BUSINESS MANAGEMENT & BEHAVIOURAL STUDIES · 2021. 7. 2. · Lou Gerstner repositioned IBM from a troubled manufacturer of mainframe computers into the dominant provider of computer

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN i

CAF - 4

BUSINESS MANAGEMENT &

BEHAVIOURAL STUDIES

ii THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Second edition published by

The Institute of Chartered Accountants of Pakistan

Chartered Accountants Avenue

Clifton

Karachi – 75600 Pakistan

Email: [email protected]

www.icap.org.pk

© The Institute of Chartered Accountants of Pakistan, August 2018

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, without the prior permission in writing of the Institute of Chartered Accountants of Pakistan, or as expressly permitted by law, or under the terms agreed with the appropriate reprographics rights organization.

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Notice

The Institute of Chartered Accountants of Pakistan has made every effort to ensure that at the time of writing, the contents of this study text are accurate, but neither the Institute of Chartered Accountants of Pakistan nor its directors or employees shall be under any liability whatsoever for any inaccurate or misleading information this work could contain.

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN iii

TABLE OF CONTENTS

CHAPTER PAGE

Chapter 1 Management concepts 1

Chapter 2 The business environment 29

Chapter 3 Organizational structure 71

Chapter 4 Managing change 103

Chapter 5 Organizational culture 121

Chapter 6 Employee behavior 133

Chapter 7 Motivation 153

Chapter 8 Leadership 189

Chapter 9 Team management 215

Chapter 10 Negotiation skills and conflict resolution 237

Chapter 11 Management information systems 253

Index 281

iv THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN 1

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CHAPTER 1

MANAGEMENT CONCEPTS

AT A GLANCE

Management is the process of dealing with or controlling resources and people to achieve a specific purpose. Management is a five-step process and comprises of planning, organizing, directing, coordinating, and controlling the work of a group of employees. There are three levels of managers: top, middle and first line.

Management skills include: leadership, time and stress management, innovation and creativity, communication, information gathering, negotiation, coaching and gathering.

Operations research is a type of decision-making and problem-solving methodology that uses analytical techniques to help ultimately make better decisions. It includes: network analysis, game theory, queuing theory, simulation, mathematical logic, optimization and modelling.

Leadership is termed as the process to influence the individuals to attain a common goal.

The practice of management has existed for centuries and examples can be traced back to ancient times, long before many of the modern studies and concepts of management were thought of. The evolution of management thought may be divided into four stages:

Pre-scientific management period.

Classical Theory

- Scientific Management of Taylor

- Administrative Management of Fayol

- Bureaucratic Model of Max Weber

- Rosemary Stewart

Neo-classical Theory or Behavior Approach

- Hawthorne experiment

- George Elton Mayo

Contemporary Management

- Modern theory (Systems Approach)

- Contingency theory

IN THIS CHAPTER

AT A GLANCE

SPOTLIGHT

1. Management and Leadership

2. Theories of Early and Modern

Management

STICKY NOTES

References

CHAPTER 1: MANAGEMENT CONCEPTS CAF 4: BMBS

2 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

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1 MANAGEMENT AND LEADERSHIP

1.1 Management

Management is the process of dealing with or controlling resources and people to achieve a specific purpose.

In simple words, management can be described as the art of getting things done through people in organizations.

Management can be a very complex and creative part of the duties of all the people working in an organization. Managers do more than just keeping the organization running its routine tasks. They can also give organizations a sense of purpose and direction. They can transform organizations and create new ways of producing and distributing goods and services, in turn changing how every business in the world works. There are numerous examples from recent years where some great entrepreneurs created exemplary organizations through their management endeavors; for example:

Sam Walton built Wal-Mart from scratch into the largest retailer in the world.

Lou Gerstner repositioned IBM from a troubled manufacturer of mainframe computers into the dominant provider of computer software services in the world.

Jack Welch reenergized General Electric, transforming a worn-out engineering conglomerate into an efficient, vibrant, entrepreneurial enterprise that set the standard for excellence and expanded into many industries as well.

In the late 1970s Steve Jobs of Apple Computer introduced the world’s first mass marketed, easy-to-use personal computer.

Meg Whitman provided the leadership that helped eBay become the world’s first and most successful online auction house, bringing a revolution in the auction industry as well as the digital landscape.

Management takes place within a structured organizational setting with prescribed roles. It is directed towards the achievement of aims and objectives through influencing the efforts of others. The essence of management is getting work done through others.

Management is a five-step process as derived from the classic definition of management by Henri Fayol as a list of managerial tasks that comprises of planning, organizing, directing, coordinating, and controlling the work of a group of employees.

Planning: Deciding in advance the tasks, its timing and methodology to accomplish it.

Organizing: Making optimum use of all the resources required.

Directing: Guiding and leading people so that they can perform efficiently and effectively.

Coordinating: Ensuring that different departments and groups work in sync.

Controlling: Monitoring and checking the progress.

Apart from organizational resources, management deals with the behavior of people and human institutions as a manager sets objectives, communicates with, motivates and develops people. The manager is the dynamic, life-giving element in every business. Without him the “resources of production” remain resources and never become production.

To sum it all up, the purpose of management is to help achieve objectives of an organization through efficient usage of human, physical, and financial resources with the best possible combination of means and making the appropriate decision while taking into consideration the external environment.

Management is getting people to work harmoniously together by making efficient use of resources to achieve

objectives

CAF 4: BMBS CHAPTER 1: MANAGEMENT CONCEPTS


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1.2 Management Levels

Most organizations have three management levels:

Top managers

Middle managers

First line managers

Top Managers

Provide the overall direction of an organization

It includes Chief Executive Officer, President, Vice President

Middle Managers

Coordinate employee activities

Determine which goods or services to provide

Decide how to market goods or services to customers

It includes Assistant Manager, Manager (Section Head)

First-line Managers

Have direct responsibility for producing goods or services

It includes Foreman, supervisors, clerical supervisors.

1.3 Management science approach

Operations research (OR) in business

Operations research (also referred to as operational research) is a type of decision-making and problem-solving methodology that uses analytical techniques (which are generally scientifically and mathematically based) to help ultimately make better decisions.

Operations research techniques include:

Network analysis – This involves identifying the different components of a project, how long each component will take to complete, the earliest and latest start and finish times for each component and the order in which components can be completed. One key objective of network analysis is to identify the critical path – the series of components which sequentially represent the short potential duration of the project. Network analysis can be used as a foundation for planning resources in a cost-effective manner and identifying where bottlenecks and slack (periods of extra time where the delay in completing a component would not impact the overall completion time of the project) exist.

Game theory – This involves studying mathematical models of conflict and cooperation to help make strategic decisions. Rules are specified which represent the various choices of action available and help determine what the potential and likely outcomes of various courses of action will be. A number of different game theory styles exist including:

- Zero-sum games – this is where one person’s gain is another’s loss – frequently used by military strategists

- Many-person (or non-zero-sum) games – these are used to study economic behavior where the objective is that for the greater good it pays for parties to cooperate – e.g. in a bargaining situation.

Queuing theory – This describes using mathematical methods for analyzing and predicting the delays and congestion of waiting and queuing. The objective is to identify ways to improve the process to make it quicker



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- for example improving traffic flow, processing shipping orders more efficiently, reducing the average time per call in a service department or call center and improving flow through shops, factories and hospitals.

Simulation – Simulation involves building a model that represents a real system then conducting experiments on the model. This allows the researcher to better understand the behavior and evaluate different strategies for operating the system. The researcher can adjust input parameters to test differing hypotheses (sometimes called ‘what-if’ scenarios) and predict future behavior prior to making an informed strategic decision. Simulation is now one of the most widely used operational research techniques which first became popular in the 1940’s when ‘Monte Carlo’ simulation was used to simulate atomic bomb raids (Monte Carlo was the code name). It is now found almost everywhere including:

- computer systems e.g. data base management and networks manufacturing – e.g. materials handling

- Government – e.g. traffic control

- Business – e.g. cash flow analysis

Mathematical logic – Mathematical logic is integral to most of the other techniques described here. It is used to reflect the relationships between the various components, variables and parameters within something that is being modelled. The logic is constructed so as to include an ‘objective function’ with which different solutions can be evaluated and constraints tested that restricts feasible values.

Mathematical optimization – In broad terms, mathematical optimization is a technique used in management science, mathematics and computer science to select the optical solution from a set of available alternatives. The solution is derived by either maximizing (e.g. profit) or minimizing (e.g. cost) a real function by systematically selecting input values from within a feasible range.

Mathematical modelling – Mathematical modelling is a way of describing a system using mathematical concepts and language. Defining a system using mathematical modelling allows the researcher to better understand the content and effect of the different components and make predictions about behavior.

The holistic approach adopted includes three steps:

Step 1: Develop a set of potential solutions to a problem. Note that this may include many iterations of solution

Step 2: Analyze the alternatives derived in step 1 to identify a much smaller sub-set of most likely workable solutions

Step 3: Apply simulated implementation to the alternatives derived in step 2 to identify and refine the best solution. If possible this should be tested out in ‘real-world’ situations with psychology and management science techniques playing an important role. Due to its bias towards computational and statistical techniques, operations research has strong ties to computer science and analytical science.

Operations research in practice

In practice, operations research is used by management to either:

maximize something (e.g. profit, yield, utilization or performance); or

minimize something (e.g. loss, cost or risk).

Some other real-world examples of applying OR in practice are:

critical path analysis for project planning routing (e.g. for transport or people)

supply chain management

scheduling

determining optimal prices

By its nature, OR requires skilled labor which often involves the employment of specialists. This can of course be costly so is normally seen either as an internal department within a larger company or accessed via an outsourced operations research bureau.



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Example: Operational Research Prior to opening the new terminal 5 at London Heathrow airport a large number of people were used to simulate passenger traffic for a forecast busy day. The simulation involved testing check-in queues, visa processing, immigration control and the baggage system Management were able to analyze the operations including waiting times, customer satisfaction, incidences of backlog and lost baggage in order to modify the operations prior to the new terminal opening to the public. Subsequently, when the new terminal 5 opened to the public all significant operational issues were avoided

Management Skills

The key skills which management need in order to operate as effective managers are as follows:

Leadership

Time management

Stress management

Innovation and creativity

Communication

Information gathering

Negotiation

Coaching and mentoring

Leadership

Leadership is termed as the process to influence the individuals to attain a common goal. Effective leadership within an organization involves:

guiding and directing others to achieve the goals of the organization

making the best use of the knowledge, skills and talent of others in the organization

developing the knowledge, skills and talent of others in the organization.

Effective leadership therefore increases the effectiveness of the organization, by getting the best out of employees to achieve the aims and objectives of the organization. Leadership is addressed in a later section as well as in detail in a separate chapter.

Time management

Managers need to be able to manage time in order to ensure their and their teams’ deadlines are achieved. Barriers to effective time management include:

Procrastination (thinking about things too long without making a decision)

Ineffective delegation

Mismanaging paperwork and official documentation

Attending or organizing unnecessary meetings

Failing to set priorities.

Effective time management techniques include:

Identify objectives, label tasks then prioritize:

- Key tasks - urgent

- Key tasks – not urgent

- Not required but would like to have

- Not required

Monitor the plan and take remedial action when slippage is identified

Set daily, medium-term and long-term plans

Delegate



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Make appointments with oneself – time for thinking and reviewing

Us check-lists

Control interruptions

- Switch phones to ‘call-divert’ and social networks or online communication programs to ‘unavailable’

- Adopt ‘surgery hours’ – open-door time

- Have regular meetings with clients and colleagues to prevent ‘surprises’ occurring

Stress management

Managers need to understand the symptoms of stress and try to prevent them from arising both personally and within their team. If stress does occur, it must be managed. Stress management is addressed in a later chapter.

Innovation and creativity

Innovation and creativity manifests in a number of ways, for example:

To identify solutions quickly and flexibly during a negotiation

To identify new ideas for products and services

To identify new markets Sources for innovation and creativity include:

The manager’s own experience

Team brainstorming

Building mind-maps (visual note taking)

Delegating design and innovation to a specialist

Communication

The purpose of communication is to:

support management

co-ordinate plans

communicate goals, plans and structures

generate ideas

gather and provide information

manage relationships

Managers need to be able to communicate in all directions including horizontally (with peers i.e. other similar grade managers), vertically (upwards to report to more senior managers, and downwards to instruct or brief subordinates) and diagonally (outside their reporting line e.g. to get help from other teams with innovation and problem solving).

Information gathering

Managers need information in order to perform their roles. Information arises from a number of sources including:

Listening – useful for:

- Gathering information

- Getting feedback

- Investigating issues or problems and to understand stakeholder interests

- Fostering positive working and stakeholder relationships



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Observation

- To understand processes, their interaction and effectiveness

- To identify benefits and disadvantages of processes

Interviews

- For example job candidates, staff, suppliers, customers

- The key steps of effective interviewing include:

Plan the agenda

Prepare and identify objectives

Open the interview - clarify objectives and form first impressions

Conduct the interview (involves listening as well as asking appropriate questions)

Close - summarize action points and next steps plus thank the candidate for their attendance

Questionnaires

- Examples include attitude surveys (good, average, bad etc.) and market research

- The advantages of questionnaires are that they are re-usable, can be written to avoid bias and provide statistical analysis

- Disadvantages can include low response rates and restricted responses (that don’t provide the information sought)

- Managers must avoid using leading questions, closed questions and must respect data protection laws

Negotiation

Negotiation is a skill that managers need to frequently adopt for example when agreeing prices with suppliers or gaining buy-in from subordinates to accept delegated work. Negotiation is addressed in a later chapter.

Coaching and mentoring

Human resource activities such as appraisals, feedback and training planning should be used to identify what needs to change. Coaching (short term) and mentoring (long term) are management skills that are then used to help implement those changes.

Coaching – short term practice aimed at improving a specific skill or knowledge. The process includes:

- Establish learning targets

- Plan and execute a systematic learning and development program involving self-study, formal training courses and on-the-job training

- Identify opportunities for broadening trainees’ knowledge and experience

- Account for trainees’ strengths and limitations

- Exchange feedback and identify areas for further development Mentoring

Mentoring involves establishing a long-term relationship with a ‘trusted advisor’ who is normally not part of someone’s reporting line.

This provides the mentee with a kind of career sponsorship, exposure to a network of contacts, direction and perhaps technical advice as well as a respected ‘listening post’.

The long-term objectives of mentoring include developing as a person, career planning and reaching one’s potential

A mentor is often described in many ways such as old wise man, teacher, counsellor, role model, supporter and encourager

Other psychosocial benefits to both parties include acceptance, belonging, friendship and the existence of a role model



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The techniques adopted by a manager in making the mentoring role effective include:

- actively managing the relationship e.g. making the occasional unsolicited call to the mentee

- encouraging and nurturing the mentee

- interacting with mutual respect

- responding to the mentee’s needs

Practice Question

Briefly discuss the concept of mentoring. A manager also plays the role of a mentor for his staff. Discuss what steps may be taken by a manager for effective mentoring of his staff.

Solution

Mentoring

Mentoring is a relationship between two people i.e. mentor and mentee with the objective of professional and personal development of the mentee.

The steps which may be taken by a manager for effective mentoring include:

i. Develop and manage the mentoring relationship e.g. ensuring occasional informal interaction with the mentee.

ii. Motivate and inspire – Urging the mentee to improve performance and pursue excellence.

iii. Interacting with mutual respect – Mentor is responsible for creating a successful relationship and needs to be flexible, honest, open and receptive to feedback.

iv. Responding to the mentee’s needs – Mentor has to play a broader role than that of a teacher which means not only imparting knowledge but also sharing own experiences and providing suitable personal advice/guidance/training.

1.4 Leadership

Leadership is termed as the process to influence the individuals to attain a common goal. Leadership is mainly concerned with how a leader is able to affect his followers. Without the element of influence leadership cannot exist because a leader is someone who can influence several people at the same time and enables people to work together towards a common purpose. Leadership as a process, is both similar as well as different from the concept of management in many ways. Though, the study of leadership can be traced to Aristotle, the concept of management emerged much later.

Leadership is considered as the exercise of power. W.C.H. Prentice, a distinguished professor in Psychology in his article Understanding Leadership published in Harvard Business Review (1961) has defined leadership as the accomplishment of goals as per the directions of the human assistants.

A successful leader is the one who is able to understand the needs and interests of a group of individuals or an organization to achieve a specific purpose. Leadership also has the additional capacity to provide different opportunities to the employees so they can learn and grow professionally.

If leadership is seen as the ability to influence, it is important for a leader to possess certain qualities, some of which are integrity, courage, attitude, initiative, energy, optimism, perseverance, balance, ability to handle stress, emotional intelligence, action.

Other important leadership qualities include setting specific goals, thinking critically, solving problems, respecting people, communicating skillfully, communicating a vision for the future, and developing oneself and others.

1.5 Differences between Management and Leadership

Leadership and management are related but they are not the same. Their relationship is obvious in their responsibility towards achieving set goals, and in having an excellent relationship.



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It is found that not all the individuals in positions of management authority are necessarily leaders and leadership responsibilities may not be expected to be a part of a position of authority. The concepts of leadership and management have been distinguished below:

a) The manager administers; the leader innovates.

b) The manager maintains; the leader develops.

c) The manager focuses on systems and structure; the leader focuses on people.

d) The manager relies on control; the leader inspires trust.

e) The manager has a short-range view; the leader has a long range perspective.

f) The manager asks how and when; the leader asks what and why.

g) The manager has his eye on the bottom line; the leader has his eye on the horizon.

h) The manager imitates; the leader originates.

i) The manager accepts the status quo; the leader challenges it.

j) The manager is the classic good soldier; the leader is his own person.

k) The manager does things right; the leader does the right thing.

Which category of people is more concerned with maintaining the status quo and taking few risks?

Managers often are more concerned with maintaining the status quo and taking few risks because they have short-term goals and have to deliver quick results.

Practice Question

Warren Bennis has made a distinction between managers and leaders by discussing various characteristics of each. Link each of the following characteristics to managers or leaders:

(i) focus on systems and structures (ii) short-range perspective

(iii) challenging the status quo (iv) reliance on control

(v) doing the right things (vi) inspire trust

(vii) transactional leadership (viii) Imitate

(ix) administer (x) Maintain

(xi) develop (xii) Visionary

Solution

Distinctive characteristics of managers and leaders

According to Warren Bennis, the distinctive characteristics of managers and leaders are as follows:

Managers Leaders

Transactional leadership Doing the right things

Administer Develop

Maintain Inspire trust

Focus on systems and structures Challenges the status quo

Short-range perspective Visionary

Imitate

Reliance on control



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2 THEORIES OF EARLY AND MODERN MANAGEMENT

2.1 Early Management Ideas

The practice of management has existed for centuries and examples can be traced back to ancient times, long before many of the modern studies and concepts of management were thought of. Human race has undertaken the tasks of organized endeavors directed by people involving planning, organizing, leading, and controlling activities that have existed for thousands of years.

The construction of great architectural monuments like the Egyptian pyramids, the Great Wall of China or the Taj Mahal are proofs that projects of tremendous scope, employing tens of thousands of people and decades were completed in ancient times. It was only possible because some people told each worker what to do, ensured that there would be enough material at the site to keep workers busy. These people were managers. Managers who were planning work to be done, organizing people and materials to do it, supervising those workers and imposing some controls to ensure that the plan was followed and were taking corrective action when there were shortages and delays.

Another example of early management can be found in the occurrence of wars. Ancient wars were fought at huge scales with armies of men and a tremendous number of weapons. The legendary victories wouldn’t have been possible if these resources were not organized and a sense of direction was not provided through management skills of the people in authority as well the ground forces at the time.

Early cities in both Europe and the Arab world have existed as centers of major economic and trade activities. They developed early forms of business enterprise and engaged in many activities common to today’s organizations. In addition, they used their own warehouse and inventory systems to keep track of materials, reward and control human resources and other management functions to manage the labor force and had accounting systems to keep track of revenues and costs.

Example: Early ideas about management strategy

Sun Tzu, a Chinese general, military strategist, writer, philosopher and the author of The Art of War. His book is an influential work of military strategy that has affected Western and East Asian philosophy and military thinking. The military strategies quoted in the book are still applied in the art of management.

Example: Early ideas about leadership

Niccolò Machiavelli was an Italian diplomat, politician, historian, writer and philosopher. He has often been called the father of modern political philosophy and political science. The sayings and insights in his highly acclaimed book “The Prince” are applicable to many of today’s managers and organizations as they were half a millennium ago.

2.2 Theories of Management

Evolution of management thought may be divided into four stages:


Classical Theory




- Rosemary Stewart



- George Elton Mayo



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2.3 Pre scientific Management (prior to1880)

This management period is mainly referred to as period I. Relationships during this period were based on the social caste and it was mainly dominated by the systems of autocracy, the feudal system and the management style of the ancient Egyptians.

During the pre-scientific era there were no particular principles in management which could guide the people. Moreover, the need to study or organize all the concepts of management was not given much consideration. People were content regarding their fate and were leading daily lives without much aspiration to do better or improve their standards of living. One development that may be traced back to the times was that the group of the craftsmen doing the same kind of work formed guilds which poses some similarity to the modern trade unions.

2.4 Classical and Scientific Theories of Management (1880-1930)

As discussed above, management has been present in the form of organized effort since a long time but the formal study of management actually began early in the twentieth century. The first studies of management, often called the classical approach, focused on rationality and improving the efficiency of organizations and people. They focused on the role of the manager and how managers can perform their roles in a better way. Two major theories that comprise the classical approach are:

Scientific management; and

General administrative theory.

The two most notable contributors to scientific management theory were Frederick W. Taylor and the husband-wife team of Frank and Lillian Gilbreth. The two most important contributors to general administrative theory were Henri Fayol and Max Weber.

2.4.1 Scientific Management

Background

The entire period is referred as period II and was dominated by the rise of the business enterprise and the revolution of industrialization. The Scientific Management theory is well known for its application of engineering science at operations level in the production oriented organizations.

The scientific management theory was focused on improving the efficiency of each individual in the organization. The major emphasis was on increasing the production numbers by using intensive technology, and the workers were just considered as a support to mechanical processes in operational performance of tasks.

The scientific management theory basically studies the tasks performed on the production floor as these tasks are different in nature than the tasks performed in other functional areas of an organization. These tasks are routine and repetitive in nature therefore the workers performing these tasks as their daily activities are divided into large number of groups based on cyclical repetition of similar or closely related activities. These activities do not require the worker to use complex-problem solving ability, the contribution of the worker is seen as mere support to the machines. Therefore, more attention is required on the standardization of working methods and improving efficiency of the activities and hence this was the focus of the scientific management theories.

The major contributor of this theory, as mentioned before is Fredrick Winslow Taylor, and that’s why the scientific management is also sometimes known as “Taylorism”. It can be said that Taylor recommended all the well-recognized and effectively defined principles that modern management sciences rest on today.



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Taylor’s Four Principles of Scientific Management

Taylor is considered to be the originator of ‘time and motion study’. He studied the relationship between people and the tasks that they perform. His approach was to analyze the tasks that individuals perform at work, and break them down into smaller units of work. Each small unit of work was then analyzed to find ways in which they could be performed with the greatest efficiency (in the shortest time). Experimentation was used to find out ways of improving efficiency for each small unit of work, and Taylor measured the time that it took to carry out each small task.

Taylor suggested that there should be four underlying principles in scientific management:

i. There should be a science of work, based on the analysis of work methods and work times, with a view to finding the most efficient way of carrying out tasks. A fair level of performance or efficiency can be identified. Workers should be rewarded through higher pay if they succeed in performing more efficiently than the expected or standard level.

ii. Workers should be selected carefully. They should have the skills and abilities that are well-suited to the work. They should also be trained in how to do the work efficiently.

iii. The scientifically-selected and trained workers and the science of work should be brought together for the best results and greatest efficiency.

iv. There should be an equal division of work between the workers and management, and workers and managers should operate closely together.

Taylor`s Scientific Management

Criticisms of scientific management

Scientific management is still associated with work study and time and motion study. It has been strongly criticized because it results in dull, repetitive and monotonous work. Tasks are reduced to such small units, such as tasks on a large production line in a factory, that they demoralize the workers who do the jobs. There is a risk that when employees are doing dull, repetitive work, their efficiency will be low because they are not at all interested in what they are doing. However, some of the principles of scientific management are valid, and continue to be applied. In particular, the scientific study of work can help to improve the organization of work procedures and methods.

2.4.2 Administrative Period of Management

The entire management theory and the administrative period of management relies on the methods of production and this era mainly emphasized on application of the empirical studies to determine faster and effective methods of production.

Fayol’s 14 Principles of Administrative Management

The ideas of Henri Fayol are probably close to the ideas that many individuals hold about management and the functions of management. Fayol argued that managers are given formal authority within an organization structure and they are responsible (to their superiors) for the effective use of their authority.

Science,

not rules

of thumb.

Scientifically

train

employees

Ensure most

efficient ways

of working are

used

Divide work

between

managers

and workers

Pay based

on results.



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Henri Fayol identified five functions of management called; planning, organization, commanding, coordinating and controlling.

He believed that there are principles of good management that apply to all types of organization, and that these principles should therefore be applied consistently. The principles are:

i. Division of Work. Specialization increases output by making employees more efficient.

ii. Authority. Managers must be able to give orders, and authority gives them this right.

iii. Discipline. Employees must obey and respect the rules that govern the organization.

iv. Unity of command. Every employee should receive orders from only one superior.

v. Unity of direction. The organization should have a single plan of action to guide managers and workers.

vi. Subordination of individual interests to the general interest. The interests of any one employee or group of employees should not take precedence over the interests of the organization as a whole.

vii. Remuneration. Workers must be paid a fair wage for their services.

viii. Centralization. This term refers to the degree to which subordinates are involved in decision making.

ix. Scalar chain. The line of authority from top management to the lowest ranks is the scalar chain.

x. Order. People and materials should be in the right place at the right time.

xi. Equity. Managers should be kind and fair to their subordinates.

xii. Stability of tenure of personnel. Management should provide orderly personnel planning and ensure that replacements are available to fill vacancies.

xiii. Initiative. Employees who are allowed to originate and carry out plans will exert high levels of effort.

xiv. Esprit de corps. Promoting team spirit will build harmony and unity within the organization

Practice Question

According to Henri Fayol managers are delegated formal authorities within the organizational framework to enable them to perform the main functions/tasks of management. Discuss the management functions in a typical business organization as enunciated by Fayol.

Solution

Management functions in a typical business organization

According to Fayol the management functions in a typical business organization are as follows:

i. Planning

The planning function involves determining the medium and long-term objectives/goals of the organization and formulating strategies for their achievement. This function entails arranging resources required for achieving the objectives and allocating them in the organization

ii. Organizing

The organizing function involves defining lines of authorities and responsibilities in the organization and managing flow of communication for optimal utilization of human and other resources.

iii. Coordinating

Coordinating function involves determining the timing and sequencing of activities so

that the functions are carried out in proper order to achieve the objectives.

iv. Commanding

Commanding function aims to ensure unity of directions. It involves obtaining insight in

the human resources and assigning work to employees according to their skills.



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v. Controlling

Controlling function entails confirming that all activities in the organization are

proceeding according to the plan in accordance with the established principles and the

issued instructions. This function involves taking timely corrective steps to remove or

rectify weaknesses.

Principles of organizations – Lyndall Urwick

Lyndall Urwick was a British management consultant and business thinker. He is recognized for integrating the ideas of earlier theorists like Henri Fayol into a comprehensive theory of management administration.

According to Urwick an organization is built on ten principles:

i. Objective - Every organization and every part of the organization must be an expression of the purpose of the undertaking concerned, otherwise it is meaningless and therefore redundant.

ii. Specialization - The activities of every member of any organized group should be confined, as far as possible, to the performance of a single function.

iii. Co-ordination - The purpose of organizing per se, as distinguished from the purpose of the undertaking, is to facilitate co-ordination and thus unity of effort.

iv. Authority - In every organized group the supreme authority must rest somewhere. There should be a clear line of authority to every individual in the group

v. Responsibility - The responsibility of the superior for the acts of the subordinate is absolute.

vi. Definition - The content of each position, both the duties involved, the authority and responsibility contemplated and the relationships with other positions should be clearly defined in writing and published to all concerned.

vii. Correspondence - In every position, the responsibility and the authority should correspond.

viii. Span of control - No person should supervise more than five, or at most, six direct subordinates whose work interlocks.

ix. Balance - It is essential that the various units of an organization should be kept in balance.

x. Continuity - Re-organization is a continuous process: in every undertaking specific provision should be made for it

Weber’s Ideal Bureaucracy

Max Weber was a German sociologist, who studied the growth in the number, size and power of large bureaucratic organizations. He suggested that bureaucracy provides an organization structure in which human activity is ‘rationalized’ and co-ordinated.

As per this theory the system is mainly characterized with the division of labor and by the clear identification of hierarchy with all the detailed rules and regulations along the interpersonal relationship to make the bureaucracy more ideal. However, the ideal bureaucracy did not exist before in reality.

According to Weber an ‘ideal’ bureaucracy has the following characteristics:

There should be a hierarchy of authority, from top management down to workers at the bottom. Offices (management positions) should be ranked in hierarchical order, with information flowing up the chain of command and instructions and directions passing down the chain.

An ideal bureaucracy should operate in an impersonal and impartial way. There should be a clear statement of duties, responsibilities, standardized procedures and expected behavior.

There should be written rules of conduct.

There should be promotion of individuals within the organization, based on their achievement.

There should be division of labor and specialization of work.

The ideal bureaucracy will achieve efficiency in operations.



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Application in the Modern Workplace

Weber believed that bureaucracies would continue to grow in number and size, because they provide a rational organization for co-ordinating human activities, based on a hierarchy of authority. He recognized, however, that large bureaucracies lead to the ‘depersonalization’ of work.

Bureaucracy is often condemned because of ‘red tape’, ‘pen-pushing’ and ‘soul-destroying work’. However, in spite of the criticisms, many large organizations today are bureaucracies. Government organizations in particular are usually bureaucratic, because bureaucracy operates with clear and impartial rules and procedures. Weber’s comments on the ‘ideal’ bureaucracy may therefore remain valid, even today.

Weber’s Ideal Bureaucracy

Rosemary Stewart on bureaucracy

Rosemary Stewart is a modern (UK) writer on management theory. She has summarized the four main features of bureaucracy as follows:

i. Specialization. There is specialization of work, but this applies to the job, not the individual who does the job. This means that there is continuity. When one person leaves the job, the job continues, and another person fills the same position.

ii. Hierarchy of authority. There is a distinction between ‘management’ and ‘workers’. Within management, there is a hierarchy with clearly-defined levels of authority and ‘ranks’ of managers.

iii. A system of rules. The rules of a bureaucracy provide impersonal and efficient rules and procedures. Individuals within a bureaucracy must know what the rules are to do their job successfully.

iv. Impersonal. In a bureaucracy, the exercise of authority and the system of privileges and rewards are based on a clear set of rules. Stewart also suggested reasons for the growth of bureaucracy.

Jobs broken down into

simple, routine, and

well-defined tasks

Managers are career

professionals, not

owners of units they

manage

Career Orientation

Division of Labor

A bureaucracy

should have

Authority Hierarchy

Positions organized in a

hierarchy with a clear

chain of command

Impersonality

Uniform application of

rules and controls, not

according to personalities

Formal Rules and Regulations

System of written rules

and standard operating

procedures

Formal Selection

People selected of jobs

based on technical

qualifications



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2.5 Neo-Human Relations Theory or Behavioral Approach (1930-1950)

Background

The classical theories of management did not give much importance to the human aspects of working in organizations. Therefore, the success they achieved was limited to the level of production that experienced a plateau after some time due to lack of efficiency and co-operation between the management and workers. The limitations of the classical approach led to the human relations movement. The Human Relations period was entirely focused on the all the human relationships in organizations.

The human relations thinkers tried to incorporate concepts of Psychology and Sociology with Management. Based on their research, they believed that an organization is a social system of interpersonal relationships between different people and groups of people. They gave importance to the management of people and their needs. They tried to prove that that supervisors and leaders can get more work done from workers by satisfying their social and psychological needs.

Management theory

Some of the most important contributions made in management theory were discovered during this period and came from the different experiments at the Hawthorne plant at the West Electric Company which is widely referred as the Hawthorne experiments (discussed later in detail). These experiments were conducted with the help of Elton Mayo who was a professor at the Harvard University and was interested in studying the behavior of workers at organizations.

The work of Elton Mayo together with Fritz J. Roethlisberger's is known as the Hawthorne studies, which were designed to discover ways to improve worker productivity at Western Electric's Hawthorne Works factory by carrying out an assessment related to working conditions such as lighting levels, rest periods, and the length of working hours. Those participating in the experiments were watched closely by the researchers. During the experiment, productivity levels of those participating in the experiment increased which were eventually linked to a higher level or morale that resulted due to the changes made in working conditions. This is discussed later in the chapter as well.

As a result of Mayo’s work at West Electric, people started paying more attention to the human factor in management of organizations. Therefore, many other social psychologists presented their research and theories that have developed into useful management concepts used to improve the organizational performance.

Emphasis, in this era, was shifted from production, structures, and technology to a focus on social interaction. Neo-human relations theorists concentrated on answering questions related to the best way to motivate, structure, and support employees within the organization.

Some of the most notable theorists of this era are Abraham Maslow, Douglas McGregor, Frederick Herzberg, and David McClelland, all of whom searched for ways to help motivate employees based on their personal needs.

Hawthorne Studies

The most important contribution to the organizational behavior field came out of the Hawthorne Studies, a series of studies conducted at the Western Electric Company Works in Cicero, Illinois. These studies, which started in 1924, were initially designed by Western Electric industrial engineers as a scientific management experiment. They wanted to examine the effect of various lighting levels on worker productivity.

Like any good scientific experiment, control and experimental groups were set up with the experimental group being exposed to various lighting intensities, and the control group working under a constant intensity. If you were the industrial engineers in charge of this experiment, what would you have expected to happen?

