANAGEMENT
In any project, two types of role players can be distinguished, namely
LFZ SPMF QMBZFST and supporting role players. The project team
consists of a group of people with different, yet complementary skills.
Key role players in the project management process are the strategic
manager, the tactical or programme manager, the project sponsor and
the operational or project manager. The project management office is
responsible for monitoring programmes and projects. Lastly, the client is
the person or institution which originated the request and is the owner
of the final product or service of the project.
Figure 14.1 illustrates the organisational structure of the opening
case, Management@ZA.
Management@ZA
$heki 5indane
National Programme OfƂce
Carli 5unshine
Gauteng
KZN
(ree 5tate
Cape
Programme Manager
Jhan Louis
Johannesburg
Durban
Bloemfontein
Worcester
East London
Pietermaritzburg
Project Manager
Jock Bush
Port
5hepstone
Port
Elizabeth
George
Cape Town
Beaufort West
(KgWre Organisational structure of Management@ZA
14.3.1 Strategic manager (programme director)
The strategic manager, together with the managerial team, analyses
the internal and external environments of the organisation. They then
define the strategic direction and priorities of the organisation as a
whole, taking all potential sources of risk into consideration. A healthy
internal environment ensures organisational efficiency which addresses
312
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 14 Project management
the speed and cost with which quality outputs are delivered. A strong
focus on the external environment in turn ensures organisational
effectiveness, measured largely by customer satisfaction. Organisational
efficacy finds a balance between the internal and external focus of the
organisation.
14.3.2 Tactical manager (programme manager)
The UBDUJDBMNBOBHFStranslates the strategic priorities and goals (as
formulated by the strategic manager) of the organisation into potential
programmes, consisting of various projects. The tactical manager assists
the project manager with any issues that occur during the implementation
of the project. Corrective action must be taken on issues that influence
the project’s progress and successful completion. The tactical manager
is then responsible for ensuring that the projects relating to their
programme produce the expected organisational benefits.
tactKcaN manager
manages at the tactical level
(middle management) and
ensures that systems, methods,
processes and resources are
available and in place to deliver
the organisation’s strategy
14.3.3 Project sponsor
In project management the QSPKFDU TQPOTPS is not necessarily the
person holding the purse strings of the project, but rather the person
in the project who will remove obstacles encountered by the project
team during the entire project life time. The project sponsor normally is
a well-connected, influential senior person in the organisation with open
communication channels to the top of the organisation.
project UponUor
mediates at the strategic
level on behalf of the project
manager/team
14.3.4 Operational manager (project manager)
The PQFSBUJPOBMNBOBHFS is responsible for the planning, execution,
control and finalisation of the project. He or she compiles a project plan
which states how, when, where and by whom the various tasks will be
done. The project manager ensures that the project objectives are met
within the project constraints thereby bringing the projects in on time,
on budget and meeting user requirements with consistent quality.
14.3.5 The project team
The QSPKFDUUFBN should comprise people with different skills to assist
the project manager in the planning and implementation of a project.
Each member of the team has an individual responsibility aimed towards
the project’s implementation. Team members with the right skills are
allocated to the appropriate activities at the right time. The just-in-time
principle is generally followed with resource allocation and when their
work is completed, they return to the functional environment they came
from.
14.3.6 The project management office (PMO)
The QSPKFDU NBOBHFNFOU PŵDF is responsible for overall project
quality in the organisation and their responsibilities generally include:
r %FWFMPQNFOUBOENBJOUFOBODFPGQSPKFDUNBOBHFNFOUQSPDFTTFT
Project management policies, processes and procedures are
operatKonaN manager
manages at the operational
level (lower management) and
ensures that systems, methods,
processes and resources are
optimally used to deliver tactics
that support the organisation’s
strategy
project team
a cohesive group of
professionals working together
to achieve contracted project
deliverables
project management oHƂce
an office that forms part of the
organisation’s structure and is
responsible for the management
and administration of project
specific systems, processes,
procedures, methods, tools and
techniques
CONTEMPORARY MANAGEMENT PRINCIPLES
313
PART III: Planning
r
r
r
r
developed, documented and maintained. The PMO further
develops and maintains document templates and ensures the
effective and uniform utilisation of the processes and documents.
"DRVJTJUJPOBOEVUJMJTBUJPOPG QSPKFDUNBOBHFNFOUTZTUFNTBOE
tools. Project management systems could include a workflow
management system that enables cross-functional collaboration,
planning and scheduling tools, document management including
version control, and a single project database (project repository).
1SPKFDUNBOBHFNFOUTLJMMTBOEEFWFMPQNFOU&OTVSFUIF
availability and development of project management skills in
terms of the science, art and industry certification in relation to
work requirements. The PMO will take responsibility for setting
standards whereas the project manager will be responsible for
ensuring that the available skills set on the project will meet project
specific quality requirements.
1SPKFDUNBUVSJUZ"TTVSBODFPG PWFSBMMQSPKFDURVBMJUZNBZCFEPOF
by the measurement of processes, procedures, systems and people
used to deliver project objectives against set quality standards
which may be informed by benchmarking.
1SPKFDUBENJOJTUSBUJPO.BUVSF1.0TFWPMWFUPCFDPNFUIF
administrative hub for all project-related activities which would
include the management of a knowledge base utilised for
organisational learning. Administration centres around monitoring,
control and reporting on projects as well as programmes. The
PMO also facilitates the change management process adopted for
managing the approval of extensions or scope changes.
14.3.7 The client
cNKent
recipient of the project
deliverables
The DMJFOU is the recipient of the project deliverables. The client
originates the request on which the project is planned and this individual
or organisation is the most important entity in the project management
process.
A project team usually also involves supporting role players, which
may include subject specialists (not necessarily the project manager),
a communications expert and representatives from human resources
management, finance, logistics, information systems and management.
The key role players are responsible for executing the project
management process successfully.
LEARNING OBJECTIVE 4
14.4 THE PROJECT MANAGEMENT PROCESS
Lead and direct the
implementation of the project
management process and
activities.
To enable managers to launch or control a project effectively, practical
steps in a logical framework and structure should be followed. The logical
process followed is dictated by the progressive work elaboration where
the output of a tool serves as input to the next tool under development.
Figure 14.2 on the next page illustrates the project management process.
314
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 14 Project management
5tep Identify need for the project
5tep Choose the project team and appoint the project manager
tactKcaN project pNan
5tep Develop a UBDUJDBMQSPKFDUQMBO
a plan for delivering strategic
project objectives
5tep Develop the RVBMJUZNBOBHFNFOUQMBO
SWaNKt[ management pNan
a plan describing how project
management quality will be
ensured during the project life
cycle
5tep DeƂne change control procedure
5tep Develop stakeholder plan
5tep Develop communication plan
5tep DeƂne the scope of the project
5tep Develop the project schedule with the following:
The work breakdown structure WB5
PERT diagram
Bar chart
Human resources plan
Procurement plan
5tep Develop the project budget
5tep Develop key performance indicators
5tep Conduct the risk management plan
5tep Implement the project
5tep Monitor and control project activities
5tep Close project
(KgWre The project management process
CONTEMPORARY MANAGEMENT PRINCIPLES
315
PART III: Planning
An important fact to consider at this point is to acknowledge the
difference in the purpose of the project specific tools during planning as
opposed to implementation. These differences are important enough to
state here and revisit again later in the chapter where they are addressed
in more detail.
A project charter is developed during the scoping exercise with
project charter
the main purpose of identifying all inclusions as well as exclusions of
project document authorising
the project. The inclusions are used during the planning process as
the project, allocating resources
input to the work breakdown structure (WBS). After completing the
and chartering project work
implementation process the charter is used to verify that the project
outputs met the contractual obligations.
The WBS is used during planning as a means to deconstruct the
contracted work, whether strategy, product or service related. The
deconstruction organises the work in deliverables as required. The final
process in developing the WBS is the allocation of Cost Account Codes
(informed by standard codes as applied by the organisation such as
wages, taxes, fuel, stationery, etc.) to activity levels which then facilitates
the allocation/booking of all expenses to the associated codes during
implementation. The choice of the financial application utilised should
be influenced by its ability to integrate a WBS with its system. As a result,
the WBS then becomes the guideline by which the project accountant
functions. With this level of detail included, the WBS serves to optimise
the project manager’s ability for cost allocation, aggregation, monitoring
and control.
The work is deconstructed to a level that the project manager is
willing and able to manage and control. The standard upheld by project
managers generally dictates that the WBS should rarely be deconstructed
beyond five levels with the lowest level constituting work packages.
The PERT (better known as the network diagram) is derived from
the WBS and an important consideration is to only include activities
from the same level of the WBS in the network diagram. The network
diagram organises activities from left to right in related paths. During the
planning phase the network diagram provides the means to determine
schedule constraints by identifying the critical path (longest path in the
network) and the level of flexibility in the other paths that would indicate
by how much they can be delayed before they become critical. During
project implementation the network diagram serves to allocate activity
priorities as focus areas and allows the observer to identify the knock-on
effect when priorities are not achieved as planned.
The bar chart (also called Gannt Chart) is the project calendar
and portrays activities as bars against a calendar proving a visual effect
over time. If colour is introduced with intelligence to plot performance
progress, the bar chart can be used as a source of information that
indicates resource productivity. A resource allocation calendar may be
combined with the bar chart in order to optimise resource utilisation.
The steps involved in the project management process are outlined
in the next section.
316
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 14 Project management
Step 1: Identify the need for a project. The first step in the project
management process is to identify the need for a project. Several
methods can be used, which can be divided into formal and informal
methods. Examples of formal methods are questionnaires, scientific
surveys and opinion polls. Examples of informal methods are debates at
community committees, discussions and observations.
When identifying the need for a project, it is important that any
information should be based on facts and not merely on personal
PQJOJPOT BOEPS BTTVNQUJPOT 5IF JEFOUJųFE OFFET BSF DBQUVSFE JO B
business case that addresses the feasibility and motivates the project.
The stakeholders who will be affected by the end results of the project
must find the project acceptable and they must support it.
Step 2: Choose the project team and appoint a project manager.
Once the project has been approved, the next step is to appoint a
project team. When deciding on the members of the project team,
it is important that they must be knowledgeable in several specialised
areas, depending on the nature of the project. For example, a financial
specialist is necessary to manage and control the budget, a human
resources expert is necessary to manage the people and a public
relations expert is necessary to create a positive and favourable image
amongst all stakeholders. An effective and efficient project manager
is needed to ensure that the project will attain its objectives within
set quality parameters and within the limited budget and time. Project
managers should have the following characteristics:
r the ability to see the project as a whole, its purpose and the
activities needed to attain its purpose
r organisational experience
r experience in leadership, management, teamwork and motivation
r the ability to contact and build relationships with all stakeholders,
such as the community, project members, suppliers and so on
r project management skills with the ability to coordinate the
project’s activities as well as its diverse pool of resources
r effective communication, negotiation and procedural skills
r the ability to delegate and control the activities of the project team
r the ability to manage adversity and applying risk management in the
process.
Step 3: Develop a tactical project plan. In order to attain the purpose
of the project, it should be divided into logical, progressive steps. The
members of the project team must gather information on all aspects
relating to the project. Project planning mainly involves a tactical plan,
stakeholder plan, communication plan, project schedule, a QSPKFDU project bWFget
CVEHFU(a plan for project expenditure) and supporting documentation. the plan for project expenditure
The tactical plan developed for the project serves to contract the
policies and procedures that will be applied to ensure the project
deliverables are met. The plan addresses the leadership and management
CONTEMPORARY MANAGEMENT PRINCIPLES
317
PART III: Planning
change management pNan
a plan describing how
proposed changes to the
project scope will be managed
318
principles of the project and includes, but is not limited to, policies on
quality, stakeholders, communication, people, finances and risk.
Step 4: Develop the quality management plan. Quality in project
management must, like all other deliverables, be planned for and will not
happen automatically. Quality can be designed into the process by taking
advantage of a number of quality principles. A widely used approach is
Total Quality Management (TQM) which is a people centered approach
and has the objective to satisfy customers, which supports the principles
of project management. TQM was also discussed in Chapter 1. In the
context of project management the main pillars of TQM are:
r 4ZTUFNTBQQSPBDImBTEJTDVTTFEFBSMJFSJOUIJTDIBQUFS BMMUIF
system elements must be identified, and for the system to be
effective all elements should function optimally.
r $VTUPNFSGPDVTmUBLJOHBDVTUPNFSGPDVTJTBQIJMPTPQIZPO
treating people as customers who are internal or external to the
organisation or project. With this philosophy everybody takes
responsibility for the quality of their own work deliverables and in
this way quality is designed into the process.
r 1FPQMFJOWPMWFNFOUmUIFQSPKFDUNBOBHFSUBLFTBGBDJMJUBUJWF
approach to people and ensures their involvement in all aspects of
planning. This approach ensures that people take ownership of the
project objectives and deliverables.
r 1SPDFTTPG DPOUJOVPVTJNQSPWFNFOUmJNQSPWFNFOUJOBMMBTQFDUT
of delivering quality work output can only be achieved through
continuously measuring work output against set objectives. The
BEPQUJPOPG UIF 1BSFUP QSJODJQMFBTTJTUTJOGPDVTJOHFŲPSUT
on project aspects that largely affect quality.
Step 5: Define the change control procedure. The one certainty
of management, whether engaged in projects or not, is that things
will change. In project management uncertainty prevails in customer
requirements that in turn will impact on cost and schedule. In order to
manage scope changes as well as extensions to the project, a change
control procedure should be adopted that allows for screening and
approval of changes by a change control committee. As discussed earlier
the PMO should manage the approval process with the project manager
taking responsibility in preparing submissions or change requests put
forward to the committee. A well administered change process will
prevent conflict during project close-out and ensure timely reconciliation.
