CIMA Official
Learning System
Managerial Level
E2 — Enterprise
Management
Ann Norton
Jenny Hughes
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Contents
The CIMA Learning System
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Acknowledgements
How to use your CIMA Learning System
Guide to the Icons used within this Text
Study technique
Paper E2 — Enterprise Management
1
The Nature of Strategic Management
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
Learning Outcomes
Introduction to the nature of strategic management
The concept of strategy
1.2.1 Common themes in strategy
Levels of strategy
A model of the rational strategy process
1.4.1 Mission, objectives and goals
1.4.2 The link between mission, goals and objectives
1.4.3 The goal structure
1.4.4 External environmental and competitive analysis
1.4.5 Internal analysis/position audit
1.4.6 Corporate appraisal (SWOT)
1.4.7 Strategic options and choice
1.4.8 Strategy implementation
1.4.9 Review and control
Criticisms of the rational model of strategy formulation
A formal top-down strategy process
1.6.1 Benefits of the formal top-down approach to strategy
1.6.2 Drawbacks of the formal top-down approach to strategy
Strategy and small businesses
Achieving competitive advantage – alternative perspectives:
resource-based view versus the positioning view
1.8.1 Competitive advantage and economic theory
1.8.2 The positioning approach
1.8.3 Resource-based view
1.8.4 Principles of resource-based theory
1.8.5 The implications of the resource-based view for strategy
development
Alternative approaches to formulating strategy
1.9.1 Emergent strategies
1.9.2 Logical incrementalism
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1.10 Stakeholders
1.10.1 The influence of stakeholders
1.10.2 The Mendelow matrix
1.10.3 Assessing power of stakeholders
1.10.4 Assessing interest of stakeholders
1.10.5 Strategies to deal with stakeholders
1.10.6 Conflict between stakeholders
1.11 Meeting the objectives of shareholders
1.11.1 Maximisation of shareholder wealth as an objective
1.11.2 Competing objectives
1.11.3 Resolving competing objectives
1.12 Summary
Section A type questions
Section B type questions
Section A solutions
Section B solutions
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The Nature of the Competitive Environment
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
Learning Outcomes
Introduction
Environmental impact assessment
Different stages in environmental analysis
2.3.1 Analysing the macro-environment
2.3.2 Analysing the micro-environment/industry environment
2.3.3 Industry life cycle analysis
2.3.4 Illustration of external environmental analysis – Example
of a car manufacturer
2.3.5 Evaluation of environmental models
2.3.6 Survival and success factors
Causes of environmental uncertainty
2.4.1 Impact of uncertainty
2.4.2 Has uncertainty really increased?
Competitor analysis
2.5.1 The importance of competitor analysis
2.5.2 Competitor analysis – key concepts
2.5.3 Levels of competitors
2.5.4 Gathering competitor intelligence
2.5.5 Forecasting competitors’ response profiles
Competitor accounting
2.6.1 Evaluation of barriers to entry
2.6.2 Estimate competitors’ costs
The global economic environment
2.7.1 The new global economy
National competitive advantages
2.8.1 Porter’s Diamond
2.8.2 Demand conditions
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2.8.3 Related and supporting industries
2.8.4 Factor conditions
2.8.5 Firm structure, strategy and rivalry
2.8.6 Other events
2.8.7 National competitive advantage
2.8.8 Losing competitive advantage
2.8.9 Porter’s strategic prescriptions
2.8.10 Comment on Porter’s Diamond
Country analysis and political risk
2.9.1 Political risk
Sources of information for environmental analysis
2.10.1 Environmental scanning
2.10.2 Accessing environmental information
2.10.3 Detailed environmental analysis
2.10.4 Categorisation of information sources
Summary
Section A type question
Section B type questions
Section A solutions
Section B solutions
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Contemporary Perspectives in Strategy
Development
3.1
3.2
3.3
3.4
3.5
3.6
Learning Outcome
Introduction
Internationalisation and globalisation
Complex organisation forms
3.3.1 Strategic alliances
3.3.2 Illustrations of network organisations
Theoretical basis of network organisations – transactions cost theory
3.4.1 Assest specificity – an illustration
3.4.2 A critique of transactions cost theory
Social responsibility and strategic decisions
3.5.1 Must social responsibility conflict with benefiting
shareholders?
3.5.2 An ecological perspective and environmental
responsibilities
3.5.3 Shareholder wealth and ethics
3.5.4 Implications of ethics for the chartered management
accountant
Summary
Section A type questions
Section B type questions
Section A solutions
Section B solutions
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Understanding Project Management
Learning Outcomes
4.1
Introduction
4.2
Projects and project management – definitions
4.3
Characteristics of a project
4.4
The project life cycle
4.4.1 The project life-cycle phases
4.4.2 An alternative project life cycle – an iterative process
4.4.3 Project approaches
4.4.4 Other project management frameworks: 4, 5, 7 or 9?
4.5
The project as a conversion process
4.5.1 Inputs
4.5.2 Constraints
4.5.3 Outputs
4.5.4 Mechanisms
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Strategy and scope
4.7
Projects and the project manager
4.7.1 The roles of the project manager
4.7.2 The responsibilities of the project manager
4.7.3 Organisation
4.7.4 The project manager and project planning
4.7.5 The project manager and controlling
4.8
The skills of the project manager
4.8.1 Leadership skills
4.8.2 Communication skills
4.8.3 Negotiation skills
4.8.4 Delegation skills
4.8.5 Problem-solving skills
4.8.6 Change-management skills
4.9
Projects and people – project teams
4.9.1 Problems of project team-working
4.9.2 Unclear team goals and objectives
4.9.3 Lack of team structure
4.9.4 Lack of definition of roles
4.9.5 Poor leadership
4.9.6 Poor team communication
4.9.7 Lack of commitment
4.9.8 Project management and team-building
4.9.9 Project team meetings
4.10 Project stakeholders
4.10.1 Managing stakeholder expectations
4.10.2 Stakeholder conflict
4.11 Projects and organisation structures and support
4.11.1 Matrix organisations
4.11.2 Project office
4.12 Why some projects fail
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4.13
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Examples of projects
4.13.1 One successful project – ongoing
4.13.2 One not so successful project
Summary
Section A type questions
Section B type questions
Section A solutions
Section B solutions
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The Process of Project Management
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
Learning Outcomes
Introduction
The project management process
Project initiation
5.3.1 Setting project objectives
5.3.2 Identifying project proposals
5.3.3 Formation of project proposals
5.3.4 Setting project requirements
5.3.5 Assessing project feasibility
5.3.6 Risk and uncertainty
5.3.7 Uncertainty
5.3.8 SWOT analysis
5.3.9 The project Initiation Document
Project planning
5.4.1 Detailed project planning
5.4.2 Project objective constraints
Tools and techniques to aid project planning
5.5.1 Work breakdown structure
5.5.2 Gantt charts
5.5.3 Network analysis
5.5.4 Slack or float
5.5.5 An alternative method for constructing network diagrams:
activity on node
5.5.6 Milestones and control gates
5.5.7 Project evaluation and review technique (PERT)
5.5.8 Coping with risk and uncertainty
Project management (PM) software
5.6.1 PM software functions
5.6.2 Advantages of using PM software
5.6.3 PM software pitfalls
Executing or performing the project
Monitoring and controlling the project
5.8.1 Making effective control decisions
5.8.2 Earned value management
5.8.3 PRINCE2 methodology
5.8.4 Other project management methodologies
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5.9
5.10
5.11
Project completion and closure
5.9.1 Organising project documentation
5.9.2 Collection of receipts and making final payments
Post-completion review and audit
5.10.1 Post-project review meetings
5.10.2 Post-completion audit
5.10.3 Justifying the cost of post-completion audit
5.10.4 Continuous improvement
Summary
Section A type questions
Section B type questions
Section A solutions
Section B solutions
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Management
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
Learning Outcomes
Introduction
Classical and contemporary theories of management
6.2.1 The Classical School
6.2.2 The human relations school
6.2.3 Systems theory
6.2.4 Contingency theory
6.2.5 Peter Drucker: management by objectives (MBO)
6.2.6 Contemporary perspectives on organisations
Power, authority, responsibility and delegation
6.3.1 Power and authority
6.3.2 Authority as legitimate power
6.3.3 Organisational power
6.3.4 Responsibility
6.3.5 Delegation
Management and the Role of Managers
6.4.1 Managers or Leaders
Different Perspectives of Leadership
6.5.1 Personality, trait or qualities theories of leadership
6.5.2 Management styles
6.5.3 One best style?
Contingency and Situational theories of leadership
6.6.1 John Adair action-centred leadership
6.6.2 Fiedler
6.6.3 Hersey and Blanchard
Transformational leaders
Entrepreneurs
Organisational culture
6.9.1 Different levels of culture
6.9.2 Models for categorising culture
6.9.3 Culture and organisational effectiveness
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6.9.4 Culture – The International Dimension
6.9.5 Culture and control
Managing in different cultures
6.10.1 National cultures
6.10.2 Other cultural characteristics
6.10.3 Changing behaviour
Mentoring
Summary
Section A type questions
Section B type questions
Section A solutions
Section B solutions
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Management of Relationships in the Working
Environment
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
7.10
Learning Outcomes
Introduction
The meaning of groups and teams
Types of groups
7.3.1 Formal groups
7.3.2 Informal groups
7.3.3 Reference groups
7.3.4 Self directed and autonomous groups
Effective group performance
7.4.1 Formation and development
7.4.2 Group cohesiveness
7.4.3 Team roles
Group dynamics and team performance
7.5.1 High-performance teams
Problems with groups
Communication
7.7.1 Oral and written communication
7.7.2 The communication process
Effective meetings
7.8.1 The roles of team members in meetings
7.8.2 Problems with meetings
Negotiation
7.9.1 The aim of negotiation
7.9.2 Phases involved in negotiation
7.9.3 Negotiation approaches
Management of the finance function
7.10.1 Business Process Outsourcing (BPO)
7.10.2 Outsourcing non-core activities
7.10.3 Benefits of outsourcing
7.10.4 Drawbacks of outsourcing
7.10.5 Shared service centres (SSC)
7.10.6 Benefits of shared services
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7.10.7 Embedding finance personnel in business and strategic
decision processes
7.10.8 Contribution of finance to other functions
7.11 The finance function and external stakeholders
7.11.1 External reporting
7.12 Summary
Section A type questions
Section B type questions
Section A solutions
Section B solutions
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Control Systems in Organisations
Learning Outcomes
Introduction
The meaning of control
A review of management theorists and control
Basic control models
Types of organisational control
8.5.1 Personal centralised control
8.5.2 Bureaucratic control
8.5.3 Output control
8.5.4 Clan or cultural control
8.6
Objectives of internal control systems
8.7
Internal control systems
8.8
Levels of control
8.8.1 Strategic control
8.8.2 Tactical control
8.8.3 Operational control
8.9
Effective control systems
8.10 Practical difficulties with control systems
8.11 An example of a control system in practice: HR and staff
performance appraisal
8.11.1 Strategic level
8.11.2 Tactical level – performance appraisal and the
employment contract
8.12 Health and safety
8.12.1 Safety committee and representatives
8.12.2 Managing safety
8.12.3 Working with contractors
8.12.4 Health and safety training
8.13 The nature of business ethics
8.13.1 Factors affecting ethical obligations
8.13.2 Developing an ethical organisation
8.13.3 Example of an ethical issue
8.1
8.2
8.3
8.4
8.5
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Professional ethics
8.14.1 Fundamental principles
8.14.2 Conceptual framework
8.15 Corporate governance
8.15.1 What is corporate governance
8.15.2 The earliest considerations of corporate governance
8.15.3 The combined code principles of corporate governance
8.15.4 The benefits of corporate governance
8.16 Summary
Section A type questions
Section B type questions
Section A solutions
Section B solutions
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Conflict and Discipline
9.1
9.2
9.3
9.4
9.5.
9.6
9.7
9.8
Learning Outcomes
Introduction
The nature of conflict in organizations
9.2.1 The symptoms of conflict
9.2.2 Horizontal conflict
9.2.3 Vertical conflict
9.2.4 Handling conflict
9.2.5 Managing intergroup conflict
9.2.6 Industrial relations and conflict
9.2.7 Resolutions of industrial relations conflict
Discipline
9.3.1 The meaning of discipline
9.3.2 Self-discipline
9.3.3 Disciplinary situations
9.3.4 Taking disciplinary action
9.3.5 Immediacy: Douglas McGregor’s ‘hot stove rule’
9.3.6 Disciplinary procedures
9.3.7 ACAS code of practice
Grievance procedures
Tribunal applications
9.5.1 Resolving disputes without a tribunal hearing
Dismissal, redundancy and job insecurity
Fairness and commitment in the work place
9.7.1 Diversity and equal opportunities
9.7.2 Working time directives
9.7.3 Child care
Summary
Section A type questions
Section B type questions
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Section A solutions
Section B solutions
Preparing for the Examination
Revision technique
Getting down to work
Tips for the final revision phase
Format of the examination
Section A type questions
Section B type questions
Background
The World Youth Indoor Games, November 2004
Project sponsor
Farchester Games Co-ordination Committee (FGCC)
Definition and objectives of the project
Telecommunications and Information Technology
Software requirements
Project activities
Critical project dimensions
Project status
Section A solutions
Section B solutions
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Exam Q & As
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Index
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The CIMA
Learning System
Acknowledgements
Every effort has been made to contact the holders of copyright material, but if any here
have been inadvertently overlooked the publishers will be pleased to make the necessary
arrangements at the first opportunity.
How to use your CIMA Learning System
This Enterprise Management Learning System has been devised as a resource for students
attempting to pass their CIMA exams, and provides:
a detailed explanation of all syllabus areas;
extensive ‘practical’ materials, including readings from relevant journals;
● generous question practice, together with full solutions;
● an exam preparation section, complete with exam standard questions and solutions.
●
●
This Learning System has been designed with the needs of home-study and distancelearning candidates in mind. Such students require very full coverage of the syllabus topics,
and also the facility to undertake extensive question practice. However, the Learning
System is also ideal for fully taught courses.
The main body of the text is divided into a number of chapters, each of which is organised on the following pattern:
Detailed learning outcomes expected after your studies of the chapter are complete. You
should assimilate these before beginning detailed work on the chapter, so that you can
appreciate where your studies are leading.
● Step-by-step topic coverage. This is the heart of each chapter, containing detailed explanatory text supported, where appropriate, by worked out examples and exercises. You
should work carefully through this section, ensuring that you understand the material
being explained and can tackle the examples and exercises successfully. Remember that
in many cases knowledge is cumulative: if you fail to digest earlier material thoroughly,
you may struggle to understand later chapters.
● Readings and activities. Most chapters are illustrated by more practical elements, such
as relevant journal articles or other readings, together with comments and questions
designed to stimulate discussion.
●
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THE CIMA LEARNING SYSTEM
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ENTERPRISE MANAGEMENT E2
Question practice. The test of how well you have learned the material is your ability to
tackle exam-standard questions. Make a serious attempt at producing your own answers,
but at this stage do not be too concerned about attempting the questions in exam conditions. In particular, it is more important to absorb the material thoroughly by completing a full solution than to observe the time limits that would apply in the actual exam.
● Solutions. Avoid the temptation merely to ‘audit’ the solutions provided. It is an illusion
to think that this provides the same benefits as you would gain from a serious attempt of
your own. However, if you are struggling to get started on a question, you should read
the introductory guidance provided at the beginning of the solution, and then make
your own attempt before referring back to the full solution.
●
Having worked through the chapters, you are ready to begin your final preparations for
the examination. The final section of this CIMA Learning System provides you with the
guidance you need. It includes the following features:
A brief guide to revision technique.
● A note on the format of the examination. You should know what to expect when you
tackle the real exam, and in particular the number of questions to attempt, which questions are compulsory and which optional, and so on.
● Guidance on how to tackle the examination itself.
● A table mapping revision questions to the syllabus learning outcomes allowing you to
quickly identify questions by subject area.
● Revision questions. These are of exam standard and should be tackled in exam conditions, especially as regards the time allocation.
● Solutions to the revision questions. As before, these indicate the length and the quality
of solution that would be expected of a well-prepared candidate.
●
If you work conscientiously through this CIMA Learning System according to the guidelines above, you will be giving yourself an excellent chance of exam success. Good luck
with your studies!
Guide to the Icons used within this Text
Key term or definition
Equation to learn
Exam tip or topic likely to appear in the exam
Exercise
Question
Solution
Comment or Note
ENTERPRISE MANAGEMENT
xv
Passing exams is partly a matter of intellectual ability, but however accomplished you are
in that respect you can improve your chances significantly by the use of appropriate study
and revision techniques. In this section we briefly outline some tips for effective study during the earlier stages of your approach to the exam. Later in the text we mention some
techniques that you will find useful at the revision stage.
THE CIMA LEARNING SYSTEM
Study technique
Planning
To begin with, formal planning is essential to get the best return from the time you spend
studying. Estimate how much time in total you are going to need for each subject that you
face. Remember that you need to allow time for revision as well as for initial study of the
material. The amount of notional study time for any subject is the minimum estimated
time that students will need to achieve the specified learning outcomes set out earlier in
this chapter. This time includes all appropriate learning activities, for example face-toface tuition, private study, directed home study, learning in the workplace, revision time,
and so on. You may find it helpful to read Better Exam Results by Sam Malone, CIMA
Publishing, ISBN: 0 7506 6357 X. This book will provide you with proven study
techniques. Chapter by chapter it covers the building blocks of successful learning and
examination techniques. Check
The notional study time for Enterprise Managerial is 200 hours. Note that the standard
amount of notional learning hours attributed to one full-time academic year of approximately 30 weeks is 1200 hours.
By way of example, the notional study time might be made up as follows:
Hours
Face-to-face study: up to
Personal study: up to
‘Other’ study – e.g. learning in the workplace, revision, etc.: up to
60
100
40
200
Note that all study and learning-time recommendations should be used only as a guideline
and are intended as minimum amounts. The amount of time recommended for face-to-face
tuition, personal study and/or additional learning will vary according to the type of course
undertaken, prior learning of the student, and the pace at which different students learn.
Now split your total time requirement over the weeks between now and the examination. This will give you an idea of how much time you need to devote to study each week.
Remember to allow for holidays or other periods during which you will not be able to study
(e.g. because of seasonal workloads). With your study material before you, decide which chapters you are going to study in each week, and which weeks you will devote to revision and
final question practice. Prepare a written schedule summarising the above – and stick to it!
The amount of space allocated to a topic in the study material is not a very good guide
as to how long it will take you. Rather, it is essential to know your syllabus. As your course
progresses you will become more familiar with how long it takes to cover topics in sufficient depth. Your timetable may need to be adapted to allocate enough time for the whole
syllabus.
THE CIMA LEARNING SYSTEM
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Tips for effective studying
1. Aim to find a quiet and undisturbed location for your study, and plan as far as possible
to use the same period of time each day. Getting into a routine helps to avoid wasting
time. Make sure that you have all the materials you need before you begin, so as to
minimise interruptions.
2. Store all your materials in one place, so that you do not waste time searching for items
around the house. If you have to pack everything away after each study period, keep
them in a box, or even a suitcase, which will not be disturbed until the next time.
3. Limit distractions. To make the most effective use of your study periods you should be
able to apply total concentration, so turn off the TV, set your phones to message mode,
and put up your ‘do not disturb’ sign.
4. Your timetable will tell you which topic to study. However, before diving in and becoming engrossed in the finer points, make sure you have an overall picture of all the areas
that need to be covered by the end of that session. After an hour, allow yourself a short
break and move away from your books. With experience, you will learn to assess the
pace you need to work at. You should also allow enough time to read relevant articles
from newspapers and journals, which will supplement your knowledge and demonstrate a wider perspective.
5. Work carefully through a chapter, making notes as you go. When you have covered
a suitable amount of material, vary the pattern by attempting a practice question.
Preparing an answer plan is a good habit to get into, while you are both studying and
revising, and also in the examination room. It helps to impose a structure on your solutions, and avoids rambling. When you have finished your attempt, make notes of any
mistakes you made, or any areas that you failed to cover or covered only skimpily.
6. Make notes as you study, and discover the techniques that work best for you. Your
notes may be in the form of lists, bullet points, diagrams, summaries, ‘mind maps’, or
the written word, but remember that you will need to refer back to them at a later date,
so they must be intelligible. If you are on a taught course, make sure you highlight any
issues you would like to follow up with your lecturer.
7. Organise your paperwork. There are now numerous paper storage systems available to
ensure that all your notes, calculations and articles can be effectively filed and easily
retrieved later.
ENTERPRISE MANAGEMENT
Syllabus Overview
Paper E2 moves away from the emphasis on functional knowledge within Paper E1
Enterprise Operations, towards an holistic, integrated view of management across the
organisation. Building on important concepts in strategic management, this paper develops tools and techniques for identifying the key types of competitive environment. The
skills and tools of project management are also addressed. Finally, the paper introduces
the skills and tools needed to work with, manage and develop teams. This includes both
the legal aspects of managing individuals, as well as the softer elements of negotiation and
leadership skills.
Syllabus Structure
The syllabus comprises the following topics and study weightings:
A
B
C
Strategic Management and Assessing the
Competitive Environment
Project Management
Management of Relationships
30%
40%
30%
Assessment Strategy
There will be a written examination paper of 3 hours, plus 20 minutes of pre-examination
question paper reading time. The examination paper will have the following sections:
Section A – 50 marks
Five compulsory medium answer questions, each worth 10 marks. Short scenarios may be
given, to which some or all questions relate.
Section B – 50 marks
One or two compulsory questions. Short scenarios may be given, to which questions
relate.
THE CIMA LEARNING SYSTEM
Paper E2 — Enterprise Management
xvii
E2 – A. Strategic Management and Assessing the Competitive Environment (30%)
Learning Outcomes
Lead
Content
Component
PEST analysis and its derivatives. (A, B)
The use of stakeholder mapping. (A, B)
● Qualitative approaches to competitive analysis. (A, B)
● Competitor analysis and competitive strategies (both qualitative and
quantitative tools of competitor analysis will be used). (A, B)
● Sources, availability and quality of data for environmental analysis. (A, B)
● Porter’s Five Forces model and its use for assessing the external
environment. (A, B)
● Porter’s Diamond and its use for assessing the competitive advantage of
nations. (A, B)
1. Discuss different
competitive environments
and key external
characteristics of these
environments. (4)
(a) Discuss the nature of competitive
environments.
(b) Distinguish between different types of
competitive environments.
●
2. Discuss important
developments in strategic
management. (4)
(a) Discuss concepts in established and
emergent thinking in strategic management.
(b) Compare and contrast approaches to
strategy formulation.
(c) Explain the relationships between different
levels of strategy in organisations.
●
●
Perspectives on the strategic management of the firm (including transaction
cost, resource-based view and ecological perspective). (A)
● Approaches to strategy (e.g. rational, adaptive, emergent, evolutionary or
system–based views. (B)
● Levels of strategy (e.g. Corporate, business-level, functional) (Note:
candidates are not expected to identify or evaluate options). (C)
ENTERPRISE MANAGEMENT E2
Learning Outcomes and Indicative Syllabus Content
xviii
THE CIMA LEARNING SYSTEM
E2 – B. Project Management (40%)
Learning Outcomes
1. Discuss tools and
techniques of project
management. (4)
Content
Component
The definition of a programme, a project, project management, and the
contrast with repetitive operations and line management. (A)
● 4-D and 7-S models to provide an overview of the project process, and the
nine key process areas (PMI) to show what happens during each part of the
process. (B)
● The benefits and limitations of having a single process for managing
projects. (C)
● Key tools for project managers (e.g. Work Breakdown Structure, network
diagrams (Critical Path Analysis), Gantt charts, resource histograms, gates
and milestones). (E, F)
● Earned Value Management. (H)
● Evaluation of plans for projects. (E)
● The key processes of PRINCE2 and their implications for project staff.
(B, C, D, E, F, H)
● Managing scope at the outset of a project and providing systems for
configuration management/change control. (E, F, H)
● The production of basic plans for time, cost and quality. (E, F)
● Scenario planning and buffering to make provision for uncertainty in projects,
as part of the risk and opportunities management process. (J, F)
● Organisational structures, including the role of the project and matrix
organisations, and their impact on project achievement. (F, G)
● Teamwork, including recognising the life-cycle of teams, team/group
behaviour and selection. (G)
● Control of time, cost and quality through performance and conformance
management systems. (J)
● Project completion, documentation, completion reports and system
close-down. (I)
● The use of post-completion audit and review activities and the justification
of their costs. (I, J)
●
ENTERPRISE MANAGEMENT
(a) Identify a project, a programme and their
attributes.
(b) Apply suitable structures and frameworks
to projects to identify common project
management issues.
(c) Construct an basic outline of the process of
project management.
(d) Identify the characteristics of each phase in
the project process.
(e) Apply key tools and techniques, including
the evaluation of proposals.
(f ) Produce a basic project plan incorporating
strategies for dealing with uncertainty, in
the context of a simple project.
(g) Identify structural and leadership issues
that will be faced in managing a project
team.
(h) Compare and contrast project control
systems.
(i) Discuss the value of post-completion audit.
(j) Apply a process of continuous
improvement to projects.
xix
THE CIMA LEARNING SYSTEM
Lead
Learning Outcomes
Lead
Component
2. Evaluate the relationship of
the project manager to the
external environment. (5)
(a) Produce a strategy for a project.
(b) Recommend strategies for the
management of stakeholder perceptions
and expectations.
(c) Explain the roles of key players in a project
organisation.
Content
Determining and managing trade-offs between key project objectives of
time, cost and quality. (A)
● Stakeholders (both process and outcome), their power and interest, and
their needs and expectations, marketing and communications to enhance
perceptions. (B)
● Roles of support structures, including project management offices, as well as
project sponsors (SROs), boards, champions, managers and clients. (C)
●
ENTERPRISE MANAGEMENT E2
E2 – B. Project Management (40%) (Cont’d)
xx
THE CIMA LEARNING SYSTEM
E2 – C. Management of Relationships (30%)
Learning Outcomes
Content
Lead
Component
1. Discuss concepts
associated with the
effective operation of an
organisation. (4)
(a) Discuss the concepts of power, bureaucracy,
authority, responsibility, leadership and
delegation.
(b) Demonstrate the importance of
organisational culture.
(c) Identify the nature and causes of conflict.
(d) Discuss alternative approaches to the
management of conflict.
●
2. Discuss the activities
associated with managing
people and their associated
techniques. (4)
(a) Analyse the relationship between managers
and their subordinates, including legal
aspects affecting work and employment.
(b) Discuss the roles of negotiation and
communication in the management
process, both within an organisation and
with external bodies.
(c) Discuss the effectiveness of relationships
between the finance function and other
parts of the organisation and with external
stakeholders.
(d) Identify tools for managing and controlling
individuals, teams and networks, and for
managing group conflict.
(e) Compare and contrast ways to deal
effectively with discipline problems.
(f ) Explain the process and importance of
mentoring junior colleagues.
(g) Analyse issues of business ethics and
corporate governance.
●
The concepts of power, authority, bureaucracy, leadership, responsibility and
delegation and their application to relationships within an organisation and
outside it. (A, B)
● Organisational culture: definition, classification, importance. (A, B)
● The sources of conflict in organisations and the ways in which conflict can
be managed to ensure that working relationships are productive and effective.
(C, D)
ENTERPRISE MANAGEMENT
Disciplinary procedures and their operation, including the form and
process of formal disciplinary action and dismissal (e.g. industrial tribunals,
arbitration and conciliation). (A, E)
● The nature and effect of legal issues affecting work and employment,
including the application of relevant employment law (i.e. relating to health,
safety, discrimination, fair treatment, childcare, contracts of employment and
working time). (A)
● Communication skills (i.e. types of communication tools and their use,
as well as the utility and conduct of meetings) and ways of managing
communication problems. (B, D)
● Negotiation skills. (B, D, E)
● Managing the finance function to maximise its value to the organisation
through lean operation (e.g. business process outsourcing, shared service
centres) and contribution to other functions (e.g. embedding finance
personnel in business and strategic decision processes). (C)
● Management of relationships with professional advisors (accounting, tax and
legal), auditors and financial stakeholders (investors and financiers) to meet
organisational objectives. (B, E)
xxi
THE CIMA LEARNING SYSTEM
Learning Outcomes
Lead
Content
Component
The principles of corporate governance and the CIMA Code of Ethics for
Professional Accountants, and their relevance to the role, obligations and
expectations of a manager. (G)
● How to lead and manage a team. (A, D, E)
● The role of a mentor, and the process of mentoring. (F)
● Motivating team members. (A, E)
● The use of systems of control within the organisation (e.g. employment
contracts, performance appraisal, reporting structures). (A, D)
●
ENTERPRISE MANAGEMENT E2
E2 – C. Management of Relationships (30%) (Cont’d)
xxii
THE CIMA LEARNING SYSTEM
1
The Nature of Strategic
Management
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The Nature of
Strategic Management
1
LEARNING OUTCOMES
By the end of this chapter you should be able to:
䉴
compare and contrast approaches to strategy formulation;
䉴
discuss concepts in established and emergent thinking in strategic management;
䉴
explain the relationship between different levels of strategy;
䉴
discuss the nature of competitive environments.
1.1
Introduction to the nature of strategic
management
The strategic management process is essentially concerned with the decisions organisations make about their future direction and the development and implementation of strategies which will enhance the competitiveness of organisations. There are many different
approaches to strategic management but they all have the aim of establishing the purpose
of the organisation and guiding managers on how to implement strategies to achieve
organisational goals.
This chapter will start by defining the concept of strategy. It will explain the various
activities involved in the strategic management process, based on the formal rational
approach to strategy. The ways in which organisations can gain competitive advantage will
also be explored. Some of the alternative approaches to strategic management will then be
explained. The final part of the chapter will discuss the concept of stakeholders and examine how different stakeholders can influence the strategy process.
1.2
The concept of strategy
Strategy has many different interpretations and dimensions. These characteristics distinguish
strategic issues from operational issues in organisations. Listed below are just some definitions:
1. Strategy. ‘A course of action, including the specification of resources required, to achieve a
specific objective.’ CIMA: Management Accounting: Official Terminology, 2005 edition p. 54.
3
4
STUDY MATERIAL E2
THE NATURE OF STRATEGIC MANAGEMENT
2. Strategic plan. ‘A statement of long-term goals along with a definition of the strategies and policies which will ensure achievement of these goals.’ CIMA: Management
Accounting: Official Terminology, 2005 edition p. 54.
3. Strategy is the direction and scope of an organisation over the long term. Which
achieves advantage in a changing environment through its configuration of resources and
competences with the aim of fulfilling stakeholder expectations.’ Johnson et al. (2008).
4. ‘The basic characteristic of the match an organisation achieves with its environment is
called its strategy.’ Hofer and Schendel (1978, p. 4).
5. ‘Corporate strategy is the pattern of major objectives, purposes and goals and essential policies or plans for achieving those goals, stated in such a way as to define what
business the company is in or is to be in and the kind of company it is or is to be.’
Andrews, cited in Lynch (2006).
6. ‘Corporate strategy is concerned with an organisation’s basic direction for the future:
its purpose, its ambitions, its resources and how it interacts with the world in which it
operates.’Lynch (2006).
1.2.1
Common themes in strategy
From these different definitions strategy is concerned with:
The purpose and long-term direction of the business.
The scope of an organisation’s activities and actions required to meet its objectives
(broad or narrow).
● Meeting the challenges from the firm’s business external environment, such as competitors and the changing needs of customers.
● Using the organisation’s internal resources and competencies effectively and building on
its strengths to meet environmental challenges.
● Delivering value to the people who depend on the firm, its stakeholders, such as customers and shareholders, to achieve competitive advantage.
●
●
Whatever interpretation is put on strategy, the strategic actions of an organisation will have
widespread and long-term consequences for the position of the organisation in the marketplace, its relationship with different stakeholders, and overall performance.
1.3
Levels of strategy
Strategy occurs at different levels in the organisation. Figure 1.1 provides a
simplified model of the hierarchy at which different strategies are made. At the
top of the hierarchy is where corporate strategy is made; this provides the framework
for the development of business strategy, which in turn provides the framework for
functional strategies. The different levels of strategy formulation are therefore interdependent in that one level should be consistent with the strategies at the next level.
Corporate strategy
The corporate centre is at the apex of the organisation. It is the head office of the firm and
will contain the corporate board.
ENTERPRISE MANAGEMENT
Corporate centre
of organisation
Business
strategy
Strategic business
unit
Strategic business
unit
Strategic business
unit
Functional
strategies
Financial strategy
Marketing
strategy
Human resources
strategy
etc.
Figure 1.1 Organisation chart showing corporate, strategic business unit and functional strategies.
From GIDO/CLEMENTS. Successful Project Management with Microsoft Project CD, 1E.
© 1999 South-Western, a part of Cengage Learning, Inc. Reproduced by permission.
www.cengage.com/permissions
Corporate strategy is typically concerned with determining the overall purpose and scope
of the organisation, in other words what type of business or businesses should the organisation be in. Common issues at this level include:
decisions on acquisitions, mergers and sell-offs or closure of business units;
relations with key external stakeholders such as investors, the government and regulatory
bodies;
● decisions to enter new markets or embrace new technologies (sometimes termed diversification strategies);
● development of corporate policies on issues such as public image, employment practices
or information systems.
●
●
Decisions at this level tend to complex and non-routine in nature because they often
involve a high degree of uncertainty based on what might happen in the future.
The formal planning approach to strategy assumes that all strategy is formulated at corporate level and then implemented in a ‘top-down’ manner by instructions to the business
divisions. During the 1980s, high-profile corporate planners like IBM, General Motors
and Ford ran into difficulties against newer and smaller ‘upstart’ competitors who seemed
to be more flexible and entrepreneurial. One consequence was the devolution of responsibility for competitive strategy to strategic business units (SBUs).
Business strategy
This level of strategy is concerned with how an operating or strategic business unit
approaches a particular market.
A strategic business unit (SBU) is defined by CIMA as: A section, usually a
division, within a larger organisation, that has a significant degree of autonomy,
typically being responsible for developing and marketing its own products or services.
CIMA: Management Accounting: Official Terminology, 2005 edition, p. 27.
THE NATURE OF STRATEGIC MANAGEMENT
Corporate
strategy
5
6
STUDY MATERIAL E2
THE NATURE OF STRATEGIC MANAGEMENT
Management of the SBU will be responsible for winning customers and beating rivals
in its particular market. Consequently, it is at this level that competitive strategy is usually
formulated. The considerations at this level will include:
●
●
marketing issues such as product development, pricing, promotion and distribution;
how should it segment the market – should it specialise in particular profitable segments.
Business strategy should be formulated within the broad framework of the overall objectives laid down by the corporate centre to ensure that each SBU plays its part. The extent
to which the management of the SBU is free to make competitive strategy decisions varies
from organisation to organisation and reflects the degree of centralisation versus decentralisation in the management structure of the firm.
Functional strategies
The functional (sometimes called operational) level of the organisation refers to main
business functions such as sales, production, purchasing, human resources and finance.
Functional strategies are the long-term management policies of these functional areas.
They are intended to ensure that the functional area plays its part in helping the SBU
achieve the goals of its corporate strategy.
1.4
A model of the rational strategy process
The traditional approach to strategic management is often termed the formal or rational
approach, and can be described as a series of logical steps which involve:
the determination of an organisation’s mission
the setting of goals and objectives
● the understanding of the organisation’s strategic position
● the formulation of specific strategies
● the commitment of resources
●
●
A continuous analysis of the external environment and the organisation’s internal
resources is needed in order to plan for the future development and survival of the business.
The rational strategy process is often conceived as consisting of four major steps:
1. Analysis of current position
2. Formulation of strategic options
3. Implementation of strategies
4. Monitor, review and evaluation.
This process seeks to answer questions concerning where the organisation is now,
where it should go in the future, and how it should get there. The rational model therefore involves a number of interrelated stages. Figure 1.2 below illustrates a framework of
the rational strategy process and shows the various stages which management may take to
develop a strategy for their organisation.
Make sure you understand what activities occur during the stages included in
the model, and can reproduce, this diagram.
ENTERPRISE MANAGEMENT
Review and
control
Corporate
appraisal
(SWOT)
Mission and
objectives
Strategy
evaluation and
choice
Strategic option
generation
Strategy
implementation
Environmental analysis
External analysis
Competitor analysis
Figure 1.2
A model of a rational strategy process
The basic idea from the model is that we start with the existing strategy of the organisation and evaluate it using information collected from internal and external analysis. From
this we can determine if the organisation should continue with its existing strategy or formulate a new strategy that will enable the organisation to compete more effectively. Having
made a choice on the strategic direction, the next stage involves implementing the strategy
and then evaluating performance to determine whether or not goals have been achieved.
Each of the different stages in the model above will now be elaborated on, introducing
some of the tools and techniques of strategic management. However, Chapter 2 will provide further explanation of some of the strategic management analytical tools, particularly
those that can be used to examine the external environment and competitive environments.
1.4.1
Mission, objectives and goals
Johnson, Scholes and Whittington (2008) provide the following useful guide to help distinguish between the terminology of strategy.
Term
Definition
Mission
Overriding purpose in line with the values and expectations of stakeholders.
What business are we in?
Desired future state: the aspiration of the organisation
General statement of aim or purpose – may be qualitative in nature
Quantification (if possible) or more precise statement of the goal
Long-term direction expressed in broad statements about the direction the
organisation should be taking and the types of actions required to achieve
its objectives
Vision or strategic intent
Goal
Objective
Strategies
From the above table we can see that a mission is a broad statement of the purposes of
the business. It will be open-ended and reflect the core values of the business. A mission
will often define the industry that the firm competes in and make comments about its general way of doing business.
For example:
British Airways seeks to be ‘the world’s favourite airline’
● Nokia speaks of ‘connecting people’
●
THE NATURE OF STRATEGIC MANAGEMENT
Position audit
Internal analysis
7
THE NATURE OF STRATEGIC MANAGEMENT
8
STUDY MATERIAL E2
DHL ‘delivers your promises’
● easyEverything group wants to ‘paint the world orange’.
●
Does your organisation have a mission statement? What is it? How is the mission communicated to employees.
Roles of mission statements
Mission statements help at four places in the rational model of strategy:
1. Mission and objectives. The mission sets the long-term framework and trajectory for the
business. It is the job of the strategy to progress the firm towards this mission over the
coming few years covered by the strategy.
2. Corporate appraisal. Assessing the firm’s opportunities and threats, its strengths and
its weaknesses must be related to its ability to compete in its chosen business domain.
Factors are relevant only insofar as they affect its ability to follow its mission.
3. Strategic evaluation. When deciding between alternative strategic options, management
can use the mission as a touchstone or benchmark against which to judge their suitability. The crucial question will be, ‘Does the strategy help us along the road to being the
kind of business we want to be?’
4. Review and control. The key targets of the divisions and functions should be related to
the mission, otherwise the mission will not be accomplished.
Research conducted among companies by Hooley et al. (1992) revealed the following
purposes of mission statements:
1. To provide a basis for consistent planning decisions.
2. To assist in translating purposes and direction into objectives suitable for assessment
and control.
3. To provide a consistent purpose between different interest groups connected to the
organisation.
4. To establish organisational goals and ethics.
5. To improve understanding and support from key groups outside the organisation.
1.4.2
The link between mission, goals and objectives
Whilst the mission is normally an open-ended statement of the firm’s purposes and strategies,
strategic objectives and goals translate the mission into strategic milestones for the business
strategy to reach. In other words, the outcomes that the organisations seeks to achieve.
A strategic objective will possess four characteristics which set it apart from a mission
statement:
1. a precise formulation of the attribute sought
2. an index or measure for progress towards the attribute
3. a target to be achieved
4. a time-frame in which it is to be achieved.
Another way of putting this is to say that objectives must be SMART, that is,
Specific – unambiguous in what is to be achieved
● Measurable – specified as a quantity
●
ENTERPRISE MANAGEMENT
Examples of strategic objectives
Mission
Attributes
Measure
Growth
Sales volume
Share of market
Asset base of firm
Customer satisfaction
Defects
Consistency
Peer group respect
Speed to market
Successful new products
Non-discrimination
Environmental pollution
Safety
000s of units
% of total volume
Net assets
Repeat purchases
No. per ‘000
Adoption of standard procedures
Industry awards received
Development time
% of sales from new products
Workforce composition
Cubic metres of waste
Notified incidents
Quality
Innovation
Social responsibility
Attainable – within reach
Relevant – appropriate to the group or individual to whom it is applied
● Time-bound – with a completion date.
●
●
Table 1.1 lists some examples of strategic objectives.
1.4.3
The goal structure
The goal structure is the hierarchy of objectives in the organisation. It can be visualised as
the diagram in Figure 1.3 suggests.
Objectives perform a number of functions:
1. Planning. Objectives provide the framework for planning. They are the targets which
the plan is supposed to reach.
2. Responsibility. Objectives are given to the managers of divisions, departments and operations. This communicates to them:
(a) the activities, projects or areas they are responsible for
(b) the sorts of output required
(c) the level of outputs required.
3. Integration. Objectives are how senior management coordinate the firm. Provided that
the objectives handed down are internally consistent, this should ensure goal congruence between managers of the various divisions of the business.
4. Motivation. Management will be motivated to reach their objectives in order to impress
their superiors, and perhaps receive bonuses. This means that the objectives set must cover
all areas of the mission. For example, if the objectives emphasise purely financial outcomes,
then managers will not pay much heed to issues such as social responsibility or innovation.
5. Evaluation. Senior management control the business by evaluating the performance of
the managers responsible for each of its divisions. For example, by setting the manager
a target ROI and monitoring it, senior management ensure that the business division
makes a suitable return on its assets.
You may be familiar with these five functions (often recalled using the acronym PRIME)
from your studies in budgetary control. Budget targets are a good example of operational
level objectives. In this chapter, however, we are working at a higher level by considering
the strategic objectives of the firm.
THE NATURE OF STRATEGIC MANAGEMENT
Table 1.1
9
STUDY MATERIAL E2
THE NATURE OF STRATEGIC MANAGEMENT
10
Mission statement
Translated into a small number of
strategic
objectives
reached by
following strategies
communicated to management
as numerous
tactical objectives
which in turn are implemented and reviewed
through setting a large number of
operational objectives
which may be communicated to managers and staff
responsible through their
individual performance targets
Figure 1.3
A goal structure
Having established where the organisation is in terms of its mission, goals and objectives, it must then determine where it wants to go in the future. This will be influenced by
the nature of the external environment and the organisation’s internal capability.
1.4.4
External environmental and competitive analysis
The strategy of an organisation must allow it to achieve ‘a good fit’ with its environment.
As part of its strategic analysis, an organisation should look at the various factors within its
environment that may represent threats or opportunities and the competition it faces.
The analysis requires an external appraisal to be undertaken by scanning the business external
environment for factors relevant to the organisations current and future activities. To achieve
this there are a number of strategic management tools that can assist in this process. These
included the PEST framework which helps in the analysis of the macro or general environment
and the five forces model which can be used to analyse the competitive environment.
PEST framework
The PEST framework is used to categorise environmental influences into four
headings that can be used to assess the external factors that might impact on
the organisation’s development in the future. These are used to understand the key
drivers of change. A brief summary of the PEST framework is provided below,
however, further discussion of the framework can be found in Chapter 2.
Political. These are political or legal factors affecting the organisation, such as legislation
or government policy, stability of the government, government attitudes to competition
and so on.
● Economic. These are economic factors such as tax rates, inflation, interest rates, exchange
rates, consumer disposable income, unemployment levels and so on.
● Social. These are social, cultural or demographic factors (i.e. population shifts, age
profiles, etc.) and refer to attitudes, value and beliefs held by people; also changes in
lifestyles, education and health and so on.
●
11
Technological. These are changes in technology that an organisation might use and
impact on the way work is done, such as new system or manufacturing processes.
THE NATURE OF STRATEGIC MANAGEMENT
●
ENTERPRISE MANAGEMENT
Some authors have expanded the mnemonic PEST into PESTEL – to include explicit
reference to ethical or environmental and legal factors.
If you are asked to apply the PEST model to an organisation, simply look for things
that might affect the organisation, and put each of them under the most appropriate heading. A brief explanation as to why you feel each activity creates either an opportunity or
threat will suffice.
The competitive environment – five forces model
As well as the macro environmental factors, part of external analysis also requires an
understanding of the competitive environment and what are likely to be the major
competitive forces in the future. A well-established framework for analysing and
understanding the nature of the competitive environment is Porter’s five forces model
(see Figure 1.4.).
Porter argues that competition in an industry is determined by its basic
underlying economic structure – the five competitive forces
1. rivalry among existing firms
2. bargaining power of buyers
3. bargaining power of suppliers
4. threat of new entrants
5. threat of substitute products or services.
The collective strength of these forces determines the profit potential, defined as
long-run return on invested capital, of the industry. Some industries have inherently
high profits due to the weakness of these forces. Others, where the collective force is
strong, will exhibit low returns on investment. This model will be explored further in
Chapter 2.
The outcomes from the PEST analysis and five forces analysis will help determine the
opportunities for an organisation, and also the potential threats.
Threat of
entry
Bargaining power
of suppliers
Rivalry among
existing firms
Bargaining power
of buyers
Substitute products
or services
Figure 1.4 Porter’s five forces model. Reprinted with the permission of The Free Press, a division
of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing
Industries and Competitors by Michael E. Porter. © 1980, 1998 by The Free Press. All rights reserved.
12
STUDY MATERIAL E2
THE NATURE OF STRATEGIC MANAGEMENT
1.4.5
Internal analysis/position audit
Internal analysis is needed in order to determine the possible future strategic options by
appraising the organisation’s internal resources and capabilities. This involves the identification of those things which the organisation is particularly good at in comparison to its
competitors.
The analysis will involve undertaking a resource audit to evaluate the resources the
organisation has available and how it utilises those resources – for example, financial
resources, human skills, physical assets, technologies and so on. It will help the organisation to assess its strategic capability. That is the adequacy and suitability of the resources
and competences of an organisation for it to survive and prosper. Johnson, Scholes and
Whittington (2008) explain that this depends upon having:
threshold resources – the resources needed to meet the customers’ minimum requirements and therefore to continue to exist;
● threshold competences – the activities and processes needed meet customers’ minimum
requirements and therefore continue to exist;
● unique resources – the resources that underpin competitive advantage and are difficult
for competitors to imitate or obtain;
● core competences – are activities that underpin competitive advantage and are difficult
for competitors to imitate or obtain.
●
There is often confusion surrounding the terms ‘resources’ and ‘competences’ – essentially
resources are what the organisation has, whereas competences are the activities and processes through which the organisation deploys its resources effectively. This concept will be
returned to later in this chapter when examining the resource-based view of strategy.
Michael Porter suggested that the internal position of an organisation can be analysed
by looking at how the various activities performed by the organisation added (or did
not add) value, in the view of the customer. Porter proposed a model, the Value Chain
(Figure 1.5), for carrying out such an analysis. To be included in the Value Chain, an
activity has to be performed by the organisation better, differently or more cheaply than
by its rivals.
The value chain of any organisation can be divided into primary activities and
support activities, each of these activities can be considered as adding value to
an organisation’s products or services.
Firm infrastructure
Human resource management
Technology development
Procurement
Secondary or
support
activities
Primary
activities
Inbound
logistics
Figure 1.5
Operations
Outbound
logistics
Marketing
and sales
Service
The Value Chain. Based on the work of Michael Porter
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Inbound logistics. The systems and procedures that the organisation uses to get inputs
into the organisation, for example the inspection and storage of raw materials.
● Operations. The processes of converting inputs to outputs, for example production
processes.
● Outbound logistics. The systems and procedures that the organisation uses to get outputs
to the customer, for example storage and distribution of finished goods.
● Marketing and sales. Those marketing and sales activities that are aimed at persuading
customers to buy, or to buy more, for example TV or point-of-sale advertising.
● Service. Those marketing and sales activities that are clearly aimed before or after the
point of sale, for example warranty provision, or advice on choosing or using the product.
THE NATURE OF STRATEGIC MANAGEMENT
The primary activities of the value chain are as follows:
●
The secondary (or support) activities of the value chain are as follows:
Procurement. The acquisition of any input or resource, for example buying raw materials
of capital equipment.
● Technology development. The use of advances in technology, for example new IT
developments.
● Human resource management. The use of the human resources of the organisation, for
example by providing better training.
● Firm infrastructure. Those general assets, resources or activities of the organisation that
are difficult to allocate to one of the other activity headings, for example a reputation for
quality, or a charismatic Chief Executive.
●
If you are asked to apply the value chain to an organisation, simply look for things that
the organisation does well, and put each of them under the most appropriate heading. A
brief explanation as to why you feel each activity has strength will suffice.
Undertake a resource audit and value change analysis for your organisation, or
for an organisation that you are familiar with. This should help you in understanding the purpose of different strategic management frameworks.
1.4.6
Corporate appraisal (SWOT)
Having undertaken an analysis of the trends and possible external environmental and competitive and internal developments that may be of significance to the organisation, the next
step is to bring together the outcomes from the analysis.
This is often referred to as corporate appraisal or SWOT analysis, standing for strengths,
weaknesses, opportunities and threats.
During this stage, management will assess the ability of the business, following its present
strategy, to reach the objectives they have set. They will draw on two sets of information:
(a) Information on the current performance and resource position of the business. This
will have been gathered in a separate internal position audit exercise.
(b) Information on the present business environment and how this is likely to change
over the period of the strategy. This will have been collected by a process of external
environmental analysis and competitor analysis.
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The four categories of SWOT can be explained in more detail as follows:
1. Strengths. These are the particular skills or distinctive competences which the organisation possesses and which gives it an advantage over the competitors.
2. Weaknesses. These are the things that are going badly (or work badly) in the organisation and can hinder the organisation in achieving its strategic aims, such as a lack of
resources, expertise or skills.
3. Opportunities. These relate to events or changes outside the organisation, that is in its
external business environment, which are favourable to the organisation. The events or
changes can be exploited to the advantage of the organisation and will therefore provide
some strategic focus to the decision-making of the managers within the organisation.
4. Threats. Threats relate to events or changes outside the organisation in its business environment which are unfavourable and that must be defended against. The organisation
will need to introduce some strategies to overcome these threats in some way or it may
start to lose market share to its competitors.
The strengths and weaknesses normally result from the organisation’s internal factors, and
the opportunities and threats relate to the external environment. So, the strengths and weaknesses come from internal position analysis tools such as the Value Chain, and the opportunities and threats from environment analysis tools such as PEST and the five forces model.
1.4.7
Strategic options and choice
Strategic choice is the process of choosing the alternative strategic options generated by the
SWOT analysis. Management need to seek to identify and evaluate alternative courses of
action to ensure that the business reaches the objectives they have set. This will be largely
a creative process of generating alternatives, building on the strengths of the business and
allowing it to tackle new products or markets to improve its competitive position.
The strategic choice process involves making decisions on:
What basis should the organisation compete and on what basis can it achieve competitive advantage?
● What are the alternative directions available and which products/markets should the
organisation enter or leave?
● What alternative methods are available to achieve the chosen direction?
●
Achieving competitive advantage
When developing a corporate strategy, the organisation must decide upon which basis it is
going to compete in its markets. This involves decisions on whether to compete across the
whole marketplace or only in certain segments (this is referred to as competitive scope).
A further consideration is the way in which the organisation can gain competitive advantage, that is anything that gives on organisation an edge over its rivals and which can be
sustained over time. To be sustainable, organisations must seek to identify the activities
that competitors cannot easily copy and imitate (We will return to this later in this chapter
when the resource-based view to strategy is introduced.).
Organisations must assess why customers chose to use one organisation over another.
The answer to this question can be broadly categorised into two reasons:
1. The price of the product/service is lower.
2. The product/service is perceived to provide better ‘added value’.
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Decisions on the above questions will determine the generic strategy options for achieving competitive advantage – known as generic because they are widely applicable to firms
of all sizes and in all industries. The two types of generic competitive strategies that enable
organisations to achieve competitive advantage are referred to as low-cost strategies or differentiation strategies. For example, organisations can compete on price-based strategies
serving prices to sensitive segments of the marketplace or they can choose to pursue a differentiation strategy which seeks to be unique on dimensions valued by buyers, such as
product design, branding, product performance and service levels. In addition, organisations need to decide on whether they are going to compete in the broad marketplace or
whether they are going to focus on one or more particular segments or niches.
THE NATURE OF STRATEGIC MANAGEMENT
Identify an organisation that follows a price based strategy and one that achieves
competitive advantage through differentiation. Then for each organisation
identify what the core competencies need to be to support the competitive strategy.
Strategic direction
The organisation also has to decide how it might develop in the future to exploit strengths
and opportunities or minimise threats and weaknesses. There are various options that
could be followed, including:
Market penetration. This is where the organisation seeks to maintain or increase its share
of exiting markets with existing products.
● Product development. Strategies are based on launching new products or making product
enhancement which are offered to its existing markets.
● Market development. Strategies are based on finding new markets for existing products.
This could involve identifying new markets geographically or new market segments.
● Diversification. Strategies are based on launching new products into new markets and is
the most risky strategic option.
●
Strategic methods
Not only must the organisation consider on what basis to compete and the direction of
strategic development, it must also decide what methods it could use. The options are:
Internal development. This is where the organisation uses it own internal resources to
pursue its chosen strategy. It may involve the building up a business from scratch.
● Takeovers/acquisitions or mergers. An alternative would be to acquire resources by taking
over or merging with another organisation, in order to acquire knowledge of a particular
product/market area. This might be to obtain a new product range or market presence
or as a means of eliminating competition.
● Strategic alliances. This route often has the aim of increasing exposure to potential customers or gaining access to technology. There are a variety of arrangements for strategic
alliances, some of which are very formalised and some which are much looser arrangements. We will return to the topic of strategic alliances in Chapter 2.
●
Evaluation of strategic options
The evaluation stage considers each strategic option in detail for its feasibility and fit with
the mission and circumstances of the business. By the end of this process, management will
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have decided on a shortlist of options that will be carried forward to the strategy implementation stage. The various options must be evaluated against each other with respect
to their ability to achieve the overall goals. Management will have a number of ideas to
improve the competitive position of the business.
1.4.8
Strategy implementation
The strategy sets the broad direction and methods for the business to reach its objectives.
However, none of it will happen without more detailed implementation. The strategy
implementation stage involves drawing up the detailed plans, policies and programmes
necessary to make the strategy happen. It will also involve obtaining the necessary resources
and committing them to the strategy. These are commonly called tactical and operational
decisions:
Tactical programmes and decisions are medium-term policies designed to implement some
of the key elements of the strategy such as developing new products, recruitment or
downsizing of staff or investing in new production capacity. Project appraisal and project
management techniques are valuable at this level.
● Operational programmes and decisions cover routine day-to-day matters such as meeting
particular production, cost and revenue targets. Conventional budgetary control is an
important factor in controlling these matters.
●
1.4.9
Review and control
This is a continuous process of reviewing both the implementation and the overall continuing suitability of the strategy. It will consider two aspects:
1. Does performance of the strategy still put the business on course for reaching its strategic objectives?
2. Are the forecasts of the environment on which the strategy was based still accurate, or
have unforeseen threats or opportunities arisen subsequently that might necessitate a
reconsideration of the strategy?
1.5
Criticisms of the rational model of strategy
formulation
Many writers on strategy dispute the rational model of strategy formulation by questioning some of the implicit assumptions. They would argue that organisational rationality is
merely a textbook assumption from economics, with little basis in the real world.
1. Organisations are incapable of having objectives. This argument is derived from the
insight of organisational sociology that organisations are really just collections of people. According to Cyert and March (1963), an organisation does not have goals of its
own but rather it is the people within it that have the goals. Notions of profit (or shareholder wealth) maximisation are merely artificially simplified assumptions left over
from economics. This leaves us with a picture of the goals pursued by a strategy being
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in fact the outcome of a bargaining process between various factions around the boardroom table. The consequences of this view are:
(a) Objectives may be in conflict with one another.
(b) Objectives will change from time to time according to which management faction
finds itself in the ascendancy.
(c) Objectives are unlikely to be directly related to the economic benefit of the
shareholder.
(d) Management will inevitably find itself adjudicating between the claims of the various stakeholder groups such as investors, employees, customers and government.
One consequence of this is their adoption of satisficing behaviour where they try
to follow strategies aimed at pleasing ‘most of the people most of the time’. (If you
consider the way you have to juggle between the elements of your daily life, job,
study, home life, leisure, etc., you get the idea of what satisficing means.) A more
sophisticated argument is that management will formulate strategy in the light of
its beliefs about the status of the firm and the nature of the environment around it.
These beliefs are inevitably partially irrational and so any strategy based on them
is likewise not completely rational. This is sometimes called an interpretative view
of strategy because any attempt to explain a given firm’s strategy must consider the
beliefs (or paradigms) in the minds of its management.
2. Senior management should not be the only people involved in setting strategy. Writers argue
that by making a separation between strategy formulation and strategy implementation,
the rational approach is bound to lead to difficulties. In the first place, senior management are too detached, and will lack the detailed understanding of the problems of a
given business division and the requirements of the particular customers and technologies there. The result will be a strategy that is unlikely to address the division’s needs.
Secondly, and more fundamentally, they will not consider the social processes, values
and cultures of the staff in the division or, if considered, these ‘soft’ factors will be misinterpreted. The resulting strategy will have unanticipated harmful effects on the motivation and commitment of those required to implement it. This view favours wider
participation in strategy formulation through encouraging emergent strategies to percolate up from below. We shall return to this view in more detail later.
3. In reality, strategy formulation is not a simple step-by step process aimed at finding the
best way to meet the firm’s objectives. The model described in Figure 1.2 presents the
process as moving in one direction. In reality, strategy formulation is a much more
jumbled-up process and can include considerable backtracking and revisiting of earlier stages in the model. Indeed, some writers question whether objectives are ever set
in advance and suggest that management may revise or set strategic objectives in the
light of the corporate appraisal or to match the strategies developed during the strategic option generation stage. Furthermore, the strategy formulation process is very
political. The main influence on the information considered and the options generated and accepted will be the power of particular personalities and factions in the
management team.
4. The strategies that firms eventually follow are not the same as the ones they set out in their
plans. At the time of strategy formulation, management suffer from bounded rationality. This means that they cannot have perfect knowledge of the future and so any strategies developed will fail to take into account all eventualities. Consequently, the actual
strategy will need to be adapted to suit the circumstances as they unfold.
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5. Strategy is not something decided in advance by managers. This view is most famously
associated with Mintzberg. He argues that strategy is often recounted by managers long
after the event. In this post-rationalisation, they will tend to present all occurrences as
intentional action and ignore all the things that happened by chance and those that did
not work out. In this view, strategy emerges as a pattern from the piecemeal decisions of
management. Another name for this view is adaptive because it sees the organisation as
adapting to the circumstances around it.
6. Strategy should not be a rational process. This view is held by writers who are keen to
re-establish the role of the individual manager and leadership in determining a firm’s success. The doctrine of action rationality proposed by Brunsson (1985) is a good example of
this. Brunsson argues that excessive rationality in decision-making will rob a manager of the
motivation and commitment necessary to implement the strategy successfully. Instead, they
will be haunted by doubts that they may have chosen the wrong alternative, aware of some
of the inconsistency between objectives, and conscious of all the things that might go wrong
and the fact that the members of management that disagreed with the strategy are secretly
hoping it will go wrong. It is better that managers should select a course of action from a
small number of alternatives, focus on just the positive consequences and then formulate
objectives based on the likely outcomes of the strategy once it has become established. This
is very similar to the ‘ready-fire-aim’ philosophy associated with some successful firms.
1.6
A formal top-down strategy process
Large organisations will often formalise process of strategy formulation. The following are
typical features of the process:
1. A designated team responsible for strategy development. There are several groups of actors
in this process:
(a) A permanent strategic planning unit reporting to top management and consisting
of expert staff collecting business intelligence, advising divisions on formulating
strategy and monitoring results.
(b) Groups of managers, often the management teams of the SBUs, meeting periodically to monitor the success of the present strategies and to develop new ones. These
are sometimes referred to as strategy away days because they often take place away
from the office to avoid the interruptions day-to-day functioning.
(c) Business consultants acting as advisers and facilitators to the process by suggesting
models and techniques to assist managers in understanding their business environments and the strategic possibilities open to them. You will be reading about many
of these models and techniques later.
2. Formal collection of information for strategy purposes. The management team will call
upon data from within and outside the firm to understand the challenges they face and
the resources at their disposal. This information can include:
(a) Environmental scanning reports compiled by the business intelligence functions
within the firm, including such matters as competitor behaviour, market trends and
potential changes to laws.
(b) Specially commissioned reports on particular markets, products or competitors.
(c) Management accounting information on operating costs and performance, together
with financial forecasts.
(d) Research reports from external consultancies on market opportunities and threats.
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3. Collective decision-taking by the senior management team. This involves the senior management
team working together to develop and agree business strategies. Techniques such as brainstorming ideas on flip charts and using visual graphical models to summarise complex ideas
will assist this process. Also, arriving at a decision will involve considerable conflict as particular
managers are reluctant to see their favoured proposal rejected and a different strategy adopted.
4. A process of communicating and implementing the business strategy. This can be accomplished using a combination of the following methods:
(a) Writing a formal document summarising the main elements of the plan. This will
be distributed on a confidential basis to other managers and key investors, and also
perhaps to other key stakeholders such as labour representatives, regulatory bodies,
major customers and key suppliers.
(b) Briefing meetings and presentations to the stakeholders mentioned above.
Frequently, reporters from the business press will be invited to ensure that the information reaches a broader public. Naturally, the fine detail will remain confidential.
(c) The development of detailed policies, programmes and budgets based on achieving
the goals laid out in the business strategy.
(d) The development of performance targets for managers and staff. These ensure that everyone plays their part in the strategy (and perhaps receive financial rewards for doing so).
5. Regular review and control of the strategy. Management will monitor the success of the
strategy by receiving regular reports on performance and on environmental changes.
Today, the sophisticated competitive strategies of many firms have necessitated the development of more complex performance measurement systems to supplement traditional
budgetary control information. These are variously termed enterprise resource management
systems and balanced scorecards. There has also been an increased emphasis on competitor
and other environmental information to assist managers in steering their businesses.
THE NATURE OF STRATEGIC MANAGEMENT
Testing your appreciation of management’s need for non-financial measures and environmental information will be a recurring feature of questions in this examination.
1.6.1
Benefits of the formal top-down approach
to strategy
Business strategy formulation obviously uses a lot of organisational resource. What are the
benefits?
1. Avoids short-termist behaviour. It ensures that management considers the long-term development of the business rather than focusing solely on short-term results and operational results.
2. Helps identify strategic issues. By encouraging management to consider the business environment in their plans and decisions, it will help them keep ahead of change and to be
more proactive.
3. Goal congruence. There are many aspects to this:
(a) It will help coordinate the different business units, divisions and departments and
ensure that they work together to realise the full potential of the corporation.
(b) Asset investment decisions will be taken with the long-term needs of the business in
mind. This could include design or acquisition of buildings and capital equipment,
information systems or acquisitions of other businesses.
(c) Tactical programmes will be congruent with the strategy. This might affect the types of
staff recruited and developed, the location of production and distribution facilities
or the sorts of products and brands created.
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4. Improves stakeholder perceptions of the business. If the firm demonstrates that it has a clear
idea of where it is going, it enables others to make plans based on its future. This may
lead to:
(a) higher share price because investors are confident of higher future returns;
(b) attraction and retention of staff and higher morale because employees can see that
their career aspirations may be met within the firm;
(c) improved relations with suppliers who feel they can rely on orders in the future.
5. Provides a basis for strategic control. By having a process of formulation and implementation, this ensures that:
(a) There is someone looking after the development of strategy.
(b) There are clear programmes and policies being developed to implement it.
(c) There are targets and reports enabling review of the success of the strategy.
6. Develops future management potential and ensures continuity. This relates to the fact that
formal strategy formulation is a collective process. This means that:
(a) Different functional managers (e.g. finance or marketing) gain an appreciation of
the other disciplines of business and so develop into general managers.
(b) Providers of information to the strategy process become more deeply involved in
the business and develop as a pool of expertise from which the next generation of
managers may be recruited.
(c) Avoids succession problems when members of senior management retire or move
on. The strategy of the firm is understood by all and will outlast the loss of key
members of the management team.
1.6.2
Drawbacks of the formal top-down approach
to strategy
Some writers are critical of the formal process discussed above, because:
1. It is too infrequent to allow the business to be dynamic. This view emphasises the infrequency
of the ‘strategy round’, say every 5 years, and the time it takes to achieve any change to the
strategy. If the environment changes unexpectedly, the firm’s performance may deteriorate
as it continues to follow a business strategy which has now become inappropriate to its
business environment, for example by continuing to make a product no one wants.
2. It forbids the development of radical or innovative strategies. The need to retain consensus
among the management team means that radical ideas are too often rejected. Writers
who advance this argument remind us of the inherent conservatism of committees and
of the fact that some of the success stories of the past few decades, such as Microsoft,
Intel, Virgin and (at points) Apple and Body Shop, have also been that of firms whose
names are associated with radical and visionary entrepreneurs. These business leaders
tend to follow the emergent strategy approach.
3. It suffers from difficulties of implementation. The formal process is management-led and
seeks to pursue the goals of the business. Successful implementation requires the participation, or at least acquiescence, of middle and junior management, together with
operative staff. There is a danger that the formal process will not build the support of
these people and hence will be misunderstood or resisted. The result will be that the
goals of the strategy are not realised.
4. There is loss of entrepreneurial spirit. Entrepreneurs are persons who break rules and
make changes to conventional ways of doing business. On the other hand, a middle
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manager in a strategically managed firm will be rewarded for carrying out their allotted
part in the strategy and for not breaking the rules. The effect will be to encourage conformity among managers. This will lose the firm potentially successful ventures and perhaps also the services of gifted entrepreneurial managers who may leave in frustration.
5. It is impossible in uncertain business environments. Formal business strategy requires that
the strategists are able to make reliable assumptions about the future and particularly
about the opportunities and threats facing them. Critics argue that the business environment is now more uncertain than ever before. Because in their view, the future cannot be forecast. Some writers argue that management efforts should be diverted from
trying to plan strategies and instead should focus on improving the ability of their businesses to respond and adapt to change.
6. It is too expensive and complicated for small businesses. The manager of a small business is unlikely to be skilled in the techniques needed for developing the kinds of
business strategy described above. Moreover, the opportunity cost in terms of the
time away from direct management of the operational parts of the business are likely
to be too great.
THE NATURE OF STRATEGIC MANAGEMENT
Having read this section, summarise the main advantages and disadvantages of the formal top down approach to strategy.
1.7
Strategy and small businesses
According to Birley (1982), the formal top-down process described above may be unsuitable for small businesses for four reasons:
1. Differences in goals. In a small firm, the goals of the business are often inseparable from
the goals of the owner-manager and immediate family group. Small businesses often do
not exhibit the economic rationality and single-minded pursuit of dividends and growth
often associated with businesses governed by external shareholders. Birley suggests that
small-business goals may pass through a life cycle from the foundation of the business:
(a) Initial desire for independence and a chance to run their own business, coupled
with a desire for a satisfactory income and lifestyle.
(b) Mid-life desire to achieve a balance between satisfactory financial returns and a
good home life. This means that growth may not be a primary consideration.
(c) When approaching retirement, the founder will have a number of possible
objectives:
● to ensure that the business passes to children or loyal employees, regardless of their
skills or aptitudes;
● to find a buyer for the business, often with safeguards for staff.
2. Limited scope of product/market choices. Small-business managers typically consider a
much narrower range of strategic options than do their large-business counterparts:
(a) Because their business is already narrowly based on the specific trade skills and
knowledge of the proprietor. Any new product or market venture will seem very
radical.
(b) The day-to-day survival of the business will depend on success in this narrow market, and management will not want to move too far away from it.
(c) Management’s knowledge, skills and horizons will tend to be limited to their current industry. They will not notice wider opportunities.
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3. Limited resources. Smaller firms lack the resources to invest in new strategic ventures
and rapid growth. Therefore, they do not exhibit the sudden strategic leaps envisaged
by the rational model:
(a) less capital due to absence of external shareholders;
(b) less managerial resource because proprietor is unwilling to delegate or share
control;
(c) smaller current income stream means that any unsuccessful strategic investment
may destroy the firm.
4. Organisational structure. Strategic implementation demands the setting up of an appropriate structure and selection of an appropriate team to carry it out. Small firms may
not be able to do this due to:
(a) desire by the proprietor to maintain absolute control;
(b) impatience with targets, budgets and other systems that smack of ‘bureaucracy’;
(c) difficulties for other managers to work with founder who may exhibit set ways of
thinking and doing business.
Birley’s observations certainly ring true of many small, family-controlled businesses.
However, there are many examples of (initially) small entrepreneurs who have managed to
exhibit very different paths of strategic development. For example:
Jeffrey Bezos (Amazon.com)
Richard Branson (Virgin Group)
● Bill Gates (Microsoft Corporation)
● Stelios Haji-Ioannou (easyGroup – founder of easyJet)
● Julian Richer (Richer Sounds)
● Anita Roddick (The Body Shop)
● Alan Sugar (Amstrad Corporation).
●
●
These businesses follow strategies that have been termed variously freewheeling opportunism, proactive management or radical entrepreneurship. One distinguished writer has coined
the term ‘The New Alchemists’ to describe them (Handy and Handy, 1999). Increasingly,
their approaches to strategy have been emulated by the ‘dotcom’ firms of the new e-business
world.
They have particular features in common with one another:
1. They grew in an industry that was already dominated by one or more large corporations. Their success was almost always through exploiting the complacency or errors of
the larger corporations.
2. The founder of the business had a particular vision of how they wanted the business to
develop, which they stuck to.
3. The products or services they offer tend to be in markets that exhibit spontaneous purchasing behaviour, where service and reassurance are important or which have been
subject to recent radical changes (or discontinuities) due to emergence of new technologies, tastes or legislative frameworks.
4. They did not rely on conventional financing sources to develop their businesses initially
(and several subsequently had unsatisfactory relationships with equity markets).
5. They do not appear to use rational strategy formulation techniques, but rather rely on
vision, the skills of the proprietor and a low aversion to risk.
6. The day-to-day involvement of the founder in the detailed running of the business has
been critical.
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This has led to increased criticism of the top-down, rational model and greater interest
in bottom-up creative approaches.
THE NATURE OF STRATEGIC MANAGEMENT
1.8
Achieving competitive advantage –
alternative perspectives: resource-based
view versus the positioning view
Theorists of business strategy disagree on the ways in which competitive advantage. Until
the 1990s, most writers took a positioning view; however, more recently, a resource-based
perspective has become popular. The two perspectives can be characterised as follows:
1. Positioning view sees competitive advantage stemming from the firm’s position in relation to its competitors, customers or stakeholders. It is sometimes called an outside-in
view because it is concerned with adapting the organisation to fit its environment.
2. Resource-based view is based on competitive advantage stemming from some unique asset
or competence possessed by the firm. This is an inside-out view of strategy because the
firm must go in search of environments that enable it to harness its internal competences.
1.8.1
Competitive advantage and economic theory
The debate over positioning versus resource-based approaches to strategy also has its origins in economic theory. The two sides disagree on the sources and durability of the competitive advantages that lead to supernormal profits.
The concept of economic profit is the same as the ‘supernormal profit’ (or ‘economic
rent’). According to economic theory, supernormal profit arises whenever market power
belongs to firms rather than consumers. In the short run, firms in competitive markets can
enjoy supernormal profits until competitive entry erodes profits by increasing buyer choice
and pushing prices down. However, the only firms that can enjoy supernormal profits in
the long run are those that have erected barriers to entry. (this links back to some of the
components of Porter’s five forces model discussed in Section 1.4.4).
1.8.2
The positioning approach
The positioning approach to strategy takes the view that supernormal profits result from the
following factors:
high market share relative to rivals
differentiated product
● low costs.
●
●
Examples of application of the positioning approach include the following:
1. Porter’s Five Forces theory argues that the long-term return on investment (ROI) of an
industry is determined by five forces and so an appropriate strategy for a given firm is
to increase its profitability by adopting a strategy that positions it against these forces in
the long run better than its rivals. These strategies are the generic strategies of overall cost
leadership, differentiation or focus and can be pursued by developing a unique configuration of its value chain or value system.
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2. Stakeholder theory suggests that the long-term competitive success of a firm will
depend on its developing a sustainable relationship with the key stakeholders on whom
it depends for resources, custom and permission to operate.
The distinctive outside-in perspective of the positioning view consists in its assertion
that threats and opportunities are external and that management must mould the organisation’s size, structure, culture, skills and products in response to them.
1.8.3
Resource-based view
Resource-based theorists (RBT) make the following criticisms of the positioning view:
1. The competitive advantages are not sustainable. Positioning advantages are short run.
These advantages are too easily copied in the long run by rivals or will lose their
power as the product life cycle enters its decline phase. Therefore, superior long-run
profitability cannot be explained or assured by possession of a world-beating product, a dominant market position or low-cost position. According to RBT writers (e.g.
Barney, 1991), superior profitability instead depends on the firm’s possession of unique
resources or abilities that cannot easily be duplicated by rivals.
2. Environments are too dynamic to enable positioning to be effective. Positioning depends
on the customer group, buyers, suppliers, rivals, and so on, to remain the same long
enough for the firm to mount an effective response. However, faster product life cycles,
the impact of IT, global competition and rapidly changing technologies make this
impossible. RBT writers (e.g. Stalk et al., 1992) argue that superior competitive performance depends on developing business processes and structures that enable it to spot
changing needs of customers immediately and to develop commercially viable responses
quickly.
3. It is easier to change the environment than it is to change the firm. Some RBT writers
(e.g. Pralahad and Hamel, 1990; Kay, 1997) are suspicious of the positioning school’s
implied belief in a ‘rubber organisation’, that is one that can have its size and shape
changed at will to fit the environment. They argue that such organisational changes are
likely to destroy the complex organisational architectures on which the firm’s present
and future success depends. It is better to retain these architectures as a unique competitive resource and to leverage them to take the firm into industries where they are valued.
1.8.4
Principles of resource-based theory
A number of different writers have developed principles that underpin the RBT and that
are needed to achieve sustainable competitive advantage.
Stalk et al. (1992) suggest four principles of capabilities-based competition:
1. The building blocks of corporate strategy are business processes, not products and
markets.
2. Competitive success depends on the ability to transform these processes into strategic
capabilities able to provide superior value to the customer.
3. Creating these capabilities requires group-wide investments that transcend traditional
functional or business unit boundaries.
4. Therefore, the champion of capabilities-based strategy is the chief executive officer
(CEO).
ENTERPRISE MANAGEMENT
25
Superior competitive performance will result from the firm using these competences to
outperform rivals on five dimensions:
THE NATURE OF STRATEGIC MANAGEMENT
1. Speed. More able to incorporate new ideas and technologies into its products.
2. Consistency. All its innovations satisfy the customer.
3. Acuity. Ability to see its environment clearly and forecast changing needs.
4. Agility. Ability to adapt on many fronts simultaneously.
5. Innovativeness. Ability to generate and combine business ideas in novel ways.
Barney (1991) argues that superior profitability depends on the firm’s possession of
unique resources. He identifies four criteria for such resources:
1. Valuable. They must be able to exploit opportunities or neutralise threats in the firm’s
environment. Here, Barney is accepting the view of resources taken in the SWOT
model. However, the point he is making is that it is not enough just to have valuable
resources.
2. Rare. Competitors must not have them too, otherwise they cannot be a source of relative advantage.
3. Imperfectly imitable. Competitors must not be able to obtain them. Generally, this will
result from them having come into the firm’s possession by a unique historical event
(e.g. ability to point to a long history in the business or perhaps past purchase of a
unique piece of land), or because they are hard to understand and duplicate if you
are an outside competitor (e.g. a particular organisational culture or relationship with
stakeholder groups).
4. Substitutability. It must not be possible for a rival to find a substitute for this resource
(e.g. not in the way that Microsoft used CD technology to substitute for the sales network, payments systems, printing and logistics of Encyclopaedia Britannica when it
launched Encarta).
Kay (1997) writes of ‘distinctive capabilities’ arising from four sources:
1. Competitive architecture. These are the relationships that make up the organisation.
These can be divided into:
(a) internal architecture: relations with employees;
(b) external architecture: relations with suppliers and customers;
(c) network architecture: relations between a group of collaborating firms.
These deliver distinctive capabilities that are greater than the sum of the parts in three
ways:
(a) through the creation of unique organisational knowledge, which arises from collaboration and interaction;
(b) through establishing a cooperative ethic among the participants;
(c) by implementing organisational routines.
Kay uses the examples of successful football clubs like Liverpool and Manchester
United. He suggests that their football league performance is due to the networks they
have built with youth clubs and their expenditure on recruiting players, their detailed
analysis of other clubs’ games, a cooperative spirit that enables players to pass the ball
rather than waste chances with lone shots at goal and deeply embedded routines of play.
2. Reputation. This is the high esteem that the public have for the firm. Among customers, it is a reason to buy the product and to remain loyal, while for investors, suppliers
and potential employees, it is a reason to become involved and give exceptional levels
26
STUDY MATERIAL E2
THE NATURE OF STRATEGIC MANAGEMENT
of support to the firm. Kay argues that reputation must be built and maintained over
time and requires detailed attention to all aspects of the firm’s products, procedures and
processes. He uses the examples of car hire and accountancy services to demonstrate
that reputation drives up margins.
3. Innovative ability. This is the ability to develop new products, services or solutions.
These stave off competitors and enable the firm to enjoy the high margins of early lifecycle markets. Innovation frequently demands collaboration among staff and with suppliers and customers. Consequently, it builds on the architectures of the firm.
4. Ownership of strategic assets. This is close to the barriers to entry discussed in traditional
economic theories of monopoly. The firm may have a unique source of materials or
possess exclusive legal rights to a market or invention. Kay observes that these generally
occur in markets with strong government involvement (e.g. medicines, defence equipment, etc.) and profits may be limited by government action too.
Prahalad and Hamel (1990) describe ‘core competence’ as ‘the collective learning in the
organisation, especially how to coordinate diverse production skills and integrate multiple
streams of technologies’. They propose three tests to identify a core competence:
1. Must provide access to a wide variety of markets. This is sometimes called the extendibility condition.
2. Must provide a significant contribution to the perceived customer benefits of the final
product.
3. Must be difficult for competitors to imitate.
The authors cite as examples Honda’s skill with small reliable high-output petrol engines
(cars, motorcycles, lawnmowers); Sony’s skills in miniaturisation (radios, televisions, CD
players, personal stereos, laptops) and 3M’s skills in coatings (cassette and video tape, PostIt-Notes, photographic film, abrasive papers). These skills enabled the firms to deliver premium profits across and through diverse environments.
They argue that core competences can be destroyed by failure to invest in them. They
share with Stalk et al. (1992) the view that excessive focus on functional or SBU divisions
can cause harm, and describe two concepts of the corporation (Table 1.2).
Table 1.2
Two concepts of the corporation (adapted from Prahalad and Hamel, 1990)
SBU
Basis for competition
Competitiveness of today’s products
Corporate structure
Portfolio of businesses related in
product-market terms
Autonomy is sacrosanct; the SBU
‘owns’ all resources other than cash
Discrete businesses are the unit of
analysis; capital is allocated business
by business
Optimising corporate returns through
capital allocation trade-offs among
businesses
Status of the
business unit
Resource allocation
Value added by top
management
Core competence
Inter-firm competition to build
competences
Portfolio of competences, core
products and businesses
SBU is potential reservoir of core
competences
Businesses and competences are the
unit of analysis: top management
allocates capital and talent
Enunciating strategic architecture
and building competences to
secure the future
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27
Close inspection of Table 1.2 suggests that Prahalad and Hamel’s formulation carries
profound implications for the management accounting function. Management accounting
is traditionally built on a responsibility centre model, whereas the view of the authors (and
of several of the other RBT writers) is that the object of control should be competences
and processes rather than business units and divisions. This issue will be returned to in
detail in the next chapter.
THE NATURE OF STRATEGIC MANAGEMENT
1.8.5
The implications of the resource-based view
for strategy development
Resource-based theory raises a number of issues:
1. Conflict with conventional product/market-based views of strategy. The notion of core
competences spreads beyond the ability of the firm to compete just in particular markets and industries. Yet many of the models we have used, such as the Porter models
and the product life cycle, tend to discuss particular products and markets and develop
strategic prescriptions for them. This leads to two possibilities:
(a) By using techniques that focus on products and markets individually, we may
develop strategies which deplete the firm’s wider core competences (e.g. by deciding
to withdraw from a market or to cut costs by outsourcing a crucial source of organisational learning).
(b) Even where a firm is involved in a range of industries and has a unique core
competence across them all, it is no guarantee of competitive advantage against
more focused players in each market (e.g. in the 1980s, IBM had a unique global
architecture, reputation and ownership of proprietary technology. This did not
stop it from being beaten into second or third place by focused rivals in each
of its sub-industries of software development, consulting, PCs and mainframe
systems).
2. Challenges the rational model of strategy. The RBT view seems to argue that strategy
should not be a process of deciding a product/market mission and competing in markets by establishing what the customer wants and exploiting the weaknesses of rivals.
Instead, it suggests that strategy involves deciding what makes the firm unique and
building strategy on that, extending into any products or markets where it will work.
The impacts of this are:
(a) RBT strategy starts with the corporate appraisal, not with the mission of the
business. Indeed, the mission must adapt to fit the most recent extension of core
competence.
(b) There is a much higher emphasis on finding an environment to match the firm
rather than vice versa (management seems to be saying ‘all we have is a hammer so
our markets are anything that involves hitting things’). This reasoning could lead to
very diverse strategies or perhaps a complete drying-up of strategic avenues (as they
run out of things to hit).
(c) Investors cannot be clear what industry they are investing in. This may increase perceived risk and hence destroy shareholder value by reducing the share price.
3. RBT can lead to different conclusions. The basis of RBT is the suggestion that the firm
should retain any unique strategic assets it has, outsource the remainder, and focus on
building up relationships with internal and external stakeholders to develop its internal
THE NATURE OF STRATEGIC MANAGEMENT
28
STUDY MATERIAL E2
knowledge so as to improve performance and innovation. Consequently, it fits well
with modern concepts in network organisation management such as:
● teamworking
● collaboration with suppliers and customers
● flexible working practices
● creation of participative culture.
However, an alternative conclusion might be that unique knowledge is too valuable to
risk losing in networks that could easily be ‘burgled’ by rivals, through enticing contract
staff and suppliers/customers to defect. This might encourage management to deliberately
keep knowledge under close control by bringing production in-house, putting staff on
restrictive long-term contracts and segmenting trade secrets on a ‘need-to-know’ basis.
1.9
Alternative approaches to formulating
strategy
Whilst it has been established that strategy deals with how an organisation achieves its objectives and can occur in a structured step-by-step way as suggested by the rational approach,
the next section will consider some alternative perspectives on the strategy creation process.
1.9.1
Emergent strategies
The research of Mintzberg (1987) suggests that few of the strategies followed by firms in the
real world are as consciously planned as the rational model suggests. The real strategies of real
firms are a long way from ‘mental maps’ designed by a rational process. Instead, they are a
combination of the planned strategy and another unanticipated emergent strategy (Figure 1.6).
Mintzberg describes emergent strategies as ‘patterns or consistencies realised despite, or
in the absence of, intentions’. By this he means us to understand that they just ‘happen
along the way’, with differing degrees of management involvement.
The failure of intended strategies to be fully realised as deliberate strategies does not
surprise Mintzberg. He regards it as unlikely that a firm’s environment can be as totally
predictable or totally benign as it would need to be for all intended strategies to work out.
The emergent strategy is often a response to unexpected contingencies and the resulting
realised strategy may, in the circumstances, be superior to the intended strategy.
Mintzberg considers management’s role in this process and suggests that some strategies
may be deliberately emergent. By this he means that managers may create the conditions for
new ideas to flourish and strategies to emerge. This has the effect of focusing attention on
Intended
strategy
Deliberate
strategy
Unrealised
strategy
Realised
strategy
Emergent
strategy
Figure 1.6
Mintzberg’s types of strategy
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29
the role of the manager as at the heart of the strategy and reduces the importance of the
rational process we have been discussing. According to Mintzberg, the manager should try
to ‘craft a vision’ through moulding the organisation and its strategy in the same way as a
potter works clay on the wheel, developing it gently and with regard for its own natural
characteristics. To do this, a manager must exhibit the following skills:
THE NATURE OF STRATEGIC MANAGEMENT
Manage stability. Managers should be able to master the details of running their business
and not feel compelled to constantly rethink the business’s strategic future. As Mintzberg
says: ‘To manage strategy . . . is not so much to promote change as to know when to
do so.’
● Detect discontinuity. This is the ability to detect the subtle environmental changes that
may affect the business and be able to assess their potential impact on its future performance. Mintzberg states: ‘The trick is to manage within a given strategic orientation most
of the time yet be able to pick out the occasional discontinuity that really matters.’Know
the business. Mintzberg believes that the ‘craftsman-manager’ will exhibit a hands-on feel
for the business that goes beyond the cold and fragmented analysis available from reports
and statistical analysis. He believes that formal strategy systems distance managers from
their business and hence ensure that they lack the knowledge they need to run it.
● Manage patterns. Management should encourage strategic initiatives to grow throughout the business and watch to see how they develop and intervene once this is clear.
Mintzberg says: ‘In more complex organisations this may mean building flexible structures, hiring creative people, defining broad umbrella strategies, and watching for the
patterns that emerge.’
● Reconcile change and continuity. Managers must realise that radical changes and new patterns of strategy will create resistance and instability in the firm. They must keep radical
departures in check, while preparing the ground for their introduction.
●
1.9.2
Logical incrementalism
Logical incrementalism is the term developed by Lindblom (1959, 1979) to describe how
government administrators ‘muddle through’ from year to year rather than carry out bold
strategic initiatives (Figure 1.7).
Radical strategy
Development
Environment
Strategic drift
Logical incrementation
Time
Past
Now
Figure 1.7
Logical incrementalism
30
STUDY MATERIAL E2
THE NATURE OF STRATEGIC MANAGEMENT
Administrators will avoid radical strategies that take the organisation off in a new
direction. Instead, they will accept that they cannot foresee the future and survive by
muddling through, taking small steps based on what has been done and has worked in
the past.
Lindblom is not recommending logical incrementalism. Rather, he is recording the reality of its existence. As he says, if the environment changes radically (a discontinuity), then
logical incrementalism will not respond sufficiently and hence the strategy will drift away
from what is required by the environment.
Quinn (1978) takes a more positive view of logical incrementalism than Lindblom. For
Quinn, a manager must map where he or she wants the organisation to go and then proceed towards it in small steps, being prepared to adapt if the environment changes or if
support is not forthcoming.
The managerial role functions as a management learning process with the following
elements:
The manager sits at the centre of a network of formal and informal communications
with staff, customers and others. They will be attuned to the problems and issues confronting the organisation. They may use formal strategy models and techniques to
understand these.
● Once they sense that a need for change has arisen and that events are pushing the firm in
a particular direction, they will start to develop a general strategic vision for the organisation. Often they will wait until circumstances have made other managers responsive to
ideas for a change to the organisation.
● Rather than present the strategy full-blown, and risk opposition, the manager will build
political support for the ideas by revealing them to key committees or on management
retreats.
● Commitment will be gained to an initial trial of the strategy. This will build further
commitment among those charged with making the project a success and erode the consensus in favour of the old way of doing business.
● This consensus will build and press the strategic change forward incrementally.
●
The use of formal strategic frameworks is valuable in developing and communicating
the changed strategy. This is the logical element in Quinn’s methodology because it ensures
that the process leads somewhere. The incrementalism comes from the need to subordinate rapid change to the process of gaining consensus and avoiding resistance (similar to
Mintzberg’s ‘Reconcile change and continuity’).
Quinn suggests four key roles for the manager in this process:
1. Improve the quality of information used in key decisions.
2. Overcome personal and political pressures resisting change.
3. Deal with the varying lead times and sequencing of events in the decisions.
4. Build organisational awareness and support for the strategies.
As we can see, Mintzberg and Quinn are essentially making the same point: that
strategies are not always planned or revealed in advance and that management skill is
crucial. Unlike Lindblom, they do not see this as unacceptably conservative, but see it
as realistic.
Logical incrementalism has been criticised as potentially being too slow to enable the
organisation to cope with rapid changes in its environment.
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31
Evaluation of approaches to strategy
The syllabus focuses on how strategy may be developed and how as a chartered management accountant, you may assist in this process. For this, it is better that we take a rational
approach as the basic framework. This said, we should still recognise what Mintzberg and
others have alerted us to, that in the real world, strategies can be influenced by irrational
factors and that implementation is a crucial step in successful strategies.
As Mintzberg has commented, most real-world strategies ‘walk on two feet’, balanced
between the rational approach and the emergent approach.
As a footnote to the earlier discussion of ‘dotcom’ firms, it is worth recalling that during
the latter part of 2000 several of the most ambitious examples of such businesses ran into
serious financial difficulty and the share prices of the general sector declined sharply. Many
business writers put this down to failures by management to develop satisfactory ‘business
models’. In other words, the investors had put their money into business ideas that could
not make a return for shareholders or which lacked a credible strategy.
This could support the view that a more formal approach to strategy brings benefits
even in the age of e-commerce and e-business.
THE NATURE OF STRATEGIC MANAGEMENT
1.10
Stakeholders
There are a number of different individual and interest groups both inside and outside the
organisation who will have views of the strategic development of the organisation and who
can affect or is affected by the performance of the organisation, These groups or individuals are referred to as stakeholders.
Stakeholders are defined by CIMA as ‘Those persons and organisations that
have an interest in the strategy of an organisation . . .’ (Management
Accounting: Official Terminology, 2005 edition, p. 53).
They include:
shareholders and owners
● management
● employees
● customers/clients
● suppliers
● local community
● local and national governments
● trade unions
● media
● regulatory bodies
● pressure groups.
●
There are different classifications of the above stakeholders, for example internal stakeholders (employees and management); connected stakeholders (shareholders, customer and
suppliers); and external stakeholders (governments, community, pressure groups).
32
STUDY MATERIAL E2
THE NATURE OF STRATEGIC MANAGEMENT
1.10.1
The influence of stakeholders
Strategic decision-making requires managers to consider stakeholders when setting the
mission and objectives of the firm. This is for two broad groups of reasons:
1. Issues of stakeholder power. This view observes that, like it or not, management must recognise that stakeholders can affect the success of a strategy, depending on whether they
support or oppose it. For example, customers refusing to buy products, shareholders
selling their shares or staff striking would disrupt any strategy. The view concludes that
management should consider stakeholders before setting strategic objectives.
2. Issues of organisational legitimacy. This more radical view suggests that firms are required
to be good citizens because they are only permitted to exist by society on sufferance
of not abusing their power. Consequently, although working primarily for the shareholders, management must ensure that its decisions do not ignore the interests of other
stakeholders.
1.10.2
The Mendelow matrix
Mendelow (1991) developed a framework to help analyse stakeholders power and interest
(Figure 1.8). Johnson, Scholes and Whittington (2008) suggest that this technique can be
used in two situations:
1. To keep track of changes in the potential influence of different stakeholder groups. By
plotting the matrix periodically, management can be alerted when a strategy may need
to be changed to accommodate (or avoid a threat from) particular stakeholders.
2. To assess the impact of a particular strategic development on stakeholders. For example,
managers proposing a factory closure could use mapping to identify where opposition
to closure may come from and how it might be managed (e.g. by shifting redundant
workers from quadrant D to C or B through generous pay-offs and thus reducing the
votes for a strike).
Plot the different stakeholders of your organisation on Mendelow’s matrix. Then explain
why you have put them in a particular quadrant.
High
Low
A
Minimal effort
B
Keep informed
C
Keep satisfied
D
Key players
Power
Low
High
Level of interest
Figure 1.8
Mendelow’s power-interest matrix
ENTERPRISE MANAGEMENT
Assessing power of stakeholders
Factors that may be associated with a particular group having high power are:
1. Status of the stakeholders, for example:
● their place in the organisational hierarchy
● their relative pay
● their reputation in the firm
● their social standing (e.g. ministers of religion may carry considerable power due to
their social status).
2. Claim on resources, for example:
● size of their budget
● number and level of staff employed
● volume of business transacted with them (e.g. suppliers and customers)
● percentage of workers they speak for (e.g. a trade union).
3. Formal representation in decision-making processes:
● level of management where they are represented
● committees they have representation on
● legal rights (e.g. shareholders, planning authorities).
1.10.4
Assessing interest of stakeholders
This will be more complex because it involves two factors:
1. Where their interests rest. We assume that powerful stakeholders will pursue their selfinterest. It is important to consider what they wish to achieve. It is possible to make
some generalisations, for example:
● managers – want to further the interests of their departments and functions as well as
their own pay and careers;
● employees – require higher pay, job security, good working conditions and some
consultation;
● customers – want fair prices, reliable supply and reassurance about their purchases;
● suppliers – want fair prices, reliable orders, prompt payment and advance notification of changes;
● local government – wants jobs, contribution to local community life, consultation
on expansions and so on.
In practice, we would need to interview the powerful stakeholders to find out precisely what they wanted.
2. How interested they are. Not all stakeholders have the time or inclination to follow management’s decisions closely. Again, some generalisations are possible about what will
lead to interest, for example:
● high personal financial or career investment in what the business does;
● absence of alternative (e.g. alternative job, customer, supplier or employer);
● potential to be called to account for failing to monitor (e.g. local councils or government bodies, such as regulators);
● high social impact of firm (e.g. well-known, visible product, association with particular issues).
THE NATURE OF STRATEGIC MANAGEMENT
1.10.3
33
STUDY MATERIAL E2
THE NATURE OF STRATEGIC MANAGEMENT
A
Casual unskilled (–)
General public (–)
Small shareholders (+)
B
Small local suppliers (–)
Local council (–/+)
Un-unionised labour (–)
Local press and media (–/+)
C
Central government (–)
National media (–)
Customers (–/+)
Minor fund managers (–/+)
D
Skilled unionised labour (–)
Key managers (–)
National suppliers (–)
Major fund managers (–/+)
Research and Development
Staff (–/+)
Power
High
Low
Level of interest
Low
High
34
Figure 1.9 Illustration of Mendelow’s matrix applied to Dyson. From HELLRIEGEL. Custom
Pub: Organizational Behaviour: Canadian Edition, 1E. © 1998 Nelson Education Ltd.
Reproduced by permission. www.cengage.com/permissions
An illustration of Mendelow’s matrix appears in Figure 1.9. It takes up the idea of a
factory closure mentioned earlier and suggests where management could classify the stakeholder factions and how it might deal with them.
1.10.5
Strategies to deal with stakeholders
The purpose is to consider what the matrix will need to look like for the strategy to be a
success and then to develop strategies to align the actual matrix with the ideal matrix.
In the example in Figure 1.9, the key concerns where alignment is poor are:
the negative attitudes of skilled labour, key managers and national suppliers;
the ambivalent attitude of shareholders and customers;
● the potentially negative interventions of national media and central government;
● the possible search for power from local council and media.
●
●
Johnson et al. (2008) suggests the following strategies to deal with each quadrant:
Box A – direction. This means their lack of interest and power makes them malleable.
They are more likely than others to accept what they are told and follow instructions.
Factory management should not reappoint the casual staff but rather provide limited
redundancy support. There is no need to tell the small shareholders or customers.
