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10/7/2013
1
Internal Environment Scanning
Outcomes from External and Internal Environmental Analyses
Examine competitors, opportunities and threats
Examine unique resources, capabilities, and competencies
Company Situation Analysis:The Key Questions
1. How well is firm’s present strategy working?
2. What are the firm’s resource strengths and weaknesses vis-à-vis external opportunities and threats?
3. Are the firm’s prices and costs competitive with those of key rivals, and does it have an appealing customer value proposition?
4. Is the firm competitively stronger or weaker than key rivals?
5. What strategic issues does the firm face?
How Well is thePresent Strategy Working?
• Best indicators of a well-conceived, well-executed strategy:
– The company is achieving its stated financial and strategic objectives.
– The company is an above-average industry performer.
How Well is thePresent Strategy Working?
• Quantitative– Sales growth – faster / slower– Market share – growing / declining– Retaining old customers, acquiring new customers– Profits increasing / decreasing– Credit rating– Image and reputation– Shareholder value
• Qualitative– Completeness, internal consistency, rationale and
relevance
Indicators of Strategic Success
• Growth in firm’s sales and market share
• Acquisition and retention of customers
• Increasing profit margins, net profits and ROI
• Growing financial strength and credit rating
• Positively viewed by shareholders and customers
• Leadership in factors relevant to market\industry success
• Continuing improvement in operating performance
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2
Make Meaningful Comparisons
• Comparison with past performance
– Trend analysis – Where are you relative to the past.
– Stages of Industry Evolution
• Emergence, Growth, Maturity and Decline
• Strengths or competencies needed at each stage are different
– Benchmarking with the competitors
• Key competitors
• Best practices irrespective of industry
SWOTPotential Resource Strengths
Potential Resource Weaknesses
Potential External Opportunities
Potential External Threats
• Powerful strategy
• Strong financial condition
• Strong brand name image/reputation
• Widely recognized market leader
• Proprietary technology
• Cost advantages
• Strong advertising
• Product innovation skills
• Good customer service
• Better product quality
• Alliances or JVs
• No clear strategic direction
• Obsolete facilities
• Weak balance sheet; excess debt
• Higher overall costs than rivals
• Missing some key skills/competencies
• Subpar profits
• Internal operating problems . . .
• Falling behind in R&D
• Too narrow product line
• Weak marketing skills
• Serving additional customer groups
• Expanding to new geographic areas
• Expanding product line
• Vertical integration
• Acquisition of rivals
• Alliances or JVs to expand coverage
• Openings to exploit new technologies
• Entry of potent new competitors
• Loss of sales to substitutes
• Slowing market growth
• Adverse shifts in exchange rates & trade policies
• Costly new regulations
• Vulnerability to business cycle
• Growing leverage of customers or suppliers
• Reduced buyer needs for product
• Demographic changes
SWOT Analysis
IdentifyDraw
Conclusions
Translate into Strategic
Action
SWOT Analysis
• Draw conclusions from the SWOT listings about the firm’s overall situation.
• Translate these conclusions into strategic actions by the firm that:
– Match its strategy to its internal strengths and to market opportunities.
– Correct important weaknesses, and defend it against external threats.
SWOT AnalysisHow Strong is the Company’s
Competitive Position?• How firm ranks relative to key rivals on each
industry KSF and relevant measure of competitive strength
• Whether firm has a sustainable competitive advantage or finds itself at disadvantage relative to certain rivals
• Ability of firm to defend its position in light of– Industry driving forces
– Competitive pressures
– Anticipated moves of rivals
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3
Assessing a Company’s Competitive Strength versus Key Rivals
1. List industry key success factors and other relevant measures of competitive strength
2. Rate firm and key rivals on each factor using rating scale of 1 to 10
3. Decide whether to use a weighted or unweightedrating system (a weighted system is usually superior because the chosen strength measures are unlikely to be equally important)
4. Sum individual ratings to get an overall measure of competitive strength for each rival
5. Determine whether firm enjoys a competitive advantage or suffers from a competitive disadvantage based on the overall strength ratings
Strategic Implications of Competitive Strength Assessment
• The higher a firm’s overall weighted strength rating, the stronger its overall competitiveness versus rivals.
