Opentuition Com: Project and Relationship Management
Opentuition Com: Project and Relationship Management
Opentuition Com: Project and Relationship Management
17
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Free resources for accountancy students s
E2
Project and
Management
Relationship
Level
Management
To benefit from these notes you must watch the free lectures on the
OpenTuition website in which we explain and expand on the topics covered
You must obtain a current edition of a Revision / Exam Kit - the CIMA
approved publisher is Kaplan. It contains a great number of exam standard
questions (and answers) to practice on.
You should also use the free Online Multiple Choice Tests which you can
find on the OpenTuition website:
http://opentuition.com/cima/
2017 Examinations CIMA E2 1
Contents
1. Strategy and strategy development 3
4. Competitor analysis 31
5. Management 39
8. Culture 61
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Chapter 1
STRATEGY AND STRATEGY
DEVELOPMENT
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2. Levels of strategy
Although strategy and strategic plan are terms which often refer to whole organisations, it
is possible to examine strategy at different levels though strategy will always imply long-
term thinking.
Corporate
level
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Strategic
Control
Internal
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appraisal
External
appraisal
3.1. Position
The rational model is an approach to strategic planning which first of all investigates the
position of the organisation, often known as position analysis. To establish the
organisations position means carrying out of an internal appraisal, an external appraisal, and
also an appraisal of stakeholders, that is, an appraisal of the various parties affected by the
organisation and what they want from it. This stage is information gathering.
3.2. Choice
Once the current position has been established, the organisation can go on to set objectives.
The objectives must take into account, for example, what the economy is doing, what
competitors are doing, and what the organisations resources will allow it to do. The
objectives are what you want to achieve; the strategy, or strategic options, are how you might
go about achieving that. For example, if the objective was to increase profits by 20%, one
strategy might be to take over another company. An alternative strategy might be to expand
abroad. A third strategy which could possibly generate the required profit growth might be
to subcontract much of the production activities.
Once the strategies have been set out and examined, one can be chosen. This will often be a
compromise, for example, between high risk and high return or lower risk and lower return.
A powerful method of choosing a suitable strategy is to look at its suitability feasibility and
acceptability. This will be examined more fully later.
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3.3. Implementation
The third stage is the action stage: strategic implementation. Everything up to here has been
investigation and high level planning. Too often, perhaps, organisations feel that is enough,
but without implementation of the plans, strategic analysis is a waste of time and effort.
Strategic implementation is hard, sustained work. As explained above, usually strategic plans
will have planning horizons of five years or so, and look at the whole organisation. Strategic
plans are therefore high-level documents, but implementation is a matter of detail. The
strategic plan has to be broken down by department and by year. Often these small parts of
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the strategic plan can be regarded as discrete projects. The project objectives and constraints
can be communicated by budgets, given to each department or cost centre.
Control
If every department meets its budget the strategic plan will be realised. However, it rarely is.
Not only are there inherent difficulties in the planning process, but almost certainly the
environment will change, and what had been a good plan will have to be modified. This is
where strategic control comes in. The plan must be continually reviewed to see if it is still
relevant and also we must try to make sure the performance is appropriate.
4. Rarely linear
The previous diagram and narrative presented strategic planning as a linear process
beginning with strategic position or analysis, then moving to strategic choice, and then
turning the strategic choice in action. The following diagram simply illustrates that a linear
process may oversimplify matters.
Strategic analysis/
position
For example, once you begin implementing a strategy inevitably you find out more
information and this may mean that you go back and review your strategy and make different
choices. The three stages are inevitably linked and inform one another.
5. Rarely unchanging
Strategies should never be set in a stone. No one is capable of gathering all the relevant fact
and making correct predictions. Random local, national and world events will intervene and
mess up a carefully thought out strategy.
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Deliberate strategy
Intended strategy
Realised strategy
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The fact that the realised strategy will rarely be the same as the intended strategy does not
mean that there must be a fault in the strategic planning process. It simply indicates that,
obviously, the future is not perfectly predictable.
6. Logical incrementalism
Not everyone agrees the five-year rational plan is a proper approach to strategic planning.
Adherents to incrementalism say that strategy should be small extensions of past policies.
They maintain this view because they claim:
It will be very unusual for strategic managers carefully to evaluate all options as it would
be very difficult and time-consuming to do so. If all options and outcomes have not
been evaluated, it would therefore be dangerous to embark on, and perhaps get locked
into, a long-range strategic plan.
It is unlikely that managers know all the relevant facts. This is known as bounded
rationality. If you dont know all the facts, you cant evaluate all options. There are the
known unknowns, such as your competitors plans. You know there are plans but dont
know what they are. There are the unknown unknowns such as random events that
no-one can predict. For example, the Japanese tsunami that inundated the Fukushima
nuclear power station meant that some countries abandoned their plans for nuclear
power stations. What is the point in detailed long-term planning when it is based on
inevitably incomplete information?
Therefore, to say that you have plan for five years is a type of arrogance. It would be better
making small logical adjustments as time goes by.
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7. Freewheeling opportunism
The ultimate anti-planning stance is held by freewheeling opportunists. Followers of this
approach do not like planning. Just as some people when going on holidays like to know
exactly where they will be each night of the holiday. Others find such detailed planning
anathema and that planning restricts the freedom of action. Freewheeling opportunists are
often entrepreneurs. These people are going to starting businesses, but then tend to lose
interest once the business matures somewhat and each day-to-day careful administration.
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Although their dislike of planning probably lies deep within their psychology freewheeling
opportunists will tend to justify their stands by claiming that planning imposes restrictions on
the development of their organisations. They say it is much better not to plan too carefully
and to grab good opportunities as they arise. Of course, a lack of planning can lead you into
difficulties. Many entrepreneurs launch into businesses which turn out to be unsuccessful and
which perhaps they would have avoided if they had better thought things through and
planned more carefully. On the other hand, they are to be saluted. These are the people who
often take a chance and who are often responsible for new and unexpected businesses which
grow quickly and successfully.
Freewheeling opportunists can make decisions very quickly, but they might not have
investigated the facts fully and thought through the implications.
Before an organisation can develop a strategy, if must work out its mission and identify and
assess its stakeholders.
9.2. Mission
Nowadays it is relatively common for organisations to issue mission statements. These are
short statements (no more than a page of A4) that set out the organisations purpose and its
position. For example it might be a supermarket which specialises in lower quality, lower cost
goods; or it might be a supermarket which tends to specialise in higher-priced luxury goods.
Those positions will often subtly be suggested in the mission statement which might make
reference to value for money or quality and choice.
In addition, most mission statements have several paragraphs dealing with values, culture,
and ethics. All missions statements tend to be very similar in these aspects: they state that
they will treat their employees and customers fairly, they will be kind to the environment,
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they will be honest, truthful and fine upstanding members of the community. Because many
mission statements tend to be rather similar, attempting to take the moral high-ground,
many observers say that mission statements have become rather devalued.
Mission statements can also contain internal consistencies. The main mission might be to
make profits, but a subsidiary one might be to be to reduce environmental impact. Where the
balance should be struck if the company wants to construct a new factory, open a new mine
or fly more aircraft?
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However, a mission statement can still make management think about what the true purpose
of the organisation is, and perhaps to pause before abandoning what the organisation has
done in the past. Additionally, if an organisations value, culture, and ethics are believed by
customers then the mission can have a role in branding. The mission can also have a role in
getting employees to do whats wanted. If employees believe in the values, culture, and
ethics of the organisation then they probably dont need to be supervised as carefully. They
will believe in the organisations culture, ethics and values and therefore employees can be
more trusted to do whats right.
9.3. Stakeholders
Stakeholders can be defined as anyone affected by the organisation. Its important to know
who your stakeholders are and what they want, because if the stakeholders are unwilling to
cooperate you may find it difficult to put a strategy into action.
Stakeholders include:
Shareholders Employees
Managers/directors Suppliers
Customers Competitors
The government The local community
Shareholders are often regarded as dominant stakeholders because they own the company
and they appoint managers. However, the interests of employees have to be looked at, as to
those of suppliers, customers, the local people, government, and lenders.
The important thing to realise about most stakeholders is that what they want is often in
conflict. For example shareholders want more profits, but employees want higher wages.
Customers may want operations 24 hours a day, seven days a week, but employees might
want to work only eight hours a day, five days a week. Customers want lower prices and
higher quality; shareholders want lower costs so that the profits are higher.
Management therefore has to try and keep most people happy most of the time. To do this
management has to enter into a series of negotiations with stakeholders. Whats the
minimum pay raise that will attract and keep employees, and stop from going on strike?
Whats the minimum quality and maximum price that customers will be prepare to pay
before they abandon us and go to our competitors? If the local people are being harmed or in
some way inconvenienced by our operations, what can we do to try and keep them onside?
There are no easy answers to this. Management has to recognise the conflicts that exist
between stakeholders and try to manage them as best they can. We will also find that
stakeholders are important when we come to decide which strategies might be best. The
strategies have to be one which the shareholders wanted to pursue, but they also have to be
strategies which other stakeholders are willing to follow. For example there is no point in
adopting a strategy which means that customers abandon you, or employees leave.
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About the only tool or model available for the analysis of stakeholders is Mendelows matrix.
This sets out on one axis the power that the stakeholder can wield, and along the other axis
the stakeholders interest, by which we mean how likely is it that the stakeholder will take
action: how active or passive are they?
Low
Power
High
Key players: stakeholders who have high power and high interest are known as key
players. Management really needs to keep those people happy. They have the power
and they have the willingness to do something about it if they are upset. These
stakeholders can stop any strategy in its tracks.
Keep satisfied: some stakeholders have high power but they are unlikely to take action
even if management does something which they dislike. They may be unwilling to take
action because of professional or ethical reasons. For example, medical staff in hospitals
are very unlikely to take industrial action. Management doesnt have to be quite as
careful with these people as with the key players. However, they have to be kept
satisfied otherwise they could be provoked to take action and turn into key players.
Keep informed: people with low power but high interest have to be kept informed. They
cant do much about it themselves but they might be able to influence key players to
take action on their behalf.
Minimal effort: these stakeholders have low power and low interest. Management can
almost ignore these people. After all, what are they going to do if they dont like whats
happening?
Large companies, small and medium-sized entities (SMEs), public entities and not-for profit
organisations will all have very different missions, sets of stakeholders and approaches to
strategic planning.
Most likely to adopt rational planning and will ultimately have profit and share price
maximisation underlying their mission statements. Listed companies (those traded on stock
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exchanges) are under considerable pressure from shareholders and analysts to hit profit
targets and achieve steady share price growth. They have the resources to carry out formal
strategic planning.
Shareholders will usually be key-player stakeholders but large companies are also likely to be
noticed by governments and regulators.
10.3. SMEs
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More likely to be dominated by the founder who will probably adopt more of a free-wheeling
opportunism approach. Initially, survival will be key and the owners might have longer term
objectives of being bought out, obtaining a stock exchange listing or passing the company
onto their families. Their missions are therefore more likely to be geared towards long-term
success.
Management and shareholders will often be the same people. Often they do not have the
resources to spend on careful, rational strategic planning.
These organisations are owned by central or local government who will often be the key
player stakeholder. Although some state-owned organisations are profit-seeking, most are
now not and include organisations such as state hospitals, schools and waste collection
services.
Their missions are therefore more aligned with providing good service and good results
rather than earning profits or gaining market share.
Their planning processes are often driven by government whim and sudden budget
constraints.
For example, charities. There are many different sizes of charity and some of the largest will
have very professional planning processes. Smaller ones will probably not want to spend
much money on these activities.
Their mission is primarily to do good, either directly or by raising money that they can pass on
to other organisations or individuals.
Key stakeholders include their beneficiaries, volunteers and those who provide them with
funds.
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11.1. Introduction
When analysing an organisations position and what it might be able to achieve we have to
analysis its strategic capability. This is an internal quality of the organisation, and capability
depends on:
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Resources (things you have like manufacturing resources, patents, people), and
Competencies (how you use the things you have).