● Box B – education/communication. The positively disposed groups from this quadrant
may lobby others to support the strategy. Also if the strategy is presented as rational or
inevitable to the dissenters, or a show of consultation is gone through, this may stop
them joining forces with more powerful dissenters in C and D.
●
ENTERPRISE MANAGEMENT
35
Factory management should brief all groups here on the reasonableness of the case for
closure and of the provisions being made for the redundant staff. Advance notice will
give each more time for adjustment.
● Box C – intervention. The key here is to keep the occupants satisfied to avoid their gaining interest and shifting into D. Usually, this is done by reassuring them of the likely
outcomes of the strategy well in advance.
Factory managers should assure the government and suppliers that the closure will
result in a more competitive firm that is able to compete worldwide. A similar message
may reassure investors if it is backed up with a reassuring short-term dividend forecast.
● Box D – participation. These stakeholders can be major drivers of the change and major
opponents of the strategy. Initially, there should be education/communication to assure
them that the change is necessary, followed by discussion of how to implement it.
The factory managers should involve the unions in determining the redundancy package or redundancy policy. Key managers should be involved in deciding the basis on
which early retirements should be handled and how redeployment or outplacement
should be managed. Key shareholders will be consulted throughout to reassure them
that costs will not be excessive.
THE NATURE OF STRATEGIC MANAGEMENT
1.10.6
Conflict between stakeholders
The objectives of the stakeholder groups will inevitably be different and may be in direct
conflict. For example, the staff ’s desire for better pay and work conditions may conflict
with the shareholders’ desire for higher profits and the customers’ desire for lower prices.
The job of management is to develop and implement strategy with these differences in
mind. This can be further complicated in organisations where the employees are also
shareholders!
Additionally, there will be differences between the goals of members of the same internal
stakeholder group. Two examples are particularly important:
1. Differences between shareholders. This commonly manifests itself as a polarisation
between those who broadly require their income as short-term dividends and those who
are happy for profits to be retained to promote capital growth.
2. Differences between managers. The goals of managers and the departments they lead may
conflict. Consequently, many strategic objectives are the outcome of a political bargaining process at boardroom level.
1.11
Meeting the objectives of shareholders
Traditionally, the shareholders’ objectives have been translated into financial objectives
such as profit or profitability (e.g. return on capital employed or earnings per share).
These accounting measures have several drawbacks when used as strategic targets:
●
They are not useful for start-up businesses. During their first few years, many firms do
not make a profit or return a positive cash flow due to the high costs of set-up and
getting established in the market. Profitability measures are better suited to mature
businesses.
THE NATURE OF STRATEGIC MANAGEMENT
36
STUDY MATERIAL E2
They are inherently short-termist. Because profit is an annual measure, it encourages management to focus on short-term returns at the expense of the long-term development of
the business. Hence, managers may decide to cut product development, promotion or
staff development to improve profit performance at the expense of the long term.
● They provide no control over strategic behaviour. The profit figure is a financial summary
of the effects of a year’s economic activity. The competitive strategy of the firm will seek
to do business in particular ways in order to make this profit. This strategy should also
feature in the goal structure.
● They can be manipulated by creative accounting. Consequently, the strategic targets of
firms usually contain a mixture of financial and non-financial measures of performance.
These ensure that:
– managers follow courses of action consistent with the competitive strategy;
– shareholders and others can form an opinion of the success of the firm’s strategy even
when financial results are low; the strategic objectives can be more easily translated
into tactical and operational;
– objectives for divisions and processes without an immediately discernible impact on
profits (e.g. human resources, marketing, etc.).
●
The debate on the primacy of financial targets widens when we recognise the impact of
other stakeholders and the issues of corporate social responsibility.
1.11.1
Maximisation of shareholder wealth
as an objective
Traditional economic theory specifies that the objective of the firm is to maximise profit.
However, this assumption does not accurately reflect the goals of the shareholder for a
number of reasons:
1. It is a single-period measure (typically annual). The shareholder wants financial returns
across many years.
2. It ignores risk. Shareholders will require higher returns if risks are higher but will be
satisfied with lower returns if risks are low.
3. It confuses profit with cash flows to the investor. The investor wants cash flows, not a
figure for profit on the income statement.
A more appropriate version of rational shareholder objectives is either (a) maximisation of
the present value of the free cash flows of the business, or (b) maximisation of the share price.
1.11.2
Competing objectives
It has been shown that profit-seeking, not-for-profit and public sector organisations may
have competing objectives arising from:
conflict between profit and social responsibilities
● differences in the goals of particular managers
● conflicts between the goals of influential stakeholder groups.
●
This has important implications in the following areas:
1. Development of consistent strategies. If the organisation does not have clear objectives,
or if its objectives are in conflict with one another, then it will not be able to follow
ENTERPRISE MANAGEMENT
37
consistent courses of action. For example, a firm that seeks to satisfy objectives for
short-term dividends while also pursuing long-term growth will eventually be forced to
sacrifice one or the other due to lack of funds.
2. Deciding between strategic options. Options are evaluated against the objectives of the
business before management agree to devote resources. However, if one option provides
a good financial return while another provides jobs in an area of high unemployment, a
firm with both financial and social responsibility objectives will not be able to choose.
3. Development of appropriate performance measures. The more objectives an organisation
has, the more control measures it will need to monitor performance towards them. If
the objectives are competing, there is a danger of conflicting signals or, worse, excessive
focus on one at the expense of the rest. For example, a school will have many objectives
such as producing good citizens, ensuring emotional development, catering for special
needs, and so on. However, parents and government prefer to have a single measure to
decide whether a school is performing well or badly and tend to focus on examination
results. This immediately distorts behaviour in the school towards exam results at the
expense of other equally worthy objectives.
THE NATURE OF STRATEGIC MANAGEMENT
1.11.3
Resolving competing objectives
There are various techniques available:
1. Prioritisation. Management can specify that any strategy considered must at a minimum satisfy one or more specific objectives before they are prepared to consider it.
For example, management may set a minimum profitability threshold for any strategy (say 15% return on investment). Once this is assured, they turn their attention to
achieving it in a more socially responsible way.
2. Weighting and scoring. Each objective is weighted according to its relative importance
to the organisation (a high weight denoting high importance). Each strategic option is
scored according to how well it satisfies the objective (a high score showing high attainment). A ranking is calculated for each option by multiplying its weighting by its score,
and the strategic option with the highest overall ranking is accepted.
3. Creation of composite measures. These are used for strategy implementation and control
rather than for strategy formulation and choice. Approaches include the use of balanced
scorecard measures and techniques of data envelopment analysis (DEA).
DEA is used to assess performance of a group of branches or divisions (e.g. a group of
schools, hospitals or universities), where each has the same set of multiple objectives to
achieve. Data is fed into a sophisticated computer programme which identifies for each
objective the best performer among the group. It calculates the comparative performance of the remaining branches against this ‘best in class’ branch. It can also give an
overall performance metric for each branch, based on a composite index of its performance against a notional ‘best in class at everything’ branch.
The above techniques are rational, mathematical ones. In their study A Behavioral
Theory of the Firm (1963), management researchers Cyert and March identify some less
obviously rational techniques by which competing objectives are resolved:
●
Satisficing. Here, the strategy selected is the one that keeps all, or at least the most powerful, stakeholders happy. It usually emerges as a result of negotiation between the competing stakeholders.
THE NATURE OF STRATEGIC MANAGEMENT
38
STUDY MATERIAL E2
Sequential attention. Stakeholders are kept happy by taking turns to get their objectives realised. Therefore, staff may get a large pay rise every 3 years but, in between, pay
remains static while dividends are paid.
● Side payments. Where particular stakeholders’ objectives cannot be addressed, they are
compensated in another way. For example, a shareholder may be compensated for a low
profit by a higher dividend, or a local community may have a new leisure centre built by
a company whose new superstore will inevitably increase noise and traffic congestion in
the area.
● Exercise of power. Where management are deadlocked due to competing objectives, this
is often resolved by one or more powerful figures using their power to force through
their preferred option.
●
1.12
Summary
This chapter provided an introduction to the strategic management process. The key topics introduced include:
the different definitions of strategy;
the different stages in the rational strategy model;
● the different ways of achieving competitive advantage and the choices organisations have
in strategy development;
● the benefits and drawbacks of the formal top-down approach to strategy development;
● the difference between the positioning approach and the resource-based theory view;
● the alternative approaches to strategy, for example emergent strategies and logical
incrementalism;
● the importance of stakeholders and the possible competing objectives.
●
●
References
Barney, J. (1991), ‘Firm Resources and Sustained Competitive Advantage’. Journal of
Management, Vol. 17, No. 1, pp. 99–120.
Birley, S. (1982), ‘Corporate Strategy and the Small Firm’. Journal of General Management,
Vol. 8, No. 2. Winter 1982–3. Reproduced in Asch, D. and Bowman, C. (eds) (1989),
Ch. 6.
Brunsson, N. (1985), The Irrational Organisation: Irrationality as a Basis for Organisational
Action and Change. Chichester: John Wiley.
CIMA (2000), Corporate Governance: History, Practice and Future. London: CIMA
Publishing.
CIMA (2005), Management Accounting Official Terminology. London: CIMA.
Cyert, R.M. and March, J.G. (1963), A Behavioural Theory of the Firm. Englewood Cliffs,
NJ: Prentice-Hall.
Hamel, G. and Prahalad, C.K. (1994), Competing for the Future: Breakthrough Strategies
for Seizing Control of Your Industry and Creating the Markets of Tomorrow. Boston, MA:
Harvard Business School Press.
Handy, C. and Handy, E. (1999), The New Alchemists. London: Hutchinson.
Hofer, C.W. and Schendel, D. (1978), Strategy Formulation: Analytical Concepts.
Minnesota: West Publishing.
ENTERPRISE MANAGEMENT
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Hooley, G.J., Cox, A.J. and Adams, A. (1992), ‘Our Five Year Mission: To Boldly Go
Where No Man Has Gone Before …’. Journal of Marketing Management, Vol. 8, pp.
35–48. Cited in Corporate Performance Evaluation in Multinationals (1993). London:
CIMA.
Johnson, G., Scholes, K. and Whittington, R. (2008), Exploring Corporate Strategy (8th
edn). Harlow: FT Prentice Hall.
Kay, J. (1997), Foundations of Corporate Success: How Business Strategies Add Value (2nd
edn). Oxford: Oxford University Press.
Lindblom, C.E. (1959), ‘The Science of Muddling Through’. Public Administration
Review, Spring, pp. 79–88.
Lindblom, C.E. (1979), ‘Still Muddling, Not Yet Through’. Public Administration Review,
November/December, pp. 517–526.
Lynch, R. (2006), Corporate Strategy (4th edn). London: Financial Times Management.
Mendelow, A. (1991), Proceedings of 2nd International Conference on Information
Systems, Cambridge MA.
Mintzberg, H. (1987), ‘Crafting Strategy’. Harvard Business Review, July–August.
Reprinted in Mintzberg et al. (1998), op. cit., pp. 110–120.
Prahalad, C.K. and Hamel, G. (1990), ‘The Core Competence of the Corporation’.
Harvard Business Review, May/June.
Quinn, J.B. (1978), ‘Strategic Change: Logical Incrementalism’. Sloan Management
Review, Vol. 20, pp. 7–21. Fall
Rockart, J.F. and Hoffman, J.D. (1992), ‘Systems Delivery: Evolving New Strategies’.
Sloan Management Review, Summer, pp. 7–19.
Stalk, G., Evans, P. and Shulman, L. (1992), ‘Competing on Capabilities’. Harvard
Business Review, March/April.
THE NATURE OF STRATEGIC MANAGEMENT
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1
Reading
Approaches to strategic management have changed and evolved considerably over the last
20 years or so. Initially, most writers on strategy emphasised the importance of adopting a
deliberate and systemic approach to the process of planning. More recently, there has been
a move towards recognising the contribution of a more flexible contingent approach within
which strategies can sometimes emerge from chance events and from complex cognitive,
cultural and political processes within organisations. An associated change of emphasis has
been a switch in the focus of attention from a concern with finding the most advantageous
position for the organisation in relation to its environment, to one of exploiting and building the organisation’s competences and resources. Alan Marsden explains these issues in
the following article.
Strategic management – which way to competitive
advantage?
Alan Marsden, Management Accounting, January 1998
Many readers of this magazine will associate strategic management with strategic planning.
This approach to strategy generally involves a deliberate step-by-step approach. It commences with a set of tentative objectives which the CEO or senior management team considers necessary for the organisation to achieve its goals. The external environment is then
analysed to determine potential opportunities and threats; an internal audit is conducted
to determine the organisation’s strengths and weaknesses; strategic alternatives are evaluated to determine which strategy will best ‘position’ the organisation so as to capitalise on
opportunities and strengths while minimising threats and weaknesses, and then a plan is
prepared to assist in the implementation of the chosen strategy.
The approach may be illustrated by a diagram such as Figure 1, which is taken from the
Management Accounting Official Terminology (CIMA, 1996).
Development of the planning/positioning approach as the
dominant framework
This approach to strategy has provided the dominant framework for textbooks on strategy
from the time the subject emerged as a distinct specialism in the 1950s with the work of
Igor Ansoff, Kenneth Andrews and others (1971), through to the early 1990s. Though
the basic framework for analysis appears to have been formulated in the early 1950s, it has
been elaborated and developed by a number of writers. Among these, the most important
contributor has been Michael Porter (1980), with his development of the concept of the
five forces model used for industry analysis, the value chain as an instrument for assessing internal organisational strengths and weaknesses, and the generic strategies as a tool to
assist in strategy evaluation.
41
THE NATURE OF STRATEGIC MANAGEMENT
42
READING E2
A
SETTING OBJECTIVES
Where do we want to go?
C
ENVIRONMENTAL
ANALYSIS
1 Shareholder’s return/
earnings per share
2 Products/markets
3 Organisation
4 Expansion/consolidation
What is the environment in
which we operate going to
be like?
B
POSITION AUDIT
Where are we now?
Products/markets
Production resources
(a) People
(b) Fixed assets
(c) Finance organisation
Results
(a) Operating companies
(b) For shareholders
Product demand
Customers
Competition
Production technology
Workforce
D
GAP ANALYSIS
Ultimate objectives
compared with extrapolated
existing
Performance–the ‘gap’
F
ESTABLISHING
STRATEGY
What is the best way to get
from B to A considering C,
D and E?
1 Strategies
(a) strengths/eliminate
low earnings
(b) expand high earnings
(c) own production/buy-in
(d) new products
(e) acquisitions
2 Resources required
3 Personal
responsibilities and
motivation
G
LONGTERM
PLAN
E
CORPORATE
APPRAISAL
SWOT analysis
Strengths, Weaknesses,
Opportunities, Threats
Figure 1 Long-term plan
Though writers such as Philip Selznick (1957), Ansoff, Porter and others discussed
the importance of internal analysis and developed both the competence-grid and the
value chain as aids to this, the major focus has tended to be on the environment.
The common assumption underlying the approach is that the environment largely
determines the organisation’s freedom to manoeuvre. Therefore, the structure of the
environment is of overwhelming importance and a strategy for delivering competitive
advantage will be one that positions the firm within the environment. The problem
for the strategist then becomes one of finding a position that is defensible against
the threats from existing and potential competitors and from the bargaining power of
suppliers and buyers.
One of the main purposes of corporate planning was, and is, that of the planning and
management of growth. During the 1960s and 1970s, diversification was very much in
fashion as a means to corporate growth. It is perhaps not surprising, then, that during this
period, we find the development and use of portfolio planning matrices as frameworks for
selecting strategies and allocating resources in the diversified corporations.
The approach outlined was taken on board and used by planning departments in
some of the world’s largest corporations. This was particularly true in the period of
stability and economic growth that characterised the 1960s and early 1970s. A study
in 1963 Gilmore (1979), found that the majority of the largest US companies had
set up corporate planning departments. The typical format used by these departments
was a five-year corporate-planning document that set goals and objectives, forecast the
main trends, such as those for market demand, the company’s market share and its
revenue and net income, established priorities for different products and business areas
and allocated resources.
The demise of the planning approach
The enthusiasm for corporate planning, however, was not to last. One reason for its demise
appears to have been the increasing rate of change and the associated macroeconomic
ENTERPRISE MANAGEMENT
43
instability with which companies had to cope from the mid-1970s onwards. Particularly
damaging was the first oil price shock of 1974. This produced fuel shortages and inflation which few if any could have anticipated and this rendered the predictions of corporate planners virtually useless. Organisations were faced not only with fluctuations in the
economy but also with technological change. One effect of this was that product life cycles
became shorter and firms more frequently needed to update their production processes.
Developments in transport and communications resulted in the development of global
competition for many products and this intensified competition. Another factor adding to
this competitive situation was the growth of Japan and other South East Asian countries as
manufacturers and exporters of an increasing range of goods. This additional competition
resulted in an ever more active search by competitors to secure competitive advantage. The
product of all these changes for the organisation was a dynamic and unstable environment
in which any long-term plans became quickly outdated. A secondary reason for the fall in
popularity of strategic planning was the failure of diversification to increase profitability.
The use of portfolio planning models did not guarantee the synergy that companies sought
in their various acquisitions and so this only added to the disillusion with the planning
approach. There is some evidence that the reason for planning failure was partly influenced
by the way in which the planning process was conducted in some organisations. Research
by R.T. Lenz and M. Lyles (1985), for instance, found that in a number of organisations
the planning process developed into an annual ritual for which managers had little enthusiasm because it took up so much time and effort and often seemed to lead nowhere. They
found that several factors contributed to this lack of commitment including the professionalisation of planning, the excessive emphasis on quantifiable data, and the drive for
administrative efficiency in the planning process and the unqualified acceptance and misapplication of various analytical techniques. The use of professional planners with their use
of technical jargon tended to alienate some practising managers. The emphasis on quantifiable data led to the neglect of important qualitative changes in the environment because
they were difficult to measure. The drive for efficiency tended to result in the growth of
bureaucratic procedures and to be detrimental to creative thinking, while the over-reliance
on analytical tools like portfolio matrices often seemed to serve as a substitute for critical
thought in the analytical process.
THE NATURE OF STRATEGIC MANAGEMENT
The recognition that strategies can emerge
All these developments affected the practice of strategic planning and led to a reappraisal
of the approach by both managers and academics. In many companies, corporate planning
departments were dismantled and responsibility for strategy formulation passed to managers who had responsibility for its implementation. A more flexible, less formal approach
was adopted and the time horizon for long-term plans reduced.
Academics charted these developments and conducted empirical research into how strategy was actually formulated in companies.
The main findings of this research can perhaps most easily be summarised by the use
of a diagram provided by Henry Mintzberg (1994). He observed that while strategy is
often thought of as a plan or a guide to a course of action into the future, it could also be
regarded as a pattern of consistent behaviour over time. The difference between these is that
a plan refers to intended future action, whereas strategy as a pattern refers to the observed
decisions and actions after they have been taken. Mintzberg suggests that strategy as a
plan can be called intended strategy, while the pattern of actions which evolve from past
decisions might be called realised strategies. The available research shows that few planned
THE NATURE OF STRATEGIC MANAGEMENT
44
READING E2
Int
str ende
ate d
gy
Delib
e
strat rate
egy
Realised
strategy
Unrealised
strategy
Emergent
strategy
Figure 2
Forms of strategy (Mintzberg, 1994)
strategies work out exactly as expected. That is to say that few plans are realised in all their
intended detail. This occurs for a number of reasons, such as an unexpected change in the
environment like a sudden fall in demand, a switch in the strategy of a competitor, pressure
from a stakeholder group or the fact that the original strategy may have been misconceived.
As depicted in Figure 2, intentions that are fully realised can be called deliberate strategies, while those that are not realised at all can be called unrealised strategies. The strategic planning approach recognises both these possible outcomes, but it does not account
for a third possibility, which Mintzberg calls emergent strategy and which applies to a
situation where a realised pattern evolves that was never intended. The most frequently
quoted example of this type of strategy development comes from a description provided
by Richard Pascale (Spring, 1984) of Honda Motor Company’s entry into the US motorcycle industry. The ostensible reason for Honda’s success is that the company redefined the
US motorcycle industry via a brilliantly conceived intended strategy. According to Pascale,
however, Honda’s intended strategy was nearly a disaster. The strategy that emerged did so,
not through planning, but through unplanned action taken in response to unforeseen circumstances. Pascale recounts how, when Honda executives arrived in Los Angeles in 1959,
they did so with the intention of setting up a subsidiary to sell 250cc and 350cc machines
to existing motorcycle enthusiasts. They had no intention of trying to sell smaller bikes
such as the 50cc machines that were so popular in Japan because they could not envisage a
market for these in a country where everything was bigger and better than back home.
As things turned out, the sales of the 250cc and 350cc bikes were disappointing. One
of the reasons had to do with mechanical failure of some of their machines. The intended
strategy looked to be failing. In the course of their work, however, the Honda executives
were using 50cc machines to run errands around Los Angeles, and their presence attracted
a lot of attention.
One day, the Honda team received a call from a Sears’ buyer who proposed selling the
50cc machines through the department chain outlets. For their part, the Honda team were
reluctant to sell the small bikes because they feared it would alienate serious bikers who
might associate the Honda Company with ‘wimp’ machines. Eventually, however, their
failure to sell the expected quota of larger machines pushed them into selling the smaller
50cc machines and to sell them not through specialist motor cycle distributors but through
general retailers. Sales took off and a new strategy was born.
ENTERPRISE MANAGEMENT
45
By 1964, nearly one out of every two motor cycles sold in the United States was a
Honda. By chance, the Honda team had stumbled on a previously untouched market
segment of consumers who were not motorcycle enthusiasts but simply wanted a small
machine to nip around to the shops, the leisure centre and the park.
The critical point demonstrated by this example is that not all strategies are planned,
and also that successful strategy can emerge without prior planning and often in response
to unforeseen circumstances. It also illustrates the fact that strategy need not originate in
the minds of the CEO or the senior management teams but can arise from the observations and experience of the salesperson.
The view that the realised strategies of an organisation depend on many processes in
addition to systematic analysis and deliberate planning is supported by the work of other
researchers like Gerry Johnson (1988). In his examination of how strategy developed in
Coopers, the retail clothing company, Johnson concluded that the strategy that emerged
could be best explained in terms of the cognitive, political and cultural fabric of the organisation. The cognitive factors referred to consisted of the common sets of assumptions
and beliefs that were taken for granted by managers in the retailing organisation studied.
This tacit knowledge consisted of agreed notions about trading procedures, and methods
of organisation and control that it was believed contributed to the effectiveness and efficiency of the organisation. This set of assumptions and beliefs may be regarded as a sort of
paradigm, which influences the perceptions of managers, and therefore the decisions they
make and the actions they take. The link between cognitive and political factors in the case
of strategy development at Coopers derived from the fact that the buyers of merchandise
in the company exercised a great deal of power. What’s more, the buyers shared the common assumption developed over years of experience in the industry that a ‘commodity’
merchandise policy (a ‘pile it high, sell it cheap’ policy) was the one most likely to deliver
competitive advantage. Johnson describes how, despite clear signals of fashion changes in
the market and continuous pressure from middle management, the buyers, supported by
top management, resisted change. Even when sales fell, the response of senior management
was not to adopt a new strategy to cope with a rapidly changing market but to pursue
the low-price strategy even more vigorously, by tightening controls and cutting controllable costs. Johnson explains the reluctance of Coopers’ management to change their strategy as arising from the mindset produced by the prevailing paradigm. The set of beliefs,
assumptions and way of doing things that had served the company well in the past were
not easily abandoned. Evidence that the changing market required a change in strategy was
dismissed as inconclusive or as temporary phenomena that would revert to its former pattern in the near future. In addition, because the prevailing paradigm was associated most
strongly with senior executives in the company, any challenge to it constituted a political
threat. Abandonment of the way of doing things, which they had continually defended,
would result in a major loss of face.
In the case of Coopers, the situation was eventually resolved in an incremental fashion
by many small adjustments over a period of time. In other organisations, it is not uncommon for a failing company to be forced to adopt a new strategy almost overnight. Senior
managers committed to a way of doing things, which bring a company to the brink of
ruin, are frequently replaced by those with new ideas.
THE NATURE OF STRATEGIC MANAGEMENT
What now for strategic planning?
The accumulated evidence suggests that the strategic planning approach to the development of strategy has a number of limitations.
46
READING E2
THE NATURE OF STRATEGIC MANAGEMENT
First, it is becoming more difficult to plan because of the accelerating rate of change.
This does not mean that attempts to plan should not be undertaken. What it does mean
is that the scanning and monitoring of the environment for trends and potential changes
in these trends becomes even more important, and that additional resources have to be
devoted to these by the organisation. It also means that organisations have to be flexible
and to accept change as something that has to be managed rather than resisted.
Second, research has shown that some of the problems experienced by organisations in their
strategic planning have to do with the failings of those who use the approach, as the study by
Lenz and Lyles has demonstrated. Here again, the problems are not such as to invalidate the
approach but do require the effort and attention by managers concerned to avoid the pitfalls.
Third, research by Mintzberg, Pascale, Johnson and others has found that in practice,
strategies can emerge that derive not only from the systematic and rational analysis used
by strategic planners but also from chance observations, trial and error and cognitive and
political processes. It is hard to avoid the conclusion from these studies that useful strategies
can and do emerge in other ways than via the strategic planning process. But again, these
findings do not mean that the strategic planning approach should be abandoned. What
these studies do is to inform us of the complex processes at work in the strategy-making
process and, knowing of them, enable us to take account of these when formulating plans.
Positioning and its problems
It is not only how managers can best formulate strategy that has concerned academics but also
where managers should concentrate their attention. As previously indicated, the focus in the
traditional planning approach tends to have been on the environment because research shows
that it is more difficult to generate profits in some industries than others. Porter’s five forces
model, in particular, suggests that an industry’s profitability potential is a function of the interactions among the five forces (suppliers, buyers, competitive rivalry among firms currently in
the industry, product substitutes and potential entrants to the industry). In Porter’s words,
‘the collective strength of these five competitive forces determines the ability of firms in an
industry to earn, on average, rates of return on investment in excess of the cost of capital’
(Porter, 1980). Because the strength of the five forces varies from industry to industry, and can
change as industry evolves, industries vary in their potential for profitability.
In some industries, such as soft drinks and pharmaceuticals where the five forces are
favourable, many competitors can earn attractive returns. But in industries like rubber,
steel and video games, the pressure from one or other of the five forces is so intense that
few firms can sustain a high level of profit.
Given these differences in industry profitability, it follows that any entrepreneur seeking
to invest in a profitable venture should seek to enter an industry in which the five forces
are favourable and the chances of profit-making are therefore greater than one in which
competitive pressures are intense.
Having selected the most favourable industry, the second question the entrepreneur
needs to address is how to best position the firm within the industry so as to earn a rate
of return above the industry average. A firm that can position itself well can become very
profitable even when the industry structure is unfavourable. The key to gaining a good
position that will secure a competitive advantage and therefore a good rate of return
depends on the strategy adopted by the organisation. The competitive forces operating in a
particular industry determine the kind of strategy that will be effective for firms operating
in the industry. For instance, producers of standardised silicon chips find themselves driven
by competitive forces to adopt a low-cost strategy because price competition is fierce in an
ENTERPRISE MANAGEMENT
47
industry where the technology allows cheap mass production. There is, however, a market
for a small number of customised chips for specialised equipment. Manufacturers with the
knowledge, expertise and appropriate flexibility to produce these can gain a competitive
advantage by targeting this niche in the market and supplying at lower cost than the mass
producers of standardised chips.
In some cases the competitive forces will be such that differentiation is the source of
competitive advantage. If this is the case, the company will seek to differentiate itself by
improving quality, by innovation, advertising and superior after-sales service.
This approach, which concerns itself with how companies might best position themselves in the market, the industry and the wider environment and so achieve a strategic fit
with the environment, though still very popular among both theorists and practitioners,
has come in for criticism in recent years.
The main shortcomings of the approach are, first, that it relies on a static picture of
competition and thus understates the role of innovation and, second, that it overemphasises
the importance of industry structure and the wider environment, while de-emphasising the
significance of individual company differences in the possession of resources, capabilities
and competence.
The fact that innovation can revolutionise industry structure is now widely recognised. The example of the development of the computer industry is one of the more dramatic recent examples. Where a few companies existed ten years ago, now companies
like Compaq, Dell, Sun Microsystems and Silicon Valley have gained market share from
the established producers like IBM, Digital Equipment and Wang Labs. Fifteen years ago,
the industry was dominated by the likes of IBM, but the revolution that Apple computers
started when it introduced the first personal computer has transformed the structure of the
computer industry. As a result, a five forces analysis conducted in 1980 would look completely different from the one done today. Other recent examples are in banking, insurance
and other financial services. In the United Kingdom, companies like Direct Line Insurance,
which pioneered telephone sales in insurance, has sparked off a revolution in the way in
which insurance, banking and other financial services can be sold and this is changing the
structure of the industry.
The second criticism of the five forces model and the positioning approach of which
it is a part is that it overemphasises the importance of industry structure as a determinant
of company performance. Research by Richard Rumelt (1991), for example, suggests that
industry structure only explains about 10 per cent of the variance in profit rates across companies. The implication of this finding is that individual company differences explain much
of the rest of the variance. Other studies suggest that the variance in performance arising
from industry structure is really nearer to 20 per cent, but this still suggests a quite limited
influence by the industry structure. These studies have been taken as evidence by a growing
number of academics to mean that the individual resources and capabilities of a company are
far more important determinants of its profitability than the industry in which it is located.
THE NATURE OF STRATEGIC MANAGEMENT
The competence-based alternative
These problems with the positioning approach have been one reason for the search for an
alternative. Another reason has been the observation that success for many companies
appears to have little to do with positioning and much more to do with the exploitation of
a company’s resources, competences and capabilities. Thus Prahalad and Hamel (1990) cite
the core competence of miniaturisation as the basis for the success of the Sony Corporation.
This competence, it is argued, has allowed Sony to make everything from the Walkman to
48
READING E2
THE NATURE OF STRATEGIC MANAGEMENT
video cameras to notebook computers. Similarly, Canon’s core competence in optics, imaging and microprocessor controls has enabled it to enter markets as diverse as copiers, laser
printers, cameras and image scanners. Marks & Spencer’s competitive advantage has been
based on its consistent ability to deliver high-quality clothing and food products at reasonable prices. These examples have led Hamel and Prahalad and other researchers to focus on
the resources, capabilities and competences of the organisation as the source of competitive
advantage rather than the environment as in the traditional approach.
Because the new approach is still in the process of development, there is as yet limited agreement on the terminology to be employed. Similar terms – core competences, distinctive competences, capabilities, resources, strengths, intangible assets, skills – are used
interchangeably by different authors. Currently, a number of writers are trying to derive a
vocabulary for discussing what they have called a ‘competence-based approach to strategic
management’ Sanchez et al. (1996). Whether or not this attempt will provide a vocabulary
on which all can agree remains to be seen. Despite the confusing use of terminology, however, it is possible to describe the main characteristics of what we shall call here the ‘competence-based approach’.
The approach assumes that an organisation is a collection of resources, capabilities and
competences that are relatively unique and that these provide a basis for its strategy and its
ability to compete. It is also assumed that firms can acquire different resources, skills and
capabilities in the process of their development. But because it takes time to acquire and
develop such resources and capabilities it follows that firms that already possess a relevant
set of these can gain competitive advantage over rivals. For example, the skills and capabilities required for miniaturisation and considered to be the basis of core competence for
Sony take many years to be honed to perfection and give Sony an advantage because they
are not readily available to competitors. A diagram such as that in Figure 3 can be used to
illustrate the competence-based approach.
In contrast to the traditional planning model which takes the environment as the critical factor determining an organisation’s strategy, the competence-based approach assumes
that the key factors for success lie within the firm itself in terms of its resources, capabilities and competences. The choice of the firm’s strategy is not dictated by the constraints of
the environment but is influenced more by calculations of how the organisation can best
exploit its core competence relative to the opportunities in the external environment.
1 Identify the firm’s resources. Study its
strengths and weaknesses as
compared with those of competitors
Resources: tangible and intangible
Inputs into a firm’s production process
2 Determine the firm’s capabilities.
What do the capabilities allow the firm
to do better than its competitors?
Capabilities
Capacity of an integrated set of
resources
3 Determine the potential of the firm’s
resources and capabilities to become
core competences and to give the
organisation a sustainable
competitive advantage
Core competence which provides
sustainable competitive advantage
Ability of firm to outperform the
competitors
4 Select a strategy that best allows the
firm to exploit its core competence
relative to opportunities in the
external environment
Strategy selection and implementation
Action taken to earn superior profits
Superior profitability
Earning of above-average profits
Figure 3
The competence-based approach (adapted from R.M. Grant, 1991)
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The resources of the firm in the competence-based approach are typically classified into
two types: tangible and intangible resources. Tangible resources are inputs into a firm that
can be seen, touched and/or quantified. They include assets like plant and equipment, access
to raw materials and finance, a trained and skilled workforce and a firm’s organisational structure. Intangible resources range from intellectual property rights like patents, trade marks
and copyrights to the know-how of personnel, informal networks, organisational culture
and a firm’s reputation for its products. The dividing line between the tangible and intangible is often unclear and how they are classified varies a little from one writer to another.
Despite the problems with classification, proponents of the competence-based approach are
agreed on the relative importance of the two types of resources. Although it is clear that both
types of resources are required for any business to operate, competence-based theorists argue
that intangible resources are the most likely source of competitive advantage. The reason for
this, it is argued, is that, being less visible, they are more difficult to understand and imitate
than tangible resources. As such they are therefore more likely to be a source of competitive
advantage. A survey of managers by Aaker in 1989 appears to confirm this. Aaker found that
a reputation for quality was rated as the most important basis for competitive advantage by
the managers questioned.
Resources alone, however, are not a basis for competitive advantage. It is the way in which
resources are integrated with each other to perform a task or an activity that provides the
capability for an organisation to compete successfully in the marketplace. This being the case,
the most important resource for any organisation is the skill and knowledge possessed by the
organisation’s employees. It is this skill and knowledge acquired over time and embedded in
the firm’s culture that influences how it operates and determines its success.
Whether or not resources and capabilities have the potential to become core competences depends on how difficult they are for competitors to acquire and how valuable they
are to the firm as a basis for competitive advantage. When they are rare, difficult to imitate, non-substitutable and they allow a firm to exploit opportunities or neutralise threats,
then they can be considered core competences and serve as the basis of an organisation’s
sustained competitive advantage.
As part of this new approach to strategy development, a number of writers have incorporated the notion of strategic intent. This is a term coined by Hamel and Prahalad (1989)
to mean the leveraging of a firm’s internal resources, capabilities and core competences
to accomplish what initially appear to be impossible goals in the face of the competitive
forces confronting it. Examples cited by various authors of strategic intent include the
intention by Intel to become the number-one supplier to the computer industry, the belief
and intention of Microsoft that it can provide the Yellow Pages for an electronic marketplace of online information systems and the intention of Komatsu to encircle Caterpillar,
its main competitor. Strategic intent is said to exist in an organisation when managers and
employees have a fervent belief in their organisation and its products and when they are
completely focused on doing what they do better than their competitors.
Because the idea of strategic intent implies ambitions that at a particular moment in
time outstrip the organisation’s resources and capabilities for their achievement, theorists
have also concerned themselves with how competences might be best acquired. As in the
rest of this developing field, a variety of perspectives exist. Thus, some writers such as
Senge (1990) and Argyris (1994) stress the acquisition of competences through internal
mechanisms of individual and collective learning, while others like Hamel and Prahalad
(1989) put greater emphasis on strategic tools like alliances, licensing, mergers and acquisitions. Writers who favour internal means of acquiring competences do so because they
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claim that such means give the advantages of secrecy, exclusivity and surprise. Those who
concentrate on external means of acquiring competences defend their approach on the
grounds of flexibility and speed. As markets change, it is argued, old alliances can be discarded and new ones formed. As new resources, capabilities and competences become necessary for competitive advantage, it is quicker to buy them than to spend years of trial
and error in their development. Such is the diversity of approach to the acquisition and
building of competences that a contingent approach has been recommended as a way of
selecting the most appropriate means of competence acquisition. This approach assumes
that the characteristics and direction of the competence building activity of a company are
mainly contingent on its strategic objectives.
Some of the claims for the competence-based approach are quite sweeping in nature.
For example:
‘Like the ‘‘grand unified theory’’ that modern physicists are searching for to explain
physical behaviour at both the subatomic level and that of the entire cosmos, the
combination of core competence and capabilities may define the universal model for
corporate strategy in the 1990s and beyond’ (Stalk et al., 1992, p. 64).
Summing up so far, then, we have the claim that changes in the business environment
have rendered the positioning approach irrelevant and that the only sound basis for sustainable competitive advantage is the development and exploitation of those resources
and capabilities which are, or will become, the core competences of the organisation.
Indeed, the claim is made that core competences are more critical than the external environment as a basis for strategy determination because the environment is in too much of
a state of change to base any strategy on it. The claim for the competence-based model as
a superior form of explanation is based on examples of a number of firms that appear to
be successful because they are particularly good in one or more functions and/or because
they have acquired some unique resource which, combined with others, gives them a
competitive edge. All this adds up, we are told, to the emergence of a new paradigm in
corporate strategy.
Problems with the competence-based approach
A review of the literature, however, would suggest that a more cautious view of the socalled new paradigm should be adopted. The reasons for caution include the following.
First, it is not a new approach because its key features are the same as those contained in
a general framework for strategic management first formulated over 30 years ago. Second,
it is partial and one-sided and thus in danger of neglecting the environment, which is still
critical to the survival of organisations. Third, the case for its superiority is based on a few
examples of successful companies that have been chosen because they appear to confirm
the theory. Companies that are successful for other reasons have been neglected.
Finally, even when the leading exponents conduct an analysis of the same case, they
disagree about the basis of competitive advantage.
Turning first to the claim that the competence-based approach represents a new paradigm. Over thirteen years ago, Waterman (Thomas, 1984) noted that the focus on distinctive competence is not new. Under a heading ‘Distinctive competence the forgotten trail’,
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Waterman recalled that the first writer to discuss the idea of organisational distinctive competences was Phillip Selznick in 1957 when that writer noted that:
THE NATURE OF STRATEGIC MANAGEMENT
The terms, institution, organisational character and distinctive competence all refer to the same basic process – the transformation of an engineered, technical arrangement of building blocks into a purposive social
organisation.
Waterman also goes on to confirm that the standard textbook on business policy
(another name for strategic management) over 30 years ago was by Learmond et al. and
that the focus of strategy-making at that time was clearly on analysing and building distinctive competences. Since that time, Waterman argues, the concern with competences
has been downgraded as ‘Analysis of strategic position within a competitive system has all
but butted out concern with the boring details of execution (which sum up to that elusive
competence).’
One of the important premises of the model is that strategies should be unique and
built on distinctive (now called core) competences. In their work, both Andrews and
Ansoff stressed the importance of internal analysis as part of the strategic planning process.
Ansoff (1965) supplied perhaps what is the most detailed account. Adopting what students today will recognise as the strengths and weakness approach to the internal analysis
of the business, Ansoff describes how to develop what he calls a grid of competences. He
recommends that for such a grid to be widely applicable, it must be constructed in terms
of competence areas which are common to most industries. To be applicable to a single
firm, these areas must list specific skills and resources which differentiate between success
and failure in different types of business. Ansoff recommends taking the fully integrated
manufacturing firm as the most comprehensive framework of capabilities and using this
as a point of reference. Frameworks for analysis of firms in trade, finance and services can
then be obtained through modification of the general model. The individual skills and
resources can then be organised according to major functional areas. Functions such as
R&D, operations, marketing and so on are listed together with the equipment, personnel
skills, organisational capabilities and management capabilities for each function.
The list of the major skills and competences identified in the competence profile, as
Ansoff called it, can then be rated with respect to those found in other firms which have
the same capabilities. This rating will produce a ranking for each skill or capability according to whether it is judged to be outstanding, average or weak. The result of this process of
analysis and rating will be to provide a competence profile for the firm which can be used
in conjunction with the analysis of the external environment as an aid to strategy formulation and planning.
Ansoff seems to use the word competence and capability interchangeably, as many of
his modern counterparts do. But whatever the merits of his approach, it is evident that he
and his contemporaries were very much aware of the need to assess a firm’s capabilities and
resources as a basis for planning and strategy formulation. It is also clear that in all fundamental respects the approach adopted was similar to that being promoted by modern day
competence-based theorists. There are, of course, some differences. Modern theorists have
refined the terminology. In particular, the importance of intangible resources is stressed
and the concept of strategic intent emphasised by Hamel and Prahalad can be seen to have
built on Ansoff ’s work and added new insights.
In brief then, there is nothing radically new in the competence-based approach; it is simply an elaboration of one part of the overall strategic management framework formulated
over 30 years ago.
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The second problem with the competence-based approach is that in seeking to distance
itself from the positioning approach, it is in danger of overemphasising internal analysis to
the extent of neglecting the problems which the accelerating rate of change in the environment poses for organisations. While fully accepting that organisations continually need to
adapt to change by developing their core competences, it is also evident that the analysis of
the environment is now even more vital in order to know how to adapt!
The third concern with the new resource-based approach is a methodological one. In
many respects the methodology reminds one of the Peters and Waterman (1982) study of
excellent companies. Existing successful companies are selected and examined. The factors
which appear to have contributed to their success are listed and put forward as the key
characteristics which contribute to the success of these and other organisations, and consultants go on to prescribe these as the basis for future success. Several of these excellent
companies have since failed and critics such as Guest (1992) have pointed out that a major
problem with the methodology adopted by Peters and Waterman was that no comparisons
were made with companies not considered to be excellent. As a result, it is difficult to
know whether the characteristics contributing to excellence were evident to a greater extent
in excellent companies than in other organisations. The same weaknesses appear to be evident in the approach adopted by the new resource-based theorists. Researchers spot some
excellent companies – often Japanese high-tech consumer-electronics companies whose
products are characterised by relatively short product life cycles – and abstract what appear
to be those resources, capabilities and core competences which contribute to success.
A fourth problem with the case made by the resource-based school is that they are
unable to agree on what it is that contributes to the competitive advantage of the organisation even when they are conducting an analysis of the very same case. The disagreement
between Stalk et al. and Prahalad and Hamel (1990) in respect of Honda’s success illustrates this point very well. According to Prahalad and Hamel, Honda’s competitive
advantage derives from core competences which they define as the combination of individual technologies and production skills that underline a company’s myriad product lines.
Their example of Sony’s technical competence at miniaturisation suggests that much of
competence has to do with the technical knowledge and skill which a firm accumulates
over time.
By contrast, Stalk et al. attribute organisational success to a capability that is defined as a
set of business processes strategically understood. By business processes it is apparent, from
their Honda example, that they are referring to what are usually thought of as business
functions, such as distribution, after-sales service, research and development and so on.
But they also emphasise the effective weaving of business process together and the need for
cross-functional integration as prerequisites for a capability to exist. In fact, the definition
of capability by Stalk et al. includes so much as to invite confusion.
In short, there are some problems with the competence-based approach. There is as
yet a lack of agreement on terminology that results in a lack of clarity. Also, the claim
that competences are the critical basis of competitive advantage has not been conclusively
established because of the limitations of the methodology applied by some researchers.
In fact, it is questionable whether or not it makes sense even to try to establish whether
position in the industry/marketplace or the organisation’s competences are the key to
critical advantage when the performance of any company is so evidently dependent on
both. There is also a danger of the impact of the environment being neglected because of
an overenthusiasm with the rediscovery that the competences of the company are vital in
the determination of strategy.
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These problems are not insurmountable. Some of them, such as the problem with terminology, are currently being addressed and the less extreme advocates of the competencebased model readily agree that the approach can complement rather than conflict with the
positioning approach.
THE NATURE OF STRATEGIC MANAGEMENT
Conclusions
This review of developments in strategic management suggests the following state of play.
The environment in which organisations operate is changing faster than ever and it is
therefore necessary for it to be continuously monitored and the position of the organisation within it to be regularly assessed.
Recent studies have re-established the importance of resources, capabilities and competences as critical sources of competitive advantage, and concepts for use in their analysis are
currently being developed. The planning process has been questioned partly because of its
limited success in application but also because it fails to take account of cognitive, political
and cultural processes which often influence both how the strategy is formulated and its content. The findings do not appear to challenge the need to conduct analysis or to plan, but it
is useful for people involved in planning to have knowledge of the cognitive and political
processes at work so that they can take account of them and avoid any negative effects.
References
Management Accounting Official Terminology, CIMA Publishing 1996, p. 38. (See the 2005
edition for all other references).
Andrews, K.R. (1971), The Concept of Corporate Strategy. Holmwood, IL: Irwin. Ansoff,
H.I. (1965), Corporate Strategy. New York: McGraw-Hill.
Porter, M.E. (1980), Competitive Strategy: Techniques for Analysing Industries and
Competitors. New York: Free Press.
Porter, M.E. (1985), Competitive Advantage: Creating and Sustaining Superior Performance.
New York: Free Press.
Selznick, P. (1957), Leadership in Administration: A Sociological Interpretation. Evanston,
IL: Row, Peterson.
Gilmore, F.F. (1979), Formulation and Advocacy of Business Policy (rev. edn). Ithaca, NY:
Cornel University Press.
Lenz, R.T. and Lyles, M.A. (1985), ‘Paralysis by Analysis: Is Your Planning System
Becoming too Rational?’ Long Range Planning, August, pp. 64–72.
Mintzberg, H. (1994), The Rise and Fall of Strategic Planning. Pearson Education.
Reprinted by permission of Pearson Education. Copyright (c) 1991, by the Regents of
the University of California Management Review Vol. 33, No. 3, by permission of The
Regents.
Pascale, R.T. (Spring 1984), ‘Perspective on Strategy: The Real Story behind Honda’s
Success’. California Management Review, Vol. 26, No. 3, pp. 47–72.
Johnson, G. (1988), ‘Re-thinking Incrementalism’. Strategic Management Journal, January/
February pp. 75–91.
Porter, M.E. (1980), Competitive Strategy: Techniques for Analysing Industries and
Competitors. New York: Free Press.
Rumelt, R.P. (1991), ‘How Much Does Industry Matter?’ Strategic Management Journal,
Vol. 12, pp. 167–185.
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Pralahad, C.K. and Hamel, G. (1990), ‘The Core Competence of the Corporation’.
Harvard Business Review, May/June.
Sanchez, R., Heene, A. and Thomas, H. (1996), ‘Towards the Theory and Practice of
Competence-based Competition’ in Sanchez, R., Heene, A. and Thomas, H. (eds),
Dynamics of Competence Based Competition: Theory and Practice in the New Strategic
Management. Oxford: Elsevier.
Grant, R.M. (1991), ‘The Resource-based Theory of Competitive Advantage: Implications
for Strategy Formulation’. California Management Review, Vol. 33 (Spring), pp.
114–135.
Aaker, D.A. (1989), ‘Managing Assets and Skills: The Key to Sustainable Competitive
Advantage’. California Management Review, Vol. 31, No. 2, pp. 91–106.
Hamel, G. and Pralahad, C.K. (1989), ‘Strategic Intent’. Harvard Business Review, Vol. 67,
No. 3, pp. 63–76.
Senge, P. (1990), ‘The Leader’s New Work: Building Learning Organisations’. Sloan
Management Review, (fall), pp. 7–23.
Argyris, C. (1994), ‘Good Communication That Blocks Learning’. Harvard Business
Review, Vol. 72, No. 4, pp. 77–85.
Hamel, G. and Pralahad, C.K. (1989), ‘Collaborate with Your Competitors and Win’.
Harvard Business Review, Vol. 67, No. 1, pp. 133–139.
Stalk, G., Evans, P. and Scholman, L.E. (1992), ‘Competing on Capabilities: The New
Rules of Corporate Strategy’. Harvard Business Review, March/April, pp. 57–69.
Thomas, P.J. (1984), ‘Strategy Follows Structure: Developing Distinctive Skills’. California
Management Review, Spring.
Ansoff, H.I. (1965), Corporate Strategy. New York: McGraw-Hill.
Peters, T. and Waterman, R. (1982), In Search of Excellence. New York: Harper & Row.
Guest, D. (1992), ‘Right Enough To Be Dangerously Wrong: An Analysis of the In Search
of Excellence Phenomena’, in Salaman, G. et al. (eds), Human Resource Strategies.
London: Sage.
Pralahad, C.K. and Hamel, G. (1990), ‘The Core Competence of the Corporation’.
Harvard Business Review, May/June.
Discussion questions
● Explain how strategies can emerge.
● Contrast the ‘positioning approach’ to strategy formulation with the ‘competence-based’
approach.
Revision Questions
1
Section A type questions
Question 1
Newco plc is a recently privatised company that supplies energy to the general public. One
of the objectives underlying Newco plc’s change of ownership was that it would be enabled
to set its own goals and targets without reference to third parties.
The chief executive of Newco plc has publicly stated that the aim of the business will
be ‘to supply the best possible service to the greatest number of consumers at the cheapest
possible cost.’ It is believed, within Newco plc, that the cheapest possible cost will only be
achieved by the introduction of a number of changes to improve operating efficiency.
The holders of this view are, like the chief executive himself, people who have been
brought into Newco plc within the last 2 or 3 years. This group is small in numbers but
seems to be very influential.
Requirement
Discuss the extent to which the chief executive’s aim is compatible with the interests of the
shareholders.
(10 marks)
Question 2
N Airline operates in the short haul flight industry. Unlike many of its competitors who
are constantly seeking to reduce costs, often at the expense of customer service, the foundation of N’s business strategy is based on providing a superior quality of service. Its mission is to be market leader, providing unrivalled customer service, in flight comfort and
reliability in the short haul airline industry. It views its customers as central to strategic
developments, and values its staff in building success.
Requirements
(a) Distinguish between the concepts of mission and objectives.
(4 marks)
(b) Illustrate how the mission for N Company could be translated into strategic objectives.
(6 marks)
Question 3
T is the owner manager of a small business that designs and produces high quality garden
furniture. The business started out as a hobby using T’s creative design and carpentry
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talents, and he has been surprised by his success. Over the last year the business has
experienced unplanned growth and by chance T has just won a contract to supply a local
chain of DIY stores.
The local Chamber of Commerce has recently sent him an invitation to attend a
number of seminars titled ‘Formal Strategic Planning for Small Business’. However, T is
doubtful that the content of the seminars will be of any relevance to him and feels he cannot afford time away from his business. His view is that it is best to let the strategies and
developments for his business emerge.
Requirement
Explain the reasons why T is right to be doubtful about the relevance of formal strategic
planning for his business.
(10 marks)
Section B type questions
Question 4
Tub plc was founded in the early 1980s by two brothers. As employees in their father’s
home-decorating business they became aware of the opportunities available in the growing
home improvement and DIY (‘do-it-yourself ’) markets. Spotting a gap in the middle-price
range of the market for bathroom and kitchen fittings, they set up a company to manufacture these items. The demand for their products outstripped their ability to supply, and
they expanded rapidly. Most of this expansion was financed from retained profits but, as
they happened to be located in an area of economic decline, they qualified for a state grant
towards the cost of their new premises.
By 1995 Tub plc had organised itself around eight operating companies covering the
different products and sales activities of the group. Some of these sold directly to housing
developers, some to major retail DIY multiples and one of the companies coordinated the
group’s export operations.
Each company had its own independent board of directors on which the brothers sat
with one vote each. The brothers could be out-voted and in fact had been at various
times in the past. The senior management believed in decentralisation, arguing that it
promoted enterprise and that it was easier for small companies to grow than for larger
ones to do so.
Tub plc has invested heavily in new technology, automating processes wherever possible.
It has developed good relationships with its suppliers and developed just-in-time purchasing and production systems. It is also able to deliver its products within 48 hours of orders
being placed. It has progressive human resource management policies in place.
At the present time the company has no new products coming on-stream and its
research and development function is tiny and confines itself to modifying existing products for what is a difficult overseas market.
The environment in which the company operates is currently very difficult. Economic
recession in the early 1990s and a housing market which continues to remain stagnant are
causes for concern.
Requirements
(a) Identify the key issues involved in formulating the corporate strategy of a company
such as Tub plc.
(8 marks)
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(b) How would you go about setting the business strategy of the various operating companies within the Tub group?
(10 marks)
(c) In what ways might the strategies of the organisational functions within each of the
operating companies contribute to the overall strategy?
(7 marks)
(Total marks ⴝ 25)
THE NATURE OF STRATEGIC MANAGEMENT
Question 5
F Company is a medium sized business that manufactures electrical kitchen appliances
including food processors, toasters, juicers and coffee makers. In the last 12 months the
company has lost market share to its competitors, and has underperformed on most of
its key performance indicators. Its future survival is threatened as new entrants are stealing market share, and the customers are demanding new product and design features. G,
the company’s management accountant, suggests that F Company’s difficulties are because
they have been too complacent, not responded to changing environmental conditions and
have not undertaken any formal strategic planning. He is also concerned that different
areas of the company appear to be pursuing conflicting objectives.
To help the company develop a sustainable competitive advantage, G proposes that a
more formal top-down approach to developing business strategy should be adopted. He
is also of the view that greater emphasis should be placed on understanding the external
environment.
However, at a recent meeting where G outlined the benefits that a more formal
approach to planning would bring, he was surprised that P disagreed. P, the HR director,
argued that the dynamic environment that F operates in means that the formal approach is
a waste of management time. She suggests that the company should assess how sustainable
competitive advantage can be achieved through using its resources, skills and capabilities.
Requirements
(a) Explain the benefits and drawbacks associated with F Company adopting a top-down
approach to the formulation of business strategy.
(12 marks)
(b) Compare and contrast the different views held by of G and P on how F Company can
gain competitive advantage.
(13 marks)
(Total marks ⴝ 25)
Question 6
B Bakery is a family owned firm employing around 250 employees. It has been in business
for over 50 years and supplies bread and confectionary products to a number of different businesses, including supermarkets and pub-chains. The firm has experienced mixed
fortunes over the years in terms of business performance, but in the last few years has
experienced a growth in orders for some of its new product ranges, particularly its organic
products. These products have been developed as a result of the Managing Director’s wife’s
interest in healthy eating. However, the Bakery has recently lost some key accounts as a
result of being unable to produce some of its products at a competitive price.
Six months ago the first non-family Board member, CT, joined the company as
Operations Director. CT is surprised to find that the firm does not have a mission nor
any formal planning process in place. He is even more concerned that the Bakery does
not have any clear objectives or key performance indicators. In a recent conversation with
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the Managing Director, CT suggested that the Board should be more proactive and that
adopting a more formal approach to planning would help better inform the future development and direction of the Bakery. He suggests that the Board should consider using the
rational approach to strategic management.
He was somewhat taken aback by the response from the Managing Director who said
that in his 30 years with the firm it had grown and been successful despite the absence of
formal plans. He commented that planning creates lots of analysis that does not result in
action and he prefers strategies to emerge. His view is that planned and intended strategies
often turn out to be invalid.
Requirements
(a) Distinguish between the views of the Managing Director and the Operations Director
on how strategy occurs.
(17 marks)
(b) State the arguments that the Operations Director could use to persuade the Managing
Director of the benefits of having a formal strategic plan.
(8 marks)
(Total marks ⴝ 25)
Solutions to
Revision Questions
1
Section A solutions
Solution 1
Common errors
● Not comparing and stating the extent of differences;
It is generally assumed that the fundamental objective of a profit-seeking company is to
maximise the shareholders’ wealth. The chief executive of Newco plc did not include the
shareholders’ interests in the statement of objectives, but expressed a view which suggests
a strong marketing orientation. Stating the objectives of the firm as supplying ‘the best possible service to the greatest number of customers at the cheapest possible cost’, the interests of
customers are stressed. This, then, is an intermediate objective which focuses on marketing. However, by emphasising an intermediate marketing objective, management may not
focus sufficient attention on the maximisation of shareholders’ wealth.
In a public utility company like Newco plc, many shareholders will also be customers and
there will be a conflict of interest between these two groups. Expenses incurred to provide the
best possible service, will result in lower levels of profit for shareholders. While this situation
may please the customers, it is likely to create dissatisfaction among shareholders. On the
other hand, excessive concern with cost-cutting will increase profits available for shareholders, but may cause customers to seek better service from competitors. This could be against
the long-run interests of the shareholders as profitability is likely to decrease if sales decline.
One of the fundamental beliefs of marketing is that of mutually beneficial exchanges
between the supplier and the customer and this is likely to be achieved if the service can be
provided at the cheapest possible price. Both shareholders and customers will obtain benefit
from the firm if excellent service is provided at a relatively low price and if the service is
available to the greatest number of consumers. It is therefore possible that the chief executive’s statement focuses attention on the best method of achieving the ultimate objective of
the organisation, the maximisation of shareholders’ wealth.
Solution 2
(a)
A mission is a broad statement of the overall purpose of the business and should reflect
the core values of the business. It will set out the overriding purpose of the business in line
with the values and expectations of stakeholders. It will also be concerned with the scope
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and boundaries of the organisation, in N’ cases short haul flights. Sometimes it is simply
referred to as ‘What business are we in?’
Objectives differ in that they state more precisely what is to be achieved and where possible, provide quantitative measures of performance. These could be expressed in financial terms, but also marketer based objectives. The characteristics objectives should possess
include:
A precise formulation of the attribute sought
● A measure for progress towards the attribute
● A target to be achieved
● A time frame in which it is to be achieved.
●
The acronym often used when setting objectives is SMART: that is objectives should be
specific, measurable, attainable, and relevant and time bound.
(b)
N Company could set objectives relating to its growth aspiration in terms of the numbers
of passengers using the airline, or in terms of market share, for example gaining 20 per
cent of short haul flights by the end of 2006. Growth could also be measured in terms of
the number of destinations or landing slots.
The objectives relating to superior quality of service could be set based on customer
satisfaction. This information could be collected through market research, against a set
of customer satisfaction criteria and might include factors such as ease of booking, in
flight comfort, helpful staff. Another measure of quality could be the percentage increase
in repeat customer bookings; percentage of flights departing and arriving on time. A
further objective could be in terms of percentage reduction in the number of complaints
received.
Solution 3
The formal approach to strategic planning usually results in a consciously thought out or
deliberately intended strategy. It assumes that strategy making is a rational process with
strategies based on careful analysis of the opportunities and threats posed by the external
environment, and consideration of the organisation’s strengths and weaknesses, relative to
other players in the industry.
Whilst there can be benefits to adopting such an approach, the formal process may not
be suitable for a small business such as T’s for the following reasons.
A formal approach can be very expensive, time consuming and complicated for small
businesses. T is right to be concerned about the opportunity cost, not only in terms of
attending the seminars, but also in terms of spending time on planning which could
take him away from the main operations of his business.
● Formal planning may also be considered too static and a process that tends to be infrequent. In a rapidly changing environment it could be argued that the outcomes on
which formally planned strategies are based often become quickly outdated, with the
result that the intended strategy fails.
● T may be worried that such a process will just end up as a bureaucratic process with
systems and targets unhelpful to a small business. The formal approach could get in the
way of T’s interest and creative talent, since it could be conceived as a rigid approach
bound up in processes, undermining T’s core competencies.
●
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One of the aims of formal strategic planning is to achieve goal congruence between different business areas and stakeholders. However in the case of a small business the goals
are likely to be inseparable from the goals of T as the owner manager. In a small business, such as that run by T is could be argued that the formal approach is not appropriate because the success is more dependent of the ideas of T. It is unlikely that T will have
the economic rationality in his approach to running the business which is more often
associated with businesses governed by external shareholders.
● Even if new options are identified from formal planning T is likely to consider narrow
product/market choices because his business is essentially based on his own specific
knowledge and skills arising from his hobby. Despite winning the contract from the DIY
stores, as a small business it is doubtful that T will have the resources to invest in new
strategic ventures and may be unwilling to share or delegate control to others. Indeed T
may not have aspirations for growth.
● T says that he prefers to let his strategy emerge. This approach arises from ad-hoc, unanticipated or uncontrollable circumstances. It is often referred to as developing from
patterns of behaviour in response to unexpected events. In the case of the scenario the
unplanned growth was as a result of the order from the local chain of DIY stores. This
was not a consciously thought out nor a deliberately intended strategy.
THE NATURE OF STRATEGIC MANAGEMENT
●
Whilst there are many valid reasons why T might not see the seminars of any benefit to
him, some of the strategic planning frameworks/models might be helpful in making future
decisions about the business. For example, it would be sensible for T to monitor the environment and conduct an informal analysis of his strengths, weaknesses, opportunities and
threats to help him to stay ahead of the game.
Section B solutions
Solution 4
Common errors
● confusion over the word ‘setting’
● lack of definitions for levels of strategy
● liability to link these levels
● lack of application to the case.
Hofer and Schendel distinguish between corporate strategy (what business to be in), business strategy (which market segments to serve and how), and functional strategy (detail by
department).
The corporate strategy of a company like Tub plc will convert its ‘mission’ – what it is
all about as a business – into practical policies on markets to be served and how to generate and manage growth.
Tub plc’s corporate strategy is to grow its businesses in particular markets in the kitchen
and bathroom furnishings sector, building a stronger group by gradually and organically
building up stronger individual companies through related diversification, and financing
this growth internally.
In formulating the corporate strategy of Tub plc, the directors need to consider Tub plc’s
overall strengths and weaknesses in relation to competitors, customers and suppliers in
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each market served, and assess current trends so that opportunities can be maximised and
threats minimised. Group corporate strategy will decide such questions as where to focus
group resources (core businesses).
Other group-level strategic choices cover such areas as:
Degree of investment in automation. Tub plc has favoured automation as a source of competitive advantage.
● Culture and people strategies. Tub plc has adopted good HR policies, encouraging local
empowerment of managers, and has built good relations with distributors. The business
also uses a TQM approach.
● Management structure. Tub plc provides a minimalist superstructure with a coordination
role, capable of using its scale advantages wherever useful – for example, buying power,
HR standards, technology, marketing.
●
Within the overall corporate strategy – which appears to be as much a framework of
goals as a formal plan – operating companies follow their own business strategies for
growth. Thus, while overseas activities are coordinated in one group entity, the emphasis
each business puts on overseas activity appears to be determined locally. At group level,
Tub plc’s management may well balance ‘cash cows’ with ‘rising stars’ to ensure that the
group remains in healthy balance as it goes forward. This is also a key issue in managing
corporate strategy.
Business strategy refers to how a business unit approaches its markets. For example,
Marks & Spencer (a large UK retailer) has extended its presence in out-of-town shopping
centres, extended its activities into financial services, and refined the standardisation of its
product range and presentation style. As another example, McDonald’s has increased its
range of non-beef products in the United Kingdom following a health scare surrounding
British beef.
I would determine the business strategy of Tub plc’s companies by reference to the group
strategy and the capacity of the companies to benefit from collaboration, by reference to
their individual competences and local competitive conditions, and by matching resources
to opportunities in each company.
I would analyse the strategic position of each company (using techniques such as SWOT
analysis, value chain analysis, and Porter’s five forces analysis) to explore the alternatives,
and then choose a set of strategic moves that would be clear-cut and measurable in implementation. Each business strategy would be designed (crafted) to build incrementally upon
the emergent strategic themes in that business. I would then make sure that the feedback
loop worked, so that information from the market on the impact of one strategic decision
could be fully and promptly factored in the evolution of future strategic plans. I would not
embark upon detailed large-scale planning, but rather seek to keep the entrepreneurial local
opportunism that has characterised much of Tub plc’s past success. To support and focus
the ongoing process, I would aim to formalise a strategic review exercise on a biennial basis.
Porter has identified three generic business strategies (cost leadership, differentiated
brand marketing, and niche focus) which a company might adopt in response to its analysis of its strengths, weaknesses, opportunities and threats. This is also the resource-based
approach to strategy formation – which tends to focus not so much on where we should
be heading in relation to our markets, but on what tools we have to work with.
Functional strategies are important as this is the level at which strategy is implemented
in detail. The accumulated effect of the strategic steps taken in each function of a business
(finance, marketing, production, etc.) determines the strategic development of that business.
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For example, a finance department strategy may be to buy a new computerised information
system that will help control the business better, enabling value to be added in various ways
across the company. Similarly, the functional strategy of the production department may be to
automate the production of product X so that it can be made in volume around the clock and
at lower cost, creating a strategic opportunity for the company to compete on price and a strategic pressure to increase its share of that market and skew its investment in that direction.
Steps taken by functional departments need to be tied into the business unit strategy
because otherwise departmental actions can thwart or counter the thrust of the overall
business (or add too little value within the overall value chain of the business). Functional
strategies within operating companies do accumulate upwards (like building blocks) into
business unit development and hence into overall group strategy. Sometimes, one development in a corner of a large group can spread out and influence its whole direction, for
example, one of the R&D units in a large pharmaceutical group developed a drug that was
such a success that it dominated the development of the whole group.
In developing functional strategies, there is both a top-down and a bottom-up communications exchange. This helps to ensure that the right strategic decisions are taken, that
the detail will work, and that everyone is aware of the plan and personally engaged in its
fulfilment. Functional strategies provide readily measurable implementation, are digestible
elements of the overall plan, and convert theory into practice at the sharp end.
THE NATURE OF STRATEGIC MANAGEMENT
Solution 5
(a)
G’s idea of introducing a formal top-down strategy process would mean building a designated team who is responsible for the strategy development for F Company, or alternatively setting up a strategic planning unit who report to senior management. This would
involve setting up systems for the formalised collection of information needed for the strategy process, and is similar to the traditional rational planning model. There would need to
be a process of communication and implementation of the business strategy. This is often
achieved by having a formal document that provides a summary of the key elements of the
plan, which is usually long term, ranging from 3 to 10 years depending on the industry
involved. Each year the strategy should be reviewed and adjustments made in the light of
changing conditions.
There are a number of benefits associated with this approach as G suggests. The first is that
such an approach can avoid short-term behaviour and help identify key strategic issues facing
the Company. By considering the longer term and the nature of the environment, F Company
should anticipate competitor actions and be more proactive in their planning to keep ahead.
The formal approach should help in terms of achieving goal congruence and providing
direction for the different areas of the business. Perhaps G’s background in management
accounting is another reason that he is a proponent of such an approach since it provides a
basis for strategic control. Responsibilities and ownership for the development of strategic
development are clearly articulated and there are a clear set of programmes and policies
associated with implementation. Targets and reports will enable the success of the strategy
to be reviewed.
This approach should demonstrate that F Company has a clear idea of where it is going,
which should improve stakeholder perceptions of the business. Investors may be more confident of higher returns which could lead to higher share prices; relationships with suppliers
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could improve because they can rely on orders in the future; it could also help in terms of
employee retention and staff morale.
Despite the benefits of the formal approach to strategic planning, there are drawbacks to
process. A formal approach could mean that the timing of the process is too infrequent to
allow the business to be dynamic. If the business environment changes unexpectedly then
F’s performance may deteriorate further. It could be argued that there is evidence that this
is already happening. It is difficult in an uncertain business environment since formal business strategies require that the strategist can make reliable assumptions about the future
and particularly about the opportunities and threats that face them.
A formal approach does not encourage the development of more radical and innovative
strategies and often results in the loss of entrepreneurial spirit since it encourages rewards
to be given to managers who carry out their part of the strategy sticking to the convention
way of doing business. The formal top-down approach does not encourage contributions
from staff who are lower down the hierarchy. Yet it is often these staff who are most in
touch with the customer and can see the impact of competitor activity.
(b)
The commonality between G’s perspective and that of P is the economic view of competitive advantage, that is, something that enables F Company to generate superior returns on
shareholder investment. Competitive advantage can be defined as the significant advantages that the organisation has over its competitors, allowing the organisation to add more
value than its competitors in the same market. The disagreement is over the sources of
competitive advantage.
G’s traditional perspective on strategic management is based on the view that competitive advantage is derived from the firm’s position in relation to its environment, competitors, customers or other stakeholders. This is usually referred to as the positioning view;
the outside-in view; or strategic fit.
The environment is the critical factor in determining the organisation’ strategy, so effort
should be focused on or involves scanning the external environment to determine potential
opportunities and threats and nature of competition in order to determine a strategy which
will best position F Company. They would then need to mould the company’s structure,
culture, skills and products to fit the environment.
The strategy for delivering competitive advantage is one that positions the organisation within the environment that is defensible against potential competition. Supernormal
profits result from achieving high market share relative to competitors; through differentiated products; or low cost.
The approach to achieving competitive advantage suggested by P is a more recent paradigm of strategic management, sometimes referred to as the resource-based view (RBV).
This is an inside-out-view where competitive advantage is gained from the exploitation of
the organisation’s resources, competences and capabilities. In other words, the distinctive
groups of skills that allows an organisation to provide particular benefits and deliver competitor advantage.
Those supporting this view criticise the position view stating that the competitive
advantage is not sustainable in the long run, since advantages are often easily copied by
rivals. Whereas adopting the RBV means that superior profitability depends on the firm’s
possession of unique resources or abilities that cannot be easily imitated by rivals. The
RBV argues that the individual resources of F Company will provide a stronger basis for
strategy development than the positioning approach.
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The assumption is that an organisation is a collection of resources, capabilities and
competences that are relatively unique and can provide the sources basis for its strategy
and its ability to compete better than those of competitors.
Resources can be tangible, such as plant and equipment, access to raw materials and
finance, trained/skilled workforce or intangible such as brand, intellectual property.
However, it is the way the resources are used which provides the capability to compete. For
resources to be unique, Barney (1991) suggests that they must add value, be rare, difficult
to imitate and cannot be easily substituted.
P could assert that the environments facing F Company are too dynamic to enable a
position approach to be effective, since it assumes the firm is flexible enough to change its
size and shape to fit the environments and can develop business processes and structures
that enable it to spot changing customer needs speedily and to develop commercially viable responses. However, the environment for F Company is characterised by faster product
life cycles, and rapidly changing technologies making this very difficult.
The RBV is based, has developed from the work of Prahalad and Hamel’s work on core
competences which focuses on the strategic intent of an organisation to leverage its internal capabilities and core competencies to confront competition.
P’s views could be considered to have some similarities to those of Mintzberg, who
argues that strategy is best considered as an emergent process. In a rapidly changing and
dynamic environment Mintzberg contends that formal planning is inadequate and rather,
it is better that the organisation retains flexibility and be ready to adapt strategy as its competitive environment changes.
THE NATURE OF STRATEGIC MANAGEMENT
Solution 6
(a)
The Managing Director refers to his preference for the emergent approach to strategy
development. This perspective was suggested by Mintzberg based on the idea that most of
what organisations intend to happen, often do not happen and few strategies followed by
organisations are consciously planned.
Mintzberg argues that strategy formulation is a continually evolving process in which
strategies emerge, perhaps as the result of the processes of negotiation, bargaining and
compromise, rather than due to the deliberate planning process as characterised in the
rational approach being suggested by the Operations Director. He contends that intended
strategies become invalid and not implemented because the pace and unpredictability
of developments in the business environment overtakes it. For example there could be
changes in the bakery’s external market such as changes in the market for the products it
produces and in the nature of the competition.
The argument is that strategy should not be considered a linear process, but rather an
iterative process in which problems raised in implementation are fed back so that the strategy can be adjusted to take account of changing circumstances.
Mintzberg further maintains that the strategy development process is not so much
about thinking and reasoning, as it is about involvement, a feeling of intimacy and harmony, developed through long experience and commitment. This is perhaps the point
being made by the Managing Director who has worked in the bakery for many years. So,
strategies can form, rather than be formulated as proposed in the rational approach
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Emergent strategies result from a number of ad-hoc choices or responses to circumstances. They can be described as developing out of patterns or behaviours that are realised
despite or in the absence of specific intentions. This means that they just happen along
the way with differing degrees of management involvement. They are not consciously
thought out, but do needed to be shaped by management to the create advantage for the
organisation. This can be illustrated by the ideas of the Managing Director’s wife’s interest
in healthy eating, with ideas being brought into the bakery
Unlike the planning approach, which implies rational and systematic analysis of competitors and markets and or strengths and weaknesses, the emergent approach requires
management to craft strategy. The role of the manager is to craft a vision through moulding the organisation and its strategy.
The rational approach that is being proposed by CT, the Operations Director, assumes
a step by step systematic approach to strategy development. It involves the careful and
deliberate formulation, evaluation and selection of strategies for the purpose of preparing a
cohesive long term course of action to attain objectives. The three main stages are strategic
analysis, strategic choice and strategic implementation.
The process is iterative, often linked to an annual planning cycle. The first stage, strategic analysis, which if undertaken by the Bakery would help in understanding its current
position in terms of the environment in which it operates, and determine what opportunities and threats exist. It would also help in formulating what the Bakery’s mission
and objectives should be which could then be communicated to employees in the Bakery.
Analysis of the Bakery’s internal capability would reveal what its resources and competencies are and where it adds value. In other words, gaining a better appreciation of what its
strengths and weaknesses are.
The next stage would involve generating strategic options for the Bakery, exploring how
it might develop in the future, given its current position. The different options would be
evaluated in terms of whether each is feasible, suitable, and acceptable to the Bakery’s key
stakeholders.
The strategies selected need to implemented, in other words strategy needs to be translated into action plans to make them happen.
(b)
The Operations Director could articulate the following benefits of having a strategic plan.
It can help the Bakery take a longer term view than a short term reactive approach and
help to approach an uncertain future.
● It should help encourage the directors in the bakery to consider the business environment which should inform plans and decisions, helping identify future strategic issues
and promote a more proactive approach.
● It can help the Bakery in allocating its resources more effectively.
● It can provide standards against which the performance of the organisation is measured
and controlled. It can also provide a basis for strategic control so that there are targets
and reports enabling review of the success of strategy.
● It can help in the co-ordination of activities, and link to operational plans in the various
parts of the Bakery. In other word promotes congruence of operational plans with
strategic direction.
● In a family owned business it can avoid succession problems, for example if the MD
retires the strategy of the firm will still be understood and outlast the loss of a key
member of the management team.
●
2
The Nature of the
Competitive Environment
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The Nature of the
Competitive Environment
2
LEARNING OUTCOMES
By the end of this chapter you should be able to:
䉴
discuss the nature of competitive environments;
䉴
distinguish between different types of competitive environments.
2.1
Introduction
Strategy is concerned with the ability of the organisation to fit with, or cope with, its environment. Since an organisation does not operate in a vacuum it is important that it continually scans its external environment in order that it can develop appropriate responses to
take advantage of opportunities, or to minimise threats. An understanding of the external
environment is, therefore, a critical element in the development of strategy and can help in
determining how to achieve a sustainable competitive advantage.
This chapter examines the different operating environments of the organisation. It
introduces models and frameworks that can be used to analyse the external environment,
including the macro environment, competitive environment and national competitive
environment. It also explains the range of information sources which management may
draw upon in the continuous process of environmental scanning.
2.2
Environmental impact assessment
According to CIMA environmental impact assessment is:
‘A study which considers potential environmental effects during the planning
phase before an investment is made or an operation started.’ CIMA:
Management Accounting: Official Terminology, 2005, p. 48.
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This suggests that environmental analysis is undertaken during the strategy formulation
process and assumes that the firm has a formal and rational strategy process. The information is gathered as a preliminary to the corporate appraisal and may include special reports
on particular factors affecting the present or proposed strategy.
However environmental scanning can also be a continuous process so that the organisation being constantly aware its environment, watching out for emerging opportunities
and threats. This will be a key part of an emergent approach to strategy, where it is recommended that as many staff as possible are involved in order to maximise the information
and create greater acceptance of the need for change.
2.3
Different stages in environmental analysis
The environment may be thought of as all the factors outside of management control
which can affect the performance of the business and the success of its strategies.
Management frequently use models to help them make sense of the environment of
their organisations. These models separate the mass of factors impacting on the firm into
groups, or segments, to aid closer analysis.
The model shown in Figure 2.1 illustrates the different levels of the environment which
together help in understanding the key trends and forces in the external and competitive
environments and the key characteristics of these environments.
The first level concerns the nature of the environment in terms of the degree of turbulence and uncertainty. It provides an understanding of the basic conditions surrounding the organisation. The level of turbulence can be explained in terms of the degree
to which the external environment is likely to change, and also predictability which is
concerned with the degree to which change can be predicted. Uncertainty can be determined by examining the degree of complexity within the environment and the degree
of dynamism. This involves assessing whether the environment is simple or complex
to understand and whether it is static or dynamic, facing rapid change. Johnson et al.
Static
Dynamic
The firm
Macro-environment
Macro-environment
Industry/microenvironment
Industry/microenvironment
Simple
Complex
Figure 2.1
Different levels in the environment
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(2008) suggest that uncertainty increases when environmental conditions are more complex and dynamic. Where turbulence and uncertainty are high the organisation will need
to structure itself so that it is adaptable and flexible in order that it can cope with rapidly changing circumstances. The concept of uncertainty is explored further later in this
chapter.
The next level in the model is the macro-environment, which includes developments in
the wider business environment relating to political, economic, social and technological
changes. It is these factors that can create opportunities or threats and impact on the strategic development and ultimately business success or failure.
The inner level is the micro-environment, which encompasses the competitive pressures
within the industry and power of customers and suppliers.
It is important to note that the various levels cannot be viewed in isolation, rather they
are interrelated. For example a change in legislation could alter the nature of the competition the organisation faces.
THE NATURE OF THE COMPETITIVE ENVIRONMENT
2.3.1
Analysing the macro-environment
The PEST model was introduced in Chapter 1 as a popular framework for analysing the
external forces driving change in the rational approach to strategy development.
PEST is an acronym which categorises factors under the following headings:
political/legal influences
● economic influences
● social and demographic patterns and values
● technological forces.
●
It is the factors within each of these dimensions that can affect, either directly or indirectly,
the organisation’s business strategy and performance. Once this analysis has been undertaken the headings can be used as a checklist to assess the relative importance of the different influences in order to identify the key drivers of change.
Although PEST analysis is often viewed as the ‘industry standard’ for macro-environmental
analysis some writers prefer the greater detail provided by a PESTEL analysis. This separates
legal from political and specifies ecological separately, for example:
Political:
● taxation policy
● foreign trade regulations
● government stability.
Economic factors:
● business cycles; GNP trends; interest rates
● inflation; unemployment disposable income.
Sociocultural factors:
demographics
● income distribution
● lifestyle changes; attitudes to work and leisure
● consumerism.
●
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Technological factors:
● government spending on research
● new discoveries/development
● rates of obsolescence.
Ecological factors:
● protection laws
● energy consumption issues
● waste disposal.
Legal factors:
● monopolies legislation
● employment law, product safety, etc.
There are other examples of frameworks using acronyms for example:
DEEPLIST: demographic, economic, environment, political, legal, informational, social
and technological.
Another variation is LoNGPEST, which adds a second dimension to the external
environment which is the levels at which influences occur. for example local, nation and
global:
Lo refers to the local level in which the organisation operates, for example the immediate city or region.
● N is concerned with the home country in which an organisation has its headquarters.
● G represents the global level, which becomes anything outside the local and national
environments.
●
The practical point for any organisation is that it is irrelevant which acronym is used
as long as the process is practised within the company and that they remain aware of the
business environment and the changes that are occurring within it.
Activity
Undertake a macro-environmental analysis for your organisation, or one with which
you are familiar. From the analysis identify what the key issues are and explain the
implications for the organisation.
Scenario-based analysis
If the environment facing an organisation is turbulent, unpredictable, and has high levels
of uncertainty then some commentators argue that undertaking a PEST analysis is meaningless since it is based on the current situation and extrapolating forward.
An alternative approach would be to undertake scenario analysis which is concerned
with developing detailed and plausible views of how the business environment of an
organisation might develop in the future and then examine the strategic significance on the
organisation (Johnson et al., 2008). This would involve building various scenarios, which
are essentially models of possible future environments for an organisation. Managers can
develop strategies and contingency plans for the different scenarios, and as the environment unfolds then they can adapt and adjust strategies accordingly.
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Analysing the micro-environment/industry
environment
One of the key drivers for change is often in response to the nature of competition. As
discussed in Chapter 1, the factors driving change at the micro-level can be anlaysed
using Porter’s five forces model. This framework identifies the five basic competitive
forces that influence the state and structure of competition in an industry, and which
collectively determine the long-term return on the capital and the profit potential of the
industry as a whole.
According to CIMA Porter’s five forces is:
External influences upon the extent of actual and potential competition within
any industry which in aggregate determine the ability of firms within that industry to earn a profit CIMA: Management Accounting: Official Terminology. 2005, p. 50.
The model can be used in several ways:
1. To help management decide whether to enter a particular industry. Presumably, they
would only wish to enter the ones where the forces are weak and potential returns
high.
2. To influence whether to invest more in an industry. For a firm already in an industry
and thinking of expanding capacity, it is important to know whether the investment
costs will be recouped. The present strength of the forces will be evident in present
profits, so management will wish to forecast how the forces may change through time.
Alternatively, they may decide to sell up and leave the industry now if they perceive the
forces are strengthening.
3. To identify what competitive strategy is needed. The model provides a way of establishing the factors driving profitability in the industry. These factors affect all the firms
in the industry. For an individual firm to improve its profitability above that of its
peers, it will need to deal with these forces better than they. If successful, it will enjoy a
stronger share price and may survive in the industry longer. Both increase shareholder
wealth.
The five competitive forces are explained below.
Threat of entry
New entrants can affect the profitability of the industry in two ways:
1. Through the impact of actual entry. A new entrant will reduce profits in the industry by:
(a) Reducing prices either as an entry strategy or as a consequence of increased industry capacity. There is also the danger that a price war may break out as rivals try to
recover share or push out the new rival.
(b) Increasing costs of participation of incumbents through forcing product quality
improvements, greater promotion or enhanced distribution.
(c) Reducing economies of scale available to incumbents by forcing them to produce
at lower volumes due to loss of market share.
THE NATURE OF THE COMPETITIVE ENVIRONMENT
2.3.2
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2. By forcing firms to follow pre-emptive strategies to stop them from entering. In view of the
above danger, firms may take action to forestall entry of new rivals by:
(a) Charging an entry-deterring price which is so low as to make the market unattractive to new, and possibly higher cost, rivals.
(b) Maintenance of high capital barriers through deliberate investment in product or
production technologies or in continuous promotion of research and development.
New rivals would be unlikely to gain sufficient scale to recover these investments.
Porter suggests that the strength of the threat of market entry depends on the availability
of barriers to entry against the entrant. These are:
1. Economies of scale. Incumbent firms will enjoy lower unit costs due to spreading their
fixed costs across a larger output and through the ability to drive better bargains with
their suppliers. This gives them the ability to charge prices below the unit costs of new
entrants and hence render them unprofitable.
2. Product differentiation. If established firms have strong brands, unique product features
or established good relations with customers, it will be hard for an entrant to rival these
by a price reduction, and expensive and time consuming to emulate them.
3. Capital requirements. If large financial resources will be needed by a rival to enter, the
effect will be to exclude many potential entrants. Porter argues this will be particularly
effective if the investment is needed in dedicated capital assets with no alternative use
or in promotion. Few would-be entrants will want to take the risk.
4. Switching costs. These are one-off costs for a customer to switch to the new rival. If
they are high enough, they will eliminate any price advantage the new rival may have.
Examples include connection charges, termination costs, special service equipment and
operator training costs.
5. Access to distribution channels. If the established firms are vertically integrated, this
leaves the entrant needing either to bear the costs of setting up its own distribution or
depending on its rivals for its sales. Both will reduce potential profits.
6. Cost advantages independent of scale. These make the established firm to have lower
costs. Examples are unique low-cost technologies, cheap resources, or experience effects
(a fall in cost gained from having longer experience in the industry, usually influenced
by cumulative production volume).
7. Government policy. Some national governments jealously guard their domestic industries by forbidding imports or using legal and bureaucratic techniques to stall import
competition. Also, some governments prefer to allow existing firms to grow large to
give them the economies of scale that they will need to compete in a global market.
Therefore, they try to restrict industry competition.
Pressure from substitute products
Substitute products are ones that satisfy the same need despite being technically dissimilar.
Examples include aeroplanes and trains, e-mail and postal services, and soft drinks and ice cream.
Substitutes affect industry profitability in several ways:
1. They put an upper limit on the prices the industry can charge without experiencing
large-scale loss of sales to the substitute.
2. They can force expensive product or service improvements on the industry.
3. Ultimately, they can render the industry technologically obsolete.
ENTERPRISE MANAGEMENT
1. Relative price/performance. A coach journey is cheaper than a rail journey which is in
turn cheaper than a flight. However, a coach is slower than a train. The trade-off is far
less clear between e-mail and postal services for simple messages, since e-mail is both
quicker and cheaper!
2. The extent of switching costs.
Bargaining power of buyers
Buyers use their power to trade around the industry participants to gain lower prices and/
or improvements to product or service quality. This will impact on profitability. Their
power will be greater if:
1. Buyer power is concentrated in a few hands. This denies the industry any alternative markets to sell to if the prices offered by buyers are low.
2. Products are undifferentiated. This enables the buyer to focus on price as the important
buying criterion.
3. The buyer earns low profits. In this situation, they will try to extract low prices for their
inputs. This effect is enhanced if the industry’s supplies constitute a large proportion of
the buyer’s costs.
4. Buyers are aware of alternative producer prices. This enables them to trade around the
market. Improvements in information technology have significantly increased this, by
enabling a reduction in ‘search costs’.
5. Low switching costs. In this case, the switching costs might include the need to change
the final product specification to accept a different input or the adoption of a new
ordering and payments system.
Bargaining power of suppliers
The main power of suppliers is to raise their prices to the industry and hence take over
some of its profits for themselves. Power will be increased by:
1. Supply industry dominated by a few firms. Provided that the buying industry does not
have similar monopolistic firms, the supplier will be able to raise prices. For example,
the ‘Wintel’ domination in personal computers developed because IBM did not insist
on exclusive access to Microsoft’s operating systems or Intel’s processors.
2. The suppliers have proprietary product differences. These unique features of images make
it impossible for the industry to buy elsewhere. For example, branded food suppliers
rely on this to offset the buyer power of the large grocery chains.
Rivalry among existing competitors
Some industries feature cut-throat competition, while others are more relaxed. The latter
have the higher profitability. Porter suggests that the factors determining competition are:
1. Numerous rivals, such that any individual firm may suddenly reduce price and trigger
a price war. If there are fewer firms of similar size, they will tend to, formally or informally, recognise that it is not in their interest to cut prices.
2. Low industry growth rate. Where growth is slow, the participants will be forced to compete against one another to increase their sales volumes.
THE NATURE OF THE COMPETITIVE ENVIRONMENT
The power of substitutes depends on:
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3. High fixed or storage costs. The former, sometimes called operating gearing, put pressure
on firms to increase volumes to take up capacity. Because variable costs are low, this is
usually accomplished by cutting prices. This is common in transportation and telecommunications. Similarly, high storage costs are often the cause of a sudden dumping of
stocks on to the market.
4. Low differentiation or switching costs mean that price competition will gain customers
and so be commonplace.
5. High strategic stakes. This is where a lot depends on being successful in the market.
Often this is because the firms are using the market as a springboard into other lines of
business. For example, banks may fight for a share of the current (chequing) account or
mortgage markets in order to provide a customer base for their insurance and investment products.
6. High exit barriers. These are economic or strategic factors making exit from unprofitable
industries expensive. They can include the costs of redundancies and cancelled leases
and contracts, the existence of dedicated assets with no other value or the stigma of
failure.
Illustration: Porter’s five forces applied to the confectionery
industry
Using Porter’s Five Forces Model, a structural analysis of the UK Confectionary industry
shows:
The threat of entry: low. Main barriers to entry:
– economies of scale, particularly chocolate to compete with the leaders;
– high advertising spend necessary for brand awareness
– access to distribution channels: concentrated retail supermarket;
– cost advantages independent of size;
– experience in production and distribution of major operators.
● Threat of substitutes: moderate/high. Growth in light food snacks, introduces possibilities: healthier snacks; fun fruit packaging; savoury snacks.
● Supplier power: moderate
– milk, sugar subject to EU prices, therefore inflated but stable;
– cocoa subject to price fluctuation, but larger manufacturers can hedge against this by
backward integration.
● Buyer power: potentially high
– as there is a concentration of buyers (the six largest retailers account for 60% of total
UK food);
– competition for shelf space is high;
– there is a threat of backward integration, especially with brand only products being
introduced BUT;
– only 30 per cent of confectionery is sold through supermarkets; other outlets include
petrol stations, off-licences, vending machines, and so on, so the effect is offset a
little.
● Competitive rivalry is high
● Substitutes threaten, competitors are in balance:
– there is slow market growth;
– there are high exit barriers (capital intensive);
– major spending on advertising.
●
ENTERPRISE MANAGEMENT
Use the five forces framework to assess the competitive environment for the industry your organisation operates in, or for another industry sector (for example, airline
industry, supermarkets).
Evaluation and developments of Porter’s model
Porter’s model owes much of its success to the fact that it provides a unitary analytical
framework in which to insert, in addition to some original concepts, many of the partial
theories of industry analysis developed by studies of industrial economics, such as economies of scale, the degree of concentration and entry barriers. However, although clear from
a theoretical point of view the model becomes increasingly difficult to apply as industries
become harder to define and delimit. It is harder to define where an industry’s boundaries
lie and which industries should be considered suppliers and which customers and, moreover, what their cost structures are. It is increasingly difficult to define the boundaries of the
telecommunications industry, or to say who the competitors are in the publishing industry. Similarly it is difficult to define the competitive dynamics of the electronic publishing
industry. This was recognised by Brandenburger and Nalebuff (1996) with the introduction of the concept of the value net. This adds complementors to the five forces of the
Porter model. However, unlike the other five forces, which are competitive in nature, the
more complements there are and the closer their relationship to the products supplied by
the industry the better. For instance a conventional analysis using the five forces of the
micro chip industry would suggest that Intel can gain competitive advantage by developing faster and faster products. But this is only part of the story, as is well understood by
Intel. Most of us would already have more computing power than we needed but for the
development of ever more power hungry applications. So Intel realises that to create a market for its faster and faster chips it must co-operate and share information with the manufacturers of computers, cell phones bandwidth and other products which will increase the
demand for faster and faster chips. The complementor concept is particularly relevant in
the information economy, since no one traditional industry can build it alone. Hardware
needs software and the Internet needs high speed phone lines or other connections. This
means that we will often find companies conducting development work with their suppliers or customers via joint ventures so that value may be captured.
It is worth remembering that although complementors are not competitors in the industry they can affect the competitiveness of the industry influencing the demand for products or services and by influencing the purchasers’ choice between different suppliers. As
such they are relatively powerful if there are few substitutes for the service they provide.
A further example of a complementor is the firm that makes the hand-held stock taking
device that is seen in supermarkets. As the employee keys in the stock they see on the shelf
the information goes to the supermarket system and to the suppliers system – speeding the
restocking process and benefiting both the supermarket and their supplier.
It is important to remember that Porter’s model is an analytical model and it is about the
strength of the forces that impact upon the industry it is not enough to just describe the forces.
For instance, you can usually recognise fierce competition because there are price wars
and heavy discounting, expensive advertising and promotional efforts, litigation and
expensive commitments to investment and product development. You should expect to see
declining margins and ROCE for all firms other than the market leaders.
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Activity
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2.3.3
Industry life cycle analysis
Industry life cycle analysis essentially charts the development of a market from introduction to growth to maturity and eventually decline, (see Table 2.1). It is similar to the
product life cycle framework which assumes products are conceived, their sales grow, they
mature and eventually, having gone into decline they die.
There are two forces which drive the evolution of the industry life cycle. These are
growth in demand and the diffusion of knowledge. At each stage of the life cycle we can
make the following assumptions.
This will obviously have implications for the strategy that a company chooses to adopt
at the various stages of the life cycle.
Over time the nature of the research and development effort in the industry will change
and this is the second driving force, the diffusion of knowledge. Initially there will be
significant expenditure on product innovation and this will bring about the birth of the
industry but, as time passes the effort will shift to process innovation with the aim of seeking cost advantage and improved product reliability as more competitors enter the market.
As with the Porter’s five forces model industry life cycle analysis should not be used in
isolation. The model should be used in conjunction with a general environmental analysis
as well. We have demonstrated here that the life cycle itself is dependent upon technological change but political forces can change the shape of the curve and the duration of each
of the stages. Tax breaks to encourage innovation would be an example.
Table 2.1
Industry life cycle
Introduction
Growth
Maturity
Decline
Buyers
Competitors
Poor quality,
no standards
Curious, rich
Few
Better quality,
differentiated
Widening
Many new entrants
Superior quality
standardization
Mass market
Competition,
shakeouts
Varied quality, little
differentiation
Sophisticated
Fewer remain
Margins
High
Fair
Falling
Low
Products
2.3.4
Illustration of external environmental
analysis – Example of a car manufacturer
The best way to understand how the various models can be used s by reference to an example. Let us consider the situation of a motor manufacturer with operations based in the
United Kingdom (say Ford, General Motors, Honda, Nissan or Toyota).
1. Direct competitors. These are the other car companies selling products in the United
Kingdom. The actions of these competitors will affect prices, levels of sales, promotional expenditure and product specification. They are large and well funded and to a
greater or lesser extent are trying to attract the same customers. New competitors have
arrived from low-cost overseas economies (e.g. Seat, Skoda, Hyundai, Daewoo, Kia and
Proton). The wave of mergers and acquisitions (Renault/Nissan, Ford/Jaguar/ Mazda/
Volvo/LandRover, General Motors/Saab, Daimler-Benz/Chrysler) and financial crises
(Kia, Daewoo, BMW/Rover) increases the uncertainty in this market.
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2. Distribution channels. Car manufacturers sell cars through two channels:
● small firms and private motorists may buy from garage showrooms;
● vehicle leasing companies are major volume customers which then provide cars to
large and small business users.
Both channels will seek to obtain the vehicles at low prices to increase their sales margins. Amalgamation between garage chains has significantly increased buyer concentration in recent years and this has put pressure on the profits of car manufacturers. As
such it is an example of buyer power. Another trend has been the growth of ‘car search’
firms, which are able to provide motorists with cheaper cars through imports or special
arrangements with particular dealers.
3. Suppliers of inputs. These affect the costs of production, quality and flexibility of the
car manufacturer. The chief inputs used by car manufacturers based in the United
Kingdom are labour, auto components, transportation services, information services
and energy. Many car manufacturers have deliberately changed their relationships with
suppliers from one based on bargaining around prices to one based on partnership.
Relations with organised labour are based on openness and consultation, while supply–chain partnership agreements are formed with the component suppliers.
4. Potential entrants. During the 1990s UK car manufacturers faced competition in
the home market from the arrival of low-price competitors from the Pacific Rim.
Additionally the US Chrysler Corporation, absent since the demise of Hillman in the
1970s, reappeared with Jeep, Voyager and Neon brands imported from production
bases in the United States and Austria. These entrants will increase industry supply and,
through providing distribution channels and final consumers with more choice, reduce
prices, cut sales volumes and raise product expectations.
5. Substitute technologies. These can reduce demand for the firm’s product or render it
obsolete altogether. As demand declines, the industry becomes oversupplied which
introduces pressure on prices as each struggle to survive. Within the car industry there
has been clear switching between classes of car as motorists have reduced their demand
for ‘hot hatchbacks’ and small saloons and embraced small sports cars, multi-purpose
vehicles and estate cars. Some manufacturers were obviously wrong-footed by this trend
to substitutes. Car firms will also need to keep a weather-eye on developments in rail
transport and the increasing popularity of two-wheeled vehicles in metropolitan areas.