It’s logical to think that individual output in the experimental group would be directly related to the intensity of the light. However, they found that as the level of light was increased in the experimental group, output for both groups increased. Then, much to the surprise of the engineers, as the light level was decreased in the experimental group, productivity continued to increase in both groups.

http://kalyan-city.blogspot.com/2011/04/what-is-management-definitions-meaning.html

http://kalyan-city.blogspot.com/2015/01/what-is-human-relations-meaning-and.html



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In fact, a productivity decrease was observed in the experimental group only when the level of light was reduced to that of a moonlit night. What would explain these unexpected results? The engineers weren’t sure, but concluded that lighting intensity was not directly related to group productivity, and that something else must have contributed to the results. They weren’t able to pinpoint what that “something else” was, though.

Elton Mayo, Western Electric engineers:

In 1927, the Western Electric engineers asked Harvard professor Elton Mayo and his associates to join the study as consultants. Thus began a relationship that would last through 1932 and encompass numerous experiments in the redesign of jobs, changes in workday and workweek length, introduction of rest periods, and individual versus group wage plans. For example, one experiment was designed to evaluate the effect of a group piecework incentive pay system on group productivity. The results indicated that the incentive plan had less effect on a worker’s output than did group pressure, acceptance, and security.

The researchers concluded that social norms or group standards were the key determinants of individual work behavior. Scholars generally agree that the Hawthorne Studies had a game-changing impact on management beliefs about the role of people in organizations. Mayo concluded that people’s behavior and attitudes are closely related, that group factors significantly affect individual behavior, that group standards establish individual worker output, and that money is less a factor in determining output than are group standards, group attitudes, and security. These conclusions led to a new emphasis on the human behavior factor in the management of organizations.

Although critics attacked the research procedures, analyses of findings, and conclusions, it’s of little importance from a historical perspective whether the Hawthorne Studies were academically sound or their conclusions justified. What is important is that they stimulated an interest in human behavior in organizations.

McGregor’s Theory X and Theory Y

Douglas McGregor (in The Human Side of Enterprise, 1960) suggested that there are two different approaches to managing people. Each approach is based on a different view of how individuals can be motivated at work. McGregor called the two management approaches Theory X and Theory Y.

This management theory stipulates that the manager’s perception of an individual needs to be understood in order to utilize the strong influence of beliefs about the working attitudes. This would in turn decide the leadership style in order to get the work done.

According to McGregor a manager would perceive the working attitudes of its employees based on certain assumptions. These assumptions would define a worker as belonging to either category X or category Y.

As a manager, if you believe that your team members dislike their work and have little motivation, then, according to McGregor, it is most likely that you will use an authoritarian style of management. This approach is very strict and usually involves micromanaging workers’ tasks to ensure that it gets done properly. McGregor called this Theory X. Alternatively, if you believe that your team members are interested in their work and would be happy to accept challenges you would be a more participative manager and reward your team members well. This is called Theory Y.

Theory X style of management assumes that:

The average person dislikes work and will avoid having to do any if at all possible.

Individuals must therefore be forced to work towards the organization’s objectives, with the threat of punishment for not working properly.

The average person prefers to be directed, wants to avoid responsibility, has no ambition and wants security more than anything else.

Theory Y organizations give employees frequent opportunities for promotion and personal growth. This style of management assumes that:

Putting effort into work is as natural as play.

Individuals will apply self-direction and self-control to work towards the objectives of the organization, without the need for constant supervision or the threat of punishments.



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The strength of an individual’s commitment to the organization’s objectives is related to the rewards associated with achieving those objectives.

Individuals usually accept and then seek responsibility.

At work, the intellectual potential of the average person is only partly utilized. Individuals have much more potential that could be utilized.

Theory Y has become more popular among organizations. This reflects workers' increasing desire for more meaningful careers that provide them with more than just money.

The advantage of McGregor’s theory is that it identifies two main types of individual for managers to consider and can help in thinking of ways of motivating them.

The disadvantage of McGregor’s theory is that it only presents two extremes of managerial behavior.

The implications of McGregor’s theory

According to McGregor, organizations with a Theory X approach tend to have a tall hierarchy of managers and supervisors to monitor and direct workers. Authority is infrequently delegated and control remains firmly centralized in such organizations due to lack of trust on the abilities of the workers. Managers are more dictatorial and actively interfere in routine tasks to get things done. Although Theory X management has a negative view, large and manufacturing based organizations may find that using this theory is inevitable due to the sheer number of people that they employ and the rather inflexible structure of their processes.

The Theory Y approach to management is consistent with a participative approach to decision-making, where the manager gives all the relevant information to his employees and encourages them to contribute to solving problems and deciding what should be done.

McGregor suggested that a Theory Y approach is not always possible, or advisable:

Theory Y is difficult to put into practice in a factory environment.

There will be some situations when the manager must exercise his authority, because this is the only way of getting results. (For example, a manager must decide what to do when his subordinates cannot agree and are arguing amongst themselves.)

However, McGregor argued that Theory Y can often be used to manage managers and professionals. When it is possible to get the commitment of employees to the objectives of the organization, it is better to explain problems fully to them. The employees will exert self-direction and self-control to do better work and achieve better results than if they are told what to do by an authoritarian manager.

For a Theory Y approach to management to work, employees must be positively motivated to work and emotionally mature, and the work must be sufficiently responsible to allow them some flexibility (some choice in how they set about the work). In these circumstances, a Theory Y approach will lead to much better results for the organization than a Theory X management style.

Management Theory of William Ouchi (Theory Z).

The management theory of William Ouchi, often called the Japanese method of management, adds an extra component to the X and Y Theories of Douglas McGregor. Dubbed "Theory Z" because of this relationship, Ouchi's management model goes farther than McGregor's Y Theory. Theory X mainly refers to the old fashioned and the autocratic approach for management which is mainly referred to the hard management and is found to be more enlightened. On the other side, theory Z include all the element which can make it more participative than theory Y.

William Ouchi made a study of Japanese companies and compared them with companies in the US. His aim was to identify the reasons why Japanese companies performed better than US companies, and in particular why Japanese companies produced better quality products than their US competitors and achieved much better productivity.

His study of Japanese companies found that in Japan, managers have a high level of trust in their workers, and assume that workers have a strong loyalty towards their company and are interested in team working.

https://www.mindtools.com/pages/article/newCDV_69.htm



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Companies in turn show loyalty to their employees, who have employment for life; however, promotion and career progression is slow. Decision-making in Japanese companies is also ‘collective’, with workers participating in decision-making and management trying to achieve universal agreement and acceptance before decisions are taken.

Ouchi was not the first management theorist to suggest that companies in other countries could learn from the success of Japanese companies. However, his work is notable because he suggested that the most efficient type of organization for the US might be one that combined features of ‘typical’ US and Japanese companies.

He called his recommended approach to management ‘Theory Z’, and he put forward his ideas in a book Theory Z: How American management can meet the Japanese challenge (1981).

Some of the main features of Theory Z are set out below:

i. Collective decision-making.

ii. Long-term employment and job security.

iii. Job rotation, generalization and overall understanding of company operations, replace job specialization as a key component of the model.

iv. Slow advancement/promotion.

v. Emphasis on training and continual improvement of product and performance.

vi. Holistic concern for the worker and his or her family further personalize management.

vii. Explicit, formalized measures, despite implicit, informal control, ensure efficiency of operations.

viii. Individual responsibility for shared accomplishments.

Practice Question

State the important characteristics of Japanese companies as illustrated by William Ouchi in Theory Z.

Solution

Characteristics of Japanese companies

The important characteristics of Japanese companies as illustrated by William Ouchi in Theory Z are as follows:

i. The managers have high degree of trust in their workers who in turn show strong loyalty towards the company.

ii. The employees are interested in working in a cohesive team environment.

iii. The employees look forward to long-term employment relations with the company.

iv. Decisions are made by consensus with workers participating in the decision making process.

v. Responsibilities for the outcomes of the decisions are shared collectively rather than individually.

vi. Promotions and prospects of career progress are rather slow.

vii. Scope for pursuing highly specialized career paths is moderate.

viii. Management shows concern for the employees as well as their families.

2.6 Contemporary Management (1950-present)

Most of the earlier approaches to management theory continue to target the factors that would influence how managers should manage organizations. The focus remained mainly on the managers’ concerns internal to the organization. During the 1960s, management researchers began to view what was happening in the external environment, outside the boundaries of the organization, as an influence on the approach to management. Two contemporary management perspectives, systems and contingency, came out as a result.



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This period is mainly referred as the period which began in 1950 and it eventually extends to the present time. However, it is often characterized with the processes of refinement, synthesis and extension within management.

2.6.1 Modern management or the Systems Approach

Systems theory, although present earlier, was viewed in relation to management in the early 1960s. Researchers viewed an organization as being made up of different parts that were dependent on each other. As a result, when managers coordinate work activities in the various parts of the organization, they ensure that all these parts are working together so the organization’s goals can be achieved. As an example, the systems approach recognizes that, efficiency of the production department is dependent on how well the marketing department anticipates the changes in customer tastes and works with the product development department in creating products customers want, otherwise the organization’s overall performance will suffer.

Another important aspect the systems approach recognizes is that organizations are equally dependent on their external environment. They rely on their environment for necessary inputs as well as markets to absorb their outputs. Any organization cannot ignore government regulations, supplier relations, or the varied external constituencies that are a part of its system.

During the beginning of the era, attention was brought to focus on the organization and its systems including the number of the inter-related systems within organizations. This approach is synthesized with the classical approach along with the human relations movement which keeps in mind the psychological and social aspects as well.

There are many writers on management theory, and there is no single ‘modern theory’ of management. The ideas of some well-known writers are described here.

Peter Drucker

Peter Drucker was a leading writer on management theory and he wrote on a wide range of subjects. He suggested that there are five areas or categories of management responsibility:

Setting objectives. Managers set objectives for the organization, and decide on targets for the achievement of those objectives, which they then communicate to other people in the organization.

Organizing work. Managers organize the work that is done, by dividing it into activities and jobs. They integrate the jobs into a formal organization structure and select and appoint people to do the jobs.

Motivating and communicating. Managers need to motivate their employees. They must also communicate with their employees so that they can do their work.

Measuring. Managers measure performance, perhaps by comparing it against a target or yardstick (benchmark). They analyze and assess performance, and communicate their findings, both to their superiors and their subordinates.

Developing people. Managers need to develop their employees and also themselves. Drucker wrote that the manager ‘brings out what is in their employees or stifles them. He strengthens their integrity or corrupts them.’

Drucker disagreed with the views of Fayol that general principles of management apply to managers in all types of organization. He argued that managing a commercial business is different from managing other types of organization, because the business manager has a key responsibility for the economic performance of the business. Managers perform well and justify their existence and their authority only if they produce the economic results (for example, profits) that are expected. Drucker therefore suggested that there are three aspects to the responsibilities of managers in business:

Managing the business. Business managers are responsible for matters such as innovation and marketing. Drucker was one of the first management theorists to argue for ‘putting the customer first’ – a basic concept on which modern ideas of marketing are based.

Managing managers. Managers need to be managed. One way of doing this is to give them targets for achievement and monitoring their performance. Drucker was the first theorist to use the term ‘management by objectives’.



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Managing workers and their work. Managers need to set objectives for their team and divide their work into manageable activities. Managers also need to motivate staff and communicate with their team as well as measure and review their performance. Managers are also responsible for developing their people.

Rosabeth Moss Kanter

Kanter has written widely on management topics, but is probably best known for her work on the inefficiencies of modern bureaucracy, and what organizations need to do to succeed in the modern business environment.

She argued that over time, traditional bureaucratic organizations had become unacceptably slow. A long hierarchical chain of command meant that information passed slowly through the organization, and decisions took a long time to make.

The world of business had changed, economic circumstances were different, competition had increased, the pace of change was much faster and new technology (particularly developments in computerization and communications technology) had made the ‘old ways of doing things’ within a bureaucratic organization very inefficient.

In her book Teaching Elephants to Dance (1989) she argued that today’s ‘corporate elephants’ need to learn to dance as nimbly and speedily as mice if they are to survive in an increasingly competitive and rapidly changing world:

‘If the main game of business is indeed like Alice in Wonderland croquet, then running it requires faster action, more creative maneuvering, more flexibility and closer partnerships with employees and customers than was typical in the corporate bureaucracy. It requires more agile, livelier management that pursues opportunity without being bogged down by cumbersome structures or weighty procedures that impede action. Corporate giants, in short, must learn to dance.’

Kanter argued that the re-birth and success of business organizations will depend on:

innovation (developing new products, services and operating methods)

entrepreneurship (taking business risks)

participative management (encouraging all employees to participate in making decisions about work).

Kanter has argued in favor of ‘empowerment’, which means giving more authority and power to the individual worker, instead of relying on managers to tell their workers what to do. Empowerment is needed to get the best out of individuals at work. She has also argued in favor of ‘flatter’ organization structures, and getting rid of the hierarchies of management and long chains of command that characterize large bureaucracies. (When workers are empowered and given more authority to make decisions for themselves, the need for supervision by management is reduced. Empowerment and flatter organization structures are therefore consistent with each other.)

Mintzberg Model: 10 Different Roles of a Successful Manager

Henry Mintzberg is another modern management theorist who has written on a wide range of topics. He is particularly well-known for research that he carried out into what managers actually do. According to classical theorists such as Fayol, the role of managers is to plan, organize, command, co-ordinate and control. Mintzberg suggested that reality is different. His research into the activities of managers made the following discoveries:

A lot of management work is disjointed. Planning, for example, is done on a day-to-day basis, when time permits between more urgent or immediate tasks.

Managers spend some of their time on routine duties of a ceremonial nature, such as meeting with important visitors.

Managers prefer informal verbal communication to formal written communications, such as reports and briefing notes. Communicating informally by word of mouth is much faster and more effective than communication through the formal information system.



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Management activities and decisions are based largely on judgement and intuition. General principles of management are not relevant to management practice. In practice, managers do many of their tasks quickly and superficially.

Mintzberg suggested that managers perform three main roles, which can be further analyzed into 10 different functions. Together, these ten roles provide an integrated picture of what managers do.

Interpersonal Roles

1 The Figurehead: performs ceremonial duties. Examples: greeting visiting dignitaries, attending an employee’s wedding, taking an important customer to lunch.

2 The Leader: responsibility for the work of subordinates, motivating and encouraging employees, exercising formal authority.

3 The Liaison: making contacts outside the vertical chain of command including peers in other companies or departments, and government and trade organization representatives.

Informational Roles

4 The Monitor: scans the environment for new information to collect.

5 The Disseminator: Passing on privileged information directly to subordinates.

6 The Spokesperson: Sharing information with people outside their organization. Examples: a speech to a lobby or suggesting product modifications to suppliers.

Manager`s Job

Interpersonal Roles

Figurehead

Leader

Liaison

Informational Roles

Informational

Roles

Monitor

Disseminator

Spokesperson

Decisional Roles

Entrepreneur

Disturbance

Handler

Resource

Allocator

Negotiator



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Decisional Roles

7 The Entrepreneur: Seeks to improve the unit by initiating projects.

8 The Disturbance Handler: Responds involuntarily to pressures too severe to be ignored. Examples: a looming strike, a major customer gone bankrupt, or a supplier reneging on a contract.

9 The Resource Allocator: Decides who gets what.

10 The Negotiator: Committing organizational resources in “real-time” with the broad information available from their informational roles.

Six Work-Related Characteristics

In 1973 Henry Mintzberg carried out empirical studies into the managerial behavior of CEOs in five private and semi-public organizations. From those first studies he was able to identify six characteristics that define the work life of managers. Later there had been criticism of these studies, because Henry Mintzberg had limited himself to five organizations only. It would only involve a small sample size as a result of which the results could not be representative for organizations in other industries or hierarchical management positions.

The six characteristics are described below:

1. Managers process open-ended workloads; they are capable of doing a lot of work under demanding time constraints.

2. Managers start up their own activities and subsequent actions. These activities are varied and fragmented and they are relatively short in duration.

3. Managers prefer to avoid information from reference materials such as notes and documents.

4. Managers prefer verbal communication, such as one-on-one talks, telephone conversations and meetings.

5. Managers maintain relationships primarily with subordinates and external parties and secondary with their superiors.

6. Managers like being involved in preparatory decisions.

Practice Question

In each of the following situations, identify and briefly explain the managerial role (at function level) as suggested by Henry Mintzberg:

i. Jamal Noor, finance manager, has been assigned the task of understanding and discussing the prospective quarterly budgets of various departments.

ii. The board of directors has approved the revised whistle blowing policy and has asked Hina Khan, HR manager, to communicate the revised policy to all employees of the company.

iii. A project has been suspended due to disagreements among project team members. Wasif Niaz, administration manager, has been assigned the task to resolve the disagreements and get the project back on track.

iv. To achieve higher profitability, Sanya Shah has been guiding the department heads, how to improve the productivity of their subordinates.

Solution

i. The managerial role of Jamal Noor is that of liaison. Under this role, manager acts as a link or bridge with managers of other groups for the purpose of gathering information.

ii. The managerial role of Hina Khan is that of disseminator. Under this role, manager acts as a channel of information within the group and / or with others.



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iii. The managerial role of Wasif Niaz is that of negotiator. Under this role, manager resolves the conflicts and disputes, and deals with other similar unexpected problems.

iv. The managerial role of Sanya Butt is that of leader. Under this role, manager provides leadership to individuals within an organization by means of guiding, training, motivating, etc.

Practice Question

Mintzberg argues that an organization structure is supposed to coordinate the activities of different individuals and work processes to implement plans into action. He suggests that there are five elements or building blocks in an organization and the way in which an entity is organized largely depends on which of these elements is dominant.

Identify and briefly discuss Mintzberg’s five building blocks/elements. Discuss the type of organization in which each of these elements is expected to play a dominant role. Give one example under each of the building blocks with regard to a university offering post graduate programs.

Solution

Mintzberg’s five building blocks

Mintzberg’s five building blocks / elements are identified and discussed as under:

i. Strategic apex

This is the top management in the organization. It is likely to be dominant in an entrepreneurial organization or simple structure where leader gives the overall direction and makes most of the decisions.

Example: Administrative cabinet

ii. Operating core

This comprises of individuals carrying out the basic work of the organization. It is likely to be dominant in a professional bureaucracy where operating core comprises of highly skilled professional individuals.

Example: Operating core – Professors

iii. Middle line

This comprises of managers who exist between strategic apex and operating core. It is likely to be dominant in a divisionalized form where each division is led by a divisional manager.

Example: Dean

iv. Support staff

This comprises of people who provide support to other building blocks such as secretarial staff, cleaning staff, IT staff, etc. It is likely to be dominant in adhocracy where there is an extensive use of team and project-based work.

Example: Cleaning and maintenance

v. Technostructure

This comprises of staff who seeks to standardize the way organization works without having direct line management responsibilities. It is likely to be dominant in machine bureaucracy where the entity is controlled through regulations.

Example: Education regulatory



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Practice Question:

Henry Mintzberg carried out research into the activities of managers and suggested that in reality, role of managers in organizations is different than that of planning, organizing, commanding, coordinating and controlling as suggested by the classical theorists.

Describe the interpersonal and informational roles which managers perform in accordance with Henry Mintzberg.

Solution:

Interpersonal role:

Managers spend much of their time performing interpersonal roles as follows:

i. They perform a vital role as figurehead of organization while dealing with external stakeholders of the organization. They often play ceremonial role by representing organization at events as a ‘public face’.

ii. They perform as leaders while dealing with internal stakeholders of the organization. They perform activities such as hiring, training, motivating, etc.

iii. Managers of groups with an organization act as a link or bridge with other groups/liaison. They often fulfill the role of communicating with other groups within an organization.

Informational role:

Managers perform following informational role:

i. They develop an extensive knowledge of the organization by monitoring the information they receive/monitor from formal and informal sources.

ii. They disseminate information by acting as a channel of information within the group and with others.

iii. They act as a spokesperson for the group in a ‘public relations’ capacity.

2.6.2 The Contingency Theory

This theory particularly recognizes that each organization operates in a unique environment. Contingency theory says that all organizations are different, they face different situations (contingencies), and hence they require different treatments of managing their respective tasks. This is a ‘One size doesn’t fit all’ approach. Basically the contingency theory states that effective management varies with the organization based on its surroundings and even within its smaller units. Some of the factors such a theorist may consider in choosing a management approach are:

Size of the organization

People and workforce

The relevant technological issues

The operating environment and industry

Practice Question

Explain briefly the salient features of the classical theories of management and the present-day behavioral studies of management.

Classical theories of management placed emphasis on:

i. applying scientific techniques of work analysis to improve work efficiency

ii. conducting experiments to analyze and measure movements of workers in the performance of their tasks through time and motion studies

iii. providing training to scientifically-selected workers to achieve high levels of efficiencies



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iv. division of work activities in small units to achieve advantages of specialization and higher efficiencies

v. offering rewards to workers on the basis of their individual efficiencies and achievement of the standard work levels.

Solution

Present-day behavioral studies of management:

i. stress the need to create efficient organizational structures to rationalize and coordinate human efforts to achieve pre-determined objectives

ii. organize the work activities by creating hierarchies of authorities and responsibilities and systems of rules

iii. conduct appraisal of performance of employees and offer incentives to achieve high levels of motivation and commitment to achieve organizational goals

iv. develop and enhance leadership qualities in the top tiers of management and skills in employees through appropriate training programs

v. place considerable reliance on studies of social sciences to motivate and improve performances.



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STICKY NOTES

Management is the process of dealing with or controlling resources and people to achieve a specific purpose.

Management is a five-step process and comprises of planning, organizing, directing, coordinating, and controlling the work of a group of employees.

There are three levels of managers: top, middle and first line.

Management skills include: leadership, time and stress management, innovation and creativity, communication, information gathering,

negotiation, coaching and gathering.

Leadership is one of the traits of managers but all managers may not be leaders. It is important to differentiate between characteristics of leaders

and managers.

The evolution of management thought may be divided into four stages:


Classical Theory




- Rosemary Stewart



- George Elton Mayo






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References:

Armstrong, M. (2008). Management a leadership. Grada Publishing as.

Fayol, H. (1916). Principles of management. URL: http://www. grandars. ru/college/ekonomika-firmy/anri-fayol. html (accessed: October 20, 2015).


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CHAPTER 2

THE BUSINESS ENVIRONMENT

_

AT A GLANCE

Business Environment encompasses the ‘climate’ or set of conditions, economic, social, political or institutional in which business operations are conducted.

Environmental factors can be grouped into four categories:

P – Political and legal factors

E – Economic factors

S – Social, cultural and demographic influences

T – Technological factors.

In modern analysis it is more common to use PESTEL analysis, in which E is for Environmental/Ecological factors and L is for Legal factors.

Environmental Scan means considering all the environmental influences on the organization, recognizing which are the most significant, and deciding how the organization should respond to these changes or developments. It consists of four sequential steps: Scanning, monitoring, forecasting and assessment.

Environmental threats and opportunities recognized in an environmental scan, and internal strengths and weaknesses recognized in a position analysis (or resource analysis) are brought together to carry out a strategic analysis of strengths, weaknesses, opportunities and threats, which is called SWOT analysis.

Michael Porter has identified five factors (‘five forces’) that determine competitiveness, as follows:

threats from potential entrants

threats from substitute products or services

the bargaining power of suppliers

the bargaining power of customers

competitive rivalry within the industry or market.

IN THIS CHAPTER

AT A GLANCE

SPOTLIGHT

1. Business Enviroment Influences

2. Political and Legal Factors

3. Economic Factors

4. Social, Cultural and

Demographic Factors

5. Technological Factors

6. Ecological Factors

7. Competitive Factors

STICKY NOTES

References

CHAPTER 2: THE BUSINESS ENVIRONMENT CAF 4: BMBS


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1. THE BUSINESS ENVIRONMENT INFLUENCES

1.1 The environment of an organization

Environment of an organization is a term that describes anything outside an organization that affects what the organization does or how it acts. There are many influences on an organization that come from pressures and changes in its environment. These environmental influences differ according to the circumstances of the organization.

“Business Environment encompasses the ‘climate’ or set of conditions, economic, social, political or institutional in which business operations are conducted” (Arthur, 1996).

“Environment contains the external factors that create opportunities and threats to the business. This includes socio-economic conditions, technology and political conditions” (Jauch, Osborn, & Glueck, 1980).

To provide a logical structure for analyzing environmental influences and their effect on an organization, it is often helpful to categorize these factors into different types.

One method of analyzing environmental factors is to group them into four categories:





Commonly known as PEST analysis.

Concerns have grown over the last 20 years over the impact of industry on the physical environment, for example in terms of carbon footprint and use of resources. Therefore, in modern analysis it is more common to use PESTEL analysis, grouped as follows:

P – Political factors




E – Environmental/Ecological factors

L – Legal factors

A second method of analyzing the environment within which a firm operates is Michael Porter’s 5 forces model. This model identifies a firm’s industry as being a key aspect of its environment and attempts to take into account factors that influence attractiveness of different industries. The 5 forces model is a well-known business model for understanding the nature and strength of competition in an industry, and was first introduced by Porter in

ANALYSIS

POLITICAL

FACTORS

ECONOMIC

FACTORS

SOCIAL

FACTORS

TECHNOLOGICAL

FACTORS

P E S T

CAF 4: BMBS CHAPTER 2: THE BUSINESS ENVIRONMENT


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The Competitive Environment. This model identified five factors (‘five forces’) that determine competitiveness and is covered later in this chapter.

1.2 The consequences of environmental change: threats and opportunities

Environmental factors can have a significant effect on a business organization, and can affect its activities and profitability. Changes in the environment might affect the planning and other decision-making of a business organization.

Management should monitor developments in the business environment, and should consider how the organization should respond to changes and developments.

Environmental scan

PEST analysis involves considering all the environmental influences on the organization, recognizing which are the most significant, and deciding how the organization should respond to these changes or developments. These influences can change over time. Understanding the environment should be an on-going activity.

This type of analysis is sometimes called an environmental scan.

When making an analysis of the business environment for an organization, the initial task is to identify factors in the environment that create threats or opportunities.

Threats. These are factors in the environment that might prevent the organization from achieving its business objectives.

Opportunities. These are developments that provide opportunities for the organization, so that it can achieve its objectives more successfully.

Measures should be considered for reducing or removing significant threats.

Environmental Scan consists of four sequential steps:

Scanning

Involves general surveillance of all environmental factors and their interactions in order to:

Identify early signals of possible environmental change

Detect environmental change already underway

Monitoring

Involves tracking the environmental trends, sequences of events, or streams of activities. It frequently involves following signals or indicators unearthed during environmental scanning.

Forecasting

Involves strategic decision-making requiring a future orientation. Naturally, forecasting is an essential element in environmental analysis and is concerned with developing plausible projections of the direction, scope, and intensity of environmental change.

Assessment

Involves answering questions, the frame of reference moves from understanding the environment, the focus of scanning, monitoring and forecasting to identify what the understanding means for the organization. Assessment tries to answer questions such as what are the key issues presented by the environment and what are the implications of such issues for the organization.



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1.3 Understanding environmental factors

Organizations need to be aware of the influence of environmental factors on their activities and how their decisions and actions can be affected by changes in the environment that provide threats or opportunities.

Environmental scanning is often associated with strategic planning and strategic information, although some awareness of the business environment is needed at all levels within an organization.

Environment influences differ between organizations and according to circumstances. Understanding of the business environment can be improved by paying attention to news about political and legal developments, economic conditions, social changes and technological developments, and their potential effect on businesses.

For example

When there is a change in the government polices the business has to make the necessary changes to adapt itself to the new policies.

Similarly, a change in the technology may render the existing products obsolete, as we have seen that the introduction of computer has replaced the typewriters; the color television has made the black and white television obsolete.



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2. POLITICAL AND LEGAL FACTORS

2.1 Political and legal influence on business

Politics and law have an extensive influence on business affairs, and political decisions, political stability, instability and changes in the law can affect just about any aspect of business activities. Local entrepreneurs and especially small and medium level businesses have grave impact of minor change in political and legal framework. Sometimes small and medium level businesses close down due to the instability of political system.

Multinational companies have the additional problem that because they operate in many different countries, their activities may be affected by political conditions and legislation in each of the different countries.

Here are just a few examples of political and legal factors that might affect business:

Nationalization of industry and privatization: In some countries, industry is nationalized and owned wholly or partly by the state (the government). Occasionally, after a change of government, an incoming government decides to nationalize a business and gives ownership of existing commercial business to the state. In other cases, a government might introduce a policy of de-nationalizing an industry (‘privatizing the industry’) and transferring ownership of state-owned businesses to commercial companies.

Transport and infrastructure: Businesses rely on the transport system to move their goods (and employees), and the quality of the road transport system depends on the infrastructure of roads. Though the transport system might be operated by commercial companies, most of the road network and possibly also the rail networks are state-owned. Government policy on transport and building roads or rail networks can have an important effect on business activity.

Education: In most countries the government is responsible for most of the education system. Education policy affects the quality and skills of individuals who make up the workforce of business organizations.

Vocational and technical education: Skilled work force is required almost in every business. Skilled workforce head counts depend on nature and level of business. Vocational and technical educational institutions, country policy and preference affect the overall business environment and strategic decisions.

Environmental policy: Business organizations might be affected by changes in the environmental policy of a government, such as policy to reduce levels of pollution in the air, water or land.

Taxation and subsidies: Governments use taxation to raise income. They might also use taxation to influence behavior, such as increasing tax on fuel in order to encourage a reduction in fuel consumption and increasing tax on the disposal of waste in order to encourage the recycling of waste. Governments sometimes encourage particular activities by offering subsidies, such as subsidies towards the cost of particular skills training.

Here are some illustrative examples of how business can be affected by government policy and the law:

In 1970s private sector was nationalized in Pakistan, through Nationalization Act 1970.

In 2007, oil companies operating in the Orinoco region of Venezuela were required by the government to hand over majority ownership in their businesses to the state (the government).

In 2007, a large shipment of corn to Europe from the United States was found to include genetically-modified corn. Although this was legal in the US, it was illegal in the European Union. The shipment had to be returned to the US.

2.2 Sources of legal authority

Business organizations need to recognize the different sources of legal authority that have the power to introduce changes in the law. The sources of legal authority vary between countries, but usually include the following:

Supranational bodies

National government

Regional or local government that exercises some powers either because it has some independence from the national government or because some powers have been delegated to the regional government by the national government.



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Supranational bodies

A supranational body has responsibility or oversight of more than one country. A supranational body in some cases has the power to impose decisions on a national government. To have the ability to impose its rules, a supranational body needs the formal support of national governments. For instance:

In the European Union, the member countries accept that legal measures introduced by the European Council must be introduced into the national laws of each member country. (European Directives approved by the European Council must be incorporated in the national laws of each member country.) A supranational body such as the European Commission also has the power to impose certain decisions, including decisions relating to various business matters such as takeovers and monopolies.

In accounting, the International Accounting Standards Board is able to impose standard rules for financial reporting on companies in every country whose governments have agreed that these international accounting standards should be applied.

Some supranational bodies attempt to influence activities in many countries but do not have the right to enforce their wishes. Examples are the United Nations and the World Bank.

2.3 Employment law

Each country has employment laws. The purpose of employment law is mainly to provide protection to employees, against unfair treatment or exploitation by employers. Business organizations, as employers, are directly affected by employment laws. They need to be aware of the employment law in each country in which they operate, and understand the consequences of breaking the law or failing to comply with regulations.

Here are some of the aspects of employment law.

Minimum wage: A country might have a minimum wage, which is the minimum hourly rate of pay that may be paid to any employee.

Working conditions: A variety of laws and regulations might specify minimum acceptable working conditions, such as maximum hours of work per week or month. There might also be laws relating to a maximum retirement age and the employment of children. Working conditions are also covered by health and safety law.

Unfair dismissal: Employment law might give employees certain rights against unfair dismissal by an employer. An employee who is dismissed from work might bring a legal claim for unfair dismissal. The employer must then demonstrate that although the employee has been dismissed, the dismissal was not for a reason or under circumstances that the law would consider ‘unfair’. When an employer is found guilty of unfair dismissal, it might be required to reemploy the individual who has been dismissed or (more likely) pay him or her substantial compensation.

Redundancy: In some countries, dismissal of employees on the grounds of redundancy is not unfair dismissal, provided that discrimination is not shown in the selection of which individual employees should be made redundant. However, a country’s laws may require an employer to consider transferring an employee to another job before deciding that redundancy is unavoidable. (Failure to consider transferring employees to other work would mean that the dismissals for redundancy are unfair.)

Discrimination: Some countries have extensive laws against discrimination, including discrimination at work. For example, employers might be held legally liable for showing discrimination against various categories of employee (or customer) and also for discrimination shown by employees against colleagues. There are laws against discrimination on the grounds of physical disability, gender, race, religion, sexual orientation and age.

Gender Equality. Many countries including Pakistan have laws for anti-harassment to eliminate the gender biasness, women protection at workplace, gender sensitization and gender equality in the society.

Changes in any aspect of these employment laws could have significant implications for business organizations, especially those where labor costs are a significant proportion of total costs.



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2.4 Health and safety law

Health and safety law provides rules and regulations about minimum health and safety requirements that employers must provide in their place of business and for their employees. Standards of health and safety law vary substantially between countries, although in countries with well-developed economies, health and safety standards are usually high.

Laws vary between different countries, and workman should try to become aware of how the law applies in his own country. It is also important to recognize that health and safety regulations can impose significant requirements on employers, and the legal consequences of failure to comply with the regulations could be serious for the company or the directors, managers or employees responsible.

In some countries, employers are required by law to provide a safe workplace for their employees. A safe workplace is one where employees are not exposed to unreasonable physical dangers or unreasonable risks to health. In some countries, this also means a place of work where employees are not subjected to discrimination or bullying. Risks to health and safety should be reviewed regularly, by means of formal risk assessments.

In addition to general laws about health and safety at work, there should also be detailed regulations specifying the minimum health and safety standards in particular types of industry or business, or particular types of business premises. For example, there should be specific minimum fire regulations for all buildings in which employees work. There should also be minimum health and safety regulations in particular industries, such as transport, food processing, building and construction and chemical processing.

There might also be voluntary health and safety codes that the government encourages but does not enforce as a legal requirement.