Strategic capability (that is capability which gives sustained competitive advantage so that
you do better than others in the long-term) depends on:
Threshold capabilities, which are the minimum capabilities needed for the organisation
to exist at all so that the company just survives; and then on
Additional capabilities, which give the organisation competitive advantage.
The additional capabilities can arise from:
Unique resources, or
Core competencies.
Unique resources are resources which one organisation has but which others dont. It could,
for example, be the right to use a particular technique or patent. However, by and large,
unique resources are hard to find. Many resources, such as production equipment, can be
bought easily and this allows rivals to copy what is being achieved.
Core competencies are ways in which an organisation uses its resources better than its
competitors do and in ways that other organisations cannot easily imitate or obtain. Core
competencies are generally harder to identify and define, and they are therefore more
difficult for other organisations to copy. Core competencies will therefore usually provide a
more permanent way in which an organisation can achieve and retain competitive
advantage. For example, Apple has core competencies in designing and developing new
hardware and services such as iTunes. Other companies find Apples competencies difficult to
replicate.
A considerable extent, resources can be thought of as mainly tangible assets such as plant
and machinery. But personnel and intangible assets such as patents are also considered
resources.
Money (finance)
Men and women (human resources)
Machinery
Manufacturing (such as factories)
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Materials
Methods (knowhow and patents)
Make (brand)
MIS (management information systems/it)
Markets
Marketing
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Management
A more recent approach is resource-based strategy. This maintains that a strategist should
focus on resources and competencies. Successful combinations of resources and
competencies, particularly unique resources and core competencies, take years to develop
and can be hard for others to copy. These resources and competencies are the secret of the
organisations success: they are likely to be the organisations crown jewels.
A position-based strategic planning approach can lure organisations into areas where they
havent got the appropriate resources and competencies, and it makes them abandon the
resources and competence which hitherto have made them successful. Why should they
throw away the resources and competencies in the hope of discovering others? There is no
reason to think that an organisation which has been successful in one area of business
through employing specific resources and competencies should automatically expect to be
successful in another area where entirely different resources and competencies are required.
Organisations, therefore, should perhaps not abandon their resources and competencies too
easily. The organisation should view the future as not just something it happens to them and
which renders its resources and competencies irrelevant. Perhaps they can create and mould
the future to make use of their resources and competencies. Of course as in so many matters
dealing with strategic planning, a balance is needed. There is no point in an organisation
clinging to existing resources and competencies when technology or public taste has
advanced, and their older products and services have become unpopular. However, it is very
salutary for organisations to remind themselves where their strengths lie, and not to give
those up without a reasonable struggle.
The academics most associated with resource-based strategic planning are Prahalad and
Hamel. They concluded some management teams were simply more foresightful than others;
some are capable of imagining products, services, and entire industries that did not exists and
then giving them birth.
These managers are also good at identifying how core competencies can be exploited in a
wide range of business sectors.
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Optics
Precision mechanics
Microprocessor controls
And it has exploited these in a wide range of products, selling to many different sectors:
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Still cameras
Video cameras
Photocopiers
Ink-jet printers
Large-format photo printers
Scanners
Projectors
Binoculars
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Chapter 2
SUSTAINABLE COMPETITIVE
ADVANTAGE
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1. An overview
Sustainable competitive advantage means doing better than your competitors in the long-
term. That means profits must be sufficiently high and safe to provide the proper rewards for
investors and to allow the company to invest in research and development and marketing so
that they can at least defend their prime position in the long term. Usually they will seek to
strengthen their lead over competitors.
There are two stages in a determining strategy for sustainable competitive advantage:
generic strategy
strategic direction
cost leadership
differentiation, and
focus.
Generic strategies are associates with the theories of Michael Porter, described below.
Having decided the fundamental way in which the organisation is going to compete it then must turn
to more detailed matters. The organisation can expand by:
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High profit
Low profit
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High profit
High cost
Low cost High cost
The first two are set out above and are usually mutually exclusive. Focus is discussed later and
can be applied on top of either differentiation or cost leadership.
Here a company is supplying a basic product or service into a competitive market. It cant put
its prices up because the product is ordinary and there are competitors supplying equivalent
products. If the selling price cant be raised, the only way the company can improve its
margins is to lower its costs.
A cost leader aims to have the lowest costs of all its competitors and its competitors are liable
to be stuck in the middle, squeezed between low prices and high costs, so making miserable
profits. The cost leader will be much stronger financially and will have spare cash to spend on
marketing, development of new products and the purchase of new machinery. It could even
drop its selling prices temporarily to put extra pressure on competitors. Weaker competitors
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could be forced out of the market, reducing competitor pressure and making the cost
leader even stronger.
Cost leaders need to have ferocious cost controls: their only trick is keeping costs low and
that is therefore where they must pay great attention. The whole culture of the organisation
will be focused on cost control.
An excellent example of a very successful cost leader is the Irish airline company, Ryanair. This
company is enormously profitable. The ways it uses to keep costs down include: non-
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reclining seats (cheaper, lighter, nothing to break down), no seat pockets (nothing to clean
out after each flight), use of cheap airports, modern efficient aircraft, web-based
communications with customers.
Cost leaders are not guaranteed a secure future. They are, for example, vulnerable to
technological breakthrough which might allow a competitor to become even cheaper.
2.2. Differentiation
So, the differentiator company increases its margin by raising its prices. It is not so concerned
with lowering its costs in fact its costs might be higher because of better quality products
with more features.
Here, the company is much more interested in innovation and higher customer service than
saving costs. Costs, of course, are important but the differentiators trick is the ability to raise
selling prices.
2.3. Focus
The focus company has decided to concentrate on a small sector of the market rather than
trying to address the whole market. The company might have decided to do this because it is
relatively small and doesnt have the resources to target the whole market, or it might have
decided to target particularly profitable segments or segments where it feels it has particular
expertise.
Once a company has decided to focus it still has to decide whether to be a cost leader or a
differentiator. It must be said, however, that a natural combination of generic strategies is to
become a focus-differentiator because if you are concentrating one or two market segments
which you have got to know very well, it is probably natural that you develop products and
services which are particularly attractive to those segments and for which more can be
charged.
Porters generic strategies is a model which is very useful in business planning. It is useful
because, if a business is successful, it will be following one of these strategies. If it is not
successful, then it should be advised to follow one of these strategies!
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For example often a small company is now facing problems despite a profitable history.
Perhaps a large multinational company is moving into the market and presenting tough
competition. Note that it is usually easier for very large companies to become cost leaders
than for small companies to do so. This is because large companies can enjoy greater
economies of scale and if they are international they can make goods in countries with
cheaper labour. It is very difficult for a small company to drive down its costs as much and it
would usually be bad advice to tell a small company to compete on cost/price. Small
companies can find a niche which might allow them to survive. If they focus on a small
segment of the market and differentiate their products to appeal to consumers in that
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market, they can make good profits even with higher costs. Also, the segment they are
specialising in might be too small to interest larger players, who are usually after large mass
markets and large scale production.
3. Ansoffs matrix
After the generic or fundamental strategies have been decided on, we can turn to more
detailed strategies. Ansoffs matrix is an immensely useful way of presenting the options that
companies have. It can be helpful if you think that most companies wanted to increase profits
and Ansoffs matrix sets out all the ways in which this could be done.
Withdrawal
Consolidation
Product development
Penetration
Efficiency gains
Diversification
Market development Related
Unrelated
In the top left quadrant the company will stay with present products and present markets. If it
does that it can increase profits by:
All of these options are regarded as relatively low risk and low return. The company is in its
home territory both for products and markets.
Next, the company can turn either to product development or market development.
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Both of these options offer considerable potential increases in returns but they also offer
higher risks. They tend to require an amount of upfront investment, and there is no guarantee
that that investment will be successful. The company is venturing into unknown territories
either geographically or in terms of its product mix.
The final option, and by far the most risky, is diversification. Diversification can be:
By and large, there is very little justification for unrelated diversification as it is difficult to
generate synergy (where two businesses together produce more profits than the total of their
profits from operating separately). However, related diversification may be create some
benefits, for example, by integrating supply and purchase operations and in cross marketing
to each others customers.
Remember this diagram summarises everything a company can do to try to increase its
profits.
Porters value chain is used to examine how a business makes profits or margin.
Firm Infrastructure
Support/ Technology Development
secondary
activities Human Resource Management
Procurement
Profit, or margin
Primary activities
The primary activities are set out across the bottom of the diagram: inbound logistics,
operations, outbound logistics, marketing and sales, and service. More or less these activities
will equate to direct costs.
The support or secondary activities are set out across the top of the diagram: firm
infrastructure, technology development, human resource management, and procurement. By
and large they equate to indirect costs.
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It has to be stressed that activities are shown in the diagram. However, every activity has an
associated cost, and if all activities are represented there, so should all costs, and these could
be allocated and apportioned, and so mapped to somewhere on to this diagram. Rent, for
example could be apportioned over the operations that is the factory, the warehouse, head
office, and the marketing and sales department. Similarly with depreciation, heating costs,
wages and salaries.
So, all the organisations costs can appear on this diagram. Lets say these amounted to $10
million. The goods and services produced by the organisation will be sold, lets say for $15
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million. How come therefore buyers are willing to spend $15 million on what cost the
organisation only $10 million? For what possible reason are customers willing to spend an
extra $5 million over and above what the goods or services cost to produce?
The organisation must understand what it is that adds value, as this is the reason it can make
profits. Furthermore, the organisation must understand how the different sections of the
value chain are linked. It could be, for example, that if more were spent on human resource
management perhaps less would need to be spent on operations because employees are
better trained. If more were spent on technology development perhaps less could be spend
on after sales service because the quality of the finish goods was higher.
Understanding the value chain is essential for organisations so that they know how their
profit is generated. It has to be said, however, that sometimes organisations make mistakes
identifying what it is about their activities that adds, value for the customer and they make
changes which reduce their ability to make profits.
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Chapter 3
THE MACRO AND MICRO-
ENVIRONMENTS
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1. PESTEL
Now we are going to look at the environmental influences in organisations. We are first going
to look at the macro-environmental influences, then influences specific to a particular market,
and finally, influences specific to a particular organisation within that market.
Political
Economic
Social
Technological
Ecological/environmental
Legal.
You may have known this previously as PEST, but now we split apart political and legal and
there is an extra E for Ecological, which for many organisations is becoming a major
concern. Note that it doesnt much matter whether something like a tax rate is regarded as
being political or economic: the important point is to have recognised a tax rate or a new tax
as something which might affect the organisation.
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2. Industry convergence
A couple of contemporary environmental influences should be mentioned. The first is
industry convergence. Here industries which had historically been separate for some reason
come together so that more diverse others products or services are now offered by the same
supplier. Examples can be airlines which now offer car hire, hotels, and insurance.
Technology can form a big part in the convergence of industries. For example in a
telecommunications industry whose considerable convergence between landline, mobiles,
voice over internet telephone providers and television and film companies. There is
increasing convergences of products which provide mobile phone access, WiFi access, music,
photographs, diaries (think of the Apple iPhone which will do all of these things. You can also
see convergence in complementary products. If a company makes digital camera it might
also be worthwhile for it to offer printers and computers. The pressure to converge, can be
driven by consumers, who may want to go to only one source for a variety of products, or it
could be driven by production and convergence of the products and technology which can
lead to cost benefits.
International companies can also manufacture their products where it is cheapest to do so.
Note that when a company enjoys sales on a global basis it is also usually facing competition
on a global basis, and many weaker companies find it difficult to compete in that fierce
environment.
Because many of the global businesses are very large and significant, governments can also
take an interest in their activities. In particular, valuable grants can be offered to companies to
encourage them to open manufacturing plants in certain countries. Additionally,
governments may sometime protect their home industries against the foreign competition.
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4. LoNGPEST
This adds another dimension to the PEST model by analysing the levels at which
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Local
National
Global
So, for example, when analysing the importance of an environmental influence such as
social an organisation has to assess whether social changes are limited to local areas, a single
country or are of international importance.
Michael Porter began to wonder how countries can achieve such international reputations
and he concluded that there were four influences.