6. Political/legal. Many issues face the car manufacturer here, including:
● the apparent shift in government transport policy towards public transport;
● the Office of Fair Trading investigation into car prices and allegations of restrictive
trade practices affecting car distributors;
● European Union ‘Social Chapter’ regulations on maximum working hours and labour
rights;
● environmental and safety regulations affecting the design of cars and the processes by
which they are made;
● European Union free-trade policies enabling easier importing of lower-price cars to
the UK from continental Europe.
7. Economic. Examples under this heading include:
● UK policy on joining the European single currency and its effects on input and sale
prices;
● general health of the UK economy and its likely growth over the coming 5 years – this
will affect demand for cars;
● taxation of cars and petrol;
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employers’ contribution to employee insurance and welfare;
● patterns of global economic development affecting target export countries.
8. Social. This broad heading includes:
● attitudes to car safety and performance;
● tastes and fashions in car colours and styling;
● extent to which cars are still seen as a status symbol or lifestyle accessory;
● lifestyle changes (e.g. activity sports);
● size of families and growth of ‘second families’.
9. Technological. This affects the product but also the demand for products:
● technological developments affecting cars (e.g. driverless technology, navigation
systems, etc.);
● development of internet and interactive TV, opening the possibility for the
manufacturer to sell direct to the final consumer;
● increased teleconferencing and homeworking, reducing the need for private transportation.
●
2.3.5
Evaluation of environmental models
The main benefits of environmental models are:
1. They ensure that management consider a wide range of potential impacts when devising
strategy. There would otherwise be a danger that they would concentrate on competitors and suppliers and not see the broader forces at work.
2. They allow division of the work of environmental analysis. For example, one team can look
at buyers, while another examines the economy and reports back to the strategy team.
3. They provide a common language for discussion of strategy between the managers. Most
managers will know the ‘Five Forces’ and PEST analysis models used above.
4. They provide insight into key strategic issues. Some models have empirical research to back
them up which may help the team identify key threats.
However, management should be aware of the limitations of the models/frameworks:
1. They can distort reality. The real business environment does not fall into neat segments.
This is just a structure put on it by strategy writers. Had we chosen a model with a different categorisation we might have obtained a completely different perspective. For example,
combining legal with political suggests that political power works in a legal framework. If
we separate legal from political we might recognise that in some of the countries we deal
with the law is ignored and real political power lies with particular elite groups.
2. They present the environment as external. The models assume that there is an internal
domain called the firm which management can control and that there is a boundary
between this and the environment which they cannot control. For example, distribution
channel, suppliers and customers are seen as separate and external. This is very hard
to square with modern strategy theory which sees them as stakeholders and partners.
Marketers would argue that customers are at the centre of the organisation, not some
external force off to the right-hand side. Human resource managers would certainly not
agree that staff are an input from the environment with the same status as spare parts.
3. They may cause management to overlook networks and interdependencies. In the example
in Section 2.1.4, one car company will see another as a competitive rival. This ignores
the fact that they are joint venture partners in a particular technology, that the rival
owns one of the car hire firms it sells to and that they are all members of the same trade
association lobbying government.
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4. They overload management. Management cannot expect to develop a strategy to deal with
all the environmental issues raised by the models. Some writers suggest that management
should monitor just the small number of key factors for success and deal with those.
THE NATURE OF THE COMPETITIVE ENVIRONMENT
The fact that such segmentation models are still popular is evidence that they are a useful tool. However, management should ensure that they reflect on the assumptions underlying them and their value in practice.
In practical terms it is important to:
1. Remember that most important factors will transcend the categorisation as political,
economic, societal or technological. For instance the advent of G.M. crops may be a
technological issue at first sight which may offer economic benefits and is enjoying
some political support. But its social acceptability is in some doubt. Remember that
PEST (or which ever acronym is in use) is only an aide memoire – rigid characterisation is unnecessary and counterproductive.
2. Indicate how much and in what direction a particular theme will affect the nature of
the firm’s business.
3. Outlook how these themes may strengthen or weaken in the future.
2.3.6
Survival and success factors
At the end of an environmental analysis a company should be able to recognise the survival
factors and success factors that relate to the industry in which they operate or wish to operate.
For instance;
Where there are powerful buyers with low switching costs,
● Survival – meeting minimum buyer requirements.
● Success – a strongly differentiated product, strong relationships and bonds of trust with
high negotiating skills.
Where there are low barriers to entry,
● Survival – very difficult without success factors!
● Success – strongly differentiated product and low costs.
Where the industry is enjoying fast growth,
● Survival – technology and cash for growth.
● Success – advanced technology, cash for growth and superior relationships with
researchers and funders.
Where the industry is mature,
● Survival – minimum economic scale.
● Success – significant scale or other cost advantage and strong buyer relationships.
2.4
Causes of environmental uncertainty
CIMA defines uncertainty as:
The inability to predict the outcome from an activity due to a lack of information about the required input/output relationships or about the environment
within which the activity takes place. CIMA: Management Accounting: Official
Terminology, 2005, p. 97.
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Uncertainty can also be defined as ‘the difficulty in making reliable assumptions about
the future’.
Managers’ perception of uncertainty will be increased by two factors – complexity and
dynamism.
1. Complexity. This is the number of variables which can impact on the firm and how difficult they are to predict or understand. Also if the relationships between the variables is
complex, this will also increase uncertainty. For example, in financial markets the very
large number of international banks, the wide variety of assets now available and their
complex structuring have all contributed to making financial forecasting very complex.
The car industry has an increased number of competitors and multinational business means that each manufacturer sources parts from, and sells cars in, a multitude of
countries each with its own specific sets of environmental variables. This has significantly increased the complexity of its environment.
2. Dynamism. This is the rate of change of the business environment. Increased dynamism means that management’s models of ‘how things work’ will become out of date
much quicker. It also suggests that competitors will be able to respond more quickly to
a firm’s initiatives.
Examples of the factors which have increased dynamism include:
(a) Swifter information communications. These mean that something happening on
one side of the world will have global impacts very quickly. The speed with which
financial crises spread is often cited as an example.
(b) Accelerated product life cycles. Modern competitive strategy leads most firms to
invest heavily in research and development to render rivals’ products obsolete. The
cumulative effect is to reduce the lifetime of all products. Management will find it
very hard to predict the sales of their products or their ability to recoup investment
expenditure on them.
2.4.1
Impact of uncertainty
High uncertainty affects business strategy in several ways:
1. Reduces the planning horizon. If a firm operates in an uncertain environment its management are unlikely to develop plans for more than a few years ahead because they
accept that they will be subject to large margins of error.
2. Encourages emergent strategies. Some writers believe that high uncertainty brings into
question the idea of planning a strategy at all. For example, Stacey (1996) suggests that
formal strategy processes have failed to recognise the impact of chaos theory. The latter
recognises that prediction in any open system is impossible due to the diversity of factors which may affect it. He cites long-range weather forecasting as a casualty when it
was abandoned once it was recognised that a falling leaf in Brazil could eventually affect
weather patterns in Europe. These writers argue for an emergent approach to strategy
and therefore suggest that management should focus on creating more-flexible organisations and encouraging strategic awareness among staff.
3. Increases information needs of the organisation. Where the environment is no longer predictable, management will require more regular information and on a greater range of
factors to make it more certain. This will increase further still if the organisation elects
to adopt emergent strategy formulation because the number of recipients of such information will increase.
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4. May lead to conservative strategies. Managers will tend to stay closer to the ‘strategic recipes’ that have worked in the past because they fear trying anything new due to not
being able to forecast its effects. This approach is flawed because under conditions of
high uncertainty there is no reason to believe that old ‘recipes’ will still work.
THE NATURE OF THE COMPETITIVE ENVIRONMENT
2.4.2
Has uncertainty really increased?
The modern assumption is that the business environment has become more uncertain
and that more information is needed by management in order to restore certainty. Hatch
(1997) observes that ‘Environments do not feel uncertain, people do’, and the only thing
which has demonstrably increased is the amount of environmental information available
to management. She ventures that perhaps the world has always been dynamic and complex but that we never fully appreciated it before.
Hatch’s suggestion is deliberately far-fetched to make a point. The more environmental data we provide to managers, the more uncertain and stressed-out they may become.
This gives weight to the argument, noted before, that in strategy formulation management should pay attention to only a few key success variables and ignore the rest.
2.5
Competitor analysis
2.5.1
The importance of competitor analysis
CIMA: Management Accounting: Official Terminology, 2005, (p. 47) defines
competitor analysis as: Identification and quantification of the relative strengths
and weaknesses (compared with competitors or potential competitors), which could
be of significance in the development of a successful competitive strategy.’
Figure 2.2 shows the impact of varying levels of competitor action on the profits of the
business. These may include:
price cuts
launching of a rival product
● aggressive expansion of production which reduces the firm’s market sales
● inclusion of costly modifications to the product which the firm must also undertake.
●
●
Annual profits
Weak competitive response
Moderate competitive response
Strong competitive response
Time
Figure 2.2
Impact of competitor responses on profit
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The unit of analysis here may be a product, customer segment, geographical region
or technology. The implications for management’s choice of product/market strategy is
clear. A suitable strategy is one which yields satisfactory financial returns after taking into
account the potential responses of competitors.
According to Wilson and Gilligan (1997) competitor analysis has three roles:
1. to help management understand their competitive advantages/disadvantages relative to
competitors;
2. to generate insights into competitors’ past, present and potential strategies;
3. to give an informed basis for developing future strategies to sustain or establish advantages over competitors;
To these we may add a fourth:
4. to assist with the forecasting of the returns on strategic investments for deciding
between alternative strategies.
2.5.2
Competitor analysis – key concepts
There are some key concepts which are helpful when undertaking competitor analysis.
These are market size, market growth and market share.
A useful starting point to competitor is to gain an understanding of market size. This
is usually based on the annual sales of competitors. A challenge in doing this is in actually
defining the ‘market’ (e.g. if undertaking an analysis of Easyjet, is the market the airline
market, or the budget airline market – which is most helpful?)
A second step involves estimating how much the market has grown, for example, over
the last year. The importance of growth is relevant to strategy development, since if an
organisation has a strategy which involves quick growth, then it would be more attracted
to a market which is growing rapidly.
A third step involves gaining an understanding of market share. This relates to
the specific share an organisation has of a particular market. A larger share is usually
regarded as being strategically beneficial since it may make it possible to influence prices
and reduce costs through economies of scale. The outcome is increased profitability.
2.5.3
Levels of competitors
Kotler (2008) identifies four levels of competitors:
(a) Brand competitors. Firms who offer similar products to the same customers we serve
and who have a similar size and structure of organisation as ourselves, for example:
● Pepsi and Coca-Cola
● Unilever and Procter & Gamble.
(b) Industry competitors. Suppliers who produce similar goods but who are not necessarily
the same size or structure as ourselves, or who compete in a more limited area or product range, for example:
● British Airways and Singapore Airlines
● Unilever ice creams and Mars ice creams
● Nestlé and Cadbury’s.
(c) Form competitors. Suppliers whose products satisfy the same needs as ours, although
they are technically quite different, for example:
● speedboats and sports cars
● book publishers and software manufacturers.
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(d) Generic competitors. Competitors who compete for the same income as the company,
for example:
● home improvements and golf clubs
● foreign vacations and new homes.
THE NATURE OF THE COMPETITIVE ENVIRONMENT
The extent to which these pose a threat to the firm depends on factors such as:
1. Number of rivals and the extent of differentiation in the market. Greater numbers of rivals
increases the complexity of the industry, but because they are smaller it reduces the danger of one competitor breaking from the rest in an attempt to deliver a knockout blow.
Instead each will try to carve a niche and hence increase differentiation. This makes it
less likely that one can invade the market of another.
2. Entry and mobility barriers*. These are costs that the firm must pay to get admission
to the industry or to the firm’s particular segment of it. For example, the Levi Strauss
brand has a strong presence in the market for casual clothing. It proved an insuperable
impediment when the firm tried to make tailored suits.
3. Cost structure. If the rival has a high-cost structure this effectively denies entry to a
market that contains a cost leader. For example, the high-cost structure of an exclusive
department store would effectively deny it access to lower market segments.
4. Degree of vertical integration. Highly vertically integrated firms have considerable strength
in a market. However, they are also inflexible because they are committed to buying
from their own upstream supply divisions. International oil firms have repeatedly lost
out to discounting petroleum retailers able to buy supplies on the world’s spot markets.
As a rule of thumb it is likely that the most significant present or potential competitors
are the ones who conform most strongly to one or more of the following descriptions:
they presently serve the same or similar customers to ourselves;
they have a similar or cheaper distribution network;
● they are at the same stage of production as ourselves;
● they utilise a similar technology in providing their goods and services;
● they utilise similar types of management and staff skills;
● they have a similar geographical spread.
●
●
These explain the sudden arrivals of:
retail stores in the banking services markets;
electronic goods manufacturers in the photographic equipment market;
● household electricity providers also offering telephone services, gas and water.
●
●
*You should distinguish carefully between entry barriers and mobility barriers. Entry barriers are fairly
straightforward and refer to the situation where a new entrant tries to enter the industry. Mobility barriers
are different and relate to a situation where an existing player in the industry attempts to change their competitive position. For instance, Skoda, who had a reputation for building cheap and low-quality cars, had to
overcome significant mobility barriers to become recognised as a supplier of high-quality vehicles. They left
one strategic group and joined another. They were only able to do this because the take-over by Volkswagen
allowed them to improve their production methods and image. Even then it took them roughly 4 years to
change customer’s perception. Similarly, within the UK Tesco moved from a strategic group which could, at
best, be described as ‘pile it high and sell it cheap’ to a quality supermarket. This involved a change of senior
management, very expensive refurbishment and a period of more than 10 years!
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Competitor analysis must, therefore, focus on two main issues; acquiring as much relevant
information about competitors and subsequently predicting their behaviour.
The prediction of the competitors’ behaviour can be considered to have two main purposes:
1. to forecast their future strategies and how to counteract them,
2. to forecast their likely reactions to a firm’s strategic decisions.
2.5.4
Gathering competitor intelligence
Competitive intelligence is not just about the gathering of information but about developing an understanding of the players in the industry. Lynch (2006) suggest that a
starting point is to undertake competitor profiling, that is the basic analysis of leading
competitors to examine their objectives, resources, market strength, products and services
and current strategies. The purpose is to identify the specific competitive advantage of
rival organisations. The gathering of information should not be viewed as a one of task,
but rather as a continual process recognising that organisations are subject to change all
the time.
Grant (2002) has produced a four-stage framework for competitor analysis:
1. Identifying the current strategy. This can be identified from what a company says and
does. More often than not what they do will be more important than what they say –
their explicit statements of intent in the annual reports and at presentations to financial
analysts may not be matched by the actions that represent their emergent strategy.
2. Identifying competitor’s objectives. Knowledge of competitors’ goals is an essential component of any analysis. Whether they are driven by short-term cash or profit goals or
whether they have the reserves to focus on long-term objectives will result in them
exhibiting significantly differing behaviours. From this perspective it is important to
recognise the goals of a parent organisation where such exists and their attitude to the
performance of subsidiaries. If a company appears happy with its current level of performance then there are unlikely to be any changes to their present approach.
3. Identifying a competitors’ assumptions about the industry. A competitors’ decisions are
governed by their perceptions and assumptions about industry structure and the players with whom they compete. These perceptions will often be driven by the value systems of the senior management and according to Spender (1989) these perceptions
will converge over time, limiting the players in an industry to behave in a particular
way, ‘rationally’, as time goes by. This often explains the complacency of existing players when a new entrant picks off a new segment of a market with out reaction from the
incumbents.
4. Identify the competitors’ resources and capabilities. Without a rigorous analysis of the
resources that a competitor possesses there can be no realistic prediction of the seriousness of a possible challenge. It is easy to determine what they are doing but the emphasis here should be on what they are capable of doing. Ideally a company should know
as much about its competitors as it knows about itself, this is, of course, unlikely to be
achieved but is something for which a company should strive. We shall be considering
the analysis of resources in a later chapter and can leave this section until then.
Once the information has been gathered and the analysis, used to predict competitor
behaviour, conducted it must be presented in the most accessible format to those who will
make the decisions on a timely basis. Thereafter the rivals should be continuously monitored for signs of activity and the industry scanned for the emergence of potential rivals.
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If the technique is well developed it will become one of the firm’s core competencies
allowing a more confident, proactive, approach to the market place contributing to
competitive advantage rather than leaving the firm to react, often defensively, to the strategic initiatives of other players in the industry.
It is worth noting that much of the information required for successful competitor analysis will be qualitative. Fleisher and Bensoussan (2002) give a full listing of the information that an organisation should gather about their competitors. The broad headings are as
follows:
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Products and services
● Marketing
● Human resources
● Operations
● Management profiles
● Sociopolitical
● Technology
● Organisational structure
● Competitive intelligence capacity
● Strategy
● Customer value analysis
● Financial.
●
An extract of a few of those categories will give an indication of the detailed qualitative
nature of much of the information (Table 2.2).
Table 2.2
Detailed qualitative information for competitor analysis
Products/services
Competitive intelligence capacity
Number of products and services
Diversity and breadth of product lines
Quality, embedded customer value
Projected new products/services
Current market shares by product and product lines
Evidence of formal CI capacity
Reporting relationships
Profile
CEO and senior management level of support
Vulnerability
Integration
Data gathering and analysis assets
Marketing
Segmentation strategies
Branding and image
Probable growth vectors
Advertising/promotions
Market research capability
Customer service emphasis
Key customers
Sociopolitical
Government contacts
Stakeholder reputation
Breadth and depth of portfolio of sociopolitical assets
Public affairs experience
Nature of government contracts
Connections of board members
Issue and crisis management capability
Customer value analysis
Quality attributes
Service attributes
Customer goals and motivations
Customer types and numbers
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2.5.5
Forecasting competitors’ response profiles
Kotler (2008 ) identifies four response profiles:
1. The laid-back competitor. Does not respond to competitive moves.
2. The selective competitor. Reacts to attacks on certain markets but not in others, or certain types of attack (e.g. to price cuts but not to promotion offensives).
3. The tiger competitor. Always responds aggressively to any threat, in order to send a message to all contenders that it will retaliate.
4. The stochastic competitor. No predictable pattern to responses. Often does not respond
to moves, and then on one occasion decides to retaliate.
Kotler advises management to consider the reasons why a competitor does or does not
have a track record of responding. For example, the following might be reasons to think
again about taking advantage of an apparently docile rival:
they believe the market is not worth defending any more;
● they know the market is one in which it will be hard to dislodge customers;
● the management have their eyes on sequel products and so do not care if their present
one is knocked out.
●
Cost structures are an important factor to consider in terms of competitor response:
(a) High fixed-cost structure. Rivals will respond more aggressively to threats to their sales
volumes. This is because their high operational gearing means that any fall in revenues
will cause drastic cuts in profits. Such costs tend to characterise:
● vertically integrated firms;
● firms employing capital-intensive production technologies;
● firms in industries with fixed supply schedules which must be maintained regardless
of demand (e.g. scheduled transportation, football clubs, and broadcasting).
(b) High unit costs. These make it impossible for the rival to effectively respond to price
cuts. These are often masked by high prices based on high market positioning. Cutting
prices is impossible without damaging this positioning.
(c) High exit costs. These are the one-off costs of leaving an unprofitable industry. Examples
of exit costs include:
● dedicated assets which cannot be used elsewhere;
● costs of redundancies;
● decommissioning costs such as making former storage and workings safe;
● danger of the stigma of failure attracting rivals to attack in other parts of its
business.
Where the rival cannot exit easily they are forced to stay and fight in the hope that
something can be salvaged. Their response will be aggressive.
Lynch (2006) also identifies a number of strategies that can be used against competitors
and potential new entrants, for example:
Attack competition. This can be achieved though head on attack against the market
leader – this often requires substantial resources and investment and attacking where
the leader is weak.
● Flanking or market segmentation which involves choosing a flank/market segment
that is relatively undefended with the aim of taking a significant market share.
● Occupy totally new territory where there is no existing product or services through
innovation or seeking market niches.
●
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Guerrilla movement which is a rapid sortie to seize a short term profitable opportunity.
This requires good information to identify opportunities.
● Blocking first mover advantage by not allowing the competitor to establish a dominant
position before a response is made. This could be achieved by launching an imitation product or a product with enhanced features, seeking to leapfrog or outflank the first mover.
THE NATURE OF THE COMPETITIVE ENVIRONMENT
●
In addition, Lynch suggests an alternative set of competitive strategies based on innovation: These include:
Rewriting the rules of the game – existing players in the market will usually understand
how competitors are engaged i.e. the rules of the game. However, new players can enter
the market rewriting the rules on how they operate and gain advantage.
● Technological innovation – for example enabling revolution in distribution, as illustrated by Amazon’s success.
● Higher levels of service.
● Co-operation – for example by joining with other players, though joint ventures or
strategic alliances can give strength to beat larger rivals.
●
2.6
Competitor accounting
Competitor accounting is a term used by Ward (1992) to refer to the calculation of the
relative costs and of competitors and their likely strategies to evaluate their potential effects
on the profits of the firm.
2.6.1
Evaluation of barriers to entry
Barriers to entry include:
(a) initial capital costs
(b) legal and patent protections
(c) the costs and economies of scale of incumbent firms
(d) extent of vertical integration
(e) brand barriers
(f ) scale of investment in R&D
(g) potential defensive action by incumbent firms (e.g. price cutting)
(h) if economies of scale are important and the learning curve is effective.
Most barriers can be overcome by an outsider, provided that they are prepared to spend
the money, for example:
investing in the capacity, R&D, branding, etc.
acquiring an incumbent firm
● riding out the losses caused by high initial costs or competitive retaliation.
●
●
You should always assume that entry barriers are low – until the evidence proves otherwise!
Competitor accounting must estimate the present value of the costs that an entrant will
incur to overcome these barriers and compare this with the present value of the returns an
entrant could achieve:
(a) If costs exceed revenues, then there will be no financial incentive to join and the threat
of market entry is low.
(b) If revenues exceed costs, then there is a financial incentive to join. The threat of entry is
higher and the incumbent firms must downgrade assessments of the market’s attractiveness.
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Where entry is likely, the incumbent firm may take entry forestalling action by increasing
the entry barriers artificially:
(a) deliberate adoption of highly capital-intensive production techniques
(b) high R&D spending to increase costs of participation
(c) high advertising leading to strong branding and a psychological switching cost
(d) reduction of price to reduce segment attractiveness.
Competitor accounting should compare:
(a) the present value of profits lost through undertaking these pre-emptive strategies; with
(b) the present value of profits lost as a consequence of market entry and advise management of whether to resist entry and even whether to invest further in the industry.
2.6.2
Estimate competitors’ costs
Knowing these can help strategic decisions by giving a guide to:
(a) their likely future pricing behaviour;
(b) their response to strategic action, say price reductions, by the company;
(c) their ability to remain profitable as prices fall and therefore whether they will stay in
the market or not;
(d) their potential prices in a tender or sealed bid for a contract.
Sources of data on competitors’ costs include:
from partnership agreements in a joint venture;
physical analysis of competitors’ products;
● banks and financial markets;
● ex-employees of competitors;
● generalisation from own cost base;
● industrial experts and consultants;
● physical observations (e.g. stand outside, or inside, their factory);
● published financial statements;
● competitor press releases;
● trade and financial media coverage;
● inspection of wage rates for grades of staff in the firm’s area;
● availability of space for expansion on their present site;
● availability and cost of their finance;
● the characteristics of the market segment they serve;
● the work methods they employ.
●
●
This will entail the management accountant working with other experts such as production engineers, marketers, human resource specialists, etc.
2.7
The global economic environment
Earlier on in the chapter the concept of LoNGPEST was introduced to recognise that the
environment of a firm exists at a number of levels. Here we are exploring specifically the
economic environment:
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1. The local and nation economic environment. This relates to the immediate economic
influences on the city/region and country (in which the firm operates and sells. Factors
here include:
● stage of the economy in the trade cycle
● macro-economic policies of domestic governments
● levels of interest, inflation and exchange rates.
2. The global economic environment. The global environment contains such factors as:
● changing patterns of global trade and economic development
● development of regional economic groupings
● international impacts on currencies and interest rates.
One of the factors increasing the complexity of the firm’s environment has been the
increased influence of global economic forces on the economies of particular states. This
has been accompanied by an increase in the influence of supranational economic bodies
such as the European Union (EU) or the G8 summits of the major industrial nations.
Having said that it is always worth considering economic forces at regional and local levels
as well since, within a country, there will be differences from place to place in a number of
factors. For instance, propensity to save, which is important to the financial services industry, changes markedly across the UK.
THE NATURE OF THE COMPETITIVE ENVIRONMENT
2.7.1
The new global economy
In his influential book Global Shift, Peter Dicken (1998) identifies two dynamics affecting
world economic development:
Internationalisation. The extension of trade across national economic boundaries. This
more extensive pattern of trade does not fundamentally affect national economic and
political boundaries.
● Globalisation. A qualitatively different process in which there is a functional integration
of internationally dispersed activities.
●
Dicken cautions against getting swept up in the idea that globalisation of business is
demolishing cultural and political boundaries between countries. Significant national differences remain. However he accepts that there has been a significant change in the extent
of globalisation brought about by:
Extension of production chains across national boundaries. The main impetus here has
been the strategy of multinational enterprises (MNEs) to disperse their production
facilities across several continents to take advantage of resource and cost differences and
also to avoid the vulnerability that arises from being dependent on a single country for
production facilities and markets. Elsewhere these have been termed production networks
to convey the fact that production and sales flows move in many directions, rather than
the more traditional model of less developed countries providing raw materials into a
chain where the finished goods always end up in a developed nation (Knox and Agnew,
1998).
● Patterns of foreign direct investment (FDI). Traditional economic theory would suggest that
the capital-rich countries of the USA, Western Europe and Japan might invest in developing productive capacity in less developed countries in order to exploit cheap labour and
materials. In fact, the bulk of FDI has been between already well-capitalised economies.
This has led to the formation of a core triad of comparatively rich and well-capitalised
economic zones centred on North America, Western Europe and Japan/ Australasia and
●
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a periphery of newly industrialising nations such as the dragon states of Malaysia, Korea,
Taiwan and, lately, China, Latin America and parts of the Indian subcontinent.
● The creation of supranational organisations. Countries within these economic zones are
moving towards common regulations and taxation systems. Although national economic
differences remain to some extent within the three triads, there are obviously moves
towards harmonisation of laws, taxes and even currencies. In Europe this is through the
EU, in North America via the North American Free Trade Agreement (NAFTA), in the
Pacific Basin via the Asia–Pacific Economic Forum (AFTA) and through similar pacts in
Latin America such as the MERCOSUR customs union.
● Technology acting as an engine of economic transformation. Although warning against
crude technological determinism (i.e. the idea that technology alone determines patterns
of economic and social development unmediated by the political and social culture),
Dicken notes that technology has shrunk the world through improved transportation
and communication, speeded up product lifecycles by hastening innovation and swept
away traditional craft-based production systems. This effect has caused remarkably similar products and lifestyles to develop across the countries touched by it.
● The development of ‘webs of enterprise’ through the spreading of multinational enterprises.
These multinationals forge trading links between countries that previously did not trade.
They also seem to possess an institutional power that rivals and transcends the political
institutions of the nation-states in which they are based.
● The impact of particular industries on transferring cultures, lifestyles and personnel across
national boundaries. The industries Dicken singles out for inspection are textiles and
clothing, automobiles, electronics and financial services. He notes that the financial
services have tended to follow the manufacturing industries. These industries have
been the major cause of FDI. Through imposing common working practices and
encouraging international staff mobility they exert a convergence influence on national
cultures.
Dicken predicts a number of challenges facing governments and individuals in the
industrialised nations as a consequence of the increased growth of the globalised economy:
Increased unemployment in the older industrialised countries, particularly among the
unskilled, poorly educated or immobile.
● Widening differences in incomes and living standards within industrialised countries.
● Increased demand for flexibility in workforces, both numerically (through more extensive use of part-time workers) and functionally (through multiskilling).
● Changes in government policies towards ones aimed at removing obstacles to economic
adjustment, promotion of small firms, increased harnessing of new innovative technologies and attracting foreign investment.
● Increased pressures for global governance to keep pace with the global businesses that
authorities wish to regulate.
●
For less industrialised nations Dicken sees considerable problems with their ability to
cope with worse poverty and unemployment.
Other writers broadly agree with Dicken’s hypothesis. Knox and Agnew (1998) discuss the
possibility of wide divergences emerging within national economies between the prosperous
urban areas and the less involved rural areas. One can imagine these problems particularly
afflicting the large continental countries such as the United States or Australia.
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National competitive advantages
The internationalisation and globalisation of markets raises issues concerning the national
sources of competitive advantages that can be substantial and difficult to imitate. Porter
(1992) in his book, The Competitive Advantage of Nations, explored why some nations tend
to produces firms with sustained competitive advantage in some industry more than others,. He set out to provide answers to:
1. Why do certain nations house so many successful international firms?
2. How do these firms sustain superior performance in a global market?
3. What are the implications of this for government policy and competitive strategy?
Porter concludes that entire nations do not have particular competitive advantages.
Rather, he argues, it is specific industries or firms within them that seem able to use their
national backgrounds to lever world-class competitive advantages.
2.8.1
Porter’s Diamond
Porter’s answer is that countries produce successful firms mainly because of the following
four reasons as illustrated in Figure 2.3.
2.8.2
Demand conditions
The demand conditions in the home market are important for three reasons:
1. If the demand is substantial it enables the firm to obtain the economies of scale and
experience effects it will need to compete globally.
2. The experience the firm gets from supplying domestic consumers will give it an information advantage in global markets, provided that:
(a) its customers are varied enough to permit segmentation into groups similar to
those found in the global market as a whole;
(b) its customers are critical and demanding enough to force the firm to produce at
world-class levels of quality in its chosen products;
Plus roles of
• Chance
• Government
Firm strategy,
structure and rivalry
fierce, capable
national firms
Factor conditions
advanced specialised
with good technical
know-how
Demand conditions
sophisticated and
demanding with
international outlook
Related and
supporting industries
home-based suppliers
and related industries
that are internationally
competitive
Source: Porter (1992)
Figure 2.3 Four elements of national competitive advantage. Reprinted with the permission of The
Free press, a Division of Simon & Schuster Adult Publishing Group, from The Competitive Advantage of
Nations. © Michael E. Porter 1990, 1998. All rights reserved
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2.8
93
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(c) its customers are innovative in their purchasing behaviour and hence encourage the
firm to develop new and sophisticated products.
3. If the maturity stage of the plc is reached quickly (say, due to rapid adoption), this will
give the firm the incentive to enter export markets before others do.
2.8.3
Related and supporting industries
The internationally competitive firm must have, initially at least, enjoyed the support of
world-class producers of components and related products. Moreover success in a related
industry may be due to expertise accumulated elsewhere (e.g. the development of the Swiss
precision engineering tools industry owes much to the requirements and growth of the
country’s watch industry).
2.8.4
Factor conditions
These are the basic factor endowments referred to in economic theory as the source of socalled comparative advantage. Factors may be of two sorts:
1. Basic factors such as raw materials, semi-skilled or unskilled labour and initial capital
availability. These are largely ‘natural’ and not created as a matter of policy or strategy.
2. Advanced factors such as infrastructure (particularly digital telecommunications), levels
of training and skill, R&D experience, etc.
Porter argues that only the advanced factors are the roots of sustainable competitive success. Developing these becomes a matter for government policy.
2.8.5
Firm structure, strategy and rivalry
National cultures and competitive conditions do create distinctive business focuses. These
can be influenced by:
ownership structure
the attitudes and investment horizons of capital markets
● the extent of competitive rivalry
● the openness of the market to outside competition.
●
●
2.8.6
Other events
Porter points out that countries can produce world-class firms due to two further factors:
1. The role of government. Subsidies, legislation and education can impact on the other
four elements of the diamond to the benefit of the industrial base of the country.
2. The role of chance events. Wars, civil unrest, chance factor discoveries, etc. can also
change the four elements of the diamond unpredictably.
2.8.7
National competitive advantage
Successful firms from a particular country tend to have linkages between them; a phenomenon that Porter calls clustering.
Clustering allows for the development of competitive advantage for several reasons:
●
transfer of expertise (e.g. through staff movement and contracts)
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Clustering may take place in two ways:
1. common geographical location (e.g. Silicon Valley, City of London)
2. expertise in key industry (e.g. Sweden in timber, wood pulp, wood-handling machinery, particleboard furniture).
2.8.8
Losing competitive advantage
Nations may lose their competitive advantage through the erosion or deterioration of the
factors which created the advantage to start with:
1. Factor deterioration. This occurs due to poor economic policies such as:
● failure to maintain and improve the country’s skill base
● lack of investment in technology and product
● failure to have developed beyond primary advantages when they run out.
2. Local demand conditions. Here local customers may fall out of step with world demands
or inappropriate government policies cause a collapse or distortion of demand at home.
3. Collapse of supporting clusters. This is usually due to firms pursuing diversification strategies and ceasing to concentrate on their core business. The effect is that the members
fail to remain world class against their more focused rivals overseas.
4. Decline of competitive rivalry. An excessive concentration between firms or pursuit of
diversified business strategies reduces the keenness of the competition at home. This
leads to shoddy products and excessive prices abroad.
2.8.9
Porter’s strategic prescriptions
Porter suggests that the firm identifies its most promising strategy in the following ways:
1. Identify which clusters in the home country give a competitive advantage – either through
(a) permitting lower costs of production than global rivals;
(b) allowing a differentiated product.
2. If these advantages are likely to be world class, the firm should compete in global markets.
3. If these advantages are not world class, the firm should find a niche market at home or
abroad where it can use its available strength.
2.8.10
Comment on Porter’s Diamond
Although not as popular as his models of Five Forces, value chain and generic strategies, this
model has still achieved a lot of recognition for Porter. It is not, however, without its difficulties:
1. Companies not countries. The industries that must succeed globally have their own management and strategies. By focusing on their country of origin Porter does not explain
why a given country produces both stars and duds in the same industry. For example,
Toyota and Honda are both Japanese car makers which are a success. Nissan and Mazda
are less successful and have been rescued by Renault and Ford, respectively.
2. Ignore multinational or global corporations. The idea that Microsoft is an American company or ICI is British seems outdated when we consider that their staff, shareholders and
THE NATURE OF THE COMPETITIVE ENVIRONMENT
concentration of advanced factors (e.g. telecommunications, training, workforce)
● better supplier/customer relations within the value chain (i.e. vertical integration).
●
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customers are from all over the world. Porter’s model seems to apply better to firms that are
exporting and less well to ones who are actually setting up outside of their home country.
3. Ignores the target country. Commercial success or failure will depend more on the environment in the target country than it will on the environment in the home country.
Therefore it is necessary to analyse the target country too.
4. Less applicable to services. Porter’s examples are restricted to manufacturing and closely
allied industries such as banks and management consultancies. It is hard to see how his
model would apply to Starbucks or McDonald’s where so much of the product and
staffing depends on the local economy and not a US industrial base.
2.9
Country analysis and political risk
As we have already discussed an analysis using Porter’s diamond will ignore the environmental factors in the target country. It is important, therefore, that as well as conducting
a PEST analysis for the home country of a company a similar analysis is conducted for
any country within which a firm is currently operating or considering operating. Particular
emphasis should be placed on determining any political and cultural differences.
2.9.1
Political risk
Political risk can be considered to arise at the macro- or micro-level. Macro-political risks
will affect all foreign firms in the same general way. Expropriation, the seizure of private
businesses with little or no compensation to the owners would be an example as would
indigenisation laws which require that national citizens hold a majority share in all
enterprises. In recent years with the liberalisation of trade in Eastern Europe, the entry
of China to the WTO and the negotiation of a trade agreement between Vietnam and
the US macro-political risk has diminished somewhat but still needs to be monitored by
multinationals.
Micro-political risk tends to affect selected sectors of the economy or specific foreign companies and is often driven by the dominance of those firms. These risks often take the form
of industry regulation, taxes on specific types of business activity and local content laws.
Rugman and Hodgetts (2003) have produced a useful summary:
Sources of risk:
● political philosophies that are changing or are in competition with each other;
● changing economic conditions;
● social unrest;
● armed conflict or terrorism;
● rising nationalism;
● impending or recent political independence;
● vested interests of local business people;
● competing religious groups;
● newly created international alliances.
Groups that can generate political risk:
current government and its various departments and agencies;
● opposition groups in the government that are not in power but have political influence;
● organised interest groups such as teachers, students, workers, retired persons, etc;
● terrorist or anarchist groups operating in the country;
●
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international organisations such as the World Bank or United Nations;
● foreign governments that have entered into international alliances with the country or
that are supporting the opposition within the country.
THE NATURE OF THE COMPETITIVE ENVIRONMENT
●
Effects of political risk:
expropriation of assets (with or without compensation);
● indigenisation laws;
● restriction of operating freedom concerning, for example, hiring policies and product
manufacturing;
● cancellation or revision of contracts;
● damage to property and/or personnel from terrorism, riots, etc.;
● loss of financial freedom such as the ability to repatriate profits;
● increased taxes and other financial penalties.
●
When forecasting political risk whether the company does this on a formal or ad hoc basis,
it is usual to focus on two areas:
1. the political system in which the company is doing business;
2. the goods/services to be produced and the operations to be carried out.
As regards the political system the major concerns would be the prospect of political upheaval in the country, the likelihood of the government giving preference to local firms or
the prospect of a government acting on a totalitarian fashion. They would also consider
the strength of lobby groups within the target country. For instance, within the United
States, lobby groups have considerable strength in the areas of steel, textiles, softwood timber and semiconductors and have been able to bring considerable pressure to bear on their
government to bring about favourable decisions.
Products and operations also face an element of political risk. For instance where a government requires a joint venture to exist with a local partner there is both a limit to control
and the risk of theft of product knowledge or technology. Where local laws do not offer
patent protection this can be a significant risk. Similarly a requirement to source a fixed
percentage of components locally can be a source of risk as can the governments approach
to monopolies, cartels and price fixing.
2.10
Sources of information for environmental
analysis
Undertaking environmental analysis for an organisation requires access to a wider range of
information.
2.10.1
Environmental scanning
It is important to distinguish between different intensities in the use of environmental information. Environmental scanning is low-intensity gathering of information. Effectively it is keeping
a close watch on developments. Responsibility for scanning arguably rests at three levels:
1. Line management. In addition to their regular operational responsibilities line managers,
or a designated manager, will be responsible. Given the operational concerns of these
members of the team, this scanning is unlikely to extend beyond the medium term and
will be limited to the technologies and products they control.
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2. Strategic planning. Conducted by members of the strategic planning team. While their
time frame of analysis will be longer than that of line managers, their lack of understanding of the operational and technologies details may mean they miss many important leads. For this reason more modern ‘bottom-up’ approaches to strategy may be
preferable.
3. Specialist unit. Persons with specific responsibility for scanning. They may be called
names such as ‘business intelligence units’.
● Jain (1990) suggests that the following benefits arise from environmental scanning:
● helps firm to identify and capitalise upon opportunities rather than losing out to
competitors;
● provides a base of objective qualitative information;
● makes the firm more sensitive to the changing needs and wishes of its customers;
● provides information to help the strategy formulation process;
● provides intellectual stimulation for the strategists;
● improves public image by showing that the firm is sensitive to its environment;
● provides a continuing broad-based education for managers in general and strategists
in particular.
2.10.2
Accessing environmental information
Wilson and Gilligan (1997) note that successful environmental scanning requires two elements to be present:
1. The generation of an up-to-date database of information.
2. The dissemination of this information to decision-makers.
This raises the important issue of how the knowledge of staff and managers can be effectively pooled and accessed. Possible techniques include:
regular management meetings;
● encouragement of broader participation in the business strategy process;
● creation of an internal environmental information database for knowledge to be entered
into under specified codes or headings.
●
2.10.3
Detailed environmental analysis
This is more focused and looks at the specific issues. It may be necessary in a number of
situations:
1. In deciding on the viability of a particular product which is being considered for launch
or continuation.
2. As part of an analysis of a particular business unit and its performance.
3. To assist with deciding whether to develop business divisions and products for another
country.
The process of scenario planning, which we will discuss in the next chapter is often used
as a means of considering the specific issues that a company needs to monitor more closely
in this way.
ENTERPRISE MANAGEMENT
Categorisation of information sources
In an excellent if now rather dated guide, Tudor (1992) provides the following categorisation of information sources:
1. Primary sources:
(a) Annual reports and statements of competitors or firms in the target market or
industry and those of their suppliers.
(b) Transcript services from newspapers, analysts and on-line data sources such as proprietary company information services.
(c) Statistical sources such as government censuses and surveys of household expenditure, production and demographics.
(d) Newspapers and newsletters such as the business press or industry bulletins (using
databases such as Lexis/Nexis which gives access to the world’s press.
(e) Magazines and journals including the trade media, business and management journals, technical journals.
(f ) Analysis services such as FAME.
(g) Patents registered with the national patents office.
2. Secondary sources:
(a) Directories and yearbooks covering particular industries (who’s who) and ownership patterns (who owns what).
(b) Market research reviews and reports produced by specialist research firms including
Mintel, Economist Intelligence Unit, etc.
(c) Abstracts, index journals and current awareness services. These are specialist databases (on paper, CD-Rom or on-line) which index technical articles under codes
and keywords. The firm can set up a profile of keywords relevant to its industry
and source the material written on it.
(d) Government publications such as special reports of select committees on particular
industries, economic forecasts and reports.
(e) Grey literature. A generic phrase covering theses, conference reports, special
research papers, maps and photographs.
3. Computer-based information services:
(a) CD-Rom-based abstracts and journals.
(b) On-line databases of professional and academic journals, newspapers and business
information.
(c) Internet resources such as:
● homepages of rival firms
● economic information from national governments
● homepages of management consultants and professional bodies
● discussion groups
● academic papers via sources such as Google Scholar.
2.11
Summary
The key points to remember are:
the components of PEST and LoNGPEST ;
● the components of the Five Forces model and the factors which influence them;
●
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2.10.4
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the elements contributing to uncertainty (complexity and dynamism);
● the frameworks for competitor analysis;
● the threats that competitors can pose and alternative competitive strategies;
● factors leading to globalisation and the elements of the Porter Diamond;
● the nature of political risk;
● the main sources of environmental information.
●
References
Brandenburger and Nalebuff (1996), Co-opetition, Doubleday.
Dicken, P. (1998), Global Shift: Transforming the World Economy (3rd edn). London: Paul
Chapman.
Fleisher, C.S.F. and Bensoussan, B.E. (2002), Strategic and Competitive Analysis. Upper
Saddle River NJ: Prentice Hall.
Gardner, H.S. (1998), Comparative Economic Systems (2nd edn). Fort Worth: Dryden
Press.
Grant (2002), Contemporary Strategy Analysis: Concepts, Techniques, Applications (4th edn).
Oxford: Blackwell.
Hatch, M.J. (1997), Organisation Theory: Modern, Symbolic and Postmodern Perspectives.
Oxford: Oxford University Press.
Jain, S.C. (1990), Marketing Planning and Strategy. Cincinnati, OH: South Western
Publishing Company (cited in Wilson and Gilligan (1997), op. cit.
Johnson, G., Scholes, K. and Whittington, R. (2008), Exploring Corporate Strategy (8th
edn). Harlow: FT Prentice Hall.
Knox, P. and Agnew, J. (1998), The Geography of the World Economy (3rd edn). London: Arnold.
Kotler, P. (2008), Marketing Management: Analysis, Planning, Implementation and Control
(9th edn). Englewood Cliffs, NJ: Prentice-Hall.
Lynch, R. (2006), Corporate Strategy (4th edn). Harlow, FT Prentice-Hall.
Porter, M.E. (1980), Competitive Strategy: Techniques for Analysing Industries and
Competitors. New York: The Free Press.
Porter, M.E. (1992), ‘Four elements of national competitive advantage’ Figure 3.1 page
72. Reprinted with the permission of the Free Press, A Division of Simon & Schuster
Adult Publishing Group from The Competitive Advantage of Nations. © 1990, 1998 by
Michael E. Porter. All rights reserved.
Ram, S. and Samir, I.T. (1998), ‘Competitor Analysis Practices of U.S. Companies: An
Empirical Investigation’. Management International Review, Vol. 38, No. 1, pp. 7–23.
Rugman, A.M. and Hodgetts, R.M. (2003), International Business (3rd edn). Harlow:
Prentice-Hall.
Stacey, R.D. (1996), Strategic Management and Organisational Dynamics (2nd edn).
London: Pitman.
Spender, J.C. (1989), Industry Recipes: The Nature and Sources of Management Judgement.
Oxford: Blackwell.
Tudor, J. (1992) Macmillan Dictionary of Business Information Sources. Basingstoke:
Macmillan.
Ward, K. (1992) Strategic Management Accounting. London: Cima/Butterworth-Heinemann.
Wilson, R.M.S. and Gilligan, C. (1997), Strategic Marketing Management. Oxford:
Butterworth-Heinemann.
Revision Questions
2
Section A type question
Question 1
W Company is a fashion retailer which designs and sells its own brand of women’s clothes
through its chain of shops in F country. However, it is facing tough operating conditions
in its home market where strong competition means there is little opportunity for future
growth. The Board has taken the strategic decision that expansion can only be achieved
through market development abroad.
Initial research has identified L country as offering the potential to be a possible suitable location for W Company to develop a new market. Further information now needs
to be collected on the external environment and competition in L country in order to help
evaluate the viability of the strategy being proposed.
If the outcomes from the research are positive W Company intends to find an existing
retail chain in L country that it can acquire, rather than set up a new operation through
internal development.
Requirement
Apply appropriate strategic management models/frameworks to explain the key external
environmental and competitive factors on which information should be collected to help
W Company evaluate its proposed strategy to move into L country.
(10 marks)
Section B type questions
Question 2
A clothing company based in the United Kingdom believes that its domestic market is
limited and is proposing to expand by the manufacture and sale of its products abroad. At
this stage it has not identified where it will locate its manufacturing facility. The company
believes that there are major advantages to be gained by setting up a factory in a country
with a low-wage economy.
The company recognises the need to understand the marketing environment of the
country within which it establishes its manufacturing facility. It appreciates that, besides
labour, there are other local environmental issues that need to be fully considered before
entering negotiations to build a factory.
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THE NATURE OF THE COMPETITIVE ENVIRONMENT
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REVISION QUESTIONS E2
Requirements
(a) Compare and contrast the environmental factors that apply in both the UK and the
other country.
(15 marks)
(b) Explain the possible cultural influences on the effectiveness of the workforce in respect
of local education and training, technology, working hours and domestic amenities.
(10 marks)
(Total marks ⴝ 25)
Question 3
Michael Porter, in his book Competitive Advantage: Creating and Sustaining Superior
Performance, suggested that a firm must assess the industry’s market attractiveness by
considering:
the extent of the rivalry between existing competitors;
the bargaining power of suppliers;
● the bargaining power of buyers;
● the threat of substitutes;
● the threat of new entrants.
●
●
Requirements
(a) If a firm wishes to monitor the bargaining power of buyers, recommend the factors
that should be included in the monitoring system implemented by the firm.
(10 marks)
(b) Explain four different methods whereby a firm can reduce the threat of new entrants
to an industry.
(10 marks)
(c) Explain the reasons why firms often continue to operate in an industry which is generating below normal returns in the short run.
(5 marks)
(Total marks ⴝ 25)
Solutions to
Revision Questions
2
Section A solutions
Solution 1
The strategic management frameworks that could be used to assess the external factors
that could help in the Board of W Company to decide whether or not to pursue its market
development strategy in L country are PEST and Porter’s five forces model.
The PEST framework is a useful way of organising information on the macroenvironmental influences that can be used to assess the external factors that might impact
on W’s development in L country. This would involve an analysis of the political/legal,
economic, social-cultural and technological factors. The headings can be used as a checklist to assess the relative importance of the different influences on W Company’s proposed
strategy. In addition Porter’s five forces model will be helpful in analysing the nature of the
competitive environment in L country.
With regard to the information that should be gathered on the general environment in
L country it will be important to assess the nature of the political and economic environment. This would include exploring the legislative and government policies and attitudes
to competition that could impact on W Company’s development. For example, is the government of L country encouraging inward investment by offering grants to companies or
do they have policies in place to protect its own industries? W Company would also want
to consider the political stability in L country, if there is political instability and unrest, it
may not be a positive step to enter the market.
Information should be collected on the nature of the economic climate such as the rate
of economic growth, level of tax rates, interest rates, exchange rates, levels of consumer
disposable income and the percentage of household income spend on clothing and specifically fashion items. All of these factors could impact on the demand for W Company’s
women’s fashion clothes.
Research should be undertaken to determine whether the social factors are encouraging for
W Company, for instance in terms of the customer attitudes, values and beliefs of people in
L country and the extent to which they would be likely to buy fashion clothes from a foreign
retailer. Information on demographic factors, such as the number of women in the age groups
that W Company intends to target would be useful. Information on social factors would also
help in determining the cultural context of L country, in order to gain an understanding of
any potential cultural differences, not only of customers, but also future employees.
Technological factors that would need to be explored relate to the communications
infrastructure and any technological issues that might impact on the way the retailers
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THE NATURE OF THE COMPETITIVE ENVIRONMENT
104
SOLUTIONS TO REVISION QUESTIONS E2
operate. This could relate to computer tracking of stock, as well as ordering and payment
systems. Also, the state of the transport systems needs to move stock around the country
would need to be assessed.
The PEST framework can be expanded to consider environmental/ethical factors.
Interest here will centre of the cost of packaging and disposal of waste, but also about ethical conduct in the management of employees.
An analysis using the five forces model will help W Company assess the level of competition and the attractiveness of the market in L country and hence whether it is an
attractive one to enter. This would involve researching the power of buyers and suppliers
in L country and the extent to which substitute products exist. One of the most important aspects of the model for W Company relates to the level of barriers to entry that it
might face. If there are high barriers to entry, for example as a result of already established
firms in L country having strong retail brands or if there are legal or bureaucratic factors in
place to deter foreign business entering the marketplace, this would make it an unattractive proposition. It also highlights the need to assess the current competitive rivalry, for
instance information will be needed on the number of retailers currently operating in the
industry and industry growth rates (i.e. is it a developing or mature industry). Presumably
W Company would only want to enter the market in L country if the forces are weak and
potential returns are high.
Section B solutions
Solution 2
This question is very closely structured. Part (a) is obviously a reference to the four elements of PEST. You should structure your answer under these four headings and try to
find more than one example of each. Note that the examiner asks you to contrast the factors between the United Kingdom and the low-wage economy’. It is a good idea to visualise a low-wage economy in your mind (say India or Mexico) and that will help bring
ideas to mind. What is different between the two economies?
● Part (b) also has four elements:
– local education and training
– technology
– working hours
– domestic amenities.
Again you should structure your answer under these headings and find at least two
examples of each.
● Be careful not to repeat yourself between sections (a) and (b).
● You are required to relate these factors in (a) and (b) to the strategy of the clothing manufacturer. In part (a) you should consider the impact of the PEST factors on it as both a
manufacturer and a seller in the country. In part (b) your comments are restricted to the
impact of the cultural factors on its role as a manufacturer only.
● Note how key points have been underlined to add emphasis. The marker can almost
make sense of the paragraph by reading the underlined sections.
(a) Before making a decision to set up manufacturing facilities abroad, the company
should consider the environmental factors which can be subdivided into the economic,
the political and legal, the cultural, and the technological business environments.
1. Economic environment. When appraising a foreign investment, the management
needs to consider many factors.
●
ENTERPRISE MANAGEMENT
THE NATURE OF THE COMPETITIVE ENVIRONMENT
A particular issue is the cost of materials and of labour with an adequate
level of skills. This will affect the decision on what level of technology to employ
and how much expatriate management and staff to use. The experience of operating within the domestic market will mean that the management is aware of
both the supply and skills of the local labour force available. However, the management may not have this information for the foreign country.
Another economic issue will be the effect of the exchange rate regime on
the costs and earning from the overseas subsidiary. Because it is freely convertible, the foreign exchange market establishes the UK exchange rate. However,
the low-wage economy may have a nonconvertible currency. This will affect
the ability to repatriate profits and also the costs of goods exported back to the
home economy.
Other issues you might mention, given time, include the relative growth
rates of the economies, inflation rates, extent to which markets are developed,
extent of state involvement in the economy, attitude to free-trade and the permissibility of foreign ownership of businesses.
2. Political and legal environment. The political risk must be investigated before
making any decision to set up a manufacturing process abroad.
For example, the problem of remittance of profits or management fees to
the parent company does not arise in the domestic situation and the ability to
remit funds is a key objective of firms that invest abroad. Governments in host
countries may have policies to forbid such flows, thereby forcing the firm to
invest funds in developing businesses and assets in the host country.
There may be differences in political stability. The UK political system is
mature and governments are elected and bound by the rule of laws passed democratically. In some low-wage economies these democratic safeguards are not in
place. This means that agreements reached to safeguard investments or give access
to markets may be rescinded without warning and even assets sequestrated.
3. Cultural environment. The customs and values of the country are often important in determining the ultimate success of an investment. The firm knows
these for its home market in the UK but to sell overseas it will have to be sure
that the design of the clothing and the styles and fabrics are acceptable in the
new markets. Market research and past experience should provide the company
with information to forecast accurate future sales.
The languages spoken in the foreign economy may be different from the UK
and this will present communication problems for management from the UK.
4. Technological environment. The UK is a developed industrial nation and hence
has electricity and a workforce familiar with the disciplines of factory life. These
may not be present in the new economy. Management needs to investigate the
foreign infrastructure. This will ensure that facilities are adequate to allow the
firm to operate with a reasonable level of efficiency.
Factors that may be considered are:
● The availability of telecommunications within the country and the quality of
connections back to the United Kingdom. This will have implications for management control.
● The reliability of electrical power. The firm may decide it needs to provide its
own generators as a primary or back-up power source.
(b) In planning the move of the manufacturing operations, it is essential that the management know about any issues which are particularly important to the workers.
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THE NATURE OF THE COMPETITIVE ENVIRONMENT
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SOLUTIONS TO REVISION QUESTIONS E2
1. Education and training. The foreign employees are likely to need training in
order to work efficiently. Their level of previous experience will be vital to the
success of the investment in their country. The firm may discover that in addition to the need for training in specific skills the workforce lack basic skills
of numeracy and literacy which will affect their abilities to follow written job
instructions and understand machine read-outs.
2. Technology. At the macro-level some low-wage economies already have substantial experience of factory working. Others are agricultural societies where the
day is measured by the progress of the sun and hence notions of keeping factory
hours is altogether strange.
At a micro-level local workers may not have experience of particular technological processes such as computer-controlled machinery or computer-assisted
design for clothing or laying out of jobs. This would necessitate use of expatriate
workers in the short run and considerable training. Once trained, these local staff
present a staff-retention problem because other firms will wish to employ them.
3. Working hours. Social and religious factors can sometimes differ in a foreign
environment. Specific areas include the importance of the family unit, attitudes
to the aged and special conditions regarding holidays and ‘free time’. In particular, additional holidays may be required by groups of workers in order to allow
them to perform religious rites or undertake significant social commitments. In
some situations, the management may consider these demands to be excessive.
However, a lack of understanding may result in problems within the workforce.
4. Provision of local housing and amenities. In some countries, it is expected that an
employer will provide facilities for the staff. This will reduce the travelling time
of the workers, but may increase the amount of capital employed in the project.
It is likely that the employer who provides housing will be seen as ‘caring’ and
this may be important for achieving acceptance within the foreign country.
This can extend to the provision of other amenities such as clean water,
health care and education for workers and their families. These enable the firm
to be seen to make a contribution to the local society, safeguard future labour
sources and may permit lower wage costs.
Solution 3
This is a very standard revision of basic theory in part (a). Parts (b) and (c) require additional thought.
(a) The bargaining power of buyers represents a major factor in establishing the
attractiveness of an industry. It is therefore important that the power of buyers is monitored in order that organisations are aware of the forces which are important in the
development of a strategic plan. Factors which will influence the relative bargaining
strength of the buyers include:
● the number of different buyers and sellers in the market;
● the relative size of both the buying and selling organisations;
● the buyer’s purchases are large in relation to the total sales of each seller, as a major
customer can often dictate terms and conditions, especially if the cost structure of
the seller includes a high level of fixed costs;
● the level of profit earned by the buyers is low;
ENTERPRISE MANAGEMENT
(b) There are a number of different barriers to entry that are likely to reduce the number
of potential entrants to the industry. Potential competitors can be deterred and competitive advantage retained by any of the following:
1. Patents, licences and government/legal constraints. It is possible for a firm to use any
of these as a form of protection and to prevent new entrants to the industry. Once
this type of legal barrier has been obtained by a firm, it can be of great value in
retaining competitive advantage.
2. Branding or customer loyalty (differentiation). Often at considerable expense, an
organisation will try to establish customer loyalty which will ensure that people will
buy the product in preference to other brands and substitutes that are available.
3. Economies of scale including the learning curve. In some industries, large-scale operations can produce the products at a lower cost than the smaller producers. This
provides an example of ‘overall cost leadership’ which can be very significant in
planning for competitive advantage.
4. Access to cheaper factors of production. Some firms are able to produce products at
a lower cost, as they have been able to obtain materials, labour, finance or other
expenses at a lower rate than their competitors.
5. Switching costs. The ability to change to another supplier without many costs being
incurred. Incumbent firms can increase these by offering volume discounts, special
delivery facilities or electronic ordering systems.
6. Control of unique distribution channels. If a firm can exclude other producers from
distributing their products through the most effective distribution channels, then
this can represent a significant entry barrier.
7. The scale of investment needed to establish the operation. If the amount of investment
is so large that most competitors are unable to consider entering the industry, this
represents a way in which potential competitors can be excluded and the existing
firms have competitive advantage and possibly even a monopoly.
8. Technological advantages that result in cost leadership. Successful research and development often results in a firm having a process that reduces the cost of production
so that competitors are unable to compete on a level playing field’ This gives the
firm that has invested in the R&D an important advantage over their competitors
and will exclude potential entrants to the industry.
THE NATURE OF THE COMPETITIVE ENVIRONMENT
the product is undifferentiated;
● the ‘switching costs’ are low;
● the quality of the component purchased is not particularly important in the final product;
● the extent to which buyers can undertake backward integration.
There will be a number of different sources of information that could be obtained to enable a firm to monitor the bargaining strength of buyers. These include:
● Details can be obtained from the financial reports of companies buying the product.
The gross margins they report give an indication of the potential for their suppliers
to raise prices if the buyer power could be reduced.
● The uniqueness of the technical specification of the product could be considered to
reveal whether it is unique or whether several suppliers are capable of making it.
● A survey of the structure of the supply industry will reveal the number and location
of alternative suppliers. Estimates can be made of their ability to supply and the costs
of transport that might be involved.
● Information may be published by specialist organisations such as industry groups,
and ad hoc reports could be commissioned.
●
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THE NATURE OF THE COMPETITIVE ENVIRONMENT
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SOLUTIONS TO REVISION QUESTIONS E2
(c) There are exit barriers that result in firms remaining in an industry, even though the
returns are below the normal level. When a firm realises that the probability of success
is low or acknowledges that there is excess capacity in the industry, a decision to close
may be appropriate. However, decisions of this kind are often postponed. This is likely
to occur if the closure will result in substantial costs being incurred by the firm. These
are termed exit costs. In general terms, the costs of closure are estimated to be higher
than continuing the operation.
Particular costs are redundancy payments to staff or long-term supply contracts
that will result in damages being due as a result of breaking the contract. In these situations, the closing may be delayed until a more appropriate time.
The ownership of assets with no resale value or assets shared with other processes
could be another factor that delays the decision to close an operation. Similarly, common costs that are absorbed by a particular process may influence the decision to close
down a portion or the whole of an operation.
Apart from the exit costs, a firm may decide to stay in an industry because the
market has a strategic importance to the firm. For example, a commercial bank may
continue to provide current (checking) accounts despite their low profitability because
they are the cornerstone of a client relationship from which more valuable products
can be sold.
3
Contemporary Perspectives in
Strategy Development
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Contemporary
Perspectives in Strategy
Development
3
LEARNING OUTCOME
After completing this chapter you should be able to:
䉴
discuss concepts in established and emergent thinking in strategic management.
3.1
Introduction
Most commentaries on contemporary trends in strategic management commence with
observations about the changes in the business environment. These changes are seen as
the result of a number of developments including the drive by multinational companies to
seek new markets as domestic markets become saturated. In addition, the liberalisation of
trade and the deregulation and privatisation of industries, and developments in the technology of communication and transportation have helped to produce a global market and
mean that companies are able to compete more easily anywhere in the world, with the
effect that competition becomes even fiercer.
Presented with opportunities for greater and cheaper access to foreign markets on the
one hand, and with the threat of increasing competition on the other, companies have
been forced to change the way they manage and operate their businesses.
Some of the recent developments in the field of strategic management and contemporary ideas on meeting the challenges of the dynamic environment facing organisations
are explored in this chapter. The implications of the move to more complex organisation
forms such as strategic alliances and ‘network’ organisations will be discussed.
Another important trend is the spotlight on social responsibility and the ethical considerations when developing strategy. This chapter will go on to review the debates surrounding social responsibility, and the reasons why there is a need to consider the interests of
more than just shareholders when making strategic decisions.
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CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
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STUDY MATERIAL E2
3.2
Internationalisation and globalisation
As discussed in Chapter 2, a major challenge for business growth will be the ability to
deal effectively with the demands of a global economy. As global competition becomes
increasingly evident, organisations must choose the geographical boundaries in which they
are going to operate, for example retain a strong domestic force, or at the other extreme,
become a global player. In most industries organisations can no longer afford to formulate
and implement strategies in response to just local conditions; they must be willing to adapt
to the conditions of a ‘borderless world’.
There are, however, many different interpretations of the concept ‘globalisation’. It can
be argued that there is a move away from national economic systems towards a system
where national markets are merging into one huge global market place, with the tastes and
preferences of consumers from around the world beginning to converge. Organisations can
now choose the whole world as their geographic market place, developing a global strategy
with standardised products, produced and sold in the same way throughout the world to
meet standardised customer demand.
Alternatively, globalisation can be viewed from a structural perspective, where operational units are fully integrated across national boundaries and functions such as HRM,
Marketing and R&D are grouped together, independently of national boundaries, in
search of the most economic production costs. Global companies can seek to gain competitive advantage by producing large volumes of standardised products at low cost. One
means of gaining low unit costs derives from economies of scale; the other derives from
producing in low-cost locations. Large corporations locate their manufacturing plants
where labour and other costs are lowest, and locate their headquarters, research and development, marketing and other functions in those parts of the world that enable their activities to be conducted most efficiently and effectively. Improvements in the technology of
transportation and communication are allowing firms to reconfigure their value chains so
as to gain greater value from the use of scarce resources.
There are, then, wide ranging reasons to explain the move towards globalisation. These
include:
limited growth in traditional and home markets;
● increased competition in home markets;
● consolidation and development of trading blocks;
● liberalisation of trade, giving rise to huge increases in investment across national
boundaries;
● free trade opening up new opportunities in emerging markets;
● potential cost and market share advantages;
● lower production costs in less developed countries;
● development in communication networks – ability to communicate more easily and rapidly due to new technology;
● developments in transportations technologies and networks;
● global financing.
●
A number of factors will influence an organisation’s ability to operate effectively as a global player, for example in terms of organisational structure, cultural issues and the need for
a set of specific leadership skills. All these factors have implications for global effectiveness
and development and implementation of strategies.
ENTERPRISE MANAGEMENT
1. global dimension for world-wide coordination to achieve economies of scale;
2. local dimension that enables country managers to respond to local customer needs.
Bartlett and Ghoshal’s contribution to the debates on internationalisation strategies has
been their work on transnational corporations which seeks to combine the local responsiveness of the international subsidiary with the coordination advantages found in global
product companies. They suggest that in managing across borders, organisations have to
make choices on the need for local independence and responsiveness (high to low) and
the need for global coordination (high or low). The transnational structure attempts to
achieve both high local responsiveness and high global coordination. Whilst each national
operation will operate independently, it is a source of ideas and capabilities for the whole
organisation.
How organisations organise themselves to become global players raises some key challenges. Conventionally, this has been done by establishing or acquiring subsidiaries in
other countries, but more recently, alliance and networks are becoming a vital aspect to
achieve success within a global marketplace.
Much of the growth of global corporations was achieved by consolidating smaller,
local organisations. This was achieved by merger or acquisition, with organisations often
acquiring new subsidiaries cross-border at a rate of several each year. The arguments for
acquisition often centre on the concept of ‘synergy’– that the whole organisation has a
greater value than the sum of its parts. Such synergies can arise from the sharing of
resources or skills, or the exploitation of economies of scale. A simple example of the latter is the increase in purchasing power of a large organisation: Buying ‘in bulk’ raises the
opportunity to demand greater levels of discount from suppliers. Other motives for developing through mergers or acquisitions may be to enhance the capability of the company,
for example to address a lack of resources or competences and to speed up learning, gaining access to efficiencies and expertise that would be difficult to achieve as quickly through
internal development.
By the 1990s, many strategists were beginning to question the logic of large conglomerate organisations. The more diverse the mix of business within an organisation, the fewer
synergies are available to it. While a large organisation should be able to exist with a relatively simple management structure, for example, the reality is often greater complexity
in the organisation structure, and large numbers of managers. Added to this, the inevitable costs of control and compliance, such as time-consuming reporting procedures and
the need to integrate information systems, and the cost of being part of a large organisation might outweigh any synergies. There is also a perception that smaller organisations
can be more focused on customer needs, and more responsive to the changing business
environment. Strategists were also familiar with the ‘excellence principles’ of Peters and
Waterman, which included ‘stick to the knitting’ – find a ‘core competence’ and build a
business model around it.
All of the above factors led to an increase in de-mergers during the 1980s and 1990s,
including some that were very large and high profile. An example of this is ICI which
CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
Although on the one hand, markets are becoming global, there is also a trend towards
customisation – with the product/service adapted to some extent for local conditions,
hence the need to ‘think global, act local’; this is sometimes termed ‘glocalisation’. Porter
states that any organisation structure competing in a global market has to balance two
dimensions:
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CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
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STUDY MATERIAL E2
de-merged into ICI (chemicals) and Xeneca (pharmaceuticals). The market capital of
the two de-merged organisations exceeded the pre-de-merger value of ICI, suggesting
that investors agreed that the de-merger added value. Xeneca has since merged with
Astra, another large pharmaceutical company. Similarly, Vodaphone (a telecommunications company) was de-merged from the Racal group (an electronics conglomerate)
as the board of Racal recognised that the risks and market conditions of Vodaphone
did not ‘fit’ with the remainder of the business. Once again, the investors valued
Vodaphone more highly as an independent business than as part of Racal.
Increasingly organisations are forming collaborative relationships through international
strategic alliances as part of their global strategies. Access to markets can be greatly facilitated by developing an alliance with a local partner who is familiar with the market that a
company wishes to enter. The economic rationale for such developments therefore has to
do with access to markets, with the sharing of knowledge and expertise and with economies of scale and scope.
The increase in the number of these networks has been greatly facilitated by developments in communication technology. Such networks, sometimes called ‘virtual organisations’, consist of a number of partner organisations that collaborate with each other to
produce, market and distribute goods and services. The links between these interdependent organisations are made much easier with the development of electronic mail and allow
communication and coordination not achievable in the past. The organisation is ‘virtual’,
in the sense that an organisation with a corporate centre does not exist. Instead, the ‘organisation’ as a set of cooperative linkages between partner companies operates in many ways
as if it had an independent existence.
3.3
Complex organisation forms
Complex forms of organisation are usually thought of as occupying the ground between pure
forms of market transactions and hierarchical organisations. They are regarded as an alternative way of coordinating resources. The idea seems to have grown out of Williamson’s
idea of ‘transaction costs’ – that market relations incur such costs, while in trying to avoid
them by internalisation, hierarchical forms of organisation result (see later in this chapter).
Unfortunately, the lack of competition within hierarchical organisations itself results in a
lack of control on costs, as mentioned earlier.
The complex forms attempt to overcome the inadequacies of both market and hierarchical
forms through collaboration between existing organisations.
The drivers for cooperation are of two sorts – cost reduction and market penetration. The cutting of costs internally has resulted in a wave of outsourcing of
non-core activities and research and development alliances. Market penetration
is perhaps more common and allows economies of scale such as ShellMex and BP
achieved in the 1950s with their joint distribution network, or more recently, where
construction consortia bid for motorway contracts and the building of the Eurotunnel
between the UK and France.
Such organisations would range from cooperatives between organisations and their
suppliers, to all forms of partnerships and strategic alliances in which coordination of
resources was based on cooperation between the parties concerned. This relies on network
relationships outside the boundaries of the organisation.
ENTERPRISE MANAGEMENT
Strategic alliances
A strategic alliance can be defined as where two or more organisations share resources and
activities to pursue strategies. There are different forms of alliance, some which depend
on formalised inter-organisational relationships and others which are much looser arrangements and informal networks between organisations. For example, joint ventures which
involve two or more organisations setting up a newly created organisation, but where the
sponsoring organisation remains independent. This form of alliance is often used where
organisations want to enter new markets. Consortia are short-term legal entities and will
usually be focused on a particular project, with sunk costs from each of the partners and
which terminate at the end of the project.
Franchising, allows the franchisee to undertake specific activities, such as manufacturing, distribution or selling, whilst the franchiser is responsible for managing the brand and
marketing (e.g. Coca-cola, The Body Shop, McDonald’s). Licensing gives the right to manufacture a patented product, for a fee.
Johnson, Scholes and Whittington (2008) suggest the ingredients of successful alliances
include:
a clear strategic purpose for all parties in the alliance;
● compatibility between parties;
● defining and meeting performance expectations – having clear goals, governance, and
organisational arrangements;
● trust and integrity between the partners to the alliance.
●
Can you identify organisations who have developed strategic alliances? What
were the reasons for the strategic alliance? What are the potential benefits and
drawbacks of such a relationship?
3.3.2
Illustrations of network organisations
To illustrate the notion of a network organisation, a good example to use is the online
bookseller Amazon.com. Amazon provides a customer website interface that enables the
visitor to search and browse the catalogue of books (and other items such as CDs and
collectibles). The customer can order the product online and expect to receive it by courier within a few days. Amazon sits in the middle of a network of other organisations. It
has contract arrangements with book warehouses throughout the world to process and
dispatch its orders so that it need keep only the 80,000 top-selling titles in stock. These
warehouses keep Amazon notified of their stock position (which is automatically transferred to the customer web pages as approximate delivery times). It also has arrangements
with couriers, credit card operators and publishers to provide it with the information and
services it will need. From the customer’s point of view, it ‘feels’ like one organisation: the
books arrive in an Amazon carton and they have their own account with the company.
The company also keeps them informed about new books in areas similar to ones they
have bought before.
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3.3.1
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Yet in fact, Amazon owns relatively few physical assets and staff to back up its service
(an alternative term ‘virtual organisation’ perhaps expresses this).
A similar analysis can be applied to the following industries:
UK local government authorities (LGAs). The local taxpayer receives environmental
health, library, leisure, law and order and education services. However, the LGA relies
on a series of contracts with private and public sector contracting companies to provide this service.
UK hospitals. A patient in the hospital will receive medical treatment, food and
accommodation services. However, the hospital may use private contractors for cleaning, laundry and catering while at the same time relying on other hospitals for the use
of specialist scanning and dialysis equipment. Many of its staff will be employed on a
contract basis from agencies.
Airlines. The customer of the airline will have the impression that everything is supplied by the airline itself. In fact, it is likely that the telephone booking service,
aircraft maintenance, on-board catering, check-in, luggage handling and departure lounges are provided under contracts from other firms. The passenger may
also find that part of their journey is provided by another carrier under a similar
arrangement.
UK railways. A passenger will buy their ticket from a train-operating company and
travel according to the timetable the company has laid down. The train itself may be
owned by a separate leasing company, depart from a station and along lines operated
by a third company, yet maintained by a fourth. The on-board catering will be provided by a fifth firm and the train cleaned by a sixth firm.
Ghoshal and Bartlett (1997) describe another form of network organisation which they
term an individualised corporation. They argue that networks will take the place of formal
organisational structures such as hierarchies and rigid divisions. Corporations will allow
their individuals to form virtual teams in order to become more creative, inspiring them to
use their initiative and knowledge to build organisational learning and competences.
The various examples demonstrate that network organisations can choose to ‘buy-in’ a
range of value-creating activities through:
1. Contract staffing. The use of contract staff (or ‘temps’) to cope with pressure points
in the workload is a long-established practice. Network organisations will often take
this as the norm and extend it beyond operative staff to include workers with considerable intellectual capital, such as systems experts and lawyers, while retaining only a
very small cohort of core staff. This shamrock organisation will be discussed in the next
chapter.
2. Use of specific capital assets. The leasing of assets has been common for many years in
high capital cost industries like airlines and shipping. However, the network organisation frequently leases IT facilities, turnkey factories and specially built machines and
highly customised office accommodation.
3. Outsourcing elements of production or service provision. Ancillary services such as office
cleaning have often been outsourced by management who do not wish to be bothered
with it. However, the network organisation goes considerably further by outsourcing
the production of its products or the distribution of its products. For example, many
processed food companies no longer make the food they brand and sell and fast-food
restaurants do not operate their restaurants.
ENTERPRISE MANAGEMENT
Writers on network organisations refer to the ‘permeable organisation boundary’ because
it becomes hard to see where one organisation ends and another begins. Staff from one
organisation physically work at the other’s offices, customers are seemingly passed from
organisation to organisation without realising it, and data about customers and products
are passed around in order to coordinate activities.
There are a number of issues posed by the development of network organisations:
1. How do firms decide which activities and assets to ‘buy-in’ and which to own and operate directly?
2. Why have network organisations become so important in recent years?
3. How can management develop systems to control operations in a network
organisation?
3.4
Theoretical basis of network
organisations – transactions cost theory
Transaction cost theory is rooted in the institutional economics of Ronald Coase and
Oliver Williamson. Williamson (1981) suggests that organisations choose between two
mechanisms to control resources and carry out its operations – hierarchies or markets.
1. Hierarchy solutions. Here, management decide to own the assets (or employ the staff
directly) and use the policies and procedures of the firm to control their use and performance. Vertically integrated companies are ones which have a high reliance on the
managerial hierarchy for control.
2. Market solutions. Management decide to buy-in the use of the assets or staff from outside companies under the terms of a contract. Outsourcing is a contemporary example
of increased reliance on the market. Hierarchies will be used if the transactions costs of
the market solution are too high.
It may be helpful to think of Williamson’s theory as a more complex version of the
familiar ‘make-or-buy’ decision. Management will make in-house the things that cost them
more to buy from the market. However, Williamson looks beyond just the unit costs of the
product or service under consideration. He is specifically interested in the costs of control
that (together with the unit costs) make up transactions costs.
Transaction costs are the organisational counterpart of friction in a physical system.
They are costs arising at the interface between economic agents, particularly between stages
in a production or supply process.
Where the enterprise relies on outside suppliers for an input or service (a market solution),
in addition to the price for the bought-in input, it will incur the following transaction costs:
(a) negotiating and drafting a legal contract with the supplier;
(b) monitoring the supplier’s compliance with the contract (quality, quantity, reliability,
invoicing, etc.);
CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
4. Reliance on outside organisations for referral of business. Many network organisations have
mutual customer-sharing arrangements and will cross-sell their products. For example:
through-ticketing on airlines and railways; car-hire firms, airlines and hotel chains network for corporate travel and fly-drive holidays; finance houses network with car and
electrical retailers to provide low-cost consumer credit and joint promotions.
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(c) pursuing legal actions for redress due to non-performance by the supplier;
(d) penalty payments and cancellation payments if the firm later finds it needs to change
its side of the bargain and draft a new contract with the supplier.
These costs arise because both the firm and its supplier wish to be protected against loss
and use the contract to define the risks each mutually takes on.
1. Bounded rationality. At the time the contract is negotiated, neither party is able to perfectly anticipate the future and how the contract will unfold. For example, a firm seeking to buy components cannot know for sure the volumes they will need because they
cannot perfectly forecast final product sales. Likewise, the innovations of a competitor may force them to vary the specification of their product that may require differently specified inputs. Similarly, the supplier will not know their production costs with
certainty.
2. Opportunistic behaviour. Each agent is seeking to pursue their own economic self-interest. This means they will take advantages of any loopholes in the contract to improve
their position. For example, a small change in the specification of the product will be
alighted on by the supplier as an opportunity to charge higher prices because they know
the buyer is bound by contract to purchase from them.
The more that these two factors are present, the greater will be the transactions costs
arising from a market solution. This is because:
(a) Bounded rationality makes the parties quibble more over the drafting of the contract
and over the interpretation of it (particularly, if circumstances have moved against
them since the contract was drawn up).
(b) Legal enforcement of the contract will become more expensive.
(c) Opportunistic behaviour will lead to expensive variations in contract terms or damages
claims for breach of contract.
If these transaction costs become too high, the organisation may reduce its costs by taking the supply in-house through development of its own upstream supply facility under
the direct control of management (a hierarchy solution). The decision of which mechanism
to use, markets or hierarchies, is (or should be) based on management’s desire to minimise
transactions costs.
Williamson considers the circumstances that lead one firm to trade with another
and therefore to incur transaction costs. This he roots in the concept of asset specificity.
Asset specificity is the extent to which particular assets are of use only in one specific
range of operations.
3.4.1
Assest specificity – an illustration
Consider the example of Eurotunnel plc. This company has a single asset, a tunnel under
the English Channel linking the British Isles to the main European continent, which
opened in 1994 having cost nearly £5 bn to build. Apart from some telecommunications
potential, this extremely expensive asset has no conceivable alternative use other than as
a rail tunnel. In addition to operating its own shuttle services for passengers and freight,
over 30 per cent of the company’s revenues come from other railway companies which pay
Eurotunnel to use the tunnel. This includes the Eurostar consortium that operates specially
built trains between London and various destinations in France and Belgium.
ENTERPRISE MANAGEMENT
1. Site specificity. The assets are attached to a particular geographical location, for example:
● locating a components plant near the customer’s assembly plant;
● building hotels near a certain theme park or tourist attraction;
● building of pipelines and harbours to service an oilfield.
2. Physical asset specificity. This is a physical asset with unique properties, for example:
● reserves of high-quality ores;
● a unique work of art or building.
3. Human asset specificity. Particular skills or knowledge, for example:
● specific technical skills relevant to only one product;
● knowledge of systems and procedures peculiar to one organisation.
4. Dedicated asset specificity. A man-made asset which has only one application, for
example:
● Eurotunnel; military defence equipment; Sydney Harbour Bridge.
5. Brand name capital specificity. A brand and associations that belong to one family of:
● products and would lose value if spread wider, for example:
● Coca-Cola; McDonald’s.
6. Temporal specificity. The unique ability to provide service at a certain time, for example:
● the right to conduct radio broadcasts at an allotted time;
● rights to exploit an asset for only a limited number of years.
Williamson admits that these categories often occur together. For example, Eurotunnel
combines temporal (limited franchise till 2086), dedicated asset and site specificity.
CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
This is a situation of high asset specificity. High asset specificity arises where a supplier
must invest in expensive assets with no alternative use in order to supply a client. This
poses a substantial risk to the supplier because if the contract is withdrawn, it will not be
able to recoup its investment. Few will take this risk without a guarantee of orders in the
long term. Eurotunnel plc is locked into the train operators. At the same time, the train
operators are locked into Eurotunnel because their investment in rolling stock and stations
would be useless without the tunnel.
Williamson examines the effect of such high ‘asset specificity’ on transaction costs.
Williamson predicts that such high asset specificity will therefore result in bilateral (or
quasi-bilateral) contracts between the firm and its supplier. High asset specificity results
in the buyer being denied the opportunity to periodically choose between rival producers on an external market, instead being forced to enter a long-term contract with the
sole supplier. Eurotunnel has the exclusive right to operate the tunnel until 2086, but
perhaps more significantly, the rail operators signed Usage Contract agreements with
Eurotunnel in 1994 until 2006 under which they are committed to certain minimum
financial payments to Eurotunnel. In return, they have the right to use up to 50 per
cent of the tunnel capacity. It can be seen that the high asset specificity of Eurotunnel
has led to high transactions costs in the form of the contracts and franchise agreements
around it.
Williamson’s conclusion is that high asset specificity will lead firms to bring supply inhouse rather than bear the high transactions costs of the market. Indeed, he suggests that
extremely high asset specificity may result in no suppliers coming forward on the market. In this connection, it is significant to note that Eurotunnel began life as a political
creation of the British and French governments rather than as a private business initiative.
Williamson suggests that asset specificity can be of six types:
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Transaction costs approaches to organisation theory are being enlisted in support of a
number of ends by strategy writers and business consultants.
1. Identification of distinctive competences. According to the transactions cost approach, this
will be an operation or asset that cannot be provided by another organisation without
increasing the transactions costs or risks of the firm. Any asset or operation that does
not have these characteristics is not a suitable basis for a competitive strategy because a
rival will be able to buy it in cheaper.
2. To support organisational restructuring. Organisations should sell-off upstream or down
stream divisions that can be provided at lower transactions costs by the market. The
same argument applies to particular business processes such as IT, logistics and human
resource development which are increasingly outsourced.
3. To predict the impacts of developments in information technology. It is believed that the
costs of searching the market for suppliers, maintaining the supplier/buyer relationship and monitoring fulfilment have been reduced by developments in information
technology (IT). These are often put under the umbrella of e-commerce or e-business.
Predicting the reduction in the costs available from the substitution of these virtual
value chains is used to drive strategic initiatives and investments.
3.4.2
A critique of transactions cost theory
According to Williamson, corporations reduce transactions costs by vertically integrating,
and in doing so, become more multi-divisionalised and more internally complex.
This casts an interesting light on organisational behaviour; for example:
Does Disney Corporation operate visitor and cast accommodation at its theme parks
because it is cheaper than offering the financial safeguards necessary to encourage hotel
operators to invest in such specific assets?
● Is the reason that Procter & Gamble develops its own brands for foods and detergents
that the uncertainties about brand values and strategy make it very expensive to draft
contracts to lease brands from brand owners? Did the same consideration lie behind
Grand Metropolitan’s decision to buy Pillsbury rather than simply license the Burger
King brand from it?
● Do large firms undertake in-house staff and management development programmes
because colleges and potential recruits are unwilling to bear the costs of training themselves in such specific skills?
● Are some staff paid far more than they could otherwise get on the job market because
they possess specific skills which the firm cannot buy from the labour market?
●
The network organisation, however, seems to challenge Williamson’s theory because it
represents a breakdown in hierarchies and features a much greater use of the market to
provide inputs and customers. Several transactions costs based explanations may be offered
for this phenomenon:
1. Organisations may have underestimated the costs of internal control. Firms undertake
activities internally when the transactions costs of external provision are too great.
However, this assumes that management can accurately quantify the costs of controlling the internal operation. These costs will include:
– staff recruitment and training;
– provision of managerial supervision;
ENTERPRISE MANAGEMENT
Communications technology such as teleconferencing, e-mail and intranets permit
much lower cost and timely maintenance of supplier relationships than was possible using
face-to-face methods.
Firms now have access to global partners because the cost of searching for suitable suppliers or buyers is reduced by IT. One example provided by Hagel and Armstrong (1997)
is the possibility of industry members forming virtual communities by using common
websites to advertise their requirements and to invite tenders from suppliers.
One influential theory adopting a transaction costs perspective is the Electronic Markets
Hypothesis of Malone et al. (1987). This suggests that more firms will be prepared to
undertake asset specific investment because the electronically facilitated global market
makes them less reliant on a single customer. Similarly, the buyer will have a choice of
suppliers rather than a single monopoly supplier. The authors suggest a significant shift
to increased outsourcing will occur as firms become able to network in an ‘unbiased market’ rather than being faced with the choice between internal production or reliance on a
monopoly partner.
Transactions costs may have been reduced by the development of trust in contractual relations. Williamson suggests that a major source of transactions costs is the potential for
opportunistic behaviour by the contracting parties, and the legal and monitoring cost that
arise from these. Nirmalya (1996) and others suggest that the mutual suspicions that give
rise to these costs can be removed if a relationship of trust is developed between the contracting parties. This is also picked up by Ouchi (1981) who suggests that the high uncertainties and impossibility of measuring performance means that contract relations must
be based on shared values, or clan control, rather than either of Williamson’s market or
bureaucratic means.
The creation of hierarchies was not economically justifiable at any time. For Williamson to
argue that organisations are structured in such a way that they minimise transactions costs,
he depends on one of two propositions:
(a) that management structure organisations in this way because they seek to improve
shareholder value; or
CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
– production planning;
– payments and incentive schemes to motivate performance;
– the development of budgetary control systems to coordinate activity;
– divisional performance measurement and evaluation;
– provision and maintenance of fixed assets, such as premises and capital equipment.
These costs of managerial control are traditionally regarded as overheads rather than
something resulting from the decision to undertake production internally. A conventional absorption costing system may allocate overheads to products, but these overheads
are not relevant costs for decision-making purposes such as ‘make or buy’. Hence, the decision to produce internally overlooks many of the costs associated with it.
More modern management accounting techniques recognise the costs of control and
this may have led to increased recognition of the savings from outsourcing.
2. Transaction costs may have been reduced by the impact of information technology. Examples
include: computer integrated manufacturing (CIM) enables ordering of components
and coordination of suppliers to be streamlined by automatic triggering of electronic
orders transmitted by electronic data interchange and, more recently, the internet.
Common computer assisted design (CAD) systems allow collaboration in research and
development with geographically remote suppliers.
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(b) only those firms that succeed in minimising costs will survive in the long run (i.e. firms
that fail to do so are no longer around because market forces have eliminated them).
Neither assumption can go unchallenged. First, many writers, including Williamson
himself, have suggested that the lax framework of corporate governance allows the management of a firm to pursue personal goals rather than maximise the wealth of shareholders
(e.g. Williamson, 1964). Therefore, it is quite possible that many hierarchies were created to
enhance managers’ feelings of prestige and power rather than in an attempt to avoid transactions costs. Indeed, the suspicion arises that many organisations developed as they did from
reasons of history and circumstance rather than to serve any particular purpose. Second, the
notion of market forces driving high-cost firms out of business overlooks the fact that vertically
integrated firms have substantial market power and may avoid these competitive pressures.
Transaction cost analysis may explain the trend to network organisations if it can be shown
that external pressures are forcing firms to reduce costs. For example, it may be that increased
shareholder pressure or market competition is forcing managers to break down their empires
in order to gain the lower transaction costs available from external partnerships.
3.5
Social responsibility and strategic decisions
Social responsibility can be defined as ‘taking more than just the immediate
interests of the shareholders into account when making a business decision’.
Issues commonly associated with social responsibility include:
environmental pollution from production or consumption of products;
● standards of factory and product safety;
● non-discrimination in employment and marketing practices;
● avoidance of the use of non-renewable resources;
● non-production of socially undesirable goods;
● production of non-degradable packaging or products.
●
In business decisions, a conflict may be encountered between what furthers the firm’s
interests and what satisfies society.
3.5.1
Must social responsibility conflict with benefiting
shareholders?
Deciding to be socially responsible may conflict with shareholders’ interests in several ways:
1. Firm may incur additional costs. Examples of these extra costs include:
● paying staff more than the minimum wage set by market forces or legislation to avoid
accusations of exploitation;
● treating emissions and waste to reduce environmental pollution;
● increasing product and plant safety levels;
● costs of monitoring compliance with social responsibility policies.
ENTERPRISE MANAGEMENT
There are counter-arguments to suggest that social responsibility in business will improve
shareholder returns:
1. Essential to being a sustainable enterprise. A ‘sustainable enterprise’ is one whose competitive strategy does not fundamentally conflict with the long-term needs and values
of society. Put simply, a non-sustainable enterprise is living on borrowed time and has
no long-term future. It is in the interests of shareholders that firms become sustainable,
if earnings are to continue into the future.
For example, some writers question whether oil companies can be sustainable enterprises because their core business seems inevitably to lead to damage to the natural
environment. These practices may be tolerated at present, the argument runs, but must
eventually be brought to an end by legislation and financial penalties prompted by the
rising tide of public concern about environmental degradation. Oil companies are aware
of this criticism and have responded by developing processes to ‘clean up their act’.
Other industries which may need to address the issues of sustainability include:
● tobacco industry (cigarettes harm quality of life and may be lethal);
● car industry (pollution, accidents, congestion);
● armaments industry (e.g. landmines are now close to being outlawed worldwide);
● mining and quarrying industry (finite resources, destroys habitat, poor safety record);
● brewing and distilling industry (promotes anti-social behaviour and alcoholism).
2. Attracts socially conscious investors. Ethical investment funds will be attracted to firms
with a TO good social responsibility score. This will cause their shares to trade at a premium price. This represents a direct rise in shareholder wealth.
3. Attracts socially conscious consumers. The consumers will pay a premium price for products they regard as ‘sound’. Examples include ethical cosmetics, organic foods, recycled
paper products and ‘fair trade’ coffee.
4. Improves relations with governments and other regulatory bodies. Many firms depend on
the goodwill of governmental bodies for the granting of production licences, planning
permission or convivial legislation. A good record in social responsibility may help convince the decision-maker to use discretion in the firm’s favour.
5. Reduces stress on management and staff and permits improved morale. This argument
points to the fact that feelings of ethics and social responsibility are not solely external
to the firm. The management and staff of the firm are members of society too and have
similar values. If business decisions force managers and staff to contradict their private
ethics on a daily basis, the impact will be to reduce morale and increase staff turnover.
This will harm financial performance. A socially responsible firm, on the other hand,
may be able to attract these staff.
CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
2. Firm may reduce revenues. Examples include:
● charging lower prices for products to avoid being accused of exploiting the consumer
(e.g. pharmaceutical products);
● refusing to supply particular governments;
● not promoting a socially undesirable good to particular consumer groups (e.g. cigarettes or alcohol to the young).
3. Shareholder funds may be diverted to socially worthwhile projects. This relates to charitable
donations by firms to the arts, relief of social need or sponsorship of national projects
(e.g. the UK Millennium Dome). This money could otherwise be dividend, perhaps.
4. Management and staff time may be wasted on social projects. The management and staff
are paid to run the business, not to indulge in social engineering.
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3.5.2
An ecological perspective and environmental
responsibilities
The ecological perspective of strategy is closely aligned with social responsibility. It is
concerned with the relationship of the organisation with the natural environment in
which it operates.
One approach suggested by Bennett and James (1996) lays down six areas in which this
might be monitored:
1. Production. This is primarily concerned with minimising the amount of materials and
energy used to generate output.
2. Environmental auditing. It focuses on improving relationship with the ecological environment and will cover such things as compliance with legislation, treatment of waste,
product and process hazard and emissions.
3. Ecological approach. This can be a life-cycle approach in which the product is
traced from the extraction of the raw material through production and consumption of the product till disposal of the final exhausted product. At each point,
the ecological impacts are noted and targets set for reducing them. Alternatively,
a single site or project can be looked at and its impacts on its immediate locale
considered.
4. Quality. This anticipates a continuous improvement in the environmental performance of the business. Therefore targets are constantly amended to achieve better
performance.
5. Accounting. Dummy shadow prices are attached to the social costs of projects to
create a separate set of accounts showing the environmental consequences of the
firm’s activities. These affect strategy through their inclusion in the investment
appraisal and financial reporting process. Any strategies taken to reduce the impact
of the firm on its environment will cause the ecoprofit to increase and also improve
the ecobalance sheet.
6. Economic. It charges environmental costs to any process, usually through budgets, to
encourage management to avoid causing the environmental damage.
Table 3.1 shows the voluntary environmental indicators of the UK chemical industry. It
should be noted that often these measures are suggested by the firm’s need to comply with
legislation or the directives of regulators.
Table 3.1
Health and safety
Environment
Distribution
Energy
Complaints
Voluntary indicators adopted by the UK chemical industry
Fatalities
Non-fatal major accidents
Diseases
Accidents in relation to man hours
Amount of ‘special waste’
Discharges of ‘red list’ substances
Site-specific data expressed in an ‘environmental index’
Number of transport incidents in relation to million tonne/miles
Energy consumption per tonne of product
Number of complaints made by public and regulators.
Source: Gray et al. (1993). Reproduced by permission of ACCA.
ENTERPRISE MANAGEMENT
Shareholder wealth and ethics
Whist issues of business ethics will be considered later in the Learning System it is appropriate here to consider the debates concerning ethics on strategic decision makings. Social
responsibility and business ethics may affect the mission and objectives of the organisation
and may dilute the importance of shareholder wealth as a primary objective. The views
of a number of researchers who have presented arguments for and against the primacy of
shareholder interests are discussed below.
Friedman: profit is the sole objective
The economist Milton Friedman (1963) supports the ethical argument in favour of shareholder supremacy with the dictum: ‘The business of business is business.’ His argument
can be presented as following a number of steps of reasoning:
All economic systems are mechanisms to serve the needs of the population of the system.
History has shown the market economy to be superior to other forms of systems, such as
feudalism and socialism, in providing the greatest benefits to the greatest number of people.
● In a market economy, the needs of society are transmitted to firms by price signals emanating from the market.
● By following these signals, firms coordinate their activities to meet society’s needs.
● The search for profit is what incentivises firms to respond to market needs.
● Therefore, by being profit motivated, firms will produce the best outcomes for society.
● If management ignore the profit motive or the state tries to intervene in the market
mechanism, say by laws or taxation, they merely change the identity of the winners
and losers. They do not actually remove the problem (‘there’s no such thing as a free
lunch’).
●
●
A follower of Friedman’s argument would respond to the ethical issues in the store
closure example above in several ways:
without a profit motive shoppers might not have any stores at all;
● the rising prices of the remaining store are an essential element if any stores are to remain
in the town centre;
● although it is inevitable that there may be some individual losers, the greater efficiency
of the out-of-town store will benefit society generally in the form of lower prices;
● forcing stores to remain in town centres for the benefit of a small number of shoppers
would deny the majority a better and cheaper service – this would raise alternative ethical issues about sacrificing the interests of one group of shoppers for another group’s
interests.
●
Sternberg: shareholder wealth is natural purpose
A different pro-shareholder argument is advanced by Elaine Sternberg (1994). Friedman
stresses the ethical superiority of profit-seeking behaviour by reference to its consequences
(i.e. higher standard of living for all). Sternberg, on the other hand, approaches from a
perspective of natural justice, that is that to do other than maximise shareholder wealth
takes business outside of its proper place in society. Sternberg’s argument can be simplified
as follows:
●
Organisations are social institutions. We understand their nature and their place in society by considering what they do and how they are different from one another.
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3.5.3
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Business organisations are distinguished from others by their pursuit of shareholder
wealth. No other organisation, say governments, charities, trades unions or armies do
this. The latter are different because they have other final purposes.
● If businesses start to become involved in social responsibility by considering other goals,
they are changing their purposes and invading the domains of charities and government
agencies. This would be a corruption of their essential nature and the natural order of
things and would constitute the theft of assets or incomes from their rightful owners,
the shareholders.
● Business cannot afford to ignore its impacts on customers and other stakeholders however, because in doing so it would forsake repeat business and alienate support. This
would destroy its long-term value.
● The key principles of business ethics are therefore distributive justice (distributing organisational rewards among people according to the contribution they have made) and ordinary decency (building long-term trust by not resorting to dishonest or coercive means in
the short run).