In a company, the board of directors has the ultimate responsibility for health and safety at work. Specialist health and safety officers might be employed by the company.

2.5 Data protection law

Some countries have fairly strict data protection laws. The purpose of data protection law is to protect individuals with regard to personal data about them that is held and used by other persons. Data protection legislation is designed to protect the private individual against others collecting, holding and using information about them without their permission. (The legislation does not apply to companies, however. On the contrary, it is generally argued that more information, rather than less, should be available about many companies.)

It might be considered illegal, for example, that any organization should be able to:

gather and hold personal data about individuals without a justifiable reason, and

make use of that personal data without the individual’s permission.

Someone holding and using personal data about individuals should also be under a legal obligation to:

make sure that the personal data is accurate, and

ensure the security of the data, so that it is not made available to or accessed by any other person who does not have any right to have it.

Data protection laws apply to any person holding personal data about individuals. This includes business organizations, which hold personal data about employees and (often) customers.

Personal data

Legal definitions of personal data vary but typically personal data means any data about a living private individual, where the individual can be identified from the data.

Law typically also makes a distinction between ordinary personal data about an individual (such as name and address) and sensitive personal data. Additional legal requirements apply to holding and using sensitive personal data, such as details of a person’s ethnic origin, political opinions, religion, trade union membership, physical and mental health.



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In many countries, anyone holding personal data about individuals must register this fact with a government department, and provide details of the type of information they hold and the reasons why it is used.

Note also that data protection legislation applies only to particular categories of information that are regulated by the legislation. There is no legislative protection for non-regulated data. For example, information about an individual’s consumer preferences is not regulated data. An individual might tell a market research group that he prefers black cars to blue cars, and prefers chocolate to potato chips. This type of information is outside the data protection legislation.

Legal restrictions on obtaining and using data

Organizations that hold and use personal data about individuals are required to comply with regulations relating to how the data is gathered, stored, kept secure from unauthorized access and used.

Failure to comply with the regulations could expose an organization to legal action by the individual concerned and/or the authorities.

Principles of data protection and security

The main principles of data protection and security include:

Personal data must be obtained and processed fairly and lawfully. Often this means that the individual must have given his consent for personal data about him to be held and used. Sometimes, it is lawful to hold and use personal data for specific reasons, for example in connection with performance of a legal contract (including a contract for the purchase and supply of goods or services) or to comply with the requirements of employment law on employers.

Personal data should be obtained only for one or more specified reasons. It is illegal to obtain and store personal data without having a specific purpose for which the data will be used.

Personal data gathered and stored about individuals should be accurate, relevant and not excessive. An organization could be legally liable for holding or using personal information about an individual that is not accurate.

Data should not be held for longer than is necessary for its purpose. When personal data no longer has a use, it should be destroyed.

Personal data should be processed in accordance with certain specific rights of individuals. For example, an individual has a right to object to the use of personal data being used for direct marketing by a business organization, and has the right to ask an organization to stop sending him direct marketing materials (such as brochures or e-mail marketing messages). In addition, any individual should have the right to access and check personal data that is held about him.

Personal data that is held about individuals should be kept secure. Unauthorized access to this data should be prevented (as far as is reasonably possible).

Personal data cross border transfer guidelines. Personal data should not be transferred to any country where the standards of data protection are not as strict (or stricter).

Business organizations in countries where strict data protection laws apply should keep data processing systems under review, to ensure that:

the rules about gathering, holding and using personal data continue to be applied, and that the regulations are not being broken, and

personal data is kept secure from authorized access.

This task can be much more difficult than it might seem, given that the law applies to personal data held unofficially as well as in formal data processing systems. For example, it includes personal data about individuals in e-mails or e-mail attachments. To apply the data protection laws properly, it is therefore necessary to educate all employees in the requirements of the law and try to ensure that all employees comply with legal requirements.



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2.6 Cyber laws

It is the newest area of legal system. It applies to internet and internet related transactions. This law was enforced to safeguard the individual’s information and confidentiality of clients where transactions are made over some network, collecting, storing, retrieving and disseminating of individual’s data. It is considered that employees of any organization are the most vulnerable segment in cyber security (Stephen, 2001).

2.7 Competition law

Some countries have laws to encourage fair competition in markets and avoid anti-competitive practices.

Monopolies

There might be a law to prevent a company from acquiring monopoly control over a market. A ‘monopoly’ of a market is theoretically 100% control of a market, where only one entity supplies a product or service to the entire market. In practice, ‘monopoly’ is usually defined as a significant influence, such as control of over 30% of the market.

When a company has a monopoly of a market, it might engage in unfair business practices, such as charging higher prices than they would be able to charge in a more competitive market. The serious risk of anti-competitive behavior from monopolies is the main reason for laws restricting them.

When a company grows to the point where it becomes a monopoly, a government organization might carry out an investigation, with a view to deciding whether measures should be taken to protect the public.

Similarly, when two companies propose a merger that would create a new monopoly, a government organization might investigate the proposed merger with a view to recommending whether it should be allowed to happen, and if so whether any conditions should be placed on the merger in order to protect the public.

Anti-collusion regulations

Collusion occurs when two or more business entities secretly agree to do something for their mutual benefit that is against the public interest. Typically, it is a secret agreement to raise prices, and avoid competition on process. In many countries, collusion is a criminal offence.

Price controls

In some countries, the government might impose price controls on certain key products or services, such as the price of essential services to consumers – water, electricity or gas. Official bodies might be established to monitor the activities of ‘utility companies’ (providers of water, sewage, electricity and gas services) and might have powers to restrict their activities. Official approval might also be required for any increase in prices.

2.7 Consumer protection

Most countries have legislation in place that aims to protect consumers of goods and services. These measures include contract law and sale of goods legislation.

Contract law

A contract is a legally binding agreement between two ‘parties’. When a contract is made, each party is obliged to carry out his part of the agreement. If one party fails to do what was agreed in the contract, the ‘injured party’ can take legal action for breach of contract.

This is important in consumer protection as each party knows their respective rights and obligations and what might happen if they do not satisfy their responsibilities.

The detail of contract law will vary in different jurisdictions but usually there are three key elements of a simple legal contract:

offer and acceptance

an intention to create a legal relationship (a binding contract)

consideration (what each party gives the other in the contract)



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A general legal principle is that the parties to a contract are free to enter into an agreement without the interference of the law, and to decide the terms of the contract between themselves. This is known as the concept of freedom of contract.

There are however some specific areas where this freedom of contract may not apply:

Employment contracts are usually governed largely by employment legislation.

‘Standard form contracts’ are contracts where the terms are stated to the consumer on a take it or leave it basis. The consumer does not have an opportunity to negotiate terms. Contracts between consumers and large commercial organizations are nearly always of this kind, such as contracts for the domestic supply of water, electricity and gas.

Sale of goods legislation

Such legislation usually specifies that in contracts for the purchase of goods (or services) there are certain terms in the contract that a consumer may rely on. For example:

Title – The buyer is entitled to assume that the seller of goods actually owns them (i.e. has title to them).

Description of goods – The buyer is entitled to assume that any good they purchase correspond to a seller’s description of those goods.

Quality – All goods supplied in the course of a business must be of satisfactory quality. This means that they must be satisfactory for the purpose intended. If a person buys a washing machine that does not work the seller must repair it, replace it or pay a refund to the customer.

2.8 Responding to political and legal developments

Business organizations need to recognize the significant political and legal factors that affect their business, and they have to decide how these factors should affect what they do. They should be alert to:

changes or potential changes in each of these factors, and

changes in the significance of each factor, including the growing importance of factors that were previously relatively unimportant.

Lobby groups

Large companies often use lobby groups to represent their interests by communicating with politicians and government officials. A lobby group is a group of individuals or a specialist firm that actively represents the interests of a company with politicians, government bodies and government officials.

In some countries, companies use specialist firms to represent their interests by speaking to politicians and government officials.

Lobby groups can help companies to argue either for or against proposed changes in the law, and to get politicians and government officials to understand the interests of the companies they represent.



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3. ECONOMIC FACTORS

Macro and Micro Economics

Economics is the study of the choices made by societies and by individuals and firms. Individuals and societies make use of limited economic resources (’scarce resources’) to satisfy needs and wants. The subject of economics might be split into:

Macroeconomics; and

Microeconomics

Macroeconomics

Macroeconomics is the study of whole economies rather than individual buyers, sellers and firms. It is the study of the total economy or aggregate economy. It is concerned with issues such as employment and the level of unemployment, the amount of economic wealth that is created (measured by national income) and economic growth, and the rate of inflation.

Example: country’s income (GDP), all prices (inflation), business sector (all businesses) or unemployment across the entire economy. Supply and demand in labor market, the influence of trade on prices, growth, employment and economic efficiency.

Microeconomics

Microeconomics is concerned with the study of economic choices by individuals and firms, and how individual economic decisions are driven by prices, costs and ‘satisfaction’.

There are links between macroeconomics and microeconomics. For example, if the level of unemployment in a national economy is very high, this will affect the availability of additional labor for individual firms within the economy.

Example: one product, one price, one consumer, one household, one business or even one industry.

3.1 Macroeconomics Factors:

Introduction

Macroeconomics essentially deals with a general equilibrium set up where we simultaneously analyze the behavior of three sets of agents: households; firms; government. The functioning of these different sets of agents are often interlinked and these interlinked actions then generate certain outcomes for the aggregate economy. In macroeconomics, we are concerned with the aggregative outcome for the entire economy rather than the outcome for any single agent. Indeed this interlinked actions (i.e., the general equilibrium aspect of it) often spell out differential outcomes for the aggregate economy vis-a-vis individual agents. In this sense, macroeconomics is more than mere aggregation of agents’ micro behavior.1

Economic Policy

A government develops a macroeconomic policy. The aim of government economic policy is normally concerned with objectives such as achieving economic growth, full employment, stable prices and a sustainable balance of payments. Developments in the national economy, and government policy to influence the state of the national economy, can have an important effect on businesses and individuals (who are often referred to in economics as ‘households’).

Measuring activity in the national economy

‘National income’, ‘gross national product’ and ‘gross domestic product’ are all measures of total economic activity during a given time period, usually one year, for a particular country (or region). At this stage in your studies, you need not be concerned about the technical differences in how each is measured.

1 Mausumi Das Introduction to Macroeconomics (Lecture Notes, 2017)

https://simplicable.com/new/economic-efficiency



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There are three broad approaches to the measurement of total economic activity during a given time period:

Expenditure approach. One way of measuring economic activity is to calculate the total amount of spending there has been in the economy. This includes spending on consumption by individuals and firms, spending on capital investment and government spending.

Income approach. Another way of measuring economic activity is to calculate the total income that has been earned by everyone in the economy during the period, such as income earned by individuals and profits earned by companies.

Output approach. A third approach to measuring economic activity is to measure the value of output by all industries and other economic activity. This includes service industries as well as agricultural, mining, construction and manufacturing industries.

We do not need to go into the detail of how national income or gross national product is calculated using each of these approaches. In practice, the three approaches produce different ‘answers’ because of the problems of government statisticians in collecting complete and accurate data. In principle, however, the three approaches to calculating national income should all produce the same figure.

The expenditure approach to calculating economic activity

The expenditure approach to the calculation of national income or gross national product can be presented as a fairly short equation. This equation provides some insight into how a national economy can grow, and key factors that affect economic growth.

Economic activity = C + I + G + (X – M)

where:

C = the amount of consumption on goods and services

I = the amount spent on investment in long-term assets

G = the amount of government spending

X = the amount of exports of goods and services

M = the amount of imports of goods and services

(X – M) is the difference between exports and imports of goods and services, and this is sometimes referred to as the balance of payments.

Economic activity in this formula is sometimes called total demand or aggregate demand (AD) in the economy.

Government economic policy aims

The main aim of government economic policy is usually to increase economic wealth and achieve something close to full employment. If economic growth and full employment are achieved, the wealth of the country as a whole will increase, and everyone will benefit. A government economic policy aim is therefore to increase aggregate demand in the economy, and achieve a steady annual growth in national income.

Economic activity, and so economic wealth, is increased as a result of an increase in any of the items in the equation above. AD is increased by any increase in consumer spending, investment, government spending or increase in the balance of payments (X – M). However, the issue is not so simple, because increases in any item in this equation might lead to a reduction in other items. For example:

An increase in government spending G provides an increase in national income, but if the extra government spending comes from higher taxation, and the higher taxation leads to falls in consumption C and investment I, the end result might not be beneficial.

Similarly, an increase in consumption will provide an increase in national income, but the extra money spent on consumption might be diverted from spending on investment (so I will fall), or the goods might be purchased from other countries (so M will increase) or might be goods that would otherwise have been exported (so X will fall).



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A link between national income growth and inflation

Another problem is that there are limits to the annual rate of increase in national income that can be achieved. A country should be able to increase the total output from its economic activities, but does not have the resources to grow in ‘real terms’ above a certain rate.

For example, national income can be increased by getting more unemployed people into work, because these individuals will then become productive and will create economic wealth. However, reducing unemployment by 1%, say, is unlikely to increase national income by more than 1%. National income can also be increased by introducing more new technology into business: however, the introduction of new technology takes time, and will only help to improve national income gradually.

When total spending in the economy increases at a faster rate than the economy can grow in real terms, the inevitable result is price inflation. For example, if national income (as measured by total expenditure in the economy) grows by 8% but the ‘real’ economy – for example actual output of goods and services – increases by just 2%, the difference of 6% must be inflation – higher prices rather than higher output.

The economic cycle

The economic cycle is a term used to describe how, in general, the national income of a country increases or decreases from one year to the next.

When national income increases from one year to the next, there is economic growth.

When national income decreases from one year to the next, there is economic recession (or in extreme cases, economic decline).

An economic cycle consists of several years of economic growth, with national income each year being higher than in the previous year, followed by economic recession, which is a period of years during which national income is falling.

Government economic policy usually tries to achieve continued economic growth, but if recession becomes unavoidable, policy is then aimed at making the recession as short and as minor as possible.

Impact of inflation

Inflation is the increase in price levels over time. The rate of inflation is measured using one or more price indices or cost indices, such as a Consumer Price Index (CPI) or a Retail Price Index (RPI) or an Index of Wages Costs.

Businesses are affected by inflation, because inflation means that they have to pay more for resources, such as materials and labor. They will try to pass on their extra costs to their customers, by raising the prices of their own goods and services. Individuals have to pay higher prices for goods and services, so they need more money to pay for them. If they are in work, they might demand higher wages and salaries.



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The ‘inflationary spiral’ can go on indefinitely, with increases in materials and wages pushing up prices of finished goods, which in turn leads to higher wages and materials costs.

It is also recognized that the rate of inflation is affected by inflationary expectations. This is the rate of inflation that businesses and individuals expect in the future. Inflationary expectations affect demands for wage rises, and decisions by businesses to raise their prices.

Implications of high inflation and inflationary expectations for the national economy

Inflation also has implications for the national economy and economic growth.

Increases in national income are the result of two factors:

an increase in the ‘real’ quantity of goods and services produced and the ‘real’ spending on goods and services, and

increases due to higher prices and costs.

It is possible for measured national income to increase when the real economy is in recession. For example, suppose that measured national income increases from one year to the next by 3% but inflation during the year was 5%. This indicates that the ‘real’ economy has gone into recession, and is 2% lower.

Experience has shown that when the rate of inflation is high, and inflationary expectations are high, the ‘real’ economy is likely to stagnate or go into recession.

A government might therefore take the view that some inflation is unavoidable (although in some countries there has been deflation – a fall in retail prices). However, the rate of inflation and inflationary expectations should be kept under control, to give the ‘real economy’ an opportunity to grow.

Implications of inflation for the distribution of wealth

However, although some inflation might be unavoidable, it has unfortunate social and economic implications, because it results in a shift of economic wealth.

In a time of inflation debts such as bank loans fall in real value over time. Borrowers gain from the falling real value of debt. At the same time, lenders and savers lose because the value of their loan or savings falls. For example, an individual with cash savings might be earning 3% after tax when inflation is 5%: if so he is losing 2% in real terms each year. The effect of inflation is therefore to shift wealth from savers and lenders to borrowers.

Another effect of inflation is to reduce the real value of households on fixed incomes or incomes that rise by less than the rate of inflation each year, such as many pensioners. The rich might get richer (because their income is often protected against inflation, for example by salary rises) whilst the poor get poorer.

Impact of unemployment

When there are many people who are unwillingly out of work, this means that there are not enough jobs for the people who want them. Business organizations (‘firms’) could take on more labor if they wanted to, but they choose not to.

When there is economic recession and demand for goods and services is falling, many firms will make some employees redundant because their profits are falling and some aspects of their business are no longer profitable.

High levels of unemployment are unwelcome in an economy because:

individuals who want jobs cannot get them (and high unemployment is damaging to society and the welfare of the people)

economic growth is less than it could be: if the unemployed individuals could be given work, output in the economy would increase and there would be economic growth.

Very low level of unemployment might also be unwelcome because:

firms that want to take on more labor might struggle to find suitable people, and

the shortage of labor might push up the cost of wages and salaries.



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An additional problem is that although the level of unemployment might be high, there could be a shortage of skilled labor. As the technological complexity of industry increases, the demand for low-skilled jobs might fall even as the demand for skilled labor rises. A shortage of skilled labor can only be overcome through:

better standards of education

more training

if necessary, moving jobs to other countries where there is a better supply of skilled labor.

Types of unemployment

Unemployment can be analyzed into categories. These are some categories that might be used for analysis.

Transitional unemployment. This happens when an employee has left one job in order to start at another. If there is a gap of time between leaving one job and starting the next, this is transitional unemployment. For example, a teacher might leave a job at one school in order to start at another school in three months’ time. During the three-month gap, unless one of the schools pays him, he is transitionally unemployed.

Frictional unemployment. This is short-term unemployment when individuals are dismissed from their work, for example because they have been made redundant or because they did not like the job they were doing. It might take them a little time to find a new job. Until they do, they are unemployed. However, the unemployment should not last long.

Structural unemployment. This is unemployment that arises because of a significant change in the structure of the economy, and in particular decline and collapse of industries that used to be major employers. For example, there might be structural unemployment because the mining industry used to employ many people, but is now in decline. When an industry goes into decline and large numbers of people are made unemployed, the consequences can be very serious. Finding new jobs in other industries for all the unemployed workers can take a very long time. There might be a demand for labor in other industries and other parts of the country, but the unemployed people available for work are of the wrong type, and have the wrong skills, or are in the wrong part of the country and do not want to move their home.

Technological unemployment. This occurs when technological changes mean that some types of workers are no longer needed, so that large numbers are made redundant. The new technology replaces manual labor. This can happen when manufacturing processes are automated. Technological unemployment can add to structural unemployment.

Regional unemployment. This is unemployment in a particular region of the country. Levels of unemployment can vary from one region to another, especially when there is no mobility of labor and individuals are reluctant to move to other regions to find work.

Seasonal unemployment. This is unemployment, often within a particular industry, because the demand by firms for labor is higher at some times of the year than at the other. For example, the demand for agricultural labor might be very seasonal, and there might be high levels of unemployment in the industry in the low-season periods.

Cyclical unemployment. When the national economy is growing, demand for labor increases and unemployment should fall. When the economic cycle goes into recession; the demand for labor decreases and unemployment increases. Governments try to deal with cyclical unemployment by managing the economy and trying to achieve real economic growth.

Impact of economic stagnation

Economic stagnation occurs when national income is not increasing, but economic activity is at a much lower level than it could be. Economic growth should be possible, but is not happening.

A feature of economic stagnation is underused economic resources, such as land and capital equipment. Unemployment is high and there is little or no new capital investment. Companies do not want to invest large amounts of money, because they see no way of getting a satisfactory return.



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When a country or region of the world suffers from economic stagnation when other countries are enjoying economic growth, it is becoming poorer relative to those other countries. Households may therefore live in relative poverty, and many individuals might look for ways of migrating to other countries where economic wealth is greater.

Depressed countries of the world that suffer from economic stagnation often need help from wealthier countries to develop their national economies.

Worldwide economic recession: protectionism

When the rate of economic growth in the world as a whole is falling, individual countries might still try to increase their own national income. However, if the world economy is not growing, any increase in a national economy has got to be at the expense of other national economies.

This can create a risk of ‘trade wars’ and ‘protectionism’. Protectionism takes the form of government measures to discourage or prohibit imports of foreign goods.

In many countries, some industries are protected against foreign competition by government measures against imports, such as:

by the imposition of high import taxes on goods coming into the country

by setting quota limits on the amount of goods that can be imported

by putting a ban on imports of some types of goods.

Attempts to promote ‘free trade’ internationally are promoted by the World Trade Organization (WTO).

International payments and international payments disequilibrium

International payments

International payments are the flows of money between different countries. The main elements of international payments are:

payments arising from international trade in goods and services (which might be referred to as the ‘balance of trade’ or ‘balance of payments’), and

movements of capital between countries.

For every country:

Surplus or deficit on trade in goods and services = Net outflow or inflow of capital

For example, if a country has a surplus of $10 billion on its foreign trade in goods and services; it also transfers $10 billion in capital flows to other countries. Similarly, a country with a deficit of $25 billion on its trade in exports and imports receives net transfers of $25 billion in capital.

International payments and foreign currencies

Payments between different countries (unless they are in the same currency area, such as the Euro zone in Europe) give rise to an exchange of currencies. Here are just two examples:

A Pakistani company buys goods from a US supplier and agrees to pay in US dollars. There is an international payment in dollars from the Pakistani buyer to the US supplier. To make the payment, the Pakistani buyer has to arrange with a bank to buy US dollars in exchange for Pak Rupee in order to make the payment. The trade in goods leads to a transaction in Pak Rupee/US dollar.

A German investor decides to invest capital in the US. There are different ways of investing. One is to buy shares in US companies or US government bonds (Treasuries). To make these investments, the German investor has to pay for them in US dollars. To obtain the dollars to make the purchase, he has to sell some Euros. The international investment therefore leads to a transaction in Euros/US dollars.



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International payments disequilibrium

In an ideal world economy, each country would achieve equality between the value of its exports and the value of its imports. When this happens, there is also equality between inflows and outflows of capital. In practice, however, this ideal state is never achieved:

There are always some countries that have a surplus on their balance of payments between their exports in goods and services and their imports.

There are always some countries that are net recipients of international capital, and some who transfer capital to other countries.

Disequilibrium in international payments occurs when these imbalances between balance of trade and international capital flows become excessive. This is the current situation at the time of writing, with regard to the United States and China in particular.

The United States has a very large balance of payments deficit in its trade in goods and services. It imports far more than it exports. This huge deficit is financed by capital investments in the US dollar by other countries, particularly China.

China has a very large surplus in its balance of trade in goods and services, exporting far more than it imports. This huge surplus is invested in other countries, particularly the US. Investments in the US include purchases of US government debt (Treasury bonds).

A serious concern is that such a large disequilibrium in international payments cannot continue indefinitely. There will presumably come a time when people and governments in other countries will decide to stop investing in US dollar capital assets. If the capital flows into the US fall, the US will have to cut its balance of payments deficit in goods and services. If the US stops importing goods and services from other countries, this could have a devastating effect on the economies of exporting countries and on world trade generally.

Foreign exchange rates and international payments disequilibrium

In theory disequilibrium in international payments could be rectified by a change in foreign exchange rates, and a fall in the exchange value of the currency of countries that have a deficit in their balance of payments in goods and services.

If there is a fall in the value of the exchange rate, a currency becomes cheaper relative to other currencies.

Exports from the country therefore become relatively cheaper and buyers in other countries will buy more of them.

Imports from other countries become relatively more expensive. Domestic buyers will therefore buy fewer imported goods (and might switch to buying more domestically-produced goods).

If exports go up and imports fall, the balance of payments position in goods and services will improve.

However, a very substantial change in foreign currency exchange rates is needed to rectify a very large disequilibrium in international payments.

National economic policies

A national government has responsibility for economic policy, and the aims of a country’s economic policy are usually economic growth and possibly also full employment. Economic growth is usually given priority, because a reduction in unemployment should follow on from economic growth.

Economic growth should be ‘real growth’. Some inflation is probably unavoidable in order to achieve economic growth, but real growth is achieved if the increase in national income each year exceeds the rate of inflation. Although a government has an ultimate economic objective – sustainable growth and full employment – it needs to establish intermediate economic targets. In other words, in order to achieve economic growth, it might be necessary to achieve some other economic targets first, such as:

low rate of inflation: with high inflation there is a risk of economic recession and also a fall in the exchange rate for the country’s currency

stable exchange rate (or a target exchange rate against major world currencies such as the US dollar or euro).



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Fiscal policy

Fiscal policy is government policy on taxation, spending and government borrowing. Government spending is a part of national income, but in order to spend a government must raise the money in tax, and borrow any excess of spending over tax revenue.

A government might also try to encourage investment by the private sector (companies). It can try to do this by offering special tax incentives or subsidies (cash payments) to encourage private sector investment in state investments, such as the state transport system, and state schools and hospitals.

Monetary policy

Government uses monetary policy as well as fiscal policy. Monetary policy involves trying to establish monetary conditions that will be favorable to economic growth.

In the US, Eurozone, UK and Pakistan, monetary policy is similar. The government seeks to encourage long-term economic growth by keeping the rate of inflation within limits. The rate of inflation is managed through control over interest rates.

The effect of managing interest rates

In the US, Euro zone, UK and Pakistan the management of interest rates is the responsibility of the central bank. The central bank is able to control short-term interest rates (on the dollar, euro, sterling, or PKR respectively) and can raise or lower interest rates as it considers appropriate.

If the central bank is concerned about rising inflation, it can raise short-term interest rates. When the central bank raises its own interest rates, other commercial banks do the same to their interest rates.

There is then a transmission mechanism that slowly works through the national economy. The effects are by no means immediate, and a change in interest rates could take months, if not two years or more, to have an eventual effect. In principle, however, higher short-term interest rates will mean that borrowers have to pay more interest to borrow.

Higher short-term interest rates could eventually lead to higher long term investment rates, and the market value of investments in shares and bonds might fall. Higher borrowing costs might make some individuals and companies less willing to borrow. If individuals are borrowing less and everyone feels less wealthy, spending on consumption will also fall (both domestically-produced goods and imports). All these changes might take some of the inflationary pressures out of the economy.

Economic policies to achieve social or environmental objectives

It is worth remembering that governments sometimes use economic policies to achieve political, social or economic objectives.

For example, the countries of the United Nations might agree to a trade embargo with a specific country, in order to persuade that country to change its policies. An example is the UN trade embargo against Iran from 2006, which was intended to persuade Iran to abandon its nuclear power development program.

Governments might also try to discourage unhealthy behavior through taxation, for example by imposing high levels of taxation on tobacco (smoking).

In 2018, newly elected government in Pakistan decided not to give subsidies in various sectors. The purpose of such a ban on subsidies is to pressurize the institutions for self-reliance and elimination of corruption from institutions.

International economic policies

Wealthy economic nations recognize the need to help poorer countries to develop their economies and efforts are made (with varying degrees of success) to provide help. Much help is provided through supranational organizations such as the World Bank (however, international aid is provided in a variety of ways).

When a supranational organization develops a policy for providing economic aid to developing countries, the main policy targets are often as follows:



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Investment in infrastructure, such as roads and railways and investment in the development of systems of telecommunication and for supplying energy and water (dam construction, irrigation systems and so on).

Investment in education and health, to improve standards of the national skilled and non-skilled labor force.

Capital investment in particular industries. This could involve investment in the development of major industries or in providing economic support to small producers, such as small farmers. If there is investment in economic infrastructure, and improvements in labor skills, multinational companies might become interested in increasing their investment in the countries concerned.

The impact of economic policy measures

Macroeconomic policies of government, and changes in the condition of the national and world economies, affect businesses, society and individuals directly.

As one should imagine, firms and individuals will react to economic changes according to the circumstances and the nature of the change.

3.2 Micro-Economic Factors

Introduction

Microeconomics is concerned with the behavior of individuals within an economy. This refers to people and firms who are both buyers and sellers.

Microeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. It is an attempt to explain and understand what drives buying and selling decisions. Microeconomics examines how these decisions and behavior affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the quantity supplied and quantity demanded of goods and services.

Microeconomics also deals with the effects of national economic policies (such as changing taxation levels) on these aspects of the economy. Macroeconomic theory is often based on basic assumptions about micro-level behavior.

Example: one product, one price, one consumer, one household, one business or even one industry.

Demand and supply

According to basic microeconomic analysis, the sales price for a product in a market is determined by demand and supply.

Demand is the volume of sales demand that will exist for the product at any given price. As a normal rule, sales demand will be higher when the price is lower. If the price rises, total sales demand will fall. If the price falls, sales demand will rise.

Supply is the quantity of the product (or service) that suppliers are willing to sell at any given sales price. Higher prices will attract more suppliers into the market and encourage existing suppliers to produce more. Lower prices will deter some suppliers, and might drive some out of business if the price fall results in losses.

Occasionally, sales demand for a product might rise to such a high level that producers in the market are unable to meet the demand in full. Until production capacity can be increased, this situation could result in very large price rises and very high profit margins for producers.

An example of demand exceeding supply capacity has been the market for oil on occasions in the past. Oil suppliers are unable to alter their output volumes quickly, so a large increase in demand for oil can result in very large price increases, at least in the short term.

Monopoly pricing

Supply and demand in the diagram above is for the market as a whole, and within the market there might be many different suppliers competing with each other to win business.

http://en.wikipedia.org/wiki/Economics

http://en.wikipedia.org/wiki/Supply_and_demand

http://en.wikipedia.org/wiki/Taxation



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A similar situation applies to companies that are dominant in their particular market, and supply most of the goods or services sold in the market. In these ‘monopoly markets’, the individual company has a downward-sloping demand curve, which means that:

as a monopoly supplier to the market, it is in a position to set prices for the market, but

if it raises the prices of its products, the demand for its products will fall.

Pricing in a competitive market

In contrast to a monopoly market, companies that sell their products in a highly competitive market will decide their selling prices by comparing them with those of competitors.

In order to compete effectively, companies might use short-term pricing tactics such as price reductions, volume purchase discounts, better credit terms and so on.

Cost

In the long run, the sales price must exceed the average cost of sales of the product that a business entity sells. If cost is higher than selling price, the business will make a loss and cannot survive in the long term. Cost is therefore a major determinant of price.

Costs are influenced by factors such as:

suppliers’ prices for raw materials and components

price inflation

exchange rate movements

other elements of cost, such as wage rates and general expenses

quality: it usually costs more to produce an item to a higher quality standard.

A company may have to decide where it wants to position its product in the market in terms of quality. Premium pricing (higher-than-average prices) prices can be used for higher quality products, but customers may prefer lower quality, lower priced products. A clear understanding of the link between quality and cost will be needed to help management determine the optimum price/quality mix.

If a company is able to reduce its costs, it should be in a position if it wishes to reduce its sales prices and compete more aggressively (on price) for a bigger share of the market.

Income of customers

Another microeconomic factor influencing sales demand in any market is the level of income of customers and potential customers for the product.

As the income of customers rises, they are more likely to want to buy more of the product. When demand is growing because income levels are rising, there is a tendency for prices to rise.

In an economy as a whole, rising income occurs when the national economy is growing, and prices will rise. (The authorities might try to prevent excessive inflation, but prices will nevertheless increase.)

When income in an economy is falling, there is an economic recession, and there might even be some price falls.

Other factors influencing price

There are other influences on pricing decisions and the general level of selling prices in a market.

The price of ‘substitute goods’. Substitute goods are goods that customers could buy as an alternative. Companies might set the price for their product in the knowledge that customers could switch to an alternative product if they think that the price is too high. For example, if the price of butter is too high, more customers might switch to margarine or other types of ‘spread’.



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The price of ‘complementary goods’. Complementary goods are items that customers will have to buy in addition to complement the product.

Consumer tastes and fashion. High prices might be obtained for ‘fashion goods’.

Advertising and marketing. Sales demand can be affected by sales and marketing activities, including public relations activity. Strong consumer interest in a product or service could allow a company to set a higher price.

In addition to general factors influencing price, such as supply and demand, competition and cost, companies will use one or more different pricing strategies to decide the sales prices for their products or services.

Price elasticity of demand

The price elasticity of demand (PED) is a measurement of the change in sales demand that would occur for a given change in the selling price.

Within a market as a whole, there is an inverse relationship between selling price and sales demand. At higher prices, total sales demand for a product will be lower. For individual companies in a monopoly position in their market (or niche of the market) the same rule applies: if prices are raised, demand will fall.

The price elasticity of demand (PED) is measured as:

The change in quantity demanded as a percentage of original demand

The change in sales price as a percentage of the original price

Price elasticity of demand has a negative value, because demand rises (positive) if the price falls (negative), and demand falls if the price rises.

Elastic and inelastic demand

Sales demand for a product could be either elastic or inelastic in response to changes in sales price.

Demand is elastic if its value is above 1. (More accurately, demand is elastic if its elasticity is a figure larger than – 1.)

Demand is inelastic if its value is less than 1. (More accurately, demand is inelastic if its elasticity is a figure below – 1, between 0 and – 1.)

The significance of elasticity

Price elasticity of demand affects the amount by which total sales revenue from a product will change when there is a change in the sales price.

If demand is highly elastic (greater than 1, ignoring the minus sign):

increasing the sales price will lead to a fall in total sales revenue, due to a large fall in sales demand, and

a reduction in the sales price will result in an increase in total sales revenue, due to the large rise in sales demand.

Profit might increase or decrease when the sales price is changed, depending on changes in total costs as well as the change in total revenue.

If demand is inelastic (less than 1, ignoring the minus sign):

increasing the sales price will result in an increase in total sales revenue from the product, because the fall in sales volume is fairly small, and

reducing the sales price will result in lower total sales revenue, because the increase in sales demand will not be enough to offset the effect on revenue of the fall in price.

A product does not necessarily have high or low price elasticity of demand at all price levels. The same product might have a high price elasticity of demand at some sales prices and low price elasticity at other prices.



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Elasticity and setting prices

An understanding of the price elasticity of demand for products can help managers to make pricing decisions.