Table 14.1 on the next page provides an example of a DIBOHF
NBOBHFNFOUQMBO of the opening case Management@ZA.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 14 Project management
TabNe Change management plan
Change control procedure
estaDlisJ a cJange control committee
contract cJange control committee memDers
log cJange reSuest
analyse cJange reSuest
prepare motiXation and suDmissions to committee
arrange cJange control committee meeting
attend meeting and maMe suDmissions
compile minutes oH meeting YitJ decisions outlined
distriDute and implement decision on cJange reSuest
close cJange reSuest log
Change control committee
Committee Member
Position
Contact
Role
$JeMi Sindane
*ead oH /gt"<A
555-12324
*onorary
Carli SunsJine
Programme Director
555-45231
CJairperson
,Jan Louis
Programme /anager
555-67687
Recommendation
,ocM $usJ
ProLect /anager
555-92345
TaDle suDmissions
Step 6: Develop the TUBLFIPMEFS QMBO. This is a plan describing
how stakeholder relations will be managed during the project life
cycle. Project stakeholders are people with an interest in the project
and who are able to influence the project deliverables in one way or
another. The stakeholders’ attitude toward the project together with
their ranked interest and influence will indicate risks associated with the
particular stakeholder. The needs and associated risk is used to develop
a stakeholder plan to ensure that requirements and needs are ultimately
met with satisfaction.
Table 14.2 on the next page illustrates the stakeholder identification
and requirement analysis for Management@ZA.
Table 14.3 on the next page provides an analysis of stakeholders
for Management@ZA in terms of their interest in the project (high or
low), the influence that they can exercise (high or low) and their attitude
towards the project (for example supportive or indifferent).
UtaMehoNFer pNan
a plan describing how
stakeholder relations will be
managed during the project life
cycle
CONTEMPORARY MANAGEMENT PRINCIPLES
319
PART III: Planning
Table 14.2: 5takeholder identiƂcation and reSuirement analysis
Stakeholder
Position
Requirements
Luke Hands
Head of Mgt@Inc
drive international shareholder value
Mgt@Inc
Management team of Mgt@Inc
country contribution to shareholder interest
Bheki Sindane
Head of Mgt@ZA
create an environment in South Africa, conducive to
effective and efƂcient delivery of shareholder eZpectations
Mgt@ZA
employees
All employees of Mgt@ZA
professional Yorking environment Yith Yorld class
resources and tools
Carli
Sunshine
Programme Director of Mgt@ZA
realise maZimum beneƂt from all Management@ZA
programmes
Jhan Louis
Programme Manager of Mgt@ZA
responsible for the T3M programme
maZimum beneƂt from the CRM system contributing to
effective customer relations as part of T3M
International
team
Team of visiting consultants
set local integration team up for successful
implementation of the CRM system
Integration
team
SA integration team
bring the CRM proLect in on time, Yithin budget and
meeting customer requirements
Local support
team
Local support team at each SA ofƂce
become comfortable and knoYledgeable enough Yith the
neY CRM system to install and support it
Mgt@ZA IT
team
SA management team of Mgt@ZA
understand Yhat Yill be required from it during
implementation and support in order to contract service
levels
Organised
labour
Labour unions representing labour
gain mileage for their union Yith their involvement
Table 14.3: 5takeholder analysis
Stakeholder
Interest (H/L)
Inƃuence (H/L)
Attitude
Luke Hands
high
loY
supportive
Mgt@Inc
loY
loY
supportive
Bheki Sindane
high
loY
supportive
Mgt@ZA employees
loY
high
indifferent
Carli Sunshine
high
loY
supportive
Jhan Louis
high
high
supportive
International team
high
loY
supportive
Integration team
high
high
supportive
Local Support team
high
high
supportive
Mgt@ZA IT team
loY
loY
supportive
All Star training
high
high
supportive
Organised labour
loY
high
supportive
320
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 14 Project management
The information contained in Table 14.3 (stakeholder analysis) is used
in Table 14.4 to compile a stakeholder matrix with two axes and four
quadrants. On the horizontal axis, stakeholder influence is plotted,
and on the vertical axis, stakeholder interest is plotted. In the top left
quadrant, stakeholders are listed that have a high interest but low
influence on the project. The most appropriate strategy is to keep these
stakeholders satisfied. In the top right quadrant, stakeholders are listed
that have a high interest in and high influence on the project. The best
strategy is to build strong relationships with these stakeholders. The
bottom left quadrant lists the stakeholders with a low interest in and low
influence on the project; they should receive the minimal effort from the
project team. Lastly, the bottom right quadrant lists the stakeholders
with a low interest in and a high influence on the project; they should be
kept informed about the project progress.
Table 14.4: Stakeholder matrix
High interest LoY inƃuence
-eep satisƂed
High interest High inƃuence
Build strong relationship
Stakeholders
Luke Hands
Bheki Sindane
Carli Sunshine
International team
Stakeholders
Jhan Louis
Integration team
Local Support team
All Star training
LoY interest LoY inƃuence
Minimal effort
LoY interest High inƃuence
-eep informed
Stakeholders
Management@Inc
Management@ZA IT team
Stakeholders
Management@ZA employees
Organised labour
The stakeholder matrix in Table 14.4 is used to compile a tactical plan
for each stakeholder group in Table 14.5 on the next page.
Step 7: Develop the communication plan. This is a plan describing a
communication flow during the project cycle. The project team informed
by the stakeholder analysis is able to segment or group stakeholders
according to the influence and interest ranking which allows the team to
structure an effective communication plan. A close relationship should
be fostered with stakeholders with a high interest and influence and
conversely stakeholders with a low interest and influence should receive
minimal effort. These aspects of the communication plan may at times
be kept confidential due to sensitivity which may prove career limiting.
Table 14.6 provides the stakeholder protocol requirements for
Management@ZA as per escalation procedure.
communication plan
a plan describing
communication flow during the
project life cycle
CONTEMPORARY MANAGEMENT PRINCIPLES
321
PART III: Planning
Table 14.5: Stakeholder tactical plan
Stakeholder group
Tactical plan for stakeholder group
(interaction/communication/reporting)
LoY Interest and LoY Inƃuence
Minimal effort
Create a landing page on the company intranet and post milestone
reports
Establish a Facebook page with an events timeline
Create a general Twitter account for ‘push’ communication to
stakeholders in general
Invite stakeholders to take advantage of these communication
mediums
LoY Interest and High Inƃuence
Keep informed
Invite to take advantage of social media channels
Put on mailing list for published newsletter articles
Host a public event and invite keynote speakers
High Interest and LoY Inƃuence
Keep satisƂed
Set up a communications forum that meets with this group on a
monthly basis
Invite feedback and comments
High Interest and High Inƃuence
Strong relationship
Set up one-to-one meetings with these stakeholders and contract
to meet requirements
Compile two-weekly status reports
Appoint a relationship manager who will also deliver the status
report
Table 14.6: Stakeholder protocol requirements
Stakeholder
Protocol
Luke Hands
All communication with Luke Hands to be channelled through Bheki Sindane
Mgt@Inc
All communication to functional divisions at Mgt@Inc to be channelled through the
respective programme ofƂces
Bheki Sindane
Although Bheki Sindane practices open door policy, it is preferred that communications
directly to Bheki Sindane be channelled through Carli Sunshine
Organised labour
Communicate labour relations matters through the ofƂce of the labour union
Table 14.7 on the next page illustrates a project communication plan,
with communication requirements pertaining to each individual, the
communication medium and the frequency of communication.
322
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 14 Project management
Table 14.7: The project communication plan
Stakeholder
Communication requirement
Medium
Frequency of
communication
Luke Hands
No direct project communication required, only
needs notiƂcation that South Africa is online
Completion notiƂcation
1
Mgt@Inc
No direct project communication required, only
needs to know that the new system is fully
functional and integrates with the international
platform
Electronic high-level Ƃnal
report
1
Bheki
Sindane
Periodic high level status report indicating
progress per province
Electronic high-level status
report
4
Mgt@ZA
employees
Needs to know the beneƂts and impact of the
new system
Must be kept up to date with the implementation
of the new system
Motivation
1
Project progress via Facebook
on demand
Carli
Sunshine
Needs to be kept abreast of the programme
beneƂts realised from all programmes
Electronic programme status
report
3
Jhan Louis
Needs to be kept abreast with on-going project
progress
Electronic monthly status
report
Meeting with project manager
3
3
International
team
Needs to know how effective the South African
integration team is coping with the system
implementation
Periodic electronic issue and
risk report
4
Integration
team
Need to stay In contact with each other as
they progress on the separate paths leading to
completion
Skype meetings
6 (Mon and
Fri)
3 (Fri)
Local
Support
team
Issues encountered by other local support teams
Issue reports – Facebook and
Twitter
Team meetings
Mgt@ZA IT
team
IT issues encountered during implementation
Needs to stay abreast of provincial progress in
order to gear up for IT support on completion of
the project
Issue report
Facebook; Twitter
Programme status report
All Star
training
Needs to be well informed on local site issues
Will be required to report on all training
undertaken
Site training analysis
Needs to know the impact on members during
implementation
Facebook updates
Organised
labour
Daily update on local progress
Electronic weekly status
reports
Training report
daily
daily
as required
as required
3
11 (one per
site)
11 (one per
site)
as required
CONTEMPORARY MANAGEMENT PRINCIPLES
323
PART III: Planning
project Ucope
the boundaries that scope
project deliverables by defining
inclusions and exclusions
project UcheFule
sequence of project activities
together with planned durations
and time table
324
Step 8: Define the QSPKFDUTDPQF. With the project tactics and the
various plans in place, the next task of the project manager and the
project team is to define the project so that each member of the team
knows exactly what is expected of him or her. A project charter is
developed to define the project scope and can include the following:
r the beneficiaries of the project
r the purpose and objective of the project
r the scope of the project
r the quality parameters of the project
r any factual information and community approval
r the planned completion date
r the resources required to execute the project
r the available resources of the project
r the estimated costs, for example of material, components,
transport, human resources and so on
r any sources of risk that may be an obstacle to attaining the
purpose of the project within the time and cost constraints
r assumptions made.
Table 14.8 on the next page illustrates the project charter for the
Management@ZA Customer Relationship Management (CRM) project.
Step 9: Develop the QSPKFDU TDIFEVMF. The development of the
project schedule involves several actions. Working from the project
charter, the work breakdown structure is developed, followed by the
network diagram and bar chart. The WBS, network diagram and bar
chart forms the basis for the development of the human resources and
procurement plans.
The project scope results in the development of the WBS which,
as discussed earlier, has the objective of deconstructing the project
work down to activity level. With the allocation of a code, the accounts
section prepares for the allocation of costs or expenses during project
implementation.
There are two recognised methods of developing a WBS, the first
being the facilitation of a brainstorming session. The activities required
to deliver the work are identified and recorded before they are organised
in groups associated with either deliverables, phases, product or any
other grouping that makes sense. The second (and preferred) method
starts from the project charter, taking the deliverables identified there
and decomposing them to the required level that makes sense. This is
done for Management@ZA and is illustrated in Table 14.9 on page 326.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 14 Project management
Table 14.: Project charter
CRM project charter
Project name
Mgt@ZA CRM Roll-Out
Approval
Project manager
Jock Bush
Approval
Project customer
Bheki Sindane
Approval
Project sponsor
Carli Sunshine
Approval
Project objective
To roll out a world-class Customer Relationship Management system for the
eZpeditious delivery of new Management@ZA customer interventions within
18 days of commencement with a budget of R1 400 000
What we expect to deliver
System roll-out to eleven major sites
Integrated customer relationship system
CRM policies and procedures
Support team training
Desktopuser training
User guidelines
What we expect NOT to do
System modiƂcation
Hardware upgrades
What someone else must do
Hardware audit
Form an interest group
What the customer must do
Arrange user training
Ensure attendance and participation
Project constraints
Short roll-out time
Current tools and processes
Project assumptions
Management buy-in
Initial deƂned risks
Resource availability
User availability
Management requirements
To be determined
Skills assessment
Tools and system assessment
CONTEMPORARY MANAGEMENT PRINCIPLES
325
PART III: Planning
Management@ZA CRM
Roll-out
Gauteng
Johannesburg
KZN
Durban
Free State
Cape
Worcester
Bloemfontein
East London
Pietermaritzburg
Port Elizabeth
Port
Shepstone
George
Cape Town
Beaufort West
Figure 14.3: Work breakdown structure
Project managers utilise scheduling tools such as Microsoft Project
for small-scale projects and Primavera or even Artemis for largescale projects. These scheduling tools provide views of the different
perspectives in projects. The trap that many self-taught project managers
fall into is working singularly from the bar chart view without realising that
the project planning process starts sequentially with the project charter,
from which the WBS is developed, followed by the PERT diagram and
finally the bar chart. The Project Evaluation and Review Technique
(PERT) diagram, also called the network diagram, is developed by
arranging the activities from the WBS into related paths by observing
dependencies between activities and sequencing them accordingly.
The arrangement is done between an activity defining the start of the
project and an activity that ultimately defines the closure of the project.
In general the dependency relationship most widely used is called the
finish-start (FS) relationship, whereby the successor can only start if all
predecessors are complete. There are other dependency relationships
but for simplicity we recommend sticking to FS relationships.
Once all the paths through the network have been established, the
process of determining the critical path and the amount of flexibility
through the other paths can begin. The duration of each activity is
estimated and then the critical path is determined by undertaking
a forward and then a backward pass through the network. With the
forward pass the durations of each activity is added to the previous
326
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 14 Project management
activity until we are able to determine the completion date of the
project. The backward pass works from the completion date backwards
and the activity durations are subtracted to the point where we arrive at
the same start date we worked from in doing the forward pass.
The forward pass determines the early start and finish dates for each
activity and the backward pass calculates the late finish and late start
dates of each activity. By subtracting the early finish of each activity from
its associated late finish we are able to calculate the float available in the
specific path. A path with zero float is critical and a path that has float is
as flexible as the amount of float would suggest.
Figure 14.4 illustrates the PERT diagram for Management@ZA.