●
For Sternberg, ‘good ethics is good business’ because just and decent behaviour will
increase the value of the business to its shareholders. A follower of Sternberg would view
the store closure example very simply. The store chain is maximising its shareholders’
wealth, while the problem of disadvantaged shoppers is being addressed by other social
organisations (social services, family, alternative profit-seeking firms) which is a fulfilment
of their essential nature. The natural order is preserved. Also, the closure of the store is
consistent with the principles of ordinary decency, despite being a regrettable necessity.
A stakeholder view of business ethics
Most arguments against the primacy of shareholder interests in business ethics have their
roots in a branch of philosophy called social contract theory (e.g. Rawls, 1999). They impose
on the business the duties of being a good corporate citizen. A simple version of this argument would proceed as follows:
A business has a social contract with society. Under this contract it enjoys rights, such as
to be able to carry on its business uninterrupted, make profits, enforce commercial contracts and be defended by the rule of law.
● This social contract does not confer the right to behave entirely selfishly because no
rational society would ever agree to allowing one of its members or groups, including
business organisations, to follow its own selfish interests at the expense of the rest of
society.
● Therefore, the enjoyment of rights under the social contract also imposes on business a
duty to behave reasonably towards society and to be socially responsible in its decisions
and actions.
● The precise scope of rights and obligations will change through time according to the
prevailing morals in society at large. For example, attitudes to different social groups, the
natural environment and animals have all changed markedly in the past 30 years and it
is the job of business to keep up with these.
● Firms that breach this social contract may ultimately have their rights revoked or curtailed (e.g. anti-trust laws, nationalisation, fines or consumer and employee protection legislation). However, this is a last resort and shows that management have done
something wrong. It demonstrates that management does have an ethical obligation to
society.
●
ENTERPRISE MANAGEMENT
An egotistical view
The stakeholder view would provoke strong reactions from a follower of the late Ayn
Rand, an influential American novelist and founder of the objectivist school of ethics
(Rand, 1989). Her argument for the ‘virtue of selfishness’ can be expressed as follows:
The essence of human existence is the need for the individuals to assure their own
survival.
● Therefore, the only rational (i.e. ethical) goal is the pursuit of individual survival
through self-interest.
● If any person shows (or is compelled by law to show) consideration for the interests of
others, this intrudes on achieving their own self-interest and they are effectively allowing
themselves to become subordinate to other people’s needs. Taken to extremes, this leads
to slavery and oppression.
● Capitalism (stripped of any benevolent religious belief systems, which are themselves a
form of oppression) is the only social and economic system which enables and rewards
pursuit of unbridled self-interest.
● Owners of firms are therefore only ethical if they ruthlessly pursue economic
self-interest.
●
The objectivist approach has no truck with a notion of social responsibility because it
believes there is no such thing as society (other than as a concept invented by would-be
oppressors). Rather, we are a collection of egoists. Objectivism would advocate leaving to
their fate the people in the store example, on the basis that to compel the store (or the
families and state) to help them would be to deny the self-interest of the helpers.
3.5.4
Implications of ethics for the chartered
management accountant
Clearly, there is no simple solution to business problems once we start bringing ethics
into it. It all depends on your viewpoint. Most of us end up taking a pragmatic view on
these issues. We learn to accept that the business decisions we sometimes make are not
always easy to square with our highest principles. We know that if we do not do it, someone else will, and so the followers of Friedman and Sternberg may sometimes have to use
corporate funds to make a donation to charity because ‘it is what’s expected’. Similarly,
subscribers to social contract views may be forced to announce redundancies and price
rises to ward off a falling share price. It is back to the issues of satisficing we discussed in
Chapter 1.
We also know that most people do not delve into ethics as we just have and hence do
not come to decisions with consistent or well-formed ethical viewpoints. Some just work
CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
Taking the store closure example, a follower of this social contract approach would argue
that management has a moral duty to consider the impact of its decision on all groups
of society and not just its shareholders. Management should realise that it is not just the
future profits that are at issue here; there are the past profits to remember too. Its right to
make profits in the past impose on it a duty to be reasonable and responsible now. The
people it is disadvantaging are its past customers with whom it had a moral contract; it
cannot just walk away. The least it should do would be to provide a free bus service to
its store, whether or not it is profitable to do so, to maintain its obligations to its former
customers.
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CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
128
STUDY MATERIAL E2
on gut feeling and ‘common sense’ (itself a phrase derived from a particular theory of ethics). Others pick up and discard ethical arguments to suit their interests. Many lie to themselves and others about their ethical justifications for actions.
The important messages to bear in mind with ethics are that:
1. Not everyone makes the same ethical assumptions that you do. What may seem totally
wrong to you is acceptable to them and vice versa. This can be a real problem for managers dealing with people:
● from other social cultures (e.g. in foreign trading and business relations);
● from other types of organisation (e.g. businesses dealing with the voluntary or caring
services);
● of different ages (i.e. morals change through time but not everyone changes with
them). It is important that we appreciate other people’s viewpoints if we are to conduct business effectively.
2. Different stakeholders may have different expectations of the firm’s behaviour;
3. Moral and ethical debates drive the actions of pressure groups and legislators:
● objectivism enjoyed an influence over senior politicians in the United States, United
Kingdom and Australia during the 1980s, before giving way to the ‘stakeholder
society’ of the 1990s;
● religious fundamentalism is a major factor in the political processes of the United
States and the Middle East.
Ethical debates and fashions are therefore a major force in the firm’s environment.
3.6
Summary
This chapter has looked at contemporary perspectives in strategic management. The key
points covered include:
industries are becoming increasingly global and organisations must decide how to
respond to the challenges of globalisation;
● the implications for organisations of moving to more complex organisational forms such
as strategic alliances and network organisations;
discussion of the theoretic base of network organisations – transaction cost the theory;
● social responsibility and business ethics may affect the mission and objectives of the firm
and may dilute the importance of shareholder wealth as a primary objective.
●
References
Friedman, M. (1963), Capitalism and Freedom. Chicago: University of Chicago Press.
Ghoshal, S. and Bartlett, C.A. (1997), The Individualised Corporation. London: Random
House.
Hagel, J. and Armstrong, A.G. (1997), Net Gain: Expanding Markets Through Virtual
Communities. Boston, MA: Harvard Business School Press.
Johnson, G., Scholes, K. and Whittington, R. (2008), Exploring Corporate Strategy (8th
edn). Harlow: FT Prentice Hall.
Nirmalya, K. (1996), ‘The Power of Trust in Manufacturer-Retailer Relationships’.
Harvard Business Review, November–December.
ENTERPRISE MANAGEMENT
CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
Ouchi, W. (1981), Theory Z: How American Businesses can Meet the Japanese Challenge.
Reading, MA: Addison-Wesley Pub Co.
Rand, A. (1989), The Virtue of Selfishness. Signet Books.
Rawls, J. (1999), A Theory of Justice (revised edn). Oxford: Oxford University Press.
Sternberg, E. (1994), Just Business: Business Ethics in Action. London: Little, Brown.
Williamson, O.E. (1964), The Economics of Discretionary Behaviour. Englewood Cliffs, NJ:
Prentice-Hall.
Williamson, O.E. (1981), ‘The Economics of Organisation: The Transactions Cost
Approach’. American Journal of Sociology, Vol. 87, No. 3, pp. 548–577.
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3
Reading
Social responsibility – the changing business paradigm
Tim Hollins, The Financial Times, 15 November 2000. Copyright © Tim Hollins
2000. Reproduced by kind permission of the author
Tim Hollins, a Corporate Social Responsibility consultant, and formerly Head of Group
Social Investment for the Royal Dutch/Shell Group, gives a personal view of social responsibility in the new century.
Corporate citizenship is nothing new, but the way we practise it is constantly evolving.
That’s what makes it so exciting.
For more than a century companies have prided themselves on thinking beyond the
bottom line and contributing to society, not only by producing the goods and services
that society needs, but also by acting as good corporate citizens. In the 19th and early
20th centuries corporate citizenship was more often than not based on the religious or
philanthropic principles of a company’s founder. In the seventies and eighties, a growing
sense of the relationship between ‘community relations’ and corporate reputation led to
an increasing professionalisation of corporate citizenship, and a recognition of it as ‘legitimate enlightened self-interest’. Typical phrases used at that time were that ‘you can’t have
healthy high streets without healthy back-streets’, and that ‘good community relations
offered ‘win, win, win’ opportunities – good for individuals, good for the community and
good for the company.
A new description of what corporate citizenship was about also began to be used: ‘Social
Investment’ – The notion that by investing in society we all – business, not-for-profit
organisations and communities were – looking for clear and measurable returns, similar to
other forms of investment. The language of business has become increasingly prevalent in
corporate social investments of all companies – ‘business planning’, ‘project management’,
‘leverage’, ‘measurement and evaluation’ are part and parcel of the language of both social
investment managers and their not-for-profit partners.
And, alongside this evolution of corporate citizenship, have emerged a number of parallel developments. Environmental management and reporting has made enormous strides
forward in the last decade; an increasing number of companies are addressing issues of
‘social accountability’ and ‘social auditing’, and a small number are tinkering with notions
of ‘economic added-value’, to get a better understanding of which parts of society, and
which stakeholders, are benefiting from the company’s economic activity. Developments in
corporate governance and ethics have added to a much wider perception of the totality of
corporate social responsibility.
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CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
132
READING E2
The challenge for the 21st Century Company is to bring all these developments
together, to integrate thinking about social and environmental management, about social
investment and social accountability into a coherent framework of practice that makes
good business sense as well as benefiting society.
Here in Shell we are increasingly talking about ‘social performance’ as the allencompassing approach to these various elements, to sit alongside (but inextricably interwoven with) economic and environmental performance. For an oil and energy Group,
operating in over 140 widely differing countries and cultures, this is a hugely complex
challenge.
At one level, it is clear there is a direct correlation between access to energy and a country or community’s economic and social development. There is also a direct relationship between the rise of energy availability around the world in the 20th century and the
enormous increase in food production that has benefited so many. But, however essential
energy is to development, nobody would deny that, both in the way it is produced and
in the way it is used, it also presents many social and environmental challenges. It is also
evident that while many countries and communities are benefiting from international economic development and energy provision, there are still many for whom opportunities are
few and the disparities increasingly great. For Shell, all these challenges are intrinsic to the
commitment it has made to contribute to Sustainable Development.
It is more than 3 years since Shell committed itself in its Business Principles to contribute to sustainable development through its operations. Sustainable development – the
responsible stewardship of resources today so that the needs of tomorrow can be met – is
a concept which Shell believes is fundamental to broader development, as well as to Shell’s
own long-term success. It encompasses not just concern for the environment, but also concern for the impact of change on societies and cultures, and concern to ensure that, underlying all development, is economic sustainability at a local level, enabling individuals and
communities to better control and manage their own futures. As Sir Mark Moody-Stuart,
the former Chairman of Shell’s Committee of Managing Directors says, ‘Building a sustainable future is the single most important challenge facing our society as we enter the
21st century’.
For all companies this sort of approach means re-appraising and re-thinking many of the
ways we have previously sought to contribute to society. It means seeking to bring together
our understanding of the different facets of our interaction with society – our interaction
with employees and contractors, with suppliers and customers, with communities and
public authorities. Without detracting from our fundamental business competitiveness,
it means looking for opportunities to add social value. And in our social investments it
means looking at our ‘contributions’ much more directly in relation to the social impacts
and opportunities our own businesses present.
Shell has always been one of the world’s most significant corporate contributors. In the
last 18 years Shell companies have contributed over $1 billion to an enormous range of
community programmes and causes around the world. But while that is something to be
proud of, the challenges in this new century are to relate what we contribute in this way
to the social issues and opportunities presented by being one of the world’s largest international oil and energy providers, to contribute our knowledge and our breadth of experience as well, to look for synergies where we can share good ideas and practice and to
partner with others who have common objectives, to make our contributions go further.
As part of its response to these challenges, the Shell Group recently set up a new
international Shell Foundation to complement and reinforce our business approach to
ENTERPRISE MANAGEMENT
Sustainable Energy – projects that encourage more sustainable and equitable energy use
by reducing environmental impacts of energy use or increasing access of poor communities in developing countries to sustainable energy;
● Sustainable Communities – projects that help disadvantaged communities to improve
their livelihoods, and manage their own futures;
● A separate group social investment programme focuses on youth enterprise – projects
that stimulate the entrepreneurship among young people on which healthy and sustainable economic and social development depends.
●
The aim of the Shell Foundation is to act as a new bridge between the Shell Group
and the many groups in civil society who are interested to explore with us how responsible business can become one of the most powerful drivers for genuine sustainable
development.
Shell is one among many companies that are tackling the undeniably complex challenges of social performance and sustainable development. We have come a long way from
the beginnings of corporate citizenship in the nineteenth century; the road ahead should
be a fascinating one!
Websites: www.shell.com
www.shellfoundation.org
Discussion question
Explain how an organisation like the Royal Dutch/Shell Group can maintain its business
competitiveness while at the same time meeting its obligations to be socially responsible.
The corporate scandals that beset US corporations like Enron, World com and Arthur
Anderson at the start of the 21st century tend to be attributed to the unethical conduct of
particular individuals. But the following article suggests that organisational culture played
a major role.
CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
sustainable development and social performance. The Foundation focuses on two specific programme areas:
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Revision Questions
3
Section A type questions
Question 1
Many organisations now include explicit reference to their commitment to act in a socially
responsible manner in their mission statement. This then forms an integral part of organisational strategies and policies. However, some shareholders see social responsibility as conflicting with their main interest in the company, which is creating maximum shareholder wealth.
Requirement
Explain the main arguments for and against the view that socially responsible business
decisions can achieve sustainable competitive performance and improve shareholder value.
(10 marks)
Question 2
Eastborough is a large region with a rugged, beautiful coastline where rare birds have recently
settled on undisturbed cliffs. Since mining ceased 150 years ago, its main industries have
been agriculture and fishing. However, today, many communities in Eastborough suffer high
unemployment. Government initiatives for regeneration through tourism have met with little success as the area has poor road networks, unsightly derelict buildings and dirty beaches.
Digwell Explorations, a listed company, has a reputation for maximising shareholder
returns and has discovered substantial tin reserves in Eastborough. With new technology,
mining could be profitable, provide jobs and boost the economy. A number of interest and
pressure groups have, however, been vocal in opposing the scheme.
Digwell Explorations, after much lobbying, has just received government permission to
undertake mining. It could face difficulties in proceeding because of the likely activity of
a group called the Eastborough Protection Alliance. This group includes wildlife protection representatives, villagers worried about the potential increase in traffic congestion and
noise, environmentalists, and anti-capitalism groups.
Requirement
Discuss the ethical issues that should have been considered by the government when
granting permission for mining to go ahead. Explain the conflicts between the main
stakeholder groups.
(10 marks)
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CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
136
REVISION QUESTIONS E2
Question 3
N Company is a manufacturer and retailer of electrical goods such as cameras, PCs,
TVs, and hi-fi equipment. The company has its head office, four manufacturing plants
and a chain of 350 retail outlets in K country. It also has a call centre, which is on
the same site as its head office, to deal with customer queries and provide service support for PCs. Following the appointment of a new CEO, the senior management of
N Company is evaluating options for its future strategic development. The company
faces a challenging time with the growth and increased strength of competition in the
sector.
N Company has previously had excellent employee relations and staff have enjoyed
superior reward and recognition packages. However, the recent arrival of D, then new
CEO, has unsettled staff. They have heard that D is proposing a major restructure aimed
at improving efficiency and controlling costs. They understand that this will mean some
of the manufacturing plants will be closed and more emphasis placed on selling cheaper
‘bought-in’ products. In addition, certain activities related to the facilities management of
the company, such as catering, cleaning, store maintenance are likely to be outsourced. It
also seems that the senior management is investigating the possibility of moving the call
centre to another country where operating costs are lower.
Requirement
Use transaction cost theory to analyse the restructure strategy D is proposing in N
Company.
(10 marks)
Section B type questions
Question 4
C plc, a quoted chemical manufacturing company, has until recently achieved a steady
increase in profitability over a number of years. It faces stern competition and the directors
are concerned about the disquiet expressed by major shareholders regarding performance
over the last 2 years. During this period it has consistently increased dividends, but its
share price has not grown at the same rate as it did previously.
K plc, a direct competitor, is similarly experiencing a reduction in profitability. Its
shareholders are diverse, with the majority being financial institutions. K plc has been
criticised for under-investment and has achieved no product development over the last 2
years. Following a concerted media campaign, K plc is facing prosecution for discharging
untreated pollutants into a river.
C plc is seriously considering making a bid to acquire K plc. The directors of C plc,
however, are divided as to whether K plc should be closed down or permitted to continue
production post-acquisition if a bid is made. In either situation, significant staff redundancies would follow.
Requirements
(a) State the strategic factors which C plc would need to consider before making a bid to
acquire K plc.
(8 marks)
ENTERPRISE MANAGEMENT
(Total marks ⴝ 25)
Question 5
Router plc, a mining company, has said in its mission statement that it will ‘endeavour to
make the maximum possible profit for its shareholders while recognising its wider responsibilities to society’.
Router plc has an opportunity to mine for gold in a remote and sparsely populated area.
The mining process proposed, in this instance, means that all vegetation will be removed
from the land concerned; after mining has finished, there will remain substantial lagoons full
of poisonous water for at least 100 years. The mining process is a profitable one, given the
current world price of gold. However, if the company were to reinstate the mined land, the
process would be extremely unprofitable. The company has received permission from
the government to carry out the mining. The few local residents are opposed to the mining.
Requirements
(a) Discuss the extent to which Router plc’s mission statement is contradictory. (5 marks)
(b) Explain how Router plc could establish a procedure whereby its wider responsibilities
to society could be routinely considered when making strategic decisions. (8 marks)
(c) Advise Router plc how it could deal with strategies that present a conflict of objectives.
(6 marks)
(d) Discuss the ethical dimensions of the decision to mine for gold.
(6 marks)
(Total marks ⴝ 25)
Question 6
‘Asset specificity’ is a term used within Transactions Cost Theory. It has been defined as the
extent to which particular assets are only of use in one specific range of operations. It has
further been suggested that asset specificity falls into six categories: site specificity, physical
asset specificity, human asset specificity, dedicated asset specificity, brand name capital specificity and temporal specificity.
Supporters of resource-based views of strategy contend that a firm’s sustainable competitive
advantage is generated from its possession of unique assets that cannot be easily irritated by
other firms. These unique assets have been called core competencies or distinctive capabilities.
Network organisations have been defined as those which are reliant on relationships
with other organisations to carry out their work.
Requirements
(a) Briefly explain what transaction costs are and how resource-based views of strategy can
be used for competitive advantage. Interpret the six categories of asset specificity by
explaining what they mean.
(15 marks)
(b) Discuss whether analysis of transactions cost has any influence on the increase in
numbers of network organisations.
(10 marks)
(Total marks ⴝ 25)
CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
(b) (i) Discuss the social and ethical implications for the managers and staff of both C plc
and K plc if the acquisition goes ahead.
(8 marks)
(ii) Discuss the environmental issues which would face the directors of C plc if it
proceeds with the acquisition of K plc.
(7 marks)
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Solutions to
Revision Questions
3
Section A solutions
Solution 1
Social responsibility is the concept that gives rise to how an organisation should conduct
itself within society and the need to deal with the impact of business decisions on different stakeholder groups. However, the debates about the extent to which organisations
should consider issues under the heading ‘social responsibility’ when they are formulating
and implementing business strategies continue to provoke conflict and tension between
different stakeholders. Organisations need to weigh up the costs of social responsible business decisions against the benefits.
Acting in a socially responsible manner concerns the extent to which the organisation
should move beyond the minimum obligation provided through regulation and corporate
governance. This will vary from firm to firm but can include issues related to a range of
factors such as:
human rights, for example job security and good conditions of work for the employees,
non-discrimination in employment;
providing products that are fit for the stated purpose; marketing practices, and impact
of product/service on customers (e.g. health and exclusion);
non-production of socially undesirable products;
environmental impact of products/services – from creation to disposal, for example
issues relating to environmental pollution and production on non-degradable
products.
The diversity of opinion on the issue of social responsibility stems from one school of
thought, advocated by Milton Friedman, based on the view that the management of an
organisation should only be concerned with strategies that maximise the wealth of shareholders. An alternative view is founded on stakeholder theory which emphasises that the
actions of an organisation should be designed to balance different stakeholder interests.
Conflicts can occur between shareholder interests and socially responsible business decisions for a number of reasons. One argument against is the perception that extra costs
will be incurred in implementing socially responsible strategies. Examples of this may be
related to paying staff more than the minimum wage to avoid accusations relating to the
exploitation of labour, the cost of treating emissions and waste to reduce environmental
pollution.
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CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
140
SOLUTIONS TO REVISION QUESTIONS E2
Shareholders may view socially responsible actions as reducing revenues. This can manifest in terms of refusing to do business in certain countries, or not promoting certain products to particular customer groups. They may also think that management time is being
wasted on socially worthwhile projects instead of ‘running the business’. They may also
take the view that funds that may otherwise have been paid out in dividends are instead
being used to make charitable donations.
However, there are counter-arguments to support the business case that pursuing
socially responsible strategies can build shareholder value.
The first argument is based on the future sustainability of the organisation. In other
words, an organisation whose strategy or core business conflicts with the needs and values
of society is unlikely to survive in the long term. Examples, of this can be seen in industries such as tobacco, in terms of health related problems; oil refining, where the impact
of pollution on the environment is a major issue; British Nuclear fuel has had to promote
an image of having the deepest concern for the safety of nuclear waste. A more recent
example is the negative publicity McDonald’s has received for encouraging what some
perceive to be promoting unhealthy eating for children. Another example would be the
negative public relations received by some organisations who have moved manufacturing
to countries to gain the benefits derived from lower labour costs and to improve profitability. These organisations are criticised for the exploitation of labour as in the cases of
Nike and Gap.
The risk for organisations who do not respond is that customers will not buy their
products and ultimately they will lose customers. Therefore, to ensure future earnings of
shareholders, organisations must operate in a socially responsible manner and amend their
strategies. Using the example of McDonald’s, they have responded to the criticisms by
introducing ‘healthier’ menus.
Another positive outcome is that socially responsible organisations could attract socially
conscious consumers who may be willing to pay a premium price for products. Examples
of these types of products currently in the news are organics foods, and fair-trade products
such as coffee and chocolate.
Finally, it could be argued that acting in a socially responsible manner can have positive outcomes on corporate image. This in turn can attract ethical investment funds to the
organisation which can have a positive effect on share price and hence represent a direct
increase in shareholder wealth. Charitable donations and sponsorship are also useful methods of public relations and can reflect well on the organisation.
All these arguments would suggest that there is evidence of positive links between social
and financial performance.
Solution 2
There are many ethical dimensions to granting outline permission for mining to go ahead.
Ultimately, the government is weighing one set of claims against another and seeking to
achieve a ‘right’ decision within the context of the common good. The role of government: it may take a view that it should not be seen as an obstacle to the free operation of
business. Alternatively, it may acknowledge a duty of care to its citizens who might be disadvantaged by the project.
Another issue concerns its efforts at regeneration: does mining ‘fit’ the overall strategy?
There may be environmental costs (scars on the landscape), but these are to be balanced
against gains such as jobs and profits for shareholders. Government may feel that the area
ENTERPRISE MANAGEMENT
Digwell’s shareholders and other investors who expect a good financial return on the
investment in the mining project. This may, however, involve disturbing birds and
wildlife, which is a concern for bird protection groups. Local unemployed people probably welcome the venture as consistent with their aspirations to gain meaningful work.
Meanwhile, local communities and environmentalists may be concerned by the disruption to the local way of life, including increased road traffic and pollution.
● Staff, customers and suppliers of Digwell have the overall objective of long-term success
of the company in order to safeguard their interests. Anti-capitalism groups, however,
look for the downfall of this and other capitalist symbols in order to build a differently
structured society.
● Employees are looking for higher pay, job security, good working conditions and some
consultation. Customers want fair prices, reliable supply and reassurance about quality.
● Suppliers desire fair prices, reliable orders and prompt payment.
● Government is a key stakeholder as the planning agency. Issues associated with its objectives are discussed above. They want jobs, to actively contribute to local community life,
and to be a participant in major developments.
●
Just as there are conflicts of objectives within government so there are likely to be conflicts
between groups and differences within other groupings. Some common conflicts of expectations amongst shareholders, for instance, include; growth or profitability, short-term
gains or investment, industrial efficiency or maintenance of job levels, mass appeal or quality concerns, and so on.
Solution 3
The basis of transaction cost theory is rooted in market economics. As organisations grow,
overhead costs grow and there becomes a need to search for economic advantage, a situation facing N Company. Transaction cost analysis deals with the way in which resources
are organised for producing a product or delivering a service and is focused on economic
efficiency. It suggests that whilst asset specificity may drive vertical integration, outsourcing every activity that is not core should be considered by organisations. The CEO, in
his attempt to increase efficiency, is assessing if any of N Company’s activities can be performed at less cost by external contractors.
The foundation of the theory, developed by Williamson, is that an organisation chooses
between two mechanisms to control and carry out its operations in production or the
delivery of service. The two mechanisms are hierarchy, where products are produced within
the organisation by use of internal hierarchical arrangements or markets where products
are bought in, in other words obtained through the market mechanism. Essentially, it is a
more complex development of the ‘make or buy’ decision.
Hierarchy solutions occur when management decide to own the assets or employ
staff directly, in other words internalise transactions. The policies and procedures of the
CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
is already an eyesore and one more mine will make little difference. They might reason,
alternatively, it is counter-productive in the context of their tourism strategy.
Issues of quality of life raise ethical concerns (traffic and mining pollution versus regeneration of local economies). Similarly, concerns over safety within the confines of the mine
and on roads emerge as a potential ‘cost’ of the scheme.
It is not possible to proceed without making certain generalisations and assumptions.
The main stakeholder groups and their conflicting objectives include:
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CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
142
SOLUTIONS TO REVISION QUESTIONS E2
company are used to control resources and their performance. It would seem that this is
the way N Company has tended to operate to date, as a vertically integrated organisation,
doing as much as possible in-house, for instance, the manufacturing and retailing of their
product range.
Market solutions are when management decide to buy in the use of assets or staff from
outside under the terms of a contract. This involves an increased reliance on the market
and organisations incur transaction costs.
The proposal to outsource and buy in products would suggest that the senior management of N company are considering a shift from hierarchy solutions to market solutions.
The restructuring plans are based on the assumption that both downstream activities
(manufacturing) and upstream activities (call centre) can be provided at lower transaction
costs by markets.
An important aspect of the theory is that it bases costs beyond just the unit cost of the
product or service, to include also the cost of control. Transactions costs are those costs
associated with performing a transaction, in other words the costs that arise at the interface between economic agents. In N Company’s case the future scenario will be one where
it increases reliance on outside suppliers, but it should take into consideration the costs
connected with managing the transactions and operating under the terms of the contract.
The costs of supply are not the same as merely the price paid per unit. There are additional
costs such as those associated with supplier selection, specifying what is required, writing
and managing the contract, coordination, enforcing the contract, communications with
the supplier etc
It is argued that developments in IT have reduced some of the costs related to searching
the markets for suppliers and in maintaining the supplier/buyer relationship. The market
solution will enable N Company to benefit from have access to resourcing from global
partners. However, there are some issues regarding outsourcing such as problems of control, security and asset specificity. N Company must consider the extent to which suppliers
could exploit their vulnerability, particularly if they use just one manufacture as their main
supplier.
The other side of the argument is that in vertically integrated companies there can be a
lack of internal competition which can result in a lack of control of costs. These are often
internal overhead costs of production and staff costs, and this perhaps reflects the position
N Company currently finds itself in.
Section B solutions
Solution 4
(a)
Despite an increase in dividends, the rate of increase in the share price of C plc has
decreased. This is an indication that the investing public is concerned about the future
earning capacity of the company and the disquiet of the major shareholders also
reflects these concerns. It seems likely that the ‘stern competition’ is responsible for
this situation.
One of the ways of achieving growth and, possibly, boosting earnings may be
to acquire another firm. Management is considering acquiring K plc, which will
mean that the combined businesses will have a much greater production capacity
ENTERPRISE MANAGEMENT
CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
if the K plc plant is not closed. The crucial issue will be what C plc can do with
the additional facilities and whether it is possible to benefit from the acquisition.
Competition in the industry will be reduced by the acquisition of one of the companies and savings are likely to result from the rationalisations and the economies of
scale which should occur.
However, management must be aware of the effect on the management and staff of both
companies involved in the acquisition. Although it is usual for acquisitions to be justified on the basis of the synergy which results from the combination of the organisations,
there is often doubt regarding the extent of these benefits. This is particularly noticeable in
markets in which there is excess capacity. It is also generally recognised that the management of the combined business poses a difficulty which reduces the synergistic effects of
the acquisition.
The cost of the acquisition will be very important in determining its ultimate success.
It is possible that during the acquisition, another company may bid for K plc and this
may raise the price to a level which makes it difficult for C plc to ensure the acquisition is
financially successful. C plc’s expected cost of capital will be a major influence in determining the result of the acquisition.
(b)
(i) It is likely that fewer employees will be needed in the combined business. In particular, the providers of specialist expertise may be particularly vulnerable as duplication
of this type of activity may not be required. It is likely, therefore, that a significant
number of redundancies will occur. This will create a feeling of insecurity among staff.
It is important that all staff are informed of the policy in respect of redundancies.
This will be particularly important in the acquired company, especially if the bid is
hostile. The rationalisation process will create uncertainty within both firms and it
is important for the motivation of employees that the issue is handled with openness
and honesty.
Changes in employees’ working conditions within the combined firm is an important issue. If it is not handled well, it is likely that the overall synergy of the acquisition
will be adversely affected. Uncertainty about employment will be a problem for the staff
and a clear statement on the rationale for the acquisition and the employment policies
to be adopted would appear essential. Remuneration, training programmes and assistance
in finding alternative employment are topics which should be discussed to improve staff
morale within the firm. It will demonstrate the attitude of the directors to the staff redundancies. It is important that employee motivation is retained if the acquisition is to reach
its potential. Management must, therefore, handle the social and ethical implications of
the acquisition sensitively, especially in respect of the staff redundancies which appear to
be inevitable.
(ii) After acquiring K plc, some environmental issues will need to be tackled by management. The pollution problem, in particular, will have to be addressed. It is clear that the
matter of the untreated pollutants should be investigated immediately so that the level of
pollution is brought under control. As a priority, the company should seek to establish
acceptable levels of effluent pollution and the firm would be wise to participate in establishing these standards.
At the same time, steps will have to be taken to reduce the adverse publicity that may
arise through the prosecution pending against K plc. It would seem to be necessary for the
company to adopt and publicise an environmental policy within the community to ensure
that the negative effects of the pollution problem are minimised.
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SOLUTIONS TO REVISION QUESTIONS E2
It is likely that considerable expenditure will be needed to rectify the position. The
continued success of the firm may depend on the way in which the pollution problem is
handled. The projected success of the combined businesses will determine the amount of
expenditure that might be incurred to reduce the pollution problems.
Solution 5
This question tackles the problem of a mission statement with particular reference to the
social responsibility of a firm if there is a conflict between profitability and pollution.
● In part (a), note that the mission statement uses the term ‘profit’, a short-term measure,
rather than ‘shareholder wealth’, the presumed economic objective of businesses. This
allows you to contrast the conflict of social responsibility with profit in the short run,
while using the sustainable enterprise to indicate that in the long run the interests of
shareholders and society may not be in conflict.
●
(a) The mission statement that Router plc has published states that the firm aims to
make the ‘maximum possible profit’. It is quite common for objectives of this kind to be
included in mission statements. In addition, the ‘wider responsibilities to society’ are recognised. This company objective is difficult to measure and there will be instances where
the maximisation of profit on behalf of the shareholders conflicts with ‘wider responsibilities to society’. The gold-mining project provides an example of such a conflict. It is
expected to provide a profitable opportunity, but will result in ‘substantial lagoons full of
poisonous water for at least 100 years’.
In the short run, this reveals a significant conflict between the interests of the shareholders and the public, particularly those living in the vicinity of the proposed mine.
While it is often possible to reduce adverse environmental effects, these remedies will
involve the business in costs that will reduce the profit available for distribution to the
shareholders.
However, theories of the sustainable enterprise suggest that in the long run the following of socially responsible policies may safeguard shareholder wealth. Router requires
that the authorities grant it operating licences and that shareholders continue to hold its
shares. If it develops a reputation as a ‘dirty firm’, both may change their minds. This
would cause a fall in both profits and share price. This would of course be a fall in shareholder wealth.
(b) There are various ways that social responsibility may be incorporated into the firm’s
decisions:
1. Include costs of environmental restoration in project appraisals. It is essential that the economic costs of a project are incorporated into the project evaluation. It is usual for a
firm to include all relevant financial costs in a project evaluation; but it is also important that the effect of the investment should be considered. In this example, Router
must include the cost of reinstatement in its calculations. This will result in the rejection of the project, as it does not meet the profitability criterion.
2. Include social responsibility in the firm’s mission and objectives. It is necessary that policy
decisions of this type are widely publicised within the firm to ensure that all managers
are aware that the environmental factors must be incorporated into all decisions. Router
has a commitment in its mission statement and there should be a written undertaking
given by each manager that social issues will be taken into account.
ENTERPRISE MANAGEMENT
(c) It is usual for an organisation to have a number of objectives. It is common to find
that the objectives conflict and a profit-maximisation objective will always be compromised by any other objective which reduces the revenue received or increases the cost of
an organisation. Furthermore, such conflicts may arise from the fact that organisations are
led by a group of managers and therefore the conflicting personal agendas of each must be
considered.
Methods of dealing with this include:
1. Establish a hierarchy of objectives. By prioritising objectives and scoring alternative
projects against them, it becomes possible for management to choose the option with
the highest weighted score. This one will best meet its overall objectives.
2. Satisficing. Where the conflict of objectives means that no single objective can be maximised, management may decide to adopt the course of action that is most acceptable
to all by giving each stakeholder group something of what it wants; in this case perhaps
to dig the mine but also provide some small amount of environmental restitution so
that some of the damage is averted.
3. Sequential attention. This involves giving each stakeholder group’s interests consideration over time, though not necessarily for every project. The effect is to keep them
on board. In this case perhaps, the mine will be abandoned because the consequences
are so great, but the next project, with lesser environmental damage, will be adopted.
The environmentalists on the management team will feel that they have achieved
something.
4. Side payments. These are compensatory payments to buy acquiescence. In this case perhaps quality housing might be provided for the labour force which would remain after
the works had finished. This could be pointed to as some compensation for the environmental damage and population displacement.
(d) In an article in the August 1992 edition of CIMA Student, the author identified
common features and issues of ethical questions:
different perceived long-and short-term advantages and disadvantages;
advantages to one group compared with disadvantages for another;
● issues of public responsibility and the accountant’s duty as a professional; and
● difficult implementation problems.
●
●
CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
3. Employ outside consultants to advise on, or audit, decisions. The appointment of a person
either from within the firm or an outside consultant to monitor the position could be
a useful method of implementing the environmental policy. It is possible that managers could neglect the ‘wider responsibilities’, especially if they are under pressure to
boost the results of the company. In this situation, there may be a temptation to understate the costs by omitting the cost of coping with the ‘wider responsibilities to society’.
A procedure, therefore, should be introduced to ensure that the environmental effects
are properly considered and this should include the regular use of outside ‘experts’ or
impartial non-executive directors to assess the environmental effects before decisions
are taken within the company.
4. Develop a social consultation panel. Router could convene a panel of stakeholder representatives to act as a consultative committee to discuss its decisions. In this case, the
inclusion of local people and environmentalists on such a panel would point up the
issues mentioned in the case.
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SOLUTIONS TO REVISION QUESTIONS E2
The principal ethical issues in mining are:
1. The use of non-renewable resources. The mining operation results in a non-replaceable
asset being extracted from the mine. This deprives both present owners and future generations. It is, therefore, important to ensure that proper and equitable compensation
is provided to the original owners of the resources. Moreover, the resources extracted
should not be wasted or used for frivolous purposes out of consideration for future
generations.
2. The use of power in the negotiations. The negotiations will raise a number of issues which
will bring an ethical component to the negotiations. In the negotiations, it is important
that the profit motive does not cause the developer to act improperly and exploit the
present owner of the mining rights. Where the country is poor, it is too easy to give
inadequate return for the value extracted.
3. The environmental damage that will remain. ‘Lagoons full of poisonous water for at
least 100 years’ is clearly not an acceptable outcome for society. Router has an ethical
responsibility to minimise the effect of this pollution. It would appear to be essential
for the company to develop a plan to deal with the problem. It is likely to reduce the
profitability of the project as there are bound to be significant costs to treat the effluent, but to minimise the effect would appear to be the minimum responsibility of
the company.
4. Impacts on the quality of life of local residents. The project must consider the effect of the
mining operation on the local residents. Although they may benefit from the establishment of the mine in the area in which they live, it is likely that the pollution will also
affect them. It is essential that Router explains the steps which will be introduced to
minimise the effects on the local environment. This may reassure local residents that
the company is adopting a responsible attitude towards the ethical aspects of the mining operation in their area.
5. Safety of processes. Mining is an industry noted for its poor safety record. Router must
ensure that it conforms to best practice in the safety measures it follows, which may be
more stringent than the legal minimums in the country of operation.
Solution 6
(a) Transactions cost analysis is concerned with more than just unit costs of products or
services. It is also concerned with the costs of control specifically relating to the delivery
of a product or provision of a service. Transactions costs come about between stages in
a production or supply process and it may be both internal to, and external from, the
firm itself. In respect of an external supply, such costs may include drafting legal contracts
and monitoring supply and quality. Similarly, internal costs of quality control and human
resource management may be included as transactions costs. Such costs exist because all
parties want to have protection against loss, and contractual arrangements may be used by
each to protect their position.
Resource-based views of strategy take the view that unique assets which cannot be
easily replicated by other firms can act as a defence. They may be viewed in Porter’s
terms as a defence barrier allowing the firm to reduce threats and exploit opportunities within a highly competitive environment. Such unique assets may enable a firm to
achieve supernormal profits, that is those which cover more than the normal opportunity
cost of capital.
ENTERPRISE MANAGEMENT
1. Site specificity relates to the assets which are connected to a particular geographical
position, for example, locating a goods distribution organisation close to a motorway
network.
2. Physical asset specificity is concerned with identifying particular physical assets or possessions with particular attributes such as valuable mineral deposits or natural ingredients with particular healing qualities.
3. Human asset specificity is associated with very specialist knowledge or skills such as
that possessed by surgeons or an employee who has particular knowledge of a specialist
process.
4. Dedicated asset specificity relates to an asset which was built for a single purpose or
application, such as bridges or dedicated buildings.
5. Brand name capital specificity concentrates a brand name to one family of products or
services such as might be employed by a food manufacturer, type of engine or air travel
service provider.
6. Temporal specificity is concerned with providing a specialist product or service at a specific time, as might be employed by a television broadcaster.
Some of these categories may be employed together by the same provider; for example,
a broadcaster might employ human asset specificity in terms of a presenter delivering the
broadcast at a specific time (temporal specificity) from a purpose-built studio (dedicated
asset specificity).
(b) Network organisations establish relationships with other organisations to supply
goods and services. They are concerned with more than just outsourcing as they look to
other organisations to supply core products as well as ancillary services. There are many
examples of such organisations, particularly in respect of leisure services and supply of
produce such as flowers being delivered to domestic households through a worldwide
network.
Oliver Williamson stated that the reduction of transaction costs occurs by vertical integration resulting in organisations becoming more divisionalised and complex.
Many organisations do carry out their own branding, training, ancillary service provision and often pay more than the going market rate in order to retain key staff.
This approach seems to be at odds with the theory of networking as described above.
Networking is reliant on market forces to provide goods and services in order to
meet customer demands. The principle is quite straightforward: if the market can
supply the product or service at an appropriate level of quality more cheaply than
the firm itself, then let it do so. This aims to increase shareholder value by reducing
organisational costs.
The reasons for the diversity existing may be as a result of:
●
Firms underestimating the cost of internal control to provide goods and services inhouse. This is a constant concern of organisations which may have been exacerbated
by the traditional form of absorption costing. Essentially, many firms believe that the
provision of a good or service by an outside contractor may be ‘more expensive’, but
this may be based on false assumptions regarding in-house costs because of arbitrary
and sometimes absurd apportionments of fixed overheads. Activity-based costing
has done much to identify true overhead costs associated with specific products and
services.
CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT
The six categories of asset specificity may be interpreted as follows:
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SOLUTIONS TO REVISION QUESTIONS E2
Advances in information technology have led to a reduction in transaction costs. The
perception of the need to rely on a single source of supply, possibly a monopoly supplier
is no longer as prominent as it once was. Electronic developments have in themselves led
to greater awareness of choice and outsourcing.
● The development of trust between contracting partners have also led to greater outsourcing. Many organisations have entered long-term relationships with suppliers and customers, resulting in much higher degrees of trust and collaboration for mutual benefit.
● The traditional economic theory of a hierarchical organisation as provided by classical
organisational theorists has become outdated. Although such organisations have been
able, in general, to provide management with high degrees of control, they have not necessarily operated in the best interests of shareholders. In fact, large hierarchical organisations have often developed as a result of agency theory and managers building their
own empires, securing their own positions and creating power domains. These have not
necessarily had increasing shareholder value as the main driver. Such organisations may
have, in fact, been operating inefficiently, but they survive because of their sheer size and
market power.
●
Transactions Cost Analysis has forced firms to look more seriously at their own supply costs. It has caused them to look in more detail at how well they meet their shareholder requirements. This, in turn, has led them to take note of market forces in delivering
their product or service in a cheaper manner. Thus, it can be argued that Transactions
Cost Analysis has to some extent influenced the increase in the number of network
organisations.
Transactions Cost Analysis firmly embraces the concept of continual improvement.
This, in itself, may be facilitated by networks of contracts, both internal and external. All
employees within an organisation have customers, whether they are internal or external.
The increasing development of network organisations is clear, but firms must be wary of
losing their core competencies by other network firms recruiting key staff. Some staff, for
example, are placed on restrictive long-term contracts to protect the firm. This, in turn,
may lead to reduced overall efficiency, but it is a natural response by a firm to protect its
position.
4
Understanding Project
Management
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Understanding Project
Management
4
LEARNING OUTCOMES
After completing this chapter you should be able to:
䉴
identify a project, a programme and its attributes;
䉴
apply suitable structures and frameworks to projects to identify common management
issues;
䉴
construct an outline of the process of project management;
䉴
identify the characteristics of each phase in the project process;
䉴
identify structural and leadership issues that will be faced in managing a project
team;
䉴
explain the roles of key players in the project management organisation;
䉴
recommend strategies for the management of stakeholder perceptions and
expectations.
4.1
Introduction
There are a vast array of projects going on within organisations varying in size and complexity, and there are an increasing number of organisations that are now project-based
(i.e. the majority of their work is accomplished through projects). However, the management of projects is often not straightforward and many projects fail as a result of ineffective project management.
In this first chapter on projects, the defining features and characteristics of projects will
be considered. This will be followed by an explanation of project management and some of
the various project management frameworks and structures. The critical role of the project
manager will be discussed, and the skills they need to be effective in that role will be
investigated. The issues involved in developing a successful project team will be explored,
including the various communications and meetings that are needed during a project. The
key stakeholders in project management will then be determined, along with their different roles in the process of project management. The final part of the chapter will consider
why some projects fail and provide two examples of successful and unsuccessful projects.
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4.2
Projects and project management –
definitions
If you study the literature on projects, you will see that there are certain similarities in the
definitions of projects and their characteristics.
The Association of Project Managers defines a project as: ‘A human activity that
achieves a clear objective against a time scale.’ An alternative, the Project
Management Body of Knowledge (PMBoK) defines a project as ‘a temporary endeavour
undertaken to create a unique product or service’. You could also define a project as ‘a
unique undertaking to achieve a specific objective that requires resources and activity’.
Have you organised a ‘holiday of a lifetime’ or a special celebration such as a Wedding,
or at work, helped with the implementation of a new way of working? Do they not meet
the definitions given?
Project management is the term used to describe ‘the application of knowledge, skills, tools and techniques to project activities in order to meet or exceed
stakeholder needs and expectations from the project’, or ‘the integration of all aspects
of a project, ensuring that the proper knowledge and resources are available when and
where needed, and above all to ensure that the expected outcome is produced in a
timely, cost-effective manner. . . .’ (CIMA: Official Terminology, 2005 edition, p. 94)
There are other definitions of project management that refer to a group of loosely connected
techniques, some of which are useful in bringing projects to a successful conclusion. Others
refer specifically to the coordination of resources necessary to complete projects as required.
All have a common ground of planning, meeting standards and communication. These
can be seen in the processes involved in project management discussed later in this chapter.
4.3 Characteristics of a project
In distinguishing between projects and business as usual, projects can be considered to
have the following characteristics:
stakeholders – all those who are interested in the progress or the final outcome of the
project including the users, the customers (if someone is buying the output of a project,
e.g. a computer system, a building, etc.), the shareholders of the customer (who want
value-for-money) and those who provide the money for the project (sponsors);
● uniqueness – it may never have been undertaken before and each project will differ from
every other in some respect;
● objectives – projects have to meet two sets of objectives: the one relating to accomplishing customer requirements of scope (the deliverables), quantity, quality and cost; and
the other relating to the achievement of the organisation’s objectives (the business case),
profitability, prestige and so on;
●
ENTERPRISE MANAGEMENT
4.4
The project life cycle
Large-scale projects usually follow separate phases, which occur in sequence. Such projects
are ‘born’ when a need or want is identified and a sponsor is found who is prepared to provide funds in order to satisfy this need or want. Sometimes, a need may be identified very
quickly, whereas in other cases, it may take months to clearly identify the need, gather data
about the problem or opportunity and ultimately define clear requirements. Figure 4.1
presents the four phases of the project life cycle of large projects.
Effort
Identify
a need
Develop a
proposed
solution
Project performance
(including monitoring
and control )
Project closure
Time
Figure 4.1
4.4.1
The project life cycle (Gido and Clements, 1999)
The project life-cycle phases
The different phases of the project life cycle include:
Identification of a need
The first phase of the project life cycle involves identification of a need, opportunity or problem. Initially, a feasibility study will be conducted to check the size of potential benefits
and evaluate in broad outline potential alternative solutions and their lifetime costs. The
feasibility study can be done by internal staff as a mini-project or by requesting proposals
UNDERSTANDING PROJECT MANAGEMENT
resources – people, finance (contained in budgets), information, materials, ideas, time
and so on;
● schedules – plans for events over time for resources and contingencies;
● quality – measured in terms of customer satisfaction and the organisation’s image;
● uncertainty – inevitably, uniqueness leads to a context of risk in the deliverables,
the activities, the contingencies associated with suppliers, subcontractors and with
time/cost;
● finiteness – a fixed time scale;
● change – there is no practice or rehearsal and once the project is completed, the team
will ideally move on to the next project.
●
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STUDY MATERIAL E2
from contractors. If contractors are used, the project’s requirements will be presented by
the company in a document called an invitation to tender (ITT) or a request for proposal
(RFP). The company, as the customer, will ask contractors with a proven history of success
at similar projects to submit proposals on how they propose to solve the problem or satisfy
the need, together with schedules of time and cost estimates. For example, a company that
has decided to upgrade its computer system may send out an ITT to several consulting
firms. This process will provide additional detail to the organisation’s fact-finding exercise,
to develop its own requirements and decide exactly which requirements are achievable. It
must be noted, however, that not all projects involve formal requests for proposals.
At the end of this phase, the company will decide whether to proceed with the project.
If it does, then a project team is formed and a project initiation document (PID) is raised.
This will include a statement of requirements (SOR or project brief ), a shortlist of
potential contractors, a vision and a business case for the project. The business case is an
important guide to decision-making throughout the project, and the vision encourages
motivation and congruent goals in the project team.
Development of a proposed solution
The second stage of the project life cycle is the development of a proposed solution. All shortlisted contractors and/or internal design teams will submit final proposals to the company,
which then evaluates them and chooses the most appropriate solution to satisfy the need.
This option-evaluation process is first filtered on quality criteria for compliance with
the statement of requirements. Then a choice will be made based on time and cost. Again,
a milestone review will decide whether to proceed further with the project. If it does and
an external contractor is chosen, a contract will be signed between the company and the
contractor.
Project Performance/Implementation
The third stage of the project life cycle is the implementation of the proposed solution.
Once a proposed solution has been selected, the work to build the required product or
service can commence. Even if the product is ‘off-the-shelf ’, for example an accounting
system, there is often build-work required to tailor it or customise it more specifically to
the requirements, for example amending the chart of accounts in the software to match
that of the organisation. This phase is the actual performance of the project and will
involve doing the detailed planning, and then implementing that plan to accomplish the
project objective.
The overall solution is subdivided into separate deliverables to be achieved at fixed milestones through this stage of the project. Achievement of these deliverables may be linked
to stage payments. The project’s objectives of functionality, quality, cost and time are monitored against each deliverable to ensure they are being met.
Project Closure/Completion
The fourth stage of the project life cycle is the completion or closure of the project. When a
project closes, important tasks need to be carried out, such as confirmation that all deliverables have been provided and accepted, and all payments have been made and received.
Project performance is evaluated and appraised in order to learn from the project for future
reference. Obtaining customer feedback is important in improving the quality of future
project provision. The business case is also revisited to check whether any subsequent
actions are needed to ensure achievement of the anticipated benefits.
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An alternative project life cycle –
an iterative process
Project life cycles may vary in terms of time frame from a couple of weeks to several years,
dependent on the complexity, size and content of the project. It is also important to recognise that not all projects will follow the exact phases of the project life cycle as presented
above. Phases may be simultaneous or less structured and formal.
For smaller projects and for those where requirements are uncertain, the life cycle above
may be too slow and involve customers too little during development. In these cases, the
project life cycle may be repeated several times before a solution is agreed, rather than linearly as shown in Figure 4.1. Approximate requirements, the best ideas from competitors
and the best parts of previous projects may be built with customers into a model or prototype. Key features of the proposed system are implemented in a simulated operational
environment that can be used as a ‘predictive model’. By trial use of the model, requirements are revised and the cycle is repeated until agreement is reached. This would reduce
risk because team members can gain experience as this process evaluates complex processes,
tests and validates design techniques and tools, designs test facilities, assesses aspects of system integration and can be used to persuade suppliers and users to accept the proposed
solution.
The feedback from this iterative process can identify risky parts of project design or
problems of integration and operation (Source: Field and Keller, 1998).
In some cases, the model then becomes the final solution with no further
implementation.
4.4.3
Project approaches
Whichever project life cycle is used (linear or iterative), a project may adopt a particular
method or approach to identify all the requirements (and hence, project tasks) that will
be needed to achieve the project objective. These methods effectively identify the starting point for the project, that is, what will be examined first. There are many different
approaches that could be adopted. Here are some of the more well known:
Functional decomposition. This involves determining a desired state and then determining all the components that would go into making that state possible. Then each of the
components are analysed in turn to determine how to make those possible. This ‘decomposition’ continues until all the requirements are known. This approach is often used
when a ‘back to the drawing board’ objective has been set.
● Gap analysis. By comparing the current system/process to the desired system/process, a
set of ‘gaps’ can appear. The project can then be orientated to filling in those gaps and so
‘moving from A to B’. This is fundamentally an incremental approach, building on what
has gone before.
● Reverse engineering. This is essentially taking an existing object apart to see how it works
in order to duplicate it or enhance it. In project terms, reverse engineering is going back
to the basic design blocks to see how a thing works, to see where errors or weaknesses
have occurred and to correct or improve them. It is especially useful in IT projects,
where, for example, there is a constant need for updating and renovating business-critical
software systems as business requirements change or technological infrastructure is
modernised.
●
UNDERSTANDING PROJECT MANAGEMENT
4.4.2
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4.4.4
Other project management
frameworks: 4, 5, 7 or 9?
There are many other project management frameworks, some of which look at different
aspects of project management, and others that take ‘life-cycle’ approaches. Whichever
framework is used, its purpose is essentially to help in understanding the various processes
so that projects can be effectively managed and deliver the desired outcomes. Some alternative frameworks are discussed in the next section.
The 4-D model
This model is often used for very creative projects, or for those that involve intervention in
the culture of an organisation. The four stages of the project, according to this model, are
as follows:
Discover. What gives the current system or organisation life? Appreciate the good things
about what we do and what the organisation already has that can be built on.
● Dream. What might be? What is the organisation/world calling for? Envision the results
of the project. This provides the opportunity for people to be creative and think beyond
boundaries and constraints.
● Design. What is the ideal solution? Construct the elements and assemble them.
● Deliver. How do we empower, learn and survive? Plan for continuous improvement.
●
You can see, from the above, that this model follows the project life cycle quite closely.
Apart from the ‘creative’ terminology used for the stages, the main difference between
this model and the project life cycle is that this model puts more emphasis on the ‘dream’
stage. This is, of course, understandable if we are dealing with creative projects. The rest
of the model follows the project life cycle quite closely, though there is little emphasis on
the implementation and completion stages of the life cycle. This is, of course, a common
criticism of ‘creative’ staff – that they are great at dreaming up big ideas, but very poor at
implementing them.
Another 4-D model is that proposed by Maylor (2003). He identifies the stages as:
Define the project. This involves determining what the project is about, its reason for
existence. It is at this stage that the possible alternatives to the problems presented can
be explored.
● Design the process. This will involve determining how the project will be done, what
will be involved in each part and when it can start and finish. Planning, estimating and
resource analysis will be critical issues at this stage.
● Deliver the project. In other words, do it. The key issues here will be the organisation,
leadership and control of the project along with problem solving. It will concern how
the project should be managed on a day-to-day basis.
● Develop the project process. This stage concerns continuous improvement, through assessment of the process, evaluation and changes for the future.
●
The 5-project management process areas
According to PMBoK which is adopted by the Project Management Institute, the five
process areas of project management can be shown in diagrammatic form, as shown in
Figure 4.2.
ENTERPRISE MANAGEMENT
Planning
Controlling
Executing
Closing
Figure 4.2 The project process areas (based on the work of the Project Management Institute).
From GIDO/CLEMENTS. Successful Project Management with Microsoft Project CD, 1E.
© 1999 South-Western, a part of Cengage Learning, Inc. Reproduced by permission.
www.cengage.com/permissions
This model is also very similar to the ‘general’ project life cycle discussed earlier.
However, it appears to place greater emphasis on the ‘planning’ and ‘controlling’ activities,
as is to be expected from a professional project management institute.
The 7-S model
The 7-S model of culture proposed by McKinsey, referred to in Chapter 2, is also sometimes used in project management. It provides a framework which can be used to consider
the set of issues surrounding project management. For example:
Strategy. This will provide the high level requirements needed to fulfill the project
objectives.
● Structure. This reminds management that the nature of the appropriate structure for the
project needs to be determined.
● Systems. Systems are the methods for project work to be designed, monitored and controlled.
● Staff. This involves the selection of staff to work on the project, along with motivation,
team management and staffing levels.
● Style. This refers to how the project manager leads the project and project team.
● Skills. These are the distinctive capabilities needed by staff working on the project.
● Shared Values. These refer to the guiding beliefs and the significant principles guiding the
project.
●
(Maylor adapts the 7-S framework to include Stakeholders – to reflect the importance of
the various individuals and groups who have an interest in the project process or outcome.)
The 9-project management, knowledge areas
The Project Management Institute also proposes that there are nine key knowledge areas
in project management, each of which is relevant in some or all of the five process areas
discussed above:
1. Integration management. Plan development, plan execution and overall change control.
2. Scope management. Initiation, scope definition, scope planning, scope verification and
scope change control.
3. Time management. Activity definition, activity sequencing, activity duration estimating,
schedule development and schedule control.
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Initiation
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4. Cost management. Resource planning, cost estimating, cost budgeting and cost control.
5. Quality management. Quality planning, quality assurance and quality control.
6. Resource management. Organisational planning, staff acquisition and team development.
7. Communications management. Communications planning, information distribution,
performance reporting and administrative closure.
8. Risk management. Risk identification, risk quantification, risk response development
and risk response control.
9. Procurement management. Procurement planning, solicitation planning, solicitation,
source selection, contract administration and contract close-out.
This model is not intended as an alternative to the project life cycle (or 5 project management process areas, in this case), but rather as a view of the knowledge and skills required
in order to carry out each of the stages of the life cycle. So, for example, at the ‘initiating’
stage, the project manager would need to consider integration management activities, scope
management activities, and so on. All of these knowledge areas are considered in this text.
4.5
The project as a conversion process
A more flexible view of a project is to use a systems approach; that is, the project can be
viewed as a conversion of some resources (input) into a final product or objective (output),
as described by Maylor (2003). The project will take place under a number of constraints,
often outside the project boundary, and the conversion process is carried out by a number
of mechanisms that transform the resources during processing.
4.5.1
Inputs
There will normally be a project brief, that is, a document that provides a statement of customer needs that is to be the foundation of the final project. There are likely to be explicit
project requirements and also those that emerge during the course of the project as a result
of the customer’s changing needs or perceptions. The initial project brief is often open to
interpretation and the expert opinions of the organisation carrying out the project, and is
likely to be negotiated with the customer.
4.5.2
Constraints
These may take any of the following forms:
financial – the budget amount and timing of capital needed;
legal – for example, planning permission requirements, health and safety regulations;
● ethical – behaving within ethical boundaries is becoming increasingly important as customers are becoming concerned about the ethical behaviour of organisations;
● quality – technical requirements specified and desired by the customer;
● environmental – organisations must consider environmental legislation and control;
● logic constraints – planning that certain activities take place before others can start;
● time and quality – discussed earlier in this chapter;
● indirect effects – the desire to minimise disruption to other areas of the business as a
result of change in one area;
● politics – for example, crossing departmental boundaries may be beyond the scope of the project.
●
●
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Outputs
The output is the satisfied need – achievement of the deliverables required. An output may
be tangible or intangible, but it must satisfy the current customer project objectives, for
example, a new computer system plus effective training for the staff.
4.5.4
Mechanisms
The mechanisms by which the output is achieved and processing carried out include the
following:
people – those involved directly and indirectly;
knowledge and expertise – brought to the project by the people participating;
● capital – the money securing the resources;
● tools and techniques – methods of organising resources;
● technology – the physical assets performing the conversion process.
●
●
4.6
Strategy and scope
You may find the terms ‘project strategy’ and ‘project scope’ used in textbooks or articles.
These two may well be sections in a project initiation document, and you may be asked to
produce them in your examination.
In Chapter 1, strategy was defined as
‘A course of action, including the specification of resources required, to achieve
a specific objective.’ CIMA: Management Accounting: Official Terminology,
2005 edition, p. 54.
This definition also applies equally to project management. A project should have a
comprehensive high level definition of what it is to achieve, how that will happen, and the
resources to be used.
The scope of a project is the extent of work needed to produce the project’s deliverables.
It is generally expressed as a list of tasks, often a summary of the work breakdown structure
(this will be explored in Chapter 5).
4.7
Projects and the project manager
It is the people carrying out the project who determine the overall success or failure.
Obviously, using the correct procedures is important, but those procedures are only the
tools people use to carry out their job. The skills, attributes and knowledge that the project
members, and especially project managers, bring to the project are critical to its success;
therefore it is important to understand:
the roles of the project manager
the responsibilities of the project manager
● the skills of the project manager.
●
●
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4.7.1
The roles of the project manager
The key role must be to ensure the success of the project objective. As projects are interdisciplinary and cross organisational reporting lines, the project manager has a complex task
in managing, coordinating, controlling and communicating project tasks.
Norris et al. (1993) see the role of the project manager as one of managing people (the
project team, customers and suppliers), carrying out processes (the work/tasks being done)
and producing the product (the final deliverable).
4.7.2
The responsibilities of the project manager
The ultimate responsibility of the project manager is to ensure the successful completion
of the project objectives to the satisfaction of the final customer. In essence, the project
manager takes responsibility for providing leadership to the project team who carry out
the project tasks in order to achieve the project objectives. The project manager will lead
and coordinate the activities of the project team to ensure that activities are performed on
time, within cost and to the quality standards set by the customer. An important aspect of
project management is to ensure that the team members are organised, coordinated and
working together. The specific responsibilities of the project manager are discussed in more
detail in the following sections.
4.7.3
Organisation
The project manager is responsible for ensuring that the necessary resources are available
to carry out the project. This will involve those tasks that can be carried out internally and
those that may need to be subcontracted externally.
For tasks to be carried out internally, the project manager is responsible for assigning
particular people within the organisation to carry out the work. The project manager will
delegate responsibility for performing project tasks to team members, who will then be
accountable to the project manager for the accomplishment of the task within budget
and on time. In complex projects, this may often involve the project manager delegating responsibility to team leaders responsible for a group of specific tasks. For example, in
projects to implement information systems, the project manager may delegate authority to
a senior programmer to ensure that all programming tasks are carried out across the whole
of the system development.
Exercise
List the activities that the project manager must do in order to perform the organising
function.
Solution
secure project resources
● assign tasks to internal/external providers
● assign responsibility
● organise team.
●
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The project manager and project planning
It is important to understand the responsibilities of the project manager within the planning stage. The primary responsibility is to define the project objective clearly with the
customer, then to communicate this objective to the rest of the project team, making it
clear what constitutes a successful project outcome.
The project manager must engender participation of the team members in the planning
process, in order to instil involvement, commitment and ownership of the project.
This may involve setting up a project-reporting information system, to record and monitor the progress of the project against the plan and then communicate the plan and actual
comparisons to team members on a regular basis. Responsibility structures may be used
(i.e. ensuring that team members receive information on their own area of influence), but
this must be carefully weighed against ensuring that project team members do not forget
that their particular area of control is likely to affect other areas and will ultimately affect
the overall achievement of the whole project objective.
Exercise
List the activities that the project manager must do in order to perform the planning
function.
Solution
Define the project objective.
Agree the objective with the customer.
● Communicate the objective to the team.
● Set up a system to compare actual results with the plan.
●
●
4.7.5
The project manager and controlling
Following the planning stage of the project, the project manager is responsible for monitoring and controlling its progress towards successful completion. Along with the project
team members carrying out the particular tasks, the project manager will collect and
analyse actual project data on costs, schedule and progress. If the project manager considers that corrective action needs to be taken in order to get the project back on target,
then action must be instigated at this level. It is important that the project manager takes
the advice of team members before deciding on a particular course of corrective action,
because participation in the decision-making process will help to foster commitment of
team members to the successful completion of the project objective. Control activities,
when required, must be carried out as quickly as possible.
Exercise
List the activities that the project manager must do in order to perform the controlling
function.
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Solution
Implement and monitor the project information system.
● Take action if variations occur.
● Communicate with the team on the progress of the project.
●
4.8
The skills of the project manager
The project manager requires a set of skills that will encourage and lead the project team
to succeed and to create customer confidence in the project team. The following project
management skills will be discussed in the next section:
leadership skills
● communication skills
● negotiation skills
● delegation skills
● problem-solving skills
● change-management skills.
●
4.8.1
Leadership skills
Leadership is the ability to obtain results from others through personal direction and
influence. Leadership in projects involves influencing others through the personality or
actions of the project manager. The project manager cannot achieve the project objectives
alone; results are achieved by the whole project team. The project manager must have the
ability to motivate the project team in order to create a team objective that they want to
be part of.
Good project management requires both participation and consultation. The project
manager should provide overall direction but should not be autocratic or prescriptive
in leading the team. As project managers are responsible for bringing together a team of
experts, it would be inappropriate in most cases to tell them how to do their jobs!
Project managers require the skills to empower the project team members. With
empowerment comes ownership of and responsibility for their part of the project, and
this will encourage team members also to feel part of the overall project achievement. The
project manager should encourage open communication between team members in order
to encourage team spirit and support.
Another important attribute of leadership is recognition. Motivation will be enhanced
if the project manager continually recognises the achievements of the team members via
encouragement, praise or formal monetary rewards. Recognition must be carried out
throughout the life of the project so as to maintain motivation of the team.
In an article in Computer Weekly, ‘IT Projects Need Leaders’ (26 October, 2001), David
Taylor, President of the IT directors’ association Certus, discussed how sad he was to
receive an advertising flyer from a training organisation because the contents of the 2-day
course (Methodologies, Process, Prince2, Bar Charts, Project Management Meetings,
Software Skills), though important, did not seem to cover the aspects of successful project
delivery that he had identified. These were communication, leadership, persistence, inspiration, motivation, focus and action. The course was about project management (important in its own right) and not project leadership which he considered to be essential.
ENTERPRISE MANAGEMENT
Scars. He asks about the biggest mistake the applicant has ever made on a project. If
none, then he is not interested. The deeper the scars the better, because learning has
occurred.
● Communication. Do they look you in the eyes when speaking to you, are they confident,
are their heads high? Forget the project when considering this essential skill.
● Radical thinkers. ‘If we do what we have always done, we will get exactly what we have
always got.’ He looks for people who can think outside the planet, not just outside
the box.
●
The last point can certainly be evidenced in the innovative approach to many aspects of
the Eden Project discussed earlier in this chapter. Taylor wrote that you can turn projects
around if leaders are appointed, and are given the freedom to do what they have to do to
get the project delivered.
4.8.2
Communication skills
As indicated by Taylor in the section above, project managers must be effective communicators. They must communicate regularly with a variety of people, including the customer, suppliers, subcontractors, project team and senior management. Communication
is vital for the progression of the project, identification of potential problems, generation
of solutions and keeping up to date with the customer’s requirements and the perceptions
of the team.
Project managers should communicate by using a variety of methods:
regular team meetings
regular meetings face-to-face with the customer
● informal meetings with individual team members
● written reports to senior management and the customer
● listening to all the stakeholders involved in the project.
●
●
It is important for the project manager to have regular and open communication
with both the customer and the team members. The customer needs to be kept regularly
informed of the progress of the project and needs to let the project manager know as soon
as possible when changes are required. The project team members must have a formal
forum on a regular basis where the whole teams get together to discuss project issues. Team
members will also require less formal communication methods in order to bring individual
concerns to the attention of the project manager. The project manager must therefore be
available for open informal discussions with team members, when required. The project
manager must also provide timely feedback to both the team and the customer.
4.8.3
Negotiation skills
Project managers will have to negotiate on a variety of project issues, such as availability
and level of resources, schedules, priorities, standards, procedures, costs, quality and people issues. Negotiation is a process of satisfying a project’s needs by reaching an agreement
UNDERSTANDING PROJECT MANAGEMENT
He wrote: ‘Too many companies advertise for project leaders with specific technical
experience, who have consistently delivered quality systems, and who really understand
processes.’ He went on to indicate that he looked for scars, communication and radical
thinkers:
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with others. The project manager may have to negotiate with someone over whom he or
she has no direct authority (e.g. consultants), or who has no direct authority over him
or her (e.g. the customer). Project managers need to be able to manage the outcome of a
negotiation so that the differences in what each side gets are kept to an absolute minimum
and conflict is avoided. Table 4.1 highlights the kind of negotiations a project manager
is likely to be involved in. To help ensure successful negotiation, a logical process can be
followed:
1. Identify and define the problem.
2. Generate a number of possible solutions that could be accepted.
3. Evaluate these alternatives and their outcomes to the project.
4. Reach agreement by compromise or by selecting the alternative proposal most suitable
to both parties.
5. Implement the results of the negotiation.
It is likely that throughout the project’s life, the project manager will be involved in
many negotiation processes and the main objective must bring in a successful project, that
is, one achieving the project objective(s).
Negotiation skills are covered in more detail in Chapter 7.
Table 4.1
Negotiation point
Resource
Schedules
Priorities
Procedures
Quality
Costs
People
Negotiations of the project manager (adapted from Field and Keller, 1998)
Possible issues
Negotiate with
Funding
Staff
Equipment
Time scale
Order of activities
Duration of activities
Timing of activities
Deadlines
Over other projects or work
Between cost, quality and time
Of team members’ activities
Methods
Roles and responsibilities
Reporting
Relationships
Assurance checks
Performance measures
Fitness for purpose
Estimates
Budgets
Expenditure
Getting team to work together
Getting required skills
Work allocations
Effort needed
Senior management
Line managers
Purchasing/estates departments
Customer/senior management
Customer/teams
Line managers/team members
Line managers/team members
Customer/line managers
Senior management
Customer/team members
Team members
Team members
Team members/customer
Senior management/customer
Team members
Customer/teams
Customer/teams
Customer/team members
Accountants/team members
Customer/senior management
Customer/accountants
Team members
Team members/line managers
Team members/line managers
Team members/line managers
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Delegation skills
A further key skill required for a project manager is that of delegation. A project manager will communicate and clarify the overall project objective to the team members, and
will then further clarify the individual team member’s role in achieving that objective by
a process of delegation. Delegation is about empowering the project team and each team
member to accomplish the expected tasks for his or her area of responsibility. The project
manager has neither the time nor the skills to carry out all the project tasks, so he or she
must delegate responsibility to those who do have the skills. Delegation is also partly about
allowing team members to learn from their mistakes and, if they are able, to correct them
by themselves, without fear of blame. Delegation ensures effective performance by the
project team and fosters conditions necessary for teamwork and coordination. There may
be times during a project’s life when the project manager needs to step in to stop serious
errors occurring, but a good project manager will be able to spot potentially dangerous
situations quickly and take control of the decision-making process.
4.8.5
Problem-solving skills
Project managers will inevitably face numerous problems throughout the project’s life. It
is important that the project manager gathers information about the problem in order to
understand the issues as clearly as possible. The project manager should encourage team
members to identify problems within their own tasks and try to solve them on their own,
initially. Delegation should foster this approach. However, where tasks are large or critical
to the overall achievement of the project, it is important that team members communicate
with the project manager as soon as possible so that they can lead the problem-solving
effort. Appropriate team members should be involved to analyse and present information
in order to generate a solution. Again, an important attribute of project management is
communication, in particular listening skills, as various opinions and possible solutions are
being generated. As the project manager is the person who retains the ‘big picture’, he or
she is in the optimum position to consider how the decision will affect the overall project.
4.8.6
Change-management skills
One thing is certain in projects, and that is change. Changes may be:
requested by the customer
requested by the project team
● caused by unexpected events during the project performance
● required by the users of the final project outcome.
●
●
Therefore, it is important that the project manager has the skills to manage and control
change. The impact that change has on accomplishing the project objective must be kept
to a minimum and may be affected by the time in the project’s life cycle when the change
is identified. Generally, the later the change is identified in the project life cycle, the greater
its likely impact on achieving the overall project objective successfully. Most likely to be
affected by change is the project budget and its timescale.
At the start of a project, procedures need to be put in place regarding how changes are to
be documented and approved. If a customer requires a change, the project manager must
request the appropriate team member to estimate the effect on project schedule and cost.
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4.8.4
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The project manager should then present these estimates to the customer for approval prior
to implementing the change. Only after agreement by the customer should project schedules and budgets be updated to include the additional costs or activities. If change is initiated by the project team or the project manager, then the project manager must present a
proposal to the customer for approval.
Some changes are necessary as a result of unexpected events such as the loss of a key
member of staff or materials shortage. These will have an impact on the project schedule
and/or cost and will require modifications to the plan.
Project changes may also occur as a result of user requirements of the final project. In
many projects, such as the introduction of computerised information systems, the project
manager is responsible not only for designing, developing and implementing the new
system, but also for ensuring that the users accept the final product. This will involve
the project manager in regular communication throughout the development, design and
implementation stage with the users in order to overcome fears and resistance to change.
Again, good communication skills are vital in this situation as the users are likely to be
suspicious and fearful of the change process, and this requires the project manager to listen carefully to those concerns and to communicate regularly to the users the objectives
and benefits of the project undertaken. Discussion groups, open meetings and one-to-one
meetings provide a good opportunity for users to express their concerns and fears. The
project manager must listen carefully and considerately to these fears and concerns and
must attempt to involve the users in the process of implementation as much as possible.
4.9
Projects and people – project teams
The issues relating to the formation and development of teams are covered in the sections
on groups and conflict in Chapters 7 and 9. You should think about the issues raised there
in relation to project teams.
4.9.1
Problems of project team-working
There may be barriers that hinder the achievement of the team objectives. The following
section highlights some of these potential issues and makes suggestions for overcoming
them.
4.9.2
Unclear team goals and objectives
It is the responsibility of the project manager to explain the project objective to the team.
He or she must demonstrate the importance of the project and the benefits its success will
have for the organisation and the team members. This should be presented and discussed
at the first project meeting and the project manager must ensure that all team members
understand these goals and the benefits of achieving them. The project manager needs to
review the project objectives on a regular basis, with the team and with individual team
members, to ensure that the objective remains an important target and that the team
remains focused. Being vague about the goals of the project or not reinforcing the importance of the achievement of the goal on a regular basis is likely to lead to a lack of team
focus and a failure to meet the project objective.
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Lack of team structure
Team members may not know or understand what roles or activities the other team members are contributing, or may feel that there are no established procedures. Therefore, it is
important for the project manager to involve the team members in project planning at an
early stage. The project manager must also determine and communicate team-operating
procedures, such as communication, reporting, approvals, and so on. Using tools such as
critical path analysis (see Chapter 5) and the project budget and baseline plan, the project
manager can demonstrate to the team how everyone’s work fits together to achieve the
project objective. All project procedures should be documented and kept in one location
for reference by all team members.
4.9.4
Lack of definition of roles
Team members may not clearly understand their roles in the project or may feel that their
lines of responsibility and duty overlap with those of another team member. The project
manager must meet with each team member early on in the life of the project to describe
and discuss individual roles, duties and responsibilities, and to explain how they interact
with other team members. When the project plan is formulated by the team, each team
member must be given a plan of work, normally a work breakdown structure (WBS),
which identifies individual tasks and when they need to be carried out. This plan must
be given to each team member by the project manager so that all the team members can
understand clearly what they have to do, and also what the other team members are doing.
Also, as stated earlier, all team members should be issued with a critical path analysis of
the project and the baseline plan so that they can view all tasks together and see how their
activities fit into the overall plan.
4.9.5
Poor leadership
The project manager must create an environment in which the team members can feel free
to contribute and provide feedback. It is important for the project manager to set guidelines for team operations, but he or she must be able to balance the requirements of many
individuals within this framework of project rules. The project manager must be flexible
enough to listen and take advice from his or her team, but must also be strong enough to
enforce his or her own suggestions and decisions when necessary. Fairness and objectivity
when dealing with team members is critical.
4.9.6
Poor team communication
It is important that the project manager holds regular team meetings and status reviews
to communicate progress and to provide a forum for team discussion and airing of views.
Participation in team meetings should be encouraged, and certain team members should
be required to report on the status of their activities. Project documents, such as plans and
budgets, must be kept up to date and circulated to the team regularly. The project manager
should encourage open and frank discussion among the team members, both formally and
informally. Physical location of team members can often be an important factor in helping
or hindering communication.
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4.9.7
Lack of commitment
Team members may not be committed to the overall project objective, perhaps as a result
of poor communication. The project manager must speak to each team member in order
to communicate his or her importance to the achievement of the project. The project manager needs to determine the motivating factors important to each individual and should
ensure that the project environment is a motivating one. The project manager must continually encourage individuals and support progress. Effective team members need to be
committed and want to feel accountable for their individual activities.
Commitment may also be lacking where an individual is being split between work on
the project and a full-time job. The project manager should recognise and deal with the
situation by clarifying priorities and, if necessary, bidding for the individual to join the
team on a full-time basis.
4.9.8
Project management and team-building
Team-building should be an ongoing process throughout the life of the project, and should
be the responsibility of all the team members. Team-building should foster honesty, open
communication and trust and also a strong commitment to the achievement of the project
objective. Possible methods of team-building could be as follows:
physically locate the team in one place
periodically call team meetings (rather than project meetings)
● socialise outside the work environment.
●
●
4.9.9
Project team meetings
As discussed above regular project team meetings are an important way to improve relationships and to communicate the objectives of the project to the whole team.
There are a range of different types of project team meeting; below are just three
examples.
Project status review meetings
The purposes of such meetings are to inform others about project status to date, to identify any issues or problems and to identify subsequent action plans for the remainder of
the project. These meetings should involve the team members, the project manager and
the customer. They should be scheduled regularly so that potential problems can be identified and acted upon quickly.
Exercise
List some of the items that may be on the agenda of a project status review meeting.
Solution
Achievements since last meeting.
Cost, schedules, scope – current status.
● Cost, schedules, scope – forecasts.
●
●
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Project design review meetings
Projects that involve a design element are likely to require a number of design review meetings. This may be a forum to present new technical specifications for customer approval or
to present design problems for problem-solving.
Project problem-solving meetings
As soon as a problem occurs within a project, a problem-solving meeting should be called
for appropriate team members to attend, in order to identify and resolve the issue. A quick
response to the identification of a problem is critical and it is important that the appropriate team members are made aware and are allowed to participate in the problem solution. It is important that the project manager provides clear guidelines on the authority of
the problem-solving team to make decisions and the allocation of responsibility to named
individuals for action to solve the problem.
4.10
Project stakeholders
We have already discussed at some length about the project managers and their relationship with the team members. However, there are a number of other stakeholders who need
to be considered (Figure 4.3). Different textbooks have different lists of stakeholders, and
there are often different names for the same stakeholder.
The following is a selection of the most common; you should make sure that you are
aware of the needs of each stakeholder, in respect of the project, and the conflicts between
those needs.
Project sponsor. The sponsor is the person or organisation providing the resources for the
project, that is, the person responsible for ensuring that the project is successful at the
business level. They often authorise the project, and are responsible for its budget. They
must also be satisfied that a business case exists to justify the project. They will also be
particularly concerned that the project does not go over budget. The sponsor may also
chair the steering committee (or project board) to which the project manager reports
progress. If we take the example of the development of a new accounting system, the
sponsor might be the Head of IT, simply because they control the budget for IT capital
investments.
● Project owner (also referred to as project client). The project owner is the person for whom
the project is being carried out. They are interested in the end result being achieved
and their needs being met. They are more interested in scope and functionality than
in budget. They would normally sit on the steering committee, and may also represent
the users. In the case of the new accounting system, the owner would be the Finance
Director or Financial Controller.
● Customers/users. The customer/user is the person or group of people whose needs the
project should satisfy. The fact that this stakeholder is a ‘group’ leads to its own problems. It may be difficult to get agreement from the customers as to what their needs
●
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Cost, schedules, scope – variances.
● Corrective action plan.
● Assignment of action plan tasks.
● Assignment of deadlines for action plan tasks.
●
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Project sponsor –
Makes investment decision
Project brief, allocation of
funds, terms of reference
Project owner –
Wants end results
Project proposals,
schedules, status reports
Project customer –
End-User
Project manager –
Responsible for achieving overall
project output
Project team –
Responsible for achieving project
tasks that make up overall project
Figure 4.3
Project stakeholder hierarchy (adapted from Gido and Clements, 1999)
are; indeed there may be conflicts within the customer group. Conventional logic dictates
that users should be, if possible, invited to participate in the project. This may simply
mean representation on the steering committee, or may involve being part of the project
team. Users, like the project owner, are primarily interested in the scope of a project.
However, they may try to ‘hijack’ the project to satisfy their own personal objectives,
rather than those of the organisation. This may bring them into conflict with the project
owner, despite theoretically being ‘on the same side’. In the case of the new finance system, the users would come from the different parts of the finance function.
● Suppliers/subcontractors/specialists. The project will often require inputs from other parties, such as material suppliers or possibly specialist labour, such as consultants. Each of
them will have their own objectives, some of which conflict with those of the project.
For example, suppliers will seek to maximise the price of the supply, and reduce its scope
and quality, in order to reduce cost. This conflicts directly with the objectives of the
sponsor and customers. In the case of the new finance system, suppliers may provide
hardware and software, and specialists might include members of the organisation’s IT,
purchasing or internal audit departments.
4.10.1
Managing stakeholder expectations
Even the simplest project is likely to have a large range of potential stakeholders with different levels of interest and power. Identifying stakeholders, assessing their interests in the
project and then using that information to manage the relationships with such groups is
a vital project management activity. Once these have been identified, it is useful to draw
ENTERPRISE MANAGEMENT
4.10.2
Stakeholder conflict
As in any group management situation, projects are susceptible to conflict between the
various stakeholders. Although it is not possible to list all of the potential conflicts, as they
are specific to each project, several obvious conflicts can be identified by looking at the
objectives of each stakeholder as summarised in Section 4.10, above; for example:
While the project owner will be seeking the ‘best’ possible solution, the sponsor will be
interested in the project being completed ‘within budget’.
● The project owner and sponsor will want the best possible solution at the lowest possible
cost, suppliers will want to maximise their profit from the project. This is the same conflict that always exists in customer-supplier relationships.
●
You should think about the other likely conflicts in a typical project and how you, as
project manager, would manage them.
4.11
Projects and organisation
structures and support
This chapter has covered a number of issues relating to project organisation structures.
However, we need to consider the relationship of the project to the organisation within
which it exists.
In conventional (functional or divisional) structures, there is often a lack of clarity as to
how authority is divided between line managers and project managers. If a project is relatively small or short term, for example an information system redevelopment, this may not
be a major issue. However, if the project forms a major part of the business of the organisation, such as in a construction company, this may necessitate an organisation structure
such as a matrix, where lines of authority are clearer.
4.11.1
Matrix organisations
A matrix structure seeks to add flexibility and lateral coordination to the traditional vertical hierarchy. One way of doing this is to create project teams made up of members drawn
from a variety of different functions or divisions: each individual then has a dual role, as he
or she maintains functional/divisional responsibilities as well as membership of the project
team (see Figure 4.4). Hence, both vertical and horizontal relationships are emphasised, and
employees within a department will report to both a functional and a product manager,
UNDERSTANDING PROJECT MANAGEMENT
up a systematic plan to secure and maintain their support or to foresee and react to any
problems. This will allow the project manager to concentrate on those critical stakeholder
relationships and thus reduce the vulnerability of the project when unexpected events
arise.
Once the project manager has established the key stakeholder groups, a table can be
drawn up listing each stakeholder’s goals, past behaviour towards the projects, what can
be expected of their future behaviour and how they may react to future changes. You may
choose to use the Mendelow matrix, outlined in Chapter 1. This will allow the project
manager to assess the risks associated with various stakeholder groups, and indicate where
attention needs to be focused.
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UNDERSTANDING PROJECT MANAGEMENT
172
Chief
executive
Project
manager 1
Division
A
Division
B
Technical
development
Figure 4.4
Production
Marketing
Production
Marketing
Project
manager 2
1
Project
manager 3
2
1
3
2
3
2
1
1
3
2
1
3
2
3
Matrix Organisation (new diagram taken from old chapter 2 on structures)
each of which has equal authority. There is a dual chain of command which violates classical management principles. A matrix structure suits rapidly changing environments because
the equal balance of power between functional and project management aids communication and coordination. It is an organic structure which facilitates adaptation to unfamiliar
and unexpected problems. People can be flexibly relocated across products or projects, aiding the speedy implementation of new ones.
The matrix organisation structure has been widely criticised, but is still used by many
organisations in industries such as engineering, construction, consultancy, audit and even
education. The characteristics of the organisation that lead to a matrix being the most suitable organisation structure are as follows:
The business of the organisation consists of a series of projects, each requiring staff and
resources from a number of technical functions.
● The projects have different start and end dates, so the organisation is continually reassigning resources from project to project.
● The projects are complex, so staff benefit from also being assigned to a technical
function (such as finance of logistics) where they can share knowledge with colleagues.
● The projects are expensive, so having resources controlled by functional heads should
lead to improved utilisation and reduced duplication across projects.
● The projects are customer-facing, so the customer requires a single point of contact (the
project manager) to deal with their needs and problems.
●
If implemented successfully matrix structure can:
improve decision-making by bringing a wide range of expertise to problems that cut
across departmental or divisional boundaries;
● replace formal control by direct contact;
● assist in the development of managers by exposing them to company-wide problems and
decisions;
● improve lateral communication and cooperation between specialists.
●
ENTERPRISE MANAGEMENT
a lack of clear responsibility;
clashes of priority between product and function;
● functions lose control of the psychological contract;
● career development can often be stymied;
● difficult for one specialist to appraise performance of another discipline in multi-skilled
teams;
● project managers are reluctant to impose authority as they may be subordinates in a later
project;
● employees may be confused by reporting to two bosses;
● managers will need to be able to resolve interpersonal frictions and may need training in
human relations skills;
● managers spend a great deal of time in meetings to prioritise tasks.
●
●
4.11.2
Project office
The effective management of any project requires a lot of administrative work to keep
the project in order. In a small project, the project manager will probably take care of the
administration with the support of an administrator or a secretary. However, for large complex projects may need project support teams. In organisations where the there is a significant number of large scale projects there will often be a permanent project office/project
support office. The function of the project office is to assist in all aspects of the management of project work and provide administrative support to an ongoing programme of
projects.
The project office provides a central function comprising staff who have the specialist
skills and knowledge of how to run the project process. Tasks which may be undertaken
include, scheduling, using network analysis and updating, servicing progress meetings, (e.g.
making arrangements, sending out the agenda and minutes), monitoring costs and budgets, maintaining project files, preparing contracts and monitoring progress. Project management and planning software will usually be kept under the control of the project office.
There are considerable benefits from having a consistent approach to running projects
through a project office. If projects follow the same processes then staff transfer between
projects is easier and staff do not have to learn new ways of working. In addition, it is beneficial to retain information on projects and learn from experiences. The project office can
be the central repository for this knowledge. This can be used to inform future projects to
improve the quality and accuracy and avoid mistakes made in earlier projects.
In summary the project office can provide administrative support, but in some organisations it is central to the overall control of projects.
4.12
Why some projects fail
There are a number of factors that are crucial to projects. To continue with this theme:
NSM Research carried out a survey of 867 IT professionals, asking them under five headings
to identify which of the 60 factors could affect the success of an IT project. This independent market research agency was commissioned by the Coverdale Organisation (a management consultancy) and Computer Weekly. The results were published in Computer Weekly in
UNDERSTANDING PROJECT MANAGEMENT
There are, however, disadvantages with a matrix structure:
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174
Table 4.2
Survey results
The 10 most common factors contributing to real IT project failures
Time/resource estimates unrealistic: 75%
Objectives not clearly defined or measurable: 71%
Project manager: poor communication skills: 64%
Objectives changed during project: 61%
Project manager: poor leadership skills: 59%
Senior management: not showing strong support: 56%
Stakeholders: not taking ownership of the project: 56%
Role and responsibilities of the project team not defined: 54%
Resources not identified/made available at the start: 54%
Project team: did not work as a team: 53%
an article entitled ‘The Project Killers’ on 28 February 2002. The results in Table 4.2 are
taken from that article.
Forrester, a research firm, informed the world that about two-thirds of major IT projects
fail to deliver some of their original objectives and more than a quarter fail altogether.
You can see from Table 4.2 that the technical or IT-specific factors were viewed as far
less relevant to project success than the way people fail to work with each other. Factors
such as communication, leadership and clarity of purpose can produce a desired result.
Significant elements of the project management process, such as the defining of
clear objectives, setting realistic estimates in terms of budgets and time, and identifying
resources, will impact seriously on the success of projects: they can head in the wrong
direction from the start.
Steve Goodman, who works for Coverdale, is experienced in blue-chip IT companies’
major IT projects. He said: ‘With one project team we agreed a work breakdown structure
and then asked them separately to estimate the time required for each task. For one task
estimates ranged from half a day to 2 weeks.’
Imagine then that you are building the Jubilee Line that had 10 000 separate tasks!
A huge impact on project success occurs when objectives are changed in the course of
the project. The associated skill set contains the ability to communicate well and to lead.
These skills should be used to communicate and to obtain agreement with clearly defined,
measurable objectives, necessitating the understanding of the various stakeholders.
Understanding the technology and technical competence are of far less importance to a
project leader, though they are more important for the project team and essential to suppliers and third parties. Project teams have to have clear roles and responsibilities, teamworking and motivation more than technical competence or formal training. The support
and involvement of senior management was essential: without it, projects fail.
Suppliers and other third parties have to be tightly managed and assurance about their
technical competence given and checked by third-party references, for example.
4.13
Examples of projects
This section will help you to become familiar with real projects. Use examples
to support your answers.
ENTERPRISE MANAGEMENT
One successful project – ongoing
The Eden Project
Imagine a large hole filled with water: an abandoned china clay pit at Bodelva in Cornwall,
5 km east of St Austell. The pit was 180 years old with an area of about 35 hectares and
80 m in depth. There were 13 natural springs feeding in the water, some 700,000 m3 to be
dealt with annually (22 litres per second.) It seems the most unlikely site for one of the most
successful projects seen in the United Kingdom that linked the imagination of Tim Smit,
who saw the site and had the vision in 1994 and the skills of the principal project teams.
The project was to construct a botanical garden and education centre within that china
clay pit, to be opened to the public as soon as possible. The mission statement was (and
is) to: promote the understanding and responsible management of the vital relationship
between plants, people and resources . . . and to inspire positive initiatives that will lead to
a sustainable future for us all.
To this end, a sheltered micro-climate was to be created below the surrounding ground
level by the construction of enormous greenhouses (called biomes) to enable large numbers
of the world’s tropical and Mediterranean species to be planted.
The customer/employer of the project was Eden Project Ltd and the Financial Project
Manager was Davis Langdon Management (DLM), which was involved in the project
from early 1996.
A crucial part of the project was the receipt of £25,000 from Restormel District
Council. This was seed-corn money that enabled the development of the millennium
funding bid to be financed.
Tenders for the construction contract were advertised in early 1997. Eight tenderers
were selected, including one Anglo-German joint venture. The contractors were interviewed and, after investigations, two were shortlisted: Tarmac and McAlpine JV. The
fundamental requirement contractually was to place a design and construct lump sum
contract with a guaranteed maximum price, with the successful contractor investing equity
into the project.
During the final negotiations, both tenderers were invited to make final proposals
including the form of contract they considered most appropriate. Both chose the New
Engineering Contract (NEC) and savings/bonus provisions with an activity schedule. This
means they chose an NEC target-cost contract, that is, a model contract based on best
practice because it supported project management and provided a secure basis for partnering. McAlpine JV (a joint venture between Robert McAlpine JV and Alfred McAlpine Ltd)
won the contract in February 1997 because of its expertise in both heavy civil engineering and building construction, its offer of equity investment and its construction management proposals being the most favourable. This meant that it became responsible for the
whole design, procurement, construction and commissioning of the total built form for a
total cost of around £59.8 m. The contract was under deed (i.e. legally enforceable) with a
12-year liability period. It was also agreed that McAlpines would have two executive directors join the Board of Directors of Eden Project Ltd: an essential realisation of the partnering concept that had underpinned the contractor’s appointment.
In May 1997, £37.5 m was granted by the Millennium Commission as one of its ‘landmark projects’, one of the largest funded by the National Lottery to celebrate the third
millennium.
In the next 18 months, Eden Project Ltd raised matching funds, obtained planning permission (including the new requirement to build a 4 km road from the project to the A390
UNDERSTANDING PROJECT MANAGEMENT
4.13.1
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STUDY MATERIAL E2
south of Bugle linking the main A30 trunk road which ran the length of Cornwall), bought
the clay pit, appointed the in-house development team and finalised the project brief.
The site was not finally bought until October 1998, during which time the owner continued to extract china clay from it as the contract and project team struggled to develop
the design. The design team, Nicholas Grimshaw and Partners Ltd, were taken on when
the contract was agreed. Eden Project Ltd’s (the client’s) expectations were also value-engineered down to the budget (the residue of funding less the inescapable ex-contract costs),
programmes and method statements were prepared, geophysical and geotechnical surveys
and wind tunnel tests were commissioned and work was done towards the site start.
In August 1998, the estimated construction costs had to be reduced by 25 per cent (over
£11 m excluding the agreed £12.5 m for the biome superstructures already negotiated) to
achieve the inadequate budget.
In October 1998, some site clearance work started, but the final construction contract
was only signed at the end of January 1999 before work could start in earnest. Throughout
the entire project, all parties worked at risk, with very small primer payments made by
the Millennium Commission against rigid ‘schedules of delivery’. There were eventually 87
suppliers and subcontractors managed by McAlpine for the client.
The contract was in two phases:
Phase 1: The buildings (the Visitor Centre) and infrastructure (roads, car parking, drainage
and so on). This was completed in five different stages to allow the customer to start fitting
out individual rooms. Completed sections of topsoiling and associated works in the pit were
also undertaken separately to enable the horticultural planting to start. Topsoil had to be created from china clay waste/sand, composted ‘green’ waste and composted bark, as there was
none in the pit. Much innovation had been required as the pit was filled to a depth of 20 m
below the water table, necessitating sophisticated water management and continual pumping of 100 litres per second off site. Starting in December 1998, 2 months of torrential and
unceasing rain fell, and construction had to stop. Work did not recommence until March
1999, when diggers and bulldozers were used round the clock to make up the time lost.
Phase 2: All the works within the pit, including the two biome structures and the temperate biome with supporting buildings on the rim such as the energy centre and the central
production unit for on-site catering, with the final infrastructure. These biomes were covered with triple-layered ‘cling-film with attitude’ or ETFE (ethyl-tetra-fluoro-ethylene
copolymer) foil. This is strong, lightweight, anti-static and highly transparent to ultra-violet
light, has better insulation properties than glass and is recyclable. It should be maintenancefree for 25 years and last 30 years. The biomes were designed by Mero UK Ltd and achieved
two world records: for the largest volume and the tallest free-standing scaffold ever erected
for the temporary steelwork: a vast scaffolding birdcage! The weight of the steel framework
was less than that of the moist air inside the humid zone biome. Part of these facilities, the
humid tropics biome and some of the biome link with the main reception area, dining
facilities, lavatories and similar facilities between the biomes, were taken over piecemeal to
allow the employer to start work in those areas. Horticultural planting started in September
1999, with the first trees planted in the Humid Tropics Biome in October 2000.
Phase 1: The Gateway to Eden – was opened to the public in May 2000 while construction
was still underway: 500,000 visitors came to watch the Big Build. Phase 1 closed in January
2001 so that the link building and modifications to the Visitor Centre could be completed.
March 2001: The Eden Project was completely opened to the public. In June 2001, the
one-millionth visitor had come to see the project. (The target had been 750,000 per annum.)
ENTERPRISE MANAGEMENT
4.13.2
One not so successful project
National Air Traffic Services (NATS)
In 1987, the Civil Aviation Authority made a case to the government of the day for a new air
traffic control system and centre. The deadline for operations was 1996, when it was felt that
the life of the existing system (the London Air Traffic Control Centre) would have reached
the end of its useful life. The new centre had to have a 40 per cent increase in capacity.
Between 1989 and 1990 the management strategy for the project was defined, but the
project team estimated an operational start date of 1998: 2 years longer than agreed.
An independent consultancy (the Mitre Corporation) was hired to help with the scoping of the project and its estimate of completion was 13 years to build a fully operational
system as envisaged. The new deadline would be 2003. The project was authorised to go
ahead on the basis of going live in 1996. Comment by an audit team revealed that the
senior management at NATS were keen to show a ‘can-do’ mentality rather than admitting
that the 1996 date was not feasible.
At the end of 1991, IBM and Thompson CSF won the system contract that had been
subject to competition. Their budget of £1 m for the project definition phase was in the
main used up by the next year. The contractors refused to invest large sums themselves.
A systems implementation contract was let to IBM, with a large number of requirements
still undefined. There were no firm offers from subcontractors at this time: firms such as
Siemens Plessey, Logica and Frequentis were involved.
The system, which was based on IBM’s RS/600 AIX-based architecture, on a token ring
network, comprised 200 workstations showing both aircraft data and radar information. The
requirements had been set by a small and unrepresentative group of air traffic controllers.