Inelastic demand

If demand is inelastic, raising selling prices will have a small effect on demand and will result in higher sales revenue. There will be a small reduction in the number of units sold so total costs will fall. Higher revenue and lower total costs mean higher profits. If management believe that sales demand for their product is price-inelastic, they might therefore consider raising the sales price.

Note that governments will often raise revenue by taxing goods for which there is an inelastic demand. Such goods include cigarettes and fuel. Cigarettes are addictive and fuel is a necessary for everyday life. In each case an increase in price through additional taxation should not result in a fall in demand.

If demand is inelastic, reducing the sale price will lead to lower total sales revenue. Sales demand will increase, and so the costs of sales are also likely to increase. Profits are therefore likely to fall.

Elastic demand

If demand is elastic, an increase in the sales price will lead to a fall in total sales revenue. Sales demand will also fall. If managers are thinking about an increase in the sales price, they will have to consider whether the fall in total costs (due to the lower volume of sales) will exceed the fall in total revenue.

If demand is elastic, reducing the sales price will increase total sales revenue from the product, but total sales volume will increase. The effect, as with raising sales prices for a product with high price elasticity of demand, could be either higher or lower total profits. There is a risk that if one company reduces its sales prices and elasticity of demand is high, this could lead to a ‘price war’ in which all competitors reduce their prices too. At the end of a price war, all sellers are likely to be worse off.

Companies might try to reduce the price elasticity of demand for their products by using non-price methods, such as improving product quality, improving service and the use of advertising and sales promotions.



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4. SOCIAL, CULTURAL AND DEMOGRAPHIC FACTORS

4.1 The nature of social, cultural and demographic factors in the environment

Social factors in the environment refer to changes in habits, tastes, values and preferences. In the short term social attitudes and habits are also affected by fashion.

Cultural factors are the customs, traditions and behaviors of people in a given country it also includes fashion trends and market activities influencing actions and decisions.

Demographic factors are concerned with a specific aspect of society – the size, spread and distribution of society.

Business organizations need to respond to changes in society, including demographic changes. If they do not, they will continue to offer products and services that are increasingly less relevant to the needs of customers.

The marketing concept in business requires that all successful businesses must keep up to date with and aware of social and demographic change, and respond accordingly.

Example: Social, cultural and demographic factors

Here are just a few examples of social and demographic changes;

Outing and dining out habits of a particular area or particular region.

Social media addiction has changed dynamics of societies.

Domestic travelling and international travelling, especially in summer and winter vacations.

People interested and concerned with their looks, and attend social gatherings.

People concerned about health and weight. Interest in fitness, healthy eating and diets has increased.

The average age at which children leave their parental home has increased. Many children are staying on at home until they are 25 or 30 years old – a much higher number than in the past.

There has been an increase in the number of ‘single–parent families’

There has been a large number of people entering the country as migrants and a large number emigrating to live in other countries.

4.2 Ageing population and other demographic and social changes

Ageing population

For some Western countries, especially countries of Western Europe, there is an ageing indigenous population. The birth rate is historically low, and the number of new babies per woman of child-bearing age has fallen.

Traditional family system is not being appreciated and birth rate has fallen down which is a major cause for the lack of working age groups population.

At the same time, average life expectancy has been increasing. More people are living until an older age than in the past.

As a consequence, there is an ageing population, which means that a larger proportion of the population than in the past will be of an older age – say past normal retirement age.

Governments are aware that the consequence of this demographic change is that in the future, there might be a relatively small working population and a relatively large number of people in retirement. The ‘few’ in work might be expected to support the ‘many’ in retirement, for example by paying taxation to fund state hospital services and many thousands of retired civil servants.



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The ageing population of countries such as the UK, Italy and France has been referred to as a ‘demographic time bomb’. The view is that the younger generation might refuse to accept the economic burdens that government might try to impose on it.

Other demographic patterns

Some countries suffer from very high rates of mortality, particularly due to disease. In these countries the population on average is very young and there are very few older people.

Some countries have high rates of child birth but low rates of economic growth. In these countries, large numbers of people might try to migrate to other countries with a wealthier economy.

Social and culture responsiveness

It refers to people’s attitude to work and wealth; role of family, marriage, religion and education; ethical issues and social responsiveness of business. The social environment of a given region can have a significant impact on success. For instance, Food companies are highly impacted by this – certain cultures prefer certain types of foods.

4.3 Government policy for demographic change

A government might try to develop a policy for social and demographic change. For example, in a country with an ageing population, the government might consider the following measures.

Permitting immigration of people from other countries, possibly under a controlled immigration scheme, in order to increase the size of the population at working age.

Increasing the average age at which individuals may retire with entitlement to a state pension.

Encouraging individuals to work beyond their normal retirement age.

Providing some form of subsidy or tax-incentive to individuals/couples who have children.

Business organizations are affected by social and demographic change, and by government policy. As a population changes, in age or ethnic origin, the needs and wants of consumers will change. Businesses must respond to those changes.

In addition, the nature of the workforce – its age distribution, availability and skills – will also change. Issues such as education and training take on importance for ageing employees as well as young employees, if companies intend to employ them beyond their normal retirement age.

4.4 Business Ethics

Ethics is defined as the “discipline dealing with what is good and bad and with moral duty and obligation”. Business ethics is concerned with truth and justice and has a variety of aspects such as expectations of society, fair competition, advertising, public relations, social responsibilities, consumer autonomy, and corporate behavior in the home country as well as abroad.

Moral management strives to follow ethical principles and precepts, moral mangers strive for success, but never violate the parameters of ethical standards. They seek to succeed only within the ideas of fairness, and justice.

Moral managers follow the law not only in letter but also in spirit. The moral management approach is likely to be in the best interests of the organization in the long run. They practice and portray the following values:

Honesty

Integrity

Trustworthiness

Loyalty

Fairness

Responsibility (Corporate Social Responsibility)



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5. TECHNOLOGICAL FACTORS

5.1 The impact of technological change on working methods

Over the years, machines have replaced man for mechanical tasks. Now new and latest machines are replacing the old machines frequently. Computers have replaced man for many mental tasks and intellectual jobs. The impact of computers on business organizations can be summarized as:

Computers have replaced man for many data processing and information analysis tasks

Humans have been used for the ‘higher level’ intellectual tasks and skills tasks that computers have not been able to perform

Computers are taking over from humans even some high level intellectual and analytical tasks.

5.2 The impact of technological change on products and services

The point should be fairly obvious, but you should also remember that technological change has a huge impact on the nature of products and services that businesses offer to customers.

Companies need to maintain technological developments in the design and manufacture of products, and in the provision of services, in order to remain competitive.

Example:

Nokia is a recent example that could not update its technology and could not compete the competitors.

A current example has been the competition between manufacturers of televisions, such as Sony and Toshiba, to achieve a technological lead in the development of televisions with the latest ‘flat screen’ technology.

Technology has shifted from manual buttons to remote and now to the touch screens.

5.3 The impact of technological change on organisation structure and strategy

Technological change has also had an effect for many businesses on their organization and strategy. Computerization, communications technology and other aspects of technological change have led to major developments in business such as:

downsizing

de-layering

outsourcing.

Restructuring of hierarchy of organization

To some extent, these developments in business organization are inter-related.

Downsizing

Downsizing means the reduction in size of a business organization. It does not (necessarily) mean that the business organization is selling fewer goods or services. It means that its business activities are conducted by a smaller number of people.

Technological change makes downsizing possible, because tasks that were performed previously by humans can now be performed by machine or computer.

De-layering

‘De-layering’ means removing one or more levels of management in the organization structure. It could mean removing all layers of middle management entirely, leaving just senior managers and front-line managers and supervisors.



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De-layering is made possible by high-quality communications, provided that senior management can delegate sufficient authority to junior managers, and expect junior managers to meet their responsibilities.

When an organization goes through a de-layering, middle managers are made redundant, and there is consequently some downsizing.

Outsourcing

Outsourcing means arranging for other business organizations to perform some administrative tasks, or management tasks, instead of having to employ individuals to do the task internally, as part of the organization’s own activities.

For example, the following tasks might be outsourced.

A company might arrange for an external accountancy firm to take over the administration of the payroll, and administer wages and salaries for the company’s workforce.

A company might arrange for an external building services company to take over responsibility for cleaning and security in all its buildings.

A company that produces motor cars might outsource the manufacture of most (or even all) of the component parts, so that its only ‘in-house tasks’ are product design, assembly, testing and marketing.

Many companies outsource their IT requirements to specialist IT firms.

Some companies outsource most of their office administration tasks, such as record keeping and word processing.

The reason why outsourcing is now popular in many countries is that it can take advantage of specializations. The conceptual argument in favor of outsourcing is as follows:

A business succeeds in its competitive markets because it is more successful at doing some things better than its competitors. A successful business has some core competences that enable it to succeed and do better than rivals.

A business also has to do other tasks that support its main activities, such as office administration, IT support, building and facilities administration and payroll. It does not have any particular skills in these activities, and there are other companies that can do these tasks just as well, and in some cases much better.

When a business performs all these noncore activities itself, this diverts management attention away from the core competences. Management should focus on its strengths, not the routine and ordinary.

It should therefore outsource ‘noncore’ activities and concentrate on its core activities, to make sure that it maintains or improves its competitive advantage over rivals.

Outsourcing is made much easier by high-quality telecommunications and computer systems, because data and information can flow easily between a business and the other organizations to which it has outsourced activities.

Restructuring

Restructuring may be vertical and horizontal both. Different organizations merge functions, sections and departments according to the technological advancement and continuously restructure the organizational structure. Like real time, online data availability has shifted the regional decision making into centralized decisions.

Virtual company

Taken to an extreme form, a business organization can outsource almost all its activities, leaving just one or two individuals at the center managing the business.

A virtual organization is an organization that has no physical hub or center of operations. Instead, it is a network of individuals linked by computer and telecommunications network (such as the internet). The individuals need not be employees of the business: they might be part-time workers or self-employed individuals.



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Each individual in the virtual company or virtual organization might work from home. Data and information is transferred between them, and each performs particular tasks – with no office, no substantial assets and few (if any) full-time employees.

The virtual company has been made possible by developments in Information technology.

Online Social Media

Social media has changed the business models. Personal and business entities now have become the digital identities. Physical interactions, traditional marketing, traditional businesses have effected through digital social media.

Big Data

Extremely large data sets are being gathered, analyzed computationally to reveal patterns, fashions, trends, associations and preferences, especially relating to human behavior and interactions. These big data sets are being used to take business decisions.

Artificial Intelligence

Artificial intelligence has shifted the paradigm. Different business segments are using artificial intelligence, various services are being provided with the help of artificial intelligence.

For example:

Online assistance to the customers is being provided through the artificial intelligence.

Frequently occurring problems are being solved using artificial intelligence.

Routine decision making is also being done with the help of artificial intelligence.



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6. ECOLOGICAL FACTORS

6.1 Impact of business on the physical environment

Environmental issues have become increasingly important to businesses. There has been a growth in awareness of the environmental impact of business organizations. Society at large holds firms responsible for the environmental impacts of their operations.

The precise nature of the environmental impacts of a firm varies from industry to industry but might be grouped into the following areas:

Use of resources

Carbon footprint – The level of CO2 emissions of a business.

Pollution

Use of resources: Non-renewable

Supplies of non-renewable resource are limited. Such resources are being used up. Extraction of non-renewable resources often has a negative impact on the local natural environment. Property development can use up land which was previously countryside.

Use of resources: Renewable

The use of some renewable resources is at such a rate that the systems which generate them cannot keep up with demand. (e.g. over fishing has depleted fish stocks).

Demand for some renewable resource has led diversion of land from what could have been agricultural use to industrial use. (e.g. growth of crops for bio-fuels)

Increase of demand for some raw material has led to deforestation of ancient forests to convert the land to use for growing crops that industry needs (e.g. palm oil). This might lead to impact on biodiversity as natural habitats are reduced.

Carbon footprint

Global warming is a major concern. There is wide acceptance in the scientific community that this is a result of human activity through the release of greenhouse gasses (of which CO2 is the most important). A carbon footprint is the amount of CO2 generated by an activity or a business. Anything that consumes energy will have a carbon footprint. Businesses use energy in:

Manufacturing

Transport

Heating and lighting

Pollution

As well as producing CO2 emissions businesses engage in activities which result in further pollution. This includes obvious things like chemical waste but also one or two that are not so obvious:

Noise – to the detriment of local residents

Heat – many industrial processes have to be cooled and this results in heat being transferred into the local environment.

Packaging.



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6.2 Ways in which businesses might limit impact on the environment.

Many large companies are actively committed to reducing their environmental impact. Possible methods include:

improved energy efficiency;

investment in renewable energies;

sourcing goods locally so as to reduce transport costs;

investment in IT to make inventory control more effective – this should lead to less waste;

investment in more efficient production technologies to reduce waste;

reducing packaging.

6.3 Benefits of economic sustainability to a range of stakeholders

A sustainable business is any organization that participates in environmentally friendly or green activities to ensure that all processes, products, and manufacturing activities adequately address current environmental concerns while maintaining a profit. A sustainable business meets the needs of the present world without compromising the ability of the future generations to meet their own needs

In general, business is described as green if it:

incorporates principles of sustainability into each of its business decisions;

supplies environmentally friendly products in place of non-green products;

is greener than traditional competition;

has made an enduring commitment to environmental principles in its business operations.

Benefits to stakeholders

A business that takes sustainability seriously will enhance its chances of being able to continue its business at current or enhanced levels. Such a business will be looked on favorably by customers and this might lead to increased sales and profits.

Shareholders and employees will benefit from the continued success of the business.

Suppliers benefit through the establishment of long term, ethical trading agreements.

Governments benefit as the action of the company will help the government meet its environmental obligations under treaties and provide tax revenue.

Society benefits through the provision of continued employment and environmental improvements

Example:

Flavorsome, a US-based fast food chain has gained worldwide recognition due to unique taste, exemplary ambiance and economy meals. It is considering to exploit an opportunity to expand its business in major cities of Xanata.

Xanata is a developing country where demand for fast food is ever increasing and during the last decade, local as well as international fast food chains have enjoyed substantial profits. Despite widening wealth gap, fast food has gained immense popularity among lower and middle class. However, social awareness groups are pressurizing health ministry to revise public health policy by introducing stringent regulations on food industry.

The government is offering tax holiday to encourage foreign investment. This incentive is strongly being opposed by local business community. In the past few years, Xanata has seen high inflation rate and the government is considering to raise the minimum wage rate by 25%.

Burger Buddy, a leading local fast food chain is gaining popularity because of its social contributions, advanced technologies, use of social media/mobile application for promotional activities, etc.

The environmental factors relevant to the above situation in accordance with PEST analysis are as follows:

http://en.wikipedia.org/wiki/Business

http://en.wikipedia.org/wiki/Business

http://en.wikipedia.org/wiki/Environmentally_friendly



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Political factors:

Foreign investment is encouraged by government by offering tax holidays.

Strong opposition of existing tax incentives may pressurize government to reconsider the policy.

Government is considering to raise minimum wage rate which would increase costs and may affect the profitability of businesses.

Economic factors:

Demand for fast food is growing and fast food chains are enjoying substantial profits.

There is a widening gap in terms of wealth distribution and demand for fast food items is mainly from middle and lower class which might be affected as the gap further widens.

Xanata is facing high rate of inflation which may have adverse impact on economy of the country and customers’ ability to buy.

Social factors:

There is an increased trend on habits of eating fast food among middle and lower classes that may comprise of major proportion of population of Xanata.

There is a pressure on health ministry to revise health policy which may adversely impact the business prospects of fast food chains.

Social contributions are appreciated by consumers.

Technological factors:

There is a trend of using advanced technologies among fast food chains as reflected in the success of Burger Buddy.

Use of social media and mobile application for promotional activities is also on rise.

Practice Question:

Identify five external factors which would necessitate changes in the strategies and policies of business organizations. Give two examples of changes relevant to each external factor.

Solution

External Factors

The external factors which necessitate changes in the strategies and policies of organizations, along with their relevant examples of changes are as follows:

i. Political factors – unexpected changes in the governments and/or their policies, major civil disturbances or disruptions, wars between countries.

ii. Economic factors – major changes in taxation policies or grant of subsidies, entry into or exit from economic unions.

iii. Social and cultural factors – changes in attitudes towards dress codes, or eating habits due to health considerations, pursuing recreational activities.

iv. Technological factors – greater reliance on IT, changes due to instant communications, fast travel facilities.

v. Ecological or environmental factors – shortage of potable water, pollution caused by industries, soil degradation.

vi. Legal factors – awareness of human rights, concern for safety of employees working in hazardous conditions, laws relating to billboards in cities.



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7. COMPETITIVE FACTORS

Successful marketers are those who can steer their organizations through the turbulent marketing environment, and do it better than competitors. Whilst easy to say, in practice it is not easy to do. Many competitive industries and organizations are very difficult to penetrate, despite all the intelligent techniques that may be available to get information. The Kenya flower industry, for example, whilst willing to give general information on their production and marketing, are very reluctant to give away their "trade" secrets. Other industries, like the diamond industry, are very exclusive in the sense that few companies dominate, the most famous being De Beers.

Despite this, any successful organization has to look at the competition, and moreover, be aware how the nature of competition can guide its strategy. The Kenyan flower industry is facing increasingly stiff competition from Zimbabwe. Its response has to be rapid in order to preserve its stance. Whilst Kenya may have been a market "leader" with the appropriate strategy to go with it, Zimbabwe as a market "challenger," may have made Kenya now to think, more in the future, to go with a "niche" strategy as a counteraction. As we saw earlier, this certainly was the case with Kenyan vegetables.

Environmental analysis uses techniques such as PEST analysis and Porter’s (1979) Five Forces to identify opportunities and threats to an organization. In addition, a position analysis of factors inside the organization can be used to identify strengths and weaknesses in the resources and systems of the organization. Strengths or weaknesses may relate for example, to particular skills or to the product range of the business.

Strengths and weaknesses are concerned with the internal capabilities and core competencies of an entity. Threats and opportunities are concerned with factors and developments in the environment.

Environmental threats and opportunities recognized in an environmental scan, and internal strengths and weaknesses recognized in a position analysis (or resource analysis) are brought together to carry out a strategic analysis of strengths, weaknesses, opportunities and threats, which is called SWOT analysis.

7.1 SWOT analysis

SWOT analysis is a technique (or ‘model’) for identifying key factors that might affect business strategy. It is a simple but useful technique for analyzing strategic position.

SWOT analysis is an analysis of strengths, weaknesses, opportunities and threats.

Strengths are internal strengths that come from the resources of the entity.

Weaknesses are internal weaknesses in the resources of the entity.

Opportunities are factors in the external environment that might be exploited, to the entity’s strategic advantage.

Threats are factors in the external environment that create an adverse risk for the entity’s future prospects.

S W

T O

trengths eaknesses

hreats

Internal factors

factors External



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A SWOT analysis might be presented as four lists, in a cruciform chart, as follows. Illustrative items have been inserted, for a small company producing pharmaceuticals.

Strengths Weaknesses

Extensive research knowledge

Highly-skilled scientists in the workforce

High investment in advanced equipment

Patents on six products

High profit margins

Slow progress with research projects

Poor record of converting research projects into new product development

Recent increase in labor turnover

Opportunities Threats

Strong growth in total market demand

New scientific discoveries have not yet been fully exploited

Recent merger of two major competitors

Risk of stricter regulation of new products

SWOT analysis is a means to allow a company to understand its competitive position. A company’s competitive position refers to its ability to generate returns in comparison to those generated by its competitors. This is a necessary step in the development of competitive advantage.

7.2 Competitive strategy

The following section is based on the ideas of Professor Michael Porter’s which he expounded in the 1980’s.

Competitive strategy should be executed to relate a company to its environment. The key aspect of a firm’s environment is the industry or industries in which it competes.

The returns that a company is able to generate are subject to two fundamental influences:

Industry attractiveness – Not all industries offer equal opportunities for sustained profitability

Competitive position within the industry – Positioning determines whether a firm’s profitability is above or below the industry average.

A firm may earn high rates of return even though the industry structure is unfavorable and the average profitability of the industry is modest by having a strong position in the industry.

Competitive advantage is an advantage that a firm has over its competitors which allows it to generate greater returns than they can. Competitive advantage is achieved by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justify higher prices

There are many different approaches to achieving a superior return on investment but at the broadest level there are three generic strategic approaches which can be used:

Cost leadership

Product differentiation

Focus

Cost leadership

A company that is a cost leader in an industry is able to make and sell its goods at a lower cost than its competitors. This means that if it sells at the same price as its competitors it will make a higher profit. Alternatively, it could sell at a lower price than its competitors and increase market share.

Product differentiation

A firm might compete by trying to give its products features that its competitors’ products do not have. If these features are valued by consumers the product can be sold at a higher price. Products might be differentiated with actual enhancements or by marketing for example active advertising campaigns. Actual enhancements might be copied by competitors.



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Focus

This relates to whether the producer targets a mass market or a small part of a market (market niche). The Ford Motor Company sells to the mass market. Aston Martin sells to the top end of the market. Both Ford and Aston Martin sell cars but they do not compete with each other. A person thinking about buying a ford focus would not see an Aston Martin Lagonda as an alternative product.

7.3 Achieving competitiveness: adding value

Value relates to the benefits that a customer obtains from a product or service. Customers are willing to pay money to buy goods or services because of the benefits that they expect to receive from them. The price they are willing to pay puts a value on those benefits.

Business entities make profits by creating added value. For example, Company X buys a quantity of leather for PKR1,000 and converts this into leather belts, which it sells for PKR10,000. Consumers could have bought the leather themselves for PKR1,000. They must believe that what Company X has done to the leather is worth paying an extra PKR9,000 for. Company X has created value of PKR9,000. In a competitive market, the most successful business entities are those that are most successful in creating value. The only reason why a customer should be willing to pay a higher price than the lowest price in the market is that he sees additional value in the higher-priced product, and is willing to pay more to obtain the value.

There are different ways of adding value.

One way of adding value is to alter a product design, and include features that might meet the needs of a particular type of customer better than products that are currently in the market. A product might be designed with added features.

Value can be added by making it easier for the customer to buy a product, for example by providing a website where customers can make purchases. Bookstores can add value to the books they sell by providing sales outlets at places where customers often want to buy books, such as airport terminals.

Value can be added by promoting a brand name. Successful branding might give customers a sense of buying products or services with a better quality.

Value can be added by delivering a service or product more quickly. For example, a private hospital might add value by offering treatment to patients more quickly than other hospitals in the region. Value can also come from providing a reliable service, so that customers know that they will receive the service on time, at the promised time, to a good standard of performance.

The concept of the value chain

A value chain is a series of activities, each of which adds value. The total value added by the entity is the sum of the value created by each stage along the chain. Johnson and Scholes have defined the value chain as: ‘the activities within and around an organization which together create a product or service.’

7.4 Value chain analysis

A technique used by Michael Porter who pointed out that within a business entity:

there is a primary value chain, and

there are support activities (also called secondary value chain activities).

Primary value chain

Porter identified the chain of activities in the primary value chain as follows.

Inbound

logistics Operations

Outbound

logistics

Marketing

and sales Service



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This value chain applies to manufacturing and retailing companies, but can be adapted for companies that sell services rather than products.

Most value is usually created in the primary value chain.

Inbound logistics. These are the activities concerned with receiving and handling purchased materials and components, and storing them until needed. In a manufacturing company, inbound logistics therefore include activities such as materials handling, transport from suppliers, inventory management and inventory control.

Operations. These are the activities concerned with converting the purchased materials into an item that customers will buy. In a manufacturing company, operations might include machining, assembly, packing, testing and equipment maintenance.

Outbound logistics. These are activities concerned with the storage of finished goods before sale, and the distribution and delivery of goods (or services) to the customers. For services, outbound logistics relate to the delivery of a service at the customer’s own premises.

Marketing and sales. These are the activities associated with the ‘4Ps’ of marketing, namely; product, place, price, and promotion.

Service. These are all the activities that occur after the point of sale, such as installation, warranties, repairs and maintenance, and providing training to the employees of customers. An important aspect of service is often the work of customer call centers or customer service centers.

The nature of the activities in the value chain varies from one industry to another, and there are also differences between the value chain of manufacturers, retailers and other service industries. However, the concept of the primary value chain is valid for all types of business entity.

Value is added by all the activities on the primary value chain. Customers might be willing to pay more for a product or a service if it is delivered to them in a more convenient way. For example, customers might be willing to pay more for household shopping items if the items are delivered to their home, so that they do not have to go out to a supermarket or a store to get them.

Secondary value chain activities: support activities

In addition to the primary value chain activities, there are also secondary activities or support activities. Porter identified these as:

Purchasing. These are activities concerned with buying the resources for the entity – materials, plant, equipment and other assets. Successful buying often means lower purchase costs, or achieving a secure source of supply for key materials or components.

Technology development. These are activities related to any development in the technological systems of the entity, such as product design (research and development) and IT systems. Technology development is an important activity for innovation. ‘Technology’ also includes acquired knowledge: in this sense all activities have some technology content, even if this is just acquired knowledge.

Human resources management. These are the activities concerned with recruiting, training, developing and rewarding people in the organization.

Corporate infrastructure. This relates to the organization structure and its management systems, including planning and finance management, quality management and information systems management.

Support activities are often seen as necessary ‘overheads’ to support the primary value chain, but value can also be created by support activities. For example:

Purchasing can add value by identifying a cheaper source of materials or equipment.

Technology development can add value to operations with the introduction of a new IT system.

Human resources management can add value by improving the skills of employees through training.

Corporate infrastructure can help to create value by providing a better management information system that helps management to make better decisions.



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Practice Question:

Eat Smart (ES), a family owned business is being managed by Mr. & Mrs. Khan. ES has been enjoying high profits and strong client base and is highly regarded for its premium quality diet food, energy drinks and low carb salads. The food is prepared under the supervision of Mrs. Khan, a foreign qualified nutritionist who has hired a team of qualified staff having sound knowledge and experience. Mr. Khan is a marketing graduate and looks after the supply chain activities i.e. from ordering and safe storage of ingredients to dealing with customer complaints and encouraging feedback.

At present, ES is offering take-away and delivery services. Dine-in service is not being offered due to the fact that Mr. & Mrs. Khan have been busy in managing routine work. ES relies on word of mouth and social media pages for promoting the business.

Given the low set-up costs and growing demand for healthy food, number of new online businesses have entered into the market. Some restaurants have also started to offer separate diet food menus.

‘Be Fit’ (BF), a chain of fitness center, has approached ES to partner with them in preparing diet plans and meals for its members. Partnering with BF would mean hiring of additional staff at various levels of operations and management.

a) Perform SWOT analysis for ES.

b) Identify the activities forming part of primary value chain as suggested by Porter and give two examples related to each such activity in ES.

Solution:

(a) SWOT analysis:

Strengths

Eat Smart (ES) has following strengths:

It is being managed and operated by qualified persons with a team of qualified staff.

It is enjoying high profit margins with strong client base.

Weaknesses

ES has following weaknesses to overcome:

High reliance on family members for management of business.

No dine-in service is being offered even though other restaurants are offering similar services.

Opportunities

ES has following opportunities to take:

Partnership with ‘Be Fit’ to expand the business.

Start offering dine-in service as client-base is already strong.

Threats

ES is subject to following threats:

(b) Activities forming part of primary value chain with two examples:

Inbound logistics

Procurement of ingredients.

Safe storage of ingredients.



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Operations

Preparation of diet food, energy drinks and low-carb salads.

Packaging of food for delivery.

Outbound logistics

Direct sale by means of take-away.

Delivery of food to clients.

Marketing and sales

Marketing by means of word of mouth.

Marketing through social media pages.

Services

Responding to customer complaints.

Encouraging feedback from customers.

7.5 The Five Forces model

A well-known business model for understanding the nature of competition in an industry, and the strength of the competition in an industry, has been provided by Michael Porter (in The Competitive Environment). This model for analyzing competitiveness in an industry or market is called the Five Forces model, because Porter is identified five factors (‘five forces’) that determine competitiveness.

These are:






When competition in an industry or market is strong, firms must supply their products or services at a competitive price, and cannot charge excessive prices and make ‘supernormal’ profits.

When any of the five forces are strong, it is difficult for a business entity to obtain a dominant position in its market, and profitability for businesses in the industry or market will therefore be low.

Threats from potential

entrants

Competitive rivalry Suppliers’ bargaining

power Customers’ bargaining

power

Threats from

substitutes



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Threat from potential entrants

Competition in a market is affected by the threat of new business entities coming into the market and adding to the competition. When new entrants are able to come into the market without much difficulty, prices of products in the market will be low. If prices went up and company profit margins improved, new firms would be tempted to come into the market in order to benefit themselves from the higher profits. The new competition would force down prices and profit margins. -

Because of this threat, firms that are already in the market keep their prices and profits low, and competition in the market is strong.

Competitive forces are reduced when it is difficult for new entrants to break into the market – in other words, when the ‘barriers to entry’ are high. A number of factors might help to create high barriers to entry:

Economies of scale. Economies of scale are reductions in average costs that are achieved by producing and selling an item in larger quantities. In an industry where economies of scale are large, and the biggest firms can achieve substantially lower costs than smaller producers, it is much more difficult for a new firm to enter the market. This is because it will not be big enough at first to achieve the economies of scale, and its average costs will therefore be higher than those of the existing large-scale producers. There are many examples of industries where the major companies have achieved a dominant market position through the size of their operations so that they can make their products cheaply and sell them at a low price.

Capital investment requirements. If a new entrant to the market would have to make a large capital investment in assets such as factory premises and equipment, this will act as a barrier to entry, and deter firms from entering the market. This is because they would lose a substantial amount of money if their new business venture failed and they might not want this ‘investment risk’.

Access to distribution channels. In some markets, there are only a limited number of distribution outlets or distribution channels. If a new entrant will have difficulty in gaining access to any of these distribution channels, the barriers to entry will be high.

Know-how. It be time-consuming and expensive for a new entrant to a market to acquire the ‘know-how’ and experience to be successful.

Switching costs. Switching costs are the costs that a buyer has to incur in switching from one supplier to a new supplier. In some industries, switching costs might be high. For example, the costs for a company of switching from one audit firm to another might be quite high, and deter a company from wanting to change its auditors. When switching costs are high, it can be difficult for new entrants to break into a market.

Government regulation. Regulations within an industry, or the granting of rights, can make it difficult for new entrants to break into a market. For example, it might be necessary to obtain a license to operate, or to become registered in order to operate within an industry. Companies that already operate within an industry might have the benefit of patent rights that prevent new competitors from ‘copying’ the products that they make.

Threat from substitute products

Competition within a market or industry will be higher when customers can switch fairly easily to buying alternative products (substitute products).

The threat from substitutes varies between markets and industries, but a few examples of substitutes are listed below:

Electric Solar System. Consumers might switch between Electric power supply corporations to own electric solar system. This means that the ability of a power supply corporations to charge higher prices for its products will be restricted by the threat that customers might switch to own solar system. Similarly, providers of gas supply are restricted in their ability to charge higher prices for gas by the threat of customers switching to electricity.

Transport. Customers might switch between air, rail and road transport services. This means that the competitive strength of a rail company is restricted by the threat of competitive actions by air transport companies or bus companies, and also by the costs of private motoring.



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Food and drink products. With many food and drink products, consumers might switch between similar products, such as rice, pasta and potatoes. For example, the competitive strength of a manufacturer of a branded coffee is therefore affected not only by other manufacturers of similar coffee products, but also by producers of tea.

Bargaining power of suppliers

In some industries, the competitive position of a business entity might be affected by the bargaining strength of its major supplier or suppliers. When this occurs, the suppliers might charge high prices to their business customers that these businesses are unable to pass on to their own customers (by charging higher prices for their own products). As a result, profitability in the industry is low. For example few local giants suppliers of Auto industry parts in local retail market might charge high price but local retailer in market cannot pass on to their customers due to the availability of China items.

Bargaining power of customers

Customers can reduce the profitability of an industry when they have considerable buying power. Powerful buyers are able to demand lower prices, or improved product specifications, as a condition of buying. Strong buyers also make rival firms compete to supply them with their products.

In many countries, a notable example of buyer power is the power of supermarkets as buyers in the market for many consumer goods. They are able to force down the prices from suppliers of products for re-sale, using the threat of refusing to buy and switching to other suppliers. As a result, profit margins in the manufacturing industries for many consumer goods are very low.

Porter suggested that buyers might be particularly powerful in the following situations:

when the volume of their purchases is high relative to the size of the supplier

when the products of rival suppliers are largely the same (‘undifferentiated’)

when the costs of switching from one supplier to another are low.

For instance, if customers are buying in large quantity, or buying perishable items in large quantity, they have bargaining power over the provider.

Competitive rivalry

Competition within an industry is obviously also determined by the rivalry between the competing business entities. Strong competition forces rival firms to offer their products to customers at a low price (relative to the product quality) and this keeps profitability fairly low.

Porter suggested that competitor rivalry might be strong in any of the following circumstances:

when the rival firms are of roughly the same size and economic strength

when there are many competitors in the industry or market

when there is only slow growth in sales demand in the market, so that firms are competing for a fairly fixed total amount of sales and customers

when the products of rival firms are largely the same (‘undifferentiated’)

when the costs of withdrawing from the industry are high, so that even unprofitable companies are reluctant to leave the market.

Practice Question:

Muntaha Group (MG) is considering to introduce airline services in a developing country. The management of MG is in the process of analyzing the airline industry to determine the intensity of competition. Explain the competitive forces that may have shaped the airline industry, considering Porter’s Five Forces Model. Clearly mention the strength of each force with related arguments. You may assume necessary details.



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Solution:

Competitive Forces

The competitive forces that may have shaped the airline industry as per Porter’s Five Forces Model are explained below:

i. Threat of new entrants

The threat of new entrants in an airline industry is low because of the following probable reasons:

The new entrants in an airline industry would have to make large capital investment (acquisition of airplanes, extensive marketing campaigns, acquisition of license, etc.).

The airline service would require particular set of skills, knowledge and experience that could be time consuming and cost bound.

The new entrant might find difficult to develop customer base as customers usually have high concerns of safety and trust in an airline industry.