4
F
6
6
G
EL
2D
6
8
A
1
1
B
JHB
1D
0
1
4
C
1
F=0
4
9
1
I
4
4
4
7
F=3
9
4
8
7
11
F=3
13
8
13
TF=2
13
E
WST
4D
15
CT
2D
13
F=0
K
DBN
4D
free
ƃoat
13
9
F=0
J
PMB
3D
D
11
GRG
2D
11
F=2
11
9
BFW
5D
F=0
PE
3D
F=2
4
BFN
3D
9
H
8
F=2
0
9
15
F=0
1
PS
2D
11
13
F=3
TF=3
ES
EF
Name
duration
LS
LF
ES = Early start
EF = Early + Duration
EF = Early Ƃnish
LS = Late Finish s Duration
LS = Late start
Float = Late Finish s Early Finish
LF = Late Ƃnish
Total Float = LF s ES s Duration
F=X
Figure 14.4: PERT diagram
The bar chart (otherwise called Gantt Chart) is a graphic representation
showing the activities on a calendar, scaled to accommodate the timeline.
Project managers can monitor the progress of the project by comparing
planned progress against actual progress. The activities are represented
by bars on the timeline which are informed by the early start and finish
CONTEMPORARY MANAGEMENT PRINCIPLES
327
PART III: Planning
times taken from the network diagram calculation. Where there is float
available the schedule flexibility is indicated by showing the late finish
time.
Once the schedule for the project has been drawn up, the necessary
funds and resources must be allocated to the project. A budget is drawn
up for this purpose.
Table 14.9 illustrates the bar chart, human resources and procurement
calendar for Management@ZA’s CRM Project.
Table 14.9: Bar chart, human resources and procurement calendar – CRM project
#
A
B
C
D
E
F
G
H
I
J
K
328
Activity Name
Johannesburg
Bloemfontein
Beaufort West
Worcester
Cape Town
East London
Port Elizabeth
George
Pietermaritzburg
Durban
Port Shepstone
1
2
3
4
Work days
5
6
7
8
9
10
11
12
13
14
15
Resource Name
Jock Bush
Mary Ribbons
Barry Jeckyll
JHB Local Team
BFN Local Team
BFW Local Team
WST Local Team
CT Local Team
EL Local Team
PE Local Team
GRG Local Team
PMB Local Team
DBN Local Team
PS Local Team
All Star Team A
All Star Team B
All Star Team C
1
A
2
B
B
l
3
B
B
l
4
B
B
I
Work days
5
6
C
C
F
F
J
J
7
C
G
J
8
C
G
J
9
C
G
K
10
D
H
K
11
D
H
12
D
13
D
14
E
E
E
15
E
E
E
B
B
B
C
C
C
D
D
D
D
E
E
E
E
A
C
F
C
F
G
I
I
B
B
I
B
B
I
Procurement Budget
Training Johannesburg
Training Bloemfontein
Training Beaufort West
Training Worcester
Training Cape Town
Training East London
Training Port Elizabeth
Training George
Training Pietermaritzburg
Training Durban
Training Port Shepstone
1
15000
2
Daily Total
15000 30000
G
H
H
K
D
H
K
D
H
I
J
A
G
B
B
I
3
4
J
C
C
F
F
J
J
Work days
5
6
J
J
C
G
J
C
G
J
7
K
C
G
K
8
9
10
D
11
D
12
13
14
15
15000
15000
15000
15000
15000
15000
15000
15000
15000
15000
0
CONTEMPORARY MANAGEMENT PRINCIPLES
0
45000
0
15000
0
15000 30000
0
0
0
15000
0
CHAPTER 14 Project management
With all activities defined, durations estimated, sequenced according to
defined relationships, and schedule flexibility determined, resources with
the requisite skills can be allocated as called for. The activities as defined
and described in the WBS dictionary will inform the skill sets required,
the skills level and number of skills for each activity. The next step will
be to determine the availability of people with the necessary skill sets
within the organisation and skills sets that might have to be contracted
into the organisation. A skills audit may be conducted when securing
resources that potentially have the requisite skills, which would also be
used to develop a training and skills development plan for meeting the
project quality requirements. Given the activities and having determined
the skills requirement, the project team is able to match people to
activities as scheduled on the bar chart.
Table 14.10 gives the resource management plan for resource management plan
a plan describing project
Management@ZA’s CRM Project.
resource management,
allocation and utilisation
Table 14.10: Resource management plan
Activity
Duration
Integration
specialist
Integration
costs @
R5 000
ppd
Local support
Support
costs @
R4000
ppd
Man
days
Total cost
per site
1 Meeting JHB
1 day
3 Integration
specialist
R15 000
3 Support staff
R12 000
6
R27 000
2 Install BFN
3 days
2 Integration
specialist
R30 000
2 Support staff
R24 000
12
R54 000
3 Install BFW
5 days
1 Integration
specialist
R25 000
2 Support staff
R40 000
15
R65 000
4 Install WST
4 days
1 Integration
specialist
R20 000
2 Support staff
R32 000
12
R52 000
5 Meeting CT
2 days
3 Integration
specialist
R30 000
2 Support staff
R16 000
10
R46 000
6 Install EL
2 days
1 Integration
specialist
R10 000
2 Support staff
R16 000
6
R26 000
7 Install PE
3 days
1 Integration
specialist
R15 000
2 Support staff
R24 000
9
R39 000
8 Install GRG
2 days
1 Integration
specialist
R10 000
2 Support staff
R16 000
4
R26 000
9 Install PMB
3 days
1 Integration
specialist
R15 000
2 Support staff
R24 000
9
R39 000
10 Install DBN
4 days
1 Integration
specialist
R20 000
2 Support staff
R32 000
12
R52 000
11 Install PS
2 days
3 Integration
specialist
R30 000
2 Support staff
R16 000
4
R46 000
TOTAL
R220 000
R252 000
99
R472 000
CONTEMPORARY MANAGEMENT PRINCIPLES
329
PART III: Planning
The scale of the procurement function in a project could result in
procurement being treated as a project in its own right. Projects that
require sourcing of products, materials or services to be contracted into
the project will need to establish a procurement plan that would address
the policies and procedures around how the project will conduct, control
and close the procurement function. In some cases a decision will need
to be made whether to make or buy products, services or even people.
The procurement plan is informed by the project plan together with
a bill of materials that addresses and quantifies product, material and
service requirements. In essence the procurement plan results in the
generation of work orders through a process that invites and contracts
suppliers. Company procurement policy will dictate the invitation
process in terms of supplier and purchasing relationships with guidelines
in choosing to request information, proposals, quotations or having to
go through a tender process.
The supplier relationship is governed by a contract that seeks to
balance project risk with the contractor’s risk. The type of supplier
contract chosen will be influenced by the project environment and
must seek to facilitate the need to best deliver quality requirements by
exploring cost and price issues.
The end result of the procurement plan is captured in alignment
with the project bar chart by indicating time scales on the delivery of
products, materials or services. In the case of large-scale procurement
where the procurement function is treated as a project, the end result
will be a procurement charter, WBS, network diagram and bar chart.
Management and control of the procurement function is greatly assisted
by the availability of these project tools and techniques.
Step 10: Compiling the project budget. A budget is a plan that deals
with the future allocation and utilisation of various resources with regard
to project activities over a given period. Budgets are typically thought
of in financial terms, but also in terms of the allocation and utilisation
of raw materials, labour, office space, machine hours, computer time
and so on. A budget can be seen as a tool that project managers use
to translate project plans into quantitative terms. Although budgeting
is an important part of planning, it also serves as a control mechanism
for evaluating project activities. A budget exercises control in two ways:
r It sets limits on the amount of resources that can be used in the
project.
r It establishes standards of performance against which future
projects will be compared.
Budgets have the following characteristics:
r They are most frequently stated in monetary terms.
r They cover a specific period (the duration of the project).
r They contain an element of management commitment.
r They are reviewed and approved by an authority higher than the
one that prepared them.
330
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 14 Project management
r Once approved (baselined), they can only be changed under
previously specified conditions.
r They are periodically compared with actual performance, and
variances are analysed and must be explained.
Generally, budgets help managers to coordinate resources and projects
and they help to define the standards needed in all control systems. They
provide clear guidelines on an organisation’s resources and on their
utilisation.
Although budgeting is an important aspect of planning and a useful
control tool, it has its limitations such as the over-emphasis at the expense
of other project constraints. Often one finds that managers focus almost
exclusively on meeting their budgets while neglecting elements such as
satisfaction that is difficult to measure in quantifiable terms.
Table 14.11 gives the DPTUNBOBHFNFOUQMBOof Management@
ZA’s CRM Project.
Table 14.11: Cost management plan
cost management plan
the plan for costing project
resources
Cost plan item
Cost plan
Currency
Although Management@ZA is an international company and listed as
such on the New ;ork stock eZchange, all foreign ofƂces trade in the
local currency – ZAR
Level of accuracy
The allocated budget being R720 400 for accurate reporting purposes is
set at increments of R50 000 on all Ƃnancial graphs and reporting tools
Units of measure
The standard unit of measure on all Ƃnancial reporting instruments will
be indicated in units of R1 000
Organisational procedure links
(Cost Account Codes in WBS)
The standard code of accounts for cost and eZpenditure allocation
used by Management@ZA internationally will be allocated on the Work
Breakdown Structure (WBS) to facilitate optimal cost collection
Control thresholds
Upper and lower control limits are set on a per project basis; for the
purposes of the CRM roll-out a 15 per cent variance initially and 5 per
cent variance at the end of the project will apply These thresholds are
stringent due to the number of times the CRM system has been rolled
out in various countries
Rules of performance measure
The CRM roll-out is achieved over a period of 15 working days
working in 11 sites country-wide, and with short timelines at each site
the Ƃnancial measurement policy for this project will not be applied
periodically but at the completion of each site installation Management
reports will however be produced weekly with a Ƃnal report at the end
of the project
Process descriptions
The project team will follow the company procurement policy for any
acquisitions made, and the International Financial Reporting Standard
(IFRS) to govern Ƃnancial management
CONTEMPORARY MANAGEMENT PRINCIPLES
331
PART III: Planning
Table 14.12 provides the budget for Management@ZA’s CRM Project.
Table 14.12: Budget
Budget item
Budget
Remarks
Labour and beneƂts
R542 800
Estimated labour plus 15 per cent contingency
Overtime
R10 900
2 per cent of labour and beneƂts
Reward and recognition
R15 000
Flat rate allowed according to company policy
Training
R577 200
5 per cent of labour and beneƂts according
to company policy plus R50 000 per site as
prescribed
Materials
R165 000
Material budget based on project requirements
Customer relations
R18 000
Flat rate based on passed projects
Transport
R54 000
1 800 km one way Z 6 trips Z R500 per km
Total
R1 382 900
Total project budget
Supporting documentation refers to a manual and information relevant
to the improvement of the project as well as instructions to the project
team members. When a project is launched, supporting documentation
may be needed to assist team members in carrying out activities in each
phase of the project. Supporting documentation is particularly needed
under the following circumstances:
r when team members are inexperienced
r when the project is extremely complex and contains a great deal
of technical detail
r when the project involves high costs
r when particular tasks need to be performed in a specific way
r when team members are in different places and involved in
different project activities
r when the project has a huge impact on the community.
key performance indicators
Step 11: Develop key performance indicators. These are charts
charts used for tracking planned used for tracking planned and actual project performance. The checklist
and actual project performance on the next page can be used to ensure that the project manager has
taken all the important steps in managing the project. If the answer is
‘no’ to any of the following questions, it indicates that not all the phases
in project management have been completed yet. The project should
not continue until all the steps have been taken.
Should the answers to all these questions be ‘yes’, the project is
ready for implementation.
332
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 14 Project management
%hecklist for project planning before implementation
Questions
Yes/No
Have all the project activities been identiƂed!
Is the time schedule of activities correct!
Have responsibilities been assigned to people!
Are the instructions and standards clear to everyone!
Is the project relevant!
Will the plan lead to the realisation of the purpose!
Does the project team have the necessary eZpertise and eZperience!
Does the project address the needs of the community or institution!
Have the correct and sufƂcient resources been identiƂed for the project!
Have costs been estimated for all the activities!
Is there a budget proposal motivating the project!
Is the goal within reach of the project team!
Source: Van der Walt, G. & Du Toit, D.F.P. 2005. Managing for Excellence in the Public Sector.
2nd edition. Cape Town: Juta Publishers, p 319.
Step 12: Develop a SJTL NBOBHFNFOU QMBO. All projects are in
existence to manage the uncertainty associated with particular project
constraints, schedule, cost, requirements and quality. Organisations
develop methodologies that govern the management of risk, defining
risk identification, quantification, response, monitoring and control.
Risks are identified as a matter of course throughout the project life
cycle and in particular during the planning phases. Initially qualitative
analysis might prove sufficient during initial planning, but the formal risk
process will include a quantitative analysis that should result in a risk
response and contingency plan. Managing actual risks is done during the
project evaluation phase.
Step 13: Implement the project. In a rapidly changing environment, it
is important that the project implementation should follow the planning
phase as soon as possible. During the implementation phase, all the
activities planned are carried out by the responsible people – they give
feedback to the project team, allocate resources and exercise control.
Project managers play a crucial role in project implementation. They
need to:
r coordinate activities
r take the lead
r motivate project team members
r constantly monitor the progress, evaluate deviations and take
corrective action if necessary
r maintain the enthusiasm and motivation of project team members
and the community.
risk management plan
the plan for managing probable
project risks
CONTEMPORARY MANAGEMENT PRINCIPLES
333
PART III: Planning
Step 14: Monitor and control project activities. Monitoring and
controlling are cross life-cycle activities, done as a matter of course
during the initial stages but more formally during project execution.
Project activities are evaluated throughout the project management
process to ensure that the planned objectives are being achieved.
The progress of the project in terms of time, cost, quality and risk
as predefined in the project plan should be monitored throughout with
consideration to deviations and recommendations for improvement.
Key to this process is the effective team utilisation of the project control
tools such as the WBS, network diagram, bar chart, Key Performance
Indicators and all relevant project reports.