In 1994, Loral bought IBM’s Air Traffic Division and conducted a secret audit of
the NATS systems that showed 21,000 defects in nearly 2 m lines of code. The whole
project, including the building at Swanwick, Hampshire, was said to cost £350 m. (Having
UNDERSTANDING PROJECT MANAGEMENT
The project has been successfully completed, though a month late. It came in on
budget. The final cost was £86 m. There was only one subcontract dispute, amicably settled. The absence of these disputes enabled the focus to remain on the considerable physical, technical and budgetary issues. The client and investors were satisfied. The revenue
from the admissions, catering and retailing facilities has been 300 per cent over estimates
made in the business plan for Phase 1. Harmonious relationships (required by contract
clause 10.1: ‘the parties to act in a spirit of mutual trust and co-operation’) had underpinned activity and, for the most part, the reaction of project partners was that it had been
exciting, harmonious and profitable.
On 24 October 2001, McAlpine JV won the British Construction Industry Major
Project Award for contracts above £50 m. The judges said: ‘The Joint Venture partnership
had enough faith in the project to work at risk for a long period: dealt with incidental
problems including weather, geology and budget cuts with enthusiasm and skill, and produced a result which has become an instant legend in its own lifetime.’
The next development phase of the Eden Project commenced in 2002.
Sources: Internet downloads: ‘Eden Project – a Landmark for the NEC’, by Tim Carter,
Davis Langdon Management: NEC Users’ Group Newsletter, Issue No. 16, www. newengineeringcontract.com. Material reprinted by permission of Thomas Telford.
McAlpine Joint Venture Eden Project St Austell: BCIA Awards 2001 – Major Project
Award: The Eden Project The Architects’ Journal: Eden Project: www.ajplus.co.uk/eden/ facts.
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assumed that this was the total bill, MPs did not appreciate being told that this was only
the capital funds draw-down.)
In 1995, though the system was working well on 30 workstations, it proved impossible
to scale it up on the whole operational configuration. By November, acceptance tests were
halted. A quarterly progress report from NATS to the Department of Transport stated
that the system would be online by the summer of 1997. This despite the knowledge of
the contractors and NATS project team that there were potential delays in the schedule.
These problems became public in 1996. The contractor submitted a plan that showed
system acceptance in August 1997. NATS turned this down, insisting that the acceptance
date should be June 1997, with the operational deadline 6 months later.
However, Lockheed Martin bought out Loral and by the end of 1996, the operational
date had shifted to March 1998. Despite the original fixed-price IT contract of £132 m,
the price that would eventually be paid to Lockheed was £337 m. Of the 160 individual
payments to the contractor, only 15 were originally specified for the software. The remainder was for additional options taken up by NATS after the award of the contract. The IT
contract was nearly half the cost of Swanwick.
A new operational deadline of October 1999 was approved by NATS in September
1997. There were calls for an independent audit of the NATS project to the House of
Commons Select Committee on Transport chaired by Gwyneth Dunwoody. The new government agreed. By October 1998, the operational deadline was agreed as 2001–02.
In June 1999, an audit by Arthur D. Little into the finances and management of the
project warned that the final cost would be £180 m more than announced to date. The
Swanwick costs were now £700 m, though tens of millions of pounds had not been included
in the costs. Reference was made by the auditors about the inhibiting nature of the culture
at NATS that prevented open debate about project problems or the potential for problems.
NATS, through its Private Finance Initiative partner EDS, installed well-written software releases that drastically reduced the number of bugs in the system from hundreds to
zero, in 2001. The operational date for Swanwick was confirmed as January 2002. The
New En Route Centre, as Swanwick is called, finally received the acceptance of its safety
case by the Civil Aviation Authority and became operational on 27 January 2002.
(This description was based on an article in Computer Weekly, 24 January 2002: ‘A Brief
History of an Air Traffic Control System’, by Tony Collins, p. 14.)
Afterword
The Eden Project goes from strength to strength and their relationship with McAlpine JV
continues. Eden Project Ltd has contracted McAlpine JV for the construction of Phase 4
due to start in late 2003 and to be finished in 2005. Phase 4 will include building another
biome, an education centre and more visitor facilities. Success clearly breeds success.
Meanwhile, NATS is still hitting the headlines with problems. EDS successfully sued
NATS (May 2002) after NATS terminated the EDS contract after 3 years. It had been due
to run for 14 years. NATS had accused EDS of failing to meet critical milestones. The settlement was for an undisclosed sum thought to be many millions.
The air traffic control system itself continues to have problems which have left passengers delayed for considerable periods of time at Heathrow and other airports.
Over a year after it became operational, the NATS system has been blamed for unreadable screens, a near-miss between a 747 and a 767, and the diversion of planes to other
traffic control centres due to operator overload.
ENTERPRISE MANAGEMENT
Having read the descriptions of the two projects, can you identify six differences that were
crucial to the success of one project and the relative lack of success of the other?
Solution
Successful projects
1. A vision that was sold to all (communication)
2. Innovation: leading-edge engineering made the
project exciting
3. Genuine partnership (McAlpine JV were willing
to invest time and money in the project because
they had belief in it)
4. Understanding the client’s needs (opening during
construction to get revenues flowing)
5. Good management of the large number of third
parties and suppliers
4.14
Unsuccessful projects
1. Contract let to IBM with many requirements
still unclear/time estimates poor
2. Changed objectives after project start
3. Poor communication
4. No consistent contractual ownership
5. Poor cost management seen in cost overruns
Summary
In this chapter, you have looked at the various aspects of projects, defining them and
examining their characteristics. The key points to remember are:
the characteristics of a project;
the project life cycle and how a project may be seen as a systematic conversion process;
● the different frameworks for understanding the process in project management;
● the difference between strategy and scope;
● the project manager’s role, skills and attributes;
● the membership, role and communication issues relating to project teams;
● the stakeholders within a project, and how to manage them;
● why some projects fail.
●
●
References
Field, M. and Keller, L. (1998), Project Management. London: The Open University.
Gido, J. and Clements, J. (1999), Successful Project Management with Microsoft Project CD,
A Practical Guide for Managers 1st edition. Reprinted with permission of SouthWestern a
division of Thomson Learning. www.thomsonrights.com. Fax: 800 730 2215.
Maylor, H. (2003), Project Management. Ft Prentice Hall.
Norris, M., Rigby, P. and Payne, M. (1993), The Healthy Software Project: A Guide to
Successful Development and Management. John Wiley & Sons Ltd. Reprinted with
permission of John Willey, UK.
UNDERSTANDING PROJECT MANAGEMENT
Exercise
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4
Readings
The Life Cycle of Technical Projects
Pierre Bonnal, Centre Européen pour la Recherche Nucléaire
Didler Gourc, École des Mines d’Albi-Carmaux
Germain Lacoste, École Nationale d’Ingénieurs de Tarbes
Project Management Journal. Copyright © 2002 by PMI Publications. Reproduced
with permission of PMI Publications via Copyright Clearance Center
It is quite difficult to attribute the concept of project life cycle to one author in particular, since this concept has gradually derived over time. However, A Guide to the Project
Management Body of Knowledge (PMBoK ®Guide) (PMI Standards Committee, 1996) proposes some definitions or models; others can be found in the Project Management Handbook
edited by Cleland and King (1988) and in many project management textbooks. As project
life cycle also is handled daily by project management practitioners, additional or alternative
models can be observed directly in real-world projects. While going through these model
proposals, one can remark that each author in some way enforces what is specific to the particular context for which the model has been made. For instance, a well-known project lifecycle model proposed by the U.S. Department of Defense emphasises the aspects related to
the demonstration of the feasibility and viability of the project (two phases), while the specification and the execution of the project consist of one phase each. Another project lifecycle model proposed by Muench for information systems projects (PMBoK ®Guide) insists
on taking into account the recursive processes often associated with these project contexts.
The aim of this paper is to review project life-cycle models, specifically those presenting
some interests in the field of technical projects. Reviewing all the models that have been
proposed during these last two or three decades would be a cumbersome endeavour; hence,
the authors limited this paper to an overview of the major project life-cycle proposals –
before proposing additional models.
The life-cycle models reviewed in this paper are organised around five broad approaches,
in an attempt to appraise the benefits of each. These approaches are:
Straightforward project life-cycle approach
Control-oriented project life-cycle approach
● Quality-oriented life-cycle approach
● Risk-oriented project life-cycle approach
● Fractal project life-cycle approach.
●
●
The referenced papers and practices have been summarised, are believed to be appropriate, and may, therefore, not truly reflect the original authors’ aims. Reference to the information source is provided when available for more complete coverage.
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Straightforward approach to technical project life cycle
Technical projects can be broken down into phases, also called stages or steps by some
authors. In this paper, the authors will not differentiate between these three substantive; the
term ‘phase’ is preferred. These phases can be divided into subphases, then sub-subphases,
and so on. The number and labels of these phases are deeply dependent on the field for
which the model has been made. Obviously, the breakdown into phases of a small project
is different from the ones used for large-scale projects. The phasing of engineering and construction projects also are different from those used for the development and industrialisation of commercial goods. In spite of such differences, projects in a broad sense – technical
endeavors more specially – have two very basic phases in common: a preproject phase and
the project itself.
The preproject phases aim to identify possible projects, called project concepts, and to
appraise them in terms of benefits for the organisation that intends to employ them. When
such phases are completed, it is up to the decision-makers to decide whether or not to go
ahead. Approved and funded projects then are implemented in the second phase, that is,
the project phase.
Several characteristics make these two phases different. For instance, Chrisotofol,
Aoussat, and Duchamp (1993) mention that a preproject phase requires creativity, while a
project phase must be managed with rigor. This is typically a situation that can be observed
on real-world projects. For instance, a designer arrives in the office of an engineer with several plant layout proposals, and the engineer notices that basic quality assurance principles
have not been respected, for example, no title blocks on the drawings, no more drawing
numbers, and missing dimensions. One can argue that more rigor could be detrimental
to the creativity of the designer. These two concepts, creativity and rigor, can be opposed
because creativity is generally associated with disorder, while rigor and order are almost synonymous. One can derive from this that these two phases should be carried out by different
people with different skills, that is, by product engineers or managers, by architects in preproject phases, and by project managers in project phases. Although this statement seems
obvious, it is not always the case, especially when projects are complex. Some project failures can be explained because this dichotomy of skills has not been respected or considered.
The work loads and the duration of these two very basic phases also are different. Few
people are generally involved in preproject phases over quite long and imprecise periods
of time, while hundreds or thousands of people can be involved in project phases over the
shortest possible time periods. This list of differences easily could be extended.
This breakdown into two very basic phases is theoretic in the sense that it intends to
embrace all kinds of endeavors. Real-world projects obviously follow more pragmatic
schemes. The project life-cycle approach proposed hereafter has been derived from several
models commonly presented in the literature (Kerzner, 1994; Meredith & Mantel, 1995;
Morris, 1988) and additional observations informally made by the authors from real-world
practices. Three phases are considered: an initiation phase, followed by a feasibility phase,
and a project implementation phase.
The inputs of the initiation phase, also called ‘concept phase’ or ‘identification phase,’
are keeping pace with technological innovations, economical trends, requests from customers, distributions or sales people, new products put on the market by competitors,
or brainstorming processes. The initial phase aims to sort all this information to identify
some project concepts. This does not mean that all the concepts made out of this phase are
to be carried out. A rational attitude towards such initiation phases is to identify as many
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UNDERSTANDING PROJECT MANAGEMENT
project concepts as possible and to eliminate the discordant ones through a preselection
procedure with respect to the objectives of the organisation. One can discuss whether or
not this first phase belongs to the project in a broad meaning, but common sense leads the
authors to think that the initiation phase is an endless process that continuously initiates
new feasibility phases.
Selected project concepts – outputs of initiation phases – then are used as inputs for the
second phase, the feasibility phase. This phase aims to analytically appraise project concepts in the context of the organisation. This second phase can be understood as follows:
on the one hand, there are the organisation’s needs, which in some cases can be expressed
with the simple words of the strategic charter of the organisation to which the feasibility is
carried out; on the other hand, there are the capabilities and the know-how of the organisation. With this information, the decision-makers should be able to decide whether or
not to go ahead with each project concept proposed.
For technical projects, Clifton and Fyffe (1977) proposed to split this feasibility phase
into subphases separated by intermediate decision points. The first subphase consists of
a market feasibility analysis to confirm the viability of the project concept from a pure
marketing point of view. If the results suggest that there is nothing to earn, the feasibility
analysis of the project concept shall be stopped at that point. Otherwise, a technical feasibility analysis, or feasibility study, is to be carried out. Such an analysis serves to demonstrate that the project is technically feasible. It also provides the information required for
estimating the costs associated with the implementation of such project concepts and for
identifying, quantifying, and mitigating technical risks. Very often, environmental analyses
are appended to technical feasibility studies to ensure that the project does not go against
external constraints related to ecological issues, social profitability, laws, and applicable
regulations. Based on the results of these technical feasibility analyses, another go or nogo decision is made to determine whether or not to initiate a financial feasibility analysis.
Its aim is to establish if a project concept, once materialised, will generate profits for the
organisation. Basically, the outputs of such a feasibility analysis can be a single figure. If it
is positive, one can go ahead, but if it is negative, the project concept can be abandoned
and eliminated from the project concept portfolio.
It is reasonable to think that this figure shall be balanced with the internal (technical)
and external (environmental) risks, the range and the accuracy of the information used,
and the size and the complexity of the project proposed. The feasibility phase is known to
be terminated when a decision-maker decides not to transform the project concept into
a project. Morris (1988) recalled that at that point, in the case of a plant, the capacity is
decided, the locations are chosen, the financing is arranged, the overall budget and schedule are agreed, and a preliminary organisation is established.
The way a project implementation phase, also called a ‘materialisation phase’ or ‘realisation phase,’ is conducted depends on the organisational context within which the project
is implemented. It is initiated when the project has been appraised to be feasible and profitable. Once launched, nothing is supposed to interrupt the realisation of the project. For
technical projects presenting low complexity, the processes associated with this phase are
quite straightforward. For speculative or complex projects, this phase can be split into a
few subphases separated by intermediate decision points at the end of which the future
owners and/or the stakeholders of the final deliverable can decide whether or not to continue the implementation of the project. For instance, in the petroleum industry it is quite
common to have this materialisation phase broken down into three subphases.
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A basic design phase carried out by an engineering company or an industrial architect,
during which the documentation for tendering and contracting the physical construction or for procuring equipment is prepared. This phase is considered completed when
engineering, procurement, and construction contracts are awarded, and when purchase
orders for long-lead equipment are issued.
● A detailed design phase, immediately followed by a construction phase, carried out by
one or more contractors during which the final deliverable (a plant, equipment, etc.) is
made and commissioned.
● A post-project phase, turnover phase, or start-up phase during which the responsibility
of the materialised deliverable is transferred from the engineers, the architects and/or the
general contractors to the owners.
●
What makes the two design phases different is that, in a basic design phase, the final
deliverable is seen as a set of functions to satisfy, while in the detailed design and construction phase, the final deliverable is handled as a breakdown or parts and pieces to procure
or fabricate and to assemble.
The outputs of the basic design phase are similar to that of a feasibility study, except that
they are more detailed; schedule and budget are reappraised based on an expanded description of the product and of the project. The milestone associated with the completion of
this basic design stage is important, because the project can be stopped at that point if the
conclusions of the feasibility analyses are not confirmed. Even if this breakdown into subphases slightly differs when transposed into other technical project contexts, for example,
automotive industry, defense, or big-science projects, the whole philosophy remains.
Control-oriented model
In the Project Management Handbook (op. cit.), Morris cites a project life-cycle approach
attributed to Kelley (1982) (Figure 1). Kelley considers a project as a servomechanism with
two levels of retroactivity: one using and acting on the product, that is, the deliverable of
the project, and another level using and acting on the project, that is, the processes of making it deliverable. This model is interesting because it highlights one of the major duties of
a project manager – checking that the product that is being made fulfills its specifications
all along the implementation phase and that the project progresses satisfactorily to get the
deliverable on time and on budget.
Need
Economics
Technology
Concept
Feasibility
Definition
Procurement
Implementation
Turnover
Project Control
Product Control
Planning
Figure 1
Execution
Control-Orientated Project Life-Cycle Model (Kelley, 1982)
Operation
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Level of Conceptualisation
High
What is Done
What Was Specified
Materialisation Phase
Low
Conceptualisation Phase
Turnover
Phase
Time
Figure 2
Project Life-Cycle Model Highlighting Project/Product Quality Matters
UNDERSTANDING PROJECT MANAGEMENT
Quality-oriented model
The project life-cycle approach shown in Figure 2 cannot be attributed to one author in
particular. It is widely used in project management classes, especially in those devoted
to the management of IT projects. It can be easily transposed to the fields of technical projects. In it, the time runs from left to right – the level of conceptualisation of the
project at a given time is featured on an orthogonal axis. At the early stage of the project,
this level is high. This is because the purpose of a basic design phase is to specify a set
of functions that the final deliverable can satisfy. As the definition of the final product
progresses, the level of conceptualisation gets lower. The lowest level is reached when parts
and pieces are being manufactured or when individual equipment is installed. This level
grows when manufactured parts and pieces are assembled to form subassemblies, then
assemblies, or when installed equipment is networked. The highest level of conceptualisation is reached again when the project is terminated and the final deliverable is delivered.
Considering the evolution of the quantity of objects handled, this quantity follows an
opposite scheme. At the early stage of the project, few functions are sufficient to describe
the final product. With the project implementation progress, these few functions can be
transformed in some physical systems and subsystems, which are made of assemblies and
subassemblies; the leaves of that hierarchical scheme are finally made up of the elementary
parts and pieces of the final deliverable. The project assembly breakdown structure allows
for reconstruction of the final product for delivery.
According to a broadly known principle of quality management, ‘I say [and write] what
I will do, she/he checks what I’ve said [and written], then I do what I’ve said, and I prove
I’ve done it.’ The project life-cycle model shown in Figure 2 can be considered as quality-oriented, because it helps to understand the integration of this principle in the project
management field. It has been said that the purpose of a basic design phase is to specify and
endorse the final deliverable as a set of functions to satisfy; the project manager and his or
her team are committed to making a product that fulfills these functions. The final acceptance of the deliverable should be conducted in such a way that the fulfillment of these
functions can be demonstrated without ambiguity. For this to be objectively feasible, a
final acceptance procedure should be written in accordance with the statement (the project
charter) that the project manager and his or her team are committed. At lower levels,
the same principle applies. A system should be commissioned according to the technical
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specification that describes it and so on, down to the manufacture, the assembly, and the
installation. This system should include procedures describing the basic actions to be handled and control reports demonstrating that these procedures have been followed and that
performance and quality aims have been reached.
This model is helpful to demonstrate that the documentation associated with a product/project shall not be issued erratically but shall follow rhythms of issuing to get and
use at the right time documents describing the product/project at the right level of
conceptualisation.
Risk-oriented model
Risk management is another important issue associated with the project management body
of knowledge. The model proposed by Lacoste (1999) (Figure 3) partially deals with this
issue. This project life-cycle model is made of two very basic phases. The issues associated with the preproject phase remain the same: on the one hand, the requirements (what
one needs) and, on the other hand, the know-how and the capabilities of the organisation (what one can). For instance, a project concept could consist in developing a new
product to fill up a market niche. The feasibility phase consists in verifying that the marketers’ requirements are compatible or consistent with respect to the know-how of the
organisation.
Typically, the following studies are to be carried out: a market feasibility study to confirm the opportunity of developing the new product, a technical study to ensure the feasibility of the new product with respect to the means and the know-how of the organisation
(the new product can be feasible but out of reach for the organisation), a financial study to
check if the organisation can financially afford the development to verify that this product
does not go against external constraints.
The project phase itself is divided into three subphases: a planning phase (Phase B in
Figure 3), during which scenarios are elaborated, followed by an execution phase (Phase C)
during which the final deliverable is made, and a closeout phase (Phase D), during which
the experience acquired is recorded. This model differs from other project life-cycle proposals because a scenario phase is inserted between the feasibility phase – more precisely
the decision to go ahead – and the implementation of the project.
Feasibility
ase
A
Scenarii
Know-How
“What One Can”
Feedback
Go/No-Go Decision
Preproject
Figure 3
Execution
Phase B
Phase D
Project
A Risk-Orientated Project Life-Cycle Model (Lacoste, 1999)
LIMITS
Ph
Phase C
Requirements
“What One Needs”
LIMITS
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Fractal approach to project life cycles
In the closing talk of a workshop devoted to project management seen from a sociologist
point of view (In French, the neologism ‘projectique’ was created to define this new field
of knowledge; neologism could be translated into ‘projectics.’), French academician Joël de
Rosnay (1993) scrutinises the evolution of project management from a linear motion – the
emergence and development of project planning and scheduling techniques in the ’50s
and ’60s – via a reticular countenance, the introduction of the management by projects in
organisations in the ’80s and ’70s – to reach a fractal dimension.
A fractal approach to project life cycles (henceforth, fractal life cycle) can explain situations that are difficult to model otherwise. Especially those concerned with the overlapping
or fuzziness of interfaces between phases, the spreading of responsibilities, and decisions
that are made complicated when OBSs deal with the matrix organisation of projects,
and, more generally, the uncertainty and imprecision associated with the execution of
any project. One of the dualities that distinguishes preproject and project phases can be
heard from the mouths of many R&D project managers: ‘In a preproject phase, don’t plan
too much if you intend to remain creative. Plan your project correctly if you intend to
deliver it in conformance with specification, on time and on budget.’ When looking to an
endeavor with this in mind, it seems that some of it goes against universal project management practices. However, once gazed through a fractal lens, endeavors can be seen as quite
homogeneous mixture of creativity and of strictness, all along any project life cycle from
an early feasibility stage to the completion of a project.
For some examples, see Figure 4. Even if creative behaviours shall animate feasibility
phases, in all the cases the deliverable of these phases are reports. These reports must be
written and the actions of writing them are no more than projects. When the analysts in
charge of carrying out such phases agreed on content, a more or less formal decision is
made to go ahead. The quality of these feasibility analysis reports, including their issuing
on time and on budget, depends on the level of elaboration of the plans.
The feasibility of a technical product/project is sometimes appraised with conclusive
results made out of tests and measurements using prototypes. In such contexts, prototypes are sub-projects of the feasibility study project. The issuing of a technical specification describing a prototype is a sub-sub-project of the prototype subproject and so
on. This way of reasoning also is applicable to the writing of technical specifications
of systems and subsystems, to the performing of calculations or to the drawing of
some plant layouts in basic design phase. So is the design and fabrication of a special
tooling in a construction phase or the treatment of noncomformities of equipment in a
commissioning phase.
UNDERSTANDING PROJECT MANAGEMENT
This intermediate phase is concerned with three out of the four project risk management processes (as per the PMBoK ® Guide): the identification of the risks (opportunities or threats) that are likely to affect the project’s execution and the conformance to the
specification of the final deliverable, its evaluation, and its mitigation. The main aim of
the scenario phase is to plan risk responses. During the execution phase, it is the duty of
the project manager to make use of the risk response planning elaborated in the scenario
phase to steer the execution of the project within acceptable limits. All along the realisation of this phase, it is also up to the project team to record the uncertain events that
occur and the responses implemented to restrain in the case of threats or to enhance their
outcomes for opportunities. This important information must feed the know-how repository of the organisation.
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Go/No-Go Decision
Preproject (Feasibility) Phase
Final Deliverables
Project (Execution) Phase
?
?
?
e.g., Writing a Specification
e.g., Writing a Feasibility Document
?
?
e.g., Fabrication of a Tooling
e.g., Realisation of a Prototype
Time
Figure 4
A Fractal Approach to Project Life Cycles
Using such a model, one can note that decisions are spread in all dimensions: hierarchical or temporal. At project level, the go/no-go decisions are made by stakeholders or the
future owner of the final deliverable. At subproject level, it is up to the project manager to
make decisions. At lower levels, decisions are made by project engineers or work package
managers. The activities of a project manager do not only consist of making decisions at
the project level, but, in many cases, he or she has a role of stakeholder, expecting that the
delivery of a document, an assembly, or whatever he or she is able to request will conform
with what he or she asked and delivered on time and on budget. This model also shows
that project managers contribute (by their creativity) to processes that are upstream decision points in appraising pre-subproject opportunities.
Down to project management practices
Before presenting what a project practitioner can gain in being aware of few project lifecycle models, the authors will discuss feelings regarding a common statement that can
become a serious pitfall if not appraised carefully. Accurately forecasting the work to be
done, the duration, and the resources needed to complete a project is not sufficient to
ensure its performance. It is obvious that this contributes to the success of a project; but it
is not enough. Issues such as possible rework, change control, product and project quality,
or project risks also shall be taken into account when planning and scheduling the project.
Because project life cycles can be understood as ‘generic macro schedules,’ every schedule should be made according to project life cycles and, for technical projects in particular,
to the four project life cycles presented earlier. However, commonly implemented planning and scheduling techniques are such – deterministic, nonrecusive (i.e., those that do
not allow loops), nondiscursive (i.e., those that do not accept decision points) – that it is
difficult to make schedules that can be consolidated at the life-style model levels. On the
other hand, project life cycles – the ones presented in this paper, but also others – strongly
use images as definitions. Even if the consolidation is difficult to make, the authors believe
that having such images in mind when managing a project can contribute to the reality of
the world.
The four project life-cycle models presented in this paper enforce four important aspects
of the project management process: control, product and project quality, risks, and something the authors have called the fractal aspect of a project process. Before concluding, the
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Project/product breakdown structure (PBS) aims to split the final deliverable of the
project into systems, then subsystems, assemblies, subassemblies – down to elementary
parts;
● Functional breakdown structure (FBS) is similar to the PBS, but it is oriented to the
functions the final deliverable should satisfy;
● Assembly breakdown structures (ABSs) aim to detail the sequence of operations to get
an object assembled or a plant constructed;
● Organisational breakdown structure (OBS) describes the organisation of the project in
terms of responsibility; the OBS is limited to decision-makers while the resource breakdown structure (RBS) takes into account all the resources involved in the project;
● Work breakdown structure (WBS) is a structured list of all the work packages and activities that have to be carried out to complete the project;
● Cost/contract breakdown structure (CBS) gives a breakdown of the project from a cost
control and/or from a contract monitoring point of view.
●
The quality-oriented project life-cycle model is useful to the project practitioners
because it helps them to understand the links that exist between all these structures and
hence, to use the right ones at the right time over the project execution period. During the
design and the commissioning phase of the project, that is, at the early and late stages of
the project, the FBS is very helpful to identify and list all the design documents (calculation notes, specifications, drawings) and the commissioning procedures to issue. The ABSs
are mostly used during the materialisation of the project. They are prepared as the design
progresses. The WBS and the OBS/RBS, which are the inputs to the schedule, are made
and updated according to the PBS, FBS, and ABSs. If all these structures are correctly
interlocked, and the quality-oriented project life-cycle model is helpful for that purpose,
the quality of the project plans and schedules is increased.
The project risk management is one of the knowledge areas of the PMBoK ® Guide. The
risk-oriented project life-cycle model presented is helpful to understand how the six phases
of the risk management process are articulated. Phase A (at a macro level) and phase B (at
a micro level) aim to prepare scenarii, that is, to identify and quantify risks, develop plans
to respond to these risks, and set up limits not to overstep. Phase C then is conducted in
UNDERSTANDING PROJECT MANAGEMENT
authors present some key points a project practitioner can use to take into account these
issues when planning and scheduling her or his project.
Rare are the project activity networks that take into account the control issue. A tendency in technical project management practices, however, is to multiply reviews, such as
preliminary design reviews, critical design reviews, production readiness reviews, progress
reviews, closeout reviews. It is obvious that the purpose of these reviews is, through the
reviewers’ recommendations, to make decisions. As a consequence of a review, an activity that was supposedly completed may be redone, an additional activity neither planned
nor scheduled may be carried out, or simply to go ahead. It is up to the project managers to quantify these possible additional activities and to spread them as contingencies all
along the project execution. This life-cycle model also highlights that the risks associated
with the product (related to the product definition) and those associated with the project
(related to the materialisation of the product) shall be handled differently because their
consequences concern different phases of the project.
As for state-of-the-art practices, project managers are strongly invited to break down
their projects in tree-like structures. One can not that there exists a wide taxonomy of such
structures:
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such a way that the limits previously defined are not exceeded. Last but not least, phase
D shows that a continuous feedback mechanism is fundamental to fill up the know-how
repository of the organisation. The risk-oriented project life-cycle model enforces the fact
that planning and scheduling on the one hand and risk estimating and monitoring on the
other hand are deeply interlocked all along the project.
This approach seals the breakdown of a project into sub-projects and so on down to
‘elementary projects.’ Then all these projects, whatever their level of complexity, comply
with a very simple life-cycle model made of two phases: a preproject (feasibility) Phase and
a project (execution) phase separated by a go/no-go decision point.
This fractal view very often is implemented on technical projects, especially on largescale industrial projects. Practically, a time management system is made of two or more
levels. Three levels can be beneficial for understanding what follows.
The first level of such a planning and scheduling system deals with strategic issues, and
the master schedule aims to reflect the strategy of the project. This schedule is issued prior
to the go decision. It covers the long term, that is, the whole duration of the project from
the go decision to the closeout. It is the tool the project manager uses to communicate
with the external world.
The intermediate level of planning and scheduling deals with tactic issues. For
instance, in the case of a large-scale project it is difficult for someone to have a precise
and detailed view of the installation and commissioning phases when the project is just
launched. Hence, this intermediate level is made of several overlapped coordination
schedules covering the midterm. The first coordination schedule to be issued covers the
design phase of the project. It is followed by a procurement coordination schedule, a
construction and installation coordination schedule, and finally a commissioning coordination schedule. This intermediate level of planning and scheduling is made of work
packages that are roughly defined at the early stage of the project and which become
more precisely detailed as the project progresses. The way the work packages are consolidated at the top level is obviously a prerequisite to the issue of the corresponding coordination schedule.
Still within the scheme, the bottom level of planning and scheduling deals with operational issues. Generally, detailed schedules cover short-term periods, from a few weeks to
a few months; they are made of the elementary activities. As for work packages, the way
elementary activities are consolidated at the corresponding coordination level constitutes
a prerequisite to the issue of the detailed schedule. Many project practitioners are familiar
with such practices. In some domains, for instance in the offshore oil platform or nuclear
waste reprocessing plant construction industries, four or five levels of schedules are common practices.
Real-world schedules, whatever their level, seldom do take ‘preproject activities’ into
account, if ever. One can argue that ‘creativity’ is something difficult to estimate and,
therefore, to schedule. Nevertheless, the time spent in dealing with these preproject activities must be considered in the project overall work load. The consequence is that project
work breakdown structure viewed through this fractal lens is much more exhaustive and
closer to reality. The project shall benefit from that.
Conclusions
Projects are characterised by their specificity: an endeavor that has a start and a finish, a
precise and unique aim that is carried out by a team set up for the purpose of the project.
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References
Cleland, D.I. and King, W.R. (eds) (1988), Project Management Handbook (2nd edn).
New York: Van Nostrand Reinhold.
Clifton, D.S. and Fyffe, D.E. (1977), Project Feasibility Analysis: A Guide to Profitable New
Ventures. Chichester, United Kingdom: John Wiley.
Christofol, H., Aoussat, A. and Duchamp, R. (1993), Construction d’un mode’le fractal du processus de conception de la coloration d’un produit. J.-P. Claveranne, J.-M.
Larrasquet, and N. Jayaratna, (eds) Projectique. A la recherche d’un sens perdu. Paris:
Economica, pp. 336–345.
de Rosnay, J. (1993), Conference de cloture. J.-P. Claveranne, J.-M. Larrasquet, and
N. Jayaratna (eds) Projectique. A al recherche d’un sens perdu. Parris: Economica. pp.
403–407.
Kelley, A.J. (1982), ‘The New Project Environment’. New Dimensions of Project
Management. Lexington, MA: Lexington Books.
Kerzner, H. (1994), Project Management: A Systems Approach to Planning, Scheduling and
Controlling (5th edn). New York: Van Norstrand Reinhold.
Lacoste, G. (1999), Risques et analyse des risques (Cours de DEA Syste’mes Industriels).
Toulouse, France: Ecoles Doctorales Syste’mes, ENSIGC.
Meredithy, J. and Mantel, S. (1995), Project Management, a Managerial Approach (3rd
edn). Chichester, UK: John Wiley.
Morris, P.W.G. (1988), ‘Managing Project Interfaces: Key Points for Project Success’. In
D. Cleland, and W. King, (eds), Project Management Handbook (2nd edn). New York:
Van Nostrand Reinhold, pp. 16–55.
PMI Standards Committee (1996), A Guide to the Project Management Body of Knowledge.
Upper Darby, PA: Project Management Institute.
The skills of project management
The scenario below analyses the importance of project leadership skills and of project team
management. The case discusses the transformation of Boeing, as led by the new chief
executive, Philip Condit. The article specifically highlights the importance of interdisciplinary teamwork and the need for a more flexible approach to project management, all of
this being achieved by strong, charismatic leadership.
UNDERSTANDING PROJECT MANAGEMENT
The purpose of a project life cycle is to find something common to all projects among all
these differences. Project life-cycle models, whatever they are, are located on a continuum
going from the simplest project life cycle, which is made of two very basic phases and
applicable to all types of projects, to project schedules that are precise and detailed but
only applicable to one specific project. Because project life cycles are models, their purpose
is to explain the real world in a simpler and understandable way. Because the world of
projects does not consist of a very small number of variables, it is difficult to imagine – and
perhaps impossible to make – a model that could integrate all the variables that make all
projects specific. In order to understand the projects they are involved in, project managers
and team members must share a common view of their projects and especially on the way
a project progresses. It is the purpose of project life-cycle models to illustrate simply the
‘progress philosophy’ of the projects to promote a better understanding and a better communication within the projects.
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This case study should aid you in understanding:
●
●
the importance of teamwork;
the importance of strong leadership and the need for effective interpersonal skills.
Destroying the old hierarchies
Seth Lubove, Forbes, June 1996. Reprinted by permission of Forbes Magazine 2002
Forbes Inc
At a recent charity event, Boeing Co’s new chief executive officer, Philip Condit, donned
a cowboy hat and belted out a rendition of the country and western classic ‘Could I Have
This Dance?’ A karaoke machine provided the accompaniment.
No one could imagine Condit’s predecessor, Frank Shrontz, 64, a lawyer by training and a
former Pentagon deputy, singing in the shower, much less in front of strangers. The change
in personalities at the top of the world’s largest aircraft manufacturer is rich in symbolism.
The seventh man to run Boeing since its founding by timberman William Boeing in
1916, fifty-four-year-old Condit is a Boeing lifer who faces the tough task of redefining
Boeing’s often confrontational relationship with its 108 000-employee workforce, tightly
unionised by the militant International Association of Machinists and Aerospace Workers.
Nobody states the problem better than Ronald Woodard, the blunt-spoken president of
Boeing’s Commercial Airplane Group: ‘We have to understand that we are a manufacturing enterprise. We aren’t an engineering, technology-development enterprise.’ There’s a
world of meaning in that seemingly bland statement.
Booming on the surface, Boeing is in fact a company in transition. Much as they are
technological marvels, today’s passenger jets are basically commodities to Boeing’s customers, the world’s airlines. Their job is to move people and goods from point A to point B
at minimum cost consistent with safety. Boeing makes great airplanes, but so do Airbus
and McDonnell Douglas. Who gets the sale depends to a large degree on price, terms and
availability.
That’s what Boeing’s Woodard means when he talks about making people understand
that Boeing is a manufacturing company, not a high-technology company.
Boeing jets represented two-thirds of the dollar value of all commercial airplanes ordered
in 1995. Boeing’s defence division, already the prime contractor on NASA’s space station,
is competing on the Joint Strike Fighter jet project, a potential $160 billion contract. Wall
Street expects per share earnings to rise by 20 per cent this year (before charges in 1995) to
$2.75 on sales of $22 billion. The Street expects earnings to go on rising through the decade.
But that will happen in what is now a commodity business only if Boeing can do what
companies like General Electric do so successfully: take costs out of the product and continue to take out.
Condit made his mark when he oversaw development of Boeing’s latest generation airplane, the 777, known internally as the ‘triple seven’. Smaller than Boeing’s humpback
747, the 777 is more distinctive for what you don’t see than for its profile. It’s a pilotfriendly and airline-friendly product. For the first time, the pilot’s commands to the rudder and flaps are communicated electronically, rather than by cables and levers. Airlines
can internally reconfigure such areas as galleys and lavatories within as few as seventy-two
hours, compared with two to three weeks on older aircraft. No marketing detail was too
small; even the toilet seats gently sink on to the toilet bowls, instead of loudly smacking.
First put into service by United Airlines last June, the 777 is Boeing’s first plane designed
entirely on computers.
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UNDERSTANDING PROJECT MANAGEMENT
But for Boeing, Condit’s biggest change was in the organisation of the program.
Adopting the theme of ‘Working Together’, Condit broke down the old-fashioned procedural walls within the company. In the past, design engineers worked independently of the
production and operations people who actually built the plane. Here it is, the designers
would say; now go build it.
Condit instead organised hundreds of integrated ‘design-build’ teams, composed of
members of all these groups. Each consults the other, so that the production teams aren’t
stuck with overly costly, hard-to-build design specifications, for example. This sort of
reform, common now in manufacturing, came late to Boeing. ‘None of us is as smart as all
of us,’ Condit says, explaining his new integrated design strategy. He wants to reorganise
the whole company along these lines. Explains Ron Woodard: We’re trying to destroy all
the old functional hierarchies.’
This is where the job gets tough. Any significant changes involving the workforce still
have to get past the Machinists’ Local, Boeing’s largest union, with about 33 000 members. (Boeing’s engineers are represented by another, less combative union, the Seattle
Professional Engineering Employees Association.)
Say what you may about the shrinking clout of private-sector unions in this country,
the fact is that the Machinists can still bring Boeing to its knees, as they proved during last
fall’s sixty-nine-day strike. ‘The thing that’s different is ten years ago we could have had a
strike and delivered airplanes late to customers, and they didn’t care,’ says Woodard. But
today, a strike means lost sales.
Frank Shrontz hammered at reducing cycle times and cutting costs, to the point when
Boeing now delivers an airplane within ten months of the order, compared with eighteen months previously. He pushed toward greater standardisation of parts and shrank the
workforce from 161,700 in 1990 to 108,000.
But Condit knows that making further gains in reducing costs and improving delivery
time depends on making improvement in that amorphous area known as human relations.
In naming Condit as his successor, Shrontz cited Condit’s interpersonal skills – not necessarily his engineering abilities – as the characteristic he considered most important for the next
leader of the company. ‘We can make pronouncements up here all day long,’ says Shrontz,
sitting in his orderly office overlooking historic Boeing Field. ‘Phil is motivational. We need
to motivate people to understand the importance of the change and to help make it happen.’
Unlike Shrontz, who was rarely seen on the shop floor, Condit frequently pops into
plants unannounced, usually tie-less and dressed casually. Recently, he walked unescorted
on to a 777 undergoing final assembly in Boeing’s Everett, Washington, plant and asked
the supervisor to leave the plane so the workers could speak without feeling intimidated.
During the strike last fall, when most Boeing executives kept a low profile, Condit
walked over to a group of picketers outside his Seattle office and chatted amiably about the
proposed contract for forty minutes. He even signed striking union member Tony Russell’s
picket sign. Addressing the message to Russell’s wife, another Boeing employee, Condit
wrote: ‘We all need to work together’.
Back at work now, Russell, a tool builder, is already seeing some differences in his job.
Under the old, military style of management, if Russell detected something wrong in his
engineering plans, he’d have to go through his supervisor and the problem would move
through the chain of command until it eventually reached the engineer.
Now Russell speaks with the engineer directly. When he was building the scaffolding for
the 777 line, for instance, Russell noticed that the metal deck he received was bigger than
the deck on the blueprints. Russell called the engineer and quickly fixed the problem.
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Multiply this sort of shortcut throughout a company as large as Boeing and you can
see how much expensive time was wasted before. You can see, too, why it used to take the
company eighteen months to deliver a product as complex as a giant jet.
When Phil Condit chats up workers on the factory floor, he’s not just going through a
public relations exercise. He is obviously sincere when he talks about making the workers partners rather than just a factor of production. Traditionally, when Boeing needed
additional hands, it would run a classified ad in the newspaper for, say, qualified assembly
mechanics. It would get maybe 2500 applicants and hire perhaps 1500, just so many bodies in the machine.
In keeping with the new attitude, Boeing is putting more time and effort into the hiring process. In April, announcing that it would hire 8200 new hands, Boeing also said it
would put applicants through extensive aptitude tests.
A cynic might say that Boeing wants to weed out potential malcontents, but that misses
the point: Boeing is also recognising that an efficient workforce is one that genuinely
believes in what it is doing and gets along well as a team. Thus such questions as: How
does a worker respond in a confrontation with a supervisor? None of this is new in manufacturing circles (Forbes, 9 Oct 1995), but it’s a big change for Boeing.
Selection of supervisors and managers, too, will change. Rather than promoting a person who is good at, say, riveting, and making him a supervisor of rivets, the company will
look for managers who can motivate, rather than intimidate, the workforce.
To underscore the emphasis on communications, at least symbolically, Boeing now
sends annual reports to all its employees, not just shareholders. The company also put
75,000 employees through a program that discussed the realities of a tough market. The
message: We no longer have it made just because we’re Boeing; the customers tell us our
planes cost too much and take too long to deliver.
‘It has been a cultural change, a fundamental change in the way we think, act and do,’
says C. Gerald King, president of Boeing’s Defence and Space Group.
The machinists’ union is responding – cautiously. It says it is willing to relax job specifications to allow cross-training of workers. But William Johnson, president of the local that
represents the Boeing workers, is hard-nosed about subcontracting, or what the union calls
‘off-loading’ work, now done in-house. Boeing makes 52 per cent of its planes’ parts in-house
and wants to shrink down to 48 per cent. Management thinks it can save an estimated $600
million annually by such outsourcing. More important: outsourcing is a way to win favour
from foreign airlines by agreeing to let factories on their home turf do some of the work.
In settling the latest strike, union and management compromised on outsourcing.
Boeing agreed to give the union warning on any major subcontracting deals and to retain
surplus workers for other jobs in the company. ‘In the old days we would have fired them,’
says Larry McKean, senior vice-president of human resources.
But what is perhaps the biggest current irritant in management/labour relations at
Boeing remains the constant pressure on the workforce to meet constantly shrinking delivery schedules. Front-line managers – and the workers below them – are evaluated on how
fast they can get the planes out the door. If the work falls behind, the team must go on
overtime. ‘They’re trying to get into cross-training, but we don’t really have time,’ says a
frantic Robert Boudreau, a lead mechanic on the 777 wing line, as he motions to a schedule that indicates his team is days behind on its work.
Many workers are cynical about the new togetherness the company tries to foster –
‘buzzers’ is their slang for the buzzword phrases like ‘total quality management’ and ‘worldclass competitiveness’.
ENTERPRISE MANAGEMENT
Discussion points
1. The article states that the previous CEO Frank Shrontz considered interpersonal skills
to be one of the most important characteristics of his successor. Discuss some of the key
management skills needed to run a project or enterprise, as shown in the article.
2. The biggest change made by Condit on the 777 project was the organisational design.
‘Working Together’ challenged all previous ways of operating and brought together the
design and production areas of Boeing. This structure was supported by teams. Does this
management approach resemble the work organisation used in project management?
Outline solutions
1. The key management skills required for the effective management of projects will be
discussed in the light of the case study.
● Leading. Philip Condit demonstrated his leading from the front when overseeing
the development of the ‘triple seven’, the Boeing 777, by breaking down the procedural walls within the company under the slogan ‘Working Together’. He did this by
organising hundreds of integrated design-build teams, which removed the barriers
between the design and production units. His predecessor had driven down the costs
in the organisation, so Condit had to focus on people. He was an excellent motivator as he adopted a policy of being viewed as facilitating the project. So he was seen
popping up at the plants unannounced, dressed in a way that did not set him apart
from the workforce. He asked supervisors to leave so that he could hear the ‘real
story’ from the final assembly workers. He saw workers genuinely as partners in the
project. He altered selection processes so that he got promotees or new entrants with
commitment and with the right interpersonal skills. He had an impact on the culture
of the organisation by setting an example of inclusivity and concern for the teams on
the project to his other managers. This concern he translated into better pay and
conditions, that is, putting his money where his mouth was.
● Communicating. Condit communicated his vision for cooperative working on the
project in a variety of ways. By talking directly to the workforce, he demonstrated
UNDERSTANDING PROJECT MANAGEMENT
Daniel Mahoney, general counsel of the engineers union, sums up the dilemma neatly:
‘You just can’t have peer democracy in the workplace. We have these extraordinary leaders in
management who are willing to treat the rank and file with great respect and listen to their
ideas. But at the same time they have a responsibility to get the best product out on time.’
But Mahoney doesn’t deny that Phil Condit is doing his best to reconcile those seemingly irreconcilable objectives. Condit plans incentive pay and rewards for achieving individual performance goals. To make this point, he banishes Boeing’s model airplanes to a
display case outside of his office and in their place displays his mother’s black-and-white
photos of children from around the world. He says he wants his employees to think,
‘Gosh, the company is really interested in my welfare’. And there can be no doubt: Condit
really means it.
He rightly says that many new ideas are just old ideas the people forgot. Visit the
restored converted barn where William Boeing first began building planes, he says.
Designers were on the top floor; production was downstairs. If production people had a
problem with a blueprint, they just walked upstairs for an answer. Can Boeing get back to
that as an employer of over 100,000 people spread over 76 million square feet of factory
floor? No, but Condit is determined to show that at the new Boeing, while aircraft are
now a commodity, people no longer are.
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his concern for the successful outcome of the 777 project. He turned up and did
not appear as a ‘suit’, that is, alienating the people he wanted to talk to by appearing
as a remote figure from Head Office. His non-verbal communication (the way he
dressed) reinforced his aim of collaborative working. He added to this impression by
his karaoke activities at a charity event. He effectively listened to what he was told,
even to the extent of discussing a disputed contract face to face with striking pickets.
He signed a picket sign with the words ‘We all need to work together’, again communicating his desire for the common goals of the project. He gave out a consistent message of collaborative work. His removal of the model planes at Head Office
replaced by pictures of the world’s children, again sent out a message that conformed
to the idea that people mattered. Annual reports were sent out to all employees and
75,000 employees were put on a training programme so that they could grasp the
market problems that Boeing was (and is) affected by. They were seeing in their daily
lives that changes were being made, though the reality was that the planes had to be
smarter. The concessions on outsourcing showed that there was a determination to
listen to what the company was being told and they would act on it.
● Negotiating. In the final analysis, Boeing is in business. There was the acceptance by
the counsel to the union that Boeing had to get the best product out on time, and if
it did not produce planes to customers’ delivery requirements and at reasonable cost,
no amount of people management would keep people at work. The negotiations over
outsourcing revealed that though this was seen as an effective way of reducing costs
($600 m was quoted in this article), Boeing compromised about it. It would give the
recognised union warning about any large outsourcing deal but would re-deploy any
surplus workers. In the past, it would have sacked them.
There were attempts to increase the flexibility of the workforce by cross-training
but there was a need for time to do it effectively. It was not available. The union
was cautiously starting to relax job specifications to allow this process to happen.
The time pressure of reducing schedules was constant and an important performance indicator was the speed of delivery. Teams had to work overtime to make up the
time. This was an issue to be negotiated in the future. Employee relations were not
always excellent, as seen in the number of strikes there were. Strikes meant lost sales
and Boeing had to change its people management to deal with issues such as lack
of respect and the treatment of the workers as a commodity. Condit led the way on
this, as may be seen in the changes to recruitment and reward policies.
● Delegation. Delegation may be defined as the handing over of authority for a piece of
a boss’s work to a subordinate, while retaining responsibility for it. In the article there
are examples of delegation and of non-delegation.
Condit did not delegate the face-to-face communication with employees because
he clearly felt that he had to lead from the front on people issues. He had to set his
own managers the example. However, he would have delegated the everyday activities of management because of the size of the organisation.
An example of delegation was seen in the way Tony Russell, a tool-builder, could
talk directly to the designers when there was a problem with his engineering plans.
This empowerment from his supervisor meant that problems, such as the sizing of
the metal deck, could be sorted out very quickly.
A reinforcement of the delegation of responsibility could be seen in the new criteria
for hiring new staff and for promotion. Technical expertise was no longer sufficient
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UNDERSTANDING PROJECT MANAGEMENT
in itself: the interpersonal skills and commitment had to be consonant with the new
culture of empowerment.
● Change management. Condit found himself in a situation where much change had
been imposed on the organisation by his predecessor, Frank Schrontz. This had been
based on radical cost-cutting by standardising parts, reducing delivery times and
reducing staff from 161,700 in 1990 to 108,000 in 1996. Condit could not stop the
process of change, as customers felt that the planes were still too costly and took too
long to be delivered.
His way of change management was to educate the workforce in the realities of
the market, and by giving them annual reports so that they could see the figures for
themselves. He involved the workforce by communicating with them directly and by
effectively listening. He discussed the situation with them in detail (the discussion
about the new contract with the strikers, for example). He changed the organisation of work to facilitate the faster delivery of the planes because problems would
be solved on the design-operational interface faster: they were on the same side with
the same goals. Boeing negotiated the new deal on outsourcing with the retention
of the surplus workers. It facilitated cross-training, though the time constraints had
themselves proved a constraint. The new reward and incentives package was being
negotiated to support the acceptance of greater responsibility and tighter delivery
schedules.
The old methods of change management under the military style of management would have included coercion (there are no jobs in this section, you’re sacked)
or manipulation (if you do what we ask, you’ll be rewarded: if you don’t, you’ll be
sacked).
Note that the desired information that the Examiner wants from you, the student,
is expressed by reference to the evidence in the article or case study.
2. Teams are a critical feature of projects which help organisations achieve future objectives and ensure the future life of the business. The process of dealing with and managing organisational change will require input from diverse areas such as design,
marketing, production, finance and sales to get a holistic view of the organisational
objectives. Without this, organisations may make incorrect decisions about itself and its
projects.
Using the Boeing example, in the early stages of the organisation, there was great
synergy between the designers and production staff because of attitude and close proximity. If Boeing could not get back to that ideal as a large organisation, it managed
the empowerment of staff so that they saw themselves as teams with goal congruence.
The proselytisation of this team spirit by Condit under the slogan ‘Working Together’
emphasised the need to focus on the super ordinate objective: To deliver fast to customer requirement. The creation of the design-build teams set up synergies that helped
save time and money. This was supported by empowerment of individuals within teams
such as when Tony Russell visited the designer about his metal deck which was bigger
than that on this blueprints. The problem was fixed between them. There were no artificial barriers to the solution of the problem because they both had the same objectives:
swift delivery of the best product. This approach would save time and thus money, enabling Boeing’s attractiveness to its customers.
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Revision Questions
4
Section A type questions
Question 1
The board of the ZM company are discussing a report that they commissioned concerning
the company’s computer systems. In the report, the IT director notes that many computer
systems are old and need significant upgrading to enable ZM to maintain any competitive
advantage for its products. However, there are insufficient resources in-house either to propose new systems or to perform any upgrade.
Requirement
Briefly explain the phases of the project life cycle showing, where possible, how each phase
relates to the ZM company.
(10 marks)
Question 2
H Company designs and manufactures sports equipment and is currently positioned as the
market leader in the industry. However, whilst operating in a growth market, there are new
competitors entering the market with innovative new product offerings. The Marketing
Director is aware that to retain market leader position, the company must improve its
practices involved with new product development (NPD), and the time taken to get from
the product idea to launch needs to be much quicker.
The company has a functional structure with the Marketing Director heading up the
marketing function, the R&D Director heading up the function responsible for research
and product development; in addition, there are separate functions for Production,
Human Resources, Finance, Sales and IT.
The Marketing Director feels that the functional structure is impeding the NPD process. Having recently read an article on organising for NPD, he is proposing that the best
way to manage the process would be through introducing a matrix structure and the use of
cross functional teams. However, at a recent meeting of the functional heads, the Research
and Development Director said that, in his experience, the potential difficulties in using a
matrix structure offset the benefits.
Requirement
Describe the advantages and disadvantages of H Company using a matrix structure in
project management work for NPD.
(10 marks)
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REVISION QUESTIONS E2
Question 3
Requirement
The project manager does not and cannot complete a project on his or her own. It requires
effective teamwork and team motivation. Explain what the project manager can do to help
foster a motivated project team environment.
(10 marks)
Question 4
Requirement
Explain the role of the project manager in respect of the:
people;
process; and
● product involved in a project.
●
●
(10 marks)
Section B type questions
Question 5
Introduction
Five firms from four countries are playing major roles in a large project devoted to the
development and implementation of an extensive communications network. Figure 4.5
shows the firms, together with the roles they play in the project and their countries of
origin.
The client
The client, Comnet, is one of the major telecommunication providers in Germany. It has
recently gone through a process of reorganisation (1996) and has since been investigating
the potential of a new telecommunications network. Christian Rueber, head of telecoms
development, spent last year leading a team of engineers, programmers and software analysts from Comnet in selecting a contractor who would supply the telecoms network. After
several months of tendering from numerous suppliers, Comnet selected a UK company
called Dantec to service the project. (The selection was based on numerous financial selection techniques and cost-benefit analysis.) The final contract was signed between the two
parties in October 1997.
The prime contractor
Dantec is a telecommunications development and installation company based in the north
of England. It has several years of experience in installing small-to medium-scale telecommunications networks throughout Europe, and has worked with Comnet previously on a
successful small-scale network installation. Richard Norton, the project manager, has been
in charge of the project throughout the tendering process, although this is his first role in
charge of a full network installation. Richard’s background is as a telecoms engineer, and he
has only very recently moved into a managerial role. Many of the project team at Dantec
consider Richard to be lacking in managerial experience to handle such a large project.
However, the management team at Dantec are more than happy with his progress –after
all, he successfully won the contract!
ENTERPRISE MANAGEMENT
DANTEC
The prime contractor
(UK)
SOLAR
Major hardware supplier
USA
YOTAMO
Major software supplier
Japan
EXAC TEST
Software testing and integration
USA
Figure 4.5
Project roles and country of origin
Having signed the contract, Richard gets together his project team for the first project
coordination meeting, where they begin to draw up a schedule of events and key milestone
activities. Each member of the team is made aware of their individual team’s responsibilities in the overall project. One of the key aspects of the project is the need for Dantec to
subcontract some of the major hardware and software supply to another company. By the
end of October, after several further planning meetings, the final master project plan is
complete, including the delivery dates for the subcontracted work.
Dantec entered into a contract with Solar, a computer manufacturer in the United
States, for the required computer hardware as well as the operating systems needed to
implement and control the network. Dantec have many years’ experience of working with
Solar on several previous successful projects. Phil Rogers, the general manager of networks coordination division, is placed in charge of the Comnet project requirements. In
November, Phil Rogers agrees the dates and targets set for Solar, proposed in the master
plan drawn up by Dantec the previous month.
Solar’s role
Solar, with the approval of Comnet, entered into negotiations with Yotamo and Exactest.
Yotamo was given the responsibility for the development of major elements of the software that could meet the functional requirements of the overall communications system.
Exactest was obligated for additional ancillary software for some specific components of
the overall system as well as for the development and implementation of a testing strategy
for all functional software developed under contracts with Solar, irrespective of which firm
wrote the software.
Responsibility for integrating the hardware and software components developed by
Solar, Yotamo and Exactest also rested with Exactest, well renowned for its high-level skills
in integration. Dantec, as prime contractor, was responsible for integrating all project
deliverables to the final client in Germany.
UNDERSTANDING PROJECT MANAGEMENT
COMNET
The client
(Germany)
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REVISION QUESTIONS E2
Requirements
Critically assess the role of Richard Norton of Dantec in the overall telecommunications
project. Your answer should include:
(a) an assessment of his main tasks internally as the project manager at Dantec; (8 marks)
(b) an assessment of main responsibilities in relation to both the main client Comnet, and
the major supplier Solar.
(5 marks)
(c) an assessment of the potential managerial problems likely to be encountered by
Richard Norton as a result of his particular background and previous experience.
(12 marks)
(Total marks ⴝ 25)
Question 6
GPConnect (GPC) is the name given to a project being undertaken by the Southern
Regional Health Authority (SRHA) to connect all medical centres and hospitals within the
region to a national information network, called the ‘Healthweb’.
You are a senior management accountant working for one of the southern region hospitals, and, as part of the project team, it is your responsibility to communicate with all SRHA
medical centres and hospitals on the progress of the project, as of today, 23 May 2002.
The SRHA is one of four regional government-controlled authorities, responsible to
the central government Department of Health. Each regional health authority manages
and controls the provision of medical care to the public within its local area. The SRHA
is responsible for fifty medical centres and ten hospitals within the region, all of which are
publicly funded (i.e., the SRHA is not responsible for private medical centres and hospitals).
The SRHA has been set a target by the central government to have 80 per cent of
all medical centers and 90 per cent of all hospitals within the region connected to the
Healthweb by July 2003. Prior to the project commencement, most information within
the hospitals and medical centres was kept by a manual, paper-based system, and all data
exchange was done by means of telephone or by post. The senior management team of the
SRHA set up a project board in January 2002 to oversee the progress of the project and to
specify the project objectives.
Requirements
You have been asked by the executives of your own hospital to prepare a memorandum
to the other senior managers in the hospital which should discuss the relationship of the
project manager to:
(a) the project sponsor (i.e., the central government);
(b) the project board;
(c) the medical and administrative users (in medical centres and hospitals).
Include in your answer a discussion of the potential conflicting project objectives of the
above stakeholders.
(25 marks)
Solutions to
Revision Questions
4
Section A solutions
Solution 1
Project planning. The initial phase of any project involves the identification of a need or a
problem that needs to be resolved. In this situation, the board of ZM have recognised that
a new computer system is required. However, the lack of in-house resources means that
the organisation must either hire new staff or outsource some or all of the systems development work. Given the lack of in-house expertise, the latter option appears to be more
favourable.
If the ZM company decides to use external contractors, then proposals will be required
to address the needs within ZM and propose solutions to those needs. An Invitation to
Tender (ITT) will be issued to obtain quotes for this work.
Responses to the ITT will include details of the work to be done, along with time and
cost summaries for that work. On receipt of this information, the board of ZM will have a
greater understanding of amendments required to the company’s systems, as well as ideas
concerning the costs and benefits of those changes.
Development of a proposed solution. These proposals can now be reviewed and the possible solutions discussed. It is likely that the solutions will be analysed by a small working
group with the responsibility of suggesting one solution to the board.
When a choice of solution has been made, a contract will be drawn up between ZM and
the contractor containing details of the proposed work, timescale and cost to be incurred.
The stage is completed when the contract is signed.
Implementation. In this situation, the contractor will first liaise with staff at ZM to
produce a detailed plan for the new system and then implement that plan to achieve the
system objectives. There is a lot of detailed work involved in this stage. The stage is complete when the board of ZM is satisfied that the new system has been implemented, on an
appropriate timescale and to the expected level of quality.
Completion. The last stage of the project life cycle is completion of the project. There are
various activities that must be carried out before a project can be termed ‘complete’. These
activities include:
confirmation that all deliverables have been provided;
checking that all payments have been made;
● ensuring that performance has been evaluated and is satisfactory; and
● checking that a list of learning points has been made for reference for future projects.
●
●
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SOLUTIONS TO REVISION QUESTIONS E2
The length of project life cycles will vary from project to project. However, in the case
of ZM, the life cycle is unlikely to be less than 6 months. Given the significance of the systems changes, individual projects may last well in excess of 1 year.
Solution 2
As the Marketing Director in H Company has noted, the ability to develop new products
and get them to market quickly requires the cooperation of a range of individuals from
various functions. H could fundamentally reorganise to form a matrix structure. This type
of structure is based on a dual chain of command and is often used as a structure in project
management. In the case of H Company it would involve establishing a cross functional
team to design and develop new sports equipment products. Each individual would have a
dual role in terms of their functional responsibility as well as membership of a project team.
For instance, an individual could belong both to the marketing function and to the NPD
project. Employees would report both to a functional manager and a project manager.
As the Marketing Director suggests, this structure does bring a number of benefits to
NPD project work. The matrix structure is particularly suited to a rapidly changing environment, such as that facing H Company, creating flexibility across the project, with the
aim of speedy implementation It can improve the decision-making process by bringing
together a wide range of expertise to the new product development process, cutting across
boundaries which can be stifled by normal hierarchical structures. Lateral communication
and cooperation should be improved. From an employee’s perspective it can facilitate the
development of new skills and adaptation to unexpected problems, broadening a specialist’s outlook.
Whilst there are benefits, the Research and Development Director is also correct in his
view that there are downsides to the matrix structure. One of the main problems is associated with the lack of clear responsibilities and potential clashes and tensions between the
different priorities of the project tasks and the specialist function. Employees may end up
being confused by having to report to two bosses and deciding whose work should take
precedence. There is also the question of who should do the appraisal of their performance?
The complexity of the matrix structure can often make it difficult to implement.
Inevitably, conflicts will arise due to the differences in the backgrounds and interests of
staff from different functional areas.
Solution 3
Guidance and common problems
This question again provides you with an opportunity to demonstrate your basic project
management knowledge. A straightforward question such as this could appear in this
examination, but again, you must be prepared to apply this knowledge to a scenario.
The project manager needs to understand his or her team members first in order to
understand what motivates them. The project manager should attempt to create a project
environment that is supportive and where team members feel enthusiastic and want to
work towards the overall project goal.
How does the project manager create such an environment?
By encouraging participation in project decision-making and by delegating decisions to
the team members, thus encouraging involvement and ownership. Project management
ENTERPRISE MANAGEMENT
Solution 4
Guidance and common problems
The question provides a useful guide for remembering some of the key roles of the project
manager. It is therefore a useful memory jogger, just in case an examination question is not
so helpful!
The overall role of the project manager is to ensure the success of the project. This
objective implies that the manager will have significant project management skills and be
able to manage the three ‘Ps’ outlined below.
People. The manager needs to manage the people involved with the project. ‘People’ in
this sense means not only the project team, but also the client staff who will be working with the project team. The manager will therefore need to delegate and monitor
the work of the more junior members of the team, and also provide strategic progress
reports for the decision-makers at the client’s. This split of jobs is likely to be quite
difficult and time-consuming.
Process. The project process itself will have to be managed. The project manager must
therefore be involved with setting the objectives for the project and then have systems
in place to monitor the progress of the project. The use of Gantt charts or network
diagrams will help in this respect.
Product. The outcome from the project will (hopefully) be the completed installation
of a new or revised system. Part of the ongoing monitoring of the project is therefore
directed at ensuring the project does provide the finished project.
The manager will therefore be involved in checking that the specification has been met,
and appropriate sign-offs and review meetings are held to confirm project completion.
Section B solutions
Solution 5
Role of Richard Norton
As the main contractor, Dantec has the major responsibility for coordination of all parties
involved in the project, that is Richard Norton is the link point to all parties, both internal
and external. He should be the focus of the negotiation process, setting time scales and
milestones (and ensuring that all parties agree and achieve these project targets).
(a) Internally, the responsibilities of Richard Norton are as follows:
● coordinate complex internal team, including: technicians, programmers, installation,
network experts, marketing, finance, and so on;
● project planning and scheduling;
UNDERSTANDING PROJECT MANAGEMENT
techniques for motivation may include regular project meetings whereby team members
can participate and air their views and put forward their experience. Also, the project manager should have regular contact individually with team members, encouraging them to
put forward their own ideas and suggestions for project improvement. The project manager needs to demonstrate that he/she values the contribution made by team members and
that their contribution is important to the overall project.
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control of coordinating internal deadlines;
● preparation of the project master plan;
● the formulation of internal resource needs: people, materials, finance, time;
● control of the financial budget;
● internal negotiator and arbitrator;
● team motivation.
(b) Responsibilities to Comnet and Solar. Externally, Richard Norton also has a number
of key roles.
● The primary communication link between the complex supply chain within this
project and the final customer.
● The coordination of internal and external activities and milestones, to ensure agreement and consensus.
● Ensuring that technical negotiations take place between the various contracted parties and that, again, agreement on technical issues is reached.
● Contractual negotiations for all parties.
(c) It is apparent that Richard Norton is likely to face problems as a result of his lack of
managerial experience in a complex project. His technical skills are strong as a result of
his previous background. This will be of importance when in negotiations and discussions regarding technical issues. However, good project managers must be able to balance this technical ability with a strong managerial ability.
●
There are potential team leadership problems as a result of his inexperience in a senior
management position. Key skills required in project management include both leadership
and inspiration, which may be difficult to foster when the project manager has little prior
experience at this level.
Communication with some team members may be difficult, particularly those with
experience who may resent a project manager with less experience than themselves. This
could lead to lack of motivation, particularly in a multi-disciplined team (in fact, the team
is already slightly dubious about the choice of project manager).
He may also have a lack of contractual negotiation experience, particularly in such a
large and complex project as this. It will be important for Richard Norton to foster and
build on management support as early as possible in the project’s life.
Technical knowledge will obviously be important in this type of project, therefore Richard
Norton could build support by proving his technical ability; this should help to gain team
confidence (but may be insufficient to build the confidence of non-technical members).
It is also likely that Richard Norton will face challenges in the financial control and budgeting of the project if he has no experience of this particular aspect of project management. This
is likely to be important in such a large project with high financial resource requirement.
Solution 6
Project management relationships and conflicts
(a) Project manager and project sponsor
T, as the company responsible for carrying out the GPC project, is contracted directly
by the central government (the project sponsor). Therefore, the project manager will
need to work through the project sponsor for any contractual dealings with T.
The project sponsor is usually the party responsible for payment of projects, but
in this case the amount of funding from the central government is not clear, neither
ENTERPRISE MANAGEMENT
Possibility of conflicting objectives
The sponsor’s objectives are the achievement of improved service to patients. This may
conflict with the objectives of the staff, who will seek to minimise their workload while
providing good care for their patients. Staff are likely to have concerns about the implementation workload, the on-going costs and workloads and the patient record security.
There is also likely to be conflict between the sponsor and the project board over funding. Although a technology fund has been set up by the central government, it is evident that this funding has not been easy to obtain, causing a financial burden upon the
SRHA and the individual hospitals and medical centres. A number of doctors have already
expressed concern over resources being spent on the new system rather than on direct
patient care, but the central government has made it quite clear that this project is not
discretionary. However, the central government are sending out rather mixed signals by
allowing individual hospitals and medical centres to decide upon their individual method
of operation.
UNDERSTANDING PROJECT MANAGEMENT
in the initial funding nor the on-going running costs. Therefore, the project manager
will need to work with the sponsor to resolve potential conflict over project costs. The
role of the central government in this project as a fund provider may cause conflict
between central government and the SRHA.
The project manager has little direct reporting/communication with the central
government, as responsibility for the project progress is mainly to the project board.
However, the ultimate achievement of long-term project objectives is to the central
government, who, as the project sponsor, will be evaluating strategic level objectives
and who will be concerned with ensuring that the whole project is not seen to waste
public resources.
(b) Project manager and the project board
The project manager is responsible for achieving the objectives set by the project
board. The project board is responsible for the overall running of the project, and their
objectives are to delegate the achievement of the sponsors’ targets without disrupting
the achievement of their own business objectives.
Direct communication between the project manager and the project board is necessary, with on-going regular reporting of project milestone review meetings.
The project board will be concerned with the achievement of management/business level objectives, in particular that the project improves business efficiency and
effectiveness.
(c) Project manager to medical and administrative users
The project manager is responsible for the overall delivery of the final working system
to the end users. The objectives of the users are to care for their patients, while minimising their workload. The first role of the project manager is to ‘sell’ the benefits of
the new system to the users, as without their backing the project is unlikely to succeed. Good communication between the project manager and the end users is essential
to the implementation of a successful project. The project manager is responsible for
reviewing the needs of each group of users to ensure that systems design meets the
needs of the users as far as possible within the project constraints, and ensuring that
training is effective. In addition, the project manager will need to manage both medical and administrative staff expectations of the system as the project progresses.
The administrative and medical staff will be evaluating the operational day-to-day
objectives of the project.
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In addition, the central government and project board may be concerned with funding
and cost minimisation, whereas the end users may see this as cost-cutting, thus reducing
the value of the end product.
As a public sector project, financial objectives should not be primary ones. Quality and
customer perspective should be of more importance to all of the stakeholders. However,
public funds must not be seen to be wasted.
5
The Process of Project
Management
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The Process of Project
Management
5
LEARNING OUTCOMES
After completing this chapter you should be able to:
䉴
produce a strategy for a project;
䉴
identify the characteristics of each phase in the project process;
䉴
produce a basic project plan, incorporating strategies for dealing with uncertainty,
in the context of a simple project;
䉴
apply key tools and techniques, including the evaluation of proposals;
䉴
identify methodologies and systems used by professional project managers;
䉴
compare and contrast project control systems;
䉴
discuss the value of post completion audit;
䉴
apply a process of continuous improvement to projects.
5.1
Introduction
This chapter develops on some of the themes introduced in the previous chapter by working through the different stages involved in the project life cycle. It will start by exploring
the project initiation stage, setting of project objectives, developing project proposals and
the role of feasibility studies. Risk is a feature of virtually all projects, therefore the different ways of minimising and managing project risk will be discussed. Project planning
is crucial to the effective management of any projects. The different aspects involved in
project planning will be examined, including some of the tools and techniques that can
help the process of project management.
To ensure that the outcomes of a project are delivered, controls need to be in place
throughout the life of a project. Different aspects of project control will be explored and
the project methodologies that can be used (such as PRINCE2). The final stage of the
project life cycle involves project closure. The different activities at this stage will be discussed, along with consideration of how learning from projects can facilitate continuous
improvement.
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5.2
The project management process
The project management process follows the stages of the project life-cycle. According to the
Project Management Institute this can be represented by a five-step process. The stages are:
1. Initiation. This phase sets out the development of a vision for a project and the establishment of goals and objectives. At this stage, the key individuals will be brought
together to form the project team. The scope, objectives and customer expectations of
the project will need to be determined.
2. Planning. This involves defining the resources required to complete the project, devising a schedule, developing a budget and planning how the project team will achieve the
constraints of time, budget, performance specifications and resources.
3. Executing. This is sometimes referred to as project implementation and performance
and involves putting the plan into action, providing leadership and coordination to
project team members and others (e.g. subcontractors or consultants) that will result
in achieving project objectives. This stage stresses the need to keep resources and team
members focused upon the project tasks.
4. Controlling. This stage is concerned with measuring the project’s progress and assessing
whether it differs from the plan. If it differs, corrective action needs to be taken; this
may lead to re-planning, which may in turn lead to a goal change. At this stage, the
project manager must decide among alternatives for solving problems.
5. Closing. This phase is about ensuring that the project is finally completed and conforms
to the latest definition of what was to be achieved.
5.3
Project initiation
5.3.1
Setting project objectives
Projects are initiated when a need or an objective is identified. Objectives are those things
that the organisation wants to achieve. Typically, top-level objectives are profit-oriented,
or in non-profit-making organisations objectives will be to improve the standard of living or education, and so on of members. It is usually a function of the board of directors
to determine the high-level organisational objectives. These objectives are then converted
from ‘whats’ into ‘hows’ by undertaking projects.
5.3.2
Identifying project proposals
Turning objectives into realisable projects can be difficult for organisations for a number of
reasons:
Prioritising objectives is not always straightforward, as different members of the organisation will have different priorities.
● There is likely to be more than one way to achieve any objective.
● Not all objectives can be attained within the same time frame because of limited resources.
●
At a strategic level, a project manager may have very little or no input at all in the process of identifying projects. However, as the key organisational strategies are identified and
increasingly defined by discussions, brainstorming, and negotiation, strategies will become
programmes of change. A project becomes a strategy to achieve an objective. For example,
ENTERPRISE MANAGEMENT
5.3.3
Formation of project proposals
As the organisation determines its objectives and the strategies to achieve these objectives,
gradually a set of priorities will emerge, that is those strategies that are considered the
most effective to realise objectives. It is likely at this point that the organisation will have a
number of strategic options. As yet, no attempt will have been made to determine the benefits of achieving a particular objective, nor determine whether it is feasible. This will be
considered later in this chapter.
Obviously, this must be done before a project can be carried out, that is a project cannot
exist without an objective to achieve. As organisations are unlikely to have the resources to
carry out all strategies, it is important to identify those strategies that provide the most
benefit and achieve the organisation’s most important objectives. Also, as the organisation
identifies its key objectives more clearly, the proposals for action become more detailed and
more accurate judgement can be made on costs and benefits.
Checklist for project proposal selection
Prioritising potential projects
1. List potential projects.
2. Determine the need or opportunity for each project.
3. Establish rough delivery dates.
4. Establish preliminary costings and budget schedule.
5. Establish the overall feasibility of each project.
6. Establish the risk associated with each project.
7. Review project list, objectives, feasibilities and risks with project team and senior
management.
8. Eliminate unfeasible or inappropriate projects (based on issues such as cost, lack of
technology, skill, conflict with long-term organisational objectives, conflict with other
projects).
9. Prioritise the rest.
10. Select the most important project.
5.3.4
Setting project requirements
A requirement is a statement of what is expected of a project or product; it must be clearly
defined and appropriate to meet the organisation’s objectives. If a project requirement is
set out clearly from the outset, the project has a greater chance of success, and less chance
of escalation of costs due to rework, continual changes and customer dissatisfaction.
A requirement is different from a specification, in that the requirement is the statement of
the reason for what is being done or developed, whereas a specification is the statement of
the detailed characteristics of the project or product such as size or performance criteria. It
is important that the customer and project team agree that the requirement is appropriate
and meets the organisational needs and objectives (Field and Keller, 1998).
THE PROCESS OF PROJECT MANAGEMENT
if a corporate objective for a pharmaceutical company is to expand its Asian markets, a
research project into an endemic disease might achieve this. This process of identifying
objectives, refining and classifying them, rating them according to need and organisational
importance, and finally establishing the links between objectives and strategies, leads to the
final formulation of a project.
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5.3.5
Assessing project feasibility
Once objectives and strategies have been identified and ranked, and requirements and
specifications have been identified, the next stage is to identify those strategies that
should be investigated, in order to examine their feasibility (i.e. how achievable they are).
Feasibility studies may be carried out on a number of potential strategies and the aim of
the study is to decide on which proposal to choose.
Sometimes the potential project manager is involved in the feasibility study stage, but
not always. However, it is important for project managers to understand the process of
feasibility assessment. Feasibility studies compare the ‘no change’ option of achieving
objectives, with two or three alternative proposals for change. Criteria used are technical
capability, fit with business goals, financial benefit, social impact and risk sensitivities.
Technical feasibility
There are a number of key aspects regarding technology. The technical features of a strategy that need to be considered are as follows:
Development, that is will it require further testing prior to usage or are we confident
that the material, technology and processes have been thoroughly tested and are readily
usable and available?
● Applicability, that is, is the technology suitable to satisfy the objective and the project
effectively?
●
It is also important to assess a variety of technical aspects of the proposals. These are
likely to vary greatly and may require numerous experts to evaluate them. For example,
when building the London Eye, a number of technical, engineering, environmental and
safety issues needed to be evaluated by a number of experts. (The delay in opening was
caused by safety concerns which was not good for the image of the project, however good
the concept and design. These were resolved.) A software developer will need advice from
hardware manufacturers before developing programs for a particular computer system configuration. Marketing campaigns must take account of specific market, customer and economic conditions.
Other technical considerations could include the following:
The ease of use of the technology.
● The degree of disruption during the construction and installation phase.
●
Features analysis is a further method used to gather information regarding different
products in order to aid comparison and evaluation. Features are those elements of the
project that are considered to be important or necessary requirements, focusing attention
on the features of any requirements that are going to be important in the achievement of
satisfying a need. Features analysis identifies those features in the requirements likely to be
vital to the final outcome of the proposal. When important features have been identified,
they can be assigned a weightage indicating the relative importance of one feature to all
others.
Social and ecological feasibility
It is becoming increasingly necessary to assess social factors affecting feasibility. These
may include awareness of the social issues within a group or office (e.g. introducing a
ENTERPRISE MANAGEMENT
Fit with business goals
Some great project proposals, with high potential financial gain, may divert the company
from its primary goals.
Exercise
Make a brief list of technical, ecological and social questions you would need to ask to
assess a proposal to collect and recycle household waste (such as bottles, cans, newspapers,
etc.) within a local town by building a recycling plant.
Solution
Technological factors
Does the technology exist to carry out the recycling?
How developed is the recycling process?
Ecological factors
How much energy is consumed in the processing?
Is the process clean or dirty?
What waste products are produced, and how can they be utilised or disposed of?
Is the location of the site likely to affect the local environment?
Does the local road network have the ability to support the new site?
Social factors
Are local people interested in recycling?
Are there available locations to place recycle points, or should collections be made from
homes?
Will it affect local employment?
How much disruption would there be in building a recycling plant in the town?
Will the local community object to the plant?
You have probably thought of many more questions to consider.
Financial feasibility
A technique often used in a feasibility study is the cost-benefit analysis. Cost-benefit
analysis helps to identify and evaluate the costs of the proposal over its anticipated life
THE PROCESS OF PROJECT MANAGEMENT
computerised system), or larger social awareness regarding the effect of projects or products
on workers or employment. Relevant considerations might include questions such as: Will
the introduction of computerised systems lead to redundancy? How will the general public
be affected or what position would people take about a project such as constructing a new
road or nuclear power plant on a community?
Ecological considerations may be driven by the understanding that customers
would prefer to purchase alternative products or services as they are more ecologically sound and less harmful to the environment. Environmental considerations may
be stimulated primarily by health and safety legislation. It is important for organisations to consider the raw material input, the production processes and the disposal of
the product at the end of its life.
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(such as purchase, building, maintenance, repair, etc.). The other side to cost-benefit is
the identification and evaluation of the benefits of the project over its life.
The types of costs and benefits involved in a project will depend upon the precise nature
and scope of that project and can vary greatly.
For every item of the project proposal, it is necessary to identify:
its value (in monetary terms or in terms of benefits);
whether it is capital or revenue;
● when it occurs;
● whether it is a one-off cost or recurring.
●
●
The different costs can be considered in terms of:
Capital costs
These are incurred in the acquisition of assets. Capital costs will include the
purchase price of an asset (e.g. land and building, equipment, plant) plus any
additional costs of installation and maintenance. Capital expenditure usually occurs
at the beginning of the project.
Revenue costs
Any cost incurred by the project other than for the purchase of assets are revenue costs. These costs are those incurred on a regular basis and include not
only repair and running costs of the assets but also the general overheads not necessarily directly incurred by the project. Examples are costs such as rent and rates, general management salaries and depreciation. The project itself will also incur direct
revenue costs such as materials and the salaries and wages of the direct workers.
Finance costs
Finance for projects is required to pay for the original assets and may also be
required to cover the recurring running expenses of the project. Financing
costs are usually incurred as interest charges that have to be paid on the balance of
funds outstanding. Therefore, if a project proposal requires funding, it is important
to know exactly how much it requires, when payments would be due and how much
interest would be paid.
Sources of finance include the following:
finance borrowed from a lending institution (bank)
● capital invested by shareholders
●
ENTERPRISE MANAGEMENT
Exercise
List the types of capital, revenue and finance costs associated with building a factory.
Solution
Capital costs
Land purchase
Building costs
Equipment purchase.
Revenue costs
Rent and rates
Staff costs
Utility expenses.
Finance
Bank loans for land, buildings, equipment.
The assumptions upon which the financial feasibility is made need to be made clear.
Also, any political sensitivities need to be identified, since these are the most common reasons for project failure.
Financial evaluation techniques
A detailed analysis of financial evaluation techniques is beyond the scope of this syllabus,
but here is a brief reminder of the main financial appraisal techniques using definitions
from CIMA’s Official Terminology (2005 edition):
The payback method. The time required for the cash inflows from a capital
investment project to equal the cash outflows.
● Discounted cash flow. The discounting of the projected net cash flows of a capital
project to ascertain its present value.
● Accounting rate of return. Based on profits not cash flows, this is a form of return
on capital employed.
● Return on investment. A form of return on capital employed comparing income
with operational assets used to generate that income.
●
Although it is unlikely that you will be asked to carry out detailed calculations of the above
financial techniques, you may be required to discuss their relevance to a project decision.
Remember, you would not rely on a single measure to determine the financial feasibility of a
project.
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retained profit from the business
● grants or subsidies from government (for specified projects only)
●
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5.3.6
Risk and uncertainty
Identifying different types of project risk will allow us to plan to reduce them or avoid
them. The following sections provide an overview of risk terminology and the various
approaches to its management.
Risk can be defined as the probability of an undesirable event. Risk identification
means recognising that a hazard exists and trying to define its characteristics.
Risks can be classified under three headings.
Quantitative risk
This is a risk that can be expressed as a financial amount. Estimation of risk is usually
based on the probability of the event occurring, multiplied by the financial or nonfinancial consequence of the event. It can be considered to be the product of three values:
1. the likelihood of an event occurring – p(E);
2. the likelihood that the event will lead to a loss – p(L);
3. the monetary cost of the worst possible potential loss associated with that accident – M.
The value of the quantitative risk is therefore p(E) p(L) M.
Socially constructed risk
People often believe some things to be risks, even when statistics indicate they are not (and
vice versa). We are all ‘risk illiterate’, in that we do not think logically about risk. Socially
constructed risk may well exceed quantitative risk, so when seeking to put people’s minds
at rest, quantitative risk assessment may not be enough. We must also manage people’s
perceptions of risk. An example of this can be seen on commercial airlines. Most evidence
suggests that, in the event of a serious accident, wearing a ‘lap strap’ beat belt on a plane
does nothing to reduce the risk of injury. It does, however, make people feel a lot more
secure, so it reduces the socially constructed risk.
Qualitative risk
Since risks cannot always be quantified accurately, but some way of categorising risks is
useful, we need a pragmatic solution. If we look at a subjective assessment of the scale and
likelihood of risk, we can generate a table such as the following:
Potential scale or
significance of loss
High
C
B
A
Medium
D
C
B
Low
E
D
C
Low
Medium
Likelihood
High
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Managing risk
Risk management (RM) comprises risk assessment (identifying and analysing risk) and
risk control (taking steps to reduce risk, provide contingency and monitor improvements).
Risk management can be seen as a series of steps:
Risk identification – producing lists of risk items;
● Risk analysis – assessing the loss probability and magnitude for each item;
● Risk prioritisation – producing a ranked ordering of risk items;
● Risk management – deciding how to address each risk item, perhaps by avoiding,
transferring or reducing the risk;
● Risk resolution – producing a situation in which risk items are avoided or reduced;
● Risk monitoring – tracking progress toward resolving risk items and taking corrective action.
●
Examples of risk management approaches would include the following:
Avoidance
● Abort the plan.
● Escape the specific clause in the contract.
● Leave the risk with the customer or supplier.
Transference
● Subcontract the risk to those more able to handle it, such as a specialist supplier or insurer.
Reduction
● Take an alternative course of action with a lower risk exposure.
● Invest in additional capital equipment or security devices to reduce the risk or limit its
consequences.
5.3.7
Uncertainty
Unlike risk, uncertainty is impossible to evaluate because it is impossible to assign a probability to an uncertain event. If the event is uncertain, we cannot put in place management controls to reduce the probability of its occurrence, simply because we do not know
that probability. Instead, we must use contingency planning to construct a series of action
plans, each to be implemented if an uncertain event occurs. An example of a contingency
plan is given after the following SWOT analysis.
5.3.8
SWOT analysis
SWOT is an analytical tool that can be used in two ways:
1. applied to a whole company, it can be used to identify strategies needed by the business
(this use of SWOT was discussed in Chapter 1);
2. applied to a specific project, it can be used to assist in project selection.
THE PROCESS OF PROJECT MANAGEMENT
Having done this, in our risk management programme we should address the category
A risks first, then the Bs and so on. Do not worry too much about the Es.
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SWOT stands for Strengths, Weaknesses, Opportunities and Threats. The strengths
and weaknesses normally result from the organisation or project’s internal factors, and the
opportunities and threats relate to the external environment.
The four categories of SWOT can be explained in more detail as follows:
1. Strengths. These are the things that are going well (or work well) in the organisation or
project, such as its competitive advantage or the skills and competencies and morale of
the individuals within it, and major successes.
2. Weaknesses. These are the things that are going badly (or work badly) in the organisation or project. They include skills that are lacking within the organisation as a whole
or the project team.
3. Opportunities. These relate to events or changes outside the organisation or project, for
example in its external business environment. The events or changes can be exploited to
the advantage of the organisation and will therefore provide some strategic focus to the
decision-making of the managers within the organisation.
4. Threats. Threats relate to events or changes outside the organisation or project (in its
business environment) that must be defended against. The company will need to provide some strategies to overcome these threats in some way or it may start to lose market share to its competitors.
When evaluating a project proposal, it is important to establish whether the proposal helps
to achieve the organisation’s objectives. SWOT can establish whether a particular project
proposal has sufficient strengths that are compatible with the achievement of the organisation’s objectives, or provides the organisation with sufficient opportunities to do so in the
future. It will also highlight the threats and weaknesses of particular proposals.
An example of a SWOT analysis in the context of project
management
Let’s assume that we are part way through a project to renovate a house. The project’s
SWOT analysis might look as follows:
Strengths:
relationships with key sub-contractors are good;
● the project is on schedule, and the current forecast is for completion on time.
●
Weaknesses:
●
the project is over budget in the areas of plumbing, construction of the fireplace and rewiring the lounge.
Opportunities:
●
●
the local furniture store is having a sale;
a decorator has been identified, as a result of recommendation by a satisfied customer.
Threats:
the builder is concerned that the cost and time estimates for the bathroom may be too
low. He says he won’t know for sure until he is part way through the work;
● the supplier says that the paint we have ordered is not in stock with the supplier – it may
take 6 weeks to arrive.
●
ENTERPRISE MANAGEMENT
Exercise
What aspects of project management are likely to involve some degree of uncertainty?
Solution
Most aspects of project management are open to some degree of uncertainty! For example,
the schedule and costs are open to uncertainty owing to unforeseen events, such as adverse
weather conditions, a shortage of resources or increase in costs of raw materials.
5.3.9
The project Initiation Document
At the beginning of a project, a Project Initiation Document (PID) should be produced –
this is sometimes referred to as the ‘project charter’. The purpose of the document is to
define the overall mission, scope and deliverables required, and the roles and responsibilities, in order to provide the overriding terms of reference for the life of the project. There
are two primary reasons for having a PID:
1. for authorisation by the project steering committee or project board;
2. to act as a base document against which progress and changes can be assessed.
A typical PID will contain the following:
the background to the project, explaining its purpose and why the project is necessary;
the project scope (i.e. the range of tasks included in it);
● the project objectives;
● the approach to be taken to the project, for example whether it is primarily to be carried
out in-house, or by suppliers;
● the project key deliverables and desired outcomes;
● any areas excluded from the project;
● any constraints, such as budget or available resources;
●
●
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Contingency planning
The SWOT analysis for our project (see above) has identified two threats. These are uncertainties, rather than risks, as we are unable to assign probabilities to them. What we have
to do is to plan for action to be taken if these threats materialise.
Actions to be planned in case the bathroom estimate is too low would include; contacting lenders to discuss possible additional finance, re-planning the remaining project with a
longer duration for the bathroom works to see what the effect would be.
The contingency plan for paint supply might include; identifying other possible paint
suppliers, investigating other manufacturers’ product ranges to see if a close alternative can
be identified, discussing an alternative design to allow the use of a paint that is easier to
obtain.
You will note that the purpose of contingency planning is to speed up the planning
process in the event that the uncertain event occurs. The contingency plans may never be
used, but we can do our contingency planning when it suits us. If we wait for the uncertain event before doing any planning, this may further delay the project.
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any interfaces between this project and others, or with other organisations or parts of the
organisation;
● any assumptions on which the PID is based;
● the project organisation structure;
● the project manager and team – roles and responsibilities and signatory powers;
● the communication plan (reports, meetings, etc.);
● the controls in place in the project (i.e. any mechanisms to ensure that the project
objectives are achieved, such as a steering committee, reports, meetings, etc.).
●
The PID can be used to ensure that the project team and project shareholders are in
general agreement about the nature and parameters of the project.
5.4
Project planning
A major responsibility for the project manager is the planning of the project. The early
stages of the project must be spent carefully establishing a baseline plan that provides a
clear definition of how the project scope will be accomplished on time, to budget, and
using available resources.
In the planning stage, a number of separate detailed plans will be drawn up. For example, separate plans for:
time
cost
● quality
● resources
● contingency
● communication.
●
●
The content of each of these plans is as follows:
The time plan lists all the activities, who will do what and how long each is planned to
take. This includes the milestone finish dates of each stage of the project life cycle, and
the estimated completion date of the whole project.
● The cost plan uses a rate per hour for each activity in the time plan, plus cost of purchases from the resource plan, plus contingency costs to create a budget for the project.
This will be time phased to provide a cash flow forecast.
● The quality plan includes identification of the customers, the key outcomes each
expects, acceptance criteria that has been agreed with them, a test plan for how each
outcome will be tested, and responsibility for each test. This may include safety and
security planning. It will also include an audit plan for the project management
process.
● The resource plan checks peaks and troughs of workload to ensure the plan is feasible
and lists purchases to be bought.
● Contingency planning includes assessment of risk and decides what additional activities
and buffer of cost and time need to be added to the plan to ensure a reliable budget and
completion date. A risk register will identify contingency plans for each of the key risks
and allocates responsibility for monitoring each.
● The communication plan identifies the key people in the project, their likely concerns,
message needed, planned method of communication and who will be responsible.
●
ENTERPRISE MANAGEMENT
Detailed project planning
Detailed planning involves the following steps:
Dividing the project into work packages
Breaking the project into work packages requires the identification of individuals responsible for elements of work. A work breakdown structure (WBS) must be created, this is a
hierarchical tree of the work elements that need to be accomplished by the project team
during the project. The work breakdown structure clearly identifies the person or people
responsible for each activity or work package. This then involves dividing a project into
work packages with defined deliverables and responsibilities for each package and allows
the project manager to delegate. Work packages can be further divided by defining the tasks
and activities that comprise them, but only where this is essential to allow delegation and
control, otherwise motivation and creativity is reduced and monitoring becomes costly.
Estimation of resources and costs
Using rates per hour and cost of purchased resources needed, the WBS can be used to calculate a total of how much the project will cost. Those responsible for each work package
are asked to estimate the time and resources needed for their work package and the tasks
and activities that comprise it. Evidence from past similar projects is used wherever possible to improve the accuracy of time estimates.
It is necessary to plan how long it will take to complete each activity, and how much of
each resource each activity will require to complete the activity on time. It is also necessary
to provide a cost estimate based on the type of resources required and the quantities anticipated for each activity.
Risk analysis is also done to estimate what additional contingency allowance is needed
for time and cost. Also, the time and cost are built into the plan for communications.
Define the activities graphically
Because some work packages occur in parallel, you cannot add together all the times of
the WBS to estimate how long the project will take. Therefore, to calculate total time, a
network diagram (also referred to as critical path analysis) is created showing the required
sequence and interdependencies of work packages to achieve the project objectives in a
more ‘user-friendly’ format (see later in this chapter).
Determine the project schedule and budget
A baseline budget needs to be produced that presents a realistic assessment of the time and
funding required, and the available resources to complete the project objective. This forms
the baseline plan for the whole project – a complete guide for accomplishing the project
scope on time and within cost.
The baseline plan
This should include a number of details:
the start and end date of the whole project;
the start and end date of each activity;
● the resources needed for each activity (this may be shown as resources needed per activity per month);
● the cost estimate (budget) for each period;
● the final cost estimate for the project.
●
●
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5.4.1
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STUDY MATERIAL E2
An example of a project management plan in outline
The plan below would be issued to stakeholders such as corporate management, the
contracting company, customers and the project team. There may be ‘commercial-inconfidence’ elements in it that would only be shown to the senior management. There are
no set layouts or contents of management plans. Some illustrative examples have been used.
Section title
Contents
Overview or
summary
Overview of the plan: project objectives; organisation of the project team;
schedule of work; especially the milestones; resources required including the
budget and an assessment of significant risks.
For example, project for the upgrade of a computer system for the Exam Company.
The project authorisation document will identify roles and responsibilities such
as the project board, the project manager, and the project team.
For example: Henry Smith, Project Manager.
Responsible for: initiating the project; selecting the project team; preparing and
implementing plans; managing the successful delivery of the project to time,
cost and quality applications.
For example, to design and implement an upgraded examination system for
the Exam Company, the customer, maintaining pre-existent standards but
catering for an increase in candidate applications.
This is identified in the project authorisation document. Reasons for undertaking
this project, what is to be achieved in terms of the deliverables (e.g. the
completion of the contract with all user training by 30 September 2003 at a cost
of £x), the WBS (higher levels) time and cost limits, assumptions made when
drawing up the plan and any items that will not be included for clarity’s sake.
From previous experience, the customer may have insisted on using particular
equipment, say blue-chip hardware such as Compaq, with Oracle software.
The project team will use project management techniques consistent with
accepted UK standards. Henry Smith is an experienced and methodical
project manager.
These may refer to site access, costs of supplies, the cost of borrowing money,
inflation, the availability of particular staff and so on. A major assumption for
the Exam Company project is that the system is accessible in the quiet period
between major application periods or examination dates.
The technical features of the project are identified. They will include
requirements, specifications, system-diagrams, site plans, tools, techniques,
support functions, standards and any relevant document relating to the
provision of the new exam administration system. In-house or subcontracted
provision of modules will be specified.
The quality plan identifies our customer, the Exam Company, the key outcomes it
expects, acceptance criteria agreed, a test plan of how each outcome is to be tested,
and responsibility for each test. Safety and security planning will be essential, as
this system must be 100 per cent secure. An audit plan will be included.
This will identify the key personnel in the project (or stakeholders), what their
interest in the project is and their concerns that will need to be addressed
consistently, what communication is planned and the responsible person. In
our project, Henry Smith will be responsible for communicating with Jane
Elliott, the Exam Company’s IT manager on a weekly basis to update her
on the progress and to tackle any concerns she has. Monthly status projects,
monthly resource reports (financial – critical to this project – and human
resource reports) will be issued and any milestones will be reported on in
writing. Should any critical status reports be needed, they will be made
outside the weekly meeting.
Project name
Project players and
responsibility
Project objectives
Project scope and
contract
Methodology
Assumptions
Technical plan
Quality and
management
Communication
plan
ENTERPRISE MANAGEMENT
Organisation and
personnel
Project schedule
Resources and
facilities including
budget breakdown
Risk assessment and
risk management
Acceptance
Change management
Post-implementation
audit
Contents
The organisation plan describes the structure of the project team and each
person’s responsibilities. Included will be any sub-contract staff and staff
from the Exam Company with any input to the project. Organisation charts
will be drafted by position if staff need to b recruited. If so, recruitment
methods, sources and training required will be identified with start times. In
our project, we need to recruit one extra software engineer to bespoke the
application.
This will describe the main phases of the project and highlight all key
milestones. It is usually illustrated by a Gantt chart with a network diagram.
As Jane Elliott is familiar with computer-based projects, an activity on node
format will be used.
This includes checks on peaks and troughs of workload to ensure the plan is
feasible and to ensure procurement is achieved by the provision of lists.