Airline industry is highly regulated (stringent aviation and other regulations) in terms of entry, operations and exit.

ii. Threat of substitutes

The threat of substitute services in an airline industry is low to moderate because of the following probable reasons:

The threat may be considered as moderate for domestic travelling because of the presence of number of substitutes such as trains, cars, boats, etc.

The threat may be considered as low for international travelling as air travel usually remains the first choice of customers.

iii. Bargaining power of suppliers

The bargaining power of suppliers in an airline industry is high because of the following probable reasons:

The airline industry mainly relies on aircraft and related parts manufacturers and fuel suppliers. Given the small number of suppliers, they can exert high bargaining powers.

There are no or may be very few substitutes to aircrafts and fuel, therefore, airline industry has to heavily rely on suppliers.

iv. Bargaining power of customers

The bargaining power of customers in an airline industry is high because of the following probable reasons:

The costs of switching from one airline to another are low thereby empowering buyers to exert high bargaining power.

In a developing country, the customer groups are likely to comprise of people who may be price sensitive than brand sensitive.

Customers have easy access to pricing information offered by other airlines to make comparison.



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v. Competitive rivalry

The competitive rivalry in an airline industry is high because of the following probable reasons:

The airline industry involves high fixed costs that might be identical for each airline company; thereby the companies compete by means of differentiation or costs leadership by attempting to attain economies of scale.

The demand for airline services often remains constant or has low growth rate, thereby, airline companies compete for a fairly fixed amount of sales and customers.

The costs of entry and exit are high in an airline industry thereby companies may be reluctant to leave the industry and attempt to survive by means of competing with each other.



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STICKY NOTES

Business Environment encompasses the ‘climate’ or set of conditions, economic, social, political or institutional in which business operations are conducted

Environmental factors can be grouped into four categories:





In modern analysis it is more common to use PESTEL analysis, in which E is for Environmental/Ecological factors and L is for Legal factors.

Environmental Scan consists of four sequential steps:

Scanning Monitoring Forecasting Assessment

SWOT analysis is an analysis of strengths, weaknesses, opportunities and threats. It is a simple but useful technique for analysing strategic position.

Michael Porter introduced a model to determine the competitiveness of an industry called the Five Forces model. The five factors that determine competitiveness are:






A value chain is a series of activities, each of which adds value. The total value added by the entity is the sum of the value created by each stage along the chain.

Johnson and Scholes have defined the value chain as: ‘the activities within and around an organisation which together create a product or service.

Value chain analysis is a technique used by Michael Porter who pointed out that within a business entity:

there is a primary value chain, such as Inbound logistics, Operations, Outbound Logistics, Marketing & Sales and Service, and

there are support activities (also called secondary value chain activities) such as Purchasing, Technology support, Corporate Services, Human resource, etc.



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References:

Francis Aguilar (1967). Scanning the Business Environment. Macmillan: 1st THUS edition (1967). Retrieved

from https://www.mindtools.com/pages/article/newTMC_09.htm

Porter, M. E. (1979). "How Competitive Forces Shape Strategy."Harvard Business Review 57, no. 2 (March–April 1979): 137–145. Retrieved from

https://www.hbs.edu/faculty/Pages/item.aspx?num=10692

Abhishek Gupta, (2013). Environment & PEST Analysis: An Approach to External Business Environment. International Journal of Modern Social Sciences, 2013, 2(1): 34-43 Retrieved from https://pdfs.semanticscholar.org/d9d2/86c5a903a91d4e5e6cff565f186f91383a02.pdf

https://www.amazon.com/Scanning-Business-Environment-Francis-Aguilar/dp/B000VF9852/ref=sr_1_1?s=books&ie=UTF8&qid=1358936612&sr=1-1&keywords=Scanning+the+Business+Environment

http://www.hbs.edu/faculty/product/10692


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CHAPTER 3

ORGANIZATIONAL STRUCTURE

_

AT A GLANCE

Organization can be seen as the process of dividing up activities in an efficient and effective manner to enable a system of co-operative activities of two or more persons. Each type of organization has features that distinguishes one from the other based on their purpose, ownership, funding and accountability.

Organizations can be classified in two broad categories:

Business organizations (Sole traders, Partnerships, Limited companies and Clubs and societies)

Not-for-profit organizations (Public sector organizations and Non-government organizations)

A stakeholder in an organization is a person who has an interest (or ‘stake’) in what the organization does, and who might therefore try to influence the decisions and actions of the organization.

Stakeholders can be either:

internal stakeholders (shareholders, executive directors and senior managers, other managers and current employees); or

external stakeholders (lenders, suppliers, government, customers, local communities, the general public, including special interest groups and pressure groups, non-executive directors)

The main stakeholders in a business organization, internal or external, are those who exercise the greatest influence. It includes: the board of directors, senior executives below board level and shareholders.

Connected stakeholder’ means a stakeholder who is not a decision-maker, or is not a part of the permanent (full-time) infrastructure of the organization, but is nevertheless very influential in shaping the future of the organization and the decisions of its leaders.

The main connected shareholders in a company are usually: non-executive directors, employees, key suppliers, key customers.

Stakeholder mapping is a technique that can help senior managers to assess their main stakeholders, and consider what should be done (if anything) to win the support of particular stakeholders for particular decisions.

IN THIS CHAPTER

AT A GLANCE

SPOTLIGHT

1. Types of Organisation

2. Organizational Structures

3. Theories of Organizational Structures

STICKY NOTES

References

CHAPTER 3: ORGANIZATIONAL STRUCTURE CAF 4: BMBS


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One approach to stakeholder mapping is to evaluate each stakeholder group using a 2 × 2 matrix. One such matrix is a stakeholder power/interest matrix. This is sometimes called a Mendelow matrix.

An organizational structure is the formal arrangement within an organization that defines how activities and tasks are formally divided and how processes and information would flow within this structure.

Organization structures differ between entities. The following basic structures that might exist within any entity or part of an entity are:

a) an entrepreneurial organization structure: An entrepreneurial organization is an entity that is managed by its entrepreneurial owner.

b) a functional structure: A functional organization groups together people who have comparable skills and perform similar tasks.

c) a divisional structure: Most large companies have divisions to function relatively autonomous to meet their objectives. Types include: product division, customer division, process division and geographical division.

d) a matrix organization. Such organizations employ a multiple command system that includes not only a multiple command structure but also related support mechanisms and an associated organizational culture and behavior pattern.

Contingency theory of organization structure: According to the theory, an entity should use the organization structure that is best suited to its size, complexity and strategies.

Burns and Stalker - mechanistic and organic structures: The theory identifies two categories of organization structure, a mechanistic structure and an organic structure.

Mintzberg’s five building blocks for organizational configurations: He suggested that there are five elements or ‘building blocks’ in an organization (strategic apex, techno structure, middle line, support staff and operating core).

Mintzberg’s six organizational configurations: He identified six different organizational configurations, each having

a different mix of the five building blocks. He suggested that the most suitable organizational configuration would

depend on the type and complexity of the work done by the entity. The six configurations are: simple structure,

machine bureaucracy, professional bureaucracy, divisionalised form, adhocracy and missionary organization.

CAF 4: BMBS CHAPTER 3: ORGANIZATIONAL STRUCTURE


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1. TYPES OF ORGANISATION

1.1 Organization

Organization and Organizational structure are the most discussed topics in the area of business management. Over the years research and experiments have led managers to re-evaluate traditional approaches to find new structural designs that best support and facilitate employees and optimize performance of the company.

The basic concepts of organization design introduced by early management writers, such as Henri Fayol and Max Weber form the principles of today’s organizational structure. Surprisingly, so many years have passed but they still provide valuable insights into designing effective and efficient organizations.

Definition of Organization

Organization can be seen as the process of dividing up activities in an efficient and effective manner to enable a system of co-operative activities of two or more persons. These activities would collectively lead to the completion of common objectives and goals of a company or group of people.

Organization exists to allow accomplishment of work that could not be achieved by people working independently.

Since people from different backgrounds come to work together, organizations are strongly influenced by the people that form them. Organizations can take in part of the personality of the people within them hence the attitudes, perceptions and behaviors of the people would affect how an organization will operate.

Two or more people working together in a

structured way.

Duties and responsibilities being

assigned to each individual

Organizations use systems (e.g. swiping

in when entering office) and procedures

(e.g. cash handling rules) to regulate staff

behavior

All organizations pursue certain goals, considered to be over and above individual

aspirations

1.2 Types of Organization

The basic design features of an organization depend on the type of organization, the environment it operates in and its nature of business. Each type of organization has features that distinguishes one from the other.

a) Purpose. They have different purposes. Business organizations exist to make a profit. Public sector organizations exist to provide a benefit to the public, such as good government or key services such as health, education, a police force, national defense, and so on.

b) Ownership. They have different types of owner. Companies are owned by their shareholders, whereas public sector organizations are owned by the government (as the representative of the general public). Co-operatives are owned by members.

Organisations are social arrangements for the

controlled performance of collective goals



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c) Funding. Business organizations obtain the funds they need to operate from a variety of sources. A stock market company, for example, obtains its long-term funds from a mixture of reinvesting profits in the business, issuing new shares and borrowing. Charities rely on a mixture of government grants and private donations for the money they need. Public sector organizations obtain their money from the government, which in turn gets its money from taxation.

d) Accountability. The management of an organization is accountable to its owners for the performance and achievements of the organization. The directors of a company, for example, are accountable to the shareholders for the financial performance of the company. This is the main reason why companies produce their annual report and accounts.

Broadly speaking, organizations can be classified in two broad categories:

Business organizations, and

Not-for-profit organizations

Business organizations: This type of organization engages in commercial and industrial activities, with the purpose of making a profit.

The main types of business organization are:

i. Sole traders

ii. Partnerships

iii. Limited companies

iv. Clubs and societies

i. Sole trader: A sole trader is an individual who owns and operates his or her own business, but might employ a small number of people. There are no legal formalities needed to set up as a sole trader. Any profit made after tax belongs to the owner. The owner is in complete control and is free to make decisions. The independence is one of the key attractions of running a business as a sole trader.

ii. Partnership: A partnership exists when the ownership of a business is shared by at least two people. In most cases, the maximum number of partners is 20, although there are some exceptions, e.g. accountants and solicitors.

iii. Limited companies: The Limited Partnership Act (1907) allows a business to become a limited partnership if some partners provide capital but take no part in the management. These partners have limited liability, which means that they can only lose the amount of money that they have invested in the business. The main feature of a limited company is that it has a separate legal identity from that of its owners. The owners of a company all have limited liability. If the company collapses, they cannot be forced to use personal funds to pay off business debts. They only lose the amount that they originally invested in the company.

iv. Clubs and societies: These non-profit making organizations, e.g. sports and social clubs, exist because their members are drawn together by a common interest. The assets of clubs and societies are the property of the members and most income comes from member’s subscriptions. Clubs and societies produce income and expenditure accounts, rather than profit and loss accounts which show either a surplus or deficit of income over expenditure, as they do not aim to make a profit.

Not-for-profit organizations: This type of organizations do not seek to make a profit, although they must operate within the limits of the funding and financial resources that is available to them. They can be divided into two main types:

i. Public sector organizations: these are government organizations that are funded by the government to achieve social indicators of the country. Examples quality education to all, availability of basic health facility, ensuring clean drinking water for all citizens, etc.

ii. Non-government organizations: these are not-for-profit organizations that are partly or wholly funded from non-government sources. Examples are charities, clubs and societies.



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1.3 Stakeholder

A stakeholder in an organization is a person who has an interest (or ‘stake’) in what the organization does, and who might therefore try to influence the decisions and actions of the organization.

Stakeholders are individuals and other organizations, but they often have a common interest. It is therefore possible to categorize some stakeholders into groups of people with a similar interest.

Stakeholders can be either:

a) people or groups within the organization (internal stakeholders), or

b) people, groups or other entities that are external to the organization (external stakeholders).

Internal stakeholders

Within a business organization, internal stakeholders can be categorized into groups as follows:

a) shareholders

b) executive directors and senior managers

c) other managers and current employees.

It might be appropriate to divide management and employees into sub-categories, where there are groups with differing interests and concerns.

Shareholders/owners

In large companies, the main shareholders are not usually involved in the day-to-day management (although there are some exceptions). Shareholders in a large company are usually investors, seeking to earn a return on their investment in the form of dividends and a higher share price.

Shareholders leave the management of their company to the board of directors and executive management team. However, they might become more closely involved in the company, and try to influence the decisions of the directors, when they feel that their interests are threatened. For example, shareholders might express their concerns about any of the following:

a) Falling profits and a falling share price

b) Lower dividend payments

c) A proposal to invest in a major project where the business risk is high

d) A proposed takeover bid for another company or from another company.

When shareholders feel that their interests are threatened, they might try to become more actively involved in the company. Major shareholders can discuss their concerns with the company chairman and other senior directors.

A company might have a majority shareholder, who owns enough shares in the company that the shareholder is able to control the composition of the board and the decisions that the company’s directors make. When there is a majority shareholder, the interests of this shareholder might differ from those of the minority shareholders owning the remainder of the shares. (In other words, the majority shareholder and the minority shareholders might be different stakeholder groups.)

Executive directors and senior managers

A board of directors might consist of executive directors and non-executive directors. Executive directors are usually full-time employees of the company (whereas non-executives are not).

As executives and full-time employees, executive directors are involved in the management of the company. Their interests are therefore often similar to the interests of other senior executives, who do not have a position on the board of directors.



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The interests of executive directors and senior managers are affected by matters such as:

a) their remuneration, which consists of basic salary, pension rights, cash bonuses and share incentive schemes

b) power and status

c) career prospects

d) job security.

Executive directors and other senior managers often want their company to grow in size, because in a larger company, they expect larger remuneration, more power and status and better career prospects. However, growing the company is not necessarily in the best interests of shareholders, who are more concerned about profitability, dividends and the share price.

Other managers and employees

Managers in the middle and junior ranks of a management hierarchy might have ambitions to become senior managers. However, their interests and concerns are different. Often, junior managers and other employees share common interests, such as:

a) pay

b) working conditions

c) job security

d) job satisfaction

e) quality of life.

External stakeholders

Business organizations, particularly large organizations, have a large number of external stakeholders. These include:

a) lenders

b) suppliers

c) government

d) customers

e) local communities

f) the general public, including special interest groups and pressure groups

g) non-executive directors.

Lenders

Lenders to a company include banks and bondholders. (Companies might issue bonds or debentures in order to raise finance. Interest is paid on the bonds, which represent a debt that the company must eventually repay.) The main concerns of lenders are that the borrower should be able to repay the debt, with interest, on schedule.

Lenders might therefore be concerned about heavy borrowing by a business organization, because when a borrower gets into heavy debt, the risks increase that it will not be able to meet all the claims for interest and debt repayment, especially if profitability falls.

Suppliers

Business organizations buy goods and services from suppliers. Suppliers will usually agree to allow their customers some credit (time to pay) but their main interests are that:

a) a customer will pay what is owed and will not become a bad debt

b) customers will continue to buy from them

c) customers will treat them fairly, and deal with them in an ethical way.



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Government

The government has an interest in all business organizations, but especially large organizations, for a wide range of reasons.

a) Businesses pay tax on profits, so government has an interest in company profitability.

b) The government should want to create and maintain a strong economy. This depends partly (or largely) on new investments by business. Government might therefore want to encourage business investments.

c) The government should want to achieve low levels of unemployment. Businesses are major employers.

d) The government regulates many different aspects of business activity: employment law, environmental law, health and safety regulations and company law are just a few examples.

The government might be a significant external stakeholder in a business because of its power to introduce new laws and regulations, or amend existing laws.

Customers

Customers have a stake in a business organization because they expect to obtain value from the goods or services that they buy.

Local communities

In some cases, local communities might be stakeholders in a business organization, especially when the organization is a major employer in the area and the local economy depends on the work and business activity that the organization brings to the area.

The concerns of a local community might be very strong when a business organization proposes to close down operations in the area, and make its employees redundant. Business shut down by a major employer in an area has a knock-on effect for other businesses, which will lose trade and income.

The general public

The general public might consider that it has a stake or interest in major companies, because the actions of these companies can affect society as a whole. Public concerns might be expressed by action groups or pressure groups. Areas of public concern might include:

a) public health, especially in the case of food manufacturers and manufacturers of drugs and medicines

b) protection of the environment, reducing pollution, and creating ‘sustainable businesses’

c) corruption in business practices (such as bribery)

d) the exploitation of the consumer through mis-selling and misleading descriptions of goods

e) the monopolization of a market by one or a small number of companies. (In the UK for example there is public concern about the dominance of supermarket chains in the retail market, and the shift of retailing from town centers to out-of-town locations.)

Non-executive directors

Oddly, perhaps, non-executive directors are external stakeholders in a company. Although they are members of the board of directors, they are not full-time employees, and they are usually appointed to a company’s board because:

a) they bring experience and knowledge to the board that they have gained outside the company, and which executive directors often do not have

b) their interests are different from those of executive directors and senior executives: they are not affected by concerns about remuneration (bonuses and performance incentives), power and status or job security.



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Appointing independent non-executive directors to the board of directors of a company is good corporate governance practice, because independent NEDs can help to prevent a company from being dominated by the personal interests of the executive directors.

The main stakeholders

The main stakeholders in a business organization, internal or external, are those who exercise the greatest influence.

The most influential stakeholders in a company are usually the board of directors, and possibly also senior executives below board level. These are the individuals with the power to make most of the decisions for the company.

The directors will often be influenced by the opinions of their shareholders, especially their largest shareholders, because shareholders can take some action against the directors if they are dissatisfied. For example, shareholders can vote against the re-election of directors (and in extreme cases can vote to have a director removed from office).

Connected stakeholders

Other stakeholder groups, other than the directors, senior management and the shareholders, might influence the decisions that directors and senior management make. The term ‘connected stakeholder’ means a stakeholder who:

a) is not a decision-maker, or

b) is not a part of the permanent (full-time) infrastructure of the organization, but

c) is nevertheless very influential in shaping the future of the organization and the decisions of its leaders.

The main connected shareholders in a company are usually:

a) non-executive directors

b) employees

c) key suppliers

d) key customers.

The main connected stakeholders in a business organization must have some power that they are able to use to influence decisions. Some sources of power, and the stakeholders who might have them, are listed below:

Source of power: External Example

Legal rights Shareholders have some legal voting rights under company law.

Lenders have legal rights under the terms of their lending agreements:

for example a lender has a right to take action in the event of default by a

borrower.

Publicity, and ability to influence

customers or legislators

Pressure groups and protest groups might be influential. These include

environmental protection groups, human rights protection groups, and

animal welfare activists.

Control over key resources A major supplier could exert influence by controlling the supply of a key

resource to the organization.

Buying power Customers can exert influence collectively through their buying power. If

they do not like what a business organization is doing, they can switch to

buying from competitors.



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Source of power: Internal Example

Position power Individual employees might be in a position of power within the

organization, perhaps because of special expertise that they possess. Top

consultants and investment bankers are examples.

Claim on resources Power might arise from a claim or control that exists over particular

resources of the business. For example the power of employees or trade

union representatives might come from their ability to withhold labor in

the event of a dispute with management.

Personal charisma or influence Some individuals might exercise considerable influence through their

personal qualities and charisma.

1.4 Stakeholder mapping: Mendelow’s power/interest matrix

The managers of a business organization should manage its stakeholders, particularly those with the greatest influence. Stakeholder mapping is a technique that can help senior managers to assess their main stakeholders, and consider what should be done (if anything) to win the support of particular stakeholders for particular decisions.

One approach to stakeholder mapping is to evaluate each stakeholder group using a 2 × 2 matrix. One such matrix is a stakeholder power/interest matrix. This is sometimes called a Mendelow matrix, named after the person who ‘invented’ it.

The matrix can be used to identify the position of each group of stakeholders in a matter affecting the organization. The matrix compares:

a) the amount of interest that the stakeholder has in a particular issue, on a scale ranging from not at all interested (0) to very interested (+10), and

b) the relative power of the stakeholder, on a scale from very weak (0) to very powerful (+10).

The recommended approach to dealing with the stakeholder group is indicated in each quadrant of the matrix. The key stakeholders are those who have considerable power or influence, and also a keen interesting the matter or decision that management is considering.

a) If a stakeholder has very little power and very little interest in a matter, minimal effort is needed trying to keep the stakeholder informed about the matter or satisfied.



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b) If a stakeholder has very little power but a strong interest in a matter, the appropriate way to deal with them is to keep them informed about what is happening and why. The stakeholder should be kept informed even if they oppose what the organization is doing.

c) If the power of a stakeholder is strong but the stakeholder has very little interest in the matter, it is important to keep the stakeholder satisfied. It is essential to avoid any course of action that will increase the stakeholder’s interest, and persuade the stakeholder to exercise its power.

d) The most significant stakeholders are those with a large amount of power and a high level of interest in a matter. These stakeholders are key players and it is essential to obtain and keep their support.

Example

The board of directors of a major company want to make a takeover bid for another company. Stock market rules require that the agreement of the shareholders must be obtained before any such takeover can go ahead.

In this situation, the shareholders are stakeholders with large power and a high level of interest. Clearly, the board of directors must ensure that they win the full support of the shareholders so that the takeover will go ahead.

Example

The directors of a company are planning to shut down an operations center, because it is losing money. The employees who will be made redundant or transferred to other jobs within the company are a stakeholder group that probably has relatively little power to affect the shutdown decision. However, their interest in the matter is strong. The directors should keep the employees fully informed about developments, what the company is planning to do, and how this will affect each employee personally.

Practice Question:

How an astute manager should handle connected stakeholders who are in the following positions:

i. wield considerable power but have very little interest in the performance of the entity

ii. wield considerable power and also have a high degree of interest in the performance of the entity

iii. wield nominal power but have strong interest in the performance of the entity.

Solution:

An astute manager should handle the different types of connected stakeholders as follows:

i. keep stakeholders satisfied by alleviating their concerns in their areas of interest

ii. make concerted efforts to satisfy them which would also result in improvement of the company’s performance and enhancing the confidence of stakeholders because they are in a position to demand good performance

iii. keep the stakeholders informed by providing timely but selected information of the affairs of the organization with explanations of the favorable/unfavorable performance even if the stakeholders do not agree with the manner in which the affairs of the organization are managed.



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2. ORGANIZATIONAL STRUCTURE

An organizational structure is the formal arrangement within an organization that defines how activities and tasks are formally divided and how processes and information would flow within this structure.

The purpose of having an organizational structure is that it:

Divides work to be done into specific jobs and departments.

Assigns tasks and responsibilities associated with individual jobs.

Coordinates diverse organizational tasks.

Clusters jobs into units.

Establishes relationships among individuals, groups, and departments.

Establishes formal lines of authority.

Allocates and deploys organizational resources.

To put it in the simplest terms possible, an organizational structure describes how a company, division, team, or other organization is built; how all of its various components fit together.

An organizational structure consists of activities such as task allocation, coordination and supervision, which are directed towards the achievement of organizational aims.

Importance of Management Structure

Choosing the correct management structure ensures an organization’s continued growth, content employees and profitable returns for the shareholders. Choosing the wrong structure creates tensions between employees and managers, allows inefficient work practices to flourish and reduces company profitability. In the worst case an incorrect management structure can lead to company closure.

Unfortunately, many managers take it for granted that their organization’s management structure is correct, static and never requires changing. However, such assumptions are naïve and as the pace of change increases, there is a need to continually assess the suitability of a company’s management structure.

Example:

A very topical example of an inappropriate management structure is that of the American automobile manufacturers. A combination of out-dated management structures, inefficient business processes, poor work-place relationships, and vague communications between head office and operating divisions have almost caused the collapse of these global giants.

2.1 Types of Organization structures

Organization structures differ between entities. The organization structure for an entity should be appropriate for the size of the entity, the nature of its operations, and what it is trying to achieve. Most important, the organization must enable the entity to develop plans and implement them effectively.

There are several different types of organization structure. Within a single entity, particularly a large entity, there might be a mixture of different organization structures, with different structures in different parts of the entity.

From a strategic perspective, however, the key question is: ‘What is the most appropriate structure for a particular entity that will help it to achieve its strategic objectives in the most efficient way?’

You should also be familiar with the following basic structures that might exist within any entity or part of an entity:

a) an entrepreneurial organization structure

b) a functional structure

c) a divisional structure

d) a matrix organization.



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2.1.1 Entrepreneurial organization

An entrepreneurial organization is an entity that is managed by its entrepreneurial owner. The main features of an entrepreneurial organization are usually that:

a) the entrepreneur takes all the main decisions, and does not delegate decision-making to anyone else

b) the entity is therefore organized around the entrepreneur and there is no formal management structure

c) operations and processes are likely to be simple, and the entity will probably sell just a small number of products or services.

An entrepreneurial structure is appropriate when an entity is in the early phase of its life. As it grows larger, however, an entrepreneurial structure will become inefficient, and a formal management structure is needed.

2.1.2 Functional organization

A functional organization groups together people who have comparable skills and perform similar tasks. This form of organization is fairly typical for small to medium-size companies, which group their people by business functions: accountants are grouped together, as are people in finance, marketing and sales, human resources, production, and research and development. Each unit is headed by an individual with expertise in the unit’s particular function. Examples of typical functions in a business enterprise include human resources, operations, marketing, and finance. Also, business colleges will often organize according to functions found in a business.

There are a number of advantages to the functional approach. The structure is simple to understand and enables the staff to specialize in particular areas; everyone in the marketing group would probably have similar interests and expertise. But homogeneity also has drawbacks: it can hinder communication and decision making between units and even promote interdepartmental conflict. The marketing department, for example, might butt heads with the accounting department because marketers want to spend as much as possible on advertising, while accountants want to control costs.

Each function has its own management structure and its own staff. An organization chart showing a simple functional structure is shown below.



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Practice Question:

a) Discuss the salient features of a functional organizational structure and the main advantages that are associated with it.

b) Present a chart (in basic form) of the functional organizational structure of a company engaged in the business of manufacturing of superior quality sanitary fittings.

Solution:

a) In a functional organizational structure, decision-making authorities and responsibilities are segregated and delegated in a formal arrangement according to the specific grouping of activities or functions. Each functional department has its own management structure and staff to perform activities that are relevant to the needs of the organization.

The main advantages of creating an organizational structure on functional lines are as follows:

i. development of skills/expert knowledge because the employees are able to concentrate within their particular areas of specialization

ii. efficient utilization of human and other resources because they are deployed in specialized activities

iii. facilitates smooth co-ordination of similar functions within the department and encourages sharing of knowledge and skills

iv. assessment of employee performance with clarity as the allocated functions are performed on a continuous basis.

b) Diagram of functional organization structure of a company engaged in the business of manufacturing superior quality sanitary fittings is presented below:

2.1.3 Divisional Organizations

Large companies often find it unruly to operate as one large unit under a functional organizational structure. Sheer size makes it difficult for managers to oversee operations and serve customers. To rectify this problem, most large companies are structured as divisional organizations. They are similar in many respects to stand-alone companies, except that certain common tasks, like legal work, tends to be centralized at the headquarters level. Each division functions relatively autonomously because it contains most of the functional expertise (production, marketing, accounting, finance, human resources) needed to meet its objectives. The challenge is to find the most appropriate way of structuring operations to achieve overall company goals. Toward this end, divisions can be formed according to products, customers, processes, or geography.

Product division: means that a company is structured according to its product lines. General Motors, for example, has four product-based divisions: Buick, Cadillac, Chevrolet, and GMC. Each division has its own research and development group, its own manufacturing operations, and its own marketing team. This allows individuals in the division to focus all their efforts on the products produced by their division. A downside is that it results in higher costs as corporate support services (such as accounting and human resources) are duplicated in each of the four divisions.



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Customer Division: Some companies prefer a customer division structure because it enables them to better serve their various categories of customers. Thus, Johnson & Johnson’s two hundred or so operating companies are grouped into three customer-based business segments: consumer business (personal-care and hygiene products sold to the general public), pharmaceuticals (prescription drugs sold to pharmacies), and professional business (medical devices and diagnostics products used by physicians, optometrists, hospitals, laboratories, and clinics).

Process Division: If goods move through several steps during production, a company might opt for a process division structure. This form works well at Bowater Thunder Bay, a Canadian company that harvests trees and processes wood into newsprint and pulp. The first step in the production process is harvesting and stripping trees. Then, large logs are sold to lumber mills and smaller logs are chopped up and sent to Bowater’s mills. At the mill, wood chips are chemically converted into pulp.

About 90 percent is sold to other manufacturers (as raw material for home and office products), and the remaining 10 percent is further processed into newspaper print. Bowater, then, has three divisions: tree cutting, chemical processing, and finishing (which makes newsprint).

Geographical Division: enables companies that operate in several locations to be responsive to customers at a local level. Adidas, for example, is organized according to the regions of the world in which it operates. They have eight different regions, and each one reports its performance separately in their annual reports.

Summing Up Divisional Organizations

There are pluses and minuses associated with divisional organization. On the one hand, divisional structure usually enhances the ability to respond to changes in a firm’s environment. If, on the other hand, services must be duplicated across units, costs will be higher. In addition, some companies have found that units tend to focus on their own needs and goals at the expense of the organization as a whole.

A divisionalized organization with two divisions, where IT and research and development are head office support functions.

Example:

Unilever’s Organizational Structure for Product Innovation by Panmore Institute and Justin Young.

Unilever maintains a structure that addresses corporate needs in terms of managing product types across the world. As a leading consumer goods firm, Unilever has an organizational structure that suitably supports diversified global operations and adapts to changes in the consumer goods industry and global market.

http://panmore.com/author/justin-young

http://panmore.com/author/justin-young



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Features of Unilever’s Organizational Structure

Unilever has a product type divisional organizational structure. The organization is divided into components based on their product focus. For example, the company has a division for personal care products and another division for home care products. The following are the main characteristics of Unilever’s organizational structure:

1. Product type divisions (most significant feature)

2. Corporate executive teams

3. Geographic divisions (least significant feature)

Product Type Divisions. A product type division functions as a unit that enables Unilever to manage the development, manufacturing, distribution and sale of its consumer goods. For example, corporate managers use this feature of the organizational structure to match markets needs with appropriate products.

An advantage of this structural characteristic is its facilitation of the company’s efforts to apply product differentiation, which is Unilever’s generic strategy for competitive advantage. This corporate structure is beneficial, especially because the company already has a diverse portfolio of products. Unilever maintains the following product type divisions in its organizational structure:

1. Personal Care

2. Foods

3. Home Care

4. Refreshment

Corporate Executive Teams. Corporate teams are a secondary characteristic of Unilever’s organizational structure. This structural feature is based on business functions.

For example, Unilever has a team for finance and another team for marketing communications. These teams make up the Unilever Leadership Executive (ULE) group.

Geographic Divisions. Geographic divisions are a minor feature of Unilever’s organizational structure. The company uses this structural characteristic to support regional strategies. For example, Unilever’s marketing strategies for Europe are different from strategies applied for Asian consumer goods markets.

Also, this corporate structure feature is used to analyze the company’s financial performance. The following geographic divisions are maintained in Unilever’s organizational structure:

1. Asia/Africa, Middle East, Turkey/ Russia, Ukraine, Belarus)

2. America

3. Europe

Unilever’s Corporate Structure – Implications, Advantages & Disadvantages

An advantage of Unilever’s organizational structure is its support for product development and innovation. For example, each product type division has its semi-autonomous capabilities to develop products that directly suit the needs in consumer goods market segments. This corporate structure is also advantageous because it enables Unilever to differentiate its products despite the large size of its global operations.

A disadvantage of Unilever’s organizational structure is its minimal support for regional strategic implementation. Even though geographic divisions are one of its structural features, the company focuses more on product type divisions. As a result, there is limited support for market-specific or regional strategic reforms. Thus, to improve this organizational structure, Unilever must increase its emphasis on geographic divisions to empower regional managerial teams. Such structural change improves strategic effectiveness in regional consumer goods markets.

http://panmore.com/unilever-generic-strategy-intensive-growth-strategies



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2.1.4 Matrix organization structure

A matrix organization has been defined as: ‘any organization that employs a multiple command system that includes not only a multiple command structure but also related support mechanisms and an associated organizational culture and behavior pattern’ (Davis and Lawrence 1977).

Unlike the other structures we’ve looked at so far, a matrix organizational structure doesn’t follow the traditional, hierarchal model. Instead, all employees have dual reporting relationships.

Matrix organizations and project organization structures were both first used in the defense and aerospace industries, where companies were required to carry out major projects for customers, such as building a quantity of aircraft for a government customer.

The challenge was to complete projects on time and on budget. However, the traditional functional structure within the construction companies meant that no one was responsible for the project as a whole. A matrix organization or project management organization was introduced to overcome the problem.

Project managers were appointed with overall responsibility for individual projects. Project managers had to organize the efforts of individuals in all the different functions.

At the same time, functional managers such as management of engineering, production and sales and marketing, retained their decision-making authority.

In this way, a dual command structure was created. In a matrix organization, the traditional vertical command structure has an overlay of horizontal authority or influence.

A matrix organization has been defined as: ‘any organization that employs a multiple command system that includes not only a multiple command structure but also related support mechanisms and an associated organizational culture and behavior pattern’ (Davis and Lawrence 1977).

The difference between a matrix organization structure and a project organization is that with a project organization, the project management comes to an end when the project ends. With matrix organization, the matrix structure of authority and command is permanent.

Functional managers Production Quality control Design

Project managers

Project A

Project B

Quality control expert

Project C

In the diagram above, the person shown is a quality control expert and is responsible to the quality control manager for technical aspects of the job, maintaining quality systems and so on.

The person is also responsible to the manager of Project B. That manager will be concerned with completing the project on time, within the cost budget and to the proper standard.

Obviously conflicts can arise: the project manager might want to skip some tests to make up time, but the quality control department won’t want to do that. Both can put the employee under some pressure. However, the matrix structure should allow the employee to ask the two managers to discuss the problem, as it is plain that they are both involved.

Responsible to Project Manager B

Responsible to quality

control manager



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Overall, matrix structures should:

encourage communication

place emphasis on ‘getting the job done’ rather than each manager defending his or her own position.

Examples of matrix organizations are as follows.