• The rating score indicates the total net competitive advantage for a firm relative to other firms.
• Firms with high competitive strength scores are targets for benchmarking.
• The ratings show how a company compares against rivals, factor by factor (or capability by capability).
• Strength scores can be useful in deciding what strategic moves to make.
MCKINSEY 7-S FRAMEWORK
McKinsey 7-S Framework
• The 7-S framework of McKinsey is a Value Based Management (VBM) model that describes how one can holistically and effectively organize a company. Together these factors determine the way in which a corporation operates.
Systems
Style
Staff
Skills
Strategy
Structure
Shared values
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Hard Elements Soft Elements
Strategy Structure
Systems
Shared ValuesSkillsStyleStaff
The McKinsey 7S model involves seven interdependent factors which are categorized as either "hard" or "soft"
elements:
"Hard" elements are easier to define or identify and management can directly influence them: These are strategy statements; organization charts and reporting lines; and formal processes and IT systems.
"Soft" elements, on the other hand, can be more difficult to describe, and are less tangible and more influenced by culture. However, these soft elements are as important as the hard elements if the organization is going to be successful.
Shared Values
• The interconnecting center of McKinsey's model
• What the organization stands for and what it believes in.
• Central beliefs and attitudes.
• Shared Values are guiding concepts - they are a set of values and aspirations (often unwritten) that go beyond the conventional formal statement of objectives
• Shared Values are the fundamental ideas around which a business is built, they are its main values. Staff who can identify and abide by these core values are very often the ones who have successful career paths.
Shared Values
• Shared Values link with ‘organisational culture’:
– The collection of traditional values, policies, beliefs and attitudes that constitute a pervasive context for everything that is done and thought and taught in organisations.
• They also link to what is termed ‘organisational climate’:
– Prevailing atmosphere surrounding the organisation,
– Level of morale, and the strength of feeling or belonging, care and goodwill among members.
– Perceptions of members towards the organisation.
Strategy
• Plans for the allocation of a firms scarce resources, over time, to reach identified goals. Environment, competition, customers.
• Strategy relates to those actions that an organisation plans, in response to or anticipation of change in its external environment:– Its Clients and its Competitors
• Strategy is the way an organisation aims to improve its position in relation to its competitors through
• low cost delivery or production
• providing better value to clients
• achieving sales and service dominance
Structure
• The way the organization's units relate to each other: centralized, functional divisions (top-down); decentralized (the trend in larger organizations); matrix, network, etc.
• The pattern of relationships among positions in the organisation and among members of the organisation.
• It makes possible the application of the process of management and creates a framework of order and command through which activities of the organisation can be planned, organised, directed and controlled
Structure
• The challenge lies not so much in comprehending all the dimensions of
organisational structure but in developing:
– the ability to focus on those dimensions that are currently important to the
organisation’s evolution
– being ready to refocus as the crucial elements in the business environment
shift
• The central problem with structuring an organization is not the one on
which most organizational designers spend their time - ‘how to divide up
tasks !’
• It is one of emphasis and co-ordination - ‘how to make the whole thing
work !’
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5
System
• The procedures, processes and routines that characterize how important work is to be done: financial systems; hiring, promotion and performance appraisal systems; information systems.
• Systems are the day-to-day procedures, formal and informal, that make the organisation function and they include:– Ordering systems
– Production procedures
– Deliver procedures
– Capital budgeting procedures
– Training systems
– Cost accounting procedures
– Budgeting systems, etc.• If you want to understand how an organisation does or doesn’t get things done?
Look at its systems
• If you want to change an organisation without disruptive restructuringTry changing its systems
Structure Vs Systems
• Structure enhances power– And therefore authority
• Systems dilute power– And therefore authority
• Systems when they get old, crystallize into structure
• Systems provide the dynamic connection between two structures
• Therefore are also change resistant!
Staff
• Numbers and types of personnel within the organization.
• At the hard end of the spectrum– Appraisal systems
– Pay scales
– Formal training programmes
• And at the soft end we talk about:
– Morale
– Attitude
– Motivation
– Behaviour
Style
• Cultural style of the organization and how key managers behave in achieving the organization’s goals.