The cost plan will give a rate per hour for all work and the costs of purchases.
Contingency costs are included to give the project budget.
Time phasing will give a cash flow forecast.
The Exam Company has made it clear that no extra project money will be
available, so Henry Smith must ensure as much as possible that his costings
and time/resources management are accurately assessed. The contracting
company will be bearing the risk of over-run and any other contingencies.
The risks are identified and contingency plans made, including extra activities
and cost and time buffers to be added to ensure reliable budget and
completion date. The risk register identifies each contingency plan for each
key risk and allocates responsibility for monitoring. In the Exam Company
project, unauthorised access to candidate details or results is the greatest
outcome risk. Security must be 100 per cent. This may mean that the best
encryption software will be needed for online applications. There will be cost
implications which Henry Smith has taken account of. He must also make
contingency costing in line with his contingency plans.
The project manager will submit the final system for acceptance to the
customer, in our example the Exam Company. It may sign off the project
or return it with a specific statement of requirements that will make it
acceptable.Acceptance will be in writing. The managing director of Exam
Company will sign off the project with Jane Elliott.
Requests for change may be initiated by Henry Smith or the Exam Company
represented by Jane Elliott. These will be reviewed and approved by the
project board with decisions in writing.
After the project, when all change requests have been reviewed to ensure
completion, input should be sought from the project team, any
subcontractors, suppliers and the customer. It will include a summary of
performance reviewing all aspects of the project, including the way it was
managed, the tools used, the time it took, the delivery of quality as required,
the costs incurred against estimates, the performance of the team and its
relationship with all other project members. The lessons learned to prevent
recurrence of any problems should be identified. An action plan with
recommendations for prevention should be drawn up. All documentation
should be reviewed after filing.
Think about a project you have worked on or are currently involved in. List the planning activities you carried out before starting the project.
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Section title
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STUDY MATERIAL E2
5.4.2
Project objective constraints
The successful accomplishment of the project objective is usually constrained
by four factors: scope/functionality, schedule/time, cost and customer satisfaction/
quality. While each of these is described in detail below, it is worth thinking about
the conflicting nature of these various constraints.
Time and cost tend to be positively correlated in projects (i.e. when time increases, so does
cost), as taking longer to complete a project generally means that human resources are
needed for longer. However, this is not always the case. If there is a degree of urgency
in a project, it may be possible to reduce the timescale to completion by allocating additional resources, or by scheduling expensive overtime working. Both of these situations will
increase cost while reducing time.
Project scope tends to be positively correlated with both cost and time, in that increasing
the number of tasks to be performed within the project will normally lead to an increase
in both the cost of the project and its overall duration. Managing variations to scope is one
of the most complex aspects of project management. The manager must ensure that every
time the customer asks for a change or addition to the scope of the project, the customer is
informed of (and ‘signs off ’) the cost and time consequences of that change. Such changes
should also be fully recorded and documented to avoid arguments about what changes
were required and authorised.
Similarly, customer satisfaction also tends to be positively correlated with both time and
cost, though there will be diminishing returns in terms of satisfaction from increases in
time and cost spent.
Project scope/functionality
The scope of the project is all of the work that must be carried out to satisfy the project’s
objective. The customer will expect the work to be carried out to completion and that there
is nothing expected which is missing. For example, when building a house the project scope
will include clearing the land, building the house and landscaping, all within the agreed
quality standards expected by the customer. Leaving windows or walls unfinished, a hole
in the roof, or a garden full of rubble, will be unlikely to satisfy the customer! In computer
systems, the scope is often defined by all the functions that the system is expected to fulfil.
Project schedule/time
The schedule is the timetable for activities involved in achieving the project objective. The
project will have a finite date for completion, either set by the customer or negotiated and
agreed upon with the customer. For example, planning a wedding will require organisation
of all activities to occur at a specific time and on a specific wedding date.
Project cost
The cost is the amount the customer agrees to pay for the final project or product. The project
cost is based on the budget, which includes a cost estimate of the resources that will be used
in the project. This will include salaries of the people working on the project, project materials, equipment purchase or hire, subcontractors’ or consultants’ costs and facilities costs.
ENTERPRISE MANAGEMENT
5.5
Tools and techniques to aid project planning
Because of the complexity of tasks involved in many projects, communication of responsibility for those tasks is often facilitated by means of graphical planning techniques. By converting complex projects and their constituent tasks into a graphical and therefore more
understandable picture, the project manager can more easily communicate the project
activities to the project team and the project sponsors. The following sections will introduce a number of these planning techniques used by project managers.
5.5.1
Work breakdown structure
As already discussed, one of the most important stages of project management is the definition
of the project objective and the breakdown of work into a comprehensive list of activities. The
WBS provides a systematic approach for breaking projects into manageable units in order to
ensure that all of the activities required to complete the project are included and carried out.
Breaks complex tasks into manageable pieces.
Sets out the logical sequence of project events.
● Provides a logical framework for making decisions.
● Provides an input into subsequent project processes, such as estimating time and resources.
● Provides a framework for continuous assessment of the project progression.
● Provides a communication tool.
●
●
5.5.2
Gantt charts
Gantt charts are a simple representation of a project from the view of the time taken for each
activity and the resources required for each activity at any point in time. They are often used
to monitor actual progress against plan on a week-by-week or possibly day-by-day basis.
An example of the use of Gantt charts can be seen in question 7 at the end of this chapter. Gantt charts can be produced separately for each person to show their total workload.
Arrows can be added to show the interrelationship between different activities, and slack
time shown on each activity, as discussed below.
However, the main advantage of Gantt charts is that they are a useful communication
tool, being easy to understand and providing a compact overview of responsibilities and
progress on the project.
THE PROCESS OF PROJECT MANAGEMENT
Customer satisfaction/quality
The objective of any project is to complete the scope within the budget and by the agreed
date to the customers’ satisfaction and quality requirements. It is important to ensure that
prior to the project planning the project team has a clear understanding of the customer
specifications and requirements, that the customer is kept informed of project progress
throughout the project life, and that the plan includes progressive testing to ensure that
quality requirements are fully met. Quality in computer systems can be measured in the
number and type of errors (‘bugs’) it still contains, response times, fitness for purpose (i.e.
matches the business process it is intended to support) and so on.
Take a few moments to think about a project that you have been involved in. Consider
the constraints involved in the project and how you carried out the planning process to
achieve the final objective of the project.
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STUDY MATERIAL E2
To calculate the start and finish times of each activity on a Gantt chart, a further
technique known as network analysis (or critical path analysis, CPA) must be used.
5.5.3
Network analysis
The main aim of network analysis (critical path analysis) is to analyse activities that occur
in parallel, in order to identify start and finish times for each activity, and the project as
a whole. One of the key features of critical path analysis is the identification of activities
that are critical, that is activities where any delay will lead to a delay in the project overall. Critical path analysis can also be used as an aid to allocating resources by identifying
those activities that are critical and therefore require additional resources to ensure they are
completed on time.
We shall now consider the main elements of constructing a critical path analysis, beginning with some definitions. Each activity in the network is designated by a symbol of the
following type:
Earliest event time
(EET)
Event label
Latest event time
(LET)
Earliest event time (EET). This is the earliest time at which any subsequent activity can
start; this will be determined by the time taken by preceding activities.
● Latest event time (LET). This occurs at the same time or later than the EET. It is the latest time at which all previous activities must have been completed to prevent the whole
project form being delayed.
●
We illustrate these definitions by looking now at a simple example. Consider a project
comprising eight activities, labelled A, B, …, H. Some activities are dependent on others;
for example, the table below indicates that Activity B cannot begin until Activity A is complete, and similarly Activity H cannot begin until Activities E, F and G are all complete.
Activity
A
B
C
D
E
F
G
H
Preceding activity
–
A
A
A
B
C
D
E, F, G
Expected time taken
5
4
5
3
5
6
7
7
The first event is assumed to start at time 0 (i.e. the start of Activity A). The network
is then constructed by building the activities from left to right, making sure that activities follow only after any preceding activities have been completed. First, the EET is
calculated.
ENTERPRISE MANAGEMENT
The EET for Event 3 (i.e. the completion of Activity B) is:
B
4
0
1
0
A
5
5
2
C
5
9
3
E
5
10
4
F
6
16
6
H
7
23
7
23
8
D
3
5
G
7
(EET at Event 2, i.e. the completion of Activity A)
(Duration of Activity B)
54
9
The EETs for the completion of Activities C and D are calculated in exactly the same way.
The first complication occurs at Event 6, that is the start of Activity H, which cannot
begin until E, F and G are completed. In this case, there are three possible EETs:
EET at Event 3 Activity E 9 5 14
EET at Event 4 Activity F 10 6 16
EET at Event 5 Activity G 8 7 15
In this instance, the earliest time that all preceding activities will have been completed is
16 days (i.e. H cannot start until all of E, F and G are fully complete). Therefore, Event 6,
the start of Activity H, has an EET of 16.
The EET for the last event (i.e. the completion of Activity H) is the earliest time that
the project can be completed, given the duration of the preceding events. The earliest time
that this project can be completed is 16 days 7 days for Activity H 23 days.
Calculation of the LET
The calculation of the LET begins at the right-hand side of the network diagram. The
LET of the final event is always the same as the EET (assuming that the project is to be
completed in the shortest possible time). For the worked example above, this would be 23
days, as indicated on the network diagram.
Moving from right to left, the next event is number 6 (the start of Activity H), and the
LET is calculated as follows:
LET at 6 (LET at Event 7) (Activity H duration)
23 7
16
THE PROCESS OF PROJECT MANAGEMENT
Calculation of the EET
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230
STUDY MATERIAL E2
The same calculations can be carried out for Events 3, 4 and 5:
LET at Event 3 16 5 11
LET at Event 4 16 6 10
LET at Event 5 16 7 9
Note that for Events 3 and 5 the EET and LET are different. This will be explained later.
B
0
A
0
5
1
5
5
11
C
2
E
9
3
4
10
F
10
6
4
5
16
H
16
7
6
23
7
23
8
5
D
G
9
3
7
A complication arises when trying to establish the LET for Event 2 as there are three
possible LETs:
LET at Event 3 Activity B duration 11 4 7
LET at Event 4 Activity C duration 10 5 5
LET at Event 5 Activity D duration 9 3 6
In this case, the LET will be 5; if it occurs later than this the whole network will be
delayed. This can be input into the network diagram at Event 2.
B
4
0
A
0
5
1
5
C
5
5
2
9
3
11
E
5
10
F
10
6
4
16
H
16
7
6
23
7
23
8
D
3
5
9
G
7
Above is the completed network diagram, and at this point it is now possible to identify
the critical path. This is the sequence of activities that begin and end in events where the
EET LET.
In this case, the critical path is Activity A C F H 23 days. This is shown on
the diagram by the bold lines.
ENTERPRISE MANAGEMENT
Slack or float
This can be calculated by taking the difference between LET and EET. Obviously, the
critical path has no slack (because activities on the critical path, by definition, have
EET LET), but if activities do not occur on the critical path, slack may occur. For
example, Activity E has an earliest start date of day 9, but it could in fact start on day
11 (or start on day 9 and take 2 days longer) and the project would still be completed
on time, that is there are 2 days of slack.
5.5.5
An alternative method for constructing network
diagrams: activity on node
This method is based on project software such as Microsoft Project.
Each activity is shown in a rectangular box or node. Activity flows from left to right as
for the activity on arrow diagrams you have previously studied.
Each node is subdivided in the following way:
Task/Activity, e.g. A, B, C, etc.
Identity number of the activity
Earliest start time
Duration of the activity
Latest start time
To calculate the earliest start time (EST): look at the box for the preceding activity and
add the bottom left figure to the top right figure. Proceed through the whole diagram from
left to right, completing all the EST boxes. Should there be two preceding activities, take
the higher figure.
To calculate the latest start time (LST): this is worked out right to left. Start with the
final duration figure and subtract the next duration figure from it, working backwards
throughout the diagram until all boxes are completed. Should there be two previous activities (working backwards remember), take the lower figure.
Exercise
Worked Example
Activity
A
B
C
D
E
F
G
H
ID number*
Preceding activity
Duration in weeks
1,037
1,038
1,039
1,040
1,041
1,042
1,043
1,044
–
–
A
B
B
E
C, D
F
5
4
2
1
5
5
4
3
* The ID number would come from the computerised listing of activities.
THE PROCESS OF PROJECT MANAGEMENT
5.5.4
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232
STUDY MATERIAL E2
First you need to work out the first logical precedence, then you can then calculate the
duration of the various paths:
ACG 5 2 4 11 weeks
BDG 4 1 4 9 weeks
BEFH 4 5 5 3 17 weeks
These durations will be the starting points for working out your backwards pass to calculate your latest start times.
So, final duration 17 weeks – 4 weeks, the latest possible start time for this activity is 14
weeks.
Similarly G: total duration is 17 weeks – 4 weeks, the latest start time for G is 13 weeks.
To calculate the latest start times from right to left and to identify the critical path, the
duration of the previous activity needs to be deducted from the latest start time at the following activity. For example, the latest start time for activity C is given by:
(Activity C duration) (Latest start at Event G) Latest start at C
2 13 11
As you can see from the precedence diagram below, the critical path is BEFH.
C
A
1,037
5
1,039
2
6
0
11
5
B
D
1,038
4
1,040
2
0
0
11
4
G
1,043
4
13
7
E
5.5.6
F
H
1,041
5
1,042
5
1,044
3
4
4
9
9
14
14
Milestones and control gates
One of the main reasons for constructing a network diagram is to improve the control of
the project duration. In order to facilitate this, a number of ‘milestones’ can be identified
in the network. Milestones are not specifically shown on a network diagram (except, of
course, for the end of activities), but they are often shown on a Gantt chart as a small triangle or other symbol.
A milestone, as the name implies, is an event that is clearly identifiable as a measure of
how far the project has progressed, and how far it has to run. This involves partitioning the
project into identifiable and manageable phases that are well defined key events and unambiguous targets of what needs to be done and by when, and should be established during
the project planning phase. Milestones are important in assessing the status of the project
and quality of the work. Monitoring the achievement of milestones enables the project
manager to keep control over the project’s progress, and allows any delays to be identified
immediately.
ENTERPRISE MANAGEMENT
5.5.7
Project evaluation and review technique (PERT)
The issues of risk and uncertainty in project management were covered in earlier in this
chapter.
Network analysis is often complicated by an uncertainty of events so that a single time
given for an event is likely to have a degree of error. To overcome this uncertainty, PERT
uses three time estimates for each activity in the network:
1. An optimistic estimate (denoted by the letter o) – the duration it would take if conditions were ideal.
2. A probable estimate (denoted by the letter m) – the duration it would take if conditions were normal, or as expected.
3. A pessimistic estimate (p) – the duration it would take if a number of things went
wrong.
The expected duration is then calculated (using expected values) and the network
drawn. The degree of risk in each activity can be estimated using standard deviations. This
would allow calculation of any necessary contingency to be added to the plan, in order to
reduce the risk of overrun.
5.5.8
Coping with risk and uncertainty
Although the use of PERT is one way to cope with risk in time planning, there are ways
of planning in a contingency for risk that are less complex. Wherever risk is identified as
taking the form of alternative outcomes, a series of contingency or scenario plans may be
constructed for each alternative. Not only would this allow the project manager to look at
the project network incorporating each different alternative, but it would also allow the
manager to ‘switch’ to the appropriate plan for whichever contingency arose.
Another, much more simplistic, way to incorporate risk is to add artificial slack into
risky activities. This is known as ‘buffering’, but should not be encouraged because it leads
to a build-up of slack in the programme and may lead to complacency.
THE PROCESS OF PROJECT MANAGEMENT
The characteristic of a good milestone is that there should be no room for doubt about
whether it has been past. This requires the identification of stages in the development of
the project that are recognised as steps towards the final project deliverable, developed
from the information in work breakdown structures and network analysis. So, milestones
should relate to the completion of stages in the project with clear outputs, which should
signal the accomplishment of a particular milestone. For example, the end of an activity, the production of a report, delivery of a completed work package, or attendance at a
meeting.
Some milestones take a very specific form. They are key points in the project life cycle
which give the project sponsor or steering committee an opportunity to review project
progress, and make a decision whether to proceed further or to terminate the project. Such
milestones are known as ‘control gates’ and represent the significant completion of milestones. A gate can only be ‘passed’ if the process meets pre-defined performance standards.
This could take the form of technical reviews or completion of documents. ‘Gates’ should
be identified in the project plan, and a gate review will be required to formally pass each
gate. If at the gate review the criteria have not been met, the project should not continue.
This may mean changes are needed to the overall project plan.
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STUDY MATERIAL E2
5.6
Project management (PM) software
It is clear that many project management techniques are complicated and involve large
amounts of constantly changing data. It is not surprising, therefore, to learn that all of
these techniques can now be carried out quickly and effectively using project management
software applications. Today, numerous PC-based PM software packages exist, with features such as easy access to graphical user interface, planning activities, work-scheduling
facilities, ability to view relationships among tasks and other projects, resource management and project progress monitoring and control.
5.6.1
PM software functions
The following is a list of functions that would commonly be found within a standard
project management software package, such as Microsoft Project:
Budgeting and cost control. At any time during the project, actual costs can be compared with budgeted costs for individual resources or activities, or for the whole
project.
● Calendars. Calendars can be used for reporting purposes and to define working
periods.
● Graphics. The ability to create and modify graphics, such as Gantt charts, is a useful feature of PM software. It will allow the tasks in Gantt charts to be linked so that preceding
activities can be shown.
● Multiple project handling. Large projects often have to be broken down into smaller
projects to make them more manageable. Alternatively, project managers may be responsible for more than one project at a time. Most PM software packages will store numerous projects quite easily.
● Planning. All PM software allows the user to define the activities that need to be performed. It will maintain detailed task lists and create critical path analyses. It will allow
the project manager to plan several thousand activities, by allocating resources, setting
start and completion dates and calculating expected time to complete.
● Scheduling. Most systems will build Gantt charts and network diagrams based on the
task and resource list and all of their associated information. Any changes to those lists
will automatically create a new schedule for the project. It is also possible to schedule
recurring tasks, to set priorities for tasks, to schedule tasks to start as late as possible, and
to specify ‘must end by’ and ‘no later than’ dates.
● Resource planning. A critical issue in project planning is resource management, that is
ensuring the project has the correct level of manpower, equipment and material at the
right place at the right time and in right quantities.
● Resource histograms. These provide the project manager with a visual display showing the usage and availability of resources over the project’s life. This allows the
project manager to see quickly and easily where there are either too few resources
or where there are surplus resources to carry out a particular activity. The project
manager then has the ability to reallocate resources or to obtain additional
resources to ensure that critical activities are achieved on time and therefore the
critical path is achieved. An example of a resource histogram is shown on top of
next page.
●
5
4
3
2
H
H
O
O
L
L
I
I
D
D
A
A
Y
Y
Maximum
1
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
29
30
Week Number
●
Reporting. The project manager has to report on the progress of the project to the stakeholders. PM software provides the facility to generate standard reports, such as progress
to date, budget reports, allocation of resources reports, individual task or WBS reports
and financial reports.
5.6.2
Advantages of using PM software
Accuracy. Particularly in large projects, manually drawing network diagrams can be prone
to error. PM software has inbuilt error checks and automatic calculation facilities.
● Affordability. Most PC-based software costs between £200 and £400, which for businesses is an affordable investment. Costs of maintaining the data need to be added to
this.
● Ease of use. Windows-based packages with graphical user interfaces make the use of PM
software easy and quick. A 3-day training course is usually needed.
● Ability to handle complexity. For large, complex projects, PM software is indispensable in
managing and controlling large volumes of activities.
● What if analysis. The software allows the user to see the effect of different scenarios by
altering elements of the project data. This enables the project manager to plan for contingencies and to assess consequences.
● Timesheet recording. In order to ease the project manager’s burden of recording the actual
effort and revised estimates to complete a task, a number of PM software packages allow
this data to be captured from individual team members. Typically, project team members will capture the time already spent and the time expected to complete a task on a
timesheet. They can input this on a daily or weekly basis that is then plotted directly
against the plan and can show project managers where variances exist and whether the
critical path is in jeopardy.
●
5.6.3
PM software pitfalls
Despite the extensive use of project management software, projects can still go spectacularly wrong – over schedule and over budget. It is important to realise that PM software is
a tool and can be used wisely or unwisely. Here are some common pitfalls:
●
Emphasis on maintaining the plan rather than managing the project. In a large project,
maintaining the detail estimates against actuals of a plan can be a full-time task. This
leaves little time for issue-management and man-management. Hence, it is often better
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Number of technicians required
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STUDY MATERIAL E2
for project managers to delegate the input/maintenance responsibility to a project
administrator and receive regular reports as a basis for managing the project.
● Mythical man-month. Peter Drucker’s book (of the same name) highlighted the problem
of assuming that if a task takes 10 days then ten men applied to the task can do it in a
day. It is important to manage resources realistically. This especially applies when tasks
are over-budget. Adding new people into a project at a late stage can make it later since
the new team members will be slower at grasping what is required and actually divert the
attention of other team members.
● Estimates. For planning purposes, the accuracy of estimates is vital to the identification
of the critical path and the key milestones of the project. However, estimates can vary
wildly. They are subjective, based on the estimator’s experience or inexperience (or even
mood) and subject to company politics (e.g. the paying customer does not want to hear
bad news). Also, estimates have been made at a fixed point in time with a particular set
of assumptions. A task that was thought simple can prove anything but. Estimating is
receiving more and more attention and there are several estimating techniques which
can be used (which are beyond the scope of this section). Needless to say, a comprehensive plan built on incorrect estimates may look impressive but is fatally flawed: garbage
in; garbage out.
● Skill levels. Plans tend to talk about resources when actually they are referring to human
beings with all the uncertainty that it brings. Human beings are not interchangeable
items like nails or screws. Where one individual may find a task within his/her skillset,
another person may struggle. It matters which person does which task. If the most competent person has given all the task estimates, then it is unlikely that the overall schedule reflects the true performance capacity of the team. Further, people have careers and
home-lives and can leave a project. A project manager must be aware of the effect that
the departure of a key person would have on the plan.
● Work breakdown. Some plans fail because the work breakdown into tasks does not match
with how people work. Work breakdown assumes discrete units of work that someone
will spend a fixed amount of time on a task before moving to the next task. Quite often
real-world tasks merge into several tasks, for example making tea may mean making coffee while the kettle has boiled and so on. People see additional required tasks while they
are working and tackle them simultaneously. A static plan (with PM software) cannot
keep up with all these changes. Hence, recording time against the plan as opposed to
what people are actually doing can make managing the plan (as opposed to managing
the project) a nightmare task, to the extent that the PM software is abandoned in favour
of a simpler monitoring system.
5.7
Executing or performing the project
Once the project plan has been developed and agreed by the customer and project team,
the project can commence. The project team will perform the tasks they are responsible
for, as and when scheduled in the plan.
As an example, the activities involved in design, development and installation of an
organisational information system could include the following work elements in performing the project (Gido and Clements, 1999, p. 66):
●
Undertaking detailed design work, including systems specifications, flow charts, programmes and a list of required hardware.
ENTERPRISE MANAGEMENT
Think of a project such as organising a conference or planning a relocation.
Determine:
the major work elements
● the resources required
● a time estimate.
●
5.8
Monitoring and controlling the project
As the project evolves, it is important to monitor it continually in order to ensure that it
is progressing as expected towards the final objective. This requires a continual measurement of actual activities, including monitoring activities started and completed, how long
it has taken so far (and how long it is estimated to take up to completion), and how much
money has been spent on that activity. This measurement of actual resources committed at
any time or to date must be compared against the plan of activities to assess progress and
monitor any deviations. If, after comparison of actual versus plan, a deviation is discovered
(such as overspending or taking longer than anticipated), the project manager must report
the deviation and, following authorisation if necessary, take corrective action to get the
project back on target.
The most important aspect of project control is ensuring that monitoring progress is
carried out on a regular basis and that corrective action is considered and implemented
immediately. Effective project control will involve a system to regularly gather project data
on actual project progress and performance, and carrying out corrective action where necessary as soon as possible. A regular project reporting period should be set up (e.g. daily,
weekly or monthly), depending on the complexity or duration of the project. More complex projects are likely to require more frequent progress assessment.
THE PROCESS OF PROJECT MANAGEMENT
Carrying out design reviews on a continual basis, which may result in modifications and
design changes. This may result in a change in the project scope, price or schedule. It
may also involve re-planning the original schedule.
● There will also be a plan prepared for systems testing once the system has been designed.
This may involve the customers who may wish to participate in testing or at least review
the test procedures.
● Carrying out the writing and construction of the software.
● Testing the software.
● Purchasing, assembling and testing the hardware, including detailed testing of subassemblies of hardware, and then a final test of the entire hardware system interface.
● Integrating hardware and software and testing the whole system.
● Planning installation, for example selecting the optimum changeover method and the
time that is least disruptive to the organisation’s operations.
● Preparation of training materials to enable users to understand, operate and maintain
the system.
● Carrying out the installation and changeover procedure.
● Carrying out training.
● Conducting final acceptance testing of the new system to demonstrate that the system
meets the original objectives.
●
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In most projects, the project manager reports to a steering committee or project board.
A system of reports and meetings should form part of the project plan:
Reports from the project manager to the project board should be made on a regular and
frequent basis. In most projects, written reports are made monthly, with a major summary report quarterly (or on completion of a life-cycle stage). These reports should have
a standard format, both within and between projects, so the recipients become familiar
with their content. Areas covered by the report would obviously focus on progress in
terms of cost, scope, and time, with any anticipated variances from plan highlighted.
There should also be provision for exception reports, should a major contingency arise.
● The project manager should meet with the project board to discuss progress. In many
projects, such a meeting might take place quarterly, and the project manager would
present their summary report. This will allow the project board to ask questions that are
not covered by the written report. It should also be possible for the project manager to
meet with the project board in exceptional circumstances.
●
A progress report is likely to cover the following issues:
Current status in terms of schedule cost and scope.
● Progress towards resolution of previously identified issues.
● New or potential problems and issues.
● Planned corrective actions.
● Milestones expected to be achieved before the next reporting period.
● Date of next report.
●
Corrective action requires consideration of alternatives before implementation. For
instance, adding extra resources in order to get a project back on time will incur extra
costs and may therefore overrun the project budget. The project manager needs to consider
very carefully the implications of any corrective action upon the project scope, budget and
schedule. Figure 5.1 demonstrates the control process.
5.8.1
Making effective control decisions
It is vitally important that the data collected about the actual progress of the project are
reported on a regular, timely basis. Making decisions about changing the project plan or
adding more resources can only be effective if the project manager is using the most upto-date, accurate project information. The project manager should not gather actual data
at the beginning of the month and then wait until the end of the month before using it
to update the schedule or budget. It is also important for the project manager to agree
any changes in the plan with the customer, as changes are likely to affect cost, schedule or
scope of the original baseline plan.
When the updated schedule and budget have been calculated, a comparison must be
made against baseline budget and schedule in order to determine if any variances have
occurred. If it is considered that the project is satisfactorily on target, then no corrective
action is required. If corrective action is required, the next decision is to determine how
to revise the schedule or budget. These decisions may be very difficult, as they will often
require a trade-off of cost, time and scope. For example, getting the project back on time
may require extra resources and therefore additional costs or a compromise on the original
scope. Reducing excess expenditure may mean using less or lower-quality resources, which
again may affect the overall scope and performance of the final project.
ENTERPRISE MANAGEMENT
Start project
Wait until next
report period
During each
report period
Collect data on
actual performance
(schedule, costs)
Incorporate changes into
project plan
(scope, schedule, budget)
Calculate updated
project schedule,
budget and forecasts
Analyse current status
compared with plan
(schedule, budget)
No
Are corrective
actions needed?
Yes
Identify corrective
actions and incorporate
associated changes
Figure 5.1
Project control process (Gido and Clements, 1999, p. 68)
Once a decision is taken, the changes must be incorporated into the schedule and
budget. This project control process will be carried out continually throughout the duration of the project. If it is considered that the project is likely to have a high control risk,
the monitoring progress should be carried out more frequently.
Project control processes cannot be overemphasised in their importance to the success
of the project. The project manager must take a continually proactive approach in controlling a project. If this is carried out successfully, the third phase of the project life cycle will
end when the project objective has been met and the customer requirements have been
achieved.
5.8.2
Earned value management
Earned value management is a method of assessing the progress on a project which takes
account not only what has been done (and spent) to date but also what value has been
THE PROCESS OF PROJECT MANAGEMENT
Establish baseline plan
(schedule,budget)
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STUDY MATERIAL E2
added for that effort or expenditure. Hence, it is a technique for monitoring progress as
part of overall project monitoring and control. It can be used to determine how well the
project is meeting scope, time and cost goals by using information from the project and
comparing it to the baseline plan. Project management software, such as Microsoft Project
provides functions for entering data and viewing earned value information.
The following list provides the different values that are needed to assess earned value on
a project.
Planned value (PV) is the proportion of the approved total cost estimate to be spent on
an activity during a given period.
● Actual cost (AC) is the total direct and indirect costs incurred in carrying out work on a
particular activity during a given period.
● Earned value (EV) is an estimate of the value of the physical work completed. This is
based on the original planned costs for an activity and the rate at which the project team
is completing work on the activity.
● Rate of performance (RP) is the ratio of actual work competed to the percentage of work
planned to have been completed by a particular point in time.
●
The results from earned value management analysis can inform project progress, and
variances on time and cost.
5.8.3
PRINCE2 methodology
Control in this context is any mechanism designed to ensure that a project achieves
its objectives. The PRINCE2 (Projects IN Controlled Environments version 2) methodology contains a large number of control elements and, although initially intended
for the management of IT projects, it can be applied to projects of all kinds, small
and large.
The main purpose of PRINCE2 is to deliver a successful project, which is defined as:
delivery of the agreed outcomes
on time
● within budget
● conforming to the required quality standards.
●
●
Features of PRINCE2
● Enforces a clear structure of authority and responsibility on the project team. The structure of supervision and reporting ensures that each party has clear objectives and that
they are supported in achieving these objectives.
● Ensures the production of a number of ‘management products’ associated with the management and control of the project: for example, the project initiation document, the
project budget, the project plan and various progress reports.
● Includes a number of different types of plan, ensuring that all the participants in the
project (both internal and external to the organisation) have a clear understanding of
the tasks to be completed, the relationships between them and their roles in the tasks’
completion.
● Contains several quality controls, such as clearly defined and documented technical and
management procedures. These ensure that work is completed both on time and at the
appropriate level of quality.
ENTERPRISE MANAGEMENT
Directing the project. This is usually carried out by the senior management team, who
define the need for the project, the resources to be allocated and whether the project
should continue. PRINCE2 call team this the project board. The constituents of the
Board will vary to suit the requirements of a particular project The project board will
decide on the project manager and team responsibilities. The project manager is then
given authority to manage the project within constraints set by the project board.
● Planning a project. This is an ongoing activity, using project management tools and techniques, to sequence the activities, also considers duration, resources requirements and
associated risks.
● Starting up a project. This involves the appointment of the project manager and project
team and assigning objectives.
● Initiating a project. Setting out the project strategy and criteria against which the project
will eventually be judged.
● Controlling a stage. This involves all aspects of control and problem-solving to ensure the
project meets its objectives.
● Managing product delivery. Co-coordinating the various aspects of the project –particularly where multiple project teams are involved.
● Managing the stage boundaries. This involves reporting on the progress and problems
encountered in a particular stage and their implications for the next stage.
● Closing a project. Reporting and feedback on performance relative to the original objectives, to help make improvement to future projects.
●
Whilst these could all be considered to be elements of good project management, the
difference is the level of structure and documentation that is required. This helps in providing controls on the planning and execution of projects and forces the identification of
potential problems.
The PRINCE2 methodology is discussed in detail in a reading later in this chapter.
(Comparing PRINCE2® with PMBoK®, by Max Wideman.) You should study this reading now.
5.8.4
Other project management methodologies
A number of other methodologies have emerged in the project management marketplace. Whereas PRINCE2 is largely in the public domain (due to sponsorship by the UK
Government), other methodologies have been developed by proprietary interests often
with accompanying consultancy and software services. They are, however, gaining in popularity in various industry sectors and hence are worth inclusion.
Here is a list of alternatives to PRINCE2:
IDEAL/INTRo – IDEAL is a process-improvement and defect-reduction methodology
from the Carnegie Mellon Software Engineering Institute (SEI). INTRo is a particular
application of the methodology for rolling out technology, for example a new computer
system. The institute has a reputation for researching and improving the project management process (particularly in the software development and deployment arena).
● PMBoK
(Project Management Body of Knowledge) – The US-based Project
Management Institute (PMI) has defined best-practice project management principles and processes into a volume entitled PMBoK. It describes nine key areas in terms
●
THE PROCESS OF PROJECT MANAGEMENT
Key processes are identified as part of the PRINCE2 framework, these include:
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of inputs, outputs, tools, techniques and how they fit together. A number of vendors
encapsulate PMBoK into their own service and software offerings.
● SixSigma – It is another process-improvement and defect methodology that has its roots
in improving manufacturing and product development processes. However, there are
now extensions to apply the statistical measurements (upon which SixSigma is based)
and corrective measures to more generic project management processes.
Exercise
Explain the benefits of a well-defined project reporting system.
Solution
It ensures that all team members are aware of the importance of regular monitoring and
control.
● It is necessary to compare actual performance with plan.
● It must be done regularly to ensure progress is maintained.
● Reporting can be daily, weekly or monthly, depending on the complexity and timescales
involved.
●
5.9
Project completion and closure
The final stage of the project life cycle is the closure of the project once the project work is
finished. The main purpose of closure procedures is to evaluate the overall project and to
learn from the experiences gained. This should help the project organisation improve its
performance on future projects. Project termination activities would include the following:
organising and filing all project documentation;
receiving and making final payments to suppliers of resources;
● agreeing formally with the customer that all agreed deliverables have been provided successfully, so that full payment can be received;
● reviewing project organisation and methods to recommend future improvements;
● rewarding the project team and ensuring they have jobs to move on to;
● reviewing the business case to check that intended benefits are likely to be achieved.
●
●
5.9.1
Organising project documentation
The project organisation must ensure that all appropriate and related project documentation is collected, organised and stored efficiently for future reference. It is also necessary to
keep information for future audit purposes.
5.9.2
Collection of receipts and making final payments
Some contracts may include a progress payments clause whereby the customer will make
a final payment on the successful completion of the project. In some contracts, this may
be a significant proportion of the total contract price – as much as 20 per cent. This is an
obvious incentive to ensure that the project organisation carries out the project successfully.
ENTERPRISE MANAGEMENT
5.10 Post-completion review and audit
5.10.1
Post-project review meetings
Evaluation meetings should be carried out both internally with the project team members,
and externally with the customer. The internal review is an opportunity for the organisation to discuss the successes and failures of the project process and to establish what can be
learned in future for the benefit of other projects. It is also an opportunity for the project
manager to discuss with individual team members their role in the project and the means
by which they could improve their own individual performance on future projects.
An evaluation of the project from the customer’s perspective is also a crucial aspect of
project closure. It is important to establish whether the project succeeded in satisfying the
customer’s requirements and to obtain feedback that could be helpful to improve future
project processes. It also allows the customer the opportunity to voice any concerns regarding how the project was carried out, and provides a framework for open dialogue and
improved customer relationships.
An evaluation of the project from the business perspective is essential. Are the benefits
intended in the feasibility study likely to be realised? If not, what ongoing actions need to
be taken?
5.10.2
Post-completion audit
When the project solution has been delivered, the final phase – an audit of the entire
project – is conducted.
Assessment of the following should take place:
the extent to which the required quality has been achieved;
the efficiency of the solution during operation compared with the agreed performance
and standards;
● the actual cost of the project compared with the budgeted expenditure and the reasons
for over- or under-expenditure identified;
● the time taken to develop the solution compared with the targeted date for completion,
and reasons for a variance identified;
● the effectiveness of the management process and structures in managing the project;
● the significance of any problems encountered and the effectiveness of the solutions generated to deal with them.
●
●
If the project objectives have been stated in terms of learning outcomes, the extent to
which these have been achieved would also be investigated. The audit would lead to the
production of a report to the management, structured around the above points.
5.10.3
Justifying the cost of post-completion audit
The primary benefit derived from the post-completion audit is to augment the organisation’s experience and knowledge. Although this benefit may be difficult to quantify, it may
THE PROCESS OF PROJECT MANAGEMENT
Likewise, the project organisation must ensure that it has paid for its materials or contractors
at the end of the project. Once payments and receipts have all been recorded, final contract
accounts can be analysed and the contract profitability established.
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be necessary to justify the cost of a post-completion audit by carrying out a cost-benefit
analysis. In this case, the expected savings to future projects should be offset against the
cost of the audit.
5.10.4
Continuous improvement
Many organisations view project management as a strategic competence, from which they
can gain a competitive advantage. This is particularly true of organisations in project-based
industries, such as engineering and consultancy. Such organisations have begun to see that
using project management without continuous improvement to the methodology allows
for the repetition of mistakes and poor practices.
Excellence in project management requires the development of a methodology, a culture
that believes in the methodology, and continues improvements to the methodology.
One such approach is the Project Management Maturity Model (PMMM), proposed by
Kerzner (2001), which provides guidance on how to become excellent in project management. The PMMM consists of five levels, and each level represents a different degree of
maturity in project management.
Level 1 – Common knowledge
In this level, the organisation recognises the importance of project management and the
need for a good understanding of the basic knowledge of project management, along with
the accompanying language/terminology. The emphasis here is on training and education.
Level 2 – Common processes
In this level, the organisation recognises that common processes need to be defined and
developed such that successes on one project can be repeated on other projects. Also
included in this level is the recognition that project management principles can be applied
to and support other methodologies employed by the company, such as total quality management and time-to market.
Level 3 – Singular methodology
In this level, the organisation recognises the synergistic effect of combining all corporate
methodologies into a singular methodology, the centre of which is project management.
The synergistic effects also make process control easier with a single methodology than
with multiple methodologies. However, in some firms the information systems personnel
may still have a separate methodology.
Level 4 – Benchmarking
This level contains the recognition that process improvement is necessary to maintain a
competitive advantage. Benchmarking must be performed on a continuous basis. The
company must decide whom to benchmark and what to benchmark.
Level 5 – Continuous improvement
In this level, the organisation evaluates the information obtained through benchmarking, and must then decide whether or not this information will enhance the singular
methodology.
ENTERPRISE MANAGEMENT
5.11
Summary
This chapter has looked at the life cycle of a project. The key points to remember are:
the five project management stages (try using the acronym IPECC);
● the different aspects of feasibility;
● the different costs incurred in a project;
● the difference between risk and uncertainty, and the ways to manage risk;
● SWOT analysis when used in project management;
● the different aspects of project plans;
● the constraints acting on a project;
● the common techniques used by project managers (Gantt charts, critical path analysis
(CPA) and project evaluation and review technique (PERT));
● the use of PM software, which may contain facilities such as planning, budgeting,
reporting and scheduling;
● the key aspects of project control, including milestones and gates;
● the features of PRINCE2;
● the process and justification of post-completion review and audit.
●
References
Field, M. and Keller, L. (1998), Project Management. London: International Thompson
Publishing.
Gido, J. and Clements, J. (1999), Successful Project Management with Microsoft Project
CD, A Practical Guide for Managers. (1st ed.), Reprinted with permission of South
Western, a division of Thomson Learning: www.thomsonrights.com. fax: 800 730
2215.
Kerzner, H. (2001), Strategic Planning for Project Management Using a Project Management
Maturity Model. John Wiley & Sons, Digital Download.
THE PROCESS OF PROJECT MANAGEMENT
When the levels of maturity (and even life-cycle phases) are discussed, there exists
a common belief that all work must be accomplished sequentially (i.e. in series). This is
not necessarily true. Certain levels can and do overlap. The magnitude of the overlap is
based upon the amount of risk the organisation is willing to tolerate. For example, the
company can create a centre for excellence in project management before benchmarking is
undertaken.
Project management maturity models allow companies to more easily identify corporate-wide training initiatives for each level, as well as the establishment of a professional
development career path for project managers.
As companies begin recognising the importance of strategic planning for excellence in
project management, the marketplace may see several more maturity models similar to the
one described above. Like strategic planning, these models should be generic such that
they can be applied and custom-designed to individual companies.
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5
Readings
Identification of project proposals and setting
project requirements
The first article covered in this section reinforces the need for sound project management
techniques and processes in large-scale, complex projects. The case discusses the Sydney
Olympic Games from a project management viewpoint, focusing attention on strict
constraints of time, and the increasing problems of managing the two other major project
factors of cost and quality.
This case study should aid you in understanding:
the importance of project identification and definition;
● the critical relationships between cost, quality and time;
● the need to break complex projects into a number of smaller, more feasible project
actions.
●
The Sydney 2000 Olympic Games:
a project management perspective
David Eager, Proceedings of the PMI Annual Seminar. Copyright © 1996 by
PMI Publications. Reproduced with permission of PMI Publications
via Copyright Clearance Center
Summary
The Sydney 2000 Olympic Games is a large-scale and very complex project involving a
diverse range of activities and large numbers of people. Given the nature and vast scale
of this project, sound and exemplary project management techniques and principles are
essential for its success. The strict time constraints set for the project increase the difficulties of managing cost and quality. The project will be regarded as successful if it is finished
on time, on budget, and to the required quality. Good quality means meeting the needs
specified by the organiser, to the standard and specification laid down, with a predictable
degree of reliability and uniformity, at a price consistent with the organiser’s budget and to
the satisfaction of the end-users. This review discusses issues that need to be addressed to
make this project a success.
Introduction
The bid was prepared by Sydney Olympics Bid Limited which drew on funds from the
private and public sectors and worked in close co-operation with the Australian Olympic
Committee. It enjoyed broad public support with 90 per cent of the people across
Australia supporting the bid. More than 100,000 volunteers offered their services. The bid
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was centred on the theme Share the Spirit and called on the people of Sydney to join in the
excitement of the bid, and invited the world to come and share the spirit of Sydney at the
Olympic Games in the year 2000. The bid also included a comprehensive set of environmental guidelines recognising the principle of ecologically sustainable development. The
guidelines promote energy conservation; water conservation; waste avoidance and minimisation; protection of air, water and soil from pollution; and protection of significant natural and cultural environments.
Some significant features
The New South Wales Government underwrites the games and is responsible for the
provision of new permanent venues and facilities needed for the games. It also provides
support services, particularly in the areas of transport, security and healthcare. The construction of new sporting facilities and refurbishment of existing facilities for the games is
being undertaken by the State Government’s Olympic Co-ordination Authority, namely:
Sydney Organising Committee for the Olympic Games (SOCOG).
The staging of the 2000 Games is the responsibility of SOCOG, which was established
in November 1993 by legislation in the New South Wales Parliament.
Except for some football preliminaries, all Olympic events are planned to be held in
metropolitan Sydney in venues within 30 minutes’ travel from the Olympic Village.
No training facility will be more than 45 minutes away from the village. The focus
is mainly on two Olympic zones, namely: the Sydney Olympic Park, situated at
Homebush Bay about 14 km west of the Sydney city centre, and the Sydney Harbor
zone located near the Sydney city centre and accessible by road, rail and ferry from
Sydney Olympic Park.
A series of test events in the years preceding the Olympic Games is planned with the
aim of trialling the Olympic venues, training the technical officials and volunteers who
will help conduct the events at the Olympic Games, and selectively trialling arrangements
for accreditation, transport, security, broadcasting, media and other services.
Infrastructure – preparation work for the games
A significant number of Sydney’s Olympic venues already exist. Most of the remaining
facilities required for the games will be constructed as part of the redevelopment programme being undertaken at Homebush Bay.
Key elements of the Homebush Bay area include the construction of new sporting facilities, establishment of a new showground and major exhibition centre, development of residential and retail areas, and the establishment of a commercial centre for high-technology
industries. A main press centre and the Olympic village with accommodation for 10,000
athletes and team officials also comes under the umbrella of the Olympic Park.
Recently completed major transport projects such as Sydney Harbor Tunnel, M4 and
M5 Motorways, and Glebe Island bridge, together with the major projects currently in
progress, such as City West Development, Ultimo-Pyrmont light rail system, Airport City
Link and the railway loop line to link the Olympic Park with the Sydney rail network’s
main western rail line, will ensure that an effective transport system will be available for
the Olympic Games.
During Sydney’s bid, a campaign to register volunteers was conducted by the St George
Bank which attracted more than 100,000 people. Sydney will require 35,000 people from
all walks of life to form a volunteer workforce essential for the smooth running of the
5 games.
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Definition of the project
The objective of the Sydney Olympic Games Programme is to stage the year 2000 Olympic
Games at specified locations in Sydney. Although the New South Wales Government is
underwriting the project activities, there is no clearly defined client for the programme.
There are many stakeholders and customers, including the citizens of New South Wales,
the New South Wales Government, the Australian people, the International Olympic
Organisation, the international community as a whole, the athletes, and Australian and
international business communities. The scope of the project comprises organising all the
games and ceremonies, putting in place technology and resources required to stage the
games, public relations, and fundraising. Criteria for the success of the project include
trouble-free performance of the games, the level of public enthusiasm and enjoyment generated by the activities, and resultant sustained economic activity generated within New
South Wales and Australia, and continued interest in the Olympic Games for the future.
SOCOG was appointed to manage the project by legislation. In addition to SOCOG
there are other organisations that directly contribute to the success of the games.
International Olympic Committee, Australian Olympic Committee, Sydney City Council
and Olympic Co-ordination Authority (New South Wales Government) have been made
party to the host city contract. Olympic Co-ordination Authority is responsible for all the
infrastructure projects, almost all of which are not being built specifically for the Olympic
Games. These projects are either already under way or are being re-programmed to accommodate the games. Completion of these projects on time is vital to the success of the
Olympic Games. The general rule of thumb used by the Government has been to relocate
infrastructure projects initially external to the games under the games umbrella.
The infrastructure construction is the responsibility of the government and is overseen
by the Olympic Co-ordination Authority. To make matters more complicated, the scope of
work of SOCOG is restricted to organisation of the events. The games budget in nominal
terms is A$1.847 billion (US$1.4 billion).
There is an explicit need to control the cost of all its activities very carefully. Any major
cost overruns will alienate the public and will have adverse effects on the success of the
games.
The project can be broken into the following major areas of work (as a work breakdown
structure):
events
● venues and facilities, including accommodation
● transport
● media facilities and co-ordination
● telecommunications
● security arrangements
● medical care
● human resources, including volunteers
●
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Revenue for the games is expected primarily from television rights fees, sponsorships,
coin marketing royalties, licensing fees, and ticket sales.
It is estimated that during the period 1994–2004 the Olympics could add A$7.3 billion
to Australia’s gross domestic product, create 150,000 full- and part-time jobs, and bring an
extra 1.3 million visitors to Australia. In order to safeguard sponsorship fees and sponsors’
and licensees’ benefits from ambush marketing, the New South Wales Government has
legislated the Sydney 2000 Games (Indicia and Images) Protection Bill 1996.
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cultural Olympiad
● pre-games training
● information technology projects
● opening and closing ceremonies
● public relations
● financing
● test games and trial events
● sponsorship management and control of ambush marketing.
●
Each of these items could be treated as a project in its own right. Further, an enormous co-ordination effort will be required to ensure these, and therefore the entire games
project, are delivered on time.
Critical project dimensions
Time is the most critical dimension of the Sydney 2000 Olympic Games project. As the
project must be completed and ready for staging the Olympic Games on the stipulated
dates, any shortcomings in the time dimension will have to be offset by sacrificing the
other two dimensions, namely: cost and quality. However, performance on all three dimensions is vital for the success of the project.
Time dimension
Sydney is fortunate in having sufficient infrastructure capacity either existing or under
construction to cater for an event of this magnitude. It is anticipated that the infrastructure projects under construction will be completed well in advance of the commencement
of the Olympic Games. Any delays in the completion dates could be accommodated without much difficulty. The criticality of the time dimension applies mainly to other activities
and timing of individual activities such as events, opening and closing ceremonies, and so
on. To ensure that the time dimension is achieved, the Sydney Organising Committee for
the Olympic Games has adopted strategies such as: holding frequent co-ordination meetings with the organisations and parties responsible for delivering the required items, setting
target dates well in advance of the main event, designing test events, and trialling events as
milestones for the critical items.
For the construction projects, estimation of the time dimension should be relatively
straightforward. Expertise is available within the construction industry to produce reasonable estimates. Critical path methods, precedence block diagrams and programme evaluation and review are employed to control the uncertainties in the time dimension. Proper
plans must be prepared for these construction activities. All persons who may be affected
by these programmes should have an opportunity to comment on the plan. Instruments
should be put in place to monitor the progress against the programme continually. The
programme should include enough leeway or float to allow minor problems to be accommodated without causing major changes to the timing of the overall programme. Elements
which are expected to have most impact on the programme must be identified and defined
as early as possible, and an adequate series of milestones must be established to allow monitoring of the progress of the programme.
At this early stage of the programme or project life cycle the time required to complete tasks for particular events introduces uncertainties. These uncertainties are related
to the nature of the tasks involved. Some non-construction projects – such as developing
software to monitor the games’ progress, establishing the games’ database and systems to
disseminate the information to general public – have larger uncertainties inherent in
ENTERPRISE MANAGEMENT
Cost dimension
The cost estimates of the construction projects are not reflected in the games’ budget as the
infrastructure projects are undertaken outside the games project.
Sydney’s games’ budget is based on conservative assumptions and estimates of games’
receipts and payments. Receipts are mainly from television rights and international and
local participation. The financial planning process included:
consultations with both national and international experts in the fields relevant to both
receipts and payments;
● consultations with the Barcelona Organising Committee, the International Olympic
Committee, and the Australian Olympic Committee;
● review and analysis of results and budgets from previous games and bid candidature;
● independent analysis of construction costs by quantity surveyors Rider Hunt;
● independent review of the estimates by auditors Price Waterhouse.
●
The NSW Audit Office cost estimates appear to have been produced using appropriate
methodologies. However, even though the cost estimates were prepared using appropriate
methodologies it is necessary to develop strict cost control mechanisms in order to keep
the overall project costs to the minimum. It is worth noting that the major portion of
the games’ budget is for the events and ceremonies, and the nature of these programmes
is such that there are considerable uncertainties inherent in these items. Further, the time
and cost dimensions of these events are tightly interrelated. Consequently, any slippage in
timing of the programming, training and testing of these activities could lead to large cost
escalations.
Due to the predicted rapid change in technology it is highly likely that there will be
variations in requirements or design. As a general rule, it is undesirable to allow too many
such changes, since they are a major source of cost escalation in any project and especially
in projects such as this. Some variations may be to a cost advantage, but this is the exception rather than the norm.
Cost escalations would lead to disillusionment among the public and would diminish the public appeal of the games, thus affecting public support and a vital source of
volunteer games staff. Any cost overrun will have to be met by the taxpayer, as the
New South Wales Government has underwritten the host city contract. This could
also become a major political issue. Maintaining the costs within budget is vital to the
games’ success.
Quality dimension
This is the most difficult dimension of the project to define. The quality is threefold:
1. good quality versus high quality
2. fit for purpose
3. conforming to the customer requirement.
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the system. Some new technologies may have to be developed to adapt to the advances
in the way the information is distributed to the public and media. For example, the
Atlanta 1996 Olympic Games had a dedicated Internet facility to give the public access
to games information. Since Internet technologies are changing very rapidly, the way
information is given out to the public may also change in line with advances in technology. It is difficult to predict what these advances may involve until much closer to the
actual event.
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As part of the host city contract, the International Olympic Committee has specified
certain quality requirements for the Sydney 2000 Olympic Games. The New South
Wales Government has specified certain environmental guidelines that all Olympic ventures should follow. Within the public mind there is also a concept of the level of quality
and excellence the Olympic Games should achieve. The SOCOG itself will set its own
quality standards mainly in performing its duties. Sponsors will demand a certain quality
standard. Some of these standards are currently only at the conceptual stage. As the project
progresses through its life cycle these standards need to emerge. Each programme component will have its own definition of quality and standards.
One of the major areas of quality which should not be underestimated nor forgotten
is the aspect of security. Responsibility for management of Olympic Games security lies
with the Olympic Security Planning and Implementation Group (OSPIG). It would
appear that there is a significant weakness in the security planning process, in that it
lacks coordinated project control. Rather than being developed as a strategic programme,
activities are being undertaken as disparate tactical operations. This has occurred because
Olympic Security is being used to expand existing programmes rather than being managed
as a separate programme. The focus has been on integrating existing activities to provide
security for the games, rather than on developing an effective games security plan and then
integrating existing programmes when practical.
Wherever there is public involvement in large projects, it is generally not sufficient to
have good quality or fit-for-purpose quality. The public demands very high quality standards. The quality of the game events is likely to be judged by the absence of delays and
clockwork precision with which the public expects events to proceed. In the case of transport, quality is judged by lack of traffic jams and hold-ups. The quality of security will be
judged by perceived public safety and lack of incidents such as terrorism.
In construction projects, quality can be clearly defined, for example, as fit for purpose
or conforming to strict environmental guidelines. In projects such as the games there
are difficulties in defining quality, particularly in the early stages of the development
cycle.
Adoption of total quality management techniques in these programmes could improve
the quality of the delivered Olympic Games. The essential ingredients of a total quality
management system are: quality of the product as the ultimate goal; quality management
process; quality assurance systems; and attitude.
Where clear specifications and well-defined standards are difficult to formulate, engaging experienced personnel and experts may be particularly desirable. The product (e.g.
events or performances) should be thoroughly tested prior to the games, allowing ample
time to make necessary modifications at least cost.
A good management process is vital to the delivery of a high-quality product. It is necessary to establish milestones and set procedures for the management process to achieve
quality.
As mentioned above, cost and quality are closely related. Quality comes at a price.
This applies particularly to a project like the Olympic Games when completion on time
is critical, and the cost of failure is extremely high for any of the items included in the
project.
Only through closely controlled quality management processes and early identification
of the possibility of failure can the success of the programme be ensured. Several safeguards
have been put in place both by the International Olympic Committee and the New South
Wales Government to ensure the delivery of the games is to an acceptable quality.
ENTERPRISE MANAGEMENT
Afterword
The preparations of SOCOG appear to have paid off handsomely. Not only were
the games and associated events eminently successful, but Sydney now benefits from
greater levels of international investment as a result of its higher and more prestigious
profile.
SOCOG raised A$2.3 billion to pay for the games whose total bill only came to A$1.9
billion. The infrastructure changes to airport terminals, transport networks and the sports
facilities have all added to the effect on the economy: six to seven billion tourist dollars in
2000 (the year of the games) alone.
Discussion points
Discuss these with your study group before reading the suggested outline solutions:
1. Explain why project scope management was critical to the Sydney 2000 project. Try
to illustrate your answer with other projects you may know about or have worked on
yourself and draw parallels.
2. Discuss the concept of quality, with reference to what you consider the meaning of
quality to be for the Sydney 2000 project.
3. Explain why time management was critical to the Sydney 2000 project.
Outline solutions
1. As evidenced by the above narrative, the scope of the Sydney 2000 project was very
large and complex. As a public project, the management and control of all aspects is
critical to the overall success of the project. Recent large-scale public projects have
had a history of overrunning on time and cost (for example, the Channel Tunnel).
Effective project scope management should safeguard or at least reduce these problems. Importantly, project scope management ensures that only the work required to
complete the project successfully is carried out, and that the overall project does not
become overburdened with unnecessary activities and costs. Project scope verification
and acceptance will be essential to ensure that quality requirements are achieved. This
kind of project will be open to constant and detailed public scrutiny; clarifying scope in
the early stages of the project management process is vital for project success.
2. For the Sydney 2000 games, quality means satisfying the needs of the organising committees to a predefined standard and set of specifications required for a large-scale
sporting event. Quality will also mean reliability and, to a certain extent, uniformity. It
is important to consider quality in the context of each project. This may involve:
● Balancing high quality with desired quality. Desired quality is defined by the purpose of the project. Different aspects of the games project will have different quality
requirements;
● Fitness for purpose. This again will depend upon each individual element of the
project, for example the security measures, transport arrangements for the athletes,
or the location and adequacy of the sporting facilities. If any element of the project
THE PROCESS OF PROJECT MANAGEMENT
Conclusion
Good communications are vital to the success of the project and to effective control of all
three dimensions. Trial games and test programmes will serve to control all three dimensions and should be treated seriously. The planned trials in the coming years will be an
excellent opportunity to monitor, control or correct any deficiencies in the project.
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is not considered to be fit for purpose then it cannot be used and is therefore of poor
quality;
● Achieving the customer requirements. The notion of fitness for purpose must also consider customer requirements. Therefore, any aspect of the project can only be of sufficient quality if it meets customer requirements.
3. Time management is a critical aspect of the Sydney 2000 project, because as of
September 2000 the eyes of the world will be focused upon the Sydney Olympic
Games. If the games are not ready on time, the project will quite obviously be
considered a failure. This will include both political embarrassment, and financial implications for the organisers and commercial sponsors relying on financial profits. The Sydney 2000 project will only be completed when all of the
various systems and subsystems have been tested and retested prior to the games
commencing.
Comparing PRINCE2 with PMBoK
R. Max Wideman, © R. Max Widemanhttp://www.maxwideman.com.
Published with permission. This material is offered to individual readers freely
in connection with their project work. It may not be used by commercial or
non-commercial organisations without permission
Introduction
From time to time we are asked to recommend project management systems and methodologies, or to compare them as part of some selection process. We have been taking an
in-depth look at PRINCE2, a widely recognised de facto standard used extensively by the
UK government and in the private sector. As a basis for comparison, and because we are
located in North America, we will refer to the Project Management Institute’s ‘PMBoK’
which actually refers to their publication A Guide to the Project Management Body of
Knowledge (2000 Edition).
‘PRINCE’ stands for Projects IN Controlled Environments and is described as a structured method for effective project management for all types of project, not just for information systems, although the influence of that industry is very clear in the methodology.
The 2002 version has been through a number of incarnations in the past and is now the
result of the ‘experience of scores of projects, project managers and project teams.’ The
408-page document, like the Guide (216 pages) is copyright, but the content is clearly
generic common sense. The PRINCE2 Introduction lists a significant set of reasons why
projects fail, and the methodology sets out to remove these causes.
It must be borne in mind that both sets of documentation must be tailored to suit
the occasion. For example, PMBoK is not intended to tell people how to do any of the
techniques or use any of the tools described. It only lays out the processes, how they link
together and the tools and techniques that can be invoked. Somewhat similarly, the application of PRINCE2 must be scaled for the size and needs of the project. Indeed, scalability
is a topic specifically included in the description of each process.
Project life cycle and major processes
The first difference to notice is that PRINCE2 is clearly project life cycle based with six
out of eight major processes running from ‘Starting up a project’ to ‘Closing a project’.
The remaining two, ‘Planning’ and ‘Directing a project’ are continuous processes supporting the other six. Each of these have their respective sub-process totaling 45 in all.
ENTERPRISE MANAGEMENT
Management levels and responsibilities
PRINCE2 recognises four parallel levels of management: ‘Corporate or Programme
Management’, ‘Directing a Project’ (i.e. the Project Board, chaired by the ‘Executive’, more
often called ‘Project Director’ in North America), ‘Managing a Project’ (i.e. the project
manager’s level) and ‘Managing Product Delivery’ (i.e. team-level technology management). In this way, the corporate business or programme management interests are closely
integrated with both project management at the project level as well as with the management of the project’s technology at the team level.
Another interesting feature is the responsibility of the project manager. The Guide
defines project manager simply as ‘An individual responsible for managing a project.’
The Software Engineering Institute goes further and calls it ‘The role with total business
responsibility for an entire project; the individual who directs, controls, administers, and
regulates a project … [and] is the individual ultimately responsible to the end user.’
THE PROCESS OF PROJECT MANAGEMENT
Then, feeding into the system, are six ‘Components’ some of which are documents and
others that are themselves processes. Finally, PRINCE2 describes three techniques namely:
‘Product Based Planning’, ‘Quality Review’ and ‘Change Control’. The whole t; document is presented as an easy-to-follow narrative, bulleted checklists, process diagrams and
timely ‘Hints and Tips’. By comparison, the Guide consists of twelve chapters describing
function-based knowledge areas with illustrations of their respective project management
processes and narrative descriptions in the form of inputs, tools-and-techniques, and
outputs.
There are a number of interesting differences between the Guide and PRINCE2 philosophies. PRINCE2 speaks of ‘stages’ rather than ‘phases’ and states that while the use of
stages is mandatory, their number is flexible according to the management requirements of
the project. PRINCE2 also differentiates between technical stages and management stages.
Technical stages are typified by a particular set of specialist skills, while management stages
equate to commitment of resources and authority to spend. The two may or may not coincide. The Guide defines a project phase as: ‘A collection of logically related project activities, usually culminating in the completion of a major deliverable.’ It does not distinguish
between phases and stages and in the text uses either indiscriminately.
The PRINCE2 project life cycle does not start with original need, solution generating
and feasibility studies – these are considered as inputs to the project life cycle, perhaps as
separate projects in their own right. For example, PRINCE2 describes a product’s life span
as having five phases: Conception, Feasibility, Implementation (or realisation), Operation
and Termination but, of these, only implementation is covered by PRINCE2. Indeed, the
manual states ‘Most of what in PRINCE2 terms will be stages will be divisions of ‘‘implementation’’ in the product life span.’ management, rather than a whole project management methodology.
Indeed, PRINCE2 assumes that the project is run within the context of a contract
and does not include this activity within the method itself. However, it suggests that
since contracting and procurement are specialist activities these can be managed separately using the methods. The Guide, on the other hand, recognises that the project
needs assessment or feasibility study may be the first phase of the project, although it
also defers to other life cycles used in various industries. The presumption in the Guide
is that Project Procurement Management, where required, is part of the overall project
management process and is viewed from the perspective of the buyer in the buyer–seller
relationship.
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PROJECT
MANAGEMENT
4. Project Integration
Management
4.1 Project Plan Development
4.2 Project Plan Execution
4.3 Integrated Change
Control
5. Project Scope
Management
5.1
5.2
5.3
5.4
5.5
7. Project Cost
Management
7.1
7.2
7.3
7.4
Resource Planning
Cost Estimating
Cost Budgeting
Cost Control
8. Project Quality
Management
8.1 Quality Planning
8.2 Quality Assurance
8.3 Quality Control
10. Project Communications
Management
10.1
10.2
10.3
10.4
Communications Planning
Information Distribution
Performance Reporting
Administrative Closure
Figure 1
Initiation
Scope Planning
Scope Definition
Scope Verification
Scope Change Control
11. Project Risk
Management
11.1
11.2
11.3
11.4
11.5
11.6
Risk Management Planning
Risk Identification
Qualitative Risk Analysis
Quantitative Risk Analysis
Risk Response Planning
Risk Monitoring and Control
6. Project Time
Management
6.1
6.2
6.3
6.4
6.5
Activity Definition
Activity Sequencing
Activity Duration Estimating
Schedule Development
Schedule Control
9. Project Human
Resource Management
9.1 Organizational Planning
9.2 Staff Acquisition
9.3 Team Development
12. Project Procurement
Management
12.1
12.2
12.3
12.4
12.5
12.6
Procurement Planning
Solicitation Planning
Solicitation
Source Selection
Contract Administration
Contract Closeout
Overview of Project Management Knowledge Areas and Project Management Process
In sharp contrast, under PRINCE2 the project manager is ‘The person given the
authority and responsibility to manage the project on a day-to-day basis to deliver the
required products within the constraints agreed with the Project Board.’ These constraints
are referred to as ‘tolerances’ and prescribe the ranges of acceptability of each scope, quality, time and cost within which the project manager must manage. Any trend beyond these
limits becomes an ‘issue’ and must be brought to the attention of the project board.
‘The project board is chaired by a person referred to as ‘executive’ and it is this person who has the real responsibility for the project. This individual ensures that the project
or programme maintains its business focus, that it has clear authority and that the work,
including risks, is actively managed. The chairperson of the project board, represent[s] the
customer and [is] owner of the business case.’
To us, this sounds very much like a project director, who provides the leadership on
the project, while the project manager provides the managementship. By comparison, the
Guide does not recognise either ‘executive’ or ‘project director’ but uses the term ‘sponsor’.
The sponsor is one of the project’s stakeholders and is defined as ‘The individual or group
within or external to the performing organisation that provides the financial resources,
in cash or in kind for the project.’ So, one can conclude that under the Guide, it is the
project manager who is firmly in charge.
ENTERPRISE MANAGEMENT
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Controls
Initiating a Project
Directing a Project
Controlling a Stage
Key
Quality Review
= Techniques
Figure 2
Plans
Quality
Mgmt of Risk
Business Case
Controls
Controls
Change Control
Configuration Mgmt
Change Control
Managing Product
Delivery
Pink
Plans
Mgmt of Risk
Organisation
Business Case
Planning
Starting up a Project
Change Control
Plans
Controls
Managing Stage
Boundaries
Plans
Business Case
Mgmt of Risk
Controls
Organisation
Closing a Project
Controls
Configuration Mgmt
Business Case
Grey
= Component
Clear
257
Productbased
Planning
= Process
Use of PRINCE2 components and techniques in the processes
Authority documentation
PRINCE2 tends to be heavy on documentation. A project has a set of progressive governing documents in its series of processes, a sequence that we had a little difficulty in following. The very first document is the ‘Project Mandate’. As PRINCE2 states, this document
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may come from anywhere, but should at least come from some level of management that
can authorise the cost and resource usage commensurate with the size and type of project.
It must contain sufficient information to trigger the first ‘Starting up a Project’ (SU) process, and in that process is converted into a ‘project brief ’. The Guide recognises neither
business case nor project brief.
The SU process is intended to be of short duration and is designed to ensure that all the
necessary players, and pieces, are in place prior to the real start of the project. It assumes
that a provisional ‘Business Case’ exists, although if it does not, it is created during the SU
process. The business case justifies the undertaking of the project in terms of reasons, benefits, cost, time and risk and the source of this information is the project mandate or the
project brief, the project plan and information from the customer. The business case is a
dynamic document that is updated throughout the project to reflect changing conditions,
although it is ‘baselined’ during the subsequent ‘Initiating a project’ process.
The output of the SU process is an ‘Initiation Stage Plan’ that ensures the required people are identified, and that the information they will need is contained in a project brief.
The project brief is a relatively simple document providing background, project definition
(i.e. what the project needs to achieve), the outline business case, the customer’s quality
expectations, acceptance criteria and any known risks.
This documentation feeds into the ‘Initiating a project’ (IP) process, the output
of which is a ‘Project Initiation Document’ (PID). Unlike the business case, which is
updated, the PID is a substantial and stable document, except for the background attachments such as the business case. The PID is intended to define all of the questions what,
why, who, when, and the how of the project. It is the base document against which the
project board will assess progress, the change management issues, and the ongoing viability of the project. Concurrently with the preparation of the PID, the first project stage is
planned leading to the authorisation by the project board of the project’s first stage.
The Guide’s equivalent of the PID is the ‘Project Charter’ which is an output from the
Initiation process under the knowledge area of Project Scope Management. The Guide
defines project charter as ‘A document issued by senior management that formally authorises the existence of a project. And it provides the project manager with the authority to
apply organisational resources to project activities.’
Special project management roles
PRINCE2 does not define management jobs, instead preferring to define roles, that may
be allocated, shared, divided or combined according to the project’s needs. In addition to
the usual roles of project board, project manager, team manager and so on, and executive
as described earlier, PRINCE2 introduces a number of other distinctive roles to facilitate
its methodology. For example:
Project Support Office (PSO) is conceived as a central pool of skilled resources, such
as clerical, configuration librarians and even PRINCE2 consultants serving a number of
projects. The manual states that a PSO is not essential, but it can be useful to support
managers with their administrative tasks and ensure proper use of PRINCE2 across all
projects. To the above list, we would add other expertise such as planning and scheduling,
estimating, forecasting and project accounting. In fact, a number of other special responsibilities are suggested in the role description.
Executive, as noted earlier, is the person who chairs the project board. Supported by
the senior user and the senior supplier, executive is the single individual with ultimate
ENTERPRISE MANAGEMENT
Document description outlines
PRINCE2 includes descriptions of thirty-three standard management ‘products’ that are
invoked through the PRINCE2 methodology. Many of these documents are standard fare,
such as various plans and reports, for which it is most useful to have detailed listings of
required contents. However, in addition to those mentioned earlier, certain unique documents are worthy of special mention in the context of managing projects successfully. For
example:
Acceptance Criteria, defines in measurable terms what must be done for the final product to be acceptable to the customer and staff who will be affected. This is either provided
by programme management, or is developed during the starting-up-a-project process. It
seems to us that this is essential information often overlooked in many projects.
Configuration Item Record: Configuration management is defined as the discipline that
gives management precise control over its assets (including the products of a project), covering planning, identification, control, [etc]. The configuration item record provides the
required information about the status of each and every item and makes reference to the
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responsibility for the project. He or she ensures that a project or programme meets its
objectives and delivers the projected benefits.
Senior User, a member of the project board, is responsible for the specification of the
needs of all those who will use the product(s), for user liaison with the project team and for
monitoring that the solution will meet those needs within the constraints of the Business
Case in terms of quality, functionality and ease of use.
Senior Supplier, also a member of the project board, represents the interests of those
designing, developing, facilitating, procuring, implementing and possibly operating and
maintaining the project products. The senior supplier is accountable for the quality of
products delivered by the supplier(s), and must have the authority to commit and acquire
supplier resources required.
Note that both these roles may each be represented by more than one person, and that
they liaise directly with the team members who are responsible for producing the project’s
products. Therefore, great care must obviously be taken to ensure that the project manager’s authority on the project is not circumvented and that his or her ability to manage the
project is not thereby undermined.
Project Assurance covers all interests of a project, including business, user and supplier.
PRINCE2 requires that this service is independent of the project manager and therefore
cannot be delegated there. Project assurance is a responsibility shared between the executive, senior user and senior supplier.
Configuration Librarian is a role responsible as a custodian and guardian of all master copies of the project’s products. It also maintains the project’s issue log. Although this
refers primarily to management documents and product documentation, rather than physical objects, nonetheless it is not a trivial task on most projects. It includes controlling the
receipt, identification, storage and retrieval of all such documents, providing information
on the status of all projects, as well as numbering, recording, distributing and maintaining
the project’s issues records. The role is part of project support.
PRINCE2 does not discuss the ever-popular-in-North-America subject of people
management, as does the Guide in its chapter ‘Project Human Resources Management’.
However, PRINCE2 does describe in detail the responsibilities of ten project management
team roles that are included in its methodology.
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product breakdown structure, stage and team plans, relevant work packages, the quality
log and change control.
The Issue Log is the repository of a summary of all issues raised on the project that
need to be brought to the attention of the project and that require an answer. Issues may
range from a question or statement of concern, to an off-specification (e.g. a deficiency) to
a request for scope change. Such issues may be raised by anyone associated by the project
at any time. In PRINCE2, the issue log is an essential part of controlling project stages by
capturing all queries, problems and similar events in a consistent way before their proper
disposition has been determined. Each item can then be followed up until the required
action has been taken and the item cleared.
Similar to the issue log, the Risk Log provides a repository for the identification of all
project risks, their analysis, countermeasures and status. PRINCE2 recognises risk as a
major component to be considered during the management of a project and is factored
into all of the major processes. Project management must control and contain risks if it is
to stand a chance of being successful.
The Lessons Learned Log is a repository of any lessons learned, both good and bad, that
cover management experiences or use of specialist products and tools, and so on that can
be usefully applied to other projects. Captured during the project, these items provide the
basis for writing up a formal lessons learned report at the end of the project. We recognise
this as an essential feature of the ‘Learning Organisation.’
With the exception of lessons learned, these documents are not discussed in the Guide.
Planning and scheduling
Product-based planning is a key feature of PRINCE2, providing a focus on the products
to be delivered and their quality. It forms an integral part of the Planning (PL) process and
leads into the use of other generic techniques, such as network planning and Gantt charts.
It provides a product-based framework that can be applied to any project, at any level, to
give a logical sequence to the project’s work. A ‘product’ may be a tangible one, such as
a machine, a document or a piece of software, or it may be intangible, such as a culture
change or a different organisational structure.
PRINCE2 describes three steps to the PL technique: (1) Producing a Product
Breakdown Structure (PBS); (2) Writing Product Descriptions; and (3) Producing a
Product Flow Diagram. Each step is described in detail and excellent examples are provided as illustration. In step 2, writing a clear, complete and unambiguous description of
products is a tremendous aid to their successful creation. The corollary is, of course, that
if it is not possible to write the description, then more work, or another iteration, is necessary to ferret out the necessary information. In step 3, the products are re-ordered into
their logical sequence to form a product flow diagram.
The original PBS can become very detailed because the links between the products in
the product flow diagram represent the activities required to create them, and every product must be included to capture every activity. The converse is that no activity is necessary
unless it contributes to the final outcome. A correctly formed product flow diagram, therefore, not only identifies the activities involved but also leads to a network dependencybased schedule or Gantt chart. PRINCE2 provides a good explanation of the technique
and specifies the associated documentation to go with it.
In the Guide, planning generally is seen as part of key general management skills, is one
of the five process groups applied to each phase and is therefore recognised as an ongoing effort throughout the life of the project. Planning is discussed in the chapter ‘Project
ENTERPRISE MANAGEMENT
Control
In PRINCE2, control of the technical work is exercised through the authorisation of work
packages. According to the manual, control is all about decision-making and is central to
project management. Its purpose is to: Produce the required products, meeting the defined
quality criteria; Carry out the work according to schedule, resource and cost plans; and
Maintain viability against the business case. We have some concern over this last item
because the business case is a ‘dynamic’ document, updated from time to time. There
could therefore be a tendency to match the business case to the current reality rather than
controlling the current reality to the business case justification.
The work package control is used to allocate work to individuals or teams. It includes
controls on quality, time and cost and identifies reporting and hand-over requirements.
The individuals or teams report back to the project manager via checkpoint reports or
other identified means such as triggers, and by updating the quality log.
In the context of control, PRINCE2 establishes a good distinction between ‘tolerance’, ‘contingency’ and ‘change control’. Tolerance is the permissible deviation from plan
allowed to the project manager without having to bring the deviation to the attention
of the project board. Contingency, in PRINCE2 terms, is a plan including the time and
money set aside to carry out the plan, which will only be invoked if a linked risk actually
occurs. Change control is a procedure designed to ensure that the processing of all project
issues is controlled, including submission, analysis and decision-making. The process is
described in detail starting with project issue management.
In the Guide, like planning, Change Control is discussed as part of Project Integration
Management, and, also like planning, is to be found referenced in many of the other
Guide chapters.
Summary
PRINCE2 and the Guide take very different approaches to the presentation of their material. Indeed, they really serve different purposes and are therefore not directly comparable.
We believe that the Guide takes that best approach for purposes of teaching the subject
content of each knowledge area, but is not so affective when it comes to providing guidance for running a particular project. Of course, the corollary is also true. In a life-cyclebased presentation like PRINCE2, it is difficult to do justice to each knowledge area.
For example, as we discussed under planning and scheduling, PRINCE2’s approach is a
single unified methodology starting from developing the initial product breakdown structure through to identifying the corresponding network schedule. In our view, this straight
forward and well-explained proposition should clearly lay to rest the controversies that we
have seen in North America. That is, over whether a work breakdown structure should be
product or activity based, which comes first, and how they are related.
While PRINCE2 is designed for a variety of customer/supplier situations, the manual
has been written on the assumption that the project will be run for a customer with a single (prime) supplier involved throughout. This has a bearing on both the organisation and
the details of control. The implication is that PRINCE2 is in the hands of the supplier
THE PROCESS OF PROJECT MANAGEMENT
Integration Management’, and the essence of which is to create a consistent, coherent
document that can be used to guide both project execution and a baseline against which
changes will be controlled. However, planning also appears in each knowledge area and t;
must be integrated across all of them. Because of this fragmentation, an attempt is made
for ease of reference to map the Guide’s various content to the planning process.
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rather than the sponsoring organisation. The manual as such does not cover the situation
of multiple prime contracts (i.e. trade contracts) directly under the control of an owner as
is the case, for example with a developer using construction management techniques. In
such cases, the issues of work coordination responsibility are much more complex.
In describing a project, the Guide explains that ‘Projects are often implemented as a
means of achieving an organisation’s strategic plan’ and ‘Projects are undertaken at all levels
of the organisation.’ The Guide is generally written from this perspective throughout, that
is to say, from the project owner’s perspective rather than from that of a supplier or seller.
Consequently, the Guide covers more ground than does PRINCE2.
Nevertheless, within its self-prescribed limitations, PRINCE2 provides a robust easy-tofollow methodology for running most projects, that is where the objectives are clear and
the deliverables are either well described, or capable of being so.
It seems to us that both PRINCE2 and the Guide have chicken-and-egg problems in
the area of documentation for project initiation. Our strong preference is for the generic
project example to start with a ‘conception’ phase. This phase, short or long, is the opportunity to assemble the owning organisation’s needs that could be potential projects, and
analyse and select the best opportunity for serious study. This is the time to articulate that
best opportunity in terms of big picture, vision and benefit. It should result in a viable
business case as the stage-gate measure.
Following approval of the business case, the project then moves into its second major
phase. In this phase, the project’s concept is developed by studying and testing alternatives
and conducting feasibility studies. At the same time, the intended products are defined as
far as possible through the necessary customer/user input. With the products defined, an
implementation plan can be formulated that covers the project’s scope and quality grade,
and time and cost tolerances.
The whole can then be assembled into a formal project brief or project charter and presented to the management for approval of a major commitment of cash and resources.
Such a life-cycle design represents a simple straight forward progression with only two
major project documents as stage-gate controls. Considering that it is in the conception
and definition phases that the most critical project decisions are made, it is surprising
that more focus is not given to this part of the project life cycle by both the Guide and
PRINCE2. Indeed, as PRINCE2 observes, ‘A lot of time can be wasted in producing a
very good plan to achieve the wrong objective’ and ‘Finding out that a product doesn’t
meet requirements during its acceptance trials is expensively late.’
While on the subject of project life cycle, there is room for improvement in both documents for dealing with the final phase of a project in which the product(s) are transferred
into the care, custody and control of the customer or user. The product resulting from the
project may be excellent and fully up to specification, but if the final transfer is not handled with appropriate delicacy, the reaction to it may still be negative and the project seen
as a failure. We use the term ‘delicacy’ advisedly, because this part of the project is often
fraught with political overtones. After all, who wants to change the way they do things
anyway?
Clearly, both the front and back ends of the project are fruitful territories for academic research and improved best practices: the front end for better project identification
and selection, and the back end for better communication and training in the use of the
project’s product. If these aspects were properly recognised and documented in standard
methodologies, perhaps sponsors would be more willing to set aside the necessary funding
to ensure higher chances of project success.
ENTERPRISE MANAGEMENT
THE PROCESS OF PROJECT MANAGEMENT
Max Wideman is a retired Canadian professional engineer and project manager with
experience in systems, social and environmental projects, as well as design and engineering projects. He is a Fellow of Project Management Institute, of which he is the past
president and chairman, and for whom he developed the 1987 version of the Project
Management Body of Knowledge. He also enjoys Fellow status in the Institution of Civil
Engineers (UK), the Engineering Institute of Canada, and the Canadian Society of Civil
Engineering. He has lectured or presented papers in 11 countries and has contributed
books, chapters, papers and articles on many project management topics. His latest book
is A Management Framework for Project, Program and Portfolio Integration, Trafford, BC,
2004. Comprehensive coverage of project management theory and practice can be found
on his website at http://www.maxwideman.com.
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Revision Questions
5
Section A type questions
Question 1
The term feasibility is often used when assessing the viability of projects.
Requirements
(a) Explain the term feasibility.
(2 marks)
(b) Discuss the aspects of feasibility that are typically considered in project selection.
(8 marks)
(Total marks ⴝ 10)
Question 2
SWOT analysis is commonly used in project selection, as it helps the organisation focus
upon projects that will facilitate the organisation’s achievement of its strategic objectives.
Requirements
(a) Explain the term SWOT analysis, and how a SWOT analysis is used in project selection.
(5 marks)
(b) When selecting a project, should the lowest price proposals always be selected? Give
reasons for your answer.
(5 marks)
(Total marks ⴝ 10)
Question 3
R Company, a manufacturer and retailer of fashion clothes, has invested in a new technology system to improve the logistics of the movement of clothes between its warehouses
and chain of 250 retail outlets. Ensuring that the outlets have the right supply of clothes is
a critical success factor for the company.
However, the warehousing stock control and logistics project set up to develop and
deliver the new system has experienced numerous problems. The project ended up being
well over budget and was also late in delivering the system. Now, only 3 months after the
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REVISION QUESTIONS E2
new system has been installed, it is apparent that the project has not delivered its objective.
Instead, the company is facing a crisis with many store managers complaining that they
are not receiving the correct stock. Even worse, some stores are out of stock of key ranges,
whereas the warehouses are full of clothing.
A meeting between the project team and project sponsor has ended up with everyone
blaming each other, saying it was not their responsibility. It is clear that they did not use a
project management methodology and did not have adequate control systems in place so
that the problems that have now transpired could have been identified and rectified earlier
in the project life cycle.
Requirements
Recommend to R Company a project management methodology/approach, explaining
how it could have helped to prevent the failures of the warehousing, stock control and
logistics project.
(10 marks)
Question 4
R has taken on the responsibility for organising the annual conference for the local Society
of Management Accountants. Remembering the project management techniques she came
across when studying for her professional qualification, R has decided that critical path
analysis may be helpful in planning the conference.
As a start, R has drawn up a list of the activities she must complete in preparation for
the conference, she has identified the dependency between the different activities and the
time she thinks each will take.
Activity
Determine conference theme
Research alternative venues
Identify and book guest speakers
Book venue
Print conference papers
Print and send out invitations
Confirm final arrangements with venue and deliver documents
A
B
C
D
E
F
G
Dependency
Time (weeks)
–
–
A
B
C
D
E, F
3
6
4
2
8
4
2
Requirement
Using the information from the scenario, construct a network diagram and explain how
information from this could be useful to R in planning the conference.
(10 marks)
Question 5
T has just returned to his job in the finance department of Z Company, having spent the
last 6 months as a member of a project team working on the development of an educational visitors centre for the company.
Reflecting on his experiences whilst working on the project, he feels that most of his
time was spent in meetings that did not achieve anything, but rather wasted his time. He
also feels that the final stages of the project were not dealt with effectively, with the project
members going back to their functional jobs without any discussion or feedback on the
project performance and outcomes.
ENTERPRISE MANAGEMENT
Requirement
Evaluate the contribution of the various activities that should be carried out as part of
project closure, the post completion review and audit of the project.
(10 marks)
Question 6
The information below relates to the proposed installation of some new software:
Activity
Install new software
Test installation
Prepare master file data
Install and test master file data
Ensure all data entered into old software
Train staff on new system
Transfer account balances to new system
Parallel run new and old systems
Processing on new system only
Commencement date
– week number
Duration
1
4
3
5
5
4
6
7
9
3
1
2
1
1
3
1
2
As long as required!
Requirement
Prepare a Gantt chart to monitor the installation of the new software.
(10 marks)
Question 7
Project planning is a critical stage of the project management process, and this question
requires you to clearly explain why this is so, and to clearly state what planning involves. In
an exam question, you could be asked to put together a project plan for a given scenario,
and therefore it is important to have the basic knowledge of project planning stages.
Project planning is considered to be one of the most important stages of the project
management process.
Requirements
(a) Explain why project planning is vital to project management.
(b) Describe the steps involved in a detailed planning process.
(3 marks)
(7 marks)
(Total marks 10)
Question 8
It is often claimed that all project management is risk management since risk is an inherent
and inevitable characteristic of most projects. The aim of the project manager is to combat
the various hazards to which a project may be exposed.
Requirement
Explain the concept of risk and the ways in which risk can be managed in a project.
(10 marks)
THE PROCESS OF PROJECT MANAGEMENT
He has now been asked to take on the role as project manager for a new project and is
determined that he will improve the experience for his project team.
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REVISION QUESTIONS E2
Question 9
Once a project is under way, control of the project tasks and activities is critical. This question is designed to ensure that you understand the importance of control and how it is
undertaken.
Requirements
(a) Explain why it is important to control a project once it is under way.
(3 marks)
(b) Briefly explain how control is carried out.
(7 marks)
(Total marks ⴝ 10)
Section B type questions
Question 10
Trend plc is a large fashion retail chain. It currently has 48 stores throughout the country, mostly
in prime high street locations. These are coordinated by the head office through six regional
general managers who take full responsibility for the performance of the stores in their region.
You are currently employed by Trend as project finance manager on a major capital
investment – the full refurbishment of a newly acquired city centre store. This project,
with a total budget in excess of US$8 million, has been in progress for 9 months and is
nearing completion. All the major structural work has been completed to schedule, and
the services (gas, electricity, water, etc.) installed on time. The building is now undergoing
its ‘fit-out’ stage, where the interior is installed.
Today
On arriving at work this morning, you received a message from Jane Bell (the regional
general manager responsible for the new store) informing you that the project manager of
the refurbishment project has resigned. Jane asked you to deputise as project manager until
a replacement could be recruited. This situation obviously provides you with a challenging
opportunity, and you expect to gain valuable experience from it.
Talking to colleagues, you have managed to establish the circumstances leading to the
unexpected departure of the project manager. Apparently, there was a very heated meeting between the project manager, Jane, and the subcontract supplier of the goods elevator
which is being installed to carry stock from the basement stockroom to the retail floors.
At the meeting, the site manager of the elevator supplier apparently mentioned that the
installation was running late by 3 weeks. Jane pointed out that this situation would delay
the opening of the store, with disastrous cash flow impact.
At some point during the meeting, Jane appears to have become angry with the subcontractor and the project manager. Jane feels that she should have been informed about the
possible delay at the earliest opportunity, and that the project manager and subcontractor
were trying to hide the delay from her. The project manager apparently claimed (rather
forcefully) that it was his responsibility to manage the project, not Jane’s. The project manager also suggested that the delay was ‘a minor detail’, and that opening would not be
delayed. Jane apparently disagreed. Shortly afterwards, the project manager resigned and
left the site. The subcontractor has refused to do further work until Jane apologises.
Jane has given you an extract from the Gantt chart for the original project plan (Figure 5.2)
and says that it ‘proves the point’.
Jane says she has been ‘left in the dark’ by the project manager and ‘doesn’t like
surprises’. Apparently, Jane had always experienced problems in persuading the project
ENTERPRISE MANAGEMENT
Install gas services
Install electricity services
Install water and waste
Test all services
δ
Commission all services
Install goods elevator (GE)
Connect and test GE
δ
Commission and hand over GE
Install catering facilities
>51
Install heating and air conditioning
>53
Figure 5.2
Gantt Chart
manager to discuss progress, and has received only three written progress reports during the
last 9 months. Other than occasional conversations when she visited the site, this has been
her only contact with the project manager. Jane has called a ‘crisis meeting’ for tomorrow
with the managing director and finance director of Trend, which she wants you to attend.
Produce notes for tomorrow’s steering committee meeting that include:
(a) a brief explanation of the nature and purpose of SWOT analysis in project management;
(b) a SWOT analysis for the project as at today;
(c) a prioritised action list based on the SWOT analysis.
(4 marks)
(8 marks)
(13 marks)
(Total marks ⴝ 25)
Question 11
IDC Ltd is a software development company that specialises in designing and implementing internet websites and e-commerce systems for their clients. IDC Ltd is based in the
United Kingdom with a branch office in the United States; their clients are worldwide.
A large proportion of IDC’s work can be done via the Internet, although they do have to
visit their clients’ sites for the initial systems analysis and sometimes to participate in presentations, systems testing and implementation.
IDC employs 150 staff, split evenly between the United Kingdom and the United
States. Some projects are shared jointly between the two sites, with staff from the United
Kingdom and the United States working together. In the past, this has caused problems
due to lack of adequate communication between the staff. Most of the staff are specialists
and can only work on a small part of a project. The staff fall into the following categories.
Systems analysts – the main contact with the client, senior systems analysts also act as
project managers.
● Designers – IDC regularly uses specialist consultant graphic designers to design the graphics for the websites. The designers are commissioned to create an appropriate graphic
design for the site that will attract and hold the attention of ‘surfers’ and regular clients.
● Programmers – create the code required to run the website.
● Administrators, sales and marketing.
●
THE PROCESS OF PROJECT MANAGEMENT
Now
Week Week Week Week Week Week Week Week Week Week Week Week
44
45
46
47
40
41
42
43
36
37
38
39
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THE PROCESS OF PROJECT MANAGEMENT
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REVISION QUESTIONS E2
The staff work on projects in development teams, the membership of which can vary
depending on the requirements of the projects.
IDC Ltd provides a full development and maintenance service for their clients, starting
with an initial idea, ‘I think we could do with setting up a Website’ through to the handover to the client’s staff.
IDC has many projects in progress at any one time. Each project has a project manager
but can utilise any of the specialist staff as required. The workload does not follow any
particular cycle but does vary from time to time. At present there are a lot of projects in
progress, some of which are being held up as the specialist required is not available when
needed. You are working with IDC Ltd as a member of a systems development team.
IDC has recently started talking to ABC Inc. ABC is considering the possibility of setting
up a website and moving into e-commerce. ABC has recently formed a steering committee
to oversee the e-commerce project. The steering committee have asked IDC to justify setting
up a feasibility study team to prepare a feasibility report on e-commerce in their company.
(a) Explain to ABC the need for, and purpose of, a feasibility study.
(5 marks)
(b) Explain the factors that ABC Inc. should consider in evaluating the feasibility of the
e-commerce project.
(15 marks)
(c) Outline the contents of a feasibility report.
(5 marks)
(Total marks ⴝ 25)
Question 12
IDC has a turnkey contract with AZ Ltd for the supply of hardware and software to run a
completely new stock control system and a website allowing access to the stock database.
The design stage has been completed and the project is progressing through the implementation stage, but is falling behind schedule. An analyst of your team at IDC has prepared
the following schedule of events for the 16-week implementation phase of the project.
AZ Ltd Implementation Schedules:
Task
Planned
Write programs
Purchase and install hardware
Create databases
Convert existing files
Test programs
Test system
Select and train personnel
Cutover
Actual
Write programs
Purchase and install hardware
Create databases
Convert existing files
Test programs
Test system
Select and train personnel
Cutover
Planned start
Planned duration
Start of week 1
Start of week 1
Start of week 6
Start of week 9
Start of week 6
Middle of week 11
Start of week 8
Start of week 14
8
5
4.5
2.5
3
2.5
5
3
Start of week 1
Start of week 1
Start of week 7
Middle of week 10
Start of week 7
Not started
Start of week 8
Not started
9
6
4
1.5 (continuing)
5 (continuing)
4 (continuing)
ENTERPRISE MANAGEMENT
(a) Explain the phases of project management.
(8 marks)
(b) Prepare a Gantt chart for the AZ Ltd project.
(9 marks)
(c) Explain the purpose of a Gantt chart and interpret the information shown on the chart
prepared for AZ Ltd.
(8 marks)
(Total marks ⴝ 25)
Question 13
Trend plc is a large fashion retail chain. It currently has 48 stores throughout the country,
mostly in prime high street locations. These are coordinated by head office through six
regional general managers who take full responsibility for the performance of the stores in
their region.
You are currently employed by Trend as project finance manager on a major capital
investment – the full refurbishment of a newly acquired city centre store. This project,
with a total budget in excess of US$8 million, has been in progress for 9 months and is
nearing completion. All the major structural work has been completed to schedule, and
the services (gas, electricity, water, etc.) installed on time. The building is now undergoing
its ‘fit-out’ stage, where the interior is installed.
Today
On arriving at work this morning, you received a message from Jane Bell (the regional
general manager responsible for the new store) informing you that the project manager of
the refurbishment project has resigned. Jane asked you to deputise as project manager until
a replacement could be recruited. This situation obviously provides you with a challenging
opportunity, and you expect to gain valuable experience from it.
Talking to colleagues, you have managed to establish the circumstances leading to the
unexpected departure of the project manager. Apparently, there was a very heated meeting between the project manager, Jane, and the subcontract supplier of the goods elevator
which is being installed to carry stock from the basement stockroom to the retail floors.
At the meeting, the site manager of the elevator supplier apparently mentioned that the
installation was running late by 3 weeks. Jane pointed out that this situation would delay
the opening of the store, with disastrous cash flow impact.
At some point during the meeting, Jane appears to have become angry with the subcontractor and the project manager. Jane feels that she should have been informed about the
possible delay at the earliest opportunity, and that the project manager and subcontractor
were trying to hide the delay from her. The project manager apparently claimed (rather
forcefully) that it was his responsibility to manage the project, not Jane’s. The project manager also suggested that the delay was ‘a minor detail’, and that opening would not be
delayed. Jane apparently disagreed. Shortly afterwards the project manager resigned and
left the site. The subcontractor has refused to do further work until Jane apologises.
Jane says she has been ‘left in the dark’ by the project manager and ‘doesn’t like surprises’. Apparently, Jane had always experienced problems in persuading the project manager to discuss progress, and has received only three written progress reports during the last
9 months. Other than occasional conversations when she visited the site, this has been her
only contact with the project manager. Jane has called a ‘crisis meeting’ for tomorrow with
the managing director and finance director of Trend, which she wants you to attend.
THE PROCESS OF PROJECT MANAGEMENT
Current date is start of week 12
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REVISION QUESTIONS E2
You then call Anne Martensen, the head of quality assurance at Trend’s head office. She
tells you that there are no standard procedures for the control of capital projects, as all her
department’s time is taken up with designing and implementing control procedures for the
retail activities of the organisation. Anne is surprised to hear about the problem with your
project, but is unable to offer any help as she and her staff have little experience of managing major projects.
Anne says that she is sure that other project managers would appreciate a set of procedures to improve the project management process.
Requirements
(a) Describe the main controls used in formal approaches to project management (e.g.
PRINCE2).
(10 marks)
(b) Explain how such controls could be used in this and future projects.
(15 marks)
(Total marks ⴝ 25)
Solutions to
Revision Questions
5
Section A solutions
Solution 1
Guidance and common problems
The first part of this question should be of no problem. The second part of the question
requires you to think about a range of aspects that affect project feasibility. As accountants
we may be primarily concerned with the financial feasibility, but examination questions
will require you to consider all aspects of feasibility, including social, ecological, technical
and financial considerations (i.e. do not just concentrate on the financial aspects).
(a) Feasibility is a term used to describe how achievable various project options are.
Feasibility is normally established by means of a feasibility study, which may be carried
out on a number of potential strategies. The aim of the study is to decide which proposal to choose.
(b) Fasibility can be examined from a number of perspectives.
Technical feasibility
There are a number of key aspects regarding technology. The technical features of a strategy that need to be considered are:
development – that is, will it require further testing prior to use or are we confident that
the material/technology/processes have been thoroughly tested and are readily usable
and available?
● applicability – that is, is the technology suitable to satisfy the objective of the project
effectively?
●
Other technical considerations could be:
●
●
the ease of use of the technology;
the degree of disruption during the construction/installation phase.
Social feasibility
It is becoming increasingly necessary to assess social factors affecting feasibility. This may
include awareness of the social issues within a group or office (e.g. introducing a computerised system), or larger social awareness regarding the effect of projects or products on
workers, employment (i.e. will the introduction of computerised systems lead to redundancy) and the general public (e.g. the effect of constructing a new road or nuclear power
plant on a community).