A large company in which there are:

divisional managers responsible for a geographical market or a particular product, and for the profitability of the market or the product, and in addition

functional managers at head office responsible for the major functions across the entire entity – for production marketing and sales, human resources management and so on.

A university in which there is a traditional command structure based on heads of faculty and heads of department, but in addition a course-based management structure in which individual lecturers are responsible for all aspects of particular courses or degree programs (for example, obtaining and managing the teachers from different faculties or departments, finding the lecture rooms, marking the examinations, and so on).

Example:

Starbucks Corporation’s Organizational Structure Type and Characteristics

Starbucks has a matrix organizational structure, which is a hybrid mixture of different features from the basic types of organizational structure (Koehn, 2002). In this case, the structural design involves intersections among various components of the business (Sakhartov, 2016; Lee, Kozlenkova & Palmatier, 2015). For example, the company’s product-based divisions intersect with functional groups and geographic divisions, which in turn intersect with other parts of the organization (“Starbucks Coffee’s Organizational Structure & Its Characteristics - Panmore Institute,” n.d.).

The following are the main features of Starbucks Coffee’s corporate structure:

1. Functional hierarchy

2. Geographic divisions

3. Product-based divisions

4. Teams

Functional Hierarchy. The functional hierarchy feature of Starbucks Coffee’s organizational structure refers to grouping based on business function.

For example, the company has an HR department, a finance department and a marketing department. These departments are most pronounced at the top levels of Starbucks’s corporate structure, such as at the corporate headquarters. This characteristic is hierarchical. For example, the corporate HR department implements policies applicable to all of the company’s cafés. The functional hierarchy of the corporate structure facilitates top-down monitoring and control, with the CEO at the top.

Functional groups are responsible for the organization-wide development and implementation of Starbucks Corporation’s generic competitive strategy and intensive growth strategies.

Geographic Divisions. Starbucks Coffee’s corporate structure involves geographic divisions, which are based on physical location of operations. The company has three regional divisions for the global market: (1) America, (2) China and Asia-Pacific, (3) Europe, Middle East, and Africa.

Each geographic division has a senior executive. In this way, each local manager reports to at least two superiors: the geographic head (e.g. President of Europe, Middle East, and Africa Operations) and the functional head (e.g. Corporate HR Manager). This feature of Starbucks’s corporate structure enables closer managerial support for geographic needs. Each division head is given flexibility in adjusting strategies and policies to suit specific market conditions.



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Product-based Divisions. Starbucks has product-based divisions in its organizational structure. These divisions address product lines. For example, the company has a division for coffee and related products, another division for baked goods, and another division for merchandise like mugs. This feature of the corporate structure enables Starbucks to focus on product development. In this way, the company develops and innovates its products with support through its organizational structure.

Teams. Teams are used in different parts of Starbucks Coffee’s organizational structure. However, teams are most visible at the lowest organizational levels, particularly at the coffeehouses. For example, in each café, the company has teams organized to deliver goods and service to customers. This feature of Starbucks’s corporate structure enables the business to provide effective and efficient service to consumers. Team effectiveness is a major determinant of the financial performance of franchised locations and company-owned coffeehouses. Starbucks’s corporate culture influences how such team effectiveness is achieved. The company’s development depends on team-based factors and associated human resource management strategies.

Starbucks Corporation’s organizational structure has many characteristics. However, the ones enumerated above are the most significant in shaping strategic management decisions in the business.

Example:

TJ Limited (TJL) was established 10 years ago as a small scale manufacturing concern. At that time the total number of employees was 18. Most of the employees were directly reporting to the CEO. With the growth in business, number of employees has increased to 55 but no significant change has been made in the reporting structure.

a) In this scenario, TJL’s growth has made it compulsory for the CEO to delegate some responsibilities to other staff so that he can focus on core business activities.

Functional/Mechanistic organizational structure seems most appropriate in the given situation. The functional structure would organize TJL according to the HR, IT, Accounting, Sales, Marketing and Administration functions. Each function will have its own management structure and its own staff. The individual employees who perform function-specific activities would report to the functional managers and functional managers will report to CEO. Because of the functional orientation, employees and the managers would gain specialized knowledge and experience of their respective functions.

In addition to the above, the delegation of authority would allow the CEO to focus his attention on core business functions, formulation and implementation of the company’s business strategy, policies and procedures.

b) CEO is of the view that with the passage of time, some of the activities would have to be outsourced.

Considering the situation, TJL may outsource its Accounting/IT/HR/Administration functions.

Following are the possible benefits due to which CEO of TJL may outsource accounting function:

i. Outsourcing can help TJL to shift its focus from non-core activities to core activities.

ii. Mostly middle and small scale firms can’t afford to match the in-house support that larger companies maintain. Outsourcing can help TJL to act “big” by giving it access to equally efficient and expert resources that are available to large companies.

iii. Outsourcing may lead to cost saving.

http://panmore.com/starbucks-coffee-company-organizational-culture



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TJL may face the following problems due to outsourcing of Accounting Function:

i. When TJL will outsource its accounting function; it will turn the control of accounting function to another company.

ii. The vendor may not be driven by the same standards which are followed by TJL.

iii. Permanent employees usually work with more sense of responsibility as compared to outsourced staff.

iv. There is a risk that all information and confidential data will be available to the vendor and may be misused.

v. Vendor’s staff may be frequently changed by vendor which may extend the learning curve and TJL may never be able to get the efficiency of a fully maintained team.

vi. TJL may become extremely dependent on the vendor. There is a risk to business continuity of TJL on account of either any dispute with the vendor or if the vendor goes out of business.

2.2 How Companies Get the Job Done

Building an organizational structure engages managers in two activities: job specialization (dividing tasks into jobs) and departmentalization (grouping jobs into units). An organizational structure outlines the various roles within an organizational, which positions report to which, and how an organization will departmentalize its work. Take note that an organizational structure is an arrangement of positions that is most appropriate for your company at a specific point in time.

More specifically, it is a framework that organizes all of the formal relationships within an organization, establishing lines of accountability and authority, and illuminating how all of the jobs or tasks within an organization are grouped together and arranged.

Restructuring: Given the rapidly changing environment in which businesses operate, a structure that works today might be out-dated tomorrow. That’s why you hear so often about companies restructuring—altering existing organizational structures to become more competitive once conditions have changed. Let’s now look at how the processes of specialization and departmentalization are accomplished.

2.2.1 Specialization

Also known as division of labor, specialization is the degree to which activities or tasks in an organization are broken down and divided into individual jobs.

High specialization can be beneficial for an organization, as it allows employees to become “masters” in specific areas, increasing their productivity as a result.

However, low specialization allows for more flexibility, as employees can more easily tackle a broader array of tasks (as opposed to being specialized for a single task).

High specialization Low specialization



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2.2.2 Departmentalization

Departmentalization refers to the process of grouping jobs together in order to coordinate common activities and tasks.

If an organization has rigid departmentalization, each department or team is highly autonomous, and there is little (or no) interaction between different teams. In contrast, loose departmentalization entails that teams have more freedom to interact and collaborate.

For example, an organization that departmentalizes by function (i.e. marketing, sales, services), is said to have a functional organizational structure.

2.3 Building Blocks

In this section, we’ll be looking at the vital components or building blocks that you can pull and arrange in order to build an organizational structure.

2.3.1 Chain of Command

One of the most basic elements of an organizational structure, chain of command is exactly what it sounds like: an unbroken line of authority that extends from the top of the organization (e.g. a CEO) all the way down to the bottom. Chain of command clarifies who reports to whom within the organization.

2.3.2 Span of Control

Span of control refers to the number of subordinates a superior can effectively manage. The higher the ratio of subordinates to superiors, the wider the span of control.

Span of control depends on:

Managers capabilities (physical & mental limitations)

Nature of manager’s workload

Nature of work undertaken (how routine it is)

Geographical dispersion of subordinates

Level of cohesiveness within the team.

a) Tall-narrow. In this type of structure, each manager has a small number of subordinates reporting directly to him. As a result, in a large organization, there are many layers of management from the top down to supervisor level. The span of control is narrow, and the shape of the organization structure is tall, because of the many layers of management.

Long Chain of Command

CEO

VP

Director

Sr. Manager

Manager

Short Chain of Command

CEO

Manager

Specialist



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b) Wide-flat. In this type of structure each manager has a large number of subordinates reporting directly to him. As a result, even in a large organization, there are only a few layers of management from the top down to supervisor level. The span of control is wide, and the shape of the organization structure is flat, because of the small number of management levels.

Tall-narrow Wide-flat

(here the span of control = 2) (here the span of control = 12)

The tall-narrow structure often has the following characteristics.

a) Formality in relationships between managers and subordinates.

b) Close supervision, with managers spending much of their time monitoring the work of subordinates and giving them directions.

c) Task specialization, with a small group of manager and subordinates specializing in a very narrow aspect of the entity’s operations.

d) A strong cultural and procedural emphasis on formal roles, job titles and job descriptions.

e) Slow vertical communication. Because of the many levels of management, it can take a long time for information to get from top to bottom of the management hierarchy, and from bottom to top. As a result, tall-narrow organizations can be slow to react to change.

The wide-flat organization structure often shows the following characteristics, where the work is fairly complex and non-routine.

a) Greater egalitarianism. ‘Bosses’ and ‘subordinates’ will often respect each other for their skills and experience, and will treat each other as equals.

b) Team-work and co-operation.

c) Greater delegation of responsibility to subordinates. Managers have too many subordinates to apply close control. Managers must therefore trust subordinates to get on with their work, with relatively little supervision.

d) Flexibility. There is less emphasis on roles and job descriptions, and individuals are more willing to switch from doing one type of task to another, as the demands of the work change.

e) There is rapid vertical communication and decision-making. Information travels quickly from top to bottom of the organization structure and from bottom to top.

Recent trends have

been to ‘flatten’ or

‘delayer’ the

structure.



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Wider and flatter organization structures have replaced tall bureaucratic structures in many organizations. The reasons why wide-flat organizations are often preferred are as follows.

a) Wide-flat structures are more suitable to rapidly-changing business environments, where entities must respond to changes quickly and with flexibility. An organization in which information travels quickly and decisions can be made quickly is more appropriate in these circumstances that a structure that is more formal and hierarchical.

b) Cost savings. It has been argued that in a tall-narrow organization, managers spend too much time managing each other, instead of adding value. If middle managers do not add value, they should be eliminated from the organization structure.

2.4 Organizational relationships and implementing strategy

Plans are put into action by the co-ordinated efforts of many individuals and groups within the entity. The way in which plans are implemented depends on:

a) the nature of internal relationships: these are relationships between different parts of the organization

b) the nature of external relationships: in many entities a significant amount of work is done by other entities and individuals who are external to the entity and not a part of it.

Internal relationships: centralization versus decentralization

An important aspect of internal relationships is the extent to which decision-making is centralized, so that major planning decisions are made (and implemented) by ‘head office’, or decentralized.

Centralization and Decentralization

Who makes the decisions in an organization? If decision-making power is concentrated at a single point, the organizational structure is centralized. If decision-making power is spread out, the structure is decentralized. In many situations, junior (‘local’) managers have much better knowledge than senior management about operational conditions.

Tactical and operational decisions are probably better when taken by local management, particularly in a large organization. Giving authority to managers at divisional level and below helps to motivate the management team.

Decisions by management are more likely to be taken with regard for the corporate objectives of the entity as a whole. There is a very strong argument in favor of making strategic decisions centrally. Decisions by management should be co-ordinated more effectively if all the key decisions are taken centrally. In a crisis, it is easier to make important decisions centrally.

By level of decision-making:

– Centralized – decisions are made by senior management (e.g. functional, entrepreneurial).

– Decentralized – decision-making is delegated to lower levels (e.g. matrix, geographical).

CEO

1

32

Decentralization Centralization



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a) In a centralized organization, senior management retain most (or all) of the authority to make the important decisions.

b) In a decentralized organization, the authority to take major decisions is delegated to the management of units at lower levels in the organization structure, such as strategic business units (SBU) managers, and divisional managers.

The choice between a centralized and a decentralized organization depends to some extent on the preference of senior management. However, the size and complexity of the entity also influence the extent to which decision-making, planning and control are centralized or decentralize (‘devolved’). It is difficult to control a large and complex entity from head office, without delegating substantial amounts of authority to divisional managers.

Advantages of centralization

Advantages of centralization are as follows.

a) Decisions by management are more likely to be taken with regard for the corporate objectives of the entity as a whole. There is a very strong argument in favor of making strategic decisions centrally.

b) Decisions by management should be co-ordinated more effectively if all the key decisions are taken centrally.

c) In a crisis, it is easier to make important decisions centrally.

Advantages of decentralization/devolution of authority

Advantages of decentralization are as follows.

a) In many situations, junior (‘local’) managers have much better knowledge than senior management about operational conditions. Tactical and operational decisions are probably better when taken by local management, particularly in a large organization.

b) Giving authority to managers at divisional level and below helps to motivate the management team.

c) Decisions can be taken more quickly at a local level, because they do not have to be referred to head office.

d) In a large and complex organization, many decisions have to be made – probably too many for senior management at head office.

The appropriate amount of centralization or decentralization for an entity will depend on the circumstances.

2.4 External relationships

An entity might use external relationships to deliver a particular strategy. These are relationships with other entities, or with individuals who are not a part of the entity but are external to it. External relationships may take the form of:

a) outsourcing of functions

b) virtual organization

Outsourcing

An entity does not need to carry out operations itself. Instead, it can outsource work to a sub-contractor.

Outsourcing is common in certain industries, such as the construction industry. It is also common to outsource ‘noncore’ activities, such as the management of the entity’s fleet of motor vehicles, security services, some IT work and some accountancy work (for example, payroll operations).

The size of an entity, and its organization structure, will depend to some extent on how much of its operational activities it chooses to outsource.

The reasons for outsourcing

Outsourcing is consistent with the view that an entity achieves competitive advantage by concentrating on its core competencies. It does not achieve competitive advantage doing work that can be done just as well – if not much better – by another entity.



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a) The entity should therefore focus activities within the entity on core competencies, with the aim of gaining more competitive advantage in these core areas.

b) The entity should outsource work to entities that have core competencies in these areas of work. They should be able to add value more effectively than the entity would if it were to carry out the work internally instead of outsourcing it.

c) The outsourced work might require specialist skills that the entity cannot employ internally, because it cannot offer enough work or a career structure to full-time specialists. It therefore outsources its specialist work to specialist firms.

Problems with outsourcing

The nature of the relationship with suppliers of outsourced work is critical to the successful implementation of strategy.

A potential problem with outsourcing is the loss of control over the outsourced activities. This can be significant when something goes wrong, and action performance does not meet expectations.

For example, a company might outsource its IT work and might commission a software company to write some new software. The software, when written, might not function properly. The problem is then to manage the external relationship with the software company, to find a satisfactory solution to the problem.

The virtual organization

The virtual company or virtual organization does not have an identifiable physical existence, in the sense that it does not have a head office or operational premises. It might not have any employees.

A virtual organization is operated by means of:

a) IT systems and communications networks – normally telephone and e-mail

b) business contacts for outsourcing all operations.

Many small businesses operate as virtual organizations. For example, a house builder might operate his business from his home. When asked to build a new house, he can hire all the labor – skilled and unskilled – that he needs to do the work, supervise it and check it. He can employ a firm of accountants to deal with the invoicing and payments. The builder does not need an office, or full-time employees. His core competence is his personal skill and experience, which he should use to give his firm its competitive advantage over rival house builders.

In the same way, there is no reason why a larger business should not be operated as a virtual company. For example, a company that sells branded footwear could operate as a virtual company, using its brand name as its major core competence. It could outsource all its value chain and support activities. Manufacture could be outsourced to producers in developing countries; warehousing companies could be used to hold inventories. A network of self-employed sales representatives might be used to sell the footwear into retail organizations, and marketing activities might be outsourced to an external agency.

One person, or a small number of individuals, can operate a virtual organization and indirectly control the actions of many ‘external’ entities and individuals.

A key to a successful virtual organization is the successful management of all the different external relationships, and successful co-ordination of their activities.

Example

ABC Limited has shown poor performance during the preceding five years in spite of the fact that the company owns substantial physical assets, including modern machinery for manufacture of a wide range of products. All the assets of the company are in good working condition and marketing prospects for the products are also promising. However, the company’s organization structure is designed inappropriately and therefore has serious shortcomings and weaknesses which create impediments in its operations and are responsible for the company’s unsatisfactory performance.



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The characteristics which would be apparent in the working of ABC Limited because of its inappropriately designed organizational structure are as follows:

i. Conflicts and lack of coordination: Lack of clarity of goals and individuals working at cross-purposes give rise to conflicts and a non-conducive team environment resulting in poor coordination between the planning and actual operational levels.

ii. Delays and inappropriate decisions: Lack of proper and timely communication of information to the relevant individuals on account of insufficient delegation of authorities and inappropriate reporting channels resulting in delays and inappropriate decisions.

iii. Low motivation and morale: Low level of motivation and poor morale amongst the employees due to lack of clarity of job descriptions and inappropriate or complex reporting lines.

iv. Rising costs: Tall hierarchal structures at management positions and excessive red-tape at the expense of genuine productive work resulting in high operating costs.

v. Inability to seize business opportunities: Lack of coordination and communication among the various operating and planning and research departments resulting in failure to identify and seize new business opportunities as they emerge from time to time.

vi. Inability to adapt to external changes in business environment: Lack of coordination among the key management and the various departments which prevents the company from foreseeing the changes in business environment and utilize its physical assets at optimum levels.



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3. THEORIES OF ORGANIZATIONAL STRUCTURES

3.1 Contingency theory of organization structure

Contingency theory of organization structure is that the most effective organization structure for an entity depends on the circumstances. An entity should use the organization structure that is best suited to its size, complexity and strategies. Organization structure will vary according to differences in organizational processes and internal and external relationships.

The consequences of adopting the wrong organizational structure may at best be mere inefficiency and at worst corporate failure.

Benefits of adopting an appropriate structure

a) Staff morale is high as employees embrace reporting lines and logistics

b) Employees understand their roles and objectives

c) Relationships and processes appear logical and well organized

d) The company’s operations are highly efficient and the structure helps to add value

e) Customers and clients receive quality products, on time and at fair prices

f) Decisions can be made quickly and by the right people

g) Inefficiencies such as redundant layers of management and delays in responding to customer queries are minimized

Consequences of adopting a deficient structure

a) Staff can become frustrated through perceived overly bureaucratic processes

b) Decision making can be delayed as it may be difficult to identify or communicate with decision makers who are not local to the customers. Furthermore, decisions made within a centralized organization where cultural variation is widespread may be inappropriate to sensitive customers.

c) There may be a lack of clarity of roles and responsibilities, particularly where multiple reporting lines exist in matrix organizations

d) The operations may be inefficient – for example the delivery costs of adopting one large country-based central warehouse may exceed the cost of operating three regional-based warehouses

e) Customers and clients lose out through delays and lower quality

f) Reputation and brand image could be damaged if the market concludes that an organization has adopted the wrong structure. This could ultimately impact (lower) the share price of listed companies which may then be at risk of a corporate take-over. Many bought-out companies then go through a restructuring phase to streamline operations and improve profitability.

g) Ultimately a ‘bad fit’ may result in significant loss of customers to competitors and overall corporate failure.

3.2 Burns and Stalker: mechanistic and organic structures

An example of contingency theory is the management study of Burns and Stalker. They identified two categories of organization structure, a mechanistic structure and an organic structure.

Mechanistic structure which is characterized by the following:

Rigid task definition

Vertical communication

High degrees of formalization



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Authority-based influence

Centralized control

Complex differentiation

High degree of co-ordination

Organic management structure is characterized by the following:

Flexible task definition

Lateral communication

Low degrees of formalization

Expertise-based influence

Decentralized control

Simple differentiation

Low degree of co-ordination

The differences between the two types of structure are set out in the table below:

Mechanistic organization Organic organization

Authority is delegated through a hierarchical management structure. Power over decision-making is obtained from a person’s position in the management hierarchy.

There is a network structure of control. Individuals influence decisions on the basis of their knowledge and skills, regardless of their position in the organization.

A bureaucracy. Control is cultural, not bureaucratic.

Communication is vertical, up and down the chain of command.

There is much more horizontal communication and free-flow of information.

Jobs are specialized, and individuals concentrate on their specialist area. Doing the job is the main priority.

Specialist knowledge and expertise are shared, and contribute to the ‘common task’ of the entity. Contributing to the common task is the main priority.

Job descriptions are precise. Job descriptions are less precise.

Tasks and operations are governed by instructions from a superior manager.

Communications consist of information and advice, rather than decisions and instructions from a manager.

Burns and Stalker found from their research that one type of organization is not necessarily better than the other. However, they did find that:

a) an organic structure is better-suited to an entity that needs to be responsive to change in its products and markets, and in its environment.

b) a mechanistic structure is better suited to an entity in a stable environment, where change is gradual.

Burns and Stalker also found that entities with an organization structure better suited to their environment perform better than entities whose structure is not well suited to their environment. For example, an entity with a mechanistic structure performs better in a stable market than an entity with an organic structure.

3.3 Mintzberg’s five building blocks for organizational configurations

Mintzberg argues that an organization structure exists to coordinate the activities of different individuals and work processes, and to implement plans into action. The nature of the organization structure varies with differences in processes and internal and external relationships. He suggested that there are five elements or ‘building blocks’ in an organization. The way in which an entity is organized most effectively depends on which of these elements is dominant.



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These five elements are shown in the diagram below.

a) Strategic apex. This is the top management in the organization.

b) Operating core. This represents the basic work of the organization, and the individuals who carry out this work.

c) Middle line. These are the managers and the management structure between the strategic apex and the operating core.

d) Support staff. These are the people who provide support for the operating core, such as secretarial staff, cleaning staff, repair and maintenance staff and IT staff.

e) Technostructure. These are staff without direct line management responsibilities, but who seek to standardize the way the organization works. They produce procedures and systems manuals that others are expected to follow.

Mintzberg argued that the group that has the greatest influence determines the way in which the entity is organized, and the way that its processes and its relationships operate.

a) When the strategic apex is powerful, the organization is entrepreneurial. The leaders give the organization its sense of direction and take most of the decisions.

b) When the technostructure is dominant, the organization often has the characteristics of a bureaucracy, with organizing, planning and controlling prominent activities. The organization continually seeks greater efficiency.

c) When the organization is divisionalized and local managers are given extensive authority to run their own division in the way that they consider best, the middle line is dominant.

d) Some organizations are dominated by their operating core, where the basic ‘workers’ are highly-skilled and seek to achieve proficiency in the work that they do. Examples might be schools, universities, and hospitals, where the teachers and doctors can have an exceptionally strong influence.

e) In a professional bureaucracy, such as a firm of accountants or lawyers, the middle line tends to be short (close contact between the partners and staff). Unexpectedly, in view of the amount of standardized audit documentation, the technostructure is small. This is because, although the documentation is extensive, the use of the documentation is unique for each client. No two audits or law cases are the same, so standardization must be limited.

3.3 Mintzberg’s six organizational configurations

Mintzberg identified six different organizational configurations, each having a different mix of the five building blocks. He suggested that the most suitable organizational configuration would depend on the type and complexity of the work done by the entity. The six configurations are:

a) simple structure

b) machine bureaucracy



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c) professional bureaucracy

d) divisionalized form

e) adhocracy

f) missionary organization

Simple structure

This is found in an entrepreneurial company. The strategic apex exercises direct control over the operating core, and there is no middle line. There is also little or no support staff or technostructure. The strategic apex might be an owner-director of the company. This type of structure is very flexible, and can react quickly to changes in the environment, because the strategic apex controls the operating core directly.

Machine bureaucracy

In a machine bureaucracy, the technostructure is the dominant element in the organization. The entity is controlled and regulated by a bureaucracy and the emphasis is on control through regulation. It is difficult for an entity with this type of organization to react quickly to environmental change. This structure is therefore more suitable for entities that operate in a stable business environment.

Professional bureaucracy

In this type of structure, the operating core is the dominant element. Mintzberg gave the name ‘professional bureaucracy’ to this type of structure because it is often found in entities where the operating core consists of highly-skilled professional individuals (such as investment bankers in a bank, programmers in a software firm, doctors in a hospital, accountants and lawyers in a professional practice, and so on).

Divisionalized form

In this type of structure, the middle line is the dominant element. There is a large group of powerful executive managers, and the organization structure is a divisionalized structure, each led by a divisional manager. In some divisionalized structures, divisional managers are very powerful, and are able to restrict the influence of the strategic apex on decision-making.

Adhocracy

Mintzberg identified a type of organization that he called an ‘adhocracy’. This is an organization with a complex and disordered structure, making extensive use of teamwork and project-based work. This type of organization will be found in a complex and dynamic business environment, where innovation is essential for success. These organizations might establish working relationships with external consultancies and experts. The ‘support staff’ element can therefore be very important.

Missionary organizations

In this type of organization, all the members share a common set of beliefs and values. There is usually an unwillingness to compromise or accept change. This type of organization is only appropriate for small entities that operate in simple and fairly static business environments.

Differences between the six organizational configurations

The differences between the six organizational configurations are summarized below. Note in particular how each configuration is likely to be suitable for different types of business environment and different types of organizational relationships. The main controlling and coordinating factor within each type of configuration also differs.



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Business

environment Internal features

Key organizational

element

Main coordinating

factor

Simple

structure

Simple and

dynamic

Small entity

Simple tasks

Strategic apex Direct control by

strategic apex

Machine

bureaucracy

Simple and

static

Large and well-

established.

Regulated processes

and systems

Techno-structure Standardized

procedures

Professional

bureaucracy

Complex but

static

Simple processes.

Control by the

professionals

Operating core Standardization of

skills

Divisionalized

form

Fairly static

Diverse activities

Large and well-

established.

Divided activities

Middle line Standardization of

outputs

Adhocracy Complex and

dynamic

Complex tasks.

Young entity

Support staff or

operating core

Flexibility and

adaptation

Missionary

organization

Simple and

static

Simple systems.

Fairly well established

(not young)

- Standard beliefs

and values

3.4 Conclusion: the most appropriate organization structure

The organizational configurations suggested by Mintzberg, or the idea of Burns and Stalker, can be used to consider whether the organization structure of an entity is well-suited to its circumstances and situation. The key point to note is that the organization structure should be designed to enable the entity to implement its strategies successfully.

Johnson, Scholes and Whittington have commented: ‘Poor performance might be the result of an inappropriate configuration for the situation or inconsistency between structure, processes and relationships.’



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STICKY NOTES

Organizations are social arrangements for the controlled performance of collective goals

Organizational hierarchy would be different for different types of organizations such as sole trader, partnerships or limited companies

There are six main building blocks that need to be considered in the designing of Organizational Structure. These can affect the efficiency and

effectiveness of the organizational structure. These are:

Span of Control

Chain of Command

Centralization and decentralization

Division of Labor/Specialization

Job structuring

Departmentalization

Organizations fall on a spectrum which has two types on each end i.e. the Mechanistic Structures and the Organic Structures.

The type of structure is defined by the nature of business as well as purpose of operations. There are different types of structures such as Functional,

Matrix, Divisional, etc.

There are a number of key components that underpin a management structure and should be considered when implementing a new structure

There is a strong link between leadership and the Organizational hierarchy. The organizational chart can depict positions of leadership and authority. Management theories also provide important insights into setting up an

organizational structure that works.



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References:

Ashkenas, R., Ulrich, D., Jick, T., & Kerr, S. (2015). The boundaryless organization: Breaking the chains of organizational structure. John Wiley & Sons.

Hatch, M. J. and Cunliffe, A. L. (2013) Organization Theory. Oxford: Oxford University Press.

Hedberg, B., Dahlgren, G., & Olve, N. G. (1997). Virtual organizations and beyond: Discover imaginary systems. John Wiley & Sons, Inc..

Koehn, N. F. (2002). Howard Schultz and Starbucks Coffee Company. Harvard Business

Markides, C. C., & Williamson, P. J. (1996). Corporate diversification and organizational structure: A resource-based view. Academy of Management journal, 39(2), 340-367.

Matuleviciene, M., & Stravinskiene, J. (2015). The importance of stakeholders for corporate reputation. Engineering Economics, 26(1), 75-83.

Menguc, B., & Auh, S. (2010). Development and return on execution of product innovation capabilities: The role of organizational structure. Industrial marketing management, 39(5), 820-831.

Mintzberg, H., 1993. Structures in Fives: Designing Effective Organizations. Englewood Cliffs, PrenticeHall, NJ.

Mintzberg, Henry (1979) The structuring of organizations, Prentice-Hall, Inc. Englewood Cliffs, N.J.

Mintzberg, Henry (1998) Mintzberg over management, Wolters-Noordhoff, Groningen (Translation of ‘Mintzberg on management’ published by Free press in 1989)

Montana, P. and Charnov, B. Management: A Streamlined Course for Students and Business People. (Hauppauge, New York: Barron’s Business Review Series, 1993), pp. 155-169.

Quinn, R.E. ea. (2003) Handbook management vaardigheden, derde editie, Academic service, Den Haag (Translation of ‘becoming a master manager’ published by John Wiley & Sons Inc.)

Sakhartov, A. V. (2016, January). Selecting Corporate Structure for Diversified Firms. In Academy of Management Proceedings (Vol. 2016, No. 1, p. 11521). Academy of Management.

Surbhi Sharma (2015). Difference Between Internal and External Stakeholders by (with Comparison Chart).. Retrieved on January 5, 2019, from https://keydifferences.com/difference-between-internal-and-external-stakeholders.html

Starbucks Coffee’s Organizational Structure & Its Characteristics - Panmore Institute. (n.d.). Retrieved January 5, 2019, from http://panmore.com/starbucks-coffee-company-organizational-structure

Unilever’s Organizational Structure for Product Innovation - Panmore Institute. (n.d.). Retrieved January 5, 2019, from http://panmore.com/unilever-organizational-structure-product-innovation

http://panmore.com/starbucks-coffee-company-organizational-structure


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CHAPTER 4

MANAGING CHANGE

_

AT A GLANCE

Organisational Change refers to changes in strategy, resource allocation and asset disposals alongwith significant reengineering of the organization structure as a standard part of many change efforts.

Change is either planned or unplanned and either incremental or transformational.

A trigger for change might come from either outside or inside the entity. The PESTEL analysis of the external environment provides a useful framework for analyzing external reasons for change.

When change occurs in an organisation employees may react in various ways such as:

Willing and enthusiastic acceptance

Begrudging acceptance

Entrenchment

Strike action

Change Management involves adopting corporate strategies and procedures to achieve the desired outcome at the macro level for the entire organization including its people as well as the systems and processes that are affected by it.

There have been several different suggestions about how transformational change might be managed. Several of these ‘models’ for change are described below:

Lewin’s Model of Force Field Analysis

Lewin’s prescriptive planned change theory (Unfreeze, Change and Refreeze Model)

The Gemini 4Rs

The McKinsey 7-S Model

IN THIS CHAPTER

AT A GLANCE

SPOTLIGHT

1. The Change

2. Models for Managing Change

3. The McKinsey 7-S Model

STICKY NOTES

References

CHAPTER 4: MANAGING CHANGE CAF 4: BMBS


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1. THE CHANGE

1.1 Definition and Explanation

Change refers to an event that occurs when something passes from one state or phase to another. It occurs when a state of equilibrium is disturbed and a new state of equilibrium is found. Most of us, at one point or another, will have to change some things in the way we do things in daily life.

Organizational Change refers to changes in strategy, resource allocation and asset disposals along with significant reengineering of the organization structure as a standard part of many change efforts. As we have seen in earlier chapters that an organization is influenced by many external and internal factors. As the environment the organization is operating in changes rapidly, the organization is forced to adapt and bring modifications in what they do and how they do it. All organizations such as big companies and small businesses, universities and colleges, state and city governments, and even the military forces experience the need for change and be innovative with progression and changing times.

More often organizational change is necessary in order to maintain a competitive edge, reduce operating costs, facilitate expansion of the business or incorporate new industry or government regulations. The process of organizational change helps a large company or organization adapt its working methods or aims in order to develop and deal with new situations or markets.

1.2 Nature of Change

Change happens continually within organizations and their markets. Change is either planned or unplanned.

Planned change (or proactive change) is deliberate and intended. The entity makes the change to move from an existing situation (or way of doing things) to a new situation.

Unplanned Change (or reactive Change) happens in response to developments, events and new circumstances that have arisen. The change is not intended in advance.

With planned change, the entity might see an opportunity to develop. Unplanned change is often seen as a reaction to a threat or an adverse event.

Change is either incremental or transformational.

Incremental change is a fairly small change. This type of change happens without the need for a major reorganization or restructuring of the organization and its systems and procedures. The entity should be able to adapt easily to the change.

Transformational change is a big change. A transformational change requires a major reorganization or a restructuring of the organization and its systems and procedures. The change has a big impact on the entity and also on the people working in it.

Transformational change requires change management skills from the managers who are responsible for introducing the change (the ‘change managers’).

Change is also either:

a ‘one-off’ event, so that the entity moves quickly from the old state of affairs to a new state of affairs, or

a continuing process of development and change over a long period of time.

1.3 Triggers for Change

Triggers for change are the reasons for making a change, or the reasons for the motivation to change. A trigger for change might come from either outside or inside the entity.

External Change Factors

External triggers for change are caused by changes in the environment. The PESTEL analysis of the external environment provides a useful framework for analyzing external reasons for change.

https://dictionary.cambridge.org/dictionary/english/organizational

https://dictionary.cambridge.org/dictionary/english/change

https://dictionary.cambridge.org/dictionary/english/necessary

https://dictionary.cambridge.org/dictionary/english/order

https://dictionary.cambridge.org/dictionary/english/maintain

https://dictionary.cambridge.org/dictionary/english/competitive

https://dictionary.cambridge.org/dictionary/english/edge

CAF 4: BMBS CHAPTER 4: MANAGING CHANGE


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Political factors

Changes in strategy might be caused by an unexpected political crisis – such as a civil war or major civil unrest in a country that is either a major source of supply or a major export market.

Economic factors

Unexpected developments in the economies of various countries might result in a change of strategy on foreign sales or expansion into foreign markets.