Risk and contingency management is also key to the evaluation
process followed in project management. The risk plan addresses the
process followed in managing risk and where required institution of
contingencies. Project risk factors and associated risks are identified and
probability and impact measures are assigned which are then analysed
and used to decide on a course of action.
Table 14.13 illustrates the risk management plan for Management@
ZA’s CRM project.
Table 14.13: Risk Management Plan
Risk register
ID
Risk
Prob.
Impact
(1–10) (1–10)
Factor
(P x I)
Priority Action
(1–3)
(eliminate/
mitigate/
deƃect/
accept)
Accountable
(owner)
1.0
Due to stringent timelines there
is a possibility that the local
support teams might not be
available when needed to work
with the integration specialist
8
4
32
1
Mitigate
Jock Bush
2.0
Due to stringent timelines there
is a possibility that the users at
the local sites might not be able
to attend the user training
9
3
27
2
Mitigate
Jhan Louis
3.0
Due to international system
alignment local management
requirements might not be fully
met
8
2
16
3
Deƃect
Jock Bush
Tables 14.14 and 14.15 on the next page illustrate the risk
segmentation and risk response plan for Management@ZA.
334
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 14 Project management
Table 14.14: Risk segmentation
Risk grouping
PROJECT RISKS: (Project manager – Mitigate/
Deƃect/Accept)
High probability; Low impact:
INSTIT7TIONAL RISK: (Portfolio/Programme –
Mitigate)
High probability; High impact:
Risk issues:
1.0 Due to stringent timelines there is a possibility that
the local support teams might not be available when
needed to work with the integration specialist.
2.0 Due to stringent timelines there is a possibility that
the users at the local sites might not be able to attend
the user training
Risk issues:
All institutional risks will be managed centrally through
the project and programme ofƂce, since they affect all
projects in the organisation
LOW RISKS: (Monitor)
Low probability; Low impact:
DISASTRO7S RISKS: (Disaster Recovery Plan)
Low probability; High impact:
Risk issues:
3.0 Due to international system alignment local
management requirements might not be fully met
Risk issues:
All disaster recovery plans will be managed centrally
and pertain to the organisation as a whole
Table 14.15: Risk response
Risk response plan P x I > [n]
*ID
Risk causes
Elimination/Mitigation action
Responsible
Target date
1.1
Stringent timelines
Jock Bush
Before project
kick-off
1.2
Availability of local
support teams
Determine local ƃexibility
Contract alternate dates where required
Determine and contract availability of local
support teams
2.1
Poor user training
attendance
Develop self-guided web-based user
training
Jhan Louis
Before project
kick-off
3.1
Management
requirements not
met in CRM system
Record local management requirements
not met and develop overall management
report for submission to international team
Jock Bush
Project closure
Step 15: Close Project. In finalising project planning the project
deliverables are baselined (contractually agreed upon) between the
project manager, project team and relevant stakeholders. Project
closure revisits the delivery of all contractual work to ensure the
product or service was delivered to the agreed scope and specification.
Administrative duties include audits and reconciliation to check that
all authorised work has been completed, accepted and paid for. Final
project reports are prepared and presented to management.
An advantage of formalising project closure is the contribution that
documented lessons learned (experienced during the project life cycle)
make to the knowledge base of the organisation. A formal meeting
hosted by the project manager reflects on events, project issues and
risks encountered during the project. A discussion reflecting on scope
and/or engineering changes could prove to be a valuable exercise.
The project management process concludes the discussion of the
project management chapter and it is the last of the five chapters
pertaining to PART III: PLANNING.
CONTEMPORARY MANAGEMENT PRINCIPLES
335
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or applicable copyright law.
Part III: Planning
CHAPTER SUMMARY
1. Explain the philosophy and meaning of project management.
Project management can be defined as a management tool used to plan, organise, implement
and control activities in order to attain a predefined objective. Project management uses
knowledge, skills, tools and resources to execute activities to meet clients’ needs and
expectations. The project manager needs to be in control of time, cost, requirements, quality
and risk. Resources that are needed for project execution can include, but are not limited
to, human resources, money, equipment, machinery, information systems, organisational
processes and time.
2. Distinguish between the various perspectives of project management.
Project management has an internal and an external perspective. Internal projects are those
launched within an organisation, to use scarce resources more effectively, improve existing
procedures and methods, ensure more efficient service and improve the quality of the final
product and/or service. External projects strive to develop and improve the quality of life.
Projects with an external perspective are undertaken in a competitive environment where the
work is acquired through a bidding process through either quotations or tenders.
3. Identify the key role players in project management.
• the strategic manager (programme director)
• the tactical manager (programme manager)
• the project sponsor
• the operational manager (project manager)
• the project team
• the project management office
• the client’s needs.
4. Lead and direct the implementation of the project management process and activities. The
project management processes comprises the following steps:
Step 1: Identify the need for the project
Step 2: Choose the project team and appoint the project manager
Step 3: Develop a tactical project plan
Step 4: Develop the quality management plan
Step 5: Define the change control procedure
Step 6: Develop the stakeholder plan
Step 7: Develop the communication plan
Step 8: Define the scope of the project
Step 9: Develop the project schedule
Step 10: Compiling the project budget
336
Contemporary management prinCiples
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ChaPter 14 Project management
Step 11: Develop the project’s key performance indicators
Step 12: Develop the risk management plan
Step 13: Implement the project
Step 14: Monitor and control project activities
Step 15: Close project.
KEY TERMS
budget
client
communication plan
cost
documentation
external projects
gantt Chart
internal projects
operational manager
pert
procurement plan
programme director
programme evaluation
programme manager
project budget
project centre
project change
project charter
project evaluation
project implementation
project management
project management office
project manager
project resources
project risk management
project schedule
project scope
project sponsor
project team
quality
resource allocation
resource management plan
risk
schedule
stakeholder plan
strategic manager
tactical manager
total quality management
triple constraint
work breakdown structure
Contemporary management prinCiples
EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 5/3/2018 2:31 PM via UNISA
337
PART III: Planning
REVIEW QUESTIONS
1. Define the term ‘project management’.
2. Managing any project entails planning, organising, coordinating and control over the project resources.
Explain these resources.
3. Explain the situations in which project management can be used effectively.
4. Discuss the advantages pertaining to project management.
5. Differentiate between the internal and external perspective of project management.
6. Identify the various role players in project management and explain the responsibilities of every role
player.
7. Explain the steps involved in the project management process.
338
CONTEMPORARY MANAGEMENT PRINCIPLES
PART IV
Organising
Chapter 15
Principles of organising
Tersia Brevis
PART IV: Organising
OPENING CASE
South African Airways1
South African Airways (SAA) is South Africa’s
national flag carrier and largest airline. Its
headquarters are in Airways Park on the grounds
of the OR Tambo International Airport in
Kempton Park, Gauteng. Currently, SAA flies to 35
destinations worldwide from its hub at the same
airport, using a fleet of 54 aircraft. A brief history,
highlighting major changes and advances impacting
the structure of the airline is discussed below.
South African Airways was founded on February
1, 1934 with the South African government’s
acquisition of Union Airways. Forty staff members,
one de Havilland DH.60 Gypsy Moth, one de
Havilland 80A Puss Moth, three Junkers F.13s and a
leased Junkers F.13 and Junkers A50 were acquired
to form SAA, under the control of the South
African Railways and Harbours Administration
(now Transnet). SAA started charter operations in
the same year. In 1935, the carrier also acquired
South West African Airways and also expanded
their fleet of aircrafts. In the same year, SAA
moved their operations to Rand Airport as it
became obvious that Johannesburg would become
South Africa’s aviation hub. During the next year,
SAA also took over all Rand-Cape Town services
from Imperial Airways and again expanded their
fleet of aircraft.
The period 1946 to 1952 was a period
of extreme growth for the airline. The first
intercontinental service was introduced and a spike
in passengers and cargo carried was experienced,
along with SAA’s fleet and staff. Air hostesses were
first introduced in 1946. In 1948, Palmietfontein
Airport became SAA’s hub after taking over from
Rand Airport in 1948. That year there were a host
of changes for the airline in terms of its operations
and services and the introduction of films onboard
its Skymaster aircraft.
The period 1953 to 1973 is known as the jet
age in aviation. SAA’s first jet arrived on May 3,
1952 in Palmietfontein after a 24-hour journey,
with five refueling stops en route. During 1980,
SAA acquired 23 brand new Jumbo Jets, including
340
CONTEMPORARY MANAGEMENT PRINCIPLES
the long range Boeing 747SP, which was especially
acquired to overcome the refusal of many
countries prohibiting SAA from using their airspace
due to the country’s political environment at the
time. International condemnation of the apartheid
regime in South Africa during the 1980s, also
posed many difficulties for SAA. For example,
the airline itself faced hostility and their local and
foreign offices were attacked. The US banned all
flights by South-African owned carriers, including
SAA. SAA’s flights to Perth and Sydney in Australia
were stopped.
With the demise of apartheid in the early
1990s, SAA was able to restore its services to
former destinations, introducing services to new
destinations and expanding to the rest of Africa
and also to Asia. June 1, 1990 was an important
date for SAA, as South African companies signed
a domestic air travel deregulation act. Flights to
New York’s JFK International Airport resumed in
November 1991 after the US imposed economic
sanctions on South Africa in 1986, and South
African’s planes were able to fly over Egypt and
Sudan for the first time. Flights to Milan were
introduced for the first time and services to
Athens were re-introduced. During 1992, the
airline entered the Miami market and re-entered
Australia flying directly to Perth. During the same
year, code sharing agreements were signed with
American Airlines and Air Tanzania. In 1997, the
airline Alliance was born – a partnership between
SAA, Uganda Airlines and Air Tanzania.
In 1991, South African Express (SA Express)
was granted its operating license as regional airline
and began its preparation process. Three years
later, SA Express, a feeder airline service for SAA
began operating, taking over some of SAA’s lowdensity domestic flights. SAA initially held a 20 per
cent share in SA Express.
In 1997, SAA adopted a new image. The
springbok emblem was dropped and the old
national colours of orange, white and blue were
replaced with new livery, based upon the new
national flag, with a sun. The airline’s name on all
the aircraft was changed to South African, and
CHAPTER 15 Principles of organising
the Afrikaans name Suid-Afrikaanse Lugdiens was
dropped. The airline also started online ticket
sales and formed an alliance with SA Airlink and
SA Express.
In March 2004, SAA announced its application
to join Star Alliance. The alliance accepted
the application in June, with SAA joining as a
full member in April 2006. SAA was the first
African airline to join Star Alliance and fulfilled 53
requirements during the joining process.
In 2003, media reports appeared of the South
African government’s plan to restructure and
overhaul the state-owned enterprise Transnet,
due to dismal financial performance. The
government planned the split of SAA from its
parent company Transnet whereby SAA would
operate under a separate identity.
During May 2007, SAA launched an 18-month
comprehensive restructuring programme. The
main purpose of the restructuring programme
was to ensure that the airline became profitable.
SAA’s business was streamlined and the airline
also re-skilled employees, improved workers’
morale and management/workers’ relations.
SAA’s business was divided into seven subsidiaries,
whereby SAA was allowed to concentrate on its
core business of passenger and cargo transport;
rationalising international routes (for example,
Paris was dropped); cutting 30 per cent of the
airline’s managers as well as other employee
retrenchments. The restructuring programme
was expected to save SAA R2.7 billion. By June
2009, R2.5 billion had been saved.
The brief history of SAA above highlights
various changes that impacted directly on
the organisation and organisational structure
of the airline, starting with the South African
government’s acquisition of Union Airways in
1934. The restructuring of the airline continued
in 1935, with the acquisition of South West
African Airways, and in 1935 when SAA took
over all Rand-Cape Town services from Imperial
Airways. In 1991, SA Express was granted its
operating license as regional airline taking over
some of SAA’s low-density domestic flights, a
decision which also impacted greatly on SAA’s
organisation. They also entered in code sharing
agreements with American Airlines and Air
Tanzania, impacting again on their organisation,
as was the partnership between SAA, Uganda
Airlines and Air Tanzania in 1992 and 1997
respectively. A major restructuring followed
when the South African government decided
to split SAA from its parent company Transnet
whereby SAA would operate under a separate
identity.
LEARNING OBJECTIVES
The purpose of this chapter is to provide an overview of organising as the process that creates a
structure for the organisation which enaDNes aNN eOpNo[ees to worM effectiveN[ and efƂcientN[ towards
the accomplishment of its vision, mission and goals. The objective of studying this chapter is to
enable you to:
1. Differentiate between the terms organising, organisation and organisational structure.
2. Expound on the importance of organising in attaining the goals and objectives of the organisation.
3. Describe the steps to follow in designing an organisational structure.
4. Explain the principles of organising that should be considered in designing an organisational
structure.
5. Explain the term authority.
6. Describe the departmentalisation approach to organisational structure.
7. Propose recommendations regarding the design or redesign of jobs as a motivational factor.
8. Design and provide implementation guidelines for a delegation process.
CONTEMPORARY MANAGEMENT PRINCIPLES
341
PART IV: Organising
With its vision, mission, goals and objectives clearly formulated, an
organisation has to decide how to organise its resources optimally.
Each manager and worker has to know exactly what he or she needs
to deliver to ensure that the resources are utilised optimally and that
no unnecessary duplication of activities takes place. For plans to be
implemented, someone in the organisation must perform the necessary
tasks to ensure that the organisation’s goals and objectives are attained.
Management must determine an effective way of dividing the major task
into sub-tasks, combining these and coordinating them.
This chapter deals with the principles and the process of structuring
an organisation in such a way that it is aligned with its plans and goals.
The structuring of the organisation poses a big challenge to managers,
as is so evident in the opening case of this chapter. There is no single
best structure that matches a specific plan or strategy. In trying to find
the most suitable structure for an organisation, management needs to
understand and be guided by the principles of organising.