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SOLUTIONS TO REVISION QUESTIONS E2
Ecological feasibility
Ecological considerations may be driven by the understanding that customers would
prefer to purchase alternative products/services as they are more ecologically sound and
less harmful to the environment. Environmental considerations may be stimulated primarily by health and safety legislation. It is important for organisations to consider the
raw material input, the production processes and the disposal of the product at the end
of its life.
Financial feasibility
A technique often used in a feasibility study is cost-benefit analysis. Cost-benefit analysis
helps to identify and evaluate the costs of the proposal over its anticipated life (such as
purchase, building, maintenance, repair, etc.). The other side to cost-benefit is the identification and evaluation of the benefits of the project over its life.
The types of costs and benefits involved in a project will depend upon the precise nature
and scope of that project and can vary greatly.
For every item of the project proposal, it is necessary to identify:
its value: in monetary terms or in terms of benefits
● whether it is capital or revenue
● when it occurs
● whether it is an one-off cost or recurring.
●
Solution 2
Guidance and common problems
SWOT analysis is a commonly used tool in strategic planning and project selection. The
answer above is mainly concerned with your ability to describe the technique and its uses.
In this examination, SWOT may also be examined in a very practical way, that is you may
have to perform a SWOT analysis on the data provided in the scenario, and the SWOT
results may form part of your evidence in recommending a particular project option.
Therefore, it is important that you consider the application of SWOT as well as being able
to describe the technique.
(a) A common analytical tool used in assessing project proposals and their feasibility is
SWOT analysis (Strengths, Weaknesses, Opportunities and Threats). The strengths
and weaknesses arise from the organisation’s internal environment, whereas the opportunities and threats arise in the organisation’s external environment.
When evaluating a project proposal, it is important to establish whether the proposal helps to achieve the organisation’s long-term aims and objectives. Thus, for any
project proposal, a SWOT analysis can establish whether a particular proposal has
sufficient strengths that are compatible with the achievement of the organisation’s
objectives, or provides the organisation with sufficient opportunities to do so in the
future. A SWOT analysis will also highlight the weaknesses and threats of particular
proposals.
For example, consider a project proposal to implement a new marketing database.
A SWOT analysis for this proposal may indicate a strength of improving customer
relationships and an opportunity to increase market share. Increasing market share
could be one of the organisation’s long-term objectives, and, therefore, this would be
an important factor in final project selection.
ENTERPRISE MANAGEMENT
Solution 3
A project management methodology that could have been used by R Company is
PRINCE2. This is an acronym for Projects IN Controlled Environments and is a structured approach to project management, used by the UK government and private sector
organisations. It includes bureaucratic controls on the planning and execution of projects,
identifies some of the potential problems that may arise and early resolution. Whilst it
could be argued that aspects of PRINCE2 could be considered to be just good project
management, the difference is in the level of structure and documentation required.
The key processes of PRINCE2 methodology offer a number of features that would
have benefited R Company including:
A defined management structure
A system of plans
● A set of control procedure
● A focus on product based planning.
●
●
The main purpose is to deliver a successful project, which can be defined as:
Delivery of agreed outcomes
On time
● Within budget
● Conforming to the required quality standards.
●
●
PRINCE2 has a set of progressive documents for a project and control is achieved
through the authorisation of work packages. These include controls on quality, time and
costs and identify reports and handover requirements, all of which are problems that have
led to the failure of the project in R Company.
The methodology includes a series of ‘management products’, for example project initiation documents, project budget, quality plan and various checkpoint and progress reports,
which would have improved controls for R’s project.
The key processes and documentation of PRINCE2 would have enforced the project
team in R Company to have a clear structure of authority and responsibility between
members in the project team, so that each party has clear objectives. As part of this, the
control responsibilities of the various members of the project team would have been determined. This should mean that the different participants in the warehousing stock control
and logistics project would have had a clearer understanding of the various tasks and the
relationships between them and should have prevented the problems R Company is now
facing.
The exception plan concept in PRINCE2 would mean that if R’s project was going to
exceed its tolerance, for example variances in time, cost or quality, this would have been
reported to the project board. The implications on the whole project deliverables should
THE PROCESS OF PROJECT MANAGEMENT
(b) The answer to this question is no. The lowest priced proposals should not necessarily
be chosen. There are many other factors to consider when evaluating proposals, such
as the reputation and experience of the project provider, the materials used, the timescales being offered, the level of quality and the level of technology being used. Cost
is obviously an important factor in deciding who to choose to provide a project, but
often other factors, such as quality, expertise, after-sales support and warranty terms
are of more importance as deciding factors.
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SOLUTIONS TO REVISION QUESTIONS E2
have been discussed and plans amended to reflect any changes needed to ensure the project
delivered its objectives.
Solution 4
Network diagram for conference planning
C, 4
3
2
3
A, 3
4
7
7
E, 8
6
1
0
0
3
B, 6
6
7
5
D, 2
8
9
15
15
G, 2
7
17
17
F, 4
Critical path analysis is a technique that can be used to assist in the time planning for
project management. It will help P to identify the sequential relationship between the various activities that need to be undertaken in planning the conference. In conducting the
analysis, P will need to answer the following questions for each activity:
1. What must be done before this activity can start?
2. What can be done once this activity finishes?
3. What activities can be done at the same time as this activity?
The answers to these questions will help to determine the dependencies and the project
duration between different activities. It will also identify the activities that are critical. In
other words, the activities where any delay will lead to a delay in the project overall, and in
this case the conference actually going ahead.
Undertaking the analysis should assist P to decide when she needs to start working on
the arrangements for the conference, and to identify the start and finish times for each
activity. This will involve calculating the earliest time event (EET), which is the earliest
time at which any subsequent activity can start, and latest time event (LET), which is the
latest time at which all previous activities must have been completed to prevent the whole
project being delayed.
In the case of the conference planning, the critical path is between, A, C, E & G and
the project duration will be 17 weeks.
Solution 5
Project closure is the final stage of the project life cycle and occurs once the project work
has finished. The purpose is to ensure benefits are gained in the final stages. It is important
to maintain commitment of the team until all the work is completed since people tend to
be more motivated to move on to new projects rather than tying up the loose ends. It is
also important to evaluate the conduct of the project in order to learn from experiences
which will help the company improve on its performance in future projects. The questions
that could be asked include:
Was the project completed to quality, on time and within budget?
Did the project deliver according to the objectives set?
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Project closure activities would involve practical tasks such as organising and filing all
project documentation and ensuring that members of the project team have jobs to return
to. It should also involve formally agreeing with the ‘client’ that all the agreed deliverables
have been achieved. The business case should be reviewed to check that intended benefits are likely to be realised. In other words, examining project performance by comparing achievement with the original project plan to show that the project has delivered the
outputs.
In addition, there should be a review of the project organisation and methods to recommend future improvements. This can be achieved through the post completion review and
audit.
The main purpose of the post completion review is to evaluate the overall project and to
learn from the experiences gained before the project team is disbanded. This might involve
debriefing meetings which enable all parties involved in the project to assess their own
performance.
It provides a forum to discuss with individual team members their role in the project
and how they could improve their own performance for the future.
An evaluation from the client’s perspective will establish if the project was successful in
satisfying their requirements and has given them the opportunity to voice any concerns.
The review will provide an opportunity to discuss the successes and failures of the
project process. The feedback should provide reinforcement of good skills and behaviours
and the identification of areas for improvement or change in practice for the smooth running of future projects.
The post completion audit is the final stage and involves conducting a formal audit of
the entire project against a checklist. This will include an assessment of the extent to which:
the required quality of the project has been achieved; the efficiency of the solution compared with the agreed performance standards;
● the actual cost of the project compared with budgets and reasons for over/under
expenditure;
● the time taken to develop the solution compared with target dates and reasons for any
variances;
● the effectiveness of project management methodologies.
●
Together, the review and audit can provide a case history of the project, providing a
repository for the knowledge captured. The project manager should issue a report summarising project performance and advising on how it could be improved in the future.
The reason that post project activities are not always undertaken is that it is often difficult to quantify in a tangible way the benefits derived, given the associated costs of review
and audit.
Solution 6
Guidance and common problems
Check how much time is required on the Gantt chart first; you can then allocate the necessary space across the page. Remember that some activities will overlap; however, from the
information given, you will not be able to input the actual duration of the different activities.
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Are there lessons to be learnt?
Are there any follow up action on this project needed?
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Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9
Install new software
Test installation
Prepare master file data
Install and test master file data
Ensure all data entered into old software
Train staff on new system
Transfer account balances to new system
Parallel run new and old systems
Processing on new system only
Solution 7
Guidance and common problems
As stated in the question, planning is a key aspect of the project management process and
students need to analyse the scenario data provided in the exam to ascertain the planning
procedures undertaken by the scenario organisation. Projects often go wrong at this early
stage of the project life cycle, so if there are signs of projects going out of control, you may
be able to explain these causes by analysing the planning stage. Part (b) of this question
should give you a clear structure, which can be used to put together a sound project plan.
(a) Planning is a vital part of any project. It is important to lay out a ‘road map’ that
clearly shows how the project activities and tasks will be accomplished, within budget
and to schedule. Attempting to begin a project without a plan would be like trying to
assemble a set of cabinets without first reading the instructions, or trying to drive from
Glasgow to Southampton without first reading a map. Getting from A to B (the start
of the project to final successful completion) is most likely to be achieved if all of the
stages and tasks between A and B are broken down and planned carefully before beginning the project. The risk of project failure is much greater without project planning.
(b) Detailed planning involves the following stages:
● Obtaining project authorisation
● Time plan
● Resources plan including staffing
● Contingency plan
● Quality plan
● Cost plan
● Communication plan
● Audit plan.
From these can be developed:
● Work packages
● Estimates of time and cost
● Graphic illustrations of the schedule: Gantt charts, etc.
● Risk analysis and plans
● Project schedule and the budget
● Change management
● Acceptance process
● Post-project implementation audit.
ENTERPRISE MANAGEMENT
Solution 8
Risk can be defined as the probability of an adverse or undesirable event occurring.
Undertaking any project carries an element of risk and project management will be
concerned with understanding what is risky about a particular project or activity within
the project. Essentially this will involve identifying the different types of risk and then
how to manage the risk. The first stage will require an assessment of the probability of
risks occurring and their likely impact on the project. It will then require plans to be put
in place to reduce or eliminate them. In other words, risk management which is what the
project manager does to counteract or prepare for the risks.
The process of risk assessment involves obtaining a clear definition of the possible risks,
for instance determining how important the risk is to the project, the likelihood of that
risk occurring and what the severity of its occurrence would be, in other words its sensitivity. This can be achieved by some assessment of the likelihood and consequences of risks
and then plotting the outcomes on a matrix which maps the potential impact of risk (low,
medium, high) and the threat of likelihood (low, medium, high).
A number of stages are involved in the process of managing risk:
Identification of risks, producing lists of risk items in a risk register.
Analysis of the risks in terms of the impact of each risk item on project performance,
schedule and quality.
● Estimate of the probability of the risk occurring during the execution of the project
(project exposure).
● Prioritise the risk according to exposure, effect and problems associated with the risks
(sensitivity).
● Carry out risk management strategies, deciding how to address each risk item.
● Review and monitor, tracking the success of resolving the risk and the risk management
approach.
●
●
These steps will enable the project manager to monitor risk factors and take appropriate
action during the execution of the project.
In deciding what to do about the risk, in other words risk management, this should
be determined in terms of the level of impact (e.g. either high or low) and the probability of the risk (high or low). There are different strategies for dealing with risk, for
example:
Avoidance of risk – where the factors which give rise to the risk are removed totally from
the work to be done.
● Reducing the risk – where the potential for the risk cannot be removed but analysis has
enabled the identification of ways to reduce the incidence or consequences.
● Transference of the risk to others, which is where the risk is passed on to someone else,
for example through insurance.
● Absorption – this is when the potential risk is accepted in the hope or the expectation
that the incidence and consequences can be coped with if necessary, perhaps having contingency plans should the risk occur.
●
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Then the plan is issued to all major stakeholders, excluding any sensitive information
that would only be given to senior management. To gain full marks you would be expected
to give some detail for each category.
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SOLUTIONS TO REVISION QUESTIONS E2
Risk management is a continuous process through the life of the project. Procedures are
necessary to regularly review and reassess the risks documented in the risk register.
Solution 9
Guidance and common problems
(a) and (b) together
Once the project is under way, it is necessary to monitor progress continually against the
plan to ensure that it is proceeding as expected. Control involves measuring actual results
and progress versus the planned progress. In order to measure actual project progress, it
is important to keep an up-to-date record of which activities have begun, which are completed, and at what time they started or were completed; it is also important to record the
actual costs of each activity.
If, during this monitoring process, it is found that the project is not progressing as
planned (i.e. it is behind schedule or is over budget) then the project manager must instigate some form of corrective action. Changes to the project scope, schedule or budget
must first be agreed by the project team and the customer.
Decisions must then be made as to how to revise the schedule or budget. These change
decisions may involve a trade-off of time, cost or scope. For example, reducing the time
taken on an activity to bring the project back on schedule may involve increasing the costs
by employing more staff to get the work done quicker, or it may involve reducing the
scope of the project by not carrying out a particular part of the project.
Similarly, reducing project costs to get the project back on budget may require the
reduction of quality in materials or functionality of the technology. It will depend very
much upon the customer’s final project needs as to which elements of the project will be
forgone or reduced to achieve the project target. Once changes are made to the budget or
schedule, they must be incorporated into a revised project plan that must then be distributed to the team members and customer.
Section B solutions
Solution 10
Trend plc
(a)
SWOT analysis
SWOT analysis is one of the most commonly used business and project management
tools. It is a brief summary of the major strengths, weaknesses, opportunities and threats
relating to the entity (project or organisation).
Strengths are: things we do well, things we do that others do not, things to be proud of.
Weaknesses are: things we do badly, things we do not do (that we should), things to correct or improve.
Opportunities are: events or changes that we can exploit to our advantage.
Threats are: events or changes that we should protect ourselves from or defend ourselves
against.
ENTERPRISE MANAGEMENT
Purpose
A SWOT analysis is used, on a periodic basis, to provide a critical analysis of the project in
relation to its environment. It can be used by the project team, in order to help them to improve
their performance, or as a communication document to report progress to project sponsors.
Each of the SWOT sections should consider:
what has happened in the past
● what is the current situation
● what might happen in the future.
●
The real value of SWOT analysis is not in the analysis itself, it is in how we use it as a
basis to discuss and agree future action.
(b)
Strengths
● Major structural work completed to schedule.
● Recognition of the scale of the problem.
Weaknesses
● Resignation of project manager.
● Relationships within project.
● Misunderstandings and communication breakdown.
● Poor reporting of progress.
● Insufficient slack in project programme.
● Absence of project control procedures.
Opportunities
● Good relationship with subcontractor prior to this project.
Threats
● Relationship with elevator subcontractor.
● Potential impact on project completion.
● Potential impact on business cash flow.
Looking at the whole SWOT analysis, it is clear that the current situation is critical. The
on-time completion of the refit is seriously threatened by continuing delays on elevator
installation. A number of actions are necessary to regain control of the project.
(c)
Immediate actions
The first priority for the project must be to get the elevator subcontractor back to work.
This will require a meeting to air and resolve differences. It is essential that this meeting
is friendly and conciliatory, rather than confrontational; it may be necessary for Jane to
apologise to the subcontractor, even if she feels she was right. Successful completion of
the project must be our first priority. I shall be producing a report for Jane on how we can
improve relationship management in the project.
Once work on the project has recommenced, the project programme must be examined
for any possible slack. It appears that elevator installation is a critical activity, but there
THE PROCESS OF PROJECT MANAGEMENT
Strengths and weaknesses relate to the project itself, opportunities and threats to the
business environment in which the project is based.
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SOLUTIONS TO REVISION QUESTIONS E2
may be some opportunity to reschedule subsequent activities or allocate more resource to
them in order to ‘claw back’ the lost weeks.
Once the project programme has been studied (and hopefully amended), Jane and
Samantha must be fully briefed. This should only happen after the programme has been
re-evaluated, as it is possible that a simple solution exists to rescue the project.
Short-term actions
In the short term, the control and reporting procedures relating to the project must be
reviewed and improved. Reporting of progress is an important part of managing the relationship between the project team and the project sponsors.
There are a number of formal project management methodologies, designed to improve
control. It is important that we adopt at least some aspects of these to improve project
management in the future.
It is also important for the project that we identify or recruit a permanent project manager as soon as possible. All projects need certainty and consistency, and having a project
manager in place for the remainder of the project will improve control and reduce risk.
The responsibility for replacing the project manager lies with Jane and Samantha.
Long-term actions
We can learn a lot by comparing our project management process against models of best
practice. I will be briefing you later on the different types of benchmarking and the likely
benefits for future projects.
Anne Martensen should be asked to prepare a set of procedures for project management
in Trend. This will allow projects to learn from each other, and should improve both the
quality and consistency of project management. Anne may require additional resource or
external help to produce these.
Solution 11
(a) Feasibility study – need and purpose
A feasibility study is a study that is carried out to assess the types of systems that are
required by an organisation to meet its objectives. A feasibility study examines the current
operational systems and considers alternative ways of meeting the systems and organisation’s objectives. A feasibility study is needed to establish the technical, operational, legal
and economic feasibility of the proposed system. The feasibility study is documented in a
feasibility report which will make recommendations on the way to proceed.
(b) Factors that should be considered during the e-commerce feasibility study
(i) The feasibility study provides the basis for the feasibility report. It will therefore have
to consider a range of topics in sufficient depth to allow a report to be prepared.
The feasibility study will be carried out by a team who have been appointed by the
steering committee. The steering committee sets the terms of reference for the study
team, who will then carry out the study and prepare a report based on the terms of
reference.
(ii) Analyse existing system. The study will start by analysing the current systems. ABC
Inc.’s current hardware and software provision will need to be carefully examined, in
ENTERPRISE MANAGEMENT
THE PROCESS OF PROJECT MANAGEMENT
order to establish whether the current configuration could support an e-commerce
operation. The answer will determine the scale of change proposed for the new system. Examples of the information that will need to be established and taken into
account in the design of the new system include:
● quantity, specification and age of the existing hardware;
● type of processors used, the operating system used;
● networking capabilities;
● speed and capacity of the CPU and disks;
● security software and access controls available;
● communication technology available;
● type, quantity and source of sales orders currently processed;
● type, quantity and timing of payments from customers;
● current structure of the stock and customer records;
● any current use made of the internet, e-mail or EFT.
(iii) Establish objectives. The study team will need to interview ABC Inc.’s management
to establish the objectives of the proposed e-commerce system and to discuss critical
success factors for the project. The information requirements of the management will
also need to be established.
(iv) Involve users. The study team will also need to discuss the system requirements with
users to establish the requirements of the system.
(v) Prepare system specification. The analysis of the current system, the requirements
of users and the information requirements of the management will be combined to
determine the new system requirements and a system specification prepared.
(vi) Compare alternatives. An outline logical system can then be prepared and alternative
outline physical specifications specified. The feasibility and advantages of each of the
alternative systems can then be analysed. They can be judged by their:
● Technical feasibility – to determine which alternative is most likely to meet the
technical specifications of the system.
● Operational feasibility – the study will need to take account of the human, organisational and political aspects of ABC Inc.:
– The levels and types of skills required to operate the new system will need to be
considered and compared with the levels and types of skills currently possessed
by the staff.
– The levels and types of changes proposed in the current jobs and possible
changes to organisational structures.
– The consequent effects on status and promotional expectations of staff.
● Economic feasibility – the costs and benefits of each proposal need to be established, the timescale of their inflow or outflow established and discounted to
present values. The costs need to be separated into one-off costs and continuing
costs, while the benefits can be separated into those that are tangible and can be
quantified and those that are intangible and unquantifiable. The proposal with the
greatest NPV is selected. The problem in organisations like ABC Inc. is that many
of the benefits associated with e-commerce will be intangible and therefore very
difficult if not impossible to calculate. This means that a full cost-benefit analysis
will be difficult to carry out. The feasibility report may therefore have to report an
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SOLUTIONS TO REVISION QUESTIONS E2
NPV for each proposal based on the quantifiable costs and benefits along with a
list of un-quantified benefits.
(c) The contents of a feasibility report
The primary purpose of the feasibility report is to enable the steering committee to make
a decision on whether to approve a systems design project or to cancel the project. It does
this by presenting the work and conclusions of the feasibility study team. The report will
set out:
the feasibility study terms of reference;
the extent of the survey carried out on the existing system and the range of interviews,
and so on performed to assess the system requirements;
● the alternative outline systems considered, those rejected and the results of the evaluation of the remaining alternatives;
● a clear recommendation for the steering committee to consider. The recommendation
could be to cancel the project; if the recommendation is to go forward it will recommend a preferred option;
● a timescale, a budget and a schedule of other resources required to implement the system
if it is approved.
●
●
Solution 12
(a) Project management can be divided into four phases:
(i) Start-up or initiation stage. The organisational aspects of the project need to be
setup. The project director and project manager have to be agreed. The feasibility
report can be used to prepare the project initiation document. This will set out:
● what is to be carried out
● why it is being carried out
● who is going to do it
● how it is to be carried out
● when it is to be carried out.
An overall plan for the whole project will also be prepared, along with a detailed
plan for the next stage.
(ii) Development stage. This is where most of the supplier’s work is carried out. In
an IT project, the requirements definition, design, integration and test stages are
included here.
(iii) Execution stage. This starts when the system has been completed by the supplier
and is delivered to the customer along with full documentation. Staff training
needs to be carried out and acceptance tests performed. The system will then be
commissioned and taken over by the customer.
(iv) Completion stage. This stage starts when live running begins. Some time after the
system has been implemented a post-implementation review should be carried
out to establish whether the project’s objectives have been met.
The AZ Ltd stock system has completed the first and second stages of the project and
is now in the third stage.
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Current point in time
Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Write
programs
Purchase
and install
equipment
Create databases
Convert
files
Test
programs
Test
system
Select
and train
personnel
Cutover
Planned time
Actual time
(c) The Gantt chart or bar chart’s purpose is to help with project planning by showing the
duration and sequence of activities in a project. The chart is also able to show actual
progress alongside planned progress but does not show dependencies.
The information shown on the attached Gantt chart for the stock control implementation
shows the following:
The initial estimate for the time to write programs was 1 week less than the time needed.
This 1-week delay meant that the file conversion could not start until Week 10; it actually started in the middle of Week 10, 1.5 weeks late, possibly due to the lack of available staff.
● File conversion has not yet been completed, although it was meant to be finished in the
middle of Week 11.
● The purchase and installation of equipment took 1 week longer than planned. This
delay caused the creation of the database and test programs to be delayed by 1 week,
starting in Week 7 instead of Week 6.
● The creation of the database went very well and the team completed the task in 4 weeks
instead of 4.5 weeks.
● Testing programs started a week late due to the delay in purchasing equipment, but is
still unfinished after 5 weeks; the original plan was for 3 weeks. This suggests problems
are arising during testing, which could be related to the delays in writing the programs.
● Testing the system was meant to have started in the middle of Week 11, but has not
started yet as it is dependent on the files being converted and the programs tested, neither of which is completed.
●
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(b) Gantt chart
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SOLUTIONS TO REVISION QUESTIONS E2
●
The system cutover is likely to be delayed as file conversion and program testing are not
yet finished and are holding up system testing. System testing is planned to take 2.5
weeks, so even if it started today the cutover will be delayed by half a week.
Solution 13
(a) Types of control. If we take as our basis for discussion that a control is any mechanism
designed to ensure that a project achieves its objectives, then the PRINCE2 methodology (as do others) contains a wide number of control elements.
● The organisation structure of the project team under PRINCE2 enforces a clear
structure of authority and responsibility on the participants. The structure of supervision and reporting (see below) seeks to ensure that each party has clear objectives and
that they are supported from both above and below in achieving those objectives.
● In PRINCE2, there are a series of ‘management products’ associated with the management and control of the project. These include, for example, the project initiation document, the project budget, the project plan, the quality plan and various
checkpoint and progress reports.
● The PRINCE2 methodology includes various different types of plans. These ensure
that all the participants in the project have a clear understanding of the tasks to be
completed and the relationships between them.
● PRINCE2 contains many quality controls such as clearly defined technical and
management procedures. These ensure that work is completed not just on time but
also at an appropriate level of quality.
(b) Control framework. We can take some of the most appropriate control elements from
the PRINCE2 methodology and use them to improve the management of major
projects within Trend. I would suggest that, as a minimum, the following aspects of
project management should be covered by control procedures.
● Each project should have a formal organisation structure. The control responsibilities of the various parties are outlined below.
● The Trend organisation (in the form of its directors) is responsible for project selection and the overall approval of the project plan and budget. This approval would be
in overview only, as the detailed breakdown of both plan and budget are operational
issues. The organisation should provide a clear set of objectives and constraints to
the project.
● The project sponsor (or, in a complex project, the steering committee) is responsible
for ensuring that project objectives are achieved. The sponsor also reports progress
and issues on a periodic basis (perhaps quarterly) to the organisation. The project
sponsor agrees the detailed plan and budget with the project manager, and provides
advice and support downwards.
● The project manager is responsible for the day-to-day management of the project
team and subcontractors. He/she will communicate objectives and monitor performance against the plan and budget. Any variations to the project must be recorded
and agreed with the sponsor, and any issues or slippages reported upwards. A series
of review meetings (weekly) will take place between the project manager and sponsor, and these will be supported by periodic progress reports (monthly), including a
project overview using SWOT analysis and a report of progress against plan using a
Gantt chart.
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The members of the project team, and the representatives of subcontractors, will
report to the project manager on a frequent basis. This will take the form of daily
briefings, supported by weekly or monthly written progress reports.
● Copies of all project documentation and reports will be kept in a well-referenced
filing system. This will allow any of the project participants to check what has been
agreed.
● At the end of the project, an independent quality assurance inspector will carry out
a full post-completion audit of the project. All participants will be briefed on the
findings of the audit and encouraged to discuss the issues that arise. Their suggestions for the improvement of future projects will be recorded and circulated widely
throughout the organisation. This will allow the participants in other projects to
learn and improve.
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6
Management
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6
Management
LEARNING OUTCOMES
After completing this chapter, you should be able to:
䉴
discuss the concepts of power, bureaucracy, authority, responsibility, leadership and
delegation;
䉴
demonstrate the importance of organisational culture;
䉴
explain the process and importance of mentoring junior colleagues.
6.1
Introduction
This chapter aims to explore the nature of management and the factors that influence the
relationship between managers and subordinates. The first section examines the historical
foundations of management and some of the different theoretical perspectives, considering
their relevance and application for organisations today. The concepts of power, authority,
responsibility and delegation are then discussed.
Leadership can be a significant determinant on organisational performance since the
effectiveness of the leader can impact on the nature of the relationship with subordinates.
The different approaches to leadership will be explored, along with some of the more contemporary thinking on transformational leadership and entrepreneurship.
A major challenge for managers arises from an increasingly global business environment
in which many organisations now operate. The management implications of globalisation
will be considered with specific reference to managing across different national cultures.
6.2
Classical and contemporary theories
of management
The study of management theory and development of ideas on effective management practice helps in providing an understanding of the principles underlying the process of management and which in turn influences management behaviour in organisations. The main
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schools of management thinking can be grouped according to their broad approaches.
Figure 6.1 illustrates the 4 main approaches.
Classical
– Scientific Management
– Functions of Management
– Bureaucracy
Human Relations
Systems
Contingency
Figure 6.1
6.2.1
Main schools of management thinking
The Classical School
The classical approach to management emphasises the technical and economic aspects of
organisations. It assumed that behaviour in organisations was rational and logical. There
are different approaches within the Classical School which can be identified as Scientific
Management, Administrative School and Bureaucracy. The foundation on which the various theories developed was that management could be learnt and codified. These ideas
were developed in an era when mass production and economies of scale were viewed as
central to business success. Although some of these theories were developed over a century
ago they do continue to inform management practice today.
There are some common interests that all these different perspectives focus on:
The purpose and structure of organisations and planning of work.
The technical requirements of each job.
● The principles of management.
●
●
Scientific management
Frederick W. Taylor (1856–1917) is known as the father of the scientific management
movement. Taylor spent some 30 years in the steel-and paper-making industries and identified that:
workers varied their pace at work to suit the conditions;
● managers made very little effort to specify what made up a reasonable day’s work;
● no effort was made either to identify the best methods, or to train the workers in the
best methods.
●
These discoveries stimulated his interest in the art of work study. He stated that the
principal object of management should be to secure the maximum prosperity for both
employer and employee. He made many other important contributions to management
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1. The development of a true science of work. This was the assessment of what constituted a fair day’s work, as well as a fair day’s pay.
2. The scientific selection and progressive development of workers, involving careful recruitment
and training to ensure that the worker was capable of achieving output and quality targets.
3. The bringing together of the science of work and the scientifically selected and trained
men. This was referred to as the mental revolution, as the workforce was encouraged to
develop to their full potential.
4. The constant and intimate cooperation between management and workers. Work was
allocated by consultation and cooperation between management and workers.
Taylor recognised that if specialised knowledge and skills were concentrated in the
hands of well-trained and able employees, there would be an improvement in productivity.
He therefore broke jobs down into separate functions and then gave each function to an
individual. Sometimes, this meant that as many as eight functional foremen were giving
instructions to other workers. Taylor believed that it was only through the effective use of
control by specialists that best use would be made of the resources available to increase the
size of the incentive surplus to be shared between efficient staff.
Taylor’s method cut across traditional craft skills and organisational principles because it
started from scratch, from real facts. The method was:
observe and collect data
● analyse data
● classify results
● develop hypotheses
● test these by experiment
● formulate laws
● use and apply the laws.
●
At Bethlehem Steel Corporation, he noticed that the same size shovel was being used
to shovel different kinds of material, and therefore different loads were being lifted by the
workers. He calculated that 21.5 lbs (9.8 kg) was the optimum weight for efficiency, and
had shovels redesigned so that their size matched up to 21.5 lbs of the material being shovelled. This improved productivity and earnings.
Exercise
Which elements of Taylorism are evident today:
(a) at the manufacturing level?
(b) at the strategic level?
Solution
Scientific management has not gone away, quite the reverse.
(a) Statistical process control and computerisation requiring precise measurement and
management by exception.
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thinking such as the ‘exception principle’ in management reporting. He laid down four
principles:
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(b) The new fashion for concentrating customer service into ‘call-centres’ is a classic
application of scientific management principles of division of labour and specialisation
of function.
The administrative school
Henri Fayol (1841–1925) was the manager of a group of mining and engineering
companies in France. His best-known book was General and Industrial Management. His
approach was to view problems from the managerial aspects and to specifically analyse the
work of management, stressing that most management features had universal application.
He defined which operations give business control:
Technical: production, maintenance, design.
Commercial: sales, purchasing, marketing.
● Financial: capital investments.
● Security: protection of goods and people.
● Accounting: accounts, balance sheets, stocktaking.
● Managerial: various functions.
●
●
Fayol concentrated on the managerial aspect of organisations and explored the role of
managers. He identified the common features as:
Forecasting and planning.
Organising: allocation of resources, duties and authority.
● Coordinating: working together to achieve company objectives.
● Commanding: giving orders and instructions.
● Controlling: comparing actual performance with expected or budgeted.
●
●
The effective manager is judged by the efficiency with which he applies these elements,
and it will be seen that Fayol identified the need for managers to be trained for their new
roles before promotion.
Confusingly, he supplemented these with thirteen general principles of management.
1. Division of labour. The use of specialisation to achieve more efficient use of labour at all levels.
2. Authority and responsibility. Fayol identified the existence of a manager’s official authority derived from his official position, and his personal authority derived from his
experience, intelligence and charisma. Fayol stated that ‘authority should always be
commensurate with responsibility’.
3. Discipline. Respect for agreements directed at achieving obedience, application, energy
and respect. Discipline should be maintained by a fair disciplinary system, with
penalties judiciously applied by worthy superiors.
4. Unity of command. A subordinate should receive orders from one superior only.
This principle could give rise to problems concerning the role of ‘staff ’ and ‘line’
management, unless duties and responsibilities were clearly defined.
5. Unity of direction. There should be one head and one plan for each group of activities.
Unity of direction relates to the organisation itself, whereas unity of command relates
to the personnel in the organisation.
6. Personal interest. The interests of one employee or group of employees should not take
priority over that of the general interest and aims of the organisation.
7. Remuneration. This should be fair, giving satisfaction to both employer and employees
alike.
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Bureaucracy: a culture, process or a form of organisation?
Bureaucracy is not ‘red tape’, but a technically superior way of operating through the
power vested in the office (French bureau, German Biiero) rather than the person.
German sociologist Max Weber (1864–1920) developed his model of the ‘ideal type’
bureaucracy, in which he explored the characteristics of a rational form of organisation.
Today, the term bureaucracy tends to have many negative connotations, but Weber used
it to describe what he believed to be potentially the most efficient form of organisation –
‘technically superior’. However, the model he put forward was deliberately idealised to highlight the key features of this form of organisation. Weber’s model of bureaucracy was based
on authority derived from the law and written rules, as opposed to other forms of organisation based on tradition or personal (charismatic) authority. The ideal type bureaucracy has a
number of distinctive characteristics, each of which contributed to the efficient functioning
of the organisation.
These eight characteristics were as follows:
1. Specialisation. Clear division of labour, so that each member has well-defined spheres of
authority to carry out his or her duties.
2. Hierarchy. A hierarchy of authority, in which offices are linked through a clear chain of
command.
3. Rules. Strict rules and procedures govern decision-making and conduct of officials.
4. Impersonality. Objective and rational decisions rather than personal preferences.
5. Appointed officials. Managers are selected by their qualifications, education or training.
6. Career officials. Managers pursue their career within the bureaucracy and work within a
defined salary structure.
7. Full-time officials. Professionalism requires commitment rather than dilettantes.
8. Public/private division. Money is used in a limited liability framework to prevent family
money being used, as this creates conservatism because of personal risk.
These features were developed against a background of a society where money bought
privilege, and positions of power were used to promote patronage. Even army generals like
Sir Arthur Wellesley (later Duke of Wellington) bought their commissions!
Nowadays, most large organisations, whether grouped according to the major types
below (functional, divisional or matrix), will be bureaucratic. Many others, though
smaller, will also have to have a rational structure because they need to conform to regulatory bodies of one sort or another and to legislation, especially in the employment field.
This is currently being debated in the United Kingdom as ‘red tape’ is snuffing out a
nascent entrepreneurial spirit. For this reason, bureaucracy is not viewed as a specific form
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8. Scalar chain. The scalar chain is the term used to describe the chain of superiors from
the highest to the lowest rank.
9. Material and social order. This defined the existence of a place for everything and
every-thing in a place.
10. Equity. A combination of kindness and justice in managers and employees.
11. Stability of tenure. Stable employment to enable goals to be achieved.
12. Esprit de corps. People must be encouraged to work as a team. ‘In union, there is
strength.’
13. Initiative. This should be developed to the full within the bounds of authority and
discipline.
14. Centralisation. Control should be retained centrally for maximum efficiency.
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of organisation but rather as a process of formalisation and standardisation. The cultural
aspect is based on position power, and results in what Harrison termed the role culture,
and which Handy drew as a temple.
Because of the formal nature of this type of organisation, the main disadvantages are:
slow response to change, as many rules have to be changed;
● lack of speedy communication owing to the segregated ‘offices’ and levels;
● little need for involving staff in decision-making;
● rules stifle initiative and innovative ideas, preventing development;
● no recognition of very important informal relationships.
●
Alvin Gouldner’s Patterns of Industrial Bureaucracy identified three patterns of bureaucracy based on the nature of the management style and the workforce attitudes.
1. Mock bureaucracy. Often occurs under centralised systems, where decisions are made by
an external authority. At local level, these rules are often amended to suit the situation.
2. Representative bureaucracy. Through maximum participation and involvement in the
setting of the rules, there tends to be a high level of acceptance.
3. Punishment-centred bureaucracy. Describes rules and procedures that are drawn up by
one side, but imposed on the other side. It is often a source of friction because of the
lack of agreement and commitment from both sides.
Whereas Weber had not considered the motivational needs of people at work, Gouldner
clearly indicated the need for appreciating the feelings and opinions of the workforce, if
cooperation was to be encouraged.
6.2.2
The human relations school
Elton Mayo (1880–1949), together with several colleagues, carried out the famous
Hawthorne investigations for the Western Electric Company at its Hawthorne Works in
Chicago during the 1920s and 1930s.
Mayo’s team was concerned with fatigue and its effects on output. When they increased
the lighting in one of the work areas, output increased. This would have indicated that
extra lights helped the workers see better and thus to suffer less from fatigue effects.
When the team of scientists took away the extra lights, however, output increased
again!!
Clearly, it was not the lights which were the cause. Mayo had hit on the ‘experimenter
effect’ – the influence of the scientists on the workforce. It was their presence, their interest
in the workers and their environment, which had increased their motivation, and, consequently, their output.
Mayo developed this finding into a detailed series of studies when the effects in the first
area were not observed in another area. Here, it was group attitudes – a micro social system –
which effectively rejected the scientists, so the experimenter effect was not contributing to extra
motivation.
It may have been significant and Fiona Wilson argues that it was – (in her book
Organisational Behaviour and Gender) that the first area was mainly female, the second
male. In the event, Mayo and his colleagues had redressed the balance away from Taylor’s
techniques and back towards people.
Frederick Herzberg carried forward Mayo’s emphasis on the identification of the
motivational needs of individuals. He believed that human behaviour even at work is
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Motivational factors
● Challenging tasks
● A feeling of achievement
● Responsibility
● Personal growth
● Advancement
● Recognition of ability.
Hygiene (or maintenance) factors
● Rules
● Environment
● Work breaks
● Supervision
● Wages and fringe benefits.
Herzberg believed that only motivators can move employees to action: the hygiene factors
cannot. They can only prevent dissatisfaction. Even money, he claimed, is not a motivator
though we cannot do without it.
His major claim is that we like what we do at work and we dislike the circumstances of
how we do it. He does admit that some jobs are ‘idiot-jobs’ and do not have motivational
potential. Also, some people are driven more by hygiene factors than motivators – if they
are in need of money, for example.
Experiments in job enlargement, job rotation and job enrichment, which provides for
the psychological development of the worker, have been derived from Herzberg’s findings.
Using Herzberg’s two-factor theory of motivation, give some specific examples of
hygiene factors and motivating factors that are used in the organisation that you work for,
or one that you are familiar with.
6.2.3
Systems theory
Trist and Bamforth developed a socio-technical systems theory (Figure 6.2).
While he was working at the Tavistock Institute, Trist’s most famous research was into
the structure and operation of the longwall’ method of mining in County Durham in the
1940s as it highlighted the interaction between social needs and technological activities.
The longwall method introduced new cutting equipment which widened the narrow coal
‘face’ into a ‘longwall’. But very soon the low morale, high absenteeism and deteriorating
relationships were so serious that the Tavistock Institute was invited to investigate causes
and possible solutions to the problems.
Trist and Bamforth diagnosed that although the new methods had been introduced
‘scientifically’:
close-knit groups had been broken up;
● communication was difficult because of the geographical spread of workers;
● new payment schemes caused jealousy among the workforce;
● too much specialisation and individuality was built into the jobs.
●
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directed towards achieving certain desirable goals or incentives, or towards avoiding the
other undesirable negative consequences. His two-factor theory of motivation describes
motivational factors and hygiene (or maintenance) factors.
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Social
systems
W
O
R
K
Technical
systems
Figure 6.2 Trist and Bamforth: socio-technical systems theory. Reprinted by permission of Sage
Publications Ltd. from ‘Human Relations’ by Trist, E.L. and Bamforth, K., © The Tavistock Institute, 1951
The mine owners had not considered the effects on the workforce, showing an ignorance of individual and group needs at work, especially in such a traditionally close-linked
occupation as mining. The social and technological factors are interlinked and cannot be
treated in isolation.
Figure 6.2 indicates the interaction that will inevitably occur when changes are made to
either the social or technical aspects of work. Managers should note that this interaction, if
ignored, would inevitably bring problems.
6.2.4
Contingency theory
Managers, researchers and consultants often found that the methods suggested by the classical management schools did not always work. The idea of one approach being right –
whether it be the school of scientific management, classical/universal human relations or
systems – is rejected in favour of contingency. The contingency view suggests that the
effectiveness of various managerial practices, styles and techniques will vary according to
the particular circumstances of the situation. The problems arise when two such contingencies are in conflict – the theory does not describe how such conflicts can be resolved.
Exercise
What do you consider to be the main contingencies?
Solution
The main contingencies are related to the external and internal environments of the organisation – in other words, a mechanistic organisation is contingent upon a stable environment and so on. Thus, any stimulus (government policy, technology, industrial relations,
competitor’s quality) will have an effect on structure.
Mechanistic versus Organic Organisations
Burns and Stalker (1961) distinguished between mechanistic and organic organisations.
Burns is quoted as saying: ‘The beginning of administrative wisdom is the awareness that
there is no one best way of designing a management system.’ Burns, a professor of sociology based in Scotland, combined with Stalker, a psychologist, in a study of the way in
which high-technology industries were being introduced into Scotland. The difficulties
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Features of a mechanistic organisation
● High degree of task specialisation.
● Responsibilities and authority clearly defined.
● Coordination and communication – a responsibility of each management level.
● Selectivity in the release of top level information to subordinates.
● Great emphasis on the organisational hierarchy’s ability to develop loyalty and
obedience.
● Employees are often locally recruited.
The mechanistic system was seen to be appropriate in fairly stable conditions where the
management of change was not seen to be an important factor. The relationship with
Weber’s bureaucracy is obvious.
Features of an organic organisation
● Skills, experience and specialist knowledge recognised as valuable resources.
● Integration of efforts via lateral, vertical and diagonal communication channels.
● Leadership based on consultation and involvement in problem-solving.
● Commitment to task achievement, survival and growth more important than loyalty and
obedience.
● Employees are recruited from a variety of sources.
The organic system is seen to be more responsive to change, and is therefore recommended
for organisations moving into periods of rapid changes in technology, market orientation,
or tasks.
(The appropriateness of organisational structure to its environment is a cornerstone of
contingency theory.)
Technology has been defined as ‘the way work is carried out’ and from 1953 to 1957
Joan Woodward’s Essex Studies examined features of the various organisations with special
emphasis on such factors as:
number of levels of authority;
● the spans of control at different levels;
● communication processes;
● use of specialists;
● use of management committees;
● recruitment of graduates.
●
In her analysis of the 100 companies (which ranged in size from 100 to 1000 employees), she identified ten types of technology which were condensed into three main groups.
These are:
unit and small batch production – typical of ‘craft’ industries;
● large batch and mass production – for example, cars;
● process production – for example, cement, oil, and food processing.
●
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experienced by low-technology companies in the conversion process to high technology
highlighted many organisation structural problems.
Burns and Stalker’s studies led them to distinguish between two major types of organisations – mechanistic and organic. However, they considered these two systems to be located
at opposite ends of a continuum, with various combinations in between.
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Differences in production type accounted for many of the differences in organisation
structure:
In heavily mechanised process technologies taller hierarchies were found to exist, but with
levels of committee rather than straight-line instruction. Since technical expertise is
important, people were highly skilled, often graduates, with most of the organisation
headcount being involved in administration. Control was far easier in these organisations. They involved groups of more highly skilled workers and job satisfaction was
highest.
● Large batch and mass production companies have shorter lines of command and thus fewer
managers and clerks. There were a traditionally larger number of direct operatives. The
large number of semi-skilled workers required for mass production means that the span
of control of supervisors is very wide, and this may create an environment where human
and industrial relations are strained. Job satisfaction was lowest.
● Unit and small batch production companies were found to have short hierarchies, with no
manager very far from production work, and a limited number of administrative controls. They tended to involve much smaller groups of more highly skilled workers and
job satisfaction was higher. Job satisfaction was middling.
●
Large batch and mass production systems, because of the high numbers of specialists
involved, create more paperwork and demand clearer cut definitions of duties.
Woodward’s studies indicated how four major factors in any company (task; technology;
people; and structure) were interrelated, and that management needed to be aware that
when one of these factors changed, it was vital to recognise the effects this change would
have on the other factors.
These studies contributed to the debate as to whether technology forced organisations
to change their structure and culture.
6.2.5
Peter Drucker: management by objectives (MBO)
Drucker popularised the process of defining organisational objectives (targets) and
linking them to a timescale. He stated that objectives should be agreed for areas
where performance and results have a direct influence on the achievement of the basic
company aims:
profitability;
managerial performance;
● worker performance;
● public responsibility.
●
●
Management by objectives can be defined as a type of control strategy: controlling
outputs. However, Drucker emphasised that if objectives are to be effective, they must
be stated in behavioural or measurable terms, so that any deviation can be highlighted at
an early enough stage to permit corrections to be made and that managers, when setting
objectives, have a responsibility to:
agree their own departmental targets with their superiors;
discuss and agree targets for their staff that are achievable;
● ensure that all targets set are measurable and possible, and that resources are made available together with some setting of priorities;
●
●
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apply the control system and discuss progress with staff at regular intervals. Where staff
jointly set objectives with their manager they achieve valuable feedback on performance,
a motivating factor acknowledged by Herzberg.
These were taken further in the United Kingdom by John Humble.
6.2.6
Contemporary perspectives on organisations
The more recent literature on organisations and management is vast and difficult to categorise in the simple ways used for early contributions to organisation theory.
Gareth Morgan has argued that we can view organisations in different ways as we try
to understand them. We are rarely aware of the image of organisations we take for granted
but, just like the photographs of the Parthenon from different perspectives, they fundamentally influence what we see and the explanations we put forward to make sense of it.
However, the Parthenon can be approached from different directions, though not all are
equally easy. Different angles will give different perspectives, and by arriving very early in
the morning you could get a photograph with unusual lighting and fewer people in it.
The same is true of the way we look at organisations and the process of management.
From one perspective it is helpful to think of organisations as machines, in which the
various jobs and departments are carefully designed to work smoothly together to perform
certain functions effectively. This is certainly the view implicit in early theories such as
classical and scientific management.
Exercise
What are likely to be the limitations of viewing organisations as machines? Can you think
of any other ways of looking at organisations that might be useful?
Solution
The view of organisations as machines provides some useful insights, but also imposes limitations, which in some circumstances can be severe. For example, the use of basic costing
techniques in large multi-product firms may result in misleading information for decisionmaking. In this type of situation, more sophisticated models which recognise the more
complicated nature of the organisation, may be more appropriate.
The limitations of mechanistic perspectives on organisations are as follows:
(a) They can create organisational forms that have great difficulty adapting to changed
circumstances.
(b) They can result in mindless and unquestioning bureaucracy.
(c) They can have unanticipated and undesirable consequences as the interests of those
working in the organisation take precedence over the goals the organisation was
designed to achieve.
(d) They can have dehumanising effects upon employees, especially those at the lower
levels of the organisational hierarchy (Morgan, 1986).
Morgan goes on to argue that there are other ways of viewing organisations that lead to
different insights. It is not possible to go into all of those here, but two other perspectives
he identifies are the view of organisations as organisms and organisations as cultures. It is
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important for managers to be able to examine organisational problems from more than
one perspective in their search for effectiveness.
6.3
Power, authority, responsibility
and delegation
Individuals within the workplace have different relationships with each other. To be able to
analyse the nature of management relationships it is necessary to understand the concepts
of power, authority, responsibility and delegation.
6.3.1
Power and authority
At the most general level, management and leadership are concerned with the process of
influencing other people so as to bring about changes in their attitudes or behaviour.
The ability to exert influence depends on the type and amount of power and
authority the manager possesses. A person’s position in an organisation gives
them authority over others and comprises a legitimate power, especially when followers accept that the leader has the right to direct them.
6.3.2
Authority as legitimate power
Authority is essentially the right to take actions and make decisions. Max Weber (1864–
1920) who studied power and how it was applied in society proposed that authority legitimises the exercise of power within the structure and rules of the organisation. Hence, it
allows individuals within an organisation to issue instructions for others to follow. Weber
defined three bases for such authority as follows:
Charismatic authority
This is derived from the personality of the leader. Weber used the term ‘charisma’ (literally
‘the gift of grace’) to describe that personal quality which sets the leader apart. This is most
commonly seen in politics or religion, but people like Tom Peters (of the Excellence literature), Richard Branson of Virgin Airways and Anita Roddick of Body shop all provide
examples in the industry. Because the charismatic power in the organisation is so dependent on the leader, difficulties arise when he or she has to be replaced. Unless someone else
is available, who also possesses the necessary charisma, the organisation either decays or
survives in one of the other two forms – traditional if the succession is made hereditary, or
rational-legal if a set of rules is drawn up to decide the succession.
Traditional authority
This is derived from custom and practice or status such as aristocratic or middle-class
power. The personality of the leader is irrelevant: he or she inherits the status of leader
because of the long-standing belief in the natural right to ‘rule’ which is sometimes handed
down. Examples would be where the organisation is family owned and appointments, or
on family rather than ability and procedures depend on what has always been done. Even a
big multinational like Ford has had a succession of Henry Fords running it!
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Advisory authority. Staff offer suggestions, give opinions and prepare plans or policies for
their area of specialty for the consideration of line managers. Line managers are not, of
course, obliged to follow staff advice.
● Service authority. This is the authority given to staff for the conduct of activity that has
been separated from line work as service to the line. Line managers are obliged to accept
this service, although they may, of course, complain about its quality. The purchasing
function, for example, has service authority.
● Control authority. Staff with control authority have responsibility for controlling certain aspects of line performance, as is the case with quality control and inspection staff.
Control authority moderates line authority in important respects.
● Functional authority. This is said to be the authority to make decisions that fall outside those made within the formal chain of command. It is usually confined to specific
areas of activity, for example health and safety, on which the responsible manager has
the authority to issue instructions and, say, prohibit the use of unsafe equipment and
machinery. Functional authority carries with it the right to both insert and enforce
standards of performance and behaviour.
●
6.3.3
Organisational power
The management and leadership relationship with subordinates is about influencing
the behaviour of others. To understand why subordinates comply and ‘obey’ leaders, it
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Rational-legal authority
This is based on the legal occupancy of senior positions and is based on the acceptance of
formal rules and procedures and on impersonal principles. So, the legal rational authority
will stem from the hierarchal position in the organisation and is typified in bureaucratic
types of structures.
It represents the ability to perform particular functions and their operations are based
on following a set of written rules. Weber called this type of organisation ‘bureaucratic’
because the organisation is based on a system of offices or bureaux arranged in a hierarchy. The various tasks which it is designed to carry out are distributed among the officeholders, whose authority is not personal but is vested, impersonally, in the office. This
clear separation of personal from business relationships is emphasised in the rules concerning appointment and advancement, which are based on technical qualifications and
not personal ones.
Authority is enshrined in the legal structure of companies who register under the various Acts of Parliament and with the appropriate Stock Exchanges, as this registration gives
directors the authority to build a business in certain areas through their ‘articles of association’ which specify that area, and to issue a certain number of shares and so on. Banking
arrangements under various Finance Acts describe the authority of various roles such as the
signing of cheques up to certain limits.
A chain of authority links each level of the organization, and functional departments
laterally have authority to act over different issues, though both are difficult to work
through at the borders of these limits. This is essentially line management and direct
authority.
The authority of staff managers, such as the management accountant, is more difficult
to capture than that of line managers who have control authority.
The relationship between specialised staff managers and line managers can be such that
staff have advisory, service, control or functional authority in respect of line activities:
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is important to understand the nature of power and how an individual can gain power.
French and Raven (1959) identified the following five possible bases of a leader’s power:
1. Reward power, where the leader is able to directly influence the intrinsic and/or extrinsic
rewards available to followers.
2. Coercive power, where the leader uses penalties or sometimes physical punishments to
enforce compliance.
3. Referent power, when followers believe that the leader has desirable characteristics that
should be copied, or has inspirational charisma.
4. Expert power, based on the followers’ belief that the leader has certain expertise and
knowledge relevant to a particular problem or issue.
5. Legitimate power (i.e. authority), when followers accept that the leader has the right to
influence them in certain areas or aspects of behaviour.
Exercise
Can you see Weber’s three types within the French and Raven scheme?
Solution
Coercive and Legitimate historical/traditional.
Reward and Referent charismatic/personal.
Expert legal/rational.
Power bases within organisations vary, Perrow (1970) described the sales department
as the ‘main gate between the organisation and the customer’ – the source of money.
Consequently, the sales department enjoys a high level of power. Other firms have cultures
based on research and development or engineering, in which these departments are
powerful. The Rolls-Royce RB211 engine nearly bankrupted the company in 1971 as it
was controlled by engineers (hence they possessed the power) rather than finance staff;
General Motors produced some appalling cars (such as the sub-compact Vega) when it was
controlled by the finance department which insisted on common parts.
Pfeffer and Salancik (1977) defined organisational power as the result of the interaction
of five factors:
1. Dependency creation;
2. Financial resources;
3. Centrality of activities;
4. Non-substitution;
5. Uncertainty reduction.
6.3.4
Responsibility
Responsibility involves the obligation of an individual who occupies a particular position
in the organisation to perform certain duties, tasks or make certain decisions. Though
managers can delegate authority for tasks (in theory anyway) they cannot delegate
responsibility: the ‘buck’ should stop with the responsible manager. However, in a large
organisation it is very difficult to work out exactly which layer of management is actually responsible. It is sometimes supposed that what is delegated is responsibility, but a
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6.3.5
Delegation
Without delegation formal organisations cannot exist. If there was no delegation the chief
executive would be responsible for everything. Of necessity, the manager has to give some
of the work (tasks and decisions) for which he is responsible to subordinates. In many
organizations, there is a definitive list of authority delegation – mostly to do with approval
for monies spent or committed. Other responsibilities are generally left to the discretion
and judgment of the manager and his or her view of the capabilities and time available for
his or her individual staff, bearing in mind training and development needs and the time
the manager has for supervision and on-the-job training.
Of course, management could not completely delegate the tasks, and the associated
authority for planning, coordinating, controlling, organising and monitoring; to do so
would be to abrogate responsibility (though this is not too uncommon in practice). On
the other hand, some laissez-faire leadership styles are effective, as are democratic styles in
certain circumstances. Both of these involve delegation to a point of allowing decisions to
be made at a very low level.
The barriers to delegation must be overcome because the process is not only inevitable,
but when carried out properly can result in a number of significant advantages:
Effectiveness and efficiency – Getting more work done is the raison d’etre of all teamwork,
and delegation requires teamwork. It is effective because it develops the staff gradually
and allows the manager to spend more time on strategic issues.
● Training – Training by doing is acknowledged to be a very effective method. By delegating more and more and further and further down the line, and by insisting on full briefing and consultation between managers and subordinates, training becomes not a special
process to be done at rare intervals, but a general day-to-day activity.
● Decision-making – Better decisions are made by people who are close to the customer or
production process and also quicker decision-making, since subordinates do not always
have to refer problems up the hierarchy for someone else to check them.
● Management succession – ‘The King is dead, long live the King’, is nothing more than a
pious hope unless the new boy has a chance of acclimatisation: he not only needs to get
to know the routine but also to accustom himself to the responsibilities of managing and
the development of managerial skills among a wider group within the organisation.
● Development and self-evaluation – A subordinate can be tested under actual conditions, before being permanently promoted. By regularly ensuring a free flow of delegation, there will be continuous assessment of staff, accepted as a matter of routine,
and increased motivation as people are given clear authority for more demanding
activities.
● Job satisfaction – The most valuable advantage of delegation is job satisfaction for
subordinates. By ensuring that the mix of delegation is appropriate, some of the
interesting jobs will be delegated and not only the tedium. By increasing employees’
●
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manager in no way diminishes his own responsibility by delegating part of his task. What
he, in fact, does is to create a new responsibility for the subordinate to himself without in
any way dividing his own responsibility. Indeed, he even adds to his responsibility because,
by delegating part of his task to a subordinate, he creates for himself the new responsibility
of control. This is an important point because what the manager delegates is work and the
necessary authority to do it.
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enjoyment in their jobs, employers can encourage better work. The question still
remains though about the appropriate degree of delegation in any particular circumstance; this is a matter of the extent to which authority and accountability should
be passed down to lower levels in the hierarchy. If there is extensive delegation the
organisation will operate on a decentralised basis, whereas if most decisions are made
by a few people at the top of the organisation it will be highly centralised. This is
obviously a matter of degree: no organisation exhibits complete centralisation or
decentralisation.
The process of delegation is usually one or a combination of the following steps:
Abdication – To leave issues without any formal delegation, which is a very crude and
usually ineffective method.
● Custom and practice – An age-old system whereby precedent rules. The most junior
member of staff opens the mail, gets the coffee and so on, and seniority allows managers
to slide out of various duties because ‘rank has its privileges’.
● Explanation – Involves the manager in ‘briefing’ subordinates along the lines of how
the task should be done (not too little and not too much – a fine balance that requires
judgement).
● Consultation – Prior consultation was once quite novel in manager/union relations and
also between managers and subordinates, but nowadays prior consultation is considered
to be important and very effective. People, if organised, are immensely powerful; by contributing or withholding their cooperation they make the task a success or failure. At
least, some managers now have the humility to admit that sometimes good ideas come
from below. Indeed, the point of view of the person nearest the scene of action is more
likely to be relevant.
●
6.4
Management and the Role of Managers
The various theories that have been discussed so far have identified a range of views on
what constitutes management and the different roles for managers. However, the overarching objective of management is the process by which the efforts of people in the organisation are co-ordinated and directed toward the achievement of organisational goals. It
involves the clarification of objective, planning, organising, directing and controlling
other people’s work (Mullins 2004). The function of a manager, as determined by Fayol
includes:
Planning. Selecting objectives and the programmes and procedures for achieving the
objectives of the organisation.
● Organising. Providing the resources to carry out the activities of the organisations and
grouping tasks which need to be performed to achieve organisational goals.
● Coordination. Unifying and harmonising the activities of individuals and groups to
achieve organisational objectives. Management needs to reconcile any differences by
making individuals aware of how their work is contributing to the goals of the overall
organisation.
● Commanding. Giving instructions to subordinates to carry out tasks over which the
manager has authority for decisions and responsibility for performance.
● Controlling. Measuring activities to ensure performance is in accordance with plans and
any deviations are identified and corrected.
●
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1. Satisfying the goals or mission of the organization.
2. Enabling the worker to achieve and focus on productivity.
3. Managing social responsibility.
Mintzberg has also contributed to the debate by identifying the roles which managers
fulfil in the conduct of their job. He classifies the activities which constitute the essential
function of a managers’ job into a set of ten managerial roles. These are divided into three
groups:
1. Interpersonal roles. These arise from the manager’s relations with others and include a
figurehead role representing the organisation; a leader role having the responsibility for
motivating employees; a liaison role involving networking with others not only outside
their own area of work but also outside the organisation.
2. Informational roles. The manager has an important role to play by collecting and disseminating information. This will include a monitoring role, where the manager scans
for information to help them develop an understanding of the organisation and its
internal and external environment; a disseminator role where information is shared
with employees by holding meetings or passing on information; and a spokesperson
role by communicating information to different parts of the organisation and outside
the organisation.
3. Decisional role. This involves the manager in making strategic decisions about the future
of the organisation. In an entrepreneurial role, the manager will seek to make changes
and look for new ideas; as a disturbance handler, the manager will respond to pressures
and crises, and unpredictable events. It will also include a resource allocator role, allocating resources to others, managing the budget and constructing timetables and schedules; as a negotiator the manager will participate in negotiating activities with other
individuals to reach agreements, solve work disputes and resolve arguments.
6.4.1
Managers or Leaders
There are many different views on whether managers and leaders are one and the same.
However, the stance taken in this text is that whilst the job of the manager will normally
require some leadership competence, not all leaders are managers. Individuals are often
given the title of ‘manager’ based on their position in the organisation hierarchy, which
gives them power and authority (as outlined in the previous section). Leadership, on the
other hand, can be viewed as providing direction, creating a vision, and then influencing others to share that vision and work towards the achievement of organisational goals.
Bennis and Nanus (1985) make a helpful distinction between leading and managing
summed up in the following quote:
to manage means to bring about, to accomplish to have responsibility for, to conduct. Leading is influencing, guiding in direction, course, action and opinion. The distinction is crucial. Managers are people who do
things right and leaders are people who do the right thing. The difference may be summarised as activities of
vision and judgement – effectiveness (leading) – versus activities mastering routines – efficiency (managing).
Leaders arise naturally in groups, often in an ‘emergent’ fashion, particularly where tasks
are of a technical nature and an expert arises to solve a problem and then disappears when
the task is finished.
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Other writers such as Drucker have tried to describe what managers do. He identifies
three broad tasks:
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Managers, however, are often in the role of appointed or nominated leaders and seldom
if ever ‘elected’, though they might emerge and be promoted. Many managers lack the
essential qualities of leadership as they are quite often concerned with achieving objectives
in a bounded time frame and do not wish to become the focus of attention that true
leadership really demands.
The process of leadership has probably been the subject of more research than any other
topic connected with organisations and management. Unfortunately, although there is
widespread acceptance that leadership is important, it has proved very difficult to identify
the elements of effective leadership. In part, this is because there is no one universally
accepted definition of the word. Indeed, it has been suggested that there are almost as many
different definitions of leadership as there are persons who have researched the subject.
Despite these problems of definition, most people would still accept that effective leadership
can make a significant difference in organisations. It is also generally agreed that the process of
leadership is inextricably intertwined with the concepts of power, influence and authority.
Leadership studies in psychology have attempted to observe the emergence of ‘natural’
leaders (social facilitators or technical experts, charismatic persons, etc.) from within
groups of people without a formal organisation. This is perhaps why there is so much
confusion in the management literature, as researchers are unsure whether they are measuring leadership as distinct from measuring the ‘directing’ part of the role of management.
6.5
Different Perspectives of Leadership
In the search to explain why some leaders are more effective than others, the following perspectives can be identified
Personality, trait or qualities theories.
Style theories.
● Contingency or situational theories.
●
●
Each of these different perspectives is explored below.
6.5.1
Personality, trait or qualities theories
of leadership
The basis of this perspective, which is the earliest attempt to explain why some people are
more effective than others, is that leaders are born rather than made. This assumes that individuals possess particular personal characteristics or traits that make them into effective leaders.
Although the common sense assumption underlying trait theory appears sound to most
people, it has in fact proved impossible, despite many research studies, to identify any consistent pattern of traits which characterise effective leaders. Despite this lack of positive
research evidence, many managers continue to attach importance to personal factors such
as judgement, initiative and decisiveness, when making selection or promotion decisions
to posts involving leadership.
Whatever the situation or group, some writers assert that to be successful the leader
should have a number of key characteristics:
●
The impulse to lead – this is a problem for many managers promoted on technical
grounds. This can be countered to some extent by technical leadership – intelligence and
knowledge of the task so that judgements are right most of the time.
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Certain other writers selected other personal qualities which were thought to be desirable
in leaders, who are ‘born and not made’ based on the analysis of successful ‘great men [sic]’.
These great leaders were considered to have:
above-average intelligence;
● initiative – independence and inventiveness, the capacity to perceive a need for action;
● motivation – the urge to do it;
● self-assurance – self-confidence;
● the ‘helicopter factor’ – the ability to rise above the particulars of a situation and perceive
it in relation to the surrounding context.
●
Other ‘essential’ qualities that researchers apparently spotted included enthusiasm, sociability, integrity, courage, imagination, determination, energy, faith, even virility.
This approach poses questions that are not easy to answer: how does one identify and
locate such qualities? Is the possession of such qualities necessary and a sufficient condition
for effective leadership? Can one train for ‘courage’ or ‘faith’?
The personality theories are not well developed, especially as they cannot account for context, or examples such as war leaders who seem to possess not intelligence but belligerence.
6.5.2
Management styles
Independently of any leadership ability, managers have been studied and differing styles
emerge. The style chosen by a manager will depend very much upon the assumptions
that he or she makes about subordinates, what he thinks they want and what he considers
their attitude towards their work to be. Most managers, of course, do not give much conscious thought to these things, but tend to act upon a set of assumptions that are largely
implicit. The implicit assumptions about the nature of human behaviour and the motivation behind a good deal of the thinking in economics have been assessed as ‘Theory X’
by Douglas McGregor. Theory X, sometimes referred to as the carrot and stick approach,
consists of the following assumptions:
The average person has an inherent dislike of work and will avoid it if possible.
Because of this, most people must be coerced, controlled, directed and threatened with
punishment to get them to put in adequate effort towards the achievement of organisational objectives.
● The average person prefers to be directed, wishes to avoid responsibility, has relatively
little ambition and wants security above everything else.
●
●
In contrast, McGregor proposed a theory which would bring about ‘true innovation’ –
an opposite view of Theory X, which he called, appropriately, Theory Y and which consists
of the following sets of assumptions.
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Integrity – a wholeness in all of the above so that the group feels the leader rings true,
and can be trusted.
● Self-awareness – the ability to evaluate the effect of the style being used on the group and
the task.
● Human sympathy – authority is given by the group and is not a divine right. A leader
who regards people as a nuisance or as his or her only interest is doomed to fail.
● Tough-mindedness – to be single-minded and do what is required in a situation in spite
of side effects; to overcome opposition and also any personal disappointments.
●
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The expenditure of physical and mental effort in work is as natural as play or rest.
● External control and the threat of punishment are not the only means for bringing about
effort towards organisational objectives. People will exercise self direction and self control in the pursuit of objectives to which they committed.
● Commitment to objectives is a function of rewards and the satisfaction of ego. Personal
achievement needs are perhaps the most significant of these rewards, and can both direct
result of effort directed towards organisational objectives.
● The average person learns, under proper conditions, not only to accept, but to seek
responsibility.
● The capacity to exercise a relatively high degree of imagination, ingenuity and creativity in the solution of organisational problems is widely, not narrowly distributed to the
population.
●
A number of different authors have contributed to the management style perspective,
the key ones are considered in the following sections.
Kurt Lewin
The first significant studies into leadership style were carried out in the 1930s by psychologist Kurt Lewin. His studies focused attention on the different effects created by three different leadership styles independent of personality:
Democratic. A participative style where all the decisions are made by the leader in consultation and participation with the group.
● Laissez-faire. A style where the leader does not really do anything but leaves the group
alone and lets them get on with it.
● Authoritarian. A style where the leader just tells the group what to do.
●
Lewin and his researchers were using experimental groups in these studies and the criteria they used were measures of productivity and task satisfaction.
In terms of productivity and satisfaction, it was the democratic style that was the most
productive and satisfying.
The laissez-faire style was next in productivity but not in satisfaction – group members
were not at all satisfied with it.
The authoritarian style was the least productive and satisfying of all and carried with it
lots of frustration and instances of aggression among group members.
Rensis Likert
Likert examined different departments in an attempt to explain good or bad performance
by identifying conditions for motivation.
Poor performing departments tended to be under the command of ‘job-centred’ managers. These tended to concentrate on keeping their subordinates busily engaged in going
through a specific work cycle in a prescribed way and at a satisfactory rate. This is clearly a
Taylorist approach, breaking down the job into its component parts, selecting and training
people to do those tasks and exerting constant pressure to achieve a required output. The
manager concentrates on getting the job completed, doing the job well and obtaining this
with the resources (including the operatives) at his disposal. No attempt was made to find
out if a better result could be obtained with better inputs into the job.
Best performance was under ‘employee-centred’ managers who tended to focus their
attention on the human aspects of their subordinates’ problems, and on building effective
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Likert summarised his findings as four systems of management.
1. System 1: exploitive authoritative. This relies on fear and threats. Communication is
downward, and superiors and subordinates are psychologically far apart, with the decision-making process concentrated at the top of the organisation. However undesirable
this may ostensibly appear, there are certain organisations, such as the Church, Civil
Service and armed forces, where there must be little room for questioning commands,
for procedural, doctrinal or strategic reasons.
2. System 2: benevolent authoritative. This is a step beyond system 1. There is a limited
element of reward, but communication is restricted. Policy is made at the top, but
there is some restricted delegation within rigidly defined procedures. Management
tends to hear only what it wishes to hear. You should be able to envisage the resultant
style of leadership; an arrogant personality at the top, possibly fanatically committed
to an ideal and determined to see it through to the ultimate conclusion desired, whatever the consequences. Criticism or dissent, even other viewpoints, is not tolerated and
frequently is ruthlessly suppressed. The result is a leadership hierarchy supported by
yes-men.
3. System 3: consultative. Here rewards are used along with occasional punishment, and
some involvement is sought. Communication is both up and down, but upward communication remains rather limited. Scope is given for some local input.
4. System 4: participative. Management gives economic rewards, rather than mere ‘pats on
the head’, utilises full group-participation, and involves teams in goal setting, improving work methods and communication flows up and down. There is a close psychological relationship between superiors and subordinates. Decision-making is permitted at
all levels and is integrated into the formal structure with reference to the organisation
chart. Each group overlaps and is linked to the rest of the organisation by link pins who
are members of more than one group.
Exercise
While accepting that technically competent, tough job-centred management
can achieve high productivity, especially if reinforced by rigid control methods,
Likert suggested that such environments generate a latent rebellious attitude in
subordinates, with high utilisation costs in waste and scrap, higher levels of conflict,
stoppages and grievances and so on. Where do you think this type of management
can be essential?
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work groups which were set demanding goals. This finding appears to comply with Elton
Mayo’s findings that one of the components of success was the creation of an elite team
with good communications, irrespective of pay and conditions. Such management regards
its job as dealing with human beings rather than work, with the function of enabling them
to work efficiently.
Likert concluded that the key to high performance is an employee-centred environment
with general supervision, emphasis on targets, high performance goals rather than methods, and scope for input from the employee and a capacity to participate in the decisionmaking processes.
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Solution
Armed forces, dangerous occupations?
To be successful requires consideration of the people being led, their ability and
traditions. Sensitivity to what people value and expect is essential. To deal with this
problem, Likert identified the following factors that can influence success.
Loyalty to the organisation, be it local, group, division, company or corporation.
Goal congruence.
● Individual motivation.
● Confidence and trust between different sub-units and between the hierarchy and lower
echelons.
● Adequate communication.
● Credibility of communication.
●
●
Tannenbaum and Schmidt
Tannenbaum and Schmidt came up with a continuum of leadership behaviours along
which various styles were placed, ranging from ‘boss centred’ to ‘employee centred’. Bosscentred is associated with an authoritarian approach and employee-centred suggests a democratic or participative approach. The continuum is based on the degree of authority used
by a manager and the degree of freedom for the subordinates. The outcomes of the continuum of styles are often summarised as:
Tells – the leader makes all the decisions and ‘tells’ the subordinates.
Sells – the leader makes the decision, but rather than just announcing or telling to the
subordinates, tries to persuade them to accept it.
● Consults – the leader does not make the decision until he has presented the problem to
the subordinates and hears their views and suggestions, then adopts the solutions that
have been suggested.
● Joins – this is where the leader defines the problem but delegates and hands over the
decision-making power to the group. The leader will indicate the limits within which
the decision must be made.
●
●
Blake and Mouton managerial grid
Blake and Mouton (1994) argued that managerial competence could be taught and
learned. Their managerial grid provides a framework for understanding and applying
effective management, and sets guidelines for an approach to management. The grid
derived from the precept that management is concerned with production and people.
Developing this concept a little further, concern for production is not confined simply
to the Taylor ideal of effective factory performance. Production may mean the number of
good research ideas generated or accounts processed, the volume of sales, quality of service and possibly warranty claims, as well as top policy decision-making and the number
of successful decisions. Likewise, concern for people embraces friendships and relationships, task commitment, self-respect, equity and integrity. The grid suggests that any
combination of concern for production and concern for people may be present within an
organisation.
A high concern for production will score 9 and a high concern for people will also
score 9, the two coordinates on the grid indicating the proportion of each concern present
(Figure 6.3). So 9,9 gives a team management style.
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Country club
management
Team
management
Middle-of-theroad management
CONCERN
FOR
PEOPLE
1
Impoverished
management
Authority-compliance
management
Low
Low 1
9 High
CONCERN FOR PRODUCTION
Figure 6.3
The managerial grid
The task-orientated style (production 9, people 1 or 9,1) is in the best, Taylor
tradition. People are treated as a commodity, like machines. The manager will be
responsible for planning, directing and controlling the work of those subordinate to
him or her. However, while this style can achieve high production, there are noticeable deficiencies. In certain environments, creative energy may be channelled into
trying to beat the system. Subordinates can become indifferent and apathetic, or even
rebellious.
The country club style (1,9) emphasises people. People are encouraged and supported,
and any inadequacies are overlooked, on the basis that people are doing their best, and
coercion may not improve things substantially. The ‘country club’, as Blake calls it, has
certain drawbacks. This style is often present in inefficient, quasi-monopolist, time-serving
organisations. Many disputes, such as within the railways, the health service, local government, the newspaper publishing industry and the coal industry, have arisen largely from
this style of management taking the easy option.
The impoverished style (1,1) is almost impossible to imagine. Certainly, no commercial
organisation could survive with such impoverished management, and it is doubtful if any
non-profit-making organisation could either. This style may exist on the micro-scale, however, for example the supervisor who abdicates responsibility and leaves others to work as
they see fit. A failure, for whatever reason, is always blamed down the line. Contact is frequently minimised, and commitment to problems raised is almost nonexistent. Typically,
the 1,1 supervisor or manager is a frustrated individual, passed over for promotion,
shunted sideways, or has been in a routine job for years, possibly because of a lack of personal maturity.
The middle road (5,5) is a happy medium. This viewpoint pushes for productivity and
considers people, but does not go ‘over the top’ either way. It is a style of ‘give and take’,
neither too lenient nor too coercive, arising probably from a feeling that any improvement
is idealistic and unachievable.
The team style (9,9) may be idealistic; it advocates a high degree of concern for production which generates wealth and for people who in turn generate the production. This
style endeavours to discover the best and most effective solutions, aiming at the highest
attainable level of production to which all involved contribute and in which everyone finds
his own sense of accomplishment.
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High
9
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The 9,9 manager assumes that employees are committed to the organisations (e.g. businesses
where the employees are all shareholders). Conflict will occur, but be successfully managed.
6.5.3
One best style?
The difficulty with style theories, even when they attempt to reflect the multidimensional
nature of leadership, is that they ignore the important influence of the context in which
the leader is operating. To take one simple example, although the 9,9 style of leadership
may be effective, there will sometimes be circumstances (e.g. in a crisis) when time constraints do not make it possible to use this style. This helps to account for the fact that no
one style of leadership has proved to be universally superior to others.
From the discussions on the leadership styles theories, it should be apparent that there
is no one best style of leadership that is equally effective for all circumstances. The best
leadership style is the one that fulfils the needs of the group the most, while at the same
time satisfying the needs of the organisation. The manager has to provide the following
factors:
Direction. The elimination of uncertainty about what has to be done and the coordination of all effort to pull in one direction.
● Drive or motivation. The commitment of the group to move forward, but this will
include satisfying the intrinsic needs of group members.
● Reputation. Represent the purpose of the group to the outside world.
●
The variables that define the successful style include:
The personality of the leader is probably the most rigid of the variables that defines the
most effective leadership style.
● The situation of the group can vary from calm to crisis, simple to complex, severe threat
to security and thus will drastically affect the successful style. The task, technology,
structure and environment in which the group is working will have similar marked
effects.
● The situation within the group (which can vary from cooperative to militant) will also
affect the successful style.
● The people within the group will vary in intelligence, education, interest and motives.
They may be loyal and long-serving, aggrieved, casual or troublemakers. This is obviously independent of the other variables.
●
What is your preferred style of leadership? Give you reasons why. Do you
think this style would be effective in all situations? Why/why not?
6.6
Contingency and Situational theories
of leadership
Following on from the discussion above concerning one best style, a more recent view of
effective leadership has developed from the notion that the most effective leaders have the
ability to adapt their style depending on the situation.
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John Adair action-centred leadership
Adair (1983), after his military training at Sandhurst, put forward a model of ‘action centred leadership’, which is based on the premise that effective leadership requires a bringing
together of task, team and individual needs (Figure 6.4):
Task achievement is obviously important for efficiency and effectiveness, but it also can
be valuable for motivating people by creating a sense of achievement.
● Teams, almost by definition effective teams, generate synergy out of the different skills
and knowledge of individuals.
● Where individuals feel they have opportunities to satisfy their needs and develop, they
are more likely to contribute to creativity and effectiveness.
●
The key task for the action-centred leader is to understand these processes and bond
them together because otherwise there will be a tendency for the organisation to remain
static.
Concern for Task
Concern for Team
Figure 6.4
6.6.2
Concern for Individuals
Action centred leadership
Fiedler
The development of the contingency approach marked the bringing together of the personality and situational approaches. Fiedler’s contingency model is the best example of an
attempt to integrate individual characteristics with the structural and task properties of the
situation.
Fiedler’s hypothesis is that the situation is going to determine the most effective style of
leadership. He defines the situation as a combination of three factors:
1. Leader/member relations. Based on the leader’s view of the favourableness or unfavourableness of his work group.
2. Task structure. The extent to which the leader is able to define and control the group’s
activities.
3. Leader position power. The degree of formal authority/responsibility allocated to the
position.
In terms of leadership style, Fiedler intimates that the leader can be high on only one
aspect at a time – either people oriented or task oriented, but not both.
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6.6.1
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Fiedler was also talking in terms of effectiveness, that is group effectiveness, but he
ignored the question of leader effectiveness which is also an important moderating variable
on performance.
The personality dimensions are taken in terms of the leader’s view of the characteristics of his
or her group. He fails to treat the characteristics of the leader as they are viewed by the group.
Nor does Fiedler define the situation adequately, either in terms of the situation itself
or in terms of the subordinates’ definition of the situation. He also overlooks a lot of other
moderating variables, including subordinates’ expectations of leader behaviour.
6.6.3
Hersey and Blanchard
The current trend in the study of leadership has been towards a situational approach, based
on the notion that the most effective leadership style varies according to the level of maturity of the followers and the demands of the situation.
Hersey and Blanchard’s theory is based on a relationship between three factors:
1. task behaviour – this is the extent to which the leader provides direction for the followers and how they should get the job done.
2. relationship behaviour – this is the extent to which the leader engages in two-way communication with followers and provides encouragement and support.
3. The level of task and relevant maturity that followers can provide to accomplish it.
Maturity is not defined as age or psychological stability. The maturity level of the followers is defined as:
a desire for achievement (level of achievement motivation) based on the need to set hard
but attainable goals;
● the willingness and ability to accept responsibility;
● education and/or experience and skills relevant to the particular task.
●
The appropriate leadership style used by a manager varies according to the maturity
level of the followers (represented by M1–M4). There are four distinct leadership styles
that are appropriate given different levels of maturity. As the maturity level of followers
increases, the manager should reduce task behaviour and increase relationship behaviour.
The four styles are:
1. Delegating style – is appropriate where there is low relationship and low task behaviour
but high maturity of the followers.
2. Supporting (participative) style – is appropriate where there is high relationship but low
task behaviour and moderate maturity of followers.
3. Selling style – is appropriate where there is high task behaviour and moderate maturity
of followers.
4. Telling (directing) style – is appropriate where there is low relationship but high task
behaviour and low maturity of the followers.
6.7
Transformational leaders
The dynamic nature of the environment facing many organisations today means that
there is a constant need to innovate and change. It is suggested that to cope with this
type of environment, leaders need to have vision and be creative, innovative and capable of
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anticipatory skills providing foresight in a constantly changing environment;
● visioning skills whereby persuasion and example can be used to induce the group to act
in accordance with the leader’s purpose or the shared purpose of a larger group;
● value-congruence skills which enable the leader to be in touch with individuals’ economic,
psychological, physical and other important needs, in order to be able to engage them
on the basis of shared understanding;
● empowerment skills involving the willingness to share power and to do so effectively;
● self-understanding so that the leader understands his or her own needs and goals as well
as those of the followers.
●
Boyd believes that there is a need to develop such skills in organisations and to create
the conditions in which this type of leadership can emerge.
Identify some examples of transformational leaders? Explain why you would
define them as transformational leaders.
6.8
Entrepreneurs
In today’s competitive environment, organisations must constantly innovate to establish themselves, survive and grow. As such, there is growing interest in enterprising
behaviour, and in the characteristics of entrepreneurs and their apparently special skills,
knowledge and attitudes that enable them to identify new opportunities. Wickham
(2004) suggests that entrepreneurs are simply managers who manage in an entrepreneurial way. They actively pursue opportunity and drive change to create new values, take a
strategic view and learn as they go. This can be applied to different situations, not just
new start-ups but small and large firms, private and public organisations, and not for
profit sectors.
Bolton and Thomson (2003) suggest that there are some key action factors that characterise entrepreneurs that enable them to make a significant difference. These include that
they:
Are creative and innovative
Spot and exploit opportunities
● Find the resource required to exploit opportunities
● Are good networkers
● Are determined in the face of adversity
● Are able to handle risk
● Have control of business
● Put the customer first
● Create capital.
●
●
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inspiring others. The approach to leadership is referred to as ‘transformational leadership’
whose distinguishing feature is the ability to bring about significant change. Leaders do
this by motivating followers, not just to follow them personally but also to believe in a
vision of organisational or political transformation.
The new kind of transformational leader needs a different range of skills from those suggested by traditional management theories. These new skills according to Boyd encompass:
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Casson (2003) goes on to propose the following qualities of entrepreneurial capacity:
Foresight
Imagination
● Communications
● Self-knowledge
● Autonomy
● Search skills
● Analytical ability
● Networking skills
● Manage risk
● Delegation
● Organisational skills
● Industry knowledge/expertise.
●
●
6.9
Organisational culture
Organisational culture is an important concept since it has a widespread
influence on the behaviours and actions of employees. It represents a powerful
force on an organisation’s strategies, structures and systems, the way it responds to
change and ultimately, how well the organisation performs.
The task for owners and managers is to achieve the right blend of cultures for the organisation’s task and environment. However, managing culture is not a short-term or straightforward task, since it goes beyond slogans and new mission statements: real change requires
modifications to values, basic assumptions and behaviour that are not easy to achieve, but
is increasingly important for many organisations. Handy expanded this as: deep-set beliefs
about the way work should be organised, the way authority should be exercised, people
rewarded, people controlled – these are all aspects of the culture of an organisation.
There are many different definitions proposed to explain culture. Schein (1992) refers
to culture as ‘the deeper level of basis assumptions and beliefs that are shared by members
of the organisation, that operate unconsciously and define in a basic ‘taken for granted’
fashion an organisation’s view of itself and its environment’. Moorhead and Griffin (1992)
define organisational culture as ‘a set of values, often taken for granted that people in an
organisation understand. It reflects the ways work is performed: and what is acceptable and
not acceptable: and what actions are encouraged and discouraged’.
From the above definitions, culture can be said to refer to the underlying beliefs, values
and does of practice that makes an organisation what it is. Handy (1993) simplifies this by
suggesting that culture is ‘the way things are done around here’.
Some aspects of an organisation’s culture will be visible and obvious, while many others
will be both less tangible and more significant. This can be depicted using the analogy of
the organisation as an iceberg (French and Bell, 1990). The part of the iceberg which is
visible above water can be characterised as the goals and strategy of the organisation, the
structure, systems and procedures and the products and services. The greater part of the
iceberg is submerged, and is concerned with the values, attitudes and beliefs, norms of
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Formal aspects
(apparent)
Goals, technology, finance,
structure, skills
Behavioural aspects (hidden)
Attitudes
Communication patterns
Group processes
Personality
Conflict
Problem-solving style
Figure 6.5 The organisational iceberg. From Organisational Behavior, Canadian Edition
1st edition by Hellriegel/Slocum/Woodman Brun. © 1998. Reprinted with permission of Nelson,
a division of Thomson Learning: www.thomsonrights.com. Fax 800 730–2215
McKinsey, a US management consultancy, also produced a framework for understanding organisations (the McKinsey 7-S framework) highlighting the ‘hard’ and ‘soft’ aspects
of organisations which can influence the culture. The seven factors referred to are:
1. Systems. How the organisation gets things done. This includes formal and informal procedures that ensure the organisation operates. For example, accounting systems, budgetary systems information technology systems and so on.
2. Structure. The issues of structure, as discussed in the previous section, should not only
be concerned with whether the organisation should be a functional/divisional or matrix
form, but should also consider the coordination between different areas.
3. Strategy. The actions that are planned in response to environmental change in order
that the organisation achieves its objectives.
4. Style. Relates to the management and leadership style which will be critical because this
will convey what is important in the organisation.
5. Skills. The key capabilities of the organisation. A change in strategic focus may mean
that new skills need to be acquired as other skills become redundant.
6. Shared values/super ordinate goals. Are the guiding concepts, values and aspirations of
the organisation that go beyond the formal statement of corporate objectives.
The hard aspects of the 7-S framework refer to systems, structure and strategy, in other
words, the overt or formal aspects of the organisational iceberg shown in Figure 6.5. The
softer elements are style, staff and skills (i.e. the covert or hidden aspects of the organisation iceberg).
A key factor in determining how effective the organisation is will be the appropriateness
of its culture for its stakeholders, and particularly its customers. A strong culture will be
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behaviour and leadership style, all of which combine to make up the organisation’s culture.
The concept of the organisational iceberg is illustrated in Figure 6.5 below.
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beneficial if it focuses on these elements and highlights the need to change proactively. On
the other hand, a strong culture that does not have these attributes is likely to be a major
barrier to effectiveness.
The main effects and characteristics of a strong culture will be as follows:
It will strengthen behavioural regularities and norms among members of the organisation.
It will minimise some of the perceptual differences among people within the organisation.
● It will reflect the philosophy and values of the organisation’s founder or dominant group.
● The particular culture will have a significant effect on the organisation’s strategy and
ability to respond to change.
●
●
6.9.1
Different levels of culture
Culture exists at a number of different levels from the core beliefs and values to the visible
manifestation of artefacts. Edgar Schein (1992), in his analysis of different levels of organisational culture, depicts culture as having four major levels:
1. Artefacts
2. Norms
3. Values
4. Basic Assumptions.
Artefacts are the more obvious and visible symbols of an organisation’s culture. These
are things such as factory and/or office equipment, head office buildings, the way in which
employees dress and the provision of information for customers.
Norms guide individuals on how they should behave in a particular situation and represent unwritten rules of behaviour. They tell people what they are supposed to do, say and
believe, and are passed on by word of mouth or behaviour. For example, how managers
treat subordinates, the importance attached by them to status and levels of formality.
Values are often taken for granted and tell individuals what is regarded as important in
the organisation and what sort of behaviour is desirable, the more strongly based the values, the more they are likely to be affected, although this does not necessarily mean that
the values are articulated in written form. Rather, the way in which they are reinforced is
by the behaviours of management.
Hewlett Packard makes use of statements called the ‘HP Way’ to clarify corporate values
to all employees, and in the area of ‘belief in our people’ the following appear:
confidence in, and respect for, our people as opposed to depending on extensive rules,
procedures, and so on;
● depend on people to do their job right (individual freedom) without constant directives;
● opportunity for meaningful participation (job dignity).
●
So explicit an approach to the use of culture is still the exception rather than the
rule, but organisations promote and act on values whether or not they are formally
documented.
Underpinning any set of values will be the basic assumptions about things which
represent the deepest level of cultural awareness and guide individuals’ behaviour,
determining how they should perceive, think and feel about things. For example, the
relationship between the organisation and its environment, appropriate human relationships (e.g. individualistic and competitive or collective groups) and what motivates people.
These will be very important, but largely subconscious.
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history and nature of the organisation’s business; the reason the organisation was formed;
● age;
● values of the first owners; influence of the leader;
● nature of the management and staff in the organisation; organisational goals and
objectives;
● structure, whether it is centralised or decentralised; nature of the business environment;
● size of the business;
● life stage of the organisation, whether it is in its youth, maturity or decline.
●
So although organisations are operating in the same industry sector and have the same
corporate status, it is their own unique culture that will differentiate them from each other,
derived from the variables described above.
In trying to explain how the culture of an organisation can be described and understood,
Johnson et al. (2005) developed the framework of the cultural web framework, which
brings together the different aspects of organisational culture. The main elements are:
Stories. what people talk about in the organisation to each other and outsiders in terms
of important events and personalities and the mavericks who deviate from the norm,
what matters in the organisation and what constitutes success or failure;
● Routines. what the normal ways of doing things are, how members behave towards each
other, what the procedures are;
● Rituals. the special events the organisation emphasises in terms of what is particularly
important; what the organisation highlights and rewards, for example sales achievement,
quality, innovation. These signal what is important and valued;
● Symbols. what the symbols of the organisation are, for example logos, titles, company
cars, travel arrangements (business class, first class, etc);
● Power structures. who the most powerful individuals or groups are, who makes the decisions, who influences the decisions;
● Control systems. the measurement and reward systems which denote what is important to
monitor and focus activity on;
● Organisational structure. which reflect the power structure, who reports to whom, on an
informal and formal basis.
●
6.9.2
Models for categorising culture
Whilst every organisation will have its own unique culture, there are a number of different
ways of classifying organisation culture. The following section will consider some of the
ways that culture can be classified.
Harrison’s/Handy’s four types of culture
Handy (1993), developing on the ideas of Harrison, suggests that there are four different
types of culture:
1. Power or club
2. Role
3. Task
4. Person.
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The structure and culture of an organisation will develop over time and will be determined by a complex set of variables, including the:
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Power culture is based on one or a few powerful central individual, often dynamic entrepreneurs, who keep control of all activities and make all the decisions. The structure
is perhaps best depicted as a web whereby power resides at the centre and all authority
and power emanates from one individual. The organisation is not rigidly structured
and has few rules and procedures. This type of culture can react well to change because
it is adaptable, informal and decision-making is quick.
This is likely to be the dominant type of culture in small entrepreneurial organisations
and family-managed businesses).
● Role culture tends to be impersonal and rely on formalised rules and procedures to
guide decision-making in a standardised, bureaucratic way (e.g. civil service and
traditional, mechanistic mass-production organisations). This type of culture can be
depicted as a Greek temple, drawing strength from the pillars which represent functions such as marketing, finance and human resource management that are joined at
the top, where the heads of the functions form management boards. Everything is
based on a logical order and rationality. There is a clear hierarchical structure with
each stage having clearly visible status symbols attached to it. Each job is clearly
defined and the power of individuals is based on their position in the hierarchy. The
form rule and procedures, which must be followed, should ensure an efficient operation. Decisions tend to be controlled at the centre, this means that whilst suitable for
a stable and predictable environment, this type of culture is slow to respond and react
to change.
● Task or achievement culture is typified by teamwork, flexibility and commitment to
achieving objectives, rather than an emphasis on a formal hierarchy of authority (perhaps typical of some advertising agencies and software development organisations,
and the desired culture in large organisations seeking total quality management). It
can be depicted as a net with the culture drawing on resources from various parts of
the organisational system and power resides at the intersections of the net. The power
and influence tends to be based on specialist knowledge and expert power rather than
on positions in the hierarchy. Creativity is encouraged and job satisfaction tends to
be high because of the degree of individual participation and group identity. A task
culture can quickly respond to change and is appropriate where flexibility, adaptability
and problem solving is needed.
● People or support culture can be divided into two types. The first type is a constellation of stars, based on technical expertise of individual employees – such as that
found in architects’ and solicitors’ practices, IT and management consultants. The
organisation is what these few people possess as skills. Other types of organisation
exist for the benefit of the members rather than external stakeholders, and are based
on friendship, belonging and consensus (e.g. some social clubs, informal aspects of
many organisations).
●
Each of the different types of culture described has advantages and disadvantages and
in reality, organisations often need a mix of cultures for their different activities and
processes.
What are the problems an organisation will face if it has an inappropriate
culture?
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1. the extent of risk connected with the activities of the organisation;
2. the speed of feedback on the outcome of employees’ decisions.
Four generic profiles resulting are:
1. Tough-guy macho. High risk, quick feedback; this reflects tough individualistic and high
risk-taking organisations. This profile is likely to be an entrepreneurial firm run by the
owner. The organisation is made up of people working as individuals who take high
risks and receive quick feedback on whether their actions were right. Financial stakes
are high and the focus is on speed, resulting in a high pressure environment.
2. Work-hard-play-hard. Few risks taken; this culture is where the team is all important
and quick feedback from the customer is the key to success.
3. Bet-your-company. High risk but slow feedback; This culture is characterised by slow
feedback with decision cycles taking years, for example in pharmaceutical research.
However, decisions are large scale and risks are high.
4. Process. No feedback, bureaucratic. This type of culture is where technical performance
is of critical importance and there is a need for order and predictability.
6.9.3
Culture and organisational effectiveness
There are different views on the relationship between culture and organisational performance. A number of researchers believe that culture plays a major role in determining an
organisation’s ability to implement strategies and contributes to organisational effectiveness and excellence and ultimately, to overall competitive advantage. Some of the different
researcher’s views are discussed below.
Ouchi – Theory A, Theory J and Theory Z
William Ouchi in 1980 popularised the idea of culture in his book Theory Z: How
American Business can Meet the Japanese Challenge. He suggested that there are a number
of characteristics that differentiate the typical American firm (Theory A) from the typical
Japanese one (Theory J). Of course, Ouchi is generalising when he speaks of the typical
American or Japanese organisation. Looked at more closely, organisations in any one country will have important differences and unique features: these differences represent the culture of the particular organisation. He went on to suggest that it was possible for American
firms to modify their culture (Theory Z) to help them compete more effectively with the
Japanese. Ouchi’s comparison of US and Japanese organisational cultures and the features
of each type of culture are summarised as follows:
Theory A (US)
Employment. Usually short term, with lay-offs quite common.
Evaluation and promotion. Very fast. If individuals are not promoted, they seek employment elsewhere.
Career path. Very specialised; people tend to stay in one function for the whole of their
career.
Decision-making. Carried out by individual managers.
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Deal and Kennedy 1982/1988 Strong culture theory
Another categorisation of culture is presented by Deal and Kennedy. They suggest that
culture can be determined according to two factors:
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Control. Very explicit. People are aware of their control responsibilities.
Responsibility. Assigned on an individual basis.
Concern for personnel. The organisation is only concerned with the workers’ work life.
Theory J (Japan)
Employment. Usually for life, with lay-offs rare.
Evaluation and promotion. Very slow.
Career path. Very general. Staff are rotated around the organisation.
Decision-making. Carried out by group or committee.
Control. Very implicit and informal. People rely on trust.
Responsibility. Shared collectively.
Concern for personnel. The organisation is concerned with the workers’ whole life.
Theory Z
Employment. Fairly long term, to encourage a loyal, committed workforce.
Evaluation and promotion. Slower, with an emphasis on development and training.
Career path. More general, with elements of job rotation and broad training.
Decision-making. Carried out by individual managers, but seeking consensus from the
group.
Control. A balance between formal and informal.
Responsibility. Assigned on an individual basis.
Concern for personnel. The organisation’s concern is expanded to include aspects of the
workers’ home life.
Peters and Waterman (1982) The cultural excellence school
These former McKinsey consultants suggest that culture, as a form of control, is critical
for corporate success. Their research into high-performing American corporations revealed
that corporations with a clearly articulated tight culture were able to develop simple,
decentralised, flexible and innovative forms of organization, based on trust and participation. These simplified forms of organisation reduced the number of managerial levels and
central staff through the avoidance of bureaucracy and, by avoiding complicated matrix
structures, lived in line with man’s limitations.
The eight key characteristics of excellent organisations are as follows:
1. Bias for action. To facilitate decision-making and problem-solving, they avoid selfperpetuating bureaucratic committees. Instead, they promote a ‘ready-fire-aim’ ethos
through temporary ad hoc mechanisms.