Social and cultural factors

Changing public attitudes and opinions might persuade an entity to alter its strategy. For example, changing public attitudes to food safety following a ‘health scare’ about a food product might persuade a food manufacturer to change its strategy to the design and production of its products.

Changing public attitudes to retirement age might persuade an entity to change its retirement policy for employees, and its human resource plan.

Technological factors

The significance of technological development has been mentioned earlier.

Ecological/environmental factors

Change might be driven by ecological change, such as diminishing supplies of fresh water, diminishing supplies of energy or factors related to climate change. These changes might force a company to consider how its businesses will continue to survive in the future, and what changes will be needed to make the business sustainable.

Legal factors

New laws on health and safety at work, laws against pollution and laws to protect the environment might have an impact on strategy and procedures.

Internal Change Factors

Change might be motivated or caused by developments within the organization:

Change of senior management.

When there is a new chief executive officer or managing director, the new person in charge might want to introduce change because he has his own ideas about how things should be done.

Acquisitions and mergers.

When there is a large acquisition or a merger, major changes will probably be required to integrate the two separate firms into a single entity.

Demergers and divestments

Similarly, when an entity is split up into two separate entities (a demerger) or when a large part of the entity is sold off (a divestment), changes in organization, management and systems will be necessary.

Reorganisation, downsizing and rationalisation.

Change might be necessary because the current organization and systems are no longer appropriate and change is needed. This might happen when a loss making entity needs to close down an operating division, or needs to reduce the size of its total workforce. Current operational systems might need to change because they are no longer appropriate and have become inefficient or ineffective.



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Diversification

Diversifications in market, trade or commodities have considerable impact on organization in terms of policies, technicalities, personnel and overall change.

Practice Question

Identify five external factors which would necessitate changes in the strategies and policies of business organizations. Give two examples of changes relevant to each external factor.

Solution

The external factors which necessitate changes in the strategies and policies of organizations, along with their relevant examples of changes are as follows:

i. Political factors – unexpected changes in the governments and/or their policies, major civil disturbances or disruptions, wars between countries.

ii. Economic factors – major changes in taxation policies or grant of subsidies, entry into or exit from economic unions.

iii. Social and cultural factors – changes in attitudes towards dress codes, or eating habits due to health considerations, pursuing recreational activities.

iv. Technological factors – greater reliance on IT, changes due to instant communications, fast travel facilities.

v. Ecological or environmental factors – shortage of potable water, pollution caused by industries, soil degradation.

vi. Legal factors – awareness of human rights, concern for safety of employees working in hazardous conditions, laws relating to billboards in cities.

Example: Stop and Think

When Stuart Rose became chief executive of Marks & Spencer, the company appeared to be in terminal decline and was close to being taken over. Pressure from shareholders and financial institutions created a situation that appeared to require a new chief executive with proven imaginative flair. The planed change strategy he introduced a top-down series of initiatives that proved very successful in the short term.

1.4 Reaction to change

When change occurs in an organization, employees may react in various ways such as:



Entrenchment

Strike action


Where employees embrace the change. This positive approach is more likely to end in win-win whereby the organisation achieves its change objective and also something positive arises for the employee. For example the employee may embrace the opportunity to learn new skills and experience different working practices.


Where employees do not support the change but understand there is no choice other than to accept the change or resign. This could be managed by involving employees in the change process and explaining exactly why change is needed and how the employees will benefit. If the employees do not ultimately embrace the change their morale is likely to suffer and also their productivity. Furthermore their lack of support during the change may play against them in the future, for example with promotion opportunities offered to others.



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Entrenchment

Where employees refuse to change. This negative tactic could lead to disciplinary proceedings and potentially dismissal. The approach generally only results in a delay in the inevitable though with the planned change invariably implemented.

Strike action

When organisations attempt to bring in change that appears to harm large groups of employees in the short-term they may choose to strike, particularly if supported (or led) by unions. Strikes bring negative publicity to an organisation and can harm the levels of service provided to customers. This can lead to protracted negotiations between management and strikers’ representatives both trying to achieve an acceptable compromise.

1.5 Managing Change

Although change has always been a constant factor, recently due to drastic alterations in business models and advent of technology it has become increasingly important to manage and control the process in an organized manner.

Managing change is controlling the process of transition from the existing state to a desired state.

Present State Transition State Desired State

Change Management involves adopting corporate strategies and procedures to achieve the desired outcome at the macro level for the entire organization including its people as well as the systems and processes that are affected by it.

Change Sponsor

Change sponsor is the person or a group of persons who has the authority to initiate the change process, who actually saw a need for change, and then took the action needed including making investments to bring about the change process. With organizational change management, many people can hold the project sponsorship role collectively i.e. board of directors.

Change Agent

Change agent is a person or a committee responsible for introducing and executing change.

Change agent reports the change progress to the change sponsor and acts as a catalyst to help the change process to run smoothly.

In organizational change management, a change agent may be an inside or outside consultant. For major changes, an organization often hires outside consultants to provide advice and assistance. On one hand, outsiders have an objective perspective that insiders cannot have, on the other hand outside consultants have an inadequate understanding of the organization’s history, culture, operating procedures and people. They’re also more likely to initiate drastic changes than insiders would because they don’t have to face the consequences after the change is implemented. Whereas, internal managers may be more thoughtful, but possibly overcautious, because they must live with the consequences of their decisions.

Stakeholders of change

Managing and controlling the stakehoders is an important part of managing change. In doing so, one of the things is to segment the stakeholders according to their needs, importance and how they will be treated based on their reaction to the change.

There are inevitable numbers of stakeholders in the change process:

Those who will be affected;

Those who will need to change or adjust and those who will resist change in status quo;

Those who will win; and those who will lose;

Those who will have an interest and commitment and those who will not.



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Guideline for managing strategic change

A general guideline for managing strategic change is as follows:

When change is planned, managing the change involves deciding how to get from where we are to where we want to be and recognizing the changes that are necessary to get there.

The change process consists of planning the changes, implementing them and then maintaining the change, so that there is no ‘going back’ to former ways and methods of operating.

There are several requirements for successful change. These are often referred to as levers of change.

Levers of change

The following requirements are needed for successful implementation of change.

A clear understanding of the need for change, and what will be the desired result of the change.

The commitment of the entity’s leaders to the change.

Effective communication with everyone affected by the change. This should be two-way communication. Management should listen as well as explain.

Management should have the required qualities to implement change successfully. Leadership qualities for managing change are described later.

The organization structure and relationships within the organization should be adapted to meet the requirements of change.

Reward systems should be amended, so that rewards to managers and other employees are based on performance targets that are consistent with the requirements of the change.

Critical success factors and key performance indicators should be revised, so that they are consistent with the requirements of the change.

Employees should be given education in the purpose of change and training to meet the operational requirements of the change.

Skills for managing change

Rosabeth Moss Kanter suggested that a manager in a change adept entity should have the following skills.

Tuning in to the environment. Managers need to be aware of changes in the environment that will make change by the entity necessary or desirable. Kanter suggested that managers should create a network of ‘listening posts’ that they should use to monitor environmental change. She commented: ‘Pay special attention to customer complaints, which are often your best source of information about an operational weakness or unmet need. Also search out broader signs of change – a competitor doing something differently or a customer using your product or service in unexpected ways.’

Challenging the prevailing organizational wisdom. Change managers should be prepared to challenge the ’conventional wisdom’ and question accepted views about what is necessary or the way that things should be done.

Communicating a compelling aspiration. A change manager should have a clear idea of what he wants to achieve and should communicate this ‘vision’ to everyone he deals with. The manager must have personal conviction that the change is necessary. Without this sense of purpose, he will not be able to ‘sell’ the need for change to others.

Building coalitions. Managers cannot make change happen through personal effort alone. They need to win the support and co-operation of all the individuals with the knowledge, influence or resources to make change happen. Making change happen is therefore a process of building alliances and support.

Learning to persevere. Managers should continue with the process of change even though there are likely to be setbacks and ‘defeats’ on the way.

Making everyone a hero. The manager should give full credit to everyone who helps to introduce change successfully, and should make them feel that their efforts are fully appreciated. If possible, individuals who help to introduce changes successfully should be rewarded.



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Practice Question

Technological innovations by competitors have far-reaching impact on the business prospects of Alpha Technologies Limited (ATL). Business rivals continuously strive to introduce new methods, processes and products to consolidate their competitive advantage. To survive in this challenging environment, ATL is forced to review its internal strategies from time to time. Explain briefly how ATL should proceed while reviewing its change management strategies.

Solution Steps involved in review of change management strategy are as follows:

1 Need for change – Review the system in place to identify the need for change or for assessing the validity of the request for change.

2 Commitment to change – Assess whether the strategy provides for seeking agreement to change at appropriate levels before proceeding with the change.

3 Planning – Review whether due recognition is given to the process of planning i.e. understanding and documenting the change and the possible impact thereof.

4 Communication – Review whether proper procedures are in place to ensure that the changes are communicated/explained to the concerned personnel and their views are given due weightage in implementing the change.

5 Appropriate revision in policies: Assess whether the need to appropriately change the critical success factors, KPUIs and reward structure on the basis of the revised system, and proper procedure thereof, is taken care of, in the change management strategy.

6 Cost and benefit of implementation: Evaluate the system/procedure for reviewing the costs and benefits associated with the change to ensure that all costs and benefits are duly recognized and considered.

7 Impact on employees: Assess the systems that are in place to ensure that employees are duly trained to adapt to the change.

Example Zen Courier Co (ZCC) is a mid-sized courier company and in the past was reconciled with its market-follower status as three companies dominated the business. Recently, ZCC has negotiated an agreement with Global Couriers, a leading international courier company. Global Couriers would make equity investment in ZCC and also provide technical expertise to ZCC to enable it to be an important player in the courier business in the country.

This significant expansion in the scale and scope of ZCC’s business would require major changes in the organizational structure and involve redundancy of several employees, besides induction of new employees with relevant skills.

ZCC should keep the following factors in perspective for successful change implementation:

i. The management of ZCC should have a clear understanding of the precise need for change and the objectives to be achieved by the change.

ii. The need for change should be communicated to all those individuals who would be affected by the change. This should entail candid two-way communication between management of ZCC and the affected employees.

iii. Reward systems may need revision so that rewards to managers and other employees are based on the new set of performance targets.

iv. Critical success factors and key performance indicators may be revised to make them compatible with the changes in ZCC’s business objectives.

v. Those employees who would be retained in the organization may need training to meet the operational requirements due to change in the scope and objectives of the business.



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2. MODELS FOR MANAGING CHANGE

There have been several different suggestions about how transformational change might be managed. Several of these ‘models’ for change are described below:

2. 1 Lewin’s Model of Force Field Analysis

Kurt Lewin was a social psychologist. He developed a theory, which he called force field analysis, to describe forces that came into conflict over planned changes. He suggested that there are two opposing forces:

The driving forces which support the need for change, and

The restraining forces which oppose and resist the change.

Any of the following factors might be a driving force or a restraining force:

The people involved in the change and what they want for themselves

The habits and customs of the individuals

Attitudes of the people involved in change

The relationships between the people involved

Organization hierarchy / structures within the organization

Vested interests and benefits

The organization’s policies

The resources available to make the change

Regulations related to organization

Events (happenings) (positive and negative both)

Lewin argued that each driving force or restraining force has a strength, which might be measured on a scale of 1 to 5. The strength of the total driving forces and the strength of the total restraining forces can therefore be measured

Lewin also argued that:

Change will not occur if the forces resisting the change are stronger than the driving forces for change.

Change is only possible when the driving forces for change are stronger than the restraining forces against change.

Therefore, a key task of the change agent is to ensure that the strength of the driving forces is stronger than the strength of the restraining forces.

There are two ways:

Strengthen the driving forces for change

By increasing the driving forces, management run the risk that the restraining forces against the change will also grow stronger.



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Reduce the restraining forces against change.

Change agent should therefore:

Identify the main restraining forces against change and

Consider ways of reducing their strength, for example by discussing the issues and difficulties with the individuals concerned, or by trying to win the support of key individuals who currently oppose the change.

2.2 Lewin’s prescriptive planned change theory (Unfreeze, Change and Refreeze Model)

Lewin (1950) suggested an approach to introducing planned transformational change. He suggested that a planned process for change should begin with:

identifying the cause of the problems, and the reasons why change is needed, and

identifying the opportunities of making improvements through transformational change.

The change process then needs to go through three stages namely:

unfreeze

movement (change)

re-freeze.

Unfreeze

The process of ‘unfreezing’ is persuading employees that change is necessary. Normally people don’t want to come out from their comfort zone and will not be willing to change anything if they think that the current situation is acceptable. Employees should therefore be encouraged to recognize what is wrong with the current system or situation and change sponsors should encourage employees to feel dissatisfaction. Employees should be ‘unfrozen’ out of their comfort zone and acceptance of the current situation

However, this is not enough. It is also necessary to offer employees an attractive alternative for the future that can be reached by changing the current situation.

Change sponsors should have a clear vision about what changes they want to make and they should encourage employees to want these changes to happen with them.

Change sponsors should communicate the problems, clearly, with the individuals affected, and communicate their ideas.

Unfreezing is therefore the process of not only making individuals dissatisfied with the current situation, but also persuading them about the nature of the changes that should be made.

Change (Move or tranisition)

The change or move should then be made.

To introduce change successfully, the support for change must be strong enough to overcome the opposition. This is consistent with Lewin’s force field analysis (FFA).

Change agent should be given sufficient resources to implement the changes. (Having sufficient resources to make a change can be a driving force for change.)

The change agents should try to involve the employees affected and get them to participate in making the changes. Participation in making changes helps to reduce the resistance to change.

Re-freeze

Lewin suggested that even if change is implemented, there is a high risk that before long, participants will go back to their old ways of doing things and the benefits of the change might be lost completely.



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It is mandatory that once change has happened, participants should be encouraged to carry on with the new way of doing things and remain with the changed condition.

One way of doing this might be to reward participants for performance based on the desired behavior and results.

The process of getting employees to carry on with the new system is called re-freezing.

2- Moving to the new level

1- Unfreezing the present 3- Refreezing the new level

Practice Question

Professors at Star University (SU) mark all the examination papers of their courses by themselves. To maintain transparency, SU has hired an independent body, called Markers, to mark all the papers. Professors are reluctant to accept this decision as they fear doing so will reduce control over feedback to the students.

a) In the above scenario, identify the ‘forces’ and ‘states’ mentioned in Lewin’s Force Field Analysis.

b) According to Lewin, would it be appropriate to force the professors to comply with the required change? Justify your answer.

Solution

a)

i. Driving Forces: Management of Star University (SU)

ii. Restraining Forces: Professors

iii. Current State: Professors mark their own papers

iv. Ideal/Target State: Markers marking papers

b) No. Lewin argued that by increasing the driving forces, management run the risk that the restraining forces against the change will also grow stronger

Attitude Values

Learning

to

Change

New Attitude New Values

New HabitNew

Behaviors

Refreeze



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Example

The Linguist (TL), a learning language institute, has been offering customized programs to the students. TL had gained recognition for its services in terms of highly qualified teachers and competitive pricing. However, in the past two years, student intake of TL has reduced significantly as more students have enrolled with a competitor who is offering online programs. To achieve cost efficiencies and to compete effectively, the management of TL is considering to discontinue the classroom teaching and to start offering online programs by connecting students and teachers through video conferencing.

The reasons because of which TL’s employees may resist the change:

They might believe that the change would put their jobs at risk.

They might believe that their existing working skills (classroom skills) would no longer be required.

They might fear that change (lack of physical presence) would make them less important for their employer.

They might believe that the call for a change is a criticism of the way they have been working.

The management of TL can implement the change in accordance with the change process presented by Kurt Lewin as follows:

i. Unfreeze

In the first stage, management of TL would have to persuade employees that change is imminent. They should be encouraged to feel dissatisfied with the current system i.e. ‘unfrozen’ out of their acceptance of the current situation. Further, the management should also offer employees an attractive alternative for the future that can be reached by changing the current situation.

ii. Movement (change)

In this stage, actual change is to be made. Management of TL should make sufficient resources available to implement the change. It should encourage employees affected by the change, to participate throughout the change process as it would help in reducing the resistance to change.

iii. Re-freeze

This is the stage where change has been implemented. At this stage, management should ensure that employees continue to carry on with the new ways by rewarding them for performance based on the desired behavior and results.

Practice Question

Model Central Hospital (MCH) is currently experiencing serious problems resulting in overall poor performance of the hospital. These problems are attributable to the indifferent attitude and lack of commitment of a group of doctors and ancillary staff in the hospital. The board of trustees of MCH is concerned with the gravity of the problems and has appointed Dr Mushtaq, a hospital management specialist, with far-reaching powers to implement change measures for improvement in the affairs of the hospital.

a) Analyze the above situation in the context of Lewin’s force field analysis model of change.

b) Discuss the measures that Dr Mushtaq should take in terms of Lewin’s force field analysis model of change stating the actions to be taken at different stages of the change process.



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Solution

a) According to Lewin’s force field analysis model of change there are two forces of change in MCH:

the driving forces

the restraining forces

The driving forces of change are those doctors and ancillary staff who favor introduction of change to improve the affairs of the hospital. The restraining forces are the group of doctors and ancillary staff who oppose and resist the change due to their entrenched attitudes/existing relationships with other employees/pursuance of vested interests.

b) In terms of Lewin’s force field analysis model of change, the measures to be taken by Dr Mushtaq at each stage of the change process should be as follows:

i. Unfreeze

Dr Mushtaq should persuade individuals at all levels to accept the existence of serious problems in MCH and seek support of all the doctors and ancillary staff for the change.

ii. Movement (change)

The stage of movement towards change should be supported by providing adequate resources to implement the changes. The resources can be the driving force for change. Participation by an increasing number of doctors and ancillary staff in the change process would reduce the resistance to change.

iii. Re-freeze

Dr. Mushtaq should ensure that the changes which are implemented should be re-frozen by re-aligning the organizational systems in the hospital. The individual doctors and ancillary staff must be encouraged to adopt the change and not revert to their previous work habits. The new behaviors should be encouraged by appreciating and offering rewards to those individuals who adhere to the new norms of the change.

2.3 The Gemini 4Rs

Another model for introducing transformational change was promoted by Gemini Consultants. This is known as the 4Rs model.

The elements of the model are as follows.

Re-frame Create the desire for change.

Create a vision of what the entity is trying to achieve.

Create a measurement system to set targets for change and measure performance.

Re-structure Examine the organization structure, and create an economic model showing how value is created by the entity, and therefore where resources should be used.

Re-design the processes so that they work better to create more value.

Revitalize This is the entity’s commitment to the future. Find new products and new markets that fit well with the entity’s environment.

Invent new businesses.

Change the rules of competition by making use of new technology.

Renew Develop individuals within the organization. Make sure that employees have the skills that are needed and that they support the change process.

Create a reward system to motivate individuals to seek change.

Develop individual learning and creativity within the entity.



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3. THE MCKINSEY 7-S MODEL

The 7S Framework was first published in 1981 and was subsequently adopted by the consultancy firm McKinsey. It is therefore sometimes known as the McKinsey 7S model. It is a model for the successful implementation of strategic change. This model is an apparatus intended to help entrepreneurs and administrators see how aligned their association is and where it tends to be progressed. There are seven components which make up this model - strategy, structure, systems, shared values, skills, style, and staff. In order to introduce strategic change, managers must take into consideration all seven factors. These seven factors consist of three ‘hard’ factors and four ‘soft’ factors. All seven factors are interrelated. The 7S model is therefore often depicted as a molecule with seven atoms (balls) all joined to each other by molecular bonds (= the ‘managerial molecule’)

The Hard Elements

The hard elements are relatively easy to identify and management can influence them directly.

Strategy

This consists of the formally stated goals and objectives of the entity, and a plan for allocating the entity’s resources to activities in order to achieve those goals.

Structure

Structure is frequently envisioned as an organizational organogram or other records that identifies who reports to whom. It is concerned with the division of responsibilities and the allocation of authority for the achievement of the strategic goals.

Systems

These are the systems that operate within the organization, including manufacturing systems, procedures and information systems.

Strategy

Structure Systems

Staff Skills

Style

Shared Values

Strategy

Structure

Systems

Hard Elements



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The Soft Elements

The soft elements inside this model are to some degree harder to characterize, less tangible and unquestionably progressively hard to measure. These are more influenced by the company’s culture and are as important as the hard elements for the success of the organization.

Shared Values

These are the guiding beliefs about the purpose of the entity and why it exists, shared by the individuals who work in it. These might be, for example: ‘providing customer service and satisfaction’, or ‘making profits’, or ‘providing a service to the community’.

Style

Style refers to the cultural characteristics of the entity and the people who work in it, and also the leadership style of its managers.

Staff

These are the people who work for the organization, and their attributes – numbers, motivation, loyalty, pay rates, working conditions, career advancement, and so on.

Skills

These are the skills of key personnel. What can they do well, and what do they do badly?

The hard factors are so-called because they are relatively easy to define: strategy can be recorded in a strategic plan, structure on an organization chart and systems in a procedures manual.

The soft factors are harder to identify and define. Of course there are elements of these factors that are relatively easy to define (such as wage rates) but there are factors that are more difficult to pin down (such as staff motivation and loyalty).

When making strategic change, a failure to take any one of the seven factors into consideration could have adverse implications for the other six factors, and the change will not be successful. All seven factors must therefore be given consideration when change is planned and implemented.

When the model was first devised, research showed that in many US corporations managers tended to focus on those factors that they felt they could change – structure, strategy and systems, i.e. the hard variables.

However, they tended to ignore the other four factors (skills, style, staff and shared values) – i.e. the soft variables. According to McKinsey, this is why attempts at strategic change often fail.

The 7S model and change management

The 7S can be used to carry out an internal assessment of the capabilities or competencies of an entity. However, the model has other applications and in particular it can be used to assess the possible implications of change within an organization.

Soft Elements

Shared Values

Style

Staff

Skills



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A change in any one of the S factors will have a knock-on effect, so that there might need to be changes in the other S factors too. Changes in ‘hard factors’ such as operational systems or the management structure will have an impact on ‘soft factors’. Problems with the soft factors could mean that changes to hard factors are difficult to implement successfully.

Example

A company recognizes that it has a weakness in its after-sales service to customers. It therefore decides to establish a new customer services department, in order to improve customer goodwill. (= Change in Strategy).

It will need to recruit staff and organize them into customer service teams (= Change in Structure).

The entity might recruit new staff who will have the confidence to use their initiative in dealing with individual customers (= Change in Staff)

The staff will need suitable training in customer service skills (= Change in Skills).

Senior management will need to promote an awareness of the need for better quality throughout the organization (= Change in Shared values).

New procedures need to be developed for guiding employees in how to handle customer complaints and queries (= Change in Systems).

Although there will be procedures for handling standard problems, management and supervisors might need to learn to ‘empower’ their employees and allow them to use their initiative in dealing with unusual cases (= Change in Style).

Strategic changes should therefore be considered from all seven perspectives. A failure to deal with any one factor could result in a new weakness.

Using 7S model analysis

One way of using the 7S model to analyze the possible consequences of change is to take each pair of factors and consider the possible implications of a change in one factor on the other.

For example, the connections between ‘structure’ and ‘skills’ might be considered. An entity might be planning to increase the skills of a group of employees by giving them training towards a professional qualification. A possible implication of the change in skills could be that the employees, once they are trained, might expect greater responsibility for decision-making and less supervision. The change in skills would therefore have implications for the organization and management structure.

By analyzing the implications of change in this way, it should be possible to plan for the change, so that the change is carried out successfully. In the example above, the strategy to raise skills levels might be accompanied by a plan to restructure the management hierarchy, and gradually reduce the number of front-line supervisors.

Practice Question

a) Briefly discuss three key attributes of highly change-adept organization.

b) Human resource function of Shayan Limited (SL) has been outsourced to Talent Hunt Limited (THL) for past many years. However, the management of SL is not pleased with some of the newly hired personnel recruited on the recommendation of THL. Further, contract with THL is expiring in two months and THL has demanded 25% increase in fee on renewal of contract.

The management of SL is considering not to renew the contract with THL and intends to establish an in-house human resource function.

Identify and briefly discuss the seven factors mentioned in the 7S model presented by McKinsey, that SL may consider while implementing the above change.



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Solution

a. The three key attributes of a highly change-adept organization are:

i. The top management/leadership promotes innovation / new ideas.

ii. The management is competent at bringing the change and staff is well trained, developed and supports management in bringing the change.

iii. The organization collaborates and shares ideas with other entities and is capable of working well with other entities to bring changes.

b. SL should take into account the following factors mentioned in 7S model:

Hard factors:

i. Strategy

Goals, objectives and a plan for allocation of resources for in-house human resource function.

ii. Structure

Assigning of responsibilities, lines of reporting and coordination among human resource function

staff.

iii. Systems

Specific processes, procedures and information systems for human resource function.

Soft factors:

i. Staff

Number of people needed for the human resource function and related factors such as rewards,

training, motivation, loyalty, working conditions, etc.

ii. Skills

Capabilities and competences that staff must possess to perform the human resource activities.

iii. Style

Leadership style and organization culture expected to be followed at human resource function.

iv. Shared values

Sharing of norms and standards by human resource function that reflect the purpose of SL.



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Sticky Notes

Organisational Change refers to changes in strategy, resource allocation and asset disposals alongwith significant reengineering of the organization

structure as a standard part of many change efforts.

Change is either planned or unplanned and either incremental or transformational.

There are different internal and external factors which drive for change. PESTEL may be a helpful tool in identifying factors for change

Employees may react in various ways due to change and it is management’s responsibility to steer employees’ reaction in the right direction.

Models of Change Management

McKinsey’s 7S Model

Lewin’s Model of Force Field

Analysis

Lewin’s Unfreeze, Change and

Refreeze Model The Gemini 4Rs



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Reference:

Ricky W. Griffin and Gregory Moorhead (2014). Organizational Behavior: Managing People and Organization.

Mason, USA: Michael Schenk

Gareth R. Jones, and Mary Mathew (2014). Organizational Theory, Design, and Change. UP, India: Dorling

Kindersley

Jim Grieves (2010). Organizational Change. New York, USA: Oxford University Press


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CHAPTER 5

ORGANIZATIONAL CULTURE

_

AT A GLANCE

In addition to having informal organization, business organizations (and other types of organization) also develop a culture. A culture is a set of dominant beliefs, attitudes, values and norms that is shared by a number of people.

There are number of factors that decide or define the culture of an organization including: structure and size, leadership, environment, events, nature of business and nature of client.

Cultural web is responsible for the prevailing culture and consists of six interrelated elements of culture including: routines and rituals, stories and myths, symbols, power structure, organization structure and control systems.

Three important models explain the determinants of culture and the interactions of human behavior that shape how organizations would perceive the way things are done.

Schein’s 3 layers of culture: There are there levels of culture that members of an organization acquire which are outer skin, inner layer and paradigm.

Charles Handy Model: There are four categories of organizational culture. i.e. power culture, role culture, task culture and personal culture.

Hofstede’s view of culture: culture of business organizations in one country will differ from the culture of organizations in a different country. There are five dimensions to differences in organization culture arising from differences in national culture which includes power-distance dimension, individualism versus collectivism, uncertainty avoidance, masculinity versus femininity, long term orientation versus short term orientation.

IN THIS CHAPTER

AT A GLANCE

SPOTLIGHT

1. Organizational Culture

2. Organizational development and diagnostic models

STICKY NOTES

References

CHAPTER 5: ORGANIZATIONAL CULTURE CAF 4: BMBS


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1. ORGANIZATIONAL CULTURE

1.1 Culture

A culture is a set of dominant beliefs, attitudes, values and norms that is shared by a number of people.

Culture is our way of life and is reflected in our history, heritage and how we express ideas and creativity.

Our culture measures our quality of life, vitality and the health of our society. Through our culture we develop a sense of belonging, personal and cognitive growth and the ability to empathize and relate to each other. Direct benefits of a strong and vibrant culture include health and wellness, self-esteem, skills development, social capital and economic return

The earliest and most concise meaning of culture is that given by Edward Tylor in 1891, who contended that culture is:

That entire compound which incorporates learning, beliefs, craftsmanship, ethics, law, custom, and some other abilities and propensities obtained by man as an individual from society. Grieves (2010).

Authoritative sociologists and theorists adopted this definition in the primary portion of the twentieth century, in light of the fact that they were keen to assess how culture could be a cohesive power among individuals that become part of social groups that were more generic and in which the ties that bound individuals together were not as obvious.

Organizational Culture

It refers to a set of beliefs, values and attitudes shared by everyone in the organization. Within an organization, organizational culture defines ‘the way we do things around here’. An organization’s culture can be utilized to increment the organizational progress.

Corporate culture

It refers to the way in which organizations are managed. This is different from organizational culture, which is the set of values shared by all the employees. (However, the term ‘organizational culture’ is often used with the same meaning as ‘corporate culture’.)

Workgroup

Within the same business organization, there may be several workgroups, each with a distinct ‘sub-culture’. For example, the culture in the sales department might be very different from the culture in the accounts department, and both these cultures may differ from the culture of the research and development department staff.

1.2 Creating The Organizational Culture

The concept of culture has significantly been linked with study of organization. It is important to note that organizational culture directly affects organizational performance. The culture that the organization develops usually differentiates it from other organizations and is one of the most important reasons for its prosperity.

Edgar Schein, a writer on organisation culture, has written that the concept of culture is still misunderstood in organisations, being treated too much as a superficial phenomenon. He also wrote culture is really a very deep phenomenon and if managers/leaders are serious about changing culture, they must make an effort to understand how culture really ‘works’ and what it really is.’

Managers need to understand the culture of the group(s) that they manage. By understanding the group culture, they can try to influence it and encourage positive attitudes to work.

Schein wrote: ‘Building an effective organisation is ultimately a matter of meshing different sub-cultures by encouraging the evolution of common goals, common language and common procedures for solving problems.’ He was the first person to use the term ‘corporate culture’. He believed that successful managers develop a positive corporate culture.

CAF 4: BMBS CHAPTER 5: ORGANIZATIONAL CULTURE


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An organization prevails because of what it does (its technique or strategy), and how it does it (its way of worklife or culture). The way of worklife is connected to the key qualities and characteristics, regardless of whether one is setting a new organization or attempting to change the worklife of a current organization. The way toward making an origination’s culture is a procedure of connecting its key qualities with its social and business environment.

1.3 Culture Deciding Factors

Combination of various factors shapes the culture of a workgroup or an organisation.

Structure and size: To some extent, the culture of an organisation is affected by its size and its formal organisation structure.

Leadership: The leaders of an organisation can influence culture, for example by stating the values of the organisation, and its goals and strategies.

Environment: Culture develops as a way of responding and reacting to the environment in which the organisation operates.

Events: Culture develops as a result of many events, and how a group or organisation has responded to those events.

Nature of Business: Nature of business has very influencial role in deciding and creating the culture of any organization. Culture of a manufacturing and service sector may not be identical.

Nature of Client: Nauture of client or geographical area of client also has very considerable role in formulating policies and deciding culture.

1.4 The cultural web

An approach to analyzing corporate culture has been suggested by Johnson and Scholes. They have suggested that there is a cultural web within every organization, which is responsible for the prevailing culture, which they call the ‘paradigm’ of the organization.

The cultural web consists of six interrelated elements of culture within an organization.

Routines and rituals. Routines are ‘the ways things are done around here’. Individuals get used to the established ways of doing things, and behave towards each other and towards ‘outsiders’ in a particular way. Rituals are special events in the ‘life’ of the organization, which are an expression of what is considered important.

Stories and myths. Stories and myths are used to describe the history of an organization, and to suggest the importance of certain individuals or events. They are passed by word of mouth. They help to create an impression of how the organization got to where it is, and it can be difficult to challenge established myths and consider a need for a change of direction in the future.

Symbols. Symbols can become a representation of the nature of the organization. Examples of symbols might be a company car or helicopter, an office or building, a logo or a style of language and the common words and phrases (‘jargon’) that employees use.

Power structure. The individuals who are in a position of power influence organizations. In many business organizations, power is obtained from management position. However, power can also come from personal influence, or experience and expertise. The most powerful groups within an organization are most closely associated with the core beliefs and assumptions in its culture.

Organisation structure. The culture of an organization is affected by its organization and management structure. Organization structure indicates the important relationships and so emphasizes who and what is the most important parts of it. Hierarchical and bureaucratic organizations might find it particularly difficult to adapt to change.

Control systems. Performance measurement and reward systems within an organization establish the views about what is important and what is not so important. Individuals will focus on performance that earns rewards.

Together, the cultural web consists of the assumptions that are ‘taken for granted’ within the organization as being correct, and also the physical manifestations of the culture.



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Practice Question

According to Johnson and Scholes, there is a cultural web within every organization. The cultural web consists of six elements of culture. Link each of the scenarios presented below with any one of the cultural elements suggested by Johnson and Scholes:

i. The company logo is affixed on the entrance wall of the office building. Inside the office, plates are displayed on the walls displaying company’s products and other motivational quotes.

ii. Company celebrates personal milestones e.g. birthday parties, retirement celebrations, last day parties, etc.

iii. CEO’s personal assistant is influential enough to assign tasks to staff of all departments.

iv. It is a general belief in the company that the father of existing managing director has played the most vital role in the turnaround of the company.

v. Electronic attendance terminals are placed at the entrance and all the employees are required to mark time-in and time-out on daily basis.

vi. The entity is controlled and regulated by bureaucracy and the emphasis is on control through regulation.

Solution

i. Symbols

ii. Routine and rituals iii. Power structure iv. Stories and myths v. Control systems vi. Organization structure

1.5 Dysfunctional aspects of culture

The existence of a well-defined, engraved and robust culture can bring dysfunctional aspects to an organization as well. The following may be the key dysfunctional aspects:

Shared Values not aligned. This can be dysfunctional when the shared values are not in alignment with those that would further the effectiveness of the organization and is typically seen in dynamic environments. An example would be the corporate administration of Eastman Kodak who failed to respond to the market’s shift in demand from traditional photography equipment and processing to digital-based products.

A recent example of Nokia which failed due to not adapting to the technological shift.