• The ‘Style’ of an organisation is very much founded in its Managerial Style
• Staff may listen to what managers say, but they believe what managers do.
• You will not sell to the clients what you cannot sell to the staff.
Skill
• Distinctive capabilities of personnel or of the organization as a whole.
• Core Competences.
• We characterise companies not by their strategies or structures but by what they can do best.
• Examples– McDonalds: efficiency and consistency
– Microsoft: innovation
– Du Pont:research and new products
– Intel: precision
RESOURCE BASED APPROACH
10/7/2013
6
Components of Internal AnalysisResources, Capabilities and Core
Competencies
• Resources
– The source of a firm’s capabilities
– Cover a spectrum of individual, social and organizational phenomena
– Alone, may not yield a competitive advantage
Resources
• Tangible resources
– Financial resources
– Physical resources
– Technological resources
– Organizational resources
• Intangible resources
– Human resources
– innovation resources
– Reputation resources
Tangible Resources
Financial Resources •The firm’s borrowing capacity•Ability to generate internal funds
Organizational Resources The firm’s formal reporting structure and its formal planning, controlling, and coordinating systems
Physical Resources •Sophistication and location of a firm’s plant and equipment•Access to raw materials
Technological Resources Stock of technology, such as patents,trade-marks, copyrights
Intangible Resources
Human Resources •Knowledge•Trust•Managerial capabilities•Organizational routines•Culture
Innovation Resources •Ideas •Scientific capabilities •Capacity to innovate
Reputational Resources •Reputation with customers•Brand name •Perceptions of product quality, durability, and reliability •Reputation with suppliers •Efficient, effective, supportive, and mutually beneficial interactions and relationships
Intangible resources are more likely than tangible resources to produce competitive
advantage
Resources, Capabilities and Core Competencies
• Capabilities– The firm’s ability to use its
resources effectively– The firm’s capacity to deploy
resources that have been purposely integrated to achieve a desired end state
– Emerge over time through complex interactions among tangible and intangible resources
– Based on developing, carrying and exchanging information and knowledge through the firm’s human capital
10/7/2013
7
Capabilities
• The foundation of many capabilities lies in:
– The unique skills and knowledge of a firm’s employees
– The functional expertise of those employees
• Capabilities are often developed in specific functional areas or as part of a functional area
Examples of Firms’ Capabilities
Functional Areas Capabilities
Distribution Effective use of Logistics Management Techniques
Human Resources Motivating, empowering and retaining employees
Management Information Systems Effective and efficient control of inventories through point of purchase data collection methods
Marketing Effective promotion of brand name productsEffective customer service
Management Effective organizational structure
Manufacturing Miniaturization of components and productsDesign and product qualityLow-cost manufacturing
Research & development Rapid transformation of technology into new products and processesContinuous innovation
Resources, Capabilities and Core Competencies
• Core Competencies
– Resources and capabilities that serve as a source of a firm’s competitive advantage
– Distinguish a company competitively and reflect its personality
– Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities
Core Competencies
• Activities that a firm performs especially well compared to competitors
• Activities through which the firm adds unique value to its goods or services
• Collective learning or co-ordination skills behind a firm’s product lines
Core Competencies
• A core competency should:
– Contribute significantly to the end product benefits
– Be difficult for competitors to imitate
• Core competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies
Core Competencies
• A Competence
– Is an activity that a firm has learned to perform with proficiency—a capability.
• A Core Competence
– Is a proficiently performed internal activity that is central to a firm’s strategy and competitiveness.
• A Distinctive Competence
– Is a competitively valuable activity that a firm performs better than its rivals.
10/7/2013
8
Competitive Advantage Sustainable Competitive Advantage
Valuable Capabilities Help a firm neutralize threats or exploit opportunitiesOffsetting the cost of acquiring resources and capabilities
Rare Capabilities Are not possessed by many others
Costly-to-Imitate Capabilities
Historical: A unique and a valuableorganizational culture or brand name Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers
NonsubstitutableCapabilities
No strategic equivalent
VRIO Framework
Value: Does it provide customer value and competitive advantage?