LEARNING OBJECTIVE 1
Differentiate between the terms
organising, organisation and
organisational structure.
organising
the process of creating a
structure for the organisation
that will enable its people to
work effectively towards its
vision, mission, goals and
objectives
organisation
the end-result of the organising
process
organisational structure
the basic framework of
formal relationships between
responsibilities, tasks, and
people in the organisation
organisational chart
a graphic representation of
the way an organisation is put
together
342
15.1 ORGANISING, ORGANISATION AND
ORGANISATIONAL STRUCTURE
Before we focus on a detailed discussion of organising, it is important
to differentiate between the terms ‘organising’, ‘organisation’ and
‘organisational structure’.
Organising can be seen as an ongoing and interactive process that
occurs throughout the life of an organisation. It entails the creation
of a structure for the organisation that will enable all employees to
work effectively towards its vision, mission, goals and objectives. The
process of organising consists of assigning the tasks necessary to achieve
the organisation’s goals to the relevant business units, departments or
sections, and then providing the necessary coordination to ensure that
these business units, departments or sections work synergistically. The
end result of the organising process is the creation of an organisation.
In a small organisation or a small department this is relatively simple
– it is usually a matter of deciding which tasks need to be done and
allocating them to various subordinates. In large organisations, such
as SAA, the process of organising becomes very complex. It involves
dividing the work of the organisation; allocating it logically to business
units, departments and sections; delegating authority and establishing
coordination, communication and information systems to ensure that
everyone is working together to achieve the goals of the organisation.
The task of dividing up the work, allocating responsibility and so on, is
referred to as the ‘design of the organisational structure’.
A typical way of illustrating an organisational structure is by
means of an organisational chart. An organisational chart shows,
among other things, authority and communication relationships between
jobs and units. The organisational charts of listed companies are usually
depicted in their annual reports.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 15 Principles of organising
15.2 THE IMPORTANCE OF ORGANISING
LEARNING OBJECTIVE 2
Organising is an indispensable function in the management process.
Plans devised and strategies formulated will never become a reality if
human and other resources are not properly deployed and the relevant
activities suitably coordinated. Leadership is not possible if lines of
authority and responsibility are not clear. Likewise, control is out of
the question if people do not know what tasks they are responsible
for. Organising is vital to the attainment of goals and objectives in an
organisation because it contributes to:
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structure that clearly indicates who is responsible for which tasks.
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employees will be expected to account for the outcomes, positive
or negative, for that portion of the work directly under their
control. Accountability links results directly to the actions of an
individual, section, department or business unit.
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communication is effective and that all information required by
managers and employees at all levels of the organisation effectively
reaches them through the correct channels so that they can
perform their jobs effectively.
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resources meaningfully, focusing on the essential activities that
need to be performed to attain the organisation’s mission and
goals.
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quality of the work performed.
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performed by an individual or a group of individuals.
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variety of tasks, procedures and resources. This is possible because
the organising process also entails an in-depth analysis of the work
to be done, so each person is aware of their duties.
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are grouped together meaningfully in specialised sections,
departments or business units so that experts in various fields can
deal with their specialised tasks.
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creating a mechanism to coordinate the activities in the entire
organisation.
Expound on the importance
of organising in attaining the
goals and objectives of an
organisation.
All the above-mentioned reasons for organising direct the organisation
towards attaining its mission and goals. However, managers should
follow a logical process in designing an organisational structure.
CONTEMPORARY MANAGEMENT PRINCIPLES
343
PART IV: Organising
LEARNING OBJECTIVE 3
Describe the steps to follow
in designing an organisational
structure.
15.3 DESIGNING AN ORGANISATIONAL
STRUCTURE
The point of departure in designing an organisational structure is
the vision, mission, goals and strategy of the organisation that were
formulated during the strategic planning phase (see Chapter 10). The first
stage in the organising process involves outlining the tasks and activities
to be completed in order to achieve the organisational goals. Once
these tasks and activities have been outlined, jobs must be designed and
assigned to employees within the organisation. Job design is discussed in
more detail in Section 15.7. Relationships between individual workers
and work groups should also be defined. The next step in the organising
process is to develop an organisational design that will support the
strategic, tactical and operational plans of the organisation. This entails
grouping the organisational members into work units, developing an
integrating mechanism to coordinate the efforts of diverse work groups
and determining the extent to which decision-making in the organisation
is centralised or decentralised. Finally, a control mechanism should be
put in place to ensure that the chosen organisational structure does
indeed enable the organisation to attain its mission and goals. Figure
15.1 summarises the stages in the organising process.
Vision, mission, goals and
strategies (strategic plan)
Outline tasks and activities
Design jobs and assign to employees
Control mechanism
DeƂne worker relationships
Develop organisational design
Figure 15.1: Steps in designing an organisational structure
344
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 15 Principles of organising
The design of an organisational structure should be guided by certain
organising principles to ensure that the structure is sound. These
principles are the focus of the next section.
15.4 PRINCIPLES OF ORGANISING
LEARNING OBJECTIVE 4
Managers at all levels of an organisation need to organise human,
physical, financial and information resources in order to achieve the
organisation’s mission and goals. The following principles of organisation
should guide managers in this process:
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Explain the principles of
organising that should be
considered in designing an
organisational structure.
These principles are discussed in more detail below.
15.4.1 Unity of command and unity of direction
Reporting to more than one supervisor can be very confusing to
employees as supervisors may focus on different aspects of the work.
The unity of command refers to a situation where each employee
reports to only one supervisor. A lack of unity of command can
also contribute to a lack of clarity in an organisation – an employee
reporting to more than one supervisor may get conflicting messages
from the various supervisors. Unity of direction is also important in
an organisation. This is achieved when all tasks and activities are directed
towards the same mission, goals and objectives.
15.4.2 Chain of command
Chain of command is also referred to as the ‘scalar principle’ and
means that an unbroken chain of command links every employee in an
organisation with an employee at a higher level of the organisational
structure. A chain of command creates a hierarchy, which can be
illustrated by means of an organisation chart. Every employee in an
organisation should know whom he or she reports to and who, if
anyone, reports to him or her.
unity of command
each employee should report to
only one supervisor
unity of direction
all tasks and activities should
be directed towards the same
mission and goals
chain of command
a clear, unbroken chain of
command should link every
employee with someone at a
higher level, all the way to the
top of the organisation
CONTEMPORARY MANAGEMENT PRINCIPLES
345
PART IV: Organising
15.4.3 Span of control
span of control
the number of subordinates
reporting to one manager or
supervisor
Span of control is also called ‘span of management’ and it refers
to the number of subordinates that report to only one manager or
supervisor. A manager can deal with a limited number of employees at
a time. If an unrealistic number of employees report to a manager, the
manager’s task becomes impossible to perform. The fewer employees
supervised, the smaller or narrower the span of control. The more
employees supervised, the greater or wider the span of control. The
span of control is in proportion to the height of the organisation – or its
number of managerial levels. A flat organisation exists when there are
few levels with wide spans of control, whereas a tall organisation exists
when there are many levels with narrow spans of control.
15.4.4 Division of work
division of work
how the workload is divided
amongst business units,
departments, sections and
individual employees in an
organisation
A major challenge faced by managers is to determine how the work
should be divided up amongst business units, departments, sections
and even individual employees. The division of work is also called
the division of labour. With the division of work, employees have
specialised jobs. Related jobs can then be grouped together in a section
or department. Employees generally have specialised jobs in a functional
area such as accounting, administration, marketing, purchasing or human
resource management. As managers move up the corporate ladder, they
perform less specialised functions. Two terms related to the division
of work, are ‘differentiation’ and ‘integration’. Differentiation refers to
the need to divide the organisation into various departments, whereas
integration refers to the need to coordinate the activities of the various
departments in an organisation.
15.4.5 Standardisation
Managers should employ the principle of standardisation when
structuring the organisation. The purpose of standardisation is to
developing uniform practices
develop a certain level of conformity, in the sense that it entails the
that employees need to follow in
development of uniform practices that employees need to follow in
doing their jobs
doing their jobs.
standardisation
15.4.6 Coordination
coordination
all business units, departments,
sections and individuals
within the organisation should
work together to accomplish
the strategic, tactical and
operational goals of the
organisation
346
Coordination entails integrating all organisational tasks and resources
to meet the organisation’s strategic, tactical and operational goals.
In general, the degree of coordination between tasks depends on
their interdependence. Thompson identified three major forms
of interdependence, namely pooled, sequential and reciprocal
interdependence2:
r Pooled interdependence. In groups that exhibit pooled
interdependence, the units operate with little interaction. The
outputs of the units are pooled at organisational level. Failure of
any single unit could threaten the entire organisation.
r Sequential interdependence. In sequential interdependence,
the output of one unit becomes the input for the next unit.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 15 Principles of organising
The second unit is directly dependent upon the first unit to
finish its work before it can begin its assigned task. Sequential
interdependence is typically found in a production-line set-up, such
as the assembly plant of a car manufacturer or the production line
in a steel-manufacturing organisation.
r Reciprocal interdependence. Reciprocal interdependence refers
to a situation in which the outputs of one work unit become the
inputs for the second work unit, and vice versa. In a hospital, the
units such as intensive care, paediatrics and so on, provide inputs
to surgery. After surgery, patients are sent back to the respective
units. In a restaurant the waiters and chefs are reciprocally
interdependent.
Unity of command and direction, the chain of command, span of
control, division of work and standardisation can be used as coordination
principles. In addition, the following can also be used as means of
coordination3:
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departments
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information and activities with one or more other departments
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departments
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for a particular department, but who coordinate the activities of a
single or multiple departments to reach an objective
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sales, customer service, procurement and public relations, who
coordinate the efforts with people in the external environment of
an organisation.
15.4.7 Responsibility, authority and accountability
These three terms are closely related and are often used interchangeably
by managers and employees. It is, however, important that managers
understand the difference between the concepts when they are involved
in the organising process.
Managers have responsibility – they have an obligation to achieve the
goals and objectives of an organisation by performing certain functions,
tasks and activities. When strategic, tactical and operational goals are set,
the managers responsible for achieving them should be clearly identified.
Authority can be defined as a manager’s right to make decisions,
issue orders and use organisational resources in order to attain goals
and objectives. Authority is discussed in more detail in Section 15.5.
Managers are accountable for everything that happens in their
departments or sections and they need to be evaluated on how well
they have met their responsibilities. Managers can delegate responsibility
and authority, but never their accountability.
CONTEMPORARY MANAGEMENT PRINCIPLES
347
PART IV: Organising
15.4.8 Power
Managers also have power in an organisation. The following kinds of
power can be distinguished in organisations:
the ability of an individual to
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in the organisation
more power to its incumbent than does the position of first-line
manager.
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abstract concept. People follow a person with referent power
simply because they like, respect, or identify with them.
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who possesses it has special power over those who need their
knowledge.
power
15.4.9 Delegation
Delegation is when managers assign responsibility and authority to
their
subordinates for attaining goals. Responsibility and authority are
the process by which managers
delegated
down the chain of command from a person at a higher level in
assign a portion of their
the
organisation
to a person at a lower level. Subordinates are given new
workload to one or more
tasks,
which
may
become part of a redesigned job or it may simply be
subordinates
a one-time assignment. Delegation is discussed in more detail in Section
15.8.
delegation
15.4.10 Downsizing and delayering
downsizing
managerial activity aimed
at reducing the size of the
workforce
delayering
reducing the number of layers
in the vertical management
hierarchy
Downsizing may be achieved by reducing the number of employees in
one or more departments – leaving the organisational unit intact – or
through eliminating a departmental unit by, for example, outsourcing its
activities. During re-engineering, organisations often eliminate at least
one layer of middle management. This is delayering. Information
technology allows contemporary senior management to gain online
real-time access to operations without consulting many layers of middle
management. This enables the organisation to speed up decision-making.
15.4.11 Flexibility
ƃeZibility
the ability to adapt to changing
circumstances
348
Flexibility in employees is vital for the success of an organisation,
since there will always be exceptions to the rule. Flexibility refers to an
employee’s ability to adapt to changing circumstances, either inside or
outside the organisation or even within the employee himself or herself.
Successful organisations realise that flexibility is important to employees
and to customer satisfaction.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 15 Principles of organising
The organising principles discussed in this section should enable managers
to organise all organisational resources in such a way that the mission
and goals of the organisation are achieved. A few of these principles,
mainly authority, departmentalisation, job design and delegation are
discussed in more detail below.
15.5 AUTHORITY
LEARNING OBJECTIVE 5
Authority has been defined in the previous section as the right to make
decisions, issue orders and use resources. It includes the right to take
action to compel the performance of duties and to punish default or
negligence. In the formal organisational structure, the owners of an
organisation possess the final authority. They may appoint a board of
directors and give them authority to manage their investments in the
organisation. The directors appoint managers who, in turn, give a certain
authority to subordinates – and in this way authority flows down the
hierarchical line. This flow of authority is known as delegation of
authority.
Authority resides in positions rather than in people – managers acquire
authority by means of their hierarchical position in the organisation
rather than from their personal characteristics. When a manager steps
down from his position, that authority is relinquished. For managers to
structure an organisation that is well aligned with its mission and goals,
they need to understand the different types of authority. These are
formal and informal authority, line and staff authority, centralised and
decentralised organisational authority and levels of authority.
Explain the term authority.
delegation of authority
formal authority passed
downwards from above
15.5.1 Formal and informal authority
Formal authority is the sanctioned way of getting things done,
illustrated by the organisational chart. It refers to the specific relationships
that exist among employees in an organisation. Informal authority is
the unsanctioned way of getting things done. It refers to various patterns
of relationships and forms of communication that evolve as employees
interact and communicate with one another.
The right to make decisions, issue orders and use resources,
narrow down from top to middle to lower levels of management.