2. Close to the customer. They listen and learn from customers so that they are market
driven. Quality, reliability and service are valued as long-term growth is sought through
customer loyalty.
3. Autonomy and entrepreneurship. They regularly reorganise to produce small basic units,
like product divisions.
4. Productivity through people. They believe people respond to trust, that those at the frontier know best, and that innovation comes from ‘where the action is’.
5. Hands on value driven. They take ‘value-shaping’ seriously and inspire employees by
‘Management by walking about’ (MBWA) – regular visits to the workplace.
6. Stick to the knitting. They avoid diversification and concentrate on the things they do
well.
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Two main points can be made about the cultural excellence school.
1. It reveals the limitations of the traditional ‘rationalist’ approach which only regards
measurable and visible aspects of organisations worthy of consideration, the consequence of which has been a restrictive emphasis on rigorous organisational design,
financial planning and analysis and information technologies, and so on. Hence,
insufficient attention has been given to the less quantifiable ingredients of organisational life. Culture has either been neglected or relegated to the ‘art of management’.
2. The emphasis on simple forms of organisation using simultaneous loose – tight controls
refocuses the traditional debate about whether or not organisations should operate tight
centralised controls or looser decentralised ones which encourage self-regulation.
Whatever the merits of this approach, we need to recognise that it constitutes a resurgence of universalism and is therefore somewhat at odds with contingency theory. Several
factors suggest, however, that it is unlikely to replace contingency theory because:
the sample of organisations studied (all high performers) and the character of their
employees (self-motivated and highly trained) is not representative;
● it is quite likely that organisations facing complex environments and undertaking changing tasks will benefit more from such forms than those operating in stable environments;
● other research, while tending to confirm the relationship between performance and some
of the key characteristics, has nevertheless found variations in the degree of centralisation
of organisations according to the market operated within.
●
While Peters and Waterman made an important contribution to the understanding of how
large, successful organisations are managed, unfortunately, some of the organisations defined as
excellent have subsequently experienced severe operating difficulties. Thus, for example, only
2 years after publication of the book, the magazine Business Week re-examined the companies
against the original criteria used by Peters and Waterman and found that fourteen of the
forty-three no longer matched up to the yardstick of ‘excellence’. This merely illustrates the
temporary nature of organisational success.
Peters (1987) Thriving on chaos
Subtitled A Handbook for a Managerial Revolution, Peters produced an amazing 45
prescriptions (his term) under five headings for ‘managing change innovation and
survival’.
Most of these contain a lot of common sense and are self-evident and revisit previous
attempts to define ‘best practice’ or ‘excellence’:
creating total customer responsiveness
using fast-paced innovation
● achieving flexibility by empowering people
● learning to love change
● building systems for a world turned upside down.
●
●
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7. Simple form, lean staff. Simple self-contained but competing structures, like product
divisions, have few central ‘staffers’ and intermediate levels of management. Simple
structures make reorganisation easier.
8. Simultaneous loose-tight properties. Since autonomy has been ‘pushed down the line’,
while the corporate level retains control over a few core values, these organisations are
both centralised and decentralised.
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Of particular interest to the management accountancy profession is the final set of prescriptions with the unusual heading ‘building systems for a world turned upside down’.
This involves control systems, and the need to measure what is most important strategic-ally. Too often, management accounting systems are set up to link into financial
reporting requirements, a theme pursued by Eli Goldratt in The Goal which he subtitled A
Management Accounting Textbook. Peters wants measures of product quality and customer
satisfaction and wants these simple. Control should be bottom-up with ‘conservative’ (i.e.
achievable) goals. Trust and integrity come high on this list as without control, trust is a de
facto requirement without which systems cannot work.
6.9.4
Culture – The International Dimension
As many organisations operate at a global level and face international competition, an
understanding of national culture has become increasingly important. Cultural practices
vary between different countries and will impact on how organisations operate. This view
is captured in one of the early definitions of culture which is ‘the configuration of learned
behaviour and result of behaviour whose component elements are shared and transmitted
to the members of a particular society (Linton, 1945). Bloisi (2004) develops this stating
that culture is a commonality of beliefs, experiences, values and expectations that put it
apart from others – so, for example, it is what makes the United Kingdom different from,
say France or China. The implications of this are that managers must be sensitive to the
dimensions of national culture. The different dispositions of countries will impact on how
they do business and manage employees.
Hofstede (1990) developed a model to explain national differences by identifying ‘key
dimensions’ of common culture in the value systems of all countries. These include, power
distance, uncertainty avoidance, individualism/collectivism and masculinity/femininity.
(Hofstede’s work will be returned to later in the study system).
The features of a country’s culture have important implications for managing cross border mergers, where problems can arise because of the different ways companies are run as a
result of cultural differences. This point is very relevant to organisations who seek to grow
through mergers and acquisitions with foreign companies. However, it is import-ant to
remember that cultures in society are not permanent and as mentioned earlier, all cultures
have sub-cultures and a range of complex and interrelated factors influence organisational
culture. The national culture is just of one of these influences.
6.9.5
Culture and control
How significant is culture for control? Academics and managers have recently suggested
that culture is significant because:
it may be appropriate for organisations which have to contend with turbulent environments while employing staff who have a high regard for self-regulation;
● strong corporate cultures that are closely linked to corporate strategy may be critical for
success.
●
Culture comprises values, which stress what is important for the corporation, and
beliefs about how things should work. It is expressed through symbols, rituals, myths,
stories and behaviour. It consists of taken-for-granted assumptions and norms about how
people should behave, usually on the basis of learning from what has been successful in
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6.10
Managing in different cultures
A challenge facing managers who are working in an increasingly global business environment is
the impact of national cultures on the way people behave at work. This highlights the need for
a cross cultural approach to understand the nature of the management/employee relationship.
Hofstede’s research has attempted to establish the essence of work related difference across the
work and relate these to preferred management styles.
6.10.1
National cultures
Hofstede suggests that the national culture of different countries can be classified according
to five ‘Dimensions of Culture’:
1. Power distance
2. Uncertainty avoidance
3. Individualism/collectivism
4. Masculinity/femininity
5. Time orientation.
Power distance
Power distance is the extent to which a society accepts that power in organisations is
distributed unequally. High power distance means people accept inequality in power
among institutions, organisations, and people. In countries with high power distance,
managers tend to make autocratic decisions and subordinates do what they are told rather
than being involved in decision-making. This kind of culture was found, by Hofstede, to
be particularly strong in Malaysia, China, Philippines, and Russia. Low power distance
means people expect equality in power, such as in Denmark, Austria and Israel.
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the past. It is this latter feature which makes corporate culture a double-edged ‘weapon’,
because it is difficult to change. Yet many organisations are facing turbulent environments
(techno-logical developments, heightened international competition, unpredictable markets, recession, deregulation, etc.) and are attempting to change corporate strategy by, for
example, moving into unfamiliar markets. This often proves difficult because the existing
culture, which may have been a tower of strength in the past, is not suited to the new
strategy. Hence, some corporations have developed an interest in cultural change, though
experience suggests it is a difficult and lengthy process which should be undertaken as a
last resort.
These aspects of organisational culture are ‘taken for granted’ by long-established
members of the organisation as representing the normal ways of doing things and
behaving. However, new members of the organisation have to learn these norms and be
socialised to accept them. Life is generally much more straightforward and easier once
the basic ground rules are known; while some of these may be set out in formal documentation, most organisations have important cultural values that are not spelled out in
this way. If an organisation has few shared values, and wide differences in ways of thinking and behaving in different departments, it has a ‘weak’ culture. Some organisations,
however, have very ‘strong’ cultures, which are an important and systematic influence
on employees.
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Uncertainty avoidance
Uncertainty avoidance is the degree to which members of society feel uncomfortable with
risk, uncertainty and ambiguity, and feel threatened by unusual situations. High uncertainty avoidance will mean risk taking is discouraged and organisations will tend to rely
heavily on rules and regulations so that people know what they are doing. This type of attitude is found in Greece, Japan, and Russia. Low uncertainty avoidance means people have
high tolerance for the unstructured and unpredictable (Singapore, Taiwan and Thailand).
Individualism and collectivism
Individualism is the extent to which people are supposed to take care of themselves and
be emotionally independent from others and reflects the values for a loosely knit social
framework. This tends to be true for the United States, Canada, Britain and Australia.
Collectivism is a preference for a tightly knit social framework in which individuals look
after one another and organisations protect their members’ interests. This was found to be
particularly the case in China, Mexico, Chile, and Peru.
Masculinity/femininity
Masculinity relates to the degree to which masculine values predominate. For example,
a focus on power, achievement, assertiveness, and material success as opposed to the
stereo-typical feminine values of relationships, modesty, sensitivity and concern for others.
Masculine values are strong in Japan, Austria, Italy and Germany. Feminine cultural values
were found in Sweden, Norway, Finland and Denmark. Both men and women subscribe
to the dominant value in masculine and feminine cultures.
Time orientation
Short-term orientation means that people expect fairly rapid feedback from decisions,
expect quick profits, frequent job evaluations and promotions, and so on.
6.10.2
Other cultural characteristics
Other issues that may require a manager to modify their approach would include the
following:
Language
● Religion
● Attitudes
● Social organisation
● Education
● Ethnocentrism (a tendency to regard one’s own culture as superior to others).
●
6.10.3
Changing behaviour
In any situation, where you are required to manage in a cross-cultural or multi-cultural
environment, there are a number of guidelines that you should follow:
●
●
Always show respect and listen, do not be in a hurry.
Try to gain an appreciation for the differences between Hofsede’s ‘masculine’ and
‘feminine’ cultures.
ENTERPRISE MANAGEMENT
6.11
Mentoring
A mentor is essentially a guide, counsellor, tutor or trainer. The name comes from
Greek literature, where Mentor was the human form of Athena who acted as a guide to
Telemachus. Mentors are often in senior positions within the organisation, usually more
experienced employees who can guide and support younger less experienced employees in
any aspect of their development and socialise them into the culture of the organisation.
The mentor is normally a role model, having already achieved a status (and possibly qualification) to which the subordinate aspires.
Whilst it is normal for the mentor to be from the same function (i.e. finance), it is unusual for the mentor to be a direct or indirect line manager of the subordinate. The fact that
the mentor is not the direct line manager means that he/she can act as an independent
arbiter; otherwise there is the danger for conflict given the development versus line management nature of mentoring.
Mentoring works alongside more formal control mechanisms, such as appraisal, and
is intended to provide the employee with a forum to discuss development issues that are
relaxed and supportive. Mentors often discuss such issues as training, the choice of qualification, interpersonal problems and career goals.
The role of a mentor is to encourage and assist junior members of staff to analyse their
performance in order to identify their strengths and weaknesses. The mentor should give
honest but supportive feedback and guidance on how weaknesses can be eliminated or
neutralised.
The mentor could also act as a sounding board for ideas. The process should help junior
staff to question and reflect on their experiences.
A mentoring system has both career-enhancing and psychological functions. The career
function is concerned primarily with enhancing career advancement through exposure, visibility and sponsorship. The psychological function is more concerned with aspects of the
relationship that primarily enhance competence and effectiveness in management roles. A
mentoring system should help junior staff in expanding their network of contacts and gain
greater exposure in the organisation.
For a mentoring system to be successful, relationships should not be based on authority
but rather a genuine wish by the mentors to share knowledge, advice and experience and
should be one of mutual trust.
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Do not feel your way is the best way.
● Emphasise points of agreement.
● Discern the perceived definitions of words.
● Save face as well as giving face.
● Do not embarrass anyone in front of others.
● Know or take someone who knows the culture.
● Understand that leadership may mean different things to different countries.
● Do not lose your temper.
● Avoid clique-building.
● Always show respect.
● Leave your own ‘domestic’ management style at home.
● Eliminate stereotypes.
● Learn to tolerate a high degree of unpredictability.
●
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STUDY MATERIAL E2
The main benefits of mentoring include the following:
Improved motivation among employees;
● Lower levels of staff turnover;
● Faster career progress.
●
In summary, the mentor stimulates, encourages, guides, supports and cautions, acting as
a role models, and nurtures learning.
6.12
Summary
This chapter has looked at the basic concepts of, and approaches to, management. The key
points to remember are:
the concepts of power, bureaucracy, authority, responsibility and delegation;
the different perspectives of leadership;
● the importance of organisational culture, and the implications for management style;
● the process of mentoring.
●
●
References
Adair, J. (1983), Effective Leadership. Basingstoke: Macmillan.
Blake, R. and Mouton, J. (1994), The Managerial Grid. Houston: Gulf.
Bolton, B. and Thomson, J. (2003), The Entrepreneur is Focus: Achieve Potential. London:
Thomson.
Burns, T. and Stalker, G.M. (1961), The Management of Innovation. London: Tavistock.
Casson, M. (2003), The Entrepreneur – An Economic Theory (2nd edn). Cheltenham UK:
Edward Elgar Publishing Inc.
French, J.R.P. and Raven, B. (1959), ‘The Bases of Social Power’. In D. Cartwright (ed.),
Studies of Social Power. Ann Arbor, MI: University of Michigan, Institute for Social Research.
French, W.L. and Bell, C.H. Jr (1987), Organisational Development: Behavioural Science
Interventions for Organisational Improvement (3rd edn). Prentice Hall.
Handy, C. (1993), Understanding Organisations. UK: Oxford University Press.
Hofstede, G. (1980), ‘Motivation, Leadership, and Organisation: Do American Theories Apply
Abroad?’ Organisational Dynamics, Vol. 9, No. 1, Summer 1980 pp. 42–63. Morgan, G.
(1986), Images of Organisation. London: Sage.
Mullins, L.J. (2004), Management and Organisational Behaviour. Harlow,: FT Prentice Hall.
Ouchi, W. (1981), Theory Z: How American Businesses can Meet the Japanese Challenge.
Reading, MA: Addison-Wesley Pub Co.
Perrow, C. (1970), ‘Departmental Power and Perspectives in Industrial Firms’. In J. Pfeffer
and G.R. Salancik (eds), The External Control of Organisations: A Resource Dependency
Perspective. New York: Harper & Row.
Peters, T. (1987), Thriving on Chaos: A Handbook for a Managerial Revolution. London: Pan.
Peters, T. and Waterman, R. (1982), In Search of Excellence. New York: Harper & Row.
Pfeffer, J. and Salancik G.R. (eds) (1977), The External Control of Organisations: A Resource
Dependency Perspective. New York: Harper & Row.
Schein, E.H. (1992), Organisational Culture and Leadership. Jossey Bass: San Francisco.
Trist, E.L. and Bamforth, K. (1951), ‘Some Social and Psychological Consequences of the
Longwall Method of Goal-getting’. Human Relations, Vol. 4, No. 1.
Wickham, P. A. (2004), Strategic Entrepreneurship (3rd edn). Harlow: Pearson Education.
Revision Questions
6
Section A type questions
Question 1
X Company is a manufacturer of non-alcoholic soft drinks and has a well-established position and brand recognition in country Z. The potential for future growth in country Z
is however limited, with the market reaching saturation. One option for expansion is to
move into new markets in other countries offering their existing product range.
The business development team are evaluating this option and are currently working
on proposals to sell their range of drinks in country Y. One possible method of achieving
market entry development that the team is investigating is through a joint venture with a
company that is already established in country Y and is in the drinks distribution business.
The Board of X Company has given the business development team the task of undertaking a feasibility study to explore the viability of the proposed strategy. As part of the
feasibility study there needs to be some assessment of industry competition and the attractiveness of the market in country Y. The feasibility study also needs to assess the cultural
compatibility of the ways of doing business in country Y compared to how X Company
currently operates in country Z.
Requirement
Discuss how Hofestede’s research on national cultures could be used to assess the cultural
compatibility of X Company’s market development strategy to form a joint venture with a
company in country Y.
(10 marks)
Question 2
Briefly describe the concepts of accountability, authority and responsibility.
(10 marks)
Question 3
G, the senior partner of L, a medium sized accountancy firm, has worked for L for over
twenty years and has a sound knowledge and understanding of the different activities of
the firm’s business. Over the years, G has become known for his fairness in how he manages staff. He is also well liked and respected for his enthusiastic approach. He always has
time to encourage and mentor younger members of staff.
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REVISION QUESTIONS E2
The firm has recently invested in new technology which will improve the effectiveness of its office systems, but will mean the roles and responsibilities of the support staff
will change. G, has taken on the unenviable role of leading the project to introduce the
technology and new working practices. He knows that the project will be met with resistance from some members of staff and he will need to draw on various sources of power to
ensure the changes are successfully implemented.
Requirement
Describe the different sources of power that G has and which will help him in introducing
the changes.
(Total for Question Two ⴝ 10 marks)
Section B type questions
Question 4
Moon Co is a family shipbuilding company owned by a technical expert in shipping engineering, Andy Moon, which has been built up by him and his sons and daughters over
the period following the Second World War. Moon himself, now in his 80s, is poor at
delegating, and the board, which consists entirely of family members except for the finance
director, is a place for heated argument and frequent clashes of personality. The situation is
no better in the offices and on the shop floor of the shipyard. Everyone tries to guess what
the owner, Mr Moon, wants, as there are few rules and regulations in this ‘power culture’.
The owner and his family can change their minds at a moment’s notice, hire and fire staff
immediately, change people’s jobs by sideways moves, by promoting them or demoting
them, punishing them by suspensions without pay and so on.
The human resources department tries to keep up with all the changes by filling in the
relevant paperwork to inform payroll and the tax authorities of changes to wages, dismissals
or new hires. The staff in HR have no time to plan ahead, nor are they required to. There is
poor morale in the yard and employees have begun to join trade unions, though the owner
and family are dead against any third-party intervention in what they regard as their own
private affairs. They do not regard employees as assets but as liabilities who get in the way
of how the family wants to do things. Unfortunately, none of the family members have any
qualifications or experience in management, so new people who have ideas from elsewhere
or qualifications are threatening, and so often do not last long before being sacked.
The finance director has had enough of the family arguing at each board meeting and
has told the owner that this, combined with unfair treatment of the workforce, may lead
him to resign. If he does there will be a lot of trade and financial secrets going with him,
so Moon is keen to make changes if only to keep the finance director happy – though he
is also aware of quality problems in the yard causing delays and re-work costs due to poor
morale; he thinks these can be solved by stricter discipline and punishment.
Things outside the yard are changing, however, and the government has introduced
measures to avoid the kind of exploitation of employees that Moon has been using. These
include protection from unfair dismissal for long-serving employees, safety, health and environment legislation and some aspects of equal opportunities such as equal pay for work
of equal value. Also, new employment opportunities have led many staff to leave, often to
lower level jobs which pay just as well as in Moon’s, and where the atmosphere is not so
threatening, and where fringe benefits are often available, such as paid holidays and sick pay.
ENTERPRISE MANAGEMENT
Question 5
Until October 2002, Sheila was the Chief Executive Officer (CEO) of X Company, a manufacturer of washing machines and similar products. As Marketing Manager in the late
1990s, Sheila had been responsible for adding new products to the company range that
boosted company profits, a success that had been largely responsible for Sheila’s promotion
to CEO.
In 2000, however, the company suffered a number of setbacks, and Sheila, in order to
boost sales by bringing products to the market sooner, ordered that all testing of new products should stop.
The consequences were disastrous; X Company was overwhelmed with returned
merchandise.
In an effort to keep the share price high, Sheila ordered the Finance Director, Bob, to
omit the recording of returned products. Bob initially protested that this would be unethical accounting, but eventually complied with Sheila’s order. Under further pressure, Bob
was also persuaded by Sheila to show an increase in sales and respectable earnings per
share figures. Bob managed to do this by adjusting the way the company reported sales, by
understating expenses and by generating several hundred false invoices.
A year-end audit exposed the misconduct of the two executives. Sheila was sent to
prison for 2 years. Bob was imprisoned for 1 year and was struck off from membership of
his professional body.
Requirements
(a) Describe the sources of power and authority that would enable someone in Sheila’s
position to persuade Bob to behave as he did in the above scenario.
(15 marks)
(b) Discuss the measures the Board of Directors of X Company might take to ensure that
the abuse of power and authority that occurred in X Company does not occur again.
(10 marks)
(Total marks ⴝ 25)
Question 6
Up until two years ago, E Company enjoyed a monopoly position in the energy industry. However, a change in government policy has meant that new competition has been
encouraged to move into the industry with E Company losing its monopoly. The company now finds itself facing severe difficulties.
E Company has developed a strong culture over the years which can be typified as a role
culture. This is now acting as a barrier to the organisation’s ability to change, to become
more flexible and to be able to respond more quickly to changes in the environment and
initiatives by its competitors.
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Requirements
(a) clearly distinguish between power and authority;
(15 marks)
(b) evaluate the type of power and control Moon had had, and suggest reasons why this is
being eroded.
(10 marks)
(Total marks ⴝ 25)
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REVISION QUESTIONS E2
E Company is falling behind its competitors when it comes to innovations in energy
services. Developments in new services require staff to work together across functional
boundaries. However, this is unheard of in E Company where people fiercely protect their
functional specialism and will only work on the tasks specified in their job descriptions.
Requirements
(a) Discuss why the characteristics of a role culture may no longer be appropriate for E
Company.
(5 marks)
(b) Recommend, with reasons, the type of culture to which the company now needs to
move to.
(5 marks)
(Total for Question Two ⴝ 10 marks)
Solutions to
Revision Questions
6
Section A solutions
Solution 1
Just as an organisation develops its own corporate culture which will influence its strategy
and its way of doing business, countries show international differences in how they view
the world and develop their own cultures in terms of values and basic assumptions. This is
an important concept since it will impact on the ways in which people behave at work and
the way things are done in organisations. The effect of different environments is a key factor in determining the cultural compatibility of organisations moving into new territories.
A mutual understanding of the different cultures will influence the effectiveness of working relationships and the management styles adopted.
Hofstede’s research was developed to explain national culture by mapping different cultural characteristics. The outcomes from the research suggest that countries can be classified according to the four dimensions in which national culture varies and that might
influence business behaviour. The dimensions are power distance; uncertainty avoidance;
individualism; and masculinity. A country can be classified on these dimensions on a continuum from high to low.
Power distance is the extent to which a society accepts that power in organisations is distributed unequally. In countries with high power distance, managers tend to make autocratic decisions and subordinates do what they are told rather than being involved in decision making.
Uncertainty avoidance is the degree to which members of a society feel uncomfortable with risk, uncertainty and ambiguity and feel threatened by unusual situations. High
uncertainty avoidance will mean risk taking is discouraged and organisations will tend to
rely heavily on rules and regulations so that people know what they are doing.
Individualism versus collectivism is the extent to which people are supposed to take care
of themselves and be emotionally independent from others (individualism), to one where
people prefer a tight-knit social framework based on involvement (collectivism).
Masculinity relates to the degree to which masculine values predominate. For example,
focus on power, achievement, assertiveness, and material success as opposed to the stereotypical feminine values of relationships, modesty, sensitivity and concern for others.
These factors need to be considered when developing strategies in a cross cultural context
since Hofstede argues that countries differ significantly in their ‘score’ on these dimensions.
For instance, on the basis of Hofstede’s work it has been argued that the Japanese are more
collective, cautious, and authoritarian than Anglo Saxon countries. The implication of this is
that Japanese methods of management may not work well in these countries and vice versa.
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SOLUTIONS TO REVISION QUESTIONS E2
X Company could use Hofstede’s work to help in the appraisal of cultural compatibility
of the proposed strategy to enter country Y through joint venture. The comparison should
not only take account of the two organisations but also the cultural differences between
consumers in Company X’s existing markets and the consumers in Country Y. If the two
countries have significant cultural differences along all four dimensions, the joint venture
might not be an attractive proposition.
Market development strategies often fail because whilst financial assessments are sound,
insufficient attention has been placed on cultural factors.
Solution 2
Common errors
● The question is straightforward in calling for a description of the concepts.
The concept of accountability relates to one person having to report to another for actions
and results in the former’s area of activity.
Authority refers to the scope and amount of discretion given to a person to make decisions. Usually, this is by virtue of that person’s position or standing in an organisation.
Authority may also be divided into expert and legal authority. As the names imply, expert
authority derives from a person’s position as an expert on certain matters or doctrines,
whereas legal authority is conferred by statute or common law. Thus, a parent will have
legal authority over a child under 16 years of age, and an employer will have legal authority over employees as defined by the Health and Safety at Work laws. Authority may also
be implied as opposed to being directly stated.
Responsibility relates to the liability a person has when called to account. A person’s
responsibilities refer to the functions that that person is under a duty to perform on behalf
of his/her organisation. Usually, if a person is responsible for a certain area of work, for
example management accounts, then he/she is also accountable for its actions. The management accountant would be responsible for management accounts staff and accountable
to the finance director, or his/her immediate superior.
Solution 3
A useful framework that can be used to discuss the different sources of power is that proposed by French and Raven and includes referent, reward, coercive, expert and legitimate
power.
Referent power is sometimes termed charismatic power and is derived from one’s admiration or respect for an individual that can inspire followers. This is gained by the personal
qualities of the individual and when followers believe that the leader has desirable characteristics that should be copied, or has inspiration charisma. The scenario mentions that
G is known for his fairness and is well liked and respected for his enthusiastic approach.
It is therefore likely that he will have referent power which will help him in implementing the changes to working practices.
● Reward power is where the leader is able to directly influence the intrinsic or extrinsic
rewards available to followers. For example, the ability to provide incentives for individuals to behave in a particular manner and has control over the organisation’s resources
such as salary, bonuses or promotion. This type of power is usually used in a positive
●
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The list proposed by French and Raven is not exhaustive and there are other sources of
power, such as resource power, physical power and negative power. Informational power is
derived from the ability to control access to information.
Section B solutions
Solution 4
(a) Power and authority. A person’s position in an organisation gives them authority over
others and comprises a legitimate power, especially when followers accept that the
leader has the right to direct them. Max Weber (1864–1920) defined three bases for
such authority as follows:
1. Charismatic/personal authority based on personal standing, nepotism, favouritism such
as Napoleon’s use of his family as heads of conquered states in the 1800s in Europe;
2. Traditional/historical authority such as aristocratic or middle-class power based on
status;
3. Rational/legal authority increasingly in an era of burgeoning scientific management,
merit or ability appeared as a variable.
Power
French and Raven identified five possible bases of power:
1. Reward power, where the leader is able to directly influence the intrinsic and/or
extrinsic rewards available to followers;
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manner, although it can be used in a negative way through the threat of removal of
rewards. As senior partner, G will have reward power that he could use to encourage
people to adopt the new working practices. As well as financial rewards, G could use
intrinsic rewards such as verbal praise and recommendation for promotion.
● Coercive power, as the term implies, is the ability to punish or deprive people of things
that they value and where the leader uses penalties or sometimes physical punishments
to enforce compliance. It is based on fears and the use of the ‘stick’ or sanction, making life unpleasant for people. The receiver is unlikely to respond to this type of power.
Whilst the immediate response might be compliance, it is unlikely to result in long term
commitment. It is doubtful that G would want to resort to using this type of power,
unless there is strong resistance to the changes, in which case he may have no choice.
● Expert power is based on the followers’ belief that the leader has certain expertise and
knowledge relevant to a particular problem or issue. It will only work if others acknowledge that expertise. G will probably have this power given the time he has worked for the
organisation and his sound knowledge and understanding of the firm’s different business
activities. This experience will be of great help in the drive to introduce new technology
and working practices into the organisation and should encourage respect from staff.
● Legitimate power, sometimes referred to as position power, is the power which is associated with a particular job. It is when followers accept that the leader has the right to
influence them in certain areas or aspects of behaviour. This is often based on the individual’s formal position in the organisation. Since G is a senior partner and leader of the
project he will be deemed to have legitimate power in managing the changes and hence
the right to issue instructions to staff.
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SOLUTIONS TO REVISION QUESTIONS E2
2. Coercive power, where the leader uses penalties or sometimes physical punishments
to enforce compliance;
3. Expert power, when followers’ belief that the leader has certain expertise that should
be copied, or has inspirational charisma;
4. Expert power, based on the followers’ belief that the leader has certain expertise and
knowledge relevant to a particular problem or issue;
5. Legitimate power (i.e. authority), when followers accept that the leader has the right
to influence them in certain areas or aspects of behaviour.
(b) Moon as both owner and manager had various types of authority and power. His charismatic/personal authority was based on nepotism and his employer status gave him
rational/legal authority. These were supplemented by reward power over both the intrinsic and extrinsic rewards available to employees, and coercive power in his use of penalties like sacking to enforce compliance ‘pour encourager les autres’.
The power base is changing because of PEST factors. Political influence comes from the
government, which has introduced measures to avoid the kind of exploitation of employees that Moon has been using. These include protection from unfair dismissal for longserving employees safety, health and environment legislation and some aspects of equal
opportunities such as equal pay for work of equal value. Economically, the yard is going
to need better management to survive, socially people are no longer putting up with ‘traditional’ authority, and resigning and going to other employers, but there seem to be no
technological changes.
Solution 5
(a)
Taking the sources of power first, it is useful to make use of a typology such as that by
French and Raven (1958), as this helps us to consider the different sources of power in a
systematic manner. The authors identify five major sources of power. These are coercive,
reward, referent, expert and legitimate power.
Taking each of these sources in turn, coercive power is defined as that dependent on
fear. In its extreme form, it is the fear that one is likely to feel if threatened by a gun or
knife. In the case of organisations, power of this extreme kind is rarely used, but Sheila
can be said to have access to coercive power because as the senior manager in the organisation she is in a position to dismiss personnel from their job. Even when this power is not
exercised, the potential for its use is still there and subordinates can feel threatened by this
potential. A second source is that of reward power. In French and Raven’s typology, this
derives from the capacity of the CEO to reward subordinates for their contribution to the
performance of the organisation. These rewards may take many forms from simple praise
in recognition for a job well done, through to more material rewards like promotion, salary increases, more interesting work, additional holidays and so on.
Referent power arises out of the admiration which people have for certain individuals. This admiration often includes a desire to be like that individual because he or she
has qualities that mark them out from the mass of people. In the organisational context,
some managers are able to persuade subordinates to make extraordinary efforts because
subordinates wish to please the manager. In the particular case of Sheila, it is difficult to
know from the scenario whether or not she possessed the charisma that would persuade
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Examiner’s Note:
Any alternative framework on power is acceptable.
(b)
It is probably impossible to ensure that the abuse of power and authority will not occur
again in X Company or any other company for that matter. Chief executive officers like
Sheila have the responsibility of getting things done through others and with others, in
order to meet corporate objectives. To accomplish this leadership role, they are accorded
a degree of authority to enable them to run the business. In appointing the chief executive officer, the board of directors selects individuals, who, in addition to possessing the
required leadership skills and experience are also assumed to possess integrity.
Unfortunately, it is difficult for any selection body to know in advance that the person
chosen as CEO will always use the power granted to them in a responsible manner.
The responsibilities of a board of directors therefore include those of controlling, monitoring and supervising top management so that the business is run according to legal
requirements and in the interests of shareholders and other stakeholders.
Following a succession of corporate scandals in the 1980s, a number of investigations
and reports such as the Cadbury Committee Report (1992) recommended Codes of Best
Practice to try to ensure better corporate governance. X Company could usefully adopt
some of the recommendations of the Cadbury Report. These include the setting up of
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subordinates to act to please her. What we do know is that she exhibited qualities in a
crises situation that would be unlikely to enhance her referent power in the world of
legitimate business.
Expert power is something that Sheila does possess. She demonstrated her marketing
and management skills in her previous role as marketing manager. It may be however, that
she does not possess the general management skills to perform effectively as CEO. We
do not know how competent she was in the role. We do know that X Company suffered
market setbacks, but these can affect any company irrespective of the skills of the CEO.
Legitimate power represents the power a person receives as a result of his or her position
in the formal hierarchy of an organisation. It is the power accorded in the constitution of
the organisation to anyone who fills a particular position. So, a policeman is accorded certain powers to arrest people if they break the law, and managers generally may be granted
powers to hire and fire personnel, to give instructions, to reward personnel and so on. In
the case of CEO, they are given wide-ranging powers such as that of strategy formulation
and the power to implement it.
The concept of legitimate power in fact is very similar to the concept of authority to
which we now turn. Power is not, however, the same as authority. Power may be exercised
without legitimacy. For example, when any one individual forces another individual to do
something which he or she would not otherwise do by a threat of physical violence, then
this is not legitimate, unless we are in a war situation. By contrast, the exercise of authority
implies the right to influence the actions of others through agreed legitimate means.
In the case under review, it is evident that Sheila, in pressurising Bob to change the figures, was exercising her power of position illegitimately.
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SOLUTIONS TO REVISION QUESTIONS E2
Audit Committees to safeguard the interests of shareholders. These seek to ensure financial
accountability through the monitoring of a company’s annual and interim results. A second recommendation of the Cadbury Committee, the appointment of more no executive
directors would also be useful in strengthening this monitoring process.
Unfortunately, even these measures cannot guarantee responsible use of power and good
ethical practices because Audit Committees and the like depend for their information on
executives involved in running the company. The encouragement of whistle-blowing; a
practice in which persons in a company expose the misdeeds of others to prevent the misuse
of power and to preserve ethical standards is one possible measure. In some US companies,
‘ethics advisers’ have been appointed to assist staff on what action to take in case of observed
unethical practices and abuses of power. To date, however, even these measures have limited
effectiveness because of a lack of legal safeguards for whistle blowers. Employees who ‘blow
the whistle’ on senior people in an organisation risk losing their job and this will remain a
threat until such time as legal measures are put into place to protect them.
From the discussions on the several leadership theories, it should be apparent that there is
no one best style of leadership that is equally effective for all circumstances. The best leadership style is the one that fulfils the needs of the group the most, while at the same time satisfying the needs of the organisation. The manager has to provide the following factors:
Direction – The elimination of uncertainty about what has to be done and the coordination of all effort to pull in one direction.
● Drive or motivation – The commitment of the group to move forward, but this will
include satisfying the intrinsic needs of group members.
● Reputation – Represent the purpose of the group to the outside world.
●
The variables that define the successful style include:
The personality of the leader’s probably the most rigid of the variables that define the most
effective leadership style.
● The situation of the group can vary from calm to crisis, simple to complex, severe threat to
security and thus will drastically affect the successful style. The task, technology, structure and environment in which the group is working will have similar marked effects.
● The situation within the group (which can vary from cooperative to militant) will also
affect the successful style.
● The people within the group will vary in intelligence, education, interest and motives.
They may be loyal and long-serving, aggrieved, casual or troublemakers. This is obviously independent of the other variables.
●
Solution 6
(a)
The concept of organisational culture is an important one for E Company because it can
exert a strong influence on business performance. It can shape the behaviours and actions
of individuals in the workplace and is often referred to as the ‘glue’ that holds the organisation together.
There are different types of culture which are determined by an organisation’s structures, processes and management methods. Currently, E Company is typified as having a
role culture which can be very efficient and successful in a stable environment when work
is predictable and the organisation can control its own environment, often by maintaining
ENTERPRISE MANAGEMENT
(b)
It is apparent that the culture of E Company needs to change and it is recommended that
a task culture would be more appropriate given the changes in business conditions.
This type of culture is typified by teamwork, flexibility and commitment to achieving objectives rather than emphasising a formal hierarchy of authority. The task culture is
often reflected in a matrix structure or project teams, where the focus is on completing a
job or project.
Staff become loyal towards the work rather than towards formal rules. The principal
concern is to get the job done, breaking down rigid hierarchies and functions. Therefore,
the individuals who are important are those with the skills and ability to accomplish a
particular task. Skill and expertise are more important than length of service and position in the organisation, as is currently the case in E Company. People are not hindered
in terms of their contribution by tight job descriptions associated with the role culture.
Hence, a task culture tends to encourage greater flexibility, with people working together
across functional boundaries to achieve organisational objectives.
Team work is fundamental to a task culture, rather than the achievement of individuals.
The result is that influence is spread throughout the organisation. By nature a task culture
fosters creativity and is adaptable, responsive and able to change very quickly.
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a monopoly position. However, this type of culture now appears to be having an adverse
effect on E Company’s performance as the company now faces very different operating
conditions since losing its monopoly position. The reasons for this can be explained by
examining the characteristics of a role culture.
Role culture works by rationality and logic, and is usually associated with a formal structure with well established rules and procedures. Job descriptions are clearly defined, tightly
describing the tasks of an individual’s job. This leads to a strict division of labour with people often reluctant to take on wider responsibilities. Rather, they are obsessed by fulfilling
narrow job duties, with a preoccupation on day to day administration rather than longer
term issues. These characteristics would make it difficult for the organisation to be flexible
and adapt to the more competitive operating environment, acting as a barrier to the developments needed in E Company.
Within a role culture the organisation is dependent upon various functions, each of
which has their own areas of strength and influence, with an emphasis on internal processes. This type of culture is also impersonal, relying on formalised rules and procedures
for work routines and communication and to guide decision making in a standardised
and bureaucratic way. Relations between staff are dominated by hierarchy and authority
with formal and rigid control systems. Individuals are selected for particular roles on the
basis of their ability to complete a particular task to the required level: over achievement
is not actively pursued. However, these characteristics of a role culture can mean that it is
more resistant or very slow to adapt to change and getting people to work together across
boundaries is difficult.
Innovation can be stifled, since the culture is one which insists people go through layers
in the hierarchy to gain approval. Decisions are made at senior level with little involvement
from other members of the organisation. In fact new ideas from below may be regarded with
suspicion from above. Individuals are required to perform their job and not to overstep the
boundaries of authority. This is occurring in the case of E Company, and would seem to be
partly responsible for the lack of flexibility, responsiveness and problem solving capability.
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7
Management of Relationships
in the Working Environment
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Management of
Relationships in the
Working Environment
7
LEARNING OUTCOMES
After completing this chapter, you should be able to:
䉴
discuss the roles of negotiation and communication in the management process,
both within an organisation and with external bodies;
䉴
identify tools for managing and controlling individuals, teams and networks and for
managing group conflict
䉴
discuss the effectiveness of relationships between the finance function and other parts
of the organisation and external stakeholders.
7.1
Introduction
Success within organisations is to a large extent dependent on the way in which people as
both individuals and in groups are managed. People rarely work in isolation at work, since
most activities need some coordination through groups of people. Whilst there are some
positive outcomes of group work, for example it can lead to increased productivity, morale
and encourage greater innovation and creativity in the workplace, working with others is not
always easy, and poor group work can have a negative impact on organisational performance.
This chapter will provide an understanding of the theory and practice of group working,
starting with an explanation of the meaning of groups and the different types of groups
that exist in organisations. This will be followed by an investigation into the factors that
can lead to effective group working. Some of the problems that can occur in groups will be
identified. The final part of the chapter will discuss some of the important skills managers
need in managing relationships including effective communication and negotiation.
7.2
The meaning of groups and teams
The reasons that groups are formed in organisations are as a consequence of the formal
organisational structure and arrangements of work tasks, hence reasons relating to the
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STUDY MATERIAL E2
fulfilment of organisational functions and division of tasks. However, they are also formed
with a view to making boring work and routine work more palatable and interesting in
order to enhance job satisfaction. Working in groups should also increase people’s skills, job
satisfaction and motivation. Group work can fulfil social needs, and can be formed to provide an outlet for companionship, support, role identity, affiliation and recognition, giving a
sense of belonging to individuals. These reasons can all be identified in the Human Relations
approach to management, discussed in the previous chapter. What is clear is that groups are
a key force on the behaviour of individuals at work.
There are many different definitions available to explain what constitutes a group.
Schein (1988) suggests that a group is any number of people who:
interact with one another;
are psychologically aware of one another; and
● perceive themselves to be a group.
●
●
Whereas teams are a kind of group, all groups are not teams. Teams can be defined
(Katzenbach and Smith, 1994) as ‘a small number of people with complementary skills
who are committed to a common purpose, performance and goals and approach for which
they hold themselves mutually accountable’. The economic concept of team production
(Alchian and Demsetz, 1972) would stress the interdependency of skills rather than the
human resource element of commitment, but it is important that the team contains the
right mixture of individuals and skills.
Surely all team members must have different goals from their roles or a team would be
a group of clones? Can you think of teams in this situation? A football team – goalies save
goals not score them, and soon.
The main potential benefits of groups for individuals and organisations include the
following:
Teamwork and improved problem-solving.
Greater creativity and quality.
● Support and facilitation for individual training and development.
● Improved information flows and more effective communication through participation.
● Satisfaction of social needs and a means of sharing and helping in a common activity.
● Providing a forum for constructive conflict resolution.
●
●
7.3
Types of groups
There are many different classifications of the types of groups that exist in organisations.
One distinction that can be made is between formal and informal groups.
7.3.1 Formal groups
Formal groups are created by management to fulfil the specific goals and tasks related to
the needs of the organisation. The membership of this group is more likely to be formal,
perhaps nominated or at least constrained by that organisation (e.g. into shop-floor operatives or into departments or divisions).
7.3.2 Informal groups
Informal groups develop from individual relationships based on common interests and to
satisfy the needs of staff beyond that of doing the job. They are not explicitly set up by
ENTERPRISE MANAGEMENT
7.3.3 Reference groups
A reference group is a group the individual does not currently belong to but wants to join
(e.g. senior manager group, if he or she is a junior member, or a shop stewards group, if he
or she is only a trade union member).
7.3.4 Self directed and autonomous groups
Self-directed work teams have evolved from the autonomous working groups and group technology developed by Volvo. These were based on a socio-technical systems theory that the
interaction of task with an individual is often best served by a group process. The Volvo
experiment however was based on difficulties in recruitment to a boring job rather than a
change in technology of work per se. It was later abandoned as not being effective. Under
cellular manufacturing methods, typically teams are where the cell makes a larger part of
the end-product than previously, and these are empowered with tasks, almost like a division of a firm, and obtain materials and create output by following their own internal
processes. Such teams must have a balance of technical skills, and usually a team leader is
elected or more often appointed after a selection centre using psychometric instruments.
Identify the different types of groups that you belong to.
7.4
Effective group performance
There are many interrelated variables that influence and constrain the behaviour of groups
and contribute to the effectiveness of the group. The criteria of group effectiveness can be
viewed in terms of the extent to which the tasks and organisational goals are achieved and
the satisfaction of team members.
One approach to identifying the various dimensions of group effectiveness was
developed by Handy (1993). He argues that it will depend on:
the ‘givens’ which include the group, the task, and the environment;
the ‘intervening factors’ such as motivation of the group, leadership style and processes
and procedure;
● the ‘outcomes’ which includes factors such as the productivity of the group and the satisfaction of group members.
●
●
MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT
management and do not figure in the organisation’s hierarchy. Individuals join groups in
order to satisfy some important needs, such as for safety, friendship and a sense of belonging. These types of group membership are likely to be voluntary and informal. The influence of informal groups over individual members’ behaviour can be more powerful than that
of formal groups, and can have a positive or negative effect on organisational performance.
The potential problems of informal groups arise from them serving a counter-organisational
function. For example, by resisting change or when their norms are inconsistent with those
of the management, conflict can occur (the nature of conflict will be examined in Chapter 9).
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7.4.1 Formation and development
The level of group performance is affected by the manner in which groups come together.
According to Tuckman’s (1965) analysis, groups typically pass through four stages of
development:
1. Forming. This stage involves the initial formation of the group. The emphasis is on
making a personal impression, getting to know the others, and possibly dropping
out of the group. Members are attempting to create their identity within the group.
Individual’s test what is acceptable behaviour and codes of conduct begin to emerge.
2. Storming. The stage can be characterised as a period of internal conflict and high emotion. As people begin to know each other, they start to present their view to the group
and disagreements and arguments begin to occur. Bargaining over goals, resulting in
conflict and hostility which can disturb the impressions gained at the forming stage.
Again, dropping out is likely and this could ultimately lead to the collapse of the group.
3. Norming. It is at this stage that as conflict is resolved, new guidelines and standards of
behaviour will be established. Group cohesion develops and norms of what is acceptable behaviour are set and roles allocated (norms are standards of behaviour to which
members will conform and are unique to each group).
4. Performing. When the group has successfully progressed through the earlier stages, it
will have created the cohesiveness to operate effectively as a team. The group should
now begin to work smoothly, although their goals or standards may well not accord
exactly with the organisation’s goals.
7.4.2 Group cohesiveness
There are a number of factors which affect the integration of organisational and individual
objectives in groups, and hence the cohesiveness of the group. They include:
Membership factors
● Homogeneity. Similarity of members is preferred for simple tasks; it leads to easier working
but less creative problem-solving. A variety of skills and knowledge is more effective for complex tasks. Homogeneity of status, both internally and externally, leads to a more cohesive
group.
● Alternatives. If the individual has alternatives, that is he or she can leave the group easily, his or her dependence on the group is reduced. Similarly, if turnover of membership
is high, the group will tend to lack cohesion. Management may, of course, deliberately
keep changing the membership of awkward groups.
● Size of group. The importance of this factor depends on the nature of the particular task.
Groups solve problems more quickly and effectively than individuals, but one should also
consider cost-effectiveness. As the size of the group goes up, the average productivity of
the members goes down; there is less opportunity to participate; individuals’ contributions
are less discernible; cliques or factions may form; less work is done; and ‘social loafing’ or
‘social noise’ may increase.
● Membership in other groups. This may detract from cohesion and effectiveness.
ENTERPRISE MANAGEMENT
Dynamic factors
● Groups are continually changing, not just in membership but also in understanding
each other and of the task.
● Success and failure, there is a tendency to persist in failure.
7.4.3 Team roles
A role is a social predisposition to certain ways of behaviour related to the perception of an
individual to his or her status (position, occupation). Hence, the status of being a mother
carries with it the role of ‘mother’ and attendant behaviours. Marital status produces the
roles of husband and wife, and so on. These roles are learned implicitly from the expectations of others.
Group roles are those functions which a group needs for it to survive (someone to
organise social events, a joker, a serious adviser, and so on). These are very often implicit
and develop spontaneously, but these roles need not emerge among groups of same-status
individuals (called ‘peers’ in sociology), such as a group of police constables, a safety committee, consultative committee or quality circle, though social roles might arise as one person volunteers to make the tea, another to collect monies for the lottery.
A popular categorisation of team roles has been developed by Belbin (1981). From his
own personality research, using Cattell’s 16PF scale, Belbin found that ‘the Apollo team’ –
the brightest individuals at the management college – was the worst performing in business
games. From there he realised that the personalities of the individuals mitigated against
them acting together and he developed eight, then nine, key roles (these do not all have to
be played by different individuals), each associated with different sets of personality traits
that are important in an effective management team:
Coordinator – who clarifies the group’s objectives and helps to identify the issues to
be addressed; individuals who prefer this role tend to be stable, dominant extroverts.
● Shaper – needs results for reassurance and has a compulsive drive to get things
done; the key traits here are those of an anxious, dominant extrovert.
● Plant – this is the person who is very good at coming up with original ideas and
suggestions; typically they are dominant introverts with a very high IQ.
● Monitor evaluator – is good at dispassionate analysis of suggestions and options; a
stable, introverted type of individual with a high IQ.
● Implementer – who turns decisions into manageable tasks; stable, controlled individual.
● Resource investigator – this is the person who goes outside the group to obtain useful
information and resources; a dominant, stable extrovert usually performs this role well.
●
MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT
Environmental factors
● Task: the nature of the task and its organisation must be compatible.
● Isolation of the group: external threat and incentives.
● The climate of management and leadership: a Theory X type of organisation tends to
lead to anti-management groups forming, even if only informally. Leadership style
should be appropriate to the task, as we have seen before.
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Team worker – who keeps the team together by supporting other members and
helping to promote unity; a stable extrovert who is low in dominance.
● Completer-finisher – is impatient and very concerned with meeting deadlines; typically an anxious introvert.
● Expert/specialist – technical person, if needed, who provides knowledge and skills
to solve technically based problems.
●
If there is not the right balance of team roles, work will not be performed effectively. This
balance is particularly important for groups operating in ill-defined, rapidly changing environments. More stable groups may be able to operate without a fully balanced set of roles.
7.5
Group dynamics and team performance
In a group, there is a high level of mutual interaction and awareness which are responsible
for powerful forces, which cause the individual to behave, sometimes, rather differently from
the way they would behave on their own. It is important to the organisation that these forces
work for the organisation and not against it. Several classic experiments illustrate these forces.
Performance of simple, well-learned routines improves in the presence of an audience, or
in co-action or in competition with others.
Performance of complex or new tasks, on the other hand, is poorer in the presence of
an audience. Zajonc has suggested that this can be explained in terms of the relationship
between arousal and performance, such that audiences can induce over-arousal and hence
anxiety in complex tasks.
Steiner has identified four basic models of group functioning:
1. An additive model in which every individual contributes but no one is dependent on
anyone else. The total output in theory depends on the average skill or ability, but in
practice it is found to fall short. This loss of efficiency increases with the size of the
group and may be either motivational or intersectional.
2. A coordination or conjunctive model in which there is a high, and often sequential,
dependence between members, as in assembly lines or highly differentiated forms
of office work. Overall performance of the team is here dependent on the weakest
member. The smaller and more homogeneous the team, the more efficient the team
performance. Though interaction losses will still occur, they will be less than in the
additive case, because there is less opportunity for interaction in a linear model.
3. A collaboration or disjunctive model applies to things like problem-solving, where the
group performance should be close to that of the most competent member, that is better than that of the average member. Group size should therefore be as small as possible,
consistent with having all the necessary range of skills available, in order to reduce interaction losses. Groups should be heterogeneous to provide these skills and to reduce any
tendency towards unproductive group norms. A well-established or homogeneous group
may tend to work towards agreement rather than towards an optimum solution.
4. A complementary model applies where the task can be divided into separate parts and
different skills are needed for each.
Variations and combinations of the above may be appropriate to meet different circumstances, for example small conjunctive teams working in parallel to feed a key worker or
ENTERPRISE MANAGEMENT
7.5.1 High-performance teams
According to Vaill (1989), high-performance teams exhibit the following characteristics:
They perform excellently against a known external standard, and what they did before.
● They perform beyond what is assumed to be their potential best.
● They are judged by informed observers to be substantially better than comparable
groups.
● They achieve results with fewer resources than are assumed necessary.
● They are seen to be exemplars, achieving the ideals of the culture.
●
High-performance teams at Digital Equipment in Scotland
Digital Equipment Corporation (DEC) started to develop high-performance work systems
around empowered teams at its manufacturing plant in Ayr, on the west coast of Scotland,
in the early 1980s. These teams were responsible for the manufacture of the company’s
range of small business computers, and had the following features:
Autonomous teams of six to twelve employees were self-managing and self-organising,
functioning without first-line supervision.
● Each team had full ‘front to back’ responsibility for a whole section of the manufacturing process, such as assembling a complete printed circuit board.
● Teams negotiated their production targets with their product manager, based on available staff, materials and equipment.
● Team members were expected to share their skills with each other to become multiskilled, and had no job titles.
● Team members were paid according to their skill level and not according to the particular job on which they were working at any one time.
● Team members were involved in the performance appraisal of colleagues and in the
selection procedure for new recruits.
● The physical layout of the factory floor was open to facilitate communications; technical
support staff had their ‘offices’ and desks on the shop-floor too.
●
This approach to work design improved productivity, reduced the time required to introduce new products, and led to more effective problem-solving and decision-making. Shop-floor
personnel developed a range of analytic, problem-solving, interpersonal, pro-cess design and
group management skills through this approach, leading in many instances to significant career
opportunities and development (based on David Buchanan and James McCalman, 1989).
7.6
Problems with groups
Unfortunately groups can also have negative as well as positive effects. Subsequent research
has identified a number of these negative effects, some of which are discussed below.
MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT
function such as inspection or packing. Also, different structures may be appropriate at
different stages, so a large committee of many diverse skills may be appropriate to solving a
problem (disjunctive), but a small homogeneous subgroup more appropriate for actioning
the solution.
This theory considers the size of a group in relation to the number of tasks it needs to
carry out, rather than the absolute size of the group. Some degree of ‘under-manning’ is
found to be desirable and beneficial, both for the individuals and for the organisation.
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Conformity
Individuals can be persuaded by group pressures to agree with decisions which are demonstrably and obviously wrong, and which the person must know to be wrong. Overall, some
74 per cent of his subjects conformed to an incorrect decision at least once, and the average level of conformity was 32 per cent.
The combination of wrongness and unanimity takes members by surprise, shakes confidence and disorients judgement. If the group is not unanimous, then the spell is broken and
normal judgement largely restored. In the Asch experiment, this was demonstrated if one confederate was briefed to break ranks, when average conformity dropped from 32 to 6 per cent.
Milgram (1965) observed a similar effect in his famous ‘electrocution’ experiments
determining obedience to authority; if a co-acting confederate rebelled, the proportion of
subjects obeying the experimenter, Milgram, fell from 65 per cent under the standard conditions to only 10 per cent.
The Abilene paradox
This is a famous case, exemplifying the stultification of individuals through implicit and
unconscious group processes. The story was written up as a case by a sociologist whose
family all ended up in Abilene, Texas, driving 100 miles through desert heat, though none
of them actually wanted to go. They all thought each other wanted to go, and no one
wanted to disturb the ‘consensus’.
Groupthink
This is a word coined by Irving Janis (1972, Victims of Groupthink) to describe a common
situation which he observed to have occurred within tightly-knit political groups. After the
initial ‘Bay of Pigs’ disaster, when the United States encouraged an abortive ‘invasion’ of
Cuba via the Bay of Pigs, John F Kennedy saw clearly how to try to avoid ‘groupthink’ and
planned his leadership accordingly by insisting on:
critical evaluation of alternatives;
independent sub-groups to work on solutions;
● external testing of proposed solutions;
● the leader to avoid domination of the group (which can be unconscious);
● the avoidance of stereotypes of the opposition.
●
●
Groupthink could be described simply as the homogeneity of objectives and thinking
carried to the ultimate, and often disastrous, extreme. The attitude is well summarised
in the more recent example of the space-shuttle disaster. To quote The Guardian: ‘NASA
argued that the ‘‘gung-ho, can-do” ethic which guided the space agency made it difficult to
raise concern about the safety of the O-ring seals.’
‘Risky shift’ or group polarisation
This is the tendency for groups to take decisions which are riskier than any that the individual
members would take on their own. It now appears that there is also a tendency, under certain
circumstances, for groups to take excessively cautious decisions. In summary, we can see:
●
●
pressures on individuals to conform to group norms;
a tendency in certain situations to make more risky decisions than individuals because
no one can be held responsible (risky shift);
ENTERPRISE MANAGEMENT
Clearly, managers must attempt to minimise these potential problems while harnessing
the benefits of groups and teams. This is not easy but recent approaches, such as TQM and
the concept of a learning organisation, mean that effective groups are even more critical
for organisational effectiveness. Managers need to pay attention to the formation of, and
support for, formal groups and also realise that they cannot ignore or suppress informal
groups. In relation to informal groups, it is important:
to let employees know that managers understand and accept them while discouraging
dysfunctional behaviour in such groups;
● to try to anticipate how decisions will influence informal groups; and
● to keep formal decisions from unnecessarily threatening informal groups.
●
Can you identify a situation when you were involved in a group that was
ineffective. What created the problems? How could they have been resolved to
improve the effectiveness of the group.
7.7
Communication
An important aspect in the relationship between managers and subordinates is communication. Most organisations will depend to some extent on the speed and accuracy
of communication to maintain their competitive edge, and the management function
involves both direct and indirect communication. Good communication skills are often
included as an essential management competence, since people with good communication skills have been found to make better decisions and tend to be promoted more
frequently.
Communication can take many forms, for instance face-to-face discussions, e-mail,
reports, teleconferencing, telephone or internal memoranda.
7.7.1 Oral and written communication
Effective and regular personal communications are vital to ensure coordination and to
identify problems quickly.
Oral communication can take many forms, such as:
face-to-face meetings;
● telephone conversations;
● videoconferencing.
●
Oral communication provides immediate feedback and is important in engendering
team spirit and relationships. It is particularly important for the managers to be proactive
in oral communication, not only with team members but also with the other stakeholders.
MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT
poor communication and lack of trust can lead groups to take decisions that none of the
individual members actually prefers (the Abilene paradox);
● a tendency to become inward looking, particularly at times of crisis, ignoring external
events and conflicting views (groupthink);
● a focus on political manipulation and conflict rather than organisational objectives.
●
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It is important during oral communication for the manager to check that understanding
has occurred to encourage feedback.
Written communication is normally achieved by internal memos and e-mails to team
members, external letters and regular reports.
7.7.2 The communication process
The process of communication involves the transmission of some idea, concept or thought
from one person (the sender) to another (the receiver). Figure 7.1 illustrates the different
stages in the process of communication.
Whilst this diagram above may suggest that the process of communication is straightforward, this is often not the case because before the medium of transmission can be accessed
the message has to be translated – or encoded – into an acceptable form (for example
‘words’). Similarly, before the receiver can access the message it has to be decoded. A further
complication arises because it is improbable that the process of encoding, transmission and
decoding are instantaneous and therefore there is the possibility of ‘interference’ – often
referred to as ‘noise’ – which can distort the message.
The first stage in the communication process is initiated by the sender, who can be an
individual, group or organisation that attempts to communicate with a particular receiver.
The sender must encode the mental thoughts so that they can be understood by the
receiver. This might include using words, numbers, gestures or non-verbal cues such as
images or body language. The output of the encoding is the message. An important point
to consider is that the message needs to match the medium used to transmit it. There
are a variety of media that can be used to communicate messages (e.g. conversations,
e-mail, meeting, memos etc) – the different types of media will be considered in more
detail later in this chapter. Decoding the message is the receiver’s version of encoding and
consists of translating a verbal or visual aspect of a message into a form that can be interpreted. Problems can occur here, in that the receiver’s interpretation of the message may
differ from that originally intended by the receiver, and they will act according to their
interpretation.
Just because communication has been sent it does not necessarily mean that it is effective, barriers can arise at each stage of the communication process:
The sender may distort the communication by:
not being clear as to what has to be communicated;
omitting information;
● choosing words in coding the message that do not accurately reflect the idea/concept,
and/or choosing words that intended recipients cannot understand;
●
●
NOISE
SENDER
Coded
Message
Figure 7.1
Medium
Channel
Decoded
Message
RECEIVER
Stages in the communication process
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The receiver may contribute to communication difficulties by:
not being in an appropriate state to receive the message (e.g. because of concentrating
on some other task);
● not wishing to receive a message from that sender – or being selective in what they
choose to hear;
● filtering out elements of the message he or she does not wish to deal with;
● having a mindset that does not admit the substance of the message – and therefore prevents the receiver from appreciating the sender’s standpoint.
●
‘Noise’ refers to any distractions or interference in the environment in which the communication is taking place and affects all linkages in the communication process. Examples
of noise are poor telephone connections, physical distance between the receiver and sender,
illegible handwriting, distractions in the environment during the communication process.
Noise may interfere with communication by:
physically impairing the receiver’s ability to receive the message – or the sender’s capacity
to receive feedback;
● physical failure of the medium of transmission (e.g. disruption of a telephone network
or system downtime);
● limiting the encoding/decoding capabilities of the sender and receiver;
● obscuring the message within a mass of other communications (e.g. having to deal with a
very large number of voice mail and e-mail messages following the return from holiday).
●
One of the main barriers to communication in organisations is information overload –
people feel overwhelmed by the high volume of information which has been transmitted,
this is partly as a result of the increased use of electronic communications. Other reasons
that can create barriers to good communication are concerned with differences in the backgrounds of the people involved, arising not only from social and educational backgrounds
but also age, personality and status. Also, difficulties can arise in the work situation, for
example where there is conflict between individuals or departments.
The above points illustrate some of the many difficulties that can hinder accurate communication. It implies that both sender and recipient should take steps to overcome these
barriers.
There are a number of ways to overcome the barriers outlined in the section above.
The sender should:
have a definite, clear objective: others will have a far greater chance of understanding the
communication if the sender has articulated – at least internally – what he or she wants
to achieve by the communication;
● plan the communication: it is better if, at the outset, the sender has thought about what is to
be communicated; to whom it is to be communicated and how it is to be communicated;
●
MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT
choosing words that provoke – wholly or partly – an emotional response in the
recipient[s];
● using technical jargon;
● choosing an inappropriate medium, for example text messaging instructions that are
complex;
● sending too much information for a person to digest – creating overload;
● sending mixed messages simultaneously, for example there is incongruence between the
verbal message and non-verbal signals, both of which are available to the receiver.
●
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ensure that all elements of the communication (words, tone, non-verbal signals, medium,
environment etc.) fit with each other and with the subject matter of the communication;
● think about the receiver[s] and the situation in which they will be in when the message
is received;
● anticipate reactions to the message and cater for these – if appropriate – within the message or choice of medium;
● practise;
● seek and work with feedback from recipients.
●
The receiver should:
consider the contribution he or she is making to the communication by being aware of
the feelings of the sender and/or the medium, and of the prejudice which, inevitably, he
or she brings to the receipt of the message;
● listen attentively, or – more broadly – receive the message actively rather than passively;
some researchers contend that listening is a key communication skill; however people are
generally not very good at listening. Listening involves more than just hearing the message, it requires the receiver to actively decode and interpret verbal messages.
● check out anything that is not clearly understood;
● give feedback to the sender so that the sender can ascertain that what has been communicated is what was meant to be communicated.
●
Non verbal communication is also important in helping to make communication more
effective. It is therefore important to ensure that non-verbal signals are consistent with the
verbal messages to avoid miscommunication. Non verbal communication could include
body movements (such as moving backwards and forwards) and gestures such as pointing;
facial expressions and eye contact. Positive non verbal actions that can help to communicate include:
maintaining eye contact;
smiling and showing animation;
● occasionally nodding the head in agreement;
● speaking at a moderate rate, in an assuring tone.
●
●
However, it should be remembered that what is acceptable as positive non-verbal communication will vary around the world and across cultures.
7.8
Effective meetings
Meetings can be an effective communication method for the manager. In order to ensure
that the meeting is effective and useful, it is important to adopt the following steps:
Determine the purpose of the meeting. If the objectives of the meeting are not clearly
defined, it is unlikely that they will be achieved.
● Establish who needs to attend. If the wrong team members are invited, time will be wasted
and again the objective of the meeting cannot be achieved.
● Determine the agenda in advance and distribute it to those attending. Meetings will be ineffective if there is no clear focus for discussion. It is also essential for attendees to view the
agenda before the meeting in order to prepare material and to generate answers or further questions.
●
ENTERPRISE MANAGEMENT
7.8.1 The roles of team members in meetings
Team members fulfil different roles in meetings. For example the manager should act
as a facilitator in the meeting process. He or she should take responsibility for setting
the agenda for discussion and ensuring that the meeting achieves its objective, and
that all team members have had an opportunity to participate, that is the gate-keeping
role again.
It is important that one person at the meeting acts as a chairperson, whose main responsibilities are to ensure that the agenda for the meeting is followed, that all members have
the ability to participate equally and that all views are listened to. This role may or may
not be carried out by the manager.
The meeting will also require a secretary or administrator, whose responsibility it is to
take the minutes of the meeting and to provide a hard/electronic copy of these minutes to
the team members after the meeting. The manager should ensure that prior to the meeting, the secretary has been clearly briefed and has a clear understanding of the purpose and
likely content and format of the meeting.
The team members attending will play various roles, depending on the purpose of the
meeting. For example, some members of the team will be protagonists, that is positive supporters of the issue under discussion. Obviously, positive support is critical for successful
team-working, but the manager must carefully assess the reasons for the positive support.
The particular manager may have a vested interest in a particular outcome, which may not
be to the overall benefit of the project.
Conversely, some team members may be antagonists, that is possibly be disruptive to the
team meeting procedures through disagreement and have a negative attitude to other team
members. The manager must be aware of these individual issues and be able to manage them.
MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT
Make suitable arrangements for location and time in advance. The timing and location of
meetings is important if it is to encourage attendance. If meetings are held at inappropriate times or locations then attendance is likely to be poor and the meeting ineffective.
● Facilitate discussion. The manager should not dominate proceedings, but rather should
allow participants to lead discussions and present solutions or arguments, that is the
gate-keeping role. The manager also needs to manage conflict during meetings to ensure
that personal issues do not get in the way of the overall discussion. A strong leader
should not only foster an open and honest debate but must also control and manage
strong team personalities and disruptive elements.
● Manage the plan of action. As the meeting progresses, the manager should note what
actions are to be taken, by whom and by when. If actions are proposed, the manager
should ensure that it is clear whose responsibility it is to ensure that the action is taken.
● Summarise. Throughout the discussions, the manager must summarise and clarify key points made. At the end of the meeting, a summary of the results should be
made in order to make sure that the participants are clear as to the action points and
commitments.
● Publish results/minutes. The results/minutes of the meeting and the subsequent team
activities should be documented and distributed to the team as soon as possible. (E-mail
is a particularly good medium, especially if the outcomes are also stored on a shared
drive on the system.) If this is not done, the focus of the meeting outcomes may be lost
and team members may forget or wrongly prioritise the meeting’s action points.
●
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All meeting members must be listened to with respect, but it is the responsibility of the
manager to make the whole team aware of the overall project objective, and the role that
each team member plays in its achievement. If the meeting is designed to solve problems,
individual team members will be called upon to offer their own expertise and advice on
the situation. (Objectivity, professionalism and integrity are key requirements in all team
members.) Other team members will take a more passive role, but will be important in
providing an objective perspective on the solutions generated. It is important that a variety
of skills are represented at a meeting so that those present can provide varying expert opinions upon the same problem.
7.8.2 Problems with meetings
Some of the problems with meetings, and methods to overcome those problems, are
explained below.
Problems with meetings
Poor preparation: inappropriate chairperson
Poor preparation: the objectives of the meeting
are undefined and so unclear
Lack of enthusiasm or interest in the meeting
Attendees talk too much without regard to the
chairperson’s requests or structure of the
meeting
Attendees cannot reach an agreement concerning
issues on the agenda
There is hostility between some of the attendees
Action points from previous meetings have not
been carried out
Minutes are either too long (information
overload) or too brief (do not include
appropriate points)
Actions to avoid problem
Selection should be based on someone with the
requisite range of communication skills
Ensure that an agenda is produced and circulated prior
to the meeting. During the meeting, the chairperson
should state the objective(s) and must return the
focus of the meeting to the points on the agenda
For future meetings, ensure that only those with an
interest in the meeting, or whose view is required,
are actually invited to the meeting. For the current
meeting, suggest a short break or stress the need to
reach a conclusion
The chairperson must impose some order on the
meeting. Possible solutions include asking the }
participants to speak in accordance with meeting
protocols such as a time constraint if necessary, or
(worst case) asking them to leave the meeting altogether
The chairperson will need to exercise negotiation skills
to try to bring the meeting to some agreement. If
this is not possible, then attendees may have to
agree to differ. However, some action points may be
required to ensure that more information is obtained
so agreement can be achieved at the next meeting
The chairperson will again need to exercise negotiation
skills. Careful use of a seating plan may help to
reduce the possibility of conflict. As a last resort, one
or both of the parties involved may be asked to leave
the meeting
Assuming that minutes were issued correctly, in the
current meeting, the chairperson should obtain reasons
for actions not being completed. For future action
points, ensure that each has a person identified as
responsible for completing it. Check the minutes of
the meeting to ensure that all action points are included
Ensure that the minutes are either minutes of resolution
(which contain agreed outcomes) or, if minutes of
narration, that they are sufficiently edited to provide
the flavour of the discussions, but not every pause
and cough
ENTERPRISE MANAGEMENT
7.9
Negotiation
Negotiation is another important skill for managers in their relationship with not only
subordinates but with other stakeholders such as suppliers and customers. Whilst there are
a variety of negotiation scenarios, most negotiations are defined by three characteristics:
1. There is a conflict of interest between two or more parties. What one wants is not necessarily what the others want.
2. Either there is no established set of rules for resolving the conflict, or the parties prefer
to work outside of an established set of rules to develop their own solution.
3. The parties prefer to search for an agreement rather than to fight openly, to have one
side capitulate, to break off contact permanently, or to take their dispute to a higher
authority.
7.9.1 The aim of negotiation
There are two types of negotiation process that differ fundamentally in their approach and
in their relative prospects for the stability of the agreement that is reached.
The first is called the win/win approach. In these negotiations, the prospects for both
sides’ gains are encouraging. Both sides attempt to reconcile their positions so that the end
result is an agreement under which both will benefit – therefore the resultant agreement
tends to be stable.
The second is called the win/lose approach. In these negotiations, each of the
parties seeks maximum gains and therefore usually seeks to impose maximum losses on the
other side.
It is clear that a win/win solution is more likely to lead to a stable solution and a successful business relationship. In real life negotiations, both of these processes tend to be
at work together. Therefore, rather than two negotiators adopting one or other of the
approaches, negotiations tend to involve a tension between the two.
7.9.2 Phases involved in negotiation
Negotiations consist of four phases – preparation, opening, bargaining and closing. In largescale negotiations these phases are normally tackled sequentially. However, in small-scale
MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT
Judgement
A real-life anecdote concerns the clever management of those attending a meeting
on a multinational project. There was a rather long-winded contribution from someone who had travelled some distance to attend the meeting. The chairperson was an
Englishman, as this was the language in which the project meeting was conducted. He
was not the most senior person there. His boss, an Italian CEO, did not speak fluent
English. Getting a little impatient with the rambling contribution, the chairperson
made to stop the contributor and get the meeting moved on. His boss quietly tapped
him on the arm. She whispered: ‘He has come a long way. His firm is vital to this
project. Just don’t have it all minuted’. The contributor completed his views about five
minutes later. He was able to report to his own CEO about his excellent reception.
Honour was satisfied: excellent relations were created with the firm, and the outcome
was a successful project.
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STUDY MATERIAL E2
negotiations it is quite common for these phases to merge – possibly into a single unstructured process.
Preparation involves information gathering – knowing the background to the problem,
and the likely constraints acting on each participant.
● The opening phase of a negotiation involves both sides presenting their starting positions to one another. It usually represents the single most important opportunity to
influence the other side.
● In the bargaining phase, your aim is to narrow the gap between the two initial positions
and to persuade the other side that your case is so strong that they must accept less than
they had planned. In order to do this, you should use clearly thought out, planned and
logical debate.
● The closing of a negotiation represents the opportunity to capitalise on all of the work
done in the earlier phases. The research that you have done in the preparation phase,
combined with all of the information that you’ve gained since should guide you in the
closing phase. It is in the closing stage that agreement is reached.
●
7.9.3 Negotiation approaches
Adopting the following approaches can facilitate the negotiation process:
Focus initially on each side’s primary objective – minor negotiating points can become a
distraction in the early stages.
● Be prepared to settle for what is fair – if an agreement is not seen to be fair it is unlikely
to be stable. Maintain flexibility in your own position, this makes it easier for the other
side to be flexible as well.
● Listen to what the other side wants and make efforts to compromise on the main issues,
so that both sides can begin to attain their goals.
● Seek to trade-off wins and losses, so each side gets something in return for everything
they give up.
●
7.10
Management of the finance function
As the economy continues to evolve so does the role of the finance function within an
organisation. The pressure remains strong to deliver the finance function at less cost.
Directors of finance in particular need to be able to demonstrate that their service is
efficient and provides good value for money.
The emphasis, therefore, is on companies to transform their finance functions to meet
the demands for both greater cost-effectiveness and to provide a constructive contribution
to the strategic decision-making process. In the same way, it could also be argued that any
company which doesn’t transform its finance function in this way risks putting itself at a
competitive disadvantage.
7.10.1 Business Process Outsourcing (BPO)
Outsourcing is the act of giving a third-party the responsibility of running what would
otherwise be an internal system or service.
ENTERPRISE MANAGEMENT
7.10.2
Outsourcing non-core activities
In theory, any of the operations that a business performs which are not either in direct or
strategic support of its specific business activity, or which do not constitute an inextricable
part of the business could justifiably be outsourced. Such operations are often termed
‘non-core’ activities.
7.10.3
Benefits of outsourcing
Cost reduction
Outsourcing can deliver significant economies of scale by using standardised procedures
and leading edge technology. Suppliers can perform finance and administration functions
far more cheaply and efficiently than companies working on their own. This could include
reduction in working capital, improvements in tax efficiency and avoidance of capital
expenditure. The services are also provided at an agreed cost which should also lead to a
more accurate prediction of costs, and therefore more accurate budgetary control.
Access to capabilities and expertise of the provider
A specialist provider can bring best practice expertise and new investment in resources.
Outsourcing financial operations can encourage business to be more innovative and
focused on value creation.
Release of capacity for finance function to provide business
partnering
Allows the retained finance function to concentrate on their role as business partners,
working more closely with the business to improve decision making (see Section 7.10)
which is a key source of competitive advantage.
7.10.4
Drawbacks of outsourcing
Loss of control
Control is passed to a third party. External providers are now relied upon to input the
right level of resource and skill required to meet the organisational needs. Businesses which
outsource need to develop expertise in managing outsourced services.
Risk to innovation
Over-reliance on external providers can lead to an erosion of internal knowledge and
skills. Outsourcing can transfer the benefits of organisational learning to the service
provider. An in-house accounts department can be a training ground for future business
managers. An outsourced function is less likely to be a source of talent in the future.
MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT
Business Process Outsourcing (BPO) is contracting with a third party (external supplier)
to provide part or all of a business process or function. Many of these BPO efforts involve
offshoring.
Offshoring is a type of outsourcing and simply means having the outsourced business
function done in another country.
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STUDY MATERIAL E2
Risk to competitive advantage
Confidentiality and risk to intellectual property are often cited as key reasons why
companies choose not to outsource to an external provider. Companies that outsource
must provide sufficient security measures to limit the risk of intellectual property theft
or breaches of confidence. This is particularly relevant when more strategic management
accounting processes are outsourced.
Managing outsourced solutions
There is the risk of unsatisfactory quality and service or even failure of supplier.
Monitoring mechanisms might be costly in themselves. The organisation could also
run the risk that costs could be high for additional services requested after the service
level has been agreed. It will be important to focus on contract compliance and adherence to predetermined standards to reduce the risk of increasing costs of outsource
provision.
7.10.5
Shared service centres (SSC)
Refers to the provision of a service by one part of an organisation or group where that
service had previously been found in more than one part of the organisation or group. An
example would be a large multinational organisation with financial processing centres in
all or several of the countries in which it operates, chooses to consolidate these activities at
one site or shared service centre (SSC).
It is sometimes referred to as ‘internal outsourcing’. It allows an organisation to investigate the potential benefits of consolidation of activities, whilst maintaining full internal
control and thus minimising the control risks often associated with the assignment of
control to an external party at the centre of the outsourcing option.
The key driver and benefit of shared services is driven by increased productivity for all
of the various parts of the organisation. Taking individual businesses where there is no
critical mass and moving them into a more industrialized model enables better economies.
By consolidating all financial transaction processing to one ‘shared service centre’ a
company could expect to enjoy substantial benefits by reducing overhead costs and thus
reducing unit transaction cost.
7.10.6
Benefits of shared services
Headcount reductions - Given the example of large multinational (Section 7.10.5 above)
it is conceivable that by consolidating each countries processing into one shared service
centre using a common financial processing system the more routine functions would
benefit from economies of scale, so that the same volume of processing and overall
activity might be performed by fewer employees.
● Reduction in premises and associated costs – which might include security, insurance, etc.
● Potential favourable labour rates in the chosen geographical location.
● Quality of service provision – this is because the establishment of a shared service
involves not only a change of organisational geographical location but often changes in
the philosophy of internal service provision.
● Consistent management of business data – the processes can be standardised to organisational ‘best in breed’.
●
ENTERPRISE MANAGEMENT
Embedding finance personnel in business and
strategic decision processes
One of the most overlooked areas of strategy development is the finance and accounting
function, often regarded as a ‘back-office’ aspect of the business, the finance function plays
a critical role in providing information for decision-making. Outsourcing certain activities
frees up time for the finance function to concentrate on value-adding activities.
In the new business environment where competition is global and fierce, companies
need better information than ever before in order to remain competitive. Organisations
and their chief executive officers now expect finance directors and financial controllers to
become more involved in matters of production, distribution and sales to play a fuller role
at a strategic management level, in particular helping to decide which markets to serve
with which products. Because decisions are only as good as the information on which they
are based, establishing a reliable pipeline of data from the external business environment
must be a priority for all businesses, regardless of size and industry.
Companies are never too big or too small to begin strategising the finance function,
particularly important when the business is considering major changes in the organisation
(a life cycle event) intended to make the company stronger. A few examples of life cycle
events that are dependent on a strong finance function include going public, acquiring a
business loan and seeking growth through acquisition. These activities rely on thorough
knowledge of the core of the business and relate to the longer-term strategic success of
the company. Accordingly a company should consider whether the responsibility for these
aspects of financial service operations remain in-house.
Decision-making is becoming the basis of competitive advantage and value creation. If
markets give all organisations access to similar resources globally and competition causes many
routine business processes to converge on world-class standards, the quality of information
could become a key differentiator. Enhancing the value of accounting in financial management processes requires a shift in focus away from transaction processing and reporting to a
role which is fully integrated into the strategic and daily business activities of the organisation.
7.10.8
Contribution of finance to other functions
Finance people need to be trained not just to furnish and assemble information but to
draw insights and to communicate these effectively to support decision-making.
● Finance people will be expected to use their understanding of the numbers and metrics
to evaluate opportunities and support decision making about investment opportunities
and resource allocation.
● The role may need to emerge as a challenging sparring partner, able to challenge in
a positive way and will require a broader business understanding and a range of soft
communicating and influencing skills.
●
7.11 The finance function and external
stakeholders
The finance function is under pressure to enhance its value contribution to the business,
deliver information and maintain effective controls in line with ever changing governance
MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT
7.10.7
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STUDY MATERIAL E2
needs. The value of accounting is achieved if it meets one of its primary purposes of
accountability, transparency and usefulness particularly to external stakeholders.
7.11.1 External reporting
Banks, shareholders, the government are examples of external stakeholders who do not
participate in the day to day management but will still have an interest in the company’s
performance.
Investors and financiers
In spite of their absence on a day to day basis, investors and financiers (those lending
money to the company) often rely exclusively on the legally mandated reporting requirements of the organisation to gain an understanding of company performance. They rely
on the accuracy and predictability of the data coming from the companies in which they
invest. They hold the company to performance predictions or forecasts and typically punish
those companies that do not meet their expectations by selling their shares. This shows the
importance of good data for external reporting and the important role the finance function
can play in maintaining credibility with the external community.
Small and emerging businesses
Financing the company’s operations may be the single most important aspect of the
finance function for the small and emerging business owner. Approaching banks is often
a popular solution; the finance function will provide data on the health of the company
and/or forecast its performance. Assembling sketchy documentation may mean that the
business does not receive the finance it requires to start or stay in business.
Taxing and statutory authorities
The finance function must be prepared to gather the necessary information and documentation to support remittances to taxing and statutory authorities. Finance need to be
familiar with legal and statutory requirements prevailing in their respective locations and
promote compliance throughout the organisation and then reporting to and filing returns
with relevant authorities on a timely basis.
External Auditors
The finance function can support organisations in delivering results and meeting externally imposed rules. Both are important in order to stay in business. External audit’s work
relates to the financial statements, they are concerned with the financial records that underpin these. The external auditors will review the system of internal control in order to determine the extent of the substantive work required on the year-end accounts. The auditors
will identify the areas of weakness and recommendations for improvement. It is important
that the management of the finance function know that they are properly managing the risk
of any internal control failures. (The growing recognition by management of the benefits
of good internal control, and the complexities of an adequate system of internal control
have led to the development of internal auditing being recognised as an important form of
control.) The finance function should implement any recommendations from the audit to
enhance the efficiency and effectiveness of the information sent to management. It is important therefore that the finance function as decision makers fully understand the benefits of a
good audit and should be extracting the maximum benefit from the company’s audit service.
ENTERPRISE MANAGEMENT
Summary
This chapter has looked at the management of groups. The key points to remember are:
the role of groups and teams in organizations, and the factors that can contribute
towards effective group working;
● the various techniques that can be used to improve team performance.
● the negative effects of group work;
● the skills managers need in managing relationships, including effective communication
and negotiation.
●
References
Alchian, A. and Demsete, M. (1972), ‘Production, Information Costs, and Economic
Organization’. American Economic Review, Vol. 62, p. 777.
Belbin, R.M. (1981), Management Teams: Why They Succeed and Fail. London:
Butterworth Heinemann.
Handy, C. (1993), Understanding Organisations (4th edn). Penguin.
Janis, I.L. (1972), Victims of Groupthink. Boston, MA: Houghton Mifflin.
Katzenbach, J.R. and Smith, D.K. (1994), The Wisdom of Teams. Harper.
Milgram, S. (1965), ‘Some Conditions of Obedience and Disobedience to Authority’.
Human Relations.
Schein, E.H. (1988), Organisational Psychology (3rd edn). Prentice Hall.
Tuckman, B.W. (1965), ‘Developmental Sequence in Small Groups’. Psychological Bulletin,
Vol. 63, pp. 384–399.
Vaill, P. (1989), Managing as a Performing Art. San Francisco: Jossey-Bass.
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7.12
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Revision Questions
7
Section A type questions
Question 1
Research into group behaviour suggests that the effectiveness of any work group/team
depends on it having the right balance of group roles.
Requirement
Explain why an understanding of group roles is important when forming an effective work
group. Use any accepted classification of group roles to illustrate your answer. (10 marks)
Question 2
Explain the advantages and disadvantages of cohesive work groups.
(10 marks)
Question 3
D Company is a manufacturer of electrical components, supplying to the car industry. As a
result of the downturn in the demand for its products and in response to difficult operating
conditions in its existing market, the company is currently going through a major restructuring. It is anticipated that the restructuring plan will involve the consolidation of some business
activities which will result in a number of staff having to move to different areas of the company. This could mean re-location to different sites, and other staff being made redundant.
Whilst employee relations have in the past been good the management of the company is
aware that employees and their trade unions which represent their interests will be resistant to
the changes that need to be made. The first stages of change will require skilful negotiation
between the management and unions on a range of issues relating to the movement of staff jobs,
the proposed job losses, specifically the criteria for redundancy and the redundancy package.
The company recognises the potential impact of the changes on staff morale and
intends to implement a programme of research amongst staff to gain feedback on the way
the change process is managed.
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REVISION QUESTIONS E2
Requirements
(a) Discuss the role of negotiation in the management of change in D Company, making
reference to the different stages involved in the negotiation process.
(10 marks)
Section B type questions
Question 4
The T Aerospace Company is in the early stages of planning the development of its latest
commercial jet, the 007. The aircraft industry is a fiercely competitive one, dominated by
a few large global players who operate at the forefront of technology. In this industry, competitors quickly copy any advance in technology or new management technique that might
provide them with a competitive edge. Some of the T Aerospace Company’s competitors
have adopted team working as a means of speeding up their development and production
processes.
The T Aerospace Company is thus considering the adoption of team working in its
operations, but some of the traditionalists in the company are doubtful. They are concerned that the benefits of work specialisation will be lost. Some of the managers have had
negative experiences with team working and so have strong reservations about the proposed changes.
Requirements
(a) Describe briefly the essential features of a team.
(5 marks)
(b) Identify the benefits that the T Aerospace Company can expect to gain from the adoption of team working.
(8 marks)
(c) Describe the difficulties that the company is likely to encounter in the management of
its teams and recommend how it might overcome these.
(12 marks)
(Total marks ⴝ 25)
Question 5
E Ltd, a long-established, medium-sized manufacturing company, designs and manufactures electrical generating units for customers all over the world. These electrical generating units are designed to provide effective stand-by electricity wherever continuous power
is critical, such as for hospitals, offices, hotels, airports and banks. E Ltd uses the latest
computer technology to design and manufacture the generating units (including CAD and
CAM systems) to meet the demands of a variety of customers. E Ltd operates in a highly
competitive market, both at home and overseas.
Its factory operates to the highest quality standards, including ISO9001. However, as a
result of increasing product complexity, and customer demands for unique product specifications, the Board of Directors recognised that their existing production planning system was unable to cope with these increased demands. In addition, the organisation had
encountered problems of obsolete stock, materials booked to wrong jobs, and problems in
measuring the cost of work completed. The Board of Directors considered that the optimum solution would be to introduce an integrated production planning and management
reporting system.
ENTERPRISE MANAGEMENT
Requirements
(a) Evaluate the problems that occurred in the ZIPS project team relationships, and
explain how these team relationship problems could have been reduced. (13 marks)
(b) Discuss the potential communication and team meeting problems that may occur in
complex projects. Explain how communications should have been undertaken and
team meetings conducted for the ZIPS project.
(12 marks)
(Total marks 25)
MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT
The Managing Director of E Ltd set up a steering committee to ascertain the requirements of the new system. The steering committee consisted of the Managing Director, the
Finance Director and the Manufacturing Director. The steering committee, having considered the current problems, decided that the initial systems requirements would need
to include a stock control facility, production planning, product costing and a financial
reporting system.
The steering committee very quickly recognised that E Ltd did not have the internal
expertise to design and develop such an information system. A brief document was subsequently produced by the steering committee, outlining the system’s requirements as highlighted above. Six national systems design and development organisations were invited to
submit tenders for either bespoke or off-the-shelf systems. No definite systems specifications were presented in the Invitation to Tender, as the MD pointed out: ‘We are not the
experts – we’ll let them tell us what we need, after all they should know.’
Four suppliers responded to the Invitation to Tender document. Having reviewed the
proposals, the steering committee decided to award the contract to Z Ltd, a systems software design company which had been in business for two years. Z Ltd had built its reputation on designing to-order systems (i.e. bespoke software designed and built from a number
of standard business modules, which can be re-designed and integrated to order). However,
Z Ltd did not have prior experience in developing large integrated production systems; but
it was the least expensive provider.
The first task was to set up a project team. This consisted of a senior consultant from Z
Ltd who was assigned the role of Project Manager, six systems analysts from Z Ltd (each
of whom would lead a module design team), along with the IT Manager, the Internal
Audit Manager, the Management Accountant and the Production Manager of E Ltd. The
Project Manager was also currently working on the completion of another Z Ltd project
for another organisation, which he assured to E Ltd that it would be finished by week 8 of
the Z Ltd Integrated Production System (ZIPS) project. The Project Manager had stated
to the steering committee: ‘the analysts don’t need me to tell them what to do.’
The project commenced on schedule, and the systems analysis and design phase progressed as expected. However, there was some concern from the project team members
from within E Ltd that there was very little coordination between the end-users of the
existing system and the module design teams. It was also noted that the Project Manager
was rarely available in the first 10–12 weeks, as he was busy dealing with problems on
other Z Ltd jobs. In fact, he did not take over full-time responsibility for the ZIPS project
until week 16, at which point the first official project team meeting took place.
At this meeting, the IT manager of E Ltd voiced his considerable concern that the module teams had not yet met to coordinate and discuss the design considerations prior to
integration of the individual systems modules. However, the Project Manager was unconcerned: What’s the problem? The project’s on time and you’ve got 12 weeks built into the
schedule for integration. Plenty of time.’
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REVISION QUESTIONS E2
Question 6
The Direct Sales and Customer Contact Centre (the Centre) of A Insurance Company
deals with vehicle, home and contents insurance products. B, who has been the manager of
the Centre for the last three years, has a participative leadership style, involving staff in key
decisions about the Centre. Initially she was very successful in achieving high staff morale
as evidenced in the results of annual staff surveys for the first two years of her appointment. The Centre scored consistently higher on dimensions such as job satisfaction, communication and co-operation when compared with other parts of the company.
However, twelve months ago B was responsible for introducing a sales target system
which involved allocating staff to teams as part of a restructuring programme. Each team
is set targets and the results are published on a monthly basis in a league table. The team
that is top of the league receives a cash bonus.
B is concerned that the restructuring has had an adverse effect on the performance of
the Centre. She is particularly concerned that the results of the most recent staff survey
show that communication and co-operation between teams have fallen dramatically. She
has also observed animosity between the team leaders. Absenteeism has increased significantly, particularly in team Y. As part of her review of the issues facing the Centre, she has
noted the following:
Team X is always at the top of the league and, as a result, receives the cash bonus. The
team leader of X is highly motivated and team spirit is high. Team members are constantly
coming up with ideas on how to increase sales. The team seems to be a very cohesive
group and team members regularly organise social events for themselves.
● Team Y never succeeds in meeting its targets. The team leader does not seem bothered
by this, and appears more interested in working out how much longer he needs to work
before he can retire. Team members have complained to B about the team leader, and
two members have resigned. There is a personality clash between the team leader and
another member of the team who is viewed by the rest of the team as the ‘unofficial’
leader.
● Team Z, whilst achieving its targets, is always behind Team X. The team members are an
extremely tight knit group, but have become very insular and are no longer responsive to
the work needs of other members of staff in the Centre. They appear to have their own
agenda.
●
The restructure of the Centre into teams and the sales target system was dictated by Head
Office. Nevertheless, B is determined to take action to resolve the problems she currently faces.
Requirements
(a) Discuss the benefits and problems of introducing sales teams and the sales target system in ‘the Centre’ of A Insurance Company.
(13 marks)
(b) Explain the strategies that could be used by B to minimise the problems caused by
introducing sales teams and the sales target system in order to improve performance in
‘the Centre’.
(12 marks)
(Total for Question Six ⴝ 25 marks)
(Total for Section B ⴝ 50 marks)
Solutions to
Revision Questions
7
Section A solutions
Solution 1
Belbin claims that there are nine useful types of contribution or group roles, and that
the preferences and natural inclinations of people for a particular group role can be predicted through personality assessments and group/team role questionnaires. In an ideal
group/team all the necessary roles are represented with each role complementing those of
others to provide an effective group/team. It is important to note that it is not necessary
for a group to consist of nine people. If there are fewer than nine members in the group it
is possible for particular individuals to perform more than one role.
The group/team roles described by Belbin are:
● Coordinator who clarifies the group’s objectives and helps to identify the issues to be
addressed; individuals who prefer this role tend to be stable, dominant extroverts.
● Shaper who needs results for reassurance and has a compulsive drive to get things done;
the key traits here are those of an anxious, dominant extrovert.
● Plant is the person who is very good at coming up with original ideas and suggestions;
typically they are dominant introverts with a very high IQ.
● Monitor/evaluator is good at dispassionate analysis of suggestions and options, a stable,
introverted type of individual with a high IQ.
● Implementer who turns decisions into manageable tasks, is a stable controlled individual.
● Resource investigator is the person who goes outside the group to obtain useful information and resources; a dominant, stable extrovert usually performs this role well.
● Team worker who keeps the team together by supporting other members and helping to
promote unity, a stable extrovert who is low in dominance.
● Completer-finisher is impatient and very concerned with meeting deadlines, typically an
anxious introvert.
● Expert is a technical specialist person, if needed, to solve technically based problems.
In Belbin’s view, it is not enough for groups or teams who are working towards a
common goal to have a varied collection of individual skills. The various behaviours (and
routines) of members identified above as role types must mesh together in order to achieve
their group’s goals and objectives.
In the formation of groups, it is therefore necessary (according to Belbin and others) to
build work groups made up of members selected on the basis of their predisposition and
capacity to play the roles of coordinator, shaper, plant and so on described above.
371
MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT
372
SOLUTIONS TO REVISION QUESTIONS E2
Solution 2
A group is any number of people who interact with one another, are psychologically aware
of each other and perceive themselves to be a group. In a cohesive group, members are
more likely to talk in terms of ‘we’ rather than ‘I’. It is also a group in which everyone is friendly
or where loyalty to fellow members is high. A cohesive group is also one in which all the members work together for a common goal and where everyone is ready to take responsibility for
group chores. Such a group is also one in which its members will defend against external criticism or attack. The norms formed by a cohesive group are likely to be particularly strong and
exert considerable influence on the behaviour of its members. Studies by M. Deutsch in the
1940s found cohesive groups to have the following advantages over less cohesive ones:
more productive in quantity;
produce higher quality;
● have a stronger push to complete the task;
● have a greater division of labour and better coordination;
● experience fewer difficulties in communication.
●
●
On the other hand, the result of the Bank Wiring Room experiments in the Hawthorne
studies showed that cohesive work groups can have disadvantages for any organisation.
The norms of a cohesive work group may develop in a way which undermines the goals
of the company. In the Bank Wiring Room, persons who turned out too much work
were considered ‘rate busters’ and were subjected to considerable pressure to reduce their
output, while ‘chisellers’ were also pressurised to fall into line.
The effectiveness of a well-integrated work group, in other words, can be used against
the company in which it exists as well as for it. This is most clearly seen when a group of
employees takes industrial action to pressurise management in a dispute over an issue such
as working conditions or a pay claim.
Solution 3
(a) Negotiation involves argument and persuasion in order to strengthen one’s own case by
undermining the opposition. It occurs when there is no established set of rules for resolving the conflict and parties are committed to search for an agreement rather than fighting
openly. Negotiation is often necessary within organisations to resolve conflicts of interest
between two or more parties which have arisen because the parties have different objectives. It has, over time, become a useful and civilised way of settling disputes. In earlier
times, industrial disputes often resulted in industrial sabotage by workers and sometimes
physical violence between workers and their employees.
In the case of D Company, it is likely that conflicts will arise as a result of the
restructuring of proposals which will involve the need for the relocation of staff and
possible redundancies. These conflicts may be resolved through negotiation between
management and the unions who are representing employees. The process of negotiation between employers and trade unions is often referred to as ‘collective bargaining’ and
involves at least two parties with a defined interest. Without any negotiation, the result
could be that the union calls for industrial or strike action which could have a detrimental
impact on the company’s future survival.
ENTERPRISE MANAGEMENT
1. Preparation, which involves both parties gathering information and insight to the problems, in order to understand the constraints acting on the negotiating parties. Who is
involved in the negotiation, what the concerns of each party are and what the goal of
the negotiation is will need to be determined. Another key feature at this stage is to
determine the time for negotiation.
2. The opening phase of negotiation involves both sides presenting their starting positions
to one another. It is at this stage that the greatest opportunity is present to influence the
other side.
3. The bargaining phase is where both parties will aim to narrow the gap between the two
initial positions to persuade the other party that their case is so strong that the other
must accept less than it had planned. This might, in the case of D company, be on the
total number of job losses, or the financial arrangements for redundancy. The union
will want the best for its members, whereas the management may be constrained by the
financial position of the company.
4. The closing phase of negotiation represents the opportunity to capitalise on the work
that has been done at the earlier phases. It is at this stage that agreement is reached. The
outcomes from the agreement should be publicised and implemented.
Important tactics for negotiation are to use questions effectively so as to control the situation; the use of persuasion; and not to weaken your case inadvertently.
During the negotiation process, particularly in the case of negotiations surrounding the
restructuring in D Company, which are likely to be formal in nature, it is important to test
from time to time that both sides understand clearly what is being proposed and at what
stage the negotiations are at.
MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT
Approaches to the negotiation process can be through focussing initially on each
side’s primary objectives, rather than becoming distracted by minor negotiating points
at an early stage. It is necessary to maintain some flexibility within the negotiation
process and for both parties to be prepared to settle for what is ‘fair’. It is important to
listen to what the other side wants and to make an effort to compromise so that both
sides can attain their goals. However, this is often where negotiation can fail because of
the tensions between the different objectives that can never coincide. This could occur
for D Company since the union’s main objective will be to keep jobs, whilst the organisation may see no alternative to their long terms survival without the job cuts. It is
likely that in the first stages of negotiation, the union will reject the proposals as unacceptable and will prepare its negotiation strategy. Whilst the union will not want to
agree to job losses, it might recognise that they are inevitable, and concentrate instead
on persuading the management to provide generous severance pay abo