Rareness: Do other competitors posses it?
Imitability: Is it costly for others to imitate?
Organization: Is the firm organized to exploit the resource?
Sustainable Competitive Advantage• Durability: depreciation rate of the firm’s resources, capabilities, or core
competencies
– Examples: Intel, cassette tapecdmp3mp4
• Imitability: duplication rate by others
– Transparency: speed of other firms in understanding the relationship of resources and capabilities supporting a successful firm’s strategy
– Transferability: competitors ability to get the resources and capabilities necessary for the competitive challenge
– Replicability: competitors duplication ability, the use of resources and capabilities to imitate the firm’s success
• Explicit knowledge vs. Implicit knowledge Which one is easier to copy?
A Resource-based Approach to Strategy Analysis
Select a strategy which best exploits the firm's resources and capabilities relative to external opportunities.
Appraise the rent-generating potential of resources and capabilities in terms of: i) their potential for sustainable competitive advantage, and ii) the appropriability of their returns
Identity the firm's capabilities: What can the firm do more effectively than its rivals? Identify the resources inputs to each capability, and the complexity of each capability.
Identify and classify the firm's resources. Appraise strengths and weaknesses relative to competitors. Identify opportunities for better utilization of resources.
Identify resource gaps which need to be filled. Invest in replenishing, augmenting and upgrading the firm's resource base
Capabilities
Resources
Competitive Advantage
Strategy
The Resource-Based View of a Winning Strategy
• Develop resources and capabilities which are rare, valuable, non-tradeable, that form the basis of the core competencies of the firm
• Make those resulting advantages sustainable by precluding imitation or substitution from competitors
• Ensure efficient use of resources
• Make sure that the implementation process is done in such a way that its associated costs do not upset the resulting benefits.
10/7/2013
9
Cautions and Reminders
• Never take for granted that core competencies will continue to provide a source of competitive advantage
• Core competencies may become “core rigidities”
• Determining what the firm can do through continuous and effective analyses of its internal environment increases the likelihood of long-term competitive success
Are the Company’sPrices and Costs Competitive?
• Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company analysis
• Key analytical tools
– Strategic cost analysis
– Value chain analysis
– Benchmarking
Strategic Cost Analysis
• Focuses on a firm’s costs relative to its rivals
• Compares a firm’s costs activity by activity against costs of key rivals
– Raw materials purchase to production to price paid by ultimate customer
• Pinpoint which internal activities are a source of cost advantage or disadvantage
• A company’s cost competitiveness depends on how well it manages its value chain relative to how well competitors manage their value chains
Strategic Advantage Profile (SAP)
• Five functional areas in most of the organizations. – Production or Operation
– Finance or Accounting
– Marketing or Distribution
– Human Resource & Corporate Planning
– Research & Development
• Identify their relative strength and weakness
Benchmarking
• Involves improving a firm’s internal activities based on learning other companies’ “best practices.”
• Assesses whether the cost competitiveness and effectiveness of a firm’s value chain activities are in line with its competitors’ activities.
• Sources of Benchmarking Information
– Reports, trade groups, analysts and customers
– Visits to benchmark companies
– Data from consulting firms
VALUE CHAIN ANALYSIS
10/7/2013
10
Value Chain Analysis
• Value chain– The chain consists of a series of activities that create
and build value.
– They culminate in the total value delivered by an organization.
– a systematic approach to examining the development of competitive advantage.
– VCA disaggregates a business into sets of activities• Primary Activities – Inbound logistics --- Operations ----
Outbound logistics ---- marketing and Sales and service• Support activities – General Administration, HRM, R&D,
Systems Development
The Basic Value Chain
Value Chain Analysis
• Primary activities involved with:
– A product’s physical creation
– A product’s sale and distribution to buyers
– The product’s service after the sale
• Support activities
– Provide the support necessary for the primary activities to take place
The Value-Creating Potential of Primary Activities
• Inbound logistics– Activities used to receive, store, and disseminate inputs to a product
(materials handling, warehousing, inventory control, etc.)
• Operations– Activities necessary to convert the inputs provided by inbound
logistics into final product form (machining, packaging, assembly, etc.)