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Factor conditions: Some countries enjoy natural advantages. For example, France starts with
an advantage in the wine industry because of its climate and soil. Finland, however, is never
likely to be good at producing wine. Germany has an abundance of iron ore, ready to be used
in the car and other industries. Climate and natural resources are known as basic factors. In
addition, countries can develop advanced factors such as their transport infrastructure,
telecommunications, and educational system. Germany, for example, has a strong tradition in
engineering training and education and this gives their car industry great assistance.
Demand conditions: The first step in developing a global presence is to start at home and the
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impetus to do this is known as (home) demand conditions. So, it is argued that Germany
produces good cars because initially the German people demanded good solid engineering.
The UK had been a major trading and manufacturing nation until the mid-1900s and this led
to the development of skilled financial services and law firms to support international
commerce.
Firms strategy, structure and rivalry. Concentrate on rivalry: having a monopoly in the home
market is unlikely to give you a major world presence. To be world beating you have to be
really good at home and this home excellence will allow you to complete against the best of
the world. Germany is perhaps really good in making cars because it has within that country
Volkswagen, Mercedes, BMW and Porsche, all of are good companies competing with one
another, and this allows them to become world-class.
Related and supporting industries. Successful industries often enjoy the benefits arising from
a cluster of related and supporting industries. For example in the West Coast of America there
are software firms, hardware firms and research institutes. Employees move around from one
firm to another and a whole centre of expertise is developed. Similarly, in Scotland in the
Scotch whisky industry, farmers can provide the grain, peat suppliers provide peat to give the
spirit flavour. There are factories which produce or recondition the barrels, and there are
large, efficient bottling plants. Not only do these related and supporting industries from
efficient clusters of industries, but also they can work together so that the products become
differentiated and uniquely good.
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Potential entrants
Substitutes
to
Monopoly, where sellers have much more choice as to what price to charge.
Changes in price will normally alter demand, revenue and profits. But remember,
just because you have a monopoly doesnt mean you will make profits. You might
be the monopoly supplier of something nobody wants.
By and large the nearer an industry gets to a monopoly the easier time its
participants will have. Therefore, provided its legal, it could therefore be a useful
strategy to take over a rival or to force it out of business by perhaps lowering
prices temporarily. Governments tend to be wary of companies which establish
powerful monopolies (Microsoft got into trouble over Internet Explorer which it
included with its Windows operating system, making it very difficult for other
browsers to compete). Most jurisdictions have anti-monopoly or anti-trust
legislation.
Buyer pressure. If buyers are very powerful then they can exert pressure on prices,
quality and delivery times. Selling almost all output to a few powerful buyers will be an
uncomfortable situation. The more buyers you have, and the harder it is for them to
switch between different suppliers the better. Businesses should try to build in
switching costs, that is real costs or impediments that mean that buyers will prefer to
stay with existing suppliers. Another way of trying to decrease buyer pressure is to try to
enter long-term contracts with major customers. You might have to compromise on
price, but get greater certainty of sales.
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Supplier pressure. Similarly, when you are buying goods from suppliers, if you have to
buy a special component from a monopoly supplier you will be in an uncomfortable
position. That supplier can raise prices almost arbitrarily and you have to pay what they
ask. Even worse, that supplier could be taken over by one of your competitors and then
you will have no supplies at all. Ideally firms should try to multi-source, and if they get
really worried about assurance of supply they should think about setting up their own
supply operation or perhaps taking over an existing supplier.
New/potential entrants. Potential entrants are sitting on the edge of the industry and
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may be attracted in if they can see that good profits can be made. New entrants are a
nuisance because they will normally try to enter with a splash: special introductory
offers and big promotions. Existing companies have to respond to defend their market
share against newcomers. Anything which keeps out potential entrants is known as a
barrier to entry. Barriers to entry include:
A legal monopoly within the business. This is rare, but is sometimes seen. For
example, many postal services operate as monopolies.
Regulation and licence requirements can make it hard for potential entrants to get
into some business sectors. For example, setting up as a bank is relatively difficult
because of the various regulatory authorities that have to give their permission,
The need for high capital expenditure increases risk and the difficulty of raising
finance.
Know-how. Some businesses are complex and acquiring the necessary skills and
knowhow can deter new entrants.
Unique, patented processes. If you own a unique, valuable patent, no one else can
use it and so your position is protected. Some pharmaceutical companies can
make use of drug patents to secure their positions and to make huge profits
during the patents lifetime.
A large market share implies economies of scale and power in the market and this
itself can itself act as a deterrent to new entrants.
Substitute products usually arise by the advance of technology. Often the appearance
of substitutes will surprise a business and take it off guard. For example, landline
telephone companies thought that they were almost in a monopoly position because of
the huge cost of entry to the market: digging up roads and laying landlines into our
houses, apartments, and businesses would have been a considerable barrier to entry.
However, then mobile telephones (cell phone technology) was invented and good
telephone coverage could be achieved with much less expense. There is not much a
business can do here. Once technology is invented it cant really be suppressed. Most
old industries have to join the new industries to maintain their market share. So now,
many conventional telephone companies also have mobile phone networks in an
attempt to retain their overall market share in telecommunications.
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7. SWOT analysis
A SWOT analysis can either be used in its own right or it can be used as a summary sheet on
which other findings are placed. SWOT stands for:
Strengths
Weaknesses
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Opportunities
Threats
Strengths and weakness are internal to the organisation; opportunities and threats are
external.
For example, an organisation might have strong resources in finance and weak resources in
marketing. Opportunities and threats are external. For example there may be political threats,
but the economy might be looking up and might provide opportunities. Those political and
economic factors could have a reason from a PESTEL analysis.
Once the strength, weaknesses, opportunities, and threats have been summarised an
organisation then has to decide what to do with them. The point of any analysis is to
stimulate action. Certain things match well.
Strengths Weaknesses
Threats Look for strategies which use Defensive: Look for strategies
strengths to overcome/ avoid which avoid threats and
threats minimise effect of weaknesses
For example, if there is an opportunity which is matched by a strength then the organisation
should try to make use of that strength. However if the opportunity depended on using an
area in which the company was weak, then the chances of success there are relatively low.
Either avoid that opportunity or look for strategies which address the weakness.
But if there is a threat in an area where the company is particularly weak, then the company
could be in some difficulty. For example the threat might be coming from overseas imports
which are particularly low cost. If our organisation is weak in manufacturing so that its costs
are relatively high because of inefficient machinery its not easy to see what the company can
do to fight that threat and it will be particularly vulnerable in that area. Perhaps what it
should do instead of fighting the imports face on is to try to avoid the whole conflict by, for
example, moving up market. Note, however, that if it is going to move up market it must be
strong in the areas of research, development, quality, and innovation.
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Chapter 4
COMPETITOR ANALYSIS
1. Introduction
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One of Porters five forces is competition (or rivalry), and competitors have a profound effect
on any organisations success. Competitors will affect:
The prices that can be charged. As said above, in a perfect market all suppliers are
locked to the market price.
The market share and sales volumes that can be expected. The more competitors the
more thinly spread is the market and this will limit profits.
The cost base to which the company must aspire if it is to earn good profits. A
competitor with a low cost base, particularly a cost leader, will be able to earn sufficient
profits even when charging lower prices. This puts other suppliers under pressure.
The technology that can or must be used. For example, smart-phone technology
(iPhones and Android phones) led to the demise of Nokia which for too long was
committed to older technology.
Innovation and new product launches. New product launches and innovation by
competitors provide them with marketing opportunities which might have to be
marched.
The conventions used in the business. For example, if an airline suddenly stopped
charging for checked baggage, how would other airlines have to respond?
Special offers and other publicity campaigns. Almost all retail organisations have to
have sales early in the New Year.
How your own initiatives will be countered ie retaliation. A price cut will usually provoke
retaliation so that competitors will also cut prices. All that might happen is that
everyones revenue decreases.
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All categories provide competition, but it is likely that the most serious and cut-throat will be
between brand competitors. So BMW and Mercedes will monitor each other carefully, but
neither will keep Suzuki under such close scrutiny. Just observing current brand competitors
is not enough however, as other competitors or technologies can emerge. Therefore, Shell
and BP are brand competitors but both need to keep watch on form competitors such as
battery manufacturers who whose technology is of increasing application for short car
journeys.
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Objectives Strategy
Competitor
response profile
Resources and
Assumptions
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capabilities
The 4Cs can be a useful way of remembering the processes needed to complete
competitor analysis:
Information about competitors can be obtained from a wide range of sources, some internal
and some external. For example:
Sales representatives deal frequently with customers and may hear about competitors
offers and products.
The Research & Development Department could identify new patents filed by
competitors which might give some warning about future developments.
The purchasing may find out that a supplier is now also supplying a competitor.
The financial statements will give information about competitor profitability and
financial strength.
Trade association information will provide information about market size, from which
competitor market shares can be deduced.
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A vast quantity and variety of data can be collected in this way and it must be indexed,
collated and stored in ways that make it accessible to users. Databases can provide a very
useful way of holding diverse data. The data also has to be scrutinised for inaccuracies.
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Often reports will be produced on each major competitor and these should be distributed to
the relevant decision-makers in the company. It is important that information is updated and
communicated regularly.
Finally, the objective of this process is to use the data to counter threats and to make use of
opportunities. For example, if it becomes clear that a competitors new product has hit
development problems and its launch will be delayed, this might be an opportunity to bring
forward the launch of your own product so as to obtain the lead position.
4. Two models: product life cycle and Boston Consulting Group Grid
4.1. Introduction
These models primarily deal with products, but the analysis of products can give insights into
the probable strategies of competitors and therefore how a company should respond or
counter those strategies
The product life cycle is a well-known diagram which purports to show how the sales revenue
and net cash flows of a product change as it moves from the introductory phase through
growth to maturity and then decline.
Sales
Cashflows
No product is guaranteed to follow this pattern and even if it does the lengths of the various
phases on the diagram will show tremendous variation. For example, the mature phase of
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some products can last for decades, but for others may last only a few years. What provides
is a set of labels which can be used as a kind of shorthand. Therefore:
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The Boston Consulting Group Matrix is another very well-known analysis tool. Note that it is
sometimes known as a portfolio analysis and it really makes sense to use the BCG Matrix if
there is more than one product (or product line) in a companys portfolio. The axes of the
matrix are relative market share and the market or industry growth rate.
High
Question mark/
Star
problem child
Market
growth
rate
Low
Question mark/problem child. This product has a high growth rate but a low market
share. Why is it known as a question mark or problem child? Well, the BCG analysis
suggests that there is no long-term future for this product if it has only a small market
share. Suppliers who have large market shares have much greater economies of scale
and could easily dominate the small supplier. The question therefore is: should we get
out of this product or should we try and grab a large market share? If we go for the large
market share, this will require investment. It will be a heavily negative cash flow because
money has to be spent on promotion, research and development or investing the
margin (that is reducing the selling price to win a higher market share).
We need also to be aware that competitors will also be facing this dilemma with
their problem children and they might be open to being bought out.
Star products. If the quest by the problem child for high market share is successful, the
product will become a star. This isnt as good as it sounds. Although we now have a
high market share (and therefore would enjoy economies of scale and are well down
the experience curve), because we have one of the highest market shares, and highest
profiles, competitors will be trying to steal market share from us. We will be the target
for competitors also wanting to gain a high market share. Remember, if the market has
a high growth rate this product is perceived as a product with a future and many
companies will be anxious to get a large share of the action. Therefore, cash flow with
the star product is usually soon to be roughly zero.
Competitors who have star products will fiercely defend their market shares and
will retaliate at any attempt we make to win a higher market share four ourselves.
Cash cows. The initially high growth rate of products will always slow down, perhaps to
zero or even becoming negative (a declining market). The product then becomes a cash
cow. Its a cash cow because we still have a high market share but nearly all the initial
expenses will have been written off. Also because this is now perceived as an old
product, competitors will not be keen in stealing market share from us. Essentially they
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leave us alone. We therefore enjoy high cash inflows without having to spend a lot on
promotion, or research and development, or defending our market share.
The dog sector is on its own. Cash cow products do not turn into dogs! This is a product
which has a low growth rate and we dont have much of a market share. Therefore, get
out of it: divest. Theres no point spending time effort and money achieving a high
market share in an old product. So, close down the production facilities or try to sell
them to another company.