This is referred to as the scope of authority. Due to the scope of
authority, top managers typically have more authority than middlelevel management, whereas middle managers have more authority than
first-line managers. Responsibility and authority are delegated and flow
down the organisation, whereas accountability flows up the organisation.
formal authority
the specified relationships
among employees
informal authority
the patterns of relationships
and communication that evolve
as employees interact and
communicate
scope of authority
the hierarchy that narrows as it
flows down the organisation
15.5.2 Line and staff authority
Line managers are those managers in the organisation who are directly
responsible for attaining the organisation’s goals. Line authority refers
to a manager’s responsibility to make decisions and to issue orders to
employees down the chain of command. It originates at top management
level, with the directors, and is delegated to the heads of the different
line authority
the responsibility to make
decisions and issue orders
down the chain of command
CONTEMPORARY MANAGEMENT PRINCIPLES
349
PART IV: Organising
units, departments, or sections, such as the financial department or the
operations department. It is then delegated further down the hierarchy
to the supervisory levels where the basic activities are carried out.
The King II Report 2002 on Corporate Governance addresses the
issue of conducting business in an ethical and transparent way. Company
secretaries, for instance, are appointed to render services to the
chairperson of the board and the CEO and to advise line management
regarding issues of ethics and governance in the organisation. The
company secretary therefore has staff authority, in other words, the
staff authority
responsibility to advise and assist other personnel, based primarily on his
the responsibility to advise and
or her expert power. Partners in a law firm or a firm of architects may
assist other personnel
appoint managers to run the business side of the firm. The presence
of such staff specialists frees lawyers or architects to practise law or
architecture – their line function. Certain people in staff positions
function only as specialists in an advisory capacity. This means that line
managers may choose whether or not to seek the advice of the specialist.
A typical example is an economist at a bank. He or she advises the line
managers on the prevailing economic variables such as interest rates,
inflation and Reserve Bank policy. The concept of advisory personnel
is certainly not a contemporary development. In the past, kings,
parliamentary governments and dictators also appointed individuals
as their advisers. Conflict often arises between people in line and staff
positions because line managers regard staff managers as a threat to
their authority. Hence staff managers are not consulted and complain
that they are under-utilised. As soon as line managers are obliged to rely
too heavily on the advice of staff managers, they feel that they are too
dependent on the staff managers’ expertise and this may make them feel
threatened. Differences in perception may also cause conflict, especially
if line managers feel that staff managers are infringing on their lines of
authority, have too idealistic a perspective or are usurping the prestige
of the line managers. However, the staff manager’s perception may be
that the other party unnecessarily opposes all new ideas.
In functional authority, staff personnel have the right to issue orders
to line personnel in established areas of responsibility. For example,
the purchasing department assists the sales personnel by keeping
appropriate stock levels. If the purchasing personnel determine that a
specific order quantity is the most economical one, they may issue an
order to a line manager to order that specific quantity. Staff managers
may also have both line and staff authority. This is called ‘dual line
authority’. For example, a labour relations manager advises and assists
all departments in an organisation. However, such a manager may also
have line authority within the HR department and may issue orders (a
line function) to their subordinates.
With micro-management, the manager normally monitors and
micro-management
assesses
every activity performed by subordinates, avoids delegation,
management style whereby
requires
constant
and detailed feedback from subordinates and tends to
managers closely observe or
be
excessively
focused
on procedural trivia rather than on overall staff
control the work of subordinates
performance. There are several motivations for micro-management,
which can be categorised as either internal or external factors. Internal
350
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 15 Principles of organising
factors include detail-orientedness and insecurity on the part of the
manager and doubts regarding the competence of employees and coworkers. Internal factors are related to the unique personality of the
individual micromanager. External factors, on the other hand, refer to
the factors pertaining to the organisation itself, such as increased time or
performance pressure, levels of stress experienced in the organisation
and the instability of the managerial position itself.
Micro-management is often a source of employee dissatisfaction and
disengagement, since micro-management suggests to employees that
a manager does not trust their work. Disengaged employees will only
invest the necessary time to earn their payment, but they do not put
forth effort or any creativity in the work to which they are assigned.
Micro-management can also completely eliminate the trust between
employees and employers, prevent opportunities for learning and the
development of interpersonal skills. Furthermore, micro-management
may bring about resentment in both vertical (manager–subordinate) and
horizontal (subordinate–subordinate) relationships, and it may harm
existing teamwork as well as inhibit future teamwork in both vertical
and horizontal relationships. Micro-management is something that can
be prevented and rectified in an organisation. For example, managers
should clearly articulate what they expect from their subordinates
and focus on hiring and placing competent and skilled employees.
Furthermore, employees should be given decision-making powers,
should be encouraged to ask questions and make suggestions. Managers
should also provide subordinates with constructive feedback4.
15.5.3 Centralised and decentralised authority
The major difference between centralised and decentralised authority
is in who makes the important decisions in an organisation. In the case
of centralised authority, important decisions in terms of the success of
the organisation, are made by the executive or top managers. On the
other hand, decentralised authority refers to situations where important
decisions are made by middle and lower levels of management.
Decentralised authority or decentralisation has become very
popular in South African organisations as a method of empowering
employees. By decentralising power and authority, a more democratic
organisation is created in which managers at the lower levels can decide
on issues such as the allocation of resources in their departments,
differentiated salaries for employees, flexible work hours, and so on. In
centralised authority important decisions are made by top managers.
In deciding whether to centralise or decentralise authority, the following
factors should be considered:
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and the greater the uncertainty, the greater the tendency is to
decentralise.
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whatever they have done in the past. Hence there will be a
tendency to follow the history of the organisation when it comes
to centralisation or decentralisation.
decentralised authority
important decisions are
made by middle and lower
management
centralised authority
important decisions are made
by top managers
CONTEMPORARY MANAGEMENT PRINCIPLES
351
PART IV: Organising
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the costs involved, the more pressure there will be to centralise
decision-making.
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determines the types of market, technological development,
and any competition to which the organisation is subject. Alfred
Chandler found that large organisations which obtained new
products through a strategy of research and development
advocated product diversification and therefore used decentralised
structures. Organisations that did business in more predictable
industries became increasingly centralised.
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not in a position to make sound decisions, decision-making in the
organisation will probably be centralised. If lower-level managers
are well qualified, top-level management can make the most of
their skills by decentralising.
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to manage a very large organisation without decentralising. The
larger and more complex an organisation is, the greater the need
for decentralisation will be. In an organisation that is growing
rapidly, management will have to bear the burden of an increasing
workload, and therefore be obliged to shift some of the decisionmaking authority to lower levels, and thus to decentralise.
Centralisation versus decentralisation in business computing5
The decision to centralise or decentralise not only
concerns the locus of authority, but managers
also need to decide on the centralisation or
decentralisation of other important activities such
as business computing. Organisations favouring
the centralised approach to business computing
have benefited from a lower cost of ownership,
given that centralised computing architectures
require fewer information technology staff for
support than decentralised architectures do. As a
result, decentralised business computing has failed
to become the dominant computing architecture
because it is too expensive and difficult to manage
hundreds or even thousands of servers spread
across the organisation. In the aftermath of the
September 11, 2001 attacks in New York, however,
the conventional wisdom about what constitutes an
expense is changing. In today’s global environment
centralised operations are a liability. Organisations
352
CONTEMPORARY MANAGEMENT PRINCIPLES
with centralised computing architectures that
were affected by the attacks are having a harder
time recovering compared to organisations with
decentralised computing. Decentralisation has
enabled them to move their business functions more
easily to other locations. In theory, organisations
that build some form of decentralised computing
will carry a higher cost of doing business compared
to organisations that rely primarily on massive data
centers. But in the case of a catastrophic event, the
cost now seems minimal compared to the amount
of time it would take to recover from an attack that
destroyed your computing resources’ location. At
the same time, many of those managers affected
will take a harder look at decentralising their own
business functions to make sure that major elements
of the business are not all concentrated in one single
location.
CHAPTER 15 Principles of organising
Advantages of decentralisation
Decentralisation has the following advantages for an organisation:
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reduced, enabling them to devote more attention to strategies.
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of action and time is not wasted by first referring the matter to a
higher authority.
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levels of management. These managers feel that they participate
in managing the organisation and are prepared for greater
responsibilities. They should experience a great deal of job
satisfaction.
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flexible, which is imperative in a rapidly changing environment.
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the organisation. Managers are motivated to participate in this
competition because their performance is constantly compared
with that of their colleagues.
Disadvantages of decentralisation
Decentralisation has the following disadvantages for an organisation:
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will result in sub-units or departments moving away from the
centres of decision-making.
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be human resources sections in the decentralised sub-units that
keep personnel records, while these records are also being kept up
to date at head office.
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more intensive management training and development to enable
managers to execute delegated tasks.
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methods. Even if there is delegation, top-level managers are always
accountable for attaining the goals of the organisation, and they
must continually receive feedback on the situation.
The shift towards decentralisation in organisations in South Africa and
abroad does not come without its challenges. More individual authority
at middle and lower management levels requires thorough management
training and development. Managers need to be aware of the impact
that their decisions could have on the survival of the organisation. A
prerequisite for such knowledge in the current turbulent business
environment is continual management training and development.
CONTEMPORARY MANAGEMENT PRINCIPLES
353
PART IV: Organising
Organising in action6
Look at a painting. Whether it is a centuries-old
masterpiece like the Mona Lisa or a modern work
by the South African artist Portchie, you see colour,
texture and shape. Look more closely and you’ll
see the artist’s study technique in composing and
organising the work. Artists start off with a blank
canvas. Then they decide whether the picture will
be a landscape, a portrait, an abstract or a still life.
While many different styles, such as Impressionism
and Cubism, have evolved over the centuries, one
ideal has held fast: an artist must know the rules of
composition. Paint is organised on canvas to convey
emotion – awe, anger, love, comfort or knowledge.
The artist’s eye organises, but he or she begins by
determining the medium and organising materials –
colours, brushes, and lighting – that will best bring
LEARNING OBJECTIVE 6
Describe the
departmentalisation approach
to organisation structure.
organisational design
the arrangement of positions
into work units or departments
and the interrelationship among
them within an organisation
354
a personal vision to life. Colours are transferred
from their blobs on a palette by personal placement
on the canvas. The artist structures the work to
embody an emotion, to tell a story, plant an idea, or
embody beauty.
Managers also organise and deploy resources to
achieve a vision and goals. Today’s managers work
for organisations, and they support, and must be
supported by, the organisation. By organising their
resources such as people, technology and knowledge
and by marshalling their strengths, managers
can support the organisation despite economic
downturns or competitive threats to achieve
organisational goals. While beauty may not be the
manager’s goal, organisational design can be a work
of art.
15.6 THE DEPARTMENTALISATION APPROACH
TO ORGANISATION STRUCTURE
In the earlier sections of this chapter, the principles of organisation are
presented and discussed. Managers need to understand these principles
in order to structure a sound organisation. As described in the opening
case, SAA has been forced to adjust its organisational structure several
times since it was founded in 1934, due to changes in the environment,
changes in their objectives and changed strategies. The South African
government’s decision in 2003 to restructure the state-owned enterprise
Transnet by splitting SAA from its parent company, probably caused the
biggest change in SAA’s structure. In 2007, SAA again launched a major
restructuring programme in order to ensure the airline’s profitability and
sustainability. SAA’s business was divided into seven subsidiaries, which
allowed them to concentrate on their core business of passenger and
cargo transport. Several other restructuring processes made it possible
for SAA to save R2.5 billion by June 2009, indicating the importance of
restructuring programmes such as these. In what follows, we will focus
on departmentalisation as an approach that organisations, such as SAA,
can follow in order to structure and restructure their organisations.
The term organisational design refers to the arrangement of
positions into work units or departments and the interrelationship
among them within an organisation7. We shall consider organisational
design by demonstrating the organisational chart and discussing the
major types of departmentalisation. In doing so, we must bear in mind
that the choice of an organisational structure should always be viewed
against the strategy of the organisation, as we have seen in the SAA case
study.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 15 Principles of organising
15.6.1 Organisational chart
As explained earlier in this chapter, an organisational chart is a graphic
representation of the way that an organisation is put together. It shows,
among other things, authority and communication relationships between
jobs and units.
15.6.2 Departmentalisation
The various departments created constitute the organisational structure
as it appears on the organisational chart. To support the chosen
strategy (or the strategic plan), management must decide on the type
of departmentalisation that best supports the strategy. The major
options in terms of departmentalisation are discussed below.
Functional departmentalisation
The functional organisational structure, as shown in Figure 15.2, is the
most basic structure. In this form of departmentalisation, the activities
belonging to each management function are grouped together into a
unit or department.
One set of activities, for example, advertising, marketing research
and sales, would belong together under the marketing function. Another
set of activities, for example debtors and creditors, would be grouped
under the financial function.
Functional departmentalisation is often used by organisations
with a single product focus. In order to build competitive advantage
in their products or services, such organisations require well-defined
skills and areas of specialisation. Dividing tasks into specialist areas
enables personnel to focus on their area of expertise only. However,
this structure poses major challenges in terms of coordination of the
specialist functions. Specialists may view the organisation solely from
their own perspective. The marketing manager for instance, may see
an opportunity or threat exclusively from a marketing perspective,
whereas the financial manager may approach the same issue from a
purely financial perspective. To overcome potential conflict between the
different departments, the chief executive must ensure that proper coordination mechanisms are in place.
departmentalisation
the grouping of related activities
into units or departments
functional
departmentalisation
activities belonging to each
management function are
grouped together into a unit or
department
Managing director
Marketing
manager
Production
manager
Research and
development
manager
Human
resources
manager
Financial
manager
Figure 15.2: Functional departmentalisation
CONTEMPORARY MANAGEMENT PRINCIPLES
355
PART IV: Organising
product departmentalisation
all activities concerned with
the manufacturing of a specific
product or group of products,
are grouped together in units or
departments
Product departmentalisation
With product departmentalisation, all the specialists associated
with such products are grouped in product units or departments. The
rationale for this structure is that the marketing, financing and personnel
needs involved in the production of, say, diesel engines will differ
considerably from those occurring in the manufacture of cigarettes. An
example of product departmentalisation is shown in Figure 15.3.