• Outbound logistics– Activities involved with collecting, storing, and physically distributing
the product to customers (finished goods warehousing, order processing, etc.)
The Value-Creating Potential of Primary Activities
• Marketing and sales– Activities completed to provide means through which customers can
purchase products and to induce them to do so (advertising, promotion, distribution channels, etc.)
– all of the activities associated with attracting and keeping customers for your products
• Service– Activities designed to enhance or maintain a product’s value (repair,
training, adjustment, etc.)
Each activity should be examined relative to competitors’ abilities and rated as superior,
equivalent or inferior
Primary Activities and Factors for Assessment
Inbound
Logistics
Operations Outbound
Logistics
Marketing &
Sales
Customer Service
• Soundness of
material and
inventory control
systems
• Efficiency of raw
material
warehousing
activities
• Productivity of
equipment
compared to that of
key competitors
• Appropriate
automation of
production
processes
• Effectiveness of
production control
systems to improve
quality and reduce
costs
• Efficiency of plant
layout and work-
flow design
• Timeliness and
efficiency of
delivery of finished
goods and services
• Efficiency of
finished goods
warehousing
activities
• Effectiveness of
market research to
identify customer
segments & needs
• Innovation in sales
& promotion
• Evaluation of
alternate
distribution
channels
• Competence of
sales force
• Development of
image of quality
and a favorable
reputation
• Extent of brand
loyalty among
customers
• Extent of market
dominance within
the market segment
or overall market
• Means to solicit
customer input for
product
improvements
• Promptness of
attention to
customer
complaints
• Appropriateness of
warranty and
guarantee policies
• Quality of customer
education and
training
• Ability to provide
replacement parts
and repair service
10/7/2013
11
The Value-Creating Potential of Supporting Activities
• Procurement– Activities completed to purchase the inputs needed to produce a
firm’s products (raw materials and supplies, machines, laboratory equipment, etc.)
• Technological development– Activities completed to improve a firm’s product and the processes
used to manufacture it (process equipment, basic research, product design, etc)
• Human resource management– Activities involved with recruiting, hiring, training, developing, and
compensating all personnel
The Value-Creating Potential of Supporting Activities
• Firm’s infrastructure– Activities that support the work of the entire value chain (general
management, planning, finance, accounting, legal, government relations, etc.)
– Establishment of accounting practices, management information systems, compliance with environmental regulations, tracking and reporting for government programs,
– Effectively and consistently identify external opportunities and threats
– Identify resources and capabilities
– Support core competencies
Each activity should be examined relative to competitors’ abilities and rated as superior, equivalent or inferior
Secondary Activities and Factors for Assessment
Firm Infrastructure Human Resource Technology
Development
Procurement
• Capability to identify new
product market
opportunities and
potential environmental
threats
• Quality of the strategic
planning system to
achieve corporate
objectives
• Coordination and
integration of all value
chain activities
• Ability to obtain
relatively low cost funds
for capital expenditures
and working capital
• Timely & accurate
information on general
and competitive
environments
• Effectiveness of
procedures for recruiting,
training, and promoting
all levels of employees
• Appropriateness of
reward systems
• Relations with trade
unions
• Levels of employee
motivation and job
satisfaction
• Success of R&D activities
in leading to product and
process innovations
• Quality of working
relationship between
R&D personnel and other
departments
• Timeliness of technology
development activities in
meeting critical deadlines
• Qualifications &
experience of laboratory
technicians and scientists
• Ability of work
environment to encourage
creativity and innovation
• Development of alternate
sources for inputs to
minimize dependence on
a single supplier
• Procurement of raw
materials on timely basis
at lowest possible cost
and at acceptable levels of
quality
• Development for criteria
for lease-vs.-buy
decisions
• Good, long-term
relationships with
suppliers
Value Chain Analysis
• How to do a VCA– Identify key activities
– Allocate costs to each activity
– Identify the activities that differentiate the firm
– Examine the Value Chain• Different activities may be important – industry and
strategy
• Importance of activities can vary based on a company position in a larger scheme of activities
The Result of the Value Chain
• Margins
– Capture the value from performing value-creating activities as cheaply as possible
– The basic idea is that the consumer is willing to pay a certain amount for the value you create. This is depicted as the size of the overall pentagon.