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Finally lets return to the name portfolio analysis. If we have lots and lots of problem children
they will all require financing and where is that money going to come from? If we have almost
exclusively cash cows we have a very positive cash flow now, but a few years down the line
the market for those cash cows could have declined rapidly and what are we going to replace
those cash flows with?
A well-balanced portfolio has some cash cows and some question marks. The cash generated
from the cash cows can be used to invest in the question marks, so securing the long-term
future of the company. A competitor with a well-balanced portfolio is in a strong position:
cash cow products are producing strong cash flows that can be invested in the development
of new products.
Extremely large collections of data (data sets) that may be analysed to reveal patterns,
trends, and associations, especially relating to human behaviour and interactions.
In addition, many definitions also state that the data sets are so large that conventional
methods of storing and processing the data will not work.
In 2001 Doug Laney, an analyst with Gartner (a large US IT consultancy company) stated that
big data has the following characteristics, known as the 3Vs:
Volume
Variety
Velocity
These characteristics, and sometimes additional ones, have been generally adopted as
essential qualities of big data.
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Variety:
disparate non-uniform data of different sizes, sources, shape,
arriving irregularly, some from internal sources and some from
external sources, some structured, but much of it is unstructured
Characteristics
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of big data
(Laney)
Velocity: Volume:
data arrives continually and often a very large amount of data. More than can be
has to be processed very quickly to easily handled by a single computer,
yield useful results spreadsheet or conventional database system
Big data can certainly be of use analysing customer preferences and habits. For example,
supermarket loyalty cards allow supermarkets to record (amongst other data):
Items purchased.
Whether they were on special offer.
When they were purchased.
What other products were purchased at the same time.
How they were paid for.
Which store they were purchased in.
Data mining and big data analytics can then be used to analyse the data so that supermarkets
can learn:
Customer preferences.
Related purchases.
What offers each customer responds to.
Possible future purchases (for example, if a customer suddenly begins to buy babys
nappies (diapers) then approximately 6 months later the customer is likely to be
interested in buying baby food).
However, big data can also be used by businesses for competitor analysis. For example:
Monitor social media for mentions of the business and its competitors.
Regularly search the internet for competitors new products and offers.
Supermarkets perform price comparisons on competitors and refund their own
customers any differences so as to fulfil a never beater on price promise.
Airlines carefully watch how competitors fares are changing on shared routes.
Credit card companies sell customers spending data to companies that can use the
information to try to lure customers away from competitors.
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Chapter 5
MANAGEMENT
There are many possible definitions of management and here are two:
Management implies that you are in some way organising what other people are doing, and
indeed the idea of organising should make us consider whats meant by an organisation.
The word social recognises that we are not machines, that we are people, that we have an
important social or human aspect to our characters. We will see that in the early theories of
management, the social dimension was often rather understated.
The idea of controlled is important. Basically one of the roles of management will be to set
some sort of goals or targets and then to try to ensure that people achieve that.
Finally, collective; the idea that in an organisation we should all be working together.
2. Trait theory
Much of the discussion of management concerns what makes a good manager and what
activities good managers should actually undertake.
One of the earliest theories is known as trait theory. Here the hope was that we could
perhaps spot who will be a good manager through certain other traits that they might
possess such as intelligence, initiative, self-assurance, even how tall the person was. This
never really got very far: it was too subjective. For example, how would you balance
intelligence versus charisma? Many good leaders are tall but then leaders such as Napoleon
and many others were rather small and were perhaps overcompensating. Trait theory was
really a dead end: it proved to be no good whatsoever by predicting who the good managers
might be.
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Planning
Organising
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Commanding
Coordinating
Controlling.
There are perhaps two things to note here. First of all, he really said nothing about inspiring
or leading or motivating; much of the social aspects of management were missing. And
secondly, although none of us is likely to deny that planning, organising, commanding,
coordinating, and controlling are important aspects of management, dividing the
management tasks into these five functions doesnt necessarily help us to be better
managers. We are unlikely to set our diaries saying that from 9:00 to 10:00 in the morning we
will do a bit of planning, from 10:00 to 11:00 perhaps a bit of commanding and so on.
Knowing what you should do is very different from being able to do it at appropriate times.
Fayols work comes under the heading of classical management and classical management
theories hold a view that there is a correct way of managing, just as classical architecture put
forward the idea that there are proper proportions of buildings which please the eye and
which are therefore correct.
Classical management held a view that there was a set of golden rules and if you obeyed
these you would be a good manager.
In general classical management theory is not believed, or at least not naively believed, any
more.
Taylor said that it is a function of management to study work, to develop a science of work,
and from that to work out how jobs could be designed so that they could be carried out
efficiently. This could allow employees to earn more. Rule of thumb methods should be
replaced by methods based on scientific study of the tasks. Scientifically select, train, and
develop each employee rather than letting them train themselves; provide detailed
instructions and supervision of each worker; divide work nearly equally between managers
and workers so that the managers apply scientific management principles to planning the
work that the workers have to actually carry out.
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Inevitably this led to task specialisation, which is basically the classic production line,
because it was discovered that one of the most efficient ways of carrying out work was to do
a relatively simple task over and over again. In later life Taylor was criticised for dehumanising
work. But its important to remember that his ambition was not to do this - his ambition was
to enable workers to earn more through working in a more efficient environment.
The conclusion from this experiment was that by making these people feel special, by asking
their opinions, by asking for suggestions, they were motivated. They enjoyed being treated as
individuals, as people, rather than simply being told what to do. This led to what was called a
human relations school in recognition that there is more to good management than simply
planning, organising, controlling, coordinating, and communicating.
The second part of these studies dealt with groups. Management had tried to increase
productivity by offering people higher wages, and was surprised to discover that productivity
did not increase.
What Mayo discovered was that there was a sophisticated but informal system whereby
people agreed what the proper level of productivity actually was. These people formed
whats now known as a group: a number of individuals who develop group norms, in other
words, an accepted standard of behaviour. If you dont comply with the norms of the group,
you are likely to be excluded from that group. Note that management did not deliberately
form groups; these were formed by people just because they worked together or relied on
each other or they became friends. People inevitably liked being part of the group and being
associated with other people. These groups have a very profound influence on how people
are likely to behave.
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6. Style theories
We have already said that trait theory has been discredited. We now come on to whats
known as style theories, in other words, a good manager becomes a good manager because
of his style of management. Whether or not this information helps to be a good manager is
another matter but you have to know the names and the key terms that they were associated
with.
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First, Peter Drucker who stated that management has three functions. You have to:
manage a business
manage other managers
manage the workers and the work.
He broke these down into five categories of activity:
setting objectives,
organising the group,
motivating and communicating,
measuring performance, and
developing people.
First, Drucker said that motivation is a very important part of management, and secondly,
developing people is also important, so they feel fulfilled, that they are growing, that they are
gaining new skills, that they are achieving their maximum potential.
Really the rest of the list isnt very much new on what Fayol suggested about planning,
organising, controlling, coordinating, and communicating.
Interpersonal roles arising from formal authority and status and supporting the information
and decision activities:
figurehead
liaison
leader
Information processing roles. For example, they monitor information maybe by looking at
management accounts and they distribute information:
monitor
disseminator
spokesman
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Decisional roles making significant decisions, perhaps about how resources should be
allocated, negotiating with suppliers or lead members of staff, and dealing with disputes; in
other words, the disturbance handling role.
improver/changer
disturbance handler
resource allocator
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negotiator
Once again, perhaps knowing that management might have these three functions -
interpersonal, information processing and decisional - doesnt necessarily help one be a
better manager.
Autocratic Democratic
Tells Sells Consults Joins
First and the most autocratic or dictatorial is tells. The manager simply tells the staff what to
do. The manager does not even feel a need to have to explain why thats what has to be
done.
A slightly more liberal approach is sells. Here the manager tells people what to do but then
sells that idea to them, convinces or persuades them, or explains why it has to be done that
way.
Next, there is the consults style. Here the manager will ask staff what they think ought to be
done, but then the manager will make the final decision. However, this is quite a participative
style.
Finally there is joins or joins with. This can be entirely democratic where the manager
actually abandons management and asks people to vote on what should be done. This might
be the sort of style adopted for deciding things like where should the summer outing be.
However, many people regard this extremely democratic style of leadership as abandoning
one of the important functions of management which is to direct and control.
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The grid was initially devised as a way of analysing a managers approach through a series of
questionnaires and their position would then be plotted on the grid. This would give them
some indication of where improvement was needed.
First of all we go to the top left of the grid - someone who has a very high concern for people
but relatively low concern for accomplishing the task. This manager adopted a country club
style. In a way they werent really very interested in accomplishing tasks at all as long as
people had a nice time. Hence their name country club: everything was fine as long as
people were happy.
The other extreme is at the bottom right of the grid, the authoritarian or task-oriented style.
Here the leader puts all their energies into getting the task done but couldnt care less about
the people. These managers wouldnt be very nice to work for: they will put you under a lot of
pressure, they certainly wouldnt be interested in dealing with any personal issues that you
might have which stood in the way of getting the task done.
The best style is presumably at the top right, someone who has great concern for people and
also great concern for the task. This is regarded as the team leadership style: someone who
will be a very good leader simultaneously getting tasks accomplished as required but also
making their staff feel wanted and needed, and having time for them.
Most ordinary managers are probably going to be near the middle, the 5,5 position, the
middle of the road style. Reasonably good with people, reasonably good with the task, but of
course what we want to do is to try and shift people up towards the 9,9 position. There will be
some managers at the 1-1 position, the impoverished style: not much good at anything. One
really has to ask: Why are they managers? Is there any way their performance can be
improved at all?
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example on the people you are managing, the urgency of the task and the resources you
have available. Contingency theories mean that style of management is contingent or
dependent on the situation. You will probably find some of these more interesting and more
helpful than others.
We know that Blake and Mouton plotted peoples approach to leadership by looking at their
concern for individuals and the concern for the task. Adair added a third variable - a
recognition that there should be a concern for the group. How shall we manage? Well,
according to Adair, it depends. On some occasions there may be a very urgent task and we
have to reduce our concern for individuals and the group and concentrate on the task.
Sometimes there may be crisis within a group; perhaps their leader has left, perhaps there is
disagreement within it, and then the manager or leader should pay more attention to making
sure that the group operates properly. Of course, sometimes the proper approach to
leadership will mean concentrating on an individual and seeing to their needs, perhaps like
giving advice or training.
Handy said that each of these variables could be what he described as loose or tight. Loose
Tight
A tight leader is very autocratic. Tight subordinates like being told what to do and want to
avoid risk. They want repetitive tasks; tighter tasks are routine and well understood, relatively
simple. And a tight environment would be one where, perhaps, time is short or there isnt
much resource to go around.
Loose would mean that the leader is very participative or democratic; subordinates want to
participate and contribute to solutions. The tasks are novel, complex, high risk; the
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environment is one which is more generous in time and resources to allow complex tasks to
be dealt with.
Handy said that provided all four variables line up, either all loose or all tight, things will work
fairly well. So an autocratic manager in charge of staff who want to be told what to do, doing
routine, repetitive tasks in an environment which is rather constrained will tend to work.
However, he said that once you get a crossover you are in trouble. If you put an autocratic
leader in charge of highly trained subordinates who are used to contributing towards
solutions or problems, and who are used to participation, and these people are given routine
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tasks with not much time to do them in, then its not going to work very well. The
subordinates will not get on with their leader; the subordinates will not enjoy the task.
So when it comes to How shall we manage? Handy is saying it depends on the situation and
the variables. The best way of managing is to make sure the leader, subordinates, task, and
environments all match. Note that this is quite different from saying that tight is better than
loose or loose is better than tight. What we are saying is that either will work provided the
four variables match.
13. Bennis
Bennis makes a distinction between the term manager and the term leader. A manager is
primarily concerned with administering the status quo. In other words, primarily looking after
the existing business somewhat in the short term, keeps an eye on the profit for the coming
year. Thats not to say its not an important activity. But best to think of a manager as having a
time horizon of about a year.