Tiger Brands
Food brands
Spar
Healthcare
brands
Critical care/
hospital
products
Figure 15.3: Product departmentalisation
Product departmentalisation is a logical structure for large organisations
providing a wide range of products or services. The advantages of this
structure are that the specialised knowledge of employees regarding
specific products is used to maximum effect, decisions can be made
quickly within a section, and the performance of each group can easily
be measured separately. The disadvantages are that the managers in one
particular section may concentrate their attention almost exclusively on
their particular products and tend to lose sight of those of the rest of
the organisation. In addition, overall administrative costs could increase,
because each section has to have its own functional specialists, such as
market researchers and financial experts.
location departmentalisation
work and workers are
organised into separate units
or departments responsible for
carrying out their responsibilities
in particular geographic areas
356
Location departmentalisation
Location departmentalisation is a logical structure for an
organisation that manufactures and sells its goods in different
geographical regions. Location departmentalisation refers to a structure
in which work to be executed and the workers allocated to it, are
organised into separate units or departments that are responsible for
carrying out their responsibilities in different geographic areas. This kind
of structure gives autonomy to the various geographic area managers,
which is necessary to facilitate decision-making and adjustment to local
business environments. This structure is also suitable for a multinational
business because each country in which the multinational operates will
be culturally unique and will have to be approached differently.
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 15 Principles of organising
SABMiller plc
Managing
director:
Europe
Chairman:
Pilsner
Urquell
International
Managing
director:
Africa and
Asia
Figure 15.4: Location departmentalisation
Customer departmentalisation
Customer departmentalisation is appropriate when an
organisation concentrates on a particular segment of the market or
group of consumers or, in the case of industrial products, where the
organisation sells its products only to a limited group of users.
Figure 15.5 illustrates customer departmentalisation.
customer
departmentalisation
work and workers responsible
for providing products or
services to a certain segment of
the market are grouped together
into a unit or department
CEO
President:
Household
President:
Professional
President:
Pharmaceutical
President:
Industrial
Figure 15.5: Customer departmentalisation
Customer departmentalisation has the same advantages and
disadvantages as product departmentalisation. Unlike a functional
structure in which activities are grouped according to knowledge,
skills, experience or training, a structure based on product, location or
customers resembles in some respects a small, privately-owned business.
It is more or less autonomous in its actions, and is accountable for its
own profits or losses. However, unlike an independent small business,
it is still subject to the overall goals and strategies of the organisation as
a whole.
CONTEMPORARY MANAGEMENT PRINCIPLES
357
PART IV: Organising
multiple departmentalisation
a combination of the functional,
product, location or customer
departmentalisation structures
Multiple departmentalisation
Large and complex organisations in particular often find it necessary
to use several of the departmental structures described earlier to
create a hybrid organisation. Any mixture of structures can be used.
The following are among the most common combinations in multiple
departmentalisation:
Matrix departmentalisation
With matrix departmentalisation, the employee works for
matrix departmentalisation
a
functional department, such as finance, but is also assigned to
combines functional and
one
or more products or projects. The major advantage of matrix
product departmental structures
departmentalisation is flexibility – it allows the organisation to organise
temporarily for a project. The major disadvantage is that each employee
reports to two superiors – a functional and a project superior – which
violates the unity of command principle. Coordination can also be
difficult8.
Figure 15.6 illustrates a matrix structure.
CEO
Manager:
Finance
Manager:
Marketing
Manager:
Operations
Team
Team
Team
Team
Team
Team
Team
Team
Team
Project
manager 1
Project
manager 2
Project
manager 3
Figure 15.6: Matrix departmentalisation
358
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 15 Principles of organising
Divisional departmentalisation
Large, complex and global organisations with related products and
services usually have divisional departmentalisation. In this case, divisional
the organisation is departmentalised in semi-autonomous strategic departmentalisation
business units. Figure 15.7 illustrates divisional departmentalisation.
departmentalised in semiautonomous strategic business
units
CEO
Product
division 2
Human
resources
Manufacturing
Accounting
Product
division 1
Human
resources
Manufacturing
Accounting
Figure 15.7: Divisional departmentalisation
With the divisional (or ‘M-form’) structure, any combination of the
other forms of departmentalisation may be used by the organisation
and within its divisions. When the organisation has unrelated diversified
business units, they usually use the conglomerate structure, based on
autonomous profit centers. In this case top management focuses on
portfolio management to buy and sell businesses without great concern
for coordinating the separate divisions.
Network structure
Network structure describes an interrelationship between different
organisations, where the organisation performs core activities itself but
subcontracts some of the non-core operations to other organisations.
One of the big challenges for a network organisation is to coordinate
its network partners’ activities to ensure that they contribute to the
network organisation’s mission and goals. Figure 15.8 on the next page
illustrates a network structure.
New venture units
New venture units use a form of matrix structure, and usually consist
of groups of employees that volunteer to develop new products or new
ventures for an organisation.
When the project is complete, it can be adopted into any of the
following organisational structures:
network structure
organisation performs the core
activities itself and subcontracts
some of its non-core operations
to other organisations
new venture units
consist of groups of employees
who volunteer to develop new
products or ventures for the
organisation
CONTEMPORARY MANAGEMENT PRINCIPLES
359
PART IV: Organising
Designer
Manufacturing
Central hub
Human resources
agency
Marketer
Figure 15.8: Network structure
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departmentalisation, such as functional, product, location or
customer departmentalisation, or
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team approach
number of people with
complementary skills and
competencies that hold
themselves accountable for
pursuing a common purpose,
achieving performance goals
and improving interdependent
work processes
Team approach
Probably the most widespread trend in departmentalisation in recent
years has been the implementation of team concepts. The vertical chain
of command is a powerful means of control, but passing all decisions up
the hierarchy takes too long and keeps responsibility at the top. The team
approach gives managers a way to delegate authority, push responsibility
to lower levels and be more flexible and responsive in the competitive
global environment. The team approach to departmentalisation refers
to a number of workers, with complementary skills and competencies,
who work together and hold themselves accountable and responsible
for pursuing a common purpose, achieving performance goals and
improving interdependent work processes.
Figure 15.9 illustrates the team approach.
CEO
Team 1
Team 2
Team 3
Figure 15.9 The team approach
virtual network approach
people who are spread out
in remote locations work as
though they were in one place
360
The virtual network approach
The virtual network approach builds on the features of the network
organisation. It is no longer necessary for the organisation to have all
its employees, teams, departments and subcontractors in one office or
facility. Information technologies enable the organisation to integrate its
internal employees, teams and departments with its external network
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 15 Principles of organising
of subcontractors in order to achieve specific goals, even in situations
where people work in remote locations.
The virtual organisation is a streamlined model that fits the rapidly
changing environment. It provides flexibility and efficiency because
partnerships and relationships with other organisations can be formed
or disbanded as needed. However, a disadvantage associated with
the virtual organisation is that the levels of reciprocal and sequential
interdependence are much higher than those of the network organisation.
They tend to be instantaneous – that is, any time and any place – for
the networked employees, teams, departments and subcontractors.
The boundaries of the virtual organisation are also more open than in
a network organisation because of the use of advanced information
technologies that seamlessly knit all partners together. Examples of the
information technologies used to create the virtual organisation are
electronic commerce, extranet and intranet, which were discussed in
Chapter 13.
Remote control9
Remote working is rapidly spreading beyond
its traditional heartland of sales teams and field
engineers. But, what are the benefits of remote
working and how can managers manage e-workers
effectively?
Employees and employers can both benefit
from remote working. For employers, cost savings
due to remote workers are very attractive (fewer
desks mean smaller offices and lower overhead
costs). Also, there is growing evidence of improved
productivity and improved job satisfaction for
remote working staff. Fast, reliable broadband
connections, remote security systems and webaccessible applications and network systems have
never been cheaper and more available, making the
practicalities of remote working easier than ever
for employers and employees. For many employees,
remote working provides them with flexibility,
greater fulfillment, high levels of job satisfaction and
a better work/life balance. On the downside, remote
working can cause remote workers to struggle with
work/no-work boundaries, so switching off can be an
issue for employees.
The big unanswered question about remote
working is whether remote workers can wave
goodbye to promotion. Despite enthusiasm for
remote working, some managers confess that
visibility is important, as is being able to coach,
mentor and influence decisions. Managers need
to understand that it is about the output of their
employees and not about presenteeism.
15.7 DESIGNING JOBS THAT MOTIVATE
LEARNING OBJECTIVE 7
Once the organisational structure is in place, management must consider
the design of jobs to motivate the incumbents of the different positions
in the structure to contribute towards the organisation’s goals and
objectives.
Propose recommendations
regarding the design or
redesign of jobs as a
motivational factor.
15.7.1 Job design
Job design is a crucial part of organising as it affects job satisfaction
and productivity. It refers to the process of combining the tasks that
each employee is responsible for. Empowering employees to be
involved in designing their own jobs motivates them and increases their
job design
the process of combining the
tasks that each employee is
responsible for
CONTEMPORARY MANAGEMENT PRINCIPLES
361
PART IV: Organising
productivity10. This obviously requires employees to have a very clear
understanding of the entire organisation and the way it operates.
15.7.2 Job specialisation
job specialisation
the narrowing down of activities
to simple, repetitive routines
Job specialisation is often used in South Africa and Africa in industries
where many of the employees are illiterate or very inexperienced in the
workings of a business. Job specialisation refers to the narrowing down
of activities to simple, repetitive routines. The term ‘job specialisation’
should not be confused with ‘person specialisation’, where the latter
refers to individuals with specialised training, such as medical specialists,
lawyers, geologists and engineers. When designing jobs, managers
need to consider motivating elements such as job specialisation and job
expansion.
The origin of job specialisation11
Job specialisation originated with the work of Adam
Smith. The famous opening words of his book Wealth
of nations describe a basic form of specialisation
in a pin factory and the subsequent increased
productivity:
‘One man draws the wire, another straightens it,
a third cuts it, a fourth points it, a fifth grids it at the
top for receiving the head. Ten persons, therefore,
could make among them upwards of 48 000 pins
in a day ... But if they had all wrought separately and
independently, and without any of them having been
educated to this peculiar business, they certainly
could not each of them have made twenty. This
would have meant that 200 pins at most would have
been made instead of 48 000.’
15.7.3 Job expansion
Job expansion is almost the opposite of job simplification. Jobs can be
expanded through job rotation, job enlargement and job enrichment.
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time. Many organisations appoint management trainees and then
develop their conceptual skills by rotating them through the various
departments of an organisation.
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They wanted to increase a job’s scope in order to break the
monotony of a limited routine. A job is enlarged when an
employee carries out a wider range of activities of approximately
the same level of skill, such as a typist whose job is enlarged to
include general administration tasks. The expanded job will be
more interesting because it is more varied.
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based on Herzberg’s two-factor theory of motivation, which
is described in detail in Chapter 20. Herzberg argued that
job rotation and job enlargement do not enhance employee
motivation. Instead a worker should be provided with actual
control over the task to make the job more motivating12. Job
enrichment entails increasing both the number of tasks a worker
does and the control the worker has over the job.
362
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 15 Principles of organising
The job of a manager is to get the work done through the efforts of
others. It is neither desirable nor is it possible, in many instances, for
managers to perform all the work for which they are held responsible.
In such instances, managers need to rely on their subordinates to
perform various functions and activities on their behalf. The delegation
of responsibilities is discussed in the last section of this chapter.
15.8 DELEGATION
LEARNING OBJECTIVE 8
With delegation, authority is also passed on to an employee, who
then has the authority to deploy the necessary resources in order to
complete the delegated task. There are different reasons why managers
delegate. Delegation is important from the organisation’s perspective
as it promotes succession planning: should the manager retire, resign or
get promoted to a higher level, a subordinate will be able to move into
the manager’s position more easily. From a manager’s point of view,
delegation is used to enable the manager to get more managerial work
done. Subordinates also benefit from delegation – by participating in
more challenging jobs, they learn to develop their decision-making and
problem-solving skills and in the process improve their managerial skills. It
is important to note that even though managers delegate authority, they
remain accountable for the completion of the job. They are accountable
both for their own actions and for those of their subordinates. Managers
may hold subordinates responsible for a job, but they are still accountable
to their own superiors for the work.
The parity principle stipulates that authority and responsibility
should be co-equal. According to the parity principle, neither the
manager nor the subordinate should be held responsible for things
beyond their control or influence. This means that, when a manager
assigns the responsibility for a task to be performed, he must also give
the subordinate the full authority to perform the task. For example, the
employee who is asked to drive across town and pick up a load of timber
(responsibility) should also be given the right (authority) to request a
vehicle from the vehicle pool to accomplish the task. This principle is
often violated – employees almost always feel they have been assigned
more responsibility than authority to act.
In what follows, we will discuss the principles of effective delegation,
the advantages of delegation, obstacles to effective delegation, strategies
for overcoming obstacles to effective delegation and the delegation
process.
Design and provide
implementation guidelines for a
delegation process.
delegation
the process whereby managers
assign a portion of their total
workload to others
parity principle
the parity principle stipulates
that authority and responsibility
should be co-equal
15.8.1 Principles of effective delegation
The delegation process is essential to every manager, for this is
how managers get others to share in the organisation’s drive for
performance. A common failing of less effective managers is that they
try to be responsible for everything. In so doing, they are overloaded
and therefore not very efficient managers. This phenomenon is evident
in South Africa, due to the shortage of suitably qualified managers.
Consequently, subordinates suffer because of the manager’s failure to
delegate and develop them.
CONTEMPORARY MANAGEMENT PRINCIPLES
363
PART IV: Organising
Below are some principles that can be used as guidelines to help
managers become more effective at delegating.
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standards and goals.
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discussed with the subordinate.
15.8.2 The advantages of delegation
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364
CONTEMPORARY MANAGEMENT PRINCIPLES
CHAPTER 15 Principles of organising
15.8.3 Obstacles to effective delegation
When one is given something to do and one knows how to do it
well, there is a natural tendency to do that task rather than to give it
to someone else. However, one of the first things managers need to
learn is to delegate those tasks that they know best. By delegating the
tasks that one knows best, one can move on to other tasks that will
offer further personal growth. Also, it is easy to supervise subordinates
who are doing things of which one has detailed knowledge. There
are a number of personal and psychological barriers that impede the
delegation process for managers. A review of these barriers may be
helpful to managers:
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as well as he or she can do it. This may stem from a lack of
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subordinates will do the job better than they can. Subordinates,
on the other hand, sometimes fear that they will fail and thus
expose themselves to disciplinary action. They may try to avoid
work responsibilities and risk, and feel that there are no additional
rewards for completing a task. Sometimes there is confusion about
who is actually responsible for the job.