– The size of the individual activity boxes represents the cost of performing those particular activities.
– Thus, the smaller the size of the individual activity boxes relative to the value the consumer is willing to pay, the greater the MARGIN will be for the firm.
Internal Value Chain for a Hospital
Referral and
Follow-Up
Discharge
Planning, Rehab/
LTC Referral
Tests, Diagnosis,
Treatment, and
Referral
ER, Admitting, and
Patient Intake
Marketing and
Promotion
Facilities, Security, Maintenance, Housekeeping
Clinical, Financial, and Managemant Information Systems (EMR, CPOE)
Human Resource Management, Medical Staff Relations, Nurse Recruiting
Legal, Compliance, Patient Advocacy, Patient Satisfaction
Medical Research, Medical Student Training
Governance, Stakeholder and Public Relations
Financial Management, Payer Contracting, Billing
Risk Management, Case Management, Quality Assurance
SUPPLIERS
(Physicians,
MCOs)
CUSTOMERS
(Patients, payers,
employers)
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12
Value Chain System for an Entire Industry
SupplierValue Chains
A Company’s OwnValue Chain
Forward ChannelValue Chains
Activities, Costs, &Margins ofForwardChannelAllies &StrategicPartners
InternallyPerformedActivities, Costs, &Margins
Activities, Costs, &Margins ofSuppliers
Buyer or End UserValueChains
Linkages with Supplier Value Chain
• Linkages between suppliers’ value chains and a firms chain provide opportunities for the firm to enhance competitive advantage.
• Division of benefits between firm and its suppliers is a function of supplier’s bargaining power and reflecting in supplier’s margins.
• Both coordination with suppliers and hard bargaining are important to competitive advantage.
The Buyer’s Value Chain
• A firm’s differentiation stems from how its value chain relates to its buyer’s chain.
• Differentiation derives fundamentally from creating value for the buyer through a firm’s impact on the buyer’s value chain.
• Value is created when a firm creates a competitive advantage for its buyer.
• The buyer must perceive the value to pay a premium price.
Outsourcing
• The purchase of a value-creating activity from an external supplier
• A firm may outsource all or only part of one or more primary and/or support activities.
10/7/2013
13
Forces Driving Outsourcing Strategic Rationales for Outsourcing
• Few organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities
• Improve business focus– Lets a company focus on broader business issues by having outside
experts handle various operational details– By forming and emphasizing fewer capabilities a firm can concentrate
on those areas in which it can create value
• Provide access to best capabilities– Specialized resources of service providers makes best capabilities
available to firms in a wide range of applications– Specialty suppliers can perform outsourced activities more efficiently
Strategic Rationales for Outsourcing
• Frees resources for other purposes– Redirects efforts from non-core activities toward those that
serve customers more effectively
• Sharing risks– Reduces investment requirements and makes firm more flexible,
dynamic and better able to adapt to changing opportunities
• Reduce and control operating costs• Make capital funds available• Gain access to world class capabilities• Resources are not available internally• Function difficult to manage
Core vs Context
Outsourcing Issues
• Outsource only to firms possessing a core competence in terms of performing the primary or supporting the outsourced activity
• Do not outsource activities in which the firm itself can create and capture value
• Do not outsource primary and support activities that are used to neutralize environmental threats or to complete necessary ongoing organizational tasks
Outsourcing Issues
• Do not outsource capabilities that are critical to the firm’s success, even though the capabilities are not actual sources of competitive advantage
• Do not outsource activities that stimulate the development of new capabilities and competencies
10/7/2013
14
Outsourcing Risks Outsourcing Costs
Outsourcing – Organizational Complexity Other Internal Issues
• Organizational Structure: Specialization, control, command, decision, communication flow
• Corporate culture: identity, commitment, stability, and employee behavior
• Marketing: positioning, segmentation, product life cycle, marketing mix, brand
• Financial: financial leverage, capital budgeting• R&D: R&D intensity(% R&D spending), patent,
publication, new product, technology transfer, technology discontinuity
• HR: teams, temporary workers, quality of life and diversity