A leader is more concerned with innovation, will be looking at the long-term future of the
organisation, will not be so concerned with matters of detailed control, but will be focusing
on people, inspiring trust, asking How can we improve, where should the business go, what
should the business do?.
The leader can therefore be regarded as transformational - in other words, concerned with
doing the right thing; whereas the manger is more concerned with transactional leadership -
in other words, doing things right, but not necessarily questioning whether what we are
doing and controlling is useful.
Bennis suggested that great leaders have certain qualities. You might like to compare this list
with the qualities of good managers you have known or good world leaders and politicians
you know about.
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14. Fiedler
Fiedler suggested that leadership effectiveness depends on:
Leadership style - thats the leaders own attributes, and the leader can either be
psychologically close or psychologically distant, and
Situational favourableness, the degree to which a situation gives the leader control and
influence.
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A leadership style which is psychologically distant is one where there tends to be very formal,
effectively distant relations between the leader and the subordinates. For example, they
prefer formal consultations with subordinates rather than more informal seeking of opinions.
A psychologically close leader will be more concerned to maintain good human relationships
at work than to ensure that tasks are being carried out well. They are a friendlier, perhaps
more easy-going type of leader. A favourable situation is one where there is a good
relationship between the leader and followers. For example, if the followers trust the leader,
or where the structure of the task is clearly defined so that everyone knows what has to be
achieved, or where the leader has power to, for example, reward and punish. Successful or
effective leadership depends on adopting the right style so that it matches the situation.
Fiedler suggested that a psychologically distant style would work well where either the
situation was very favourable or very unfavourable. So in these two extremes, the leadership
style should be psychologically distant. If however the situation was unfavourable, a more
difficult situation, then it would be more important for the leader to try to adopt a close
leadership style.
Authority
Of course having power doesnt mean you have a right to exercise that power. If you
have the right to exercise power then you have whats known as authority. So for
example, you will be well aware of the term authority limits where people may be able
to buy fixed assets up to $1,000 but not beyond that. Having power without authority is
poor but so is having authority without power. We probably all remember some school
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teachers who have the authority, the right to tell the class to sit down and be quiet, but
when they try to exercise that authority, they had a complete lack of power over the
class.
Responsibility.
This is the same as accountability. If you are made responsible or accountable for
something then as the saying goes the buck stops with you.
Delegation
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This is the transfer of authority. Note that it is the transfer of authority: you cannot
transfer responsibility. If your manager asks you to do something and you delegate that
task to one of your staff members, and that staff member messes it up, when your
manager reprimands you, you cant blame that staff member. The task was yours and
either you have to do it yourself or ensure that you delegated it properly to a staff
member who had the time and skills, and whom you could supervise to make sure that
the task was actually completed.
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Chapter 6
HUMAN RESOURCES MANAGEMENT
The purpose of performance appraisal is first to improve the organisational performance and
secondly to develop individuals. This should be win-win. Developing individuals should
motivate them. They feel that theyve recognised, they feel their skills maybe growing and
that they are doing more meaningful jobs. Of course, improving organisational performance
is very important, but if you dont let people know how theyre getting on, where they
perhaps need to improve, or where theyve done well, it is going to be relatively difficult to
improve organisational performance, because ultimately that depends on the performance of
the individuals in the organisation.
2. Appraisal systems
Its often said that there are three elements to an appraisal interview.
First, reward. What are we going pay these people next year?
Secondly, performance, looking back over the previous year and seeing whether people
hit their targets and met their objectives.
Thirdly, potential, looking forward to the next period, setting objectives, listening to
peoples preferences, deciding perhaps where they require training.
It must be said however that some human resources professionals suggest that the reward
part of the appraisal should be kept quite separate from the other two parts. They argue that
there is more to reward than simply basing it on performance. You have to look at what can
the company afford and they say it doesnt look too good if you say someone has done really
well and then you immediately say, but we cant give you much of a pay rise this year.
Some people therefore suggest that the reward part of the review should be about six
months away from the other parts of the review.
3. Appraisal interviews
Employees performance must be monitored to identify and evaluate:
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3600 appraisal is becoming increasingly common where employees are appraised by their
boss, their subordinates and their colleagues.
It is also important that good two-way communication is encouraged rather than the
manager simply doing all the talking. Employees might have legitimate complaints or reasons
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why their performance seemed to be inadequate. Finding out employees preferences is also
important for the employees promotion and movement through the organisation.
Most appraisal processes make use of a form listing the important aspects of performance
such as: technical ability, punctuality, ability to get on with customers etc. Scores are
allocated to these elements of performance (eg 5 to + 5).
The most effective way of doing this is using an open appraisal process in which the form is
initially blank and the manager and employee go through it together discussing what the
mark should be. This forces the parties to communicate. Less successful is where the manager
has already filled in the form and then goes through it with the employee. Managers will
rarely change a score no matter what the employee says.
A number of problems can arise from poorly-executed performance appraisals. Indeed some
writers and practitioners dislike the term performance appraisal because of its judgemental
and critical overtones. They prefer to use the term performance management so that
emphasis is placed on improving the performance of the employee which should benefit
both employer and employee.
At the conclusion of appraisal interviews managers and subordinate should agree on and
commit to what the employee is expected to do in the future. Summarise and formally record
the agreement.
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There should be a report, probably two-part. The top copy can go to the employee with
agreed conclusions and perhaps objectives. The other part will go on the personnel file.
Finally there should be follow-up. If you have arranged for training then make sure it takes
place. If you have arranged for that employee to spend three months in another department
make sure that takes place. If the employee has been having difficulty you may want to
monitor their progress continually before waiting a whole year till their next appraisal
interview.
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4.1. Introduction
Training is very specific. It is needed for your current role. So you would talk about training in
use of a spreadsheet or a database or the accounting system.
Development is much less specific; its needed at some time in the future. Very often the word
development is linked to management to give the term management development. Say
that we know that, probably, as a managers career progresses, the manager will be required
to make presentations, to write reports, perhaps to interview potential new employees. The
manager might not need to carry out these activities within the next month or so or even the
next year. But we know that probably at some time in the future a manager should be
equipped with these skills.
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In the UK, the law provides for equal opportunities in the areas of:
Sex discrimination
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Race
Religion
Sexual orientation
Age
Disability where there have to be equal opportunities and reasonable adjustments have
to be made to allow disables people to work.
5.2. Diversity
Diversity of employment is ensuring that the composition of the workforce reflects the
population as a whole. There are sound reasons for diversity:
First of all youre likely to attract a wider range of candidates if you are known as an
employer who embraces diversity. Diversity means more than race or sexual diversity; it
can also mean offering people part-time work or working from home. If you can offer
part-time work or home working you may well get additional good candidates worthy
of consideration. So why reduce the field by putting unnecessary restrictions?
Secondly, a diverse workforce brings a variety of skills. If you employ people just like
yourself youll probably get skills just like yours.
Third, the diverse workforce might better reflect customers and clients so your
customers and clients are likely to feel more comfortable.
Finally you may be able claim the moral high ground by having a diverse workforce and
this of itself may be attractive to customers, clients, and potential employees.
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These may be needed to address issues of both misconduct (such as poor time-keeping or
health and safety breaches) and poor performance. It is important for disciplinary procedures
to be handled properly because otherwise, if they lead to dismissal, it is likely that
employment tribunals will find the dismissal unfair.
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Initially there will be an informal talk with the employee and that might be enough to correct
performance.
If that doesnt product results, then there should be a verbal warning. This can be informal
(not entered on the employees record), or formal (entered on the employees record).
If improvements are still not made (and time must be given in some cases for this) then there
will be:
Some acts, termed gross misconduct, are so serious that they may justify dismissal without
initial warnings. But a fair disciplinary process should always be followed, before dismissing
for gross misconduct
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Appeals. If an employee feels that disciplinary action taken against them is unjust they
should appeal against the decision. Appeals should be heard without unreasonable
delay and should be dealt with impartially and, wherever possible, by a manager who
has not previously been involved in the case. Workers have a statutory right to be
accompanied at appeal hearings.
Grievance procedures are a means of dispute resolution that can be used by a company to
address complaints by employees, suppliers, customers, and/or competitors. Employers must
set out a grievance procedure and share it in writing with all employees. It must:
Identify who to contact if the normal contact person is involved in the grievance.
Explain that if the problem cant be resolved informally, there will be a meeting with the
employee, called a grievance hearing.
Set out time limits for each stage of the process.
Explain how to appeal a decision (The appeal should be dealt with impartially and
wherever possible by a manager who has not previously been involved in the case.
State that employees can be accompanied in any meetings by a colleague or union
representative.
Work practices and the work environment must be safe and healthy.
The plant and equipment should be maintained to the necessary standard.
There should be information, instructions, training and supervision so people know how
to work the machinery and that safe working practices are adopted.
People should know that there is a policy.
People should be aware of the organisations safety policy
Employers must carry out risk assessments, thinking ahead, identifying risks, seeing to
what extent those risks need to be worried about, and providing training, guidance, and
protection as necessary.
Note there is a requirement to share hazards and risk information with others.
You have to identify employees who are particularly at risk.
You must employ competent safety and health advisors
Within the organisation there will be a safety representative effectively from the employee
side, and probably a safety committee which meets regularly to consider health and safety
matters.
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They must inform the employer of any situation which they think is a danger. For
example if an employee sees that a machine has deteriorated and is now perhaps
dangerous they have a duty to inform their employer.
They have to use equipment properly, making use of all the safety features that it may
incorporate.
Some companies establish and publish a health and safety policy. This will usually have the
following sections:
Wrongful dismissal is when the dismissal breaches the contract of employment, for
example, not giving the employee the agreed amount of notice. A more serious problem is
unfair dismissal, a part of the law that gives the employee some protection against as it is
assumed that dismissal is unfair unless the employer can proves it to have been fair.
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Other substantial reasons: for example the sales director is married to the sales director
of a rival.
Dismissal is automatically unfair if it is because of:
Pregnancy
Membership of a trade union
Carrying out health and safety procedures
Insisting on employment contracts and payslips.
Most often the remedy is damages because usually neither party wants to be associated with
the other after legal action.
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Chapter 7
BEHAVIOURAL ASPECTS OF
MANAGEMENT CONTROL
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1. Introduction
Control of an organisations performance ultimately depends on controlling the people who
work in that organisation.
By control we do not necessarily mean ordering people around and watching them closely,
but their performance has to be managed so that the necessary organisational performance
is attained. A completely hands-off approach by management is unlikely to work. Apart from
anything else, the organisation would probably be poorly coordinated and potentially
chaotic.
The Theory X manager assumes that people really dont want to work, that they have to
be watched very carefully, that they are lazy, that they only go to work with some
reluctance because they have to earn money to live. There is little or no trust between
managers and their subordinates.
The Theory Y manager believes. Under this approach there inevitable has to be greater
trust between managers and their subordinates. Managers trust subordinates to carry
out their tasks responsibly and well.
So how do we motivate these people so as to get the best possible performance from them?
McGregor called his model Theory X and Theory Y to be entirely neutral, not Theory Wrong
and Theory Right, or Theory Good and Theory Bad. Basically he was saying that if you are put
in charge of people who dont like to work and who go there reluctantly, then perhaps the
way you have to get the best work out of these people is to be very strict with them, to watch
them carefully, to control them closely (a Theory X approach).
If, however, you are a manager of people who have good qualifications, who are used to
being asked their opinion, who have high technical skills, then by far the best way to motivate
them is a much more participative approach (a theory Y approach).
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4. Increasing motivation
So how on a practical basis could we go about increasing motivation?
The first approach which is normally suggested is participation. Elton Mayos investigations
in the 1930s suggested that taking an interest in people, asking their opinion, allowing them
to contribute towards decisions, seems to motivate. If an employee can contribute to
problem-solving and decision-making decisions this provides strong intrinsic rewards.
The second approach is job design, of which there are three main types. Probably the first
two here arent going to be very motivating in fact.
Job enlargement means more of almost exactly the same. It is certainly what will be
called a horizontal change; there is no more challenge or responsibility in the job. So if
you are working in a car factory and your job was putting on the front wheels, job
enlargement would let you put on the back wheels as well.