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others. It is possible that the current organisational design may be
an impediment to delegation.
If there are problems in delegation, managers should review all the
elements of the organising function to determine the root cause of such
organisational stumbling blocks. A few organisational impediments to
delegation should be mentioned here. First, delegation is not effective if
authority and responsibility are not clearly defined. If managers do not
know which tasks to delegate and what is expected of them, they will not
be able to delegate decision-making to their subordinates. This situation
requires a clarification of duties from above or from the manager’s
superior. Second, when a manager does not make subordinates
accountable for task performance, it is likely that this responsibility will
be passed on to others, creating additional staff and communication
burdens. Lastly, in the absence of or with poorly developed job
descriptions individuals may not have a good understanding of what
is expected of them. The next section describes strategies that
management can implement in order to overcome obstacles that hinder
effective delegation.
CONTEMPORARY MANAGEMENT PRINCIPLES
365
PART IV: Organising
15.8.4 Overcoming obstacles to effective delegation
Most of the impediments to delegation can be minimised by a greater
awareness on the part of the manager that such obstacles exist. One
way of overcoming obstacles to effective delegation is to create a
culture of continuous learning. Managers should realise that there is
more than one way to deal with a situation and they should, therefore,
not compel subordinates to apply their methods. Managers should
clearly state the outcome that the subordinate must deliver, but should
give the subordinate maximum freedom to perform their delegated
tasks. When mistakes are made, the subordinate should be assisted
with finding solutions to problems. Improved communication between
subordinates and managers removes obstacles to delegation. Close
communication will reveal the strengths and weaknesses of employees,
enabling managers to know which tasks can be appropriately delegated
in the knowledge that the job will be done properly. Training helps
subordinates to understand their responsibilities, authority and
accountability. Subordinates should be made aware of the extent of
their contribution in achieving the goals of the organisation. Managers
should be able to analyse the organisation’s goals and task requirements
and determine to what extent employees are capable of performing the
task they wish to delegate. They should be able to trust their employees
and have faith in their ability to complete the task successfully. When
employees cannot perform the job effectively, the manager’s job is to
teach them how to do it.
15.8.5 The delegation process
We have discussed how essential the delegation process is to the
manager. Similarly, the process is also essential to the growth and wellbeing of subordinates. Delegation does not take place automatically – it
is something that a manager must initiate. Conditions are constantly
changing in today’s organisations, so it is important for managers to
review the changing requirements with their subordinate staff. Of
course, in the case of new staff members, more time is required to
ensure that they understand their jobs. Figure 15.10 illustrates the steps
to be followed in the delegation process.
1
Decide on the
tasks to be
delegated
2
Decide who
should
perform the
tasks
3
Provide
resources
4
Delegate
6
Feedback
Figure 15.10: The delegation process
366
CONTEMPORARY MANAGEMENT PRINCIPLES
5
Step in
CHAPTER 15 Principles of organising
Each of the steps in the delegation process is discussed in more detail
below:
1. Decide on the tasks to be delegated. Tasks of a repetitive nature,
or minor chores, can easily be delegated. It is important, however,
to delegate more challenging tasks in order to develop employees
and create self-confidence. Try delegating the tasks that you know
how to do best.
2. Decide who should perform the tasks. In this instance, the time
available, the competency required, and the experience of the
subordinate should be taken into account. You may also want to
rotate certain tasks among employees in order to create a more
flexible workforce.
3. Provide sufficient resources for carrying out the delegated
task. These resources include people, financial, physical (such
as computers) and information resources. Without sufficient
resources, the subordinate cannot perform the task. This is the
nature of authority. All too often the manager delegates the
work to be done, but fails to give the individual control over the
necessary resources to perform the task.
4. Delegate the assignment. The delegating manager should brief the
employee by providing all the relevant information on the task to
be performed, including expected outcomes. He or she will not
normally prescribe the methods to be used in performing the task,
unless they are not known to the subordinate. Open channels
of communication should exist between the manager and the
subordinate regarding the delegated tasks.
5. Be prepared to step in, if necessary. Problems could be
experienced with the execution of a task if resources are
insufficient, or if the subordinate experiences difficulties or lacks
performance skills. Managers should be prepared to assist in cases
where it may be necessary, and the subordinate should be made
aware of this.
6. Establish a feedback system. This is vital because the outcome
of the delegation process is important information that serves as
input for the next delegation process.
CONTEMPORARY MANAGEMENT PRINCIPLES
367
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or applicable copyright law.
Part IV: Organising
CHAPTER SUMMARY
1. Differentiate between the concepts organising, organisation and organisational
structure.
The term ‘organising’ refers to the process of creating a structure for the organisation
that will enable its employees to work effectively towards its vision, mission, goals and
objectives. The end result of the organisation process is referred to as the ‘organisation’. The
basic framework that illustrates the formal relationships between responsibilities, tasks, and
people in the organisation, is referred to as the ‘organisational structure’.
2. Expound on the importance of organising in attaining the goals and objectives of the
organisation.
Reasons why organising is indispensible for the attainment of goals and objectives in an
organisation, include the following:
• leads to an organisational structure that indicates clearly who is responsible for which
tasks
• employees will be expected to account for the outcomes, positive or negative, for that
portion of the work directly under their control
• ensures that communication is effective and that all information required by managers and
employees at all levels of the organisation effectively reaches them
• helps managers deploy resources meaningfully
• enhances the principle of synergy, effectiveness and quality of the work performed
• workload is divided into activities to be performed by an individual or a group of individuals
• means that a variety of tasks, procedures and resources can be grouped systematically
• related tasks and activities of employees are grouped together meaningfully in specialised
sections, departments or business units so that experts in various fields can deal with their
specialised tasks
• organisational structure is responsible for creating a mechanism to coordinate the
activities in the entire organisation.
3. Describe the steps to follow in designing an organisational structure.
These steps are:
1. outline the tasks and activities
2. design jobs and assign them to employees
3. define relationships between individual workers and work groups
4. develop an organisational design
5. implement a control mechanism to ensure that the chosen organisational structure enables
the organisation to attain its mission and goals.
4. Explain the principles of organising that should be considered in designing an
organisational structure.
The following principles play an important role in designing an organisational structure:
• unity of command
368
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Chapter 15 Principles of organising
• chain of command
• span of control
• division of work
• standardisation
• coordination
• responsibility
• authority
• accountability
• power
• delegation
• downsizing
• delayering
• flexibility.
5. Explain the term authority.
Authority is the right to make decisions, issue orders and use resources. The following are
important principles pertaining to authority:
• delegation of authority
• formal authority
• informal authority
• scope of authority
• line authority
• staff authority
• micro-management
• centralised authority
• decentralised authority.
6. Describe the departmentalisation approach to organisational structure.
An organisational structure refers to the arrangement of positions into work units
or departments and the interrelationship among them within an organisation.
Departmentalisation refers to the grouping of related activities into units or departments.
Various options in terms of departmentalisation exist, such as the following:
• functional departmentalisation
• product departmentalisation
• location departmentalisation
• customer departmentalisation
• multiple departmentalisation
• matrix departmentalisation
• divisional departmentalisation
• network structure
Contemporary management prinCiples
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369
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or applicable copyright law.
Part IV: Organising
• new venture units
• team approach
• virtual network approach.
7. Propose recommendations regarding the design or redesign of jobs as a motivational
factor.
Once the organisational structure is in place, jobs need to be designed to motivate the
incumbents of the various positions in the structure to contribute to the organisation’s
success. The following principles relate to this:
• job design – the process of combining the tasks that each employee is responsible for
• job specialisation – narrowing down of activities to simple, repetitive routines
• job expansion – making jobs less specialised
• job rotation – performing different jobs for a set period of time
• job enlargement – job carries a wider range of activities of approximately the same level of
skill
• job enrichment – the process of increasing the number of tasks and the control over the job.
8. Design and provide implementation guidelines for a delegation process.
Delegation is the process whereby managers assign a portion of their workload to others. The
following principles are important as far as delegation is concerned:
1. Explain the reason(s) for delegating.
2. Set clear standards and goals.
3. Ensure clarity of authority and responsibility.
4. Involve subordinates.
5. Request the completion of tasks.
6. Provide performance training.
7. Provide feedback to the subordinate.
There are numerous advantages and disadvantages associated with delegation. It is important
for a manager to be aware of these, as well as of the various obstacles to effective delegation
and ways or strategies to overcome obstacles. The delegation process, of which the steps
are listed below, provides a framework for managers to assign a portion of their workload
effectively to others:
Step 1: Decide on the tasks to be delegated
Step 2: Decide who should perform the tasks
Step 3: Provide sufficient resources for carrying out the delegated task
Step 4: Delegate the assignment
Step 5: Be prepared to step in if need be
Step 6: Establish a feedback system.
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CHAPTER 15 Principles of organising
KEY TERMS
accountability
authority
centralisation
chain of command
coordination
decentralisation
delayering
delegation
departmentalisation
division of work
downsizing
high involvement
job design
network structures
new venture units
organisation
organisational chart
organisational design
organisational structure
organising
pooled interdependence
power
product departmentalisation
reciprocal interdependence
responsibility
sequential interdependence
span of control
specialisation
standardisation
team approach
unity of command
virtual network organisation
REVIEW QUESTIONS
1. Differentiate between the concepts ‘organising’, ‘organisation’ and ‘organisational structure’.
2. Organising is one of the fundamental functions of management. Explain the reasons for its
importance.
3. To design an organisational structure, managers need to follow a sequence of steps. Describe
these steps.
4. Explain the principles of organising that should be considered when designing an organisational
structure.
5. Discuss the term ‘authority’ and differentiate between the various kinds of authority.
6. Describe the departmentalisation approach to organisational structure. In your answer, you should
refer to the various options in terms of departmentalisation and the circumstances in which each
option is appropriate.
7. Explain how a manager can design jobs to motivate incumbents of the different positions in the
formal organisational structure so that it contributes towards the organisation’s goals and objectives.
8. Provide an explanation of delegation, by referring to the principles pertaining to effective delegation,
the advantages thereof, obstacles associated with effective delegation and the steps involved in the
delegation process.
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PART IV: Organising
END NOTES
1
[Online] Available: http://www.flysaa.com/. Accessed on 23 May 2013.
2
Thompson, J.D. 1976 in Organisations and Beyond. Rushing, W.A. & Zald, M.N. (Editors). Lexington, Mass: DC
Heath, p 41.
3
Lussier, R.N. 2012. Management fundamentals. 5th edition. South-Western: Cengage Learning, p 174.
4
Lussier, op. cit., pp 178–179.
5
Vizard, M. 2001. Above the noise: When computing is an organisational liability – after the September 11 attacks,
companies are rethinking decisions to centralise computing. InfoWorld, 23(42): 8.
6
Daft, R.L. 2005. Management. 7th edition. Australia: Thomson, p 347.
7
Lussier, R.N. 2006. Management Fundamentals: Concepts, Applications, Skill Development. 3rd edition. Mason:
Thomson South-Western College Publishing, p 204.
8
Lussier, op. cit., p 183.
9
Kennett, M. 2011. Remote control. Management today. March: 46–47.
10
West, M. & Patterson, M. 1998. Profitable personnel. People Management, 4(1): 28–32.
11
Campbell, R.H., Skinner, A.S. & Todd, W.B. (Editors).1976. Adam Smith: An Inquiry into the Nature and Causes of the
Wealth of Nations. Oxford: Clarendon Press, p 15.
12
372
Herzberg, F. 1968. Work and the Nature of Man. London: Crosby Lockwood Staples.
CONTEMPORARY MANAGEMENT PRINCIPLES
Chapter 16
Value chain and e-business
Tersia Brevis
OPENING CASE
The Benetton Group1
The Benetton Group is a global fashion brand
based in Treviso, Italy. The name comes from the
Benetton family who founded the company in
1965. The Group now employs more than 10 000
people and is represented in 120 countries with
an annual turnover exceeding 2 billion euro per
year. The company’s core business is their clothing
lines, namely the United Colors of Benetton,
Undercolors of Benetton, Sisley and Playlife.
Their products include womenswear, menswear,
childrenswear and underwear and they have
expanded into perfumes, stationery, eyewear and
travel bags.
The Group had its beginning with Giuliana
Benetton, one of four siblings, who started knitting
brightly coloured wool sweaters from home. In the
late fifties through the early sixties, wool sweaters
were not available in many colours. Brother Luciano
recognised his sister’s talents in producing brightly
coloured wool sweaters. With the sale of a bicycle
and an accordion for 30 000 lire, they purchased a
secondhand hosiery knitting machine and founded
the Benetton Group. The other two Benetton
siblings (Gilberto and Carlo) were involved from
the start of the business.
Giuliana put together a collection of brightly
coloured sweaters which sold immediately to local
stores in their area. The collection soon expanded
to 36 pieces. Giuliana soon had to employ some
young women whom Luciano had to transport to
work.
Luciano, being an innovative leader, instituted a
number of key initiatives that took Benetton from a
small family business to a giant company. Sales were
only done through specialised knitwear stores with
whom Benetton formed close relations. Next, an
incentive discount was offered for cash payment
towards inventory on delivery. In a drive to lower
production cost, a technique observed in Scotland
was introduced to beat raw wool in water for
softening it to have a cashmere feel to it. Second
hand knitting machines were also bought and
refurbished which worked perfectly well.
Benetton further concentrated on expanding
their production and distribution capabilities. A
new dyeing technique they patented enabled
them to produce unbleached woollen sweaters
on demand through 450 subcontractors. A stateof-the-art warehouse enabled them to efficiently
manage inventory and distribution.
The acknowledged reasons contributing