Job rotation is also a horizontal change, no real increase in challenge. Here if you were
working in a car factory and your job was putting on the wheels then perhaps next
week you could put in the headlights, the week after that you could fit the exhaust pipe
and so on. But they are all essentially fairly basic manual jobs and at best perhaps job
rotation alleviates some of the boredom.
Job enrichment is a vertical change. Its giving people more responsibility and more
challenge in their job. Here we use our car factory analogy again. If your job was putting
on wheels it could perhaps be enriched if you are also given responsibility for some sort
of quality control. Perhaps as a car went past youd be asked to identify blemishes in the
paintwork and to report those. Here there is an undoubted increased responsibility and
interest and this is assumed to increase peoples motivation somewhat.
5. Pay as a motivator
Finally on motivation we look at the extent to which pay, wages, and salaries can be regarded
as a motivator.
If its going to motivating its really essential that pay is related in some way to effort or to
achievement, but there are certain difficulties here. First of all businesses often dont have
complete freedom relating to what to pay people. They have to bear in mind what they can
afford, what the going rate is. You cant keep giving people increases over and above inflation
otherwise theyll simply be priced out of their market.
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Also, many large companies have strict pay bands and if you are a certain grade youll be
paid within that band irrespective of how good you are. And finally, performance-related pay
can be difficult to assess unless that persons performance can be directly measured and
assessed. However, in many organisations performance depends on what other people do as
well as what you do, and it can become very difficult to be sure that youre giving group
rewards or performance-related pay in fair ways.
6. Target setting
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Having a target imposed with little explanation can cause resentment and a rejection of
the target. It is easy to argue to oneself that the target is too difficult, has not been
properly explained and so the target is rejected. Of course, the threat of disciplinary
action can make people take heed of targets, but not with enthusiasm or with
motivation.
Participating in the target-setting process provides motivation and, having negotiated
and agreed the target, it is much more difficult to later disown it.
A second problem with target-setting is deciding how difficult the target should be to
achieve:
7. Management by objectives
This term was first used by the management theorist Peter Drucker.
It is important that the objectives are agreed by both parties because this should ensure
better participation and commitment among employees, as well as alignment of objectives
across the organisation.
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The balanced scorecard (developed by Kaplan and Norton 1992) views the business from four
perspectives and aims to establish goals for each together with measures which can be used
to evaluate whether these goals have been achieved.
It is an important approach because it forces goals and objectives to be set for many
important areas - not jut financial objectives.
The model is used to ensure that managers and employees do not simply concentrate on
short-term financial performance. Good financial performance is needed but seeing profit
increasing by, say, 20%, tells managers little about how that improvement was achieved.
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Chapter 8
CULTURE
1. Cultural web
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Charles Handy defined the culture as the way we do things around here.
You will be aware of the effect of culture. For example whenever you join a new organisation,
whether school or college or work, you tend to go carefully for the first couple of days or
couple of weeks until you see how people behave, and then you usually try to fit in.
Symbols and
titles
Power relations
Myths and stories
Organisational assumptions
(paradigm)
Control systems
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layers and each manager therefore having to look after a relatively large number of
people, but inevitably because they are looking after more people, people have to be
better at looking after themselves.
Control systems. For example, how carefully do you have to account for your time?
Some organisations, perhaps for billing purposes, insist that people record what they
are doing every 12 minutes. Other organisations dont control individual activities quite
so closely and are more interested in the overall results.
Rituals and routines. For example, in some organisations when a sale is made, the
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person who has made the sale has to stand up and ring a bell. Other people then
applaud. To some of you this may seem childish. But those organisations which do it
presumably think its worthwhile in terms of morale-boosting and challenging others
who have not yet made the sale. In some organisations you are expected to socialise,
say on a Friday evening after work.
Myths and stories. How the company in the past won a particular contract which was
very valuable, the way in which a clever presentation was made or the way in which
they worked hard against the clock to ensure that a job was finished on time.
Organisational assumptions. For example the assumption that we are the best, that
we are never beaten, that we only produce work of the highest quality.
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Espoused values. At a slightly deeper level are espoused values. These are the stated
goals, strategies, and philosophies. The mission statement of a company, for example,
may set out what the companys purpose is and how it perceives itself within the
marketplace, how it values employees, how it tries not to harm the environment.
Underlying assumptions. The most fundamental level is the basic underlying
assumptions. These are very important but are often the most difficult to identify and to
understand. They will often not be stated, but there is an assumption about the quality
of work, about never missing deadlines, about our willingness to work overtime even if
not paid in order to hit a deadline, the assumption that we are the best. It can take time
before these basic underlying assumptions are understood by new members of
organisations.
4. National cultures
Hofstede examined how people from different countries are likely to develop different
organisational cultures and how national culture influences how people work and expect to
be managed. Hofstede identified the following variables:
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Chapter 9
GROUPS AND TEAMS
1. Groups
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Formal group: A formal group is simply one which is formed and known by
management.
Informal group: Informal groups are not formed by management action and indeed
management may not even be aware of their existence. However we are social beings
and we like being part of a group and therefore understanding groups is important to
management.
Handy defined a group as: any collection of people who perceive themselves to be a group.
This is a very good definition because it includes both formal and informal groups. Handy said
any group will have:
2. Team Roles
A team is an example of a formal group: the team would have been deliberately created by
management.
One of the great advantages of the team is that people with different skills are brought
together so that the team is stronger than any one person individually could be. So if youre
forming a team to look at the implementation of a new IT system, you probably have
someone with IT skills, someone with accounting skills, someone with production skills, and
so on. Each of these people will bring knowledge and also can represent their own particular
interests.
However, as well as bringing different technical skills it has been recognised that people
bring different psychological profiles, and this has been examined by Dr Meredith Belbin who
categorised eight or perhaps nine team roles, and produced questionnaires that would allow
people to assess what their particular characteristic or characteristics were.
Chairman (sometimes called, the coordinator.) This person clarifies goals, promotes
decision-making and is a good delegator.
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Shaper. Someone who is someone driven, thrives under pressure, wants to overcome
obstacles, tends to want to get their own way.
Monitor/evaluator. Sees all options, judges things accurately and fairly objectively.
Company worker (sometimes called an implementer). Turns ideas into practical
actions. Theyre not particularly the theoretical person, more the roll your sleeves up
and get on with it sort of person.
Resource-investigator. Explores opportunities, examines contacts.
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Team worker. Listens, builds, tries to play down potential friction, calms the water.
Plant. A rather unusual unorthodox person - creative, imaginative, and is deliberately
put into the team - planted in other words - with the hope that they will solve difficult
problems and bring some slightly offbeat ideas into consideration.
Completer/finisher. Is painstaking, conscientious, careful, looks for errors and is keen
on finishing within the deadline.
Specialist. A single-minded person who provides particular knowledge and the skills
which may be in rare supply otherwise.
Belbin says that you want people with all of these characteristics within a team; this doesnt
mean you have to have eight or nine people because many people are strong in more than
one of these characteristics. You also have to sometimes be careful not to have more than
one person of a particular sort. For example if you have two shapers they were the people
who quite liked their own way. If you have two shapers there is likely to be some conflict.
Forming: First, there is the forming stage; a rather slow tentative stage - should
we form a group? What might it be for? In informal groups, a gradual
coming together of people with like interests.
Storming: This is a stage where different people might compete for different
roles within the group; perhaps two people with shaper-type
characteristics fighting over who is actually going to become the main
spokesperson for the group. Then there would be norming -
establishment of how the group is going to behave, acceptable
methods of behaviour.
Norming: Settling down to normal methods and habits of working.
Performing: At long last the group begins to perform; we get some output from it.
People know each other, they know what the group is for, they know
who is the leader of the group, they know who is the spokesperson of
the group, they know who the completer/finisher is, they know how
often they are going to meet, whether formal records are going to be
kept and so on, and they can perform.
Dorming: Finally there is a dorming stage. This is where a group meets out of
habit rather than out of any real need. At the dorming stage,
effectively the sleeping stage, not much is achieved and really the
group at this point should be disbanded.
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Are there any lessons to be learned from these stages of team development? Well, the main
one is that no useful output is really achieved until the group reaches its performing stage.
Therefore anything management can do to accelerate the passage from forming, trough
storming and norming until we get to performing, is good.
So when a formal group is created, management form it and they will say who is in it and
what its for. They will also say who the leader of the group or the team is going to be. Thats
the storming process out of the way. They might tell the group that you will meet once a
week, that we want you to report once a month. That addresses norming. So very quickly the
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group can get down to actually performing its task so that the organisation gets useful
output.
The second thing that Tuckman said was that every time the composition of the group
changes - one member leaves, another one joins - you go through these stages again and
there is a slight loss of performance. Once again management could take action to try to
introduce a new person to the group in such a way that the group is disturbed relatively little,
and the performing continues almost unabated.
First of all a team. We use the word team automatically whether its an IT implementation
team, a project team, a football team. Teams are deliberately formed, they have very specific
objectives, almost always they bring together mixed skills, and they will have a definite leader
or captain.
Committees are also formal groups deliberately formed, and certainly with specific areas to
deal with. However, rather than actually carrying out specific tasks they tend to be more
There will be a chairperson or chairman, or nowadays even just called chair. This person
tends to coordinate the committee rather than giving it orders. They will be drawn from
different departments and they will have mixed skills so the information is shared, and finally
any decisions made are normally recorded formally.
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Chapter 10
COMMUNICATION AND RELATIONSHIP
MANAGEMENT
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1. Communication
Communication within businesses is obviously important: in particular its required for
planning, coordination, and control. The communication pathway is more complex than you
might think and you need to know what these steps are.
Feedback
First of all, the person who wants to do the communicating forms the thought.
Then they encode it: they find a way of expressing it.
The thought is transmitted and that could be by sound, it could be by letter, it could be
by email.
It has to be received by the recipient.
The recipient has to decode it.
Often after its decoded there will be some sort of feedback. Feedback could be an
action, it could be nodding your head, it can be asking a question because you dont
understand the message properly or it has provoked further queries.
The important thing to realise is that communication can break down at any of these stages
and anything that interferes with the successful communication is known as noise.
If the thought was garbled to start with, you are lost. If its not encoded properly, for example
if its written down in a confusing way, then that will interfere with successful communication.
Transmission can be messed up. We have all had, no doubt, examples of letters which have
gone astray or emails which have gone to the wrong person. The intended recipient might
not receive the message. One of the reasons it might not be received is that they simply dont
open their inbox. Finally they might decode it incorrectly, they misunderstand what you are
trying to communicate.
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Examples of informal communication would simply be chatting around the coffee machine.
An example of a formal communication would be memorandum issued to all members of
staff.
3. Barriers to communication
Its important to understand what can act as barriers to communication.
Inappropriate language.
Obviously this could mean speaking a foreign language to people who dont
understand it, but in practice it is more likely to be using terminology which not
everyone understands. So for example, if you are in a firm of accountants and you are
writing to a client and you are talking about tax computations, terms such as
disallowable, capital allowances, adjustment of profits and so on may not simply
be understood by the client and if thats the case communication has not been
successful.
Status.
Differences in status can interfere. This can be in two ways. First of all it could be the
person at the top of an organisation not wanting to hear what the people at the bottom
are saying, perhaps not believing that people at the bottom have anything of value to
say. It can happen the other way round where people at the bottom of the organisation
are frightened to talk to people at the top of the organisation.
Emotion.
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If you go into an appraisal review and you are very angry or worked up about
something or even just frightened about something, the chances are that
communication will not be successful.
Wrong medium.
If, for example, you wanted to give your employees information about the technicalities
of their pension scheme, probably giving them a long lecture isnt going to be very
useful. There is too much technical information in that for them to understand.
Presenting the information in written form or perhaps a mix of communication, some
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lectures in outline and then the detailed material available in written form, will be more
successful.
Not wanting to transmit and not wanting to receive can both occur.
It could be that a manager doesnt want to point out shortcomings in a staff members
performance. It could be that the staff member is not willing to believe that there is
anything wrong with their performance.
Information overload.
A curse of the information age, for example the copy everyone email. We are often
bombarded with so much information that we really cant see the wood for the trees.
We spend so much time looking at information, deciding whether or not we need to
know the information or not, that there is a real danger we overlook the important
material.
4. Negotiation
Negotiation is a particular form of communications. It can be defined as:
A bargaining process between two or more parties, each with their own objectives trying to
find common ground that will be the basis of an agreement.
For example:
A supplier and customer negotiating prices.
A supplier and a customer negotiating compensation for poor or late products.
An employer and employee negotiating salary.
A company negotiating the takeover price of another business.
For negotiation to be successful both parties must be prepared to give some ground and for
an agreement to be reached. The parties should aim for a win-win solution where each
comes away with something they want.
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Counter blocking moves. For example if a sales representative says that they do not
have authority to give a larger discount then ask them to contact someone who has.
Take a break to assess where youve got to and think again about where the win-win
position might be.
If agreement is reached then summarise and confirm the positions reached.
Unfortunately conflict often arises in groups, teams and committees. There can be many
causes, such as:
Different objectives
Competition for resources
Personal animosity
Rewards which encourage one faction winning at the expense of another
Turf wars ie disagreement as to who is responsible for an area or decision
Conflict can also arise in relations with parties outside the organisation such as customers,
suppliers, regulators and competitors.
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In 1974 Thomas and Kilmann introduced their ThomasKilmann Conflict Mode Instrument
(TKI). This model uses two variables (assertiveness and co-operativeness) for mapping the
nature of the conflict and how it might - or might not - be resolved:
High
Competing Collaborating
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Assertiveness Compromising
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The finance function can be thought of as sitting at the middle of the organisation. Not much
goes on without some aspect of finance being involved
Production
Purchasing and Sales and
suppliers customers
Treasury Marketing
Research and
development
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contract comes up for renewal: the price increase might be higher than expected but it
can be difficult to abandon the supplier.
Damage to reputation. If the outsource company does no perform properly, for
example, to the proper quality standards, then great damage can be done to the
organisations reputation.
Non-congruent objectives and loss of managerial control. The supplier company makes
money be doing things efficiently. The buying company might make money by
innovation. To some extent, despite the contract, there can therefore be a difference in
the objectives and core values between the two parties.
Success depends on another companys performance. Though there is always a
dependency between buyers and sellers, outsourcing shifts more responsibility for
success to other companies performance. If an important outsource company goes
bankrupt, there can be serious consequences.
Confidentiality/security. Outsourcing some processes will inevitably give the supplier
information that could be valuable or sensitive. Keeping a process in-house is should
increase security.
Service level agreements are needed to specify exactly what will be supplied in the sub-
contracting arrangement.
The rise of such centres has been encouraged by much simpler, faster and cheaper
communications systems linking computers and staff (eg through technologies such as
Skype).
Again, it is common to have internal service level agreements to specify exactly what will be
supplied in the shared-service arrangement.
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In all complex contracts the parties will be confronted at some point with the need to adapt
to events that were not anticipated or planned for in the original contract. This occurs
because of:
At some point the potential difficulties will encourage to carry out the transactions
themselves rather than out-sourcing. This has implications for both clients and providers
inoutsourcing arrangements for services such as finance and IT.
From the client perspective, when contracts for services are hard to draw up and enforce, it
may bebetter to have those services provided by in-house departments rather than external
vendors. On the other hand,vendors need to focus onkeeping contracts asunambiguous
and transparentas possible so that clients are not scared off.
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Chapter 11
CHANGE AND CHANGE MANAGEMENT
1.1. Introduction
Nothing stands still and organisations have to adapt to change if they are to continue being
successful in delivering what customers and clients want and to remain competitive. In
general, not changing and adapting in general means becoming irrelevant.
The need for change can be triggered by both internal and external factors. For example:
Internal factors
A new owner
The loss of an important customer or member of staff
A discovery
A decision to change strategy
Automation
An efficiency drive
External factors
Political events
Economic events
Social events and changes
Technological changes
Environmental concerns
Legal changes
A new competitor
Customer changing their requirements
Suppliers and supplies altering
A competitor deciding to expand aggressively
A substitute product becoming available
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Whereas external triggers are outside an organisations control, internal changes can be
deliberately searched for to try to improve operational efficiency. Search methods are:
2. Change methodology
2.1. Strategic alignment
It can be argued that all business change projects will begin with strategic alignment: why is
the business being changed (not merely maintained) if there is no strategic need?
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There are a number of versions of the stages that make up the business change lifecycle.
Typical are the following stages:
(1) Planning: define the goals. What will be achieved as a result of the change? Also
at this stage people must be allocated responsibilities.
(2) Analyse existing activities. This is usually an essential starting point to all
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business change processes. The existing systems might not be perfect but they
will usually achieve at least the bare minimum required of operations which can
be built on and improved. Identifying problems with the existing system will
point the way to where improvements are needed.
(3) Design a new or improved process. Explore alternatives and choose the best
redesign that achieves the goals set.
(4) Development. Redesign products and services and devise ways in which the
success of processes can be measured.
(5) Implement/transition. This will include training employees and overcoming any
resistance they might have.
3. Types of change
There are a number of ways in which change can be classified. First we can simply look at the
extent of the change:
The distinction between automation, rationalisation, and business process reengineering are
not hard and fast. There is a continuum, but at the more sophisticated strategic end radical
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changes may be what are required to keep the business competitive and to successfully add
value to what its doing.
The second categorisation looks at both the scope of change and the nature of the change:
Incremental
Adaptation Evolution
Nature
of change
Reconstruction Revolution
Big bang
The scope of change relates to the size of the change and how fundamental it is. For example,
if every department were being affected the scope would be transformational (large).
Similarly, if the fundamental nature of the business was being changed, such as moving from
being a cost leader to a differentiator), the scope would again be transformational.
The diagram gives some indication as to the amount of risk that the change involves and
therefore will influence whether the company embarks on the process at all and also how
closely it should monitor and manage the process.
You can remember the top two quadrants from biological terms: adaptation means slow,
small changes. Evolution means slow large changes. Because the changes are incremental,
these types of change are relatively low risk as the change process can be halted or reversed if
its not going well.
Revolution is obviously a large, fast change. There is a high risk of things going wrong.
Reconstruction is a fast change of limited consequences. Obviously its speed means that
things can go wrong, but as the extent of the change is limited, any damage should be
limited to relatively few stakeholders and it should be relatively easy to put it right again.
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4.1. Introduction
Its usually assumed that there will be resistance to change. People may fear that:
Even if resistance is not strong, major change is likely to be a difficult time for an organisation
and if handled badly can cause considerable harm. For example, customer service could be
disrupted, employees could go on strike or valuable employees could leave.
Managing change so that it can be implemented with the least disruption is therefore
important.
As mentioned above, the normal assumption is that change will be resisted by employees,
and even if its not resisted very strongly there is likely to be a period where employees are
nervous and there will be a certain amount of disruption.
Aim to weaken
resistance
Lewin says that on one side there are forces for change. The assumption is that these changes
will set up forces resisting them. It could be just individual employees who object or it could
be more highly organised through a trade union or works council.
The wrong approach, according to Lewin, is for management to push very hard one way
because the chances are that the forces resisting change will just push equally hard the other
way, and the whole conflict escalates so that there is a serious risk of industrial unrest and
strikes and work-to-rules.
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Lewin says that instead of taking on the resisting forces head-on, management should aim to
weaken resistance to change.
How do you weaken resistance to change? Well, the suggested ways are:
Communication. Often resistance to change is there because people simply dont
know what is happening. They fear for their jobs or perhaps there are no plans to make
anyone redundant. If people are worried that they wont be able to cope with the new
system you can say that training will be provided for everyone.
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Education. Explain why the changes are needed. You might be able to say to people
that if we dont change we cant compete, if we cant compete there will a contraction
of the business.
Participation. If you explain to people why change is needed and then ask them to
make suggestions about the change in the structure of the company (a kind of bottom-
up approach) it is subsequently quite difficult for them to object to suggestions that
they have made themselves.
Envision the future. Acknowledge that the period of change might be tough, but that
in three months time, when new systems and work practices have settled down, that
work will be more pleasant and jobs will be more secure.
Lewins second suggestion for managing change is his three-step process which effectively is
very similar to his Force Field Analysis, though not using quite the same analogy. Here he
says:
First, management must first unfreeze the current situation. Explain to people why
change is needed, get them ready for change. Ideally, get them ready to embrace
change.
Secondly, you put through the changes. This can be a relatively long period where
people will have to perhaps undergo retraining and restructuring.
Third, refreeze the situation. Let things settle down, have a period of calm where things
refreeze and become stable in a new environment. Above all make sure that people
dont slip back into old patterns of behaviour
4.4. Beer and Nohria Theory E and Theory O (Harvard Business Review, May - June 2000)
Theory E change strategies are the ones that make all the headlines. In this hard approach
to change, shareholder value is the only legitimate measure of corporate success. Change
usually involves heavy use of economic incentives, drastic redundancies, downsizing and
restructuring.
Managers who subscribe to Theory O believe that if they were to focus exclusively on the
share price, they might harm their organisations. In this soft approach to change, the goal is
to develop corporate culture and human capability through individual and organisational
learning: the process of changing, obtaining feedback, reflecting, and making further
changes.
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They suggested that the best way to manage change is to apply both approaches
simultaneously:
organisational
capability
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5. Change agents
A change agent is someone who is employed by an organisation, or sub-contracted by the
organisation to change the way it is organised and controlled.
A change agent will often be an outside consultant. Consultants can be very expensive but
there can be considerable advantages in hiring one to oversee the entire change process:
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Chapter 12
PROJECT MANAGEMENT
We tend to recognise the concept of a project intuitively, but projects of certain important
characteristics.
First, they are really by definition non-routine. They are different from ones day-to-day
activities. They will have specific starting and ending points.
Second, they are usually addressing novel or unique challenges, something which you
havent done before and will probably never be asked to do again.
Third, projects usually have project teams and the team members will normally be from
different departments with different backgrounds, so these people may have different
priorities. They may want different things from the project. They will use different
terminology. They will have different outlooks, for example, different attention to detail,
different sense of urgency, different attitudes towards quality, and differ in views on
costs.
Fourth, for most projects though not all, there is no benefit until the project is finished.
Usually, half a computer system, or half a factory, or half a system of quality control will
be rather useless. Therefore, many projects are characterised by a period of spending
and effort, and only much later, perhaps after several years, will we see whether the
project works and whether the benefits we had hoped for are actually realised. All of
these characteristics of a project should worry you. Its non-routine, its novel, there are
people from many backgrounds who have not worked together before. There is no
benefit until the project is finished.
Therefore the risk attaching to projects can often be very great. We need, carefully how to
control the project and its scope otherwise we will simply have wasted the organisations
effort and money
Start date
Duration
Finish date
A relationship to other projects: after some, before others etc
A cost
A person responsible
A closely defined set of outcomes
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Initiation/initial screening
Risk assessment.
Business case
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Project plan
Executing
Monitoring and controlling/project milestones
Closing: delivery
Review
A project milestone is a fixed date by which certain parts of the project should have been
accomplished.
4. Risk assessment
Risk assessment has four responses. The CIMA terms are remembered by TARA:
These responses are sometimes also known as the 4Ts: transfer, terminate, treat, tolerate.
Project risk can be partially judged by considering the following independent variables:
Project scope definition: How well defined is the project? If you were to embark on a
project which was defined as something like we want to improve the inventory
system, really we have to ask what on earth that means. What does the word Improve
mean? Does it mean going all the way to just-in-time inventory? Does it mean
automatic reordering? Does it mean having fewer stock-outs? Does it mean lowering
the average inventory value? A project defined as improved inventory is very hazy,
and hazy projects are full of risks. Basically, we have no idea what its scope is, and if we
have no idea what its scope is we will find its susceptible to what is called project drift.
In other words the objectives and deliverables of the project are never really defined, or
keep changing, and we will get hopelessly lost.
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The size of the project. You can easily see that if a project were simply something to
do with the receivables ledger that is relatively small. If it goes wrong, its only the
receivables ledger which is affected. If its however to do with the whole of the
accounting system and it goes wrong then all of the accounting system is going to be
affected with large-scale disruption.
Complexity. If the technical complexity is low, its a fairly well-understood problem,
there are well-understood solutions to those problems, and we are on pretty safe
ground. If however the project is cutting-edge and rather experimental, no one has
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really much experience of it before, and involves many different stakeholders, you can
see that the project risk is much higher. So if you are in charge of a project which is not
well-defined, it is hazy, its large, its very complex, you might like to think about finding
a new job.
Its important to be aware of project risk because high risk projects should be more carefully
monitored for cost, time, quality, and scope.
Financial feasibility should always form a very important part of any business case. In a profit-
seeking organisation it is necessary to demonstrate that the project will increase profits. In a
not-for-profit organisation it should show how service levels or other outcomes will be
improved.
Usually costs are easy to budget. However, often benefits are intangible (such as customer
service level) and are much more difficult to quantify with any precision. For example, how
would you quantify the benefits arising from a major training project? You might firmly
believe that the project is worthwhile, but could you prove it in advance?
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The benefits really begin to be more easily dealt with once they change from measurable to
quantifiable because predictions are needed for DCF calculations. Methods for making this
transition include:
Pilot operation. Try out the new system in one branch, measure the improvements and
assume these will be available company-wide.
Simulation. Based on mathematical models.
Observing improvements found by other users. Be careful a vendor does not simply
show you the most delighted user who might be completely uncritical of the new
system.
Think of the project initiation document as the master handbook of the project.
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First, what is the project? The initiation document defines the project. It sets out the scope
of the project and its deliverables. Only by setting out deliverables in advance can we
possibly judge after the event whether the project has been successful or not?
It justifies a project both in terms of cost benefit analysis and also risk analysis. Remember a
project could potentially show substantial benefits, but if it was at very high risks we might
prefer not to embark upon it.
If necessary we have to secure funding for the project to see it right the way through bearing
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in mind that most projects yield no benefits whatsoever until they are completed
successfully.
It defines the roles and responsibilities of the project participants. The project sponsor can be
regarded as a person to whom the project belongs and very often is a person or department
which is providing the funding. The project manager has got day-to-day responsibilities for
looking after the progress of the project and that manager in particular will be looking after a
project team. Do not underestimate the skills required of a project manager. They will
probably be in charge of a diverse group of people; they will be working to time, cost, and
quality standards. They have to liaise with the sponsor. They have to interpret what is wanted,
from time to time they may have to reach comprises with the various stakeholders.
And finally it gives people information; they need to be productive and effective right from
the start of the project. It will assign responsibilities. It will set out a schedule perhaps on a
network diagram. It will ensure that the right people are there at the right time. It will
establish ways of controlling the project in terms of time, money, quality, and scope.
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A group of people with a full set of complementary skills required to complete a task, job, or
project.
This can be difficult to achieve because they will be drawn from different backgrounds and
departments and are likely to have different priorities for project outcome. It is an important
task of the project manager to get the diverse team members to work well together.
Matrix management is often used for project teams because teams usually need a mix of
disciplines. Therefore, employees from different disciplines and departments can be assigned
to project teams. They will have dual responsibilities: to the project and its manager, and to
their home department and the manager there.
Time
Scope
Cost Quality
It says there are four variables, the time or deadline, the cost, the scope or extent of a project,
and the quality we have to achieve. The diagram first states that if you change one of these
variables we are bound to affect the others. So if you want the project to be done more
quickly you may have to spend more money, you may have to limit scope, or you may cut
corners and quality. If you want the project to be done more cheaply at a lower cost it may
take longer, you may reduce its scope, and again you might comprise quality
Furthermore, even if you are not adjusting one of these variables, most projects will have one
of them as a priority. It might be that above all we have to have something done within a
deadline and if we concentrate tremendously on getting the project done within a deadline,
inevitably we may compromise costs, scope, and quality. Similarly, if the project were to do
with public safety and the quality of the output was to be the highest possible standard, then
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we have to be aware there is a danger that the project will take too long, it will be very
expensive, or we compromise on its scope.
So now the project manager knows who is doing what and how much each element should
cost. Costs are relatively easy to track: give each project a cost-code so that material, labour
and overhead costs can be booked to it. Cost codes could be created for every activity that
makes up the project so that more detailed monitoring could be undertaken and actual costs
compared to budgeted costs.
These diagrams (or similar) are universally used in large projects such as IT development,
construction, ship-building and so on.
To illustrate the use of these diagrams we will use the example of a project to build a house.
The project has been broken down into the following activities, labelled A F, and the
durations of each activity in weeks has been noted:
We will assume that foundations have to be in before brickwork can commence, but that the
joinery work for the windows, door and roof beams can be carried on off-site, in a factory.
Doors, windows and the roof beams can be fitted only after the brickwork is finished.
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The roof covering can only be installed once the roof beams are there.
The house has to be weatherproof (roof, doors and windows) before wiring and decoration
can start.
2 4
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E3
A2 B6 F4
1 3 5 6
C4 D2 G6
The numbers in the circles are for reference only and they number events, points in time
So A and C can be carried out together, but B (brickwork) can start only when A (foundations)
are finished.
Walls and joinery have to be completed before the roof beams (E) and windows and doors (D)
can be fitted. The roof (F) has to come after the roof beam fitting (E). The house has to be
weatherproof before the internal work (G) can begin.
You can now look at each pathway through the network (moving forwards only) and
calculate its length:
ABEFG = 2 + 6 + 3 + 4 + 6 = 21 weeks
ABDG = 2 + 6 + 2 + 6 = 16 weeks
CEFG = 4 + 3 + 4 + 6 = 17 weeks
CDG = 4 + 2 + 6 = 12 weeks.
The critical path length is the longest way through the project. This project cannot be
completed in less than 21 weeks as the sequential activities A, B, E, F, and G dominate the
project.
A, B, E, F, and G are known as critical activities. If any one of them takes longer than planned,
the project will take longer than the planned 21 weeks.
There is some flexibility with respect to other activities. For example, you can probably see
that C could take up to 8 days without harming completion because A + B = 8 days. Similarly
D could take up to 7 days because E + F take 7.
In simple projects as above, the critical path can be found by looking at all the possible
pathways and choosing the largest.
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A more formal approach (and one used by computer software) can be taken by looking at
each event and working out the earliest time it can occur (earliest event time EET) and the
latest time it can occur (latest event time LET) without delaying the project completion.
Events occur only when all activated leading to them have been completed.
To calculate EET start at the beginning of the project and work forward. To calculate LET start
at the end and work backwards.
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Float relates to activities and is a measure of how much flexibility there is in that activity.
Float = LET of the ending event EET of the starting event activity DURATION
Activity Duration Ending event LET Starting event EET LET EET Duration =
activity float
A 2 2 2 1 0 202=0
B 6 3 8 2 2 82-6=0
C 4 3 8 1 0 8 0 4= 4
D 2 5 15 3 8 15 8 2 = 5
E 3 4 11 3 8 11 8 3 = 0
F 4 5 15 4 11 15 11 4 = 0
G 6 6 21 5 15 21 15 6 = 0
As we saw before, only activities C and D have any flexibility or float. C has 4 days and D has 5
days float.
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Using the above example, the Gantt chart would look like:
Activity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
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A
B
C
D
E
F
G
This Gantt chart is simply an alternative representation of the previous network diagram. Here
the time and week goes along the bottom of the chart and activities go down the side of the
chart.
The dark shading shows where activities start and end. This shows we can start activities A
and C together. We can start activity B as soon as A is completed, but we cant start D
until B, and C are completed. The light shading shows the amount of flexibility (float) we
have over the duration of the non-critical path activities: 4 days for C and 5 days for D.
13. PERT
PERT = program evaluation and review technique
This is an approach to dealing with uncertain activity times: obviously if activity times could
vary, so too could the total project duration. PERT takes timing uncertainties into account
though rather subjectively.
o + 4m + p
The expected time for each activity is then =
6
It is the expected time that is placed on network charts and Gantt charts.
Another way of dealing with uncertainty is simply to build padding into estimated times. So,
if you think that an activity should take 10 days, you will put 12 on any planning charts to
build in some safety. This, of course, can lead to inefficiency and complacency. If an activity is
allowed to take 12 days, it probably will.
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1. The scope (deliverables) had never been properly defined in the first place. This might
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have been cowardice on the part of the project sponsors and manager as it avoids making
hard decisions at the start and everyone hopes that it will sort itself out. It wont.
2. Changes are permitted as the project develops, but the changes are not properly costed
or evaluated. Stakeholders want more and more but the costs are not taken into account.
In many types of project, IT projects are a good example, changing the design part way
through is very expensive and puts at risk the success of the whole undertaking.
Any change to a projects specification and scope should be subjected to a rigorous feasibility
study to check on economic, technical operational and social feasibility. A cost-benefit
analysis should certainly be carried out before any changes are authorised.
15. Completion
Completion involves formally accepting the project and bringing it to a close. A completion
report shows the outcome of the project and is used to:
Check that everything promised by the project has been delivered ie that the project
objectives have been achieved.
Check on any changes which had to be made to reach acceptance, and that there are
no outstanding project issues.
Deliver the final budget report.
Arrange for post-project and post-implementation reviews.
There are two types of review that should be carried out after the project is completed:
This examines the project looking for areas that did not go smoothly and for those that did.
For example, the project might have been late and that needs to be examined to see if it
could have been prevented and to learn lessons for future projects. It can also look at the
performance of the project team members.
Without such a review, there is little hope of improving the management of future projects
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This examines what the project achieved. Before the project was started there should have
been hopes and ambitions for it. These would have been set out in the business case and the
project initiation document.
It is now time to see if the project has delivered anything of sufficient value, at the right cost,
by the right time and whichw people are prepared to use enthusiastically. In other words, has
the project realised benefits?
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If the answer is negative, then the organisation has to critically examine what went wrong so
that similar waste does not happen in the future.
A methodology provides:
Documentation such as project initiation documents
Technique a set of standard project management techniques required to plan and
control the project (Critical Path Analysis, PERT)
Sequence- the order in which the stages will be performed
Overview a picture of how the documentation and techniques fit together
Stage control is the process undertaken by the project manager to ensure that any given
stage of the project remains on course. A project might consist of just one stage.
1. Starting a project: the business case must be made (this will include scope, why it is
needed, feasibility studies and risks) and plan for the project initiation. Before going to the
next stage, the board should approve the project.
2. Directing a project: the project manager and project sponsors must control the project
throughout.
3. Initiating a project: a detailed project plan is drafted together with project controls. Mile
posts should be established.
4. Controlling a stage of the project: the project is broken down into activities each with a
start point, end point, duration and cost. Regular reports on progress are needed.
5. Managing stage boundaries: for example, ensuring that one stage is completed
satisfactorily before a subsequent one begins.Agreeing remedial work if necessary.
6. Managing product delivery: managing acceptance and sign-off. Ensures that the project
delivers what was promised.
7. Closing a project: final reports and reviews of the project management and its outcomes.
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The stages of the project and the processes carried on can be depicted as follows:
Starting up a project
Directing a project
Initiating a project
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Controlling a stage
Managing a stage boundary
Managing a product delivery
Closing a project
(1) A project initiation meeting agrees the scope and objectives of the project and gives
approval for it to start.
(2) The completion of each project stage is marked by an end stage reports from the
project manager. The next stage does not commence until its plans have been reviewed
and approved. This is known as managing the stage boundary
(3) Mid-stage assessments are optional and might be needed if, for example, a stage is very
long or a new stage has to be started before the current one is complete. They are
interim progress reports.
(4) Progress reports are submitted regularly by the project manager to sponsors and the
board. These reports form the main overall routine controls mechanism and their
frequency (often monthly) is agreed at project initiation. They are essentially progress
reports and should include brief summaries of project schedule, budget status and any
problems encountered.
(5) Meetings are also held by the project team more frequently than highlight reports are
prepared (possibly weekly) and are the basis for detailed management project
managers, team leaders and team members.
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