Creating barriers to change towards something that is not considered part of the existing culture – for example resistance from management to the introduction of a ‘work-life balance’ initiative including relaxation, family and leisure time in a high-performing corporate finance organization.

Creating barriers to diversity: for example facing resistance when aiming to achieve greater gender balance in boardroom composition.

The diversity theme creates a kind of paradox whereby management wish new employees to conform to existing cultural norms whilst simultaneously wanting them to be different (diverse) in some way.

Organizations seek to hire varied and diverse individuals because of their alternative approach and fresh ideas. However, in reality these diverse strengths and behaviors by their very nature are likely to weaken the existing culture definition.

Creating barriers to mergers and acquisition when operational fit is achieved but cultural practices are not aligned. The objectives and tests for corporate consolidation are typically focused on synergies and cost savings whereas in reality the greatest factor in success or failure tends to be whether the cultures are matched or not.



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2. ORGANIZATIONAL DEVELOPMENT & DIAGNOSTIC MODELS

2.1 Edgar Schein’s levels of culture

According to Schein, there are three levels of culture that members of an organisation acquire:

the outer skin, or artefacts

the inner layer (or espoused values)

the paradigm (basic underlying assumptions).

These are interrelated and react with each other. However, aspects of culture, particularly artefacts, are often difficult to ‘interpret’ and understand.

Levels of culture

The outer skin (artefacts)

At one level, the culture of a company is evident in what a visitor can see and hear by visiting the company.

The facilities and surroundings in which employees work help to create culture. So too does the way that employees dress. For example, some organizations insist on office workers dressing formally. In others, even senior managers go to work in casual clothes, such as an open-necked shirt and jeans.

Culture is also seen in the way that employees talk to each other and interact with each other. It can be heard in the language that individuals use when talking to each other, such as the use of ‘jargon’.

The inner layer (espoused values)

A company might have a formal code of ethical behavior, which is intended to shape the attitudes of all its members. It might have a formal code of ethical behavior, which is intended to shape the attitudes of all its members.

Stated values and mission statements are often expressed in general terms, such as ‘providing a service to the community’ and ‘providing the best quality of service to customers’.

Culture might also be expressed in the goals and strategies of the organization.

This level of culture can be influenced by the organization’s leaders.

The paradigm (basic underlying assumptions)

‘Paradigm’ is a term for the shared assumptions and attitudes about what really matters, that are taken for granted and rarely discussed. These affect the way that the organization sees itself and the environment in which it operates, and is the real ‘core’ culture of the organization. Unlike mission statements and codes of ethics, a paradigm is not written down, and it is difficult to identify or explain. The ‘paradigm’ has also been described as the reason why the organization exists. A police force exists to catch criminals, and a school exists as a place for learning.

Basic underlying assumptions

Artefacts

Espoused values

Visible structures and processes in the organisation

Philosophies (mission), ethics, strategies, goals, stated values

Unconscious beliefs, perceptions and thoughts that are taken for granted



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A paradigm has been defined by (Capra, 1997) as: ‘a constellation of concepts, values, perceptions and practices shared by a community, which forms a particular vision of reality that is the basis of the way a community organizes itself.’

Schein argued that changing corporate culture is very difficult. The ‘outer skin’ can be changed fairly easily, with a determined effort by management, but it is very difficult to change the paradigm.

2.2 Charles Handy Model

Charles Handy (2000) in his book Gods of Management, suggested that there are four different categories of organizational culture. He described these as cultural ‘stereotypes’:

A power culture, also called a club culture and a spider’s web culture

A role culture

A task culture

A personal culture, also called an existential culture.

He also connected each stereotype with the characteristics of different Gods in Greek mythology to relate them with their specific qualities.

The Culture The God

Club

Zeus

Role

Apollo

Task

Athena

Existential

Dionysus

Power culture

In a power culture, there is one major source of power at the centre of the organisation. Power, authority and influence spread out from this central point, along functional or specialist lines, but control remains at the central point. Handy compared the power culture to a spider’s web, with the spider at the centre controlling everything. Individuals closer to the centre of the web have more influence than individuals who are further from the centre.

A power culture is often found in small entrepreneurial organisations, where the boss is usually the founder of the business and also a dominant personality, who exercises close control over activities.

A power culture is based on trust.

The ‘boss’ maintains freedom of manoeuvre, and retains power, by writing very little down and relying on the spoken word.

The ‘boss’ tries to influence other people through the force of his personality, and personal charm.

A problem with a power culture is that it depends on the character of the ‘boss’. As an organisation grows in size, it becomes more difficult for one person to control everything. There is a risk that the organisation will become inefficient unless the corporate culture is changed. A power culture is therefore unlikely to be efficient for organisations of more than about 20 people.

Role culture

A role culture is probably the most readily-understood of the four corporate cultures. It exists in a bureaucracy, where the responsibilities of each individual are defined by the job that he or she has, the job definition and its position in the organizational structure. There is a traditional hierarchical structure to the organization, and each job (role) has a specific function. The organization relies on formal communications rather than informal communication.



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A role culture has been compared with a pyramid of boxes, and each box has a job description. The boxes remain in place and the culture is unchanged when the individuals in the boxes leave the organisation and are replaced.

A role culture is probably best-suited to a large organisation in a fairly stable business environment, where employees are expected to do the job that they have been given, and where enterprise and initiative are relatively unimportant. People in organisations with a role culture are ‘managed’ rather than ‘led’.

Task culture

In a task culture, the focus is on tasks and getting tasks completed in the most efficient and effective way, and the main aim is the successful solution of problems.

In a task culture, organisation is flexible. Work teams can be formed, disbanded when a task is completed, and then re-formed into new workgroups to deal with new tasks. Individuals gain respect and authority from their knowledge and skills, rather than from their ‘official role’ within a work team. A task culture is typically found in project teams and development groups.

A task culture is well-suited to an organisation that is continually facing new problems and challenges. This is often found in rapidly-changing organisations and industries such as IT companies and knowledge-based industries. It is also found in building and construction companies. In these organisations, workgroups are often formed to deal with a particular task, and disbanded when the task has been completed.

In a team culture, personal relationships matter, and individuals are ‘led’ rather than ‘managed’.

Person culture

In a person culture, the entire organisation structure is built around one individual or a group of individuals. The rest of the organisation exists to serve the needs of the central individual. The culture is based on the view that the organisation exists to serve the talented individual or individuals.

It is unusual for an entire organisation to have a person culture, but small parts of an organisation might be structured in this way. Examples are organisations built around individuals in the sports or entertainment industries, small management consultancies, or parts of investment banks. Firms of lawyers and small hospitals might also have a person culture.

In an organisation with a person culture, the central individuals may share some common resources, such as a small administrative support function. However, the individuals operate independently and have some dedicated support staff of their own.

Different cultures may exist in different parts of the same organisation. The culture of an organisation, or a part of an organisation, determines how it is managed, and how individuals within the organisation think and act.

Practice Question

WeSolve, a software house, provides software solutions to small and medium sized businesses. It has following two divisions:

Finance

It comprises of 3 accountants reporting to the chief accountant. Each accountant has defined area of responsibility i.e. receivables, payments and general accounting.

Software Development

It comprises of 2 software development managers, 3 designers and 4 programmers. The designers and programmers are rotated on different assignments in accordance with the knowledge and skills required.

Required:

Identify the corporate cultures (as categorized by Charles Handy) being followed at finance and software development divisions of WeSolve. Also mention key characteristics of the corporate cultures identified by you.



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Solution

Corporate cultures being followed at WeSolve and their key characteristics are as follows:

Finance

This division is following ‘Role Culture’ which has following characteristics:

There is a bureaucracy where responsibilities of each individual are defined.

There is a traditional hierarchical structure and each role has a specific function.

The reliance is on formal communications over informal communications.

Business environment is fairly stable and initiatives have relatively less importance.

People are ‘managed’ rather than ‘led’.

Software Development

This division is following ‘Task Culture’ which has following characteristics:

The focus is on the completion of task in the most efficient and effective manner.

Team is formed for each task and on completion of task, the team is disbanded.

Power is driven from skills and expertise rather than from official roles.

Business environment is volatile and radical solutions are encouraged.

People are ‘led’ rather than ‘managed’.

3.3 Hofstede: international perspectives on culture

In the 1980s and early 1990s, Geert Hofstede added some useful views about the effect of national cultures on organizational culture. Hofstede argued that culture is a property of groups, not individuals. There is no such thing as individual culture. Culture is the collective programming of the mind that distinguishes the members of one group from the members of another group.

He argued that national cultures are different. As a result, the culture of business organizations in one country will differ from the culture of organizations in a different country.

Multinational companies face the challenge of trying to create a common organizational culture for an organization that operates across national boundaries.

Different national cultures mean that business practices that are considered perfectly acceptable in one country might be considered unacceptable in others. For example, the following business practices are acceptable in some countries but not in others.

a) Paying an adviser to discover loopholes in the tax laws, in order to avoid paying tax on business profits.

b) Inspecting the product of a competitor at a trade fair, and then developing a close copy as a rival product.

c) Paying a government official to speed up the completion of a bureaucratic procedure.

d) Giving a gift to the purchasing manager of a large company that buys your products.

Hofstede suggested that there are five dimensions to differences in organization culture arising from differences in national culture.

Power-distance dimension. This refers to the way in which power is dispersed within the organization. When the power-distance dimension is low, this means that inequalities in the distribution of power within the organization are minimized. When the power-distance dimension is high, inequalities in power are regarded as acceptable and those without power look to those with the power to make the decisions for the organization. Writing in the 1980s, Hofstede suggested that the power-distance dimension was low in countries such as Sweden and New Zealand, and high in Latin American countries and in the ‘Latin’ European countries such as Spain and France.



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Individualism versus collectivism dimension. In some countries the interests of the individual come before the collective interests of the group. (Hofstede gave Australia and Canada as examples.) In other countries, concern for the group comes before concern for the individual. (Indonesia is an example.)

Uncertainty avoidance. This is the extent to which a group feels threatened and endangered by unexpected and unfamiliar happenings. When a culture of uncertainty avoidance is high, work behavior such as precision and punctuality are highly esteemed. (Hofstede gave Japan and South Korea as examples.)

Masculinity versus femininity. In some countries there is a much stronger cultural acceptance of ‘feminine’ qualities such as modesty, intuition and quality of life, rather than aggressive ‘masculine’ qualities of aggressiveness and competitiveness. Hofstede gave the US and UK as examples of ‘masculine’ cultures.

Long-term orientation versus short-term orientation. In some countries, there is a greater focus on short-term goals and short-term results, whereas in other countries there is a greater willingness to consider the longer term. Short-termism is a feature of organization culture in the US and much of Western Europe.



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STICKY NOTES

Organizational culture is the arrangement of norms and values in any organization that enables the employee to comprehend which activities are

viewed as suitable and which are unsuitable.

A combination of factors shapes the culture of a workgroup or an organisation such as structure and size, leadership style, environment, events, nature of

business etc. There are six interrelated factors that form the cultural web and determine organisation’s culture.

The existence of a well-defined, engraved and robust culture can bring dysfunctional aspects to an organisation as well. Such as when shared values not aligned, there is resistance to change, esitence of barriers to diersity and

existence of barriers to mergers and acquisitions

Three important models explain the determinants of culture and the interactions of human behaviour that shape how organisations would

perceive the way things are done:

Edgar Schein’s level of culture

Charles Handy Model

3.3 Hofstede: international perspectives on culture

According to Schein, there are three levels of culture that members of an

organisation acquire:

the outer skin, or artefacts

the inner layer (or espoused values)

the paradigm (basic underlying assumptions).

Charles Handy model suggests that there are four different categories of organizational culture. described as cultural ‘stereotypes’:

A power culture, also called a club culture and a spider’s web culture

A role culture

A task culture

A personal culture, also called an existential culture.

Geert Hofstede argued that culture is a property of groups, not individuals. There is no such thing as individual culture. Culture is the collective

programming of the mind that distinguishes the members of one group from the members of another group.



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References:




Kindersley




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CHAPTER 6

EMPLOYEE BEHAVIOR

AT A GLANCE

Employee behavior is defined as an employee’s reaction to a particular situation at workplace. Every individual is different from other and has personal qualities that are unlike any other individual. Personality is composed of two main attributes: nature and nurture. Perception is the process by which we attach meaning to the world around us. The perception process involves observing, organizing and interpreting other people, ideas, experiences and objects in the context of the person’s own beliefs, values, background and expectations.

An important determinant of perception is our set of sensory abilities. Perception could be influenced by any one or a combination of the following factors: attitudes, motives, interests, experience, expectations, beliefs, background / environment, history, values, culture and religion. The perception process involves three stages: selection, organization and interpretation. Sensation is the initial process of perception. Perceptual selectivity looks to clarify how, and why individuals select a few improvements out of the numerous upgrades they experience at some random time. It is affected by different interior and outside components. Perceptual problems include: stereotyping, halo effect, selective perception, contrast effect, projection.

Attitudes are individuals’ compositions of beliefs and feelings regarding specific situations, ideas, or other individuals. Attitude comprises a number of components: Knowledge or informational / cognitive component, feelings or emotional / affective component, behavioral Intention / component. Explicit attitudes are attitudes that people are consciously aware of. Implicit attitudes are driven by the subconscious mind. Variation in cultural heritage, morals, beliefs and values can significantly impact people’s attitudes, particularly their implicit attitude

Job satisfaction refers to the attitudes and feelings that individuals have in relation to their jobs. Job satisfaction is split between: Affective job satisfaction and Cognitive job satisfaction. Job stress in the workplace describes feelings of tension or exhaustion typically associated with excessive or overly demanding work. Symptoms include: exhaustion, loss of appetite, headaches, crying, sleeplessness and oversleeping. Job stress is triggered by environmental, organizational and personal factors.

IN THIS CHAPTER

AT A GLANCE

SPOTLIGHT

1. Employee Behavior

2. Attitude

3. Job Satisfaction

STICKY NOTES

References

CHAPTER 6: EMPLOYEE BEHAVIOR CAF 4: BMBS


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Employees should consider multiple strategies designed to help cope with and avoid stress in the long term. These might include:

Break bad habits and eliminate self-defeating behaviours

Dispel stress

Improve your emotional intelligence (EI) –

Prioritize and organize

Take care of yourself

Recognize warning signs and symtoms (breifed earlier)

Improve management skills

CAF 4: BMBS CHAPTER 6: EMPLOYEE BEHAVIOR


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1. EMPLOYEE BEHAVIOR

Employee behavior is defined as an employee’s reaction to a particular situation at workplace.

There is a certain way individuals behave in a particular situation. No two individuals behave in similar ways. There are individuals who find it difficult to handle stress whereas there are certain individuals who have the ability to face unforeseen circumstances with a smile.

Individual Uniqueness

Every individual is different from other and has personal qualities that are unlike any other individual. These unique characteristics may be physical appearances, psychological empowerment and emotional intelligence. Personality, perception, attitude, thinking and creativity make people different and unique.

Managers and leaders must realize that these distinctions exist and they need to understand them. To comprehend the conduct of individuals in an organization, the leader ought to look at the fundamental idea of the individual’s relationship to the organization. Understanding this relationship enables managers to accept the idea of individual contrasts. Every individual would relate with the organization according to his/her needs, interests and characteristics of their unique behavior which would in turn decide the basic relationship they form with the organization.

Personality

Personality is basically an identity of an individual. Identity is the generally steady arrangement of mental characteristics that recognizes one individual from other. Personality is composed of two main attributes, one is “nature” that mean those attributes which are inherited from parents, in fact these attributes are biological. Second one is “nurture” which means how environment has shaped the person. These two biological and environmental factors determine or shape the overall personality.

Psychological Agreement

The importance of understanding individualism helps us understand the relationship between an employee and the origination which may be called Psychological Agreement. Psychological agreement (mental understanding) is an individual’s arrangement of assumptions about what the person will add to an organization and what the organization, consequently, will give to the person. It governs the basic relationship between people and organizations. An individual’s contribution to an organization include things such as commitment, effort, knowledge, skills, ability, time, and loyalty. Organizations in return favor employees with appropriate rewards and compensation such as financial and non-financial incentives, job security and recognition as well as personal and professional growth.

The individual characteristics help determine employee’s perception which in turn plays an important role in understanding employee behavior.

1.1. Perception

Perception is the awareness, or the ability to see, hear, or become aware of something through the senses. Perception is a process by which individuals organise and interpret their sensory impressions in order to give meaning to their environment. In short, perception is the process by which we attach meaning to the world around us.

Individual Contribution:

Competencies

(knowledge, skills, attitude)

Time and work

Association Contribution:

Compensation or reward with other

benefits

Future Growth



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The perception process involves observing, organizing and interpreting other people, ideas, experiences and objects in the context of the person’s own beliefs, values, background and expectations.

Perceptions enable individuals to frame their behavioural responses towards particular objects. Note that perception is unique to each person – no two people view the world exactly the same.

Perceptions of an individual(s) may not necessarily be in accordance with the objective reality of the situation. Even reality of object is different among the individuals. In fact they frequently differ leading to variation in individual and organizational behaviour.

Sensory Sources

An important determinant of perception is our set of sensory abilities. We use our five basic biological senses to perceive the world around us. These senses include:

Sight

Hearing

Touch

Taste

Smell

Other Sources of Perception

Perception of an individual towards any object or situation could be influenced by any one or a combination of the following factors:

Attitudes

Motives

Interests

Experience

Expectations

Beliefs

Backgournd / Environment

History

Values & Culture

Religion

1.2. Stages of perception

The perception process involves three stages:

Stage 1: Selection

Selecton is the screening process, individuals screen out the uncomfortable information or contradictions of beliefs by using their senses – i.e. touch, taste, sight, sound and smell.

Stage 2: Organization

Organization involves mentally arranging information gained from the stimuli or from the senory senses so we can understand and make sense out of it.

People perceive the same things differently. If every individual perceived everything in the same manner, then life would have been boring.



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Stage 3: Interpretation

- Interpretation is the final and key stage where we attach meaning to the stimuli.

- Our interpretations are subjective and based on our values, beliefs, expectations, needs, involvement and other personal factors.

- Interpretations does not explain the object reality, while reality is shaped and explained or interpreted by this process.

1.3. Sensation Versus Perception

Sensation is the initial process of perception. Sensations are things in our environment that are registered by the five senses. This process is limited in scope as it is restricted to the human body’s physiological process involving the five senses.

However, there are an infinite number of ways in which individuals may perceive the same information that was sensed through the five senses. This is what makes us different and leads us to being individuals.

Some examples of the difference between sensation and perception in practice are:

Someone makes a comment which they think is funny. However, someone else, hearing the same comment, may take offence at it.

Two people share the same food dish – one person finds it unpleasant and overly spicy, whilst the other person enjoys the food immensely.

Music tastes – the same piece of music may be calming to one person yet significantly disturbing to another.

When moving towards a building from afar our sense of sight tells us that the building gets bigger the closer we get to it. However, our perception tells us that it’s the same building and does not change in actual size as we approach it.

In the work environment one manager may perceive a set of financial results as being highly favourable whereas a different manager may perceive the same set of financial results as being a disaster.

1.4. Perceptual Selectivity

Perceptual selectivity seeks to explain how and why individuals select just a couple of improvements out of the numerous upgrades they experience at some random time. It is affected by different interior and outside components which can likewise be thought of as qualities of the perceiver (internal factors) and perceived (external factors).

Internal Factors (Characteristics of the perceiver)

Factor Explanation

Habit Individuals perceive objects, situations and conditions differently according to

their habits. For example a retired soldier may take cover when he hears a tyre

blow-out.

Personality Both the personality of the perceiver and stimulator has an impact on the

perception process. This also incorporates age, dress, race and sex.

Motivation and interest Motivational factors increase the individual’s sensitivity to those stimuli that they

consider as being relevant to the satisfaction of their needs in view of past

experience with them.

For example a thirsty individual will inadvertently seek a water fountain or

grocery store to enable them to quench their thirst.



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Factor Explanation

Economic and social

background

Socially and economically developed employees have a more positive attitude

towards development rather than less developed employees.

Learning People generally perceive at a level synonymous to their level of education.

Therefore it becomes important for an organisation to develop its employees

through education and training.

Organizational role and

specialization

Many modern organisations value specialization. The speciality of a person

predisposes them to select certain stimuli and to disregard others.

Thus in a comprehensive report the departmental head will typically first notice

the text relating to their department.

External Factors (Characteristics of the perceived)

Factor Explanation

Novelty and familiarity Either a novel object in a familiar situation or a familiar object in a novel situation

will tend to attract attention.

Motion Individuals attend to changing objects in their field of vision more readily than to

static objects.

This is seen in nature where the hunter remains motionless when attempting to

catch prey. Advertisers also embrace this concept.

Repetition Repeated stimuli have greater impact on performance than a single statement as

it catches the attention.

This is seen in advertising where the brand name is mentioned multiple times in

each advert.

Contrast Greater contrast also augments stimuli. For example a white object against a dark

background will receive more attention than a white object against a yellow

background.

Size Size influences attention and recognition in a highly effective manner. Generally,

the larger the object the more likely it will be perceived.

Intensity Intensity provides that the more intense the stimulus audio or visual, the more

likely it will be perceived.

For example a loud noise, strong odour or bright colour sill be more readily

perceived than soft sound, weak odour or dim light.

1.5. Perceptual Problems

Perception is dependent on five senses and error may occur while sending or receiving any information and making any perception or judgement. Different problems may occur due to these errors. ‘Do not judge a book by its cover’ and ‘jump to conclusions’ are common phrases you may have encountered in life. These describe situations where our perception has drawn an incorrect conclusion through some kind of bias.

The notes below describe a number of common distortions encountered when dealing with people.



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Stereotyping

Stereotyping is the process of classifying or captioning people on the basis of a single quality. Sometimes few forms of stereotyping may be useful. Stereotyping describes judging someone on the basis of one’s perception of the group to which that person belongs.

This commonly manifests the perception people attach to certain cultural, religious and political groups as well as age, gender, physique and ethnicity.

It could be argued that stereotyping and generalization is not always a negative trait, it certainly allows us to simplify a complex world and make decisions quickly and consistently. However, problems tend to arise when the stereotyping is inaccurate.

In practice, if people expect to encounter stereotypes then that is what they will perceive, whether or not they are accurate.

Halo effect

Halo effect, mistakes in reasoning, in which an impression shaped from a solitary attribute or trademark is permitted to impact different decisions, unrelated factors or evaluations of random components. Research on the Halo effect phenomenon was spearheaded by American psychologist Edward L. Thorndike, who in 1920 announced the presence of the impact.

The halo effect describes when someone draws a general impression about an individual based on either a single or very limited number of characteristics. This impression then influences how someone feels and thinks about the character of another individual.

For example, a senior manager may conclude that an employee should be promoted to managerial level based on one outstanding technical invention. In reality the individual may be an excellent technician but poor manager. The core technical skill does not lead to the leading or managerial role always.

The halo effect is arguably the most common bias in conducting staff appraisals in the work environment. The supervisor might bias the whole appraisal based on how they rate say the timekeeping of an employee. In reality it could be the employee with the worst timekeeping record who is the most productive and effective.

Selective perception

Selective perception describes how people selectively interpret what they see on the basis of their interest, experience, attitudes and background.

For example, public figures, particularly celebrities. Given they are perceived as successful, attractive and likeable people tend to also see them as intelligent, kind and funny. But in reality normally it is not so.

Contrast effects

Rather than evaluate someone objectively, ‘contrast effects’ describes when someone evaluation of a person’s characteristics is skewed by comparison with other people recently encountered who rank higher or lower on the same characteristics.

This can be a risk when conducting annual appraisals. A manager may inadvertently ‘average down’ the grades from a particularly high performing team due to associating the weakest team member relative to the others as performing at a lower level than they actually were when considered objectively. Conversely when assessing a particularly weak team, they may ‘average up’ the grades compared to a truly objective judgement.

Projection

Projection bias exists when an individual attributes their own characteristics to other people rather than perceiving them objectively.

For example we hear a lot of people saying if I can do it so can he/she.



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Example

At times even highly experienced and knowledgeable individuals make perceptual errors in their assessment of other people. The perceptual errors in dealing with other people may be due to the following reasons:

i. Inability to obtain sufficient information of the individual with whom one is dealing OR Selective Perception

ii. Interacting with other people from the standpoint of what one expects or wants to see in them on the basis of one’s own characteristics. OR Projection

iii. Reaching judgment or conclusions based on irrelevant information of others. OR Contrast Effect

iv. Making judgments regarding other people on the basis of generally held beliefs and cultural traits of the group to which they belong but have no bearing on the subject individual. OR Stereotyping

v. Allowing earlier information/experiences to affect the manner in which the individuals are perceived for subsequent interactions. OR Primacy



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2. ATTITUDE

Attitudes are individual compositions of beliefs and feelings regarding specific situations, ideas, or other individuals. Attitude means a tendency in an individual to persistently feel and behave in a particular manner towards any object or situation with which it is related. Thus in practice it represents an expression of favor or disfavor towards a person, place or thing (the ‘attitude object’).

Attitudes are subjective rather than objective. Therefore, they are dependent on perception, personal experience and information and the influence of other people. Attitudes is important because it is the mechanism by which individuals express their feelings.

Attitudes are formed from a person’s past and present.

2.1. Mechanism of attitude

Attitude comprises a number of components:

Knowledge or informational/cognitive component - This component of attitude consists of beliefs, perceptions and information that an individual has about an object. An individual’s congnition constitutes the knowledge an individual presumes to have regarding something. For example, “I believe crocodiles are dangerous or snakes are poisonous”.

Feelings or emotional/affective component – An individual’s affect is his or her feelings towards anything. A person’s feelings or emotions may be positive, negative or neutral towards an object or situation. In certain situations, individuals may be asked to show particular types of behaviour which may be different from their innate natural feelings.

For example “I am scared of crocodiles or snakes”.

Behavioural Intention / component – Behavioural intention is a component of an attitude that leads an individual’s behaviour. This attribute consists of an individual’s tendency to behave, respond or perform in a particular manner towards an object or in a particular situation. Unlike the other two components of attitude, the behavioural component can be observed directly. For example, “I will avoid crocodiles or snakes and will run away if I see one”.

Attitudes are normally considered as constant or stable disposition to behave toward object in a particular way. Consumer behaviors (engaged for their own sake perhaps through habit, ritual or addiction) are likely to be affectively driven. For example: eating lots of chocolate because we enjoy the taste or relaxing on a sunny beach because we enjoy the rest and sensation from the sun. We do not focus on the high sugar content or dangerous ultra-violet light when taking pleasure from such behaviors.

Conversely, instrumental behaviour (i.e. behaviour intended to accomplish a rational goal independent from our attitude) is more likely to be cognitively driven. For example when making decisions in the workplace to maximise profit.

Organisations will benefit from a blend of cognitive and affective views in running their business. For example when designing a marketing campaign there needs to be consideration for both components:

Affective component – is the marketing material visually attractive? Are the samples tasty? Is the background music enjoyable? Is the visual contents acceptable?

Cognitive component - will the marketing campaign result in higher sales enquiries? Can we charge higher prices as a result of the marketing? Will the marketing campaign careate brand equity?

Cognition Affect

Behavioural Intention



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Recognising whether people are more strongly persuaded by cognitive or affective traits may help management influence and motivate both employees and customers. Employees who are less emotionally developed with lower emotional intelligence may respond better to cognitive based messages whereas those who are much more emotionally developed and aware, may be more influenced by affective based messages.

As is typical with most psychological discussions the most appropriate approach is to embrace contingency and understand that effective tactics will vary depending on the situation and people involved.

2.2. Implicit and explicit attitudes

Explicit attitudes

Explicit attitudes are attitudes that people are consciously aware of. They can be measured reasonably through self-testing and observing behaviour typically involving bipolar scales such as:

Strongly support to strongly oppose

Highly favourable to highly unfavourable

Very good to very bad

Implicit attitudes

Implicit attitudes are driven by the subconscious mind. They are largely unacknowledged although they strongly reflect the underlying morals, beliefs and values of a person.

In practice a person can control their explicit attitude but this may or may not align with their implicit attitude.

Example:

While interviewing a candidate for the position of public relations officer for a financial institution, it would be important to assess more carefully the implicit attitude of the individual for the position of public relations officer for a financial institution because it would have a deep impact in dealings with others and any traits of negative implicit attitudes would be harmful for the organization.

2.3. Cross-cultural variation in the bases for attitudes

Variation in cultural heritage, morals, beliefs and values can significantly impact people’s attitudes, particularly their implicit attitude. Care should be taken in the work environment to ensure employees are aware of and sensitive to other people’s culture.

Influence stems from a number of factors including:

Hereditary variables

Patriotism

Rituals and ceremonies

Symbols

Dress

Power structures

Government

Attitudes to risk

Views on long-term employment versus regularly changing jobs

Concern for employee welfare compared to concern for getting the job completed at any cost

Collective and participative decision making versus autonomous leadership and imposed decisions

Levels of trust between figures of seniority and the common workforce

Role of bureaucracy and rules

Levels of individualism – focus on groups or self



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Masculinity vs. femininity traits in society – e.g. masculine traits include possessions, status symbols and ego whereas feminine traits include quality of life and concern for others

Religion

Access to education

Language

Social and business customs – e.g. gifts and hospitality

2.4. Attitude and behavior

Attitudes are not as steady as personality qualities. For instance new data may change attitude. A supervisor may have a negative frame of mind about another co-worker as a result of the coworker’s absence of employment related expereince. However, while working with that coworker for some time, the supervisor may come to understand that he is really very skilled and therefore build up a progressively inspirational frame of mind or attitude. Moreover, if the object of a frame of mind changes, a man's attitude’s toward that coworker may likewise change.

Attitude objects

Attitude objects are those things which on which judgements are made or towards which we have a feeling. These judgments/ feelings about the can be either positive or negative. Attitude objects can be a person, place, thing, or idea.

Changing attitude

Effective and persuasive communication can be successful in changing attitudes. Note:

The communication will be more effective if written with expertise, trustworthiness and on a personal level.

Success also depends on target characteristics – for example more intelligent people are less likely to be persuaded by unbalanced (one-sided) messages. People of moderate self-esteem tend to be more easily persuaded than people with either high or low self-esteem.

Emotion also has a major impact in persuasion and attitude change as is commonly found in advertising, health campaigns and political messages.

Reasoned action

The theory of reasoned action states that if a person evaluates a particular behaviour as positive and thinks that significant others want them to perform the behaviour then they are more likely to behave in that way.

Making use of attitude

Attitude can serve a number of useful functions for an individual. These functions address both inner needs (expressing ourselves and protecting self-esteem) and also the external environment (social acceptance and prediction).

Expressing ourselves – the attitude we express helps communicate who we are and also brings confidence that we have asserted our identity on a situation. Therefore, attitude forms part of our identity.

Protecting self-esteem – attitude can be used to help protect our self-esteem or justify actions that may make us feel guilty. For example, after losing a tender for new work a manager may claim that they aren’t bothered about losing the bid but that they were simply interested in gaining the experience of going through the bid process.

Social acceptance–people will generally be rewarded in a group with social acceptance if they express socially acceptable attitudes and suppress socially unacceptable attitudes.

Prediction –people generally embrace consistency and stability. Knowledge and an ability to embrace it through attitude enable us to predict what is likely to happen giving us a sense of control and helping us organize and structure our life. This extends to a person’s behaviour as knowledge of their attitude helps us predict their behaviour.



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3. JOB SATISFACTION

Job satisfaction refers to the attitudes and feelings that individuals have in relation to their jobs. The extent of positive and favourable attitudes towards the job indicates the level of job satisfaction.

A satisfied employee in general will be absent less frequently, will make positive commitments & impression, and will remain with the association. Interestingly, a disappointed worker might be absent more regularly, may encounter pressure & stress that upsets associates, and might be ceaselessly searching for another job. Reviews showed that, additionally as opposed to famous sentiment, Japanese employees are less happy with their occupations than their counterparts in the United States.

Job satisfaction is split between:

Affective job satisfaction – this is the extent of pleasurable emotional feelings individuals have about their job

Cognitive job satisfaction – this is the extent of individuals’ satisfaction with particular elements of their job, for example working hours, pension arrangements and salary.

In summary, job satisfaction is the measure of how content an individual is with his/her job.

3.1. Factors effecting Job Satisfaction

Levels of job satisfaction can be affected by many factors including:

Rewards

Recognition

Quality of supervision

Social relationship with workgroup

Extent to which the individual is successful in the performance of their duties

There is significant overlap between theories of motivation and job satisfaction which reflect that a motivated employee is motivated because they are satisfied with the various affective and cognitive elements.

For example, in applying Herzberg’s two-factor theory, there are hygiene components that need to be in place to prevent an employee being dissatisfied such as:

Sufficient pay

Fair and consistent company policies

Fair and consistent supervisory practice

Appropriate working conditions

Herzberg then states that there are separate motivating factors that relate to the job (the job ‘content’) that will provide motivation and the opportunity to feel satisfied such as:

The ability to achieve

Being recognized for effective work

Exposure to promotional opportunities

3.2. The outcomes of job satisfaction

The outcome of high job satisfaction will impact numerous stakeholders both internal (the individual, team and organisation) and external (suppliers, customers, shareholders)

Internal stakeholder impact

- Employees

o will feel happy and motivated with their job

o this will extend to reflect in their more positive interaction with others including colleagues, friends and family



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o the standard and efficiency of their work is likely to increase as they naturally invest more energy, time and effort into their job

o Willingness and ownership will increase

Department or Team

- the team will benefit through more harmonious interpersonal communication and a generally much happier environment.

- this is likely to manifest with increased productivity in the team and a strong team identity and reputation

Organisation

- the organisation will benefit through improved productivity and profitability

- the organisation’s reputation for being a happy place to work will help retain employees (and thus reduce costs associated with staff turnover) and also attract new employees

- the improved reputation for looking after the workforce may also attract both investors and customers who want to be associated with a socially responsible organisation who keeps its workforce satisfied

External stakeholder impact

- Suppliers

o where employees who are involved with inbound logistics (suppliers) enjoy high job satisfaction they are more likely to share improved interaction with external stakeholders such as suppliers. This could lead to the forging of collaborative rather than combative relationships resulting in much stronger integration between the supplier and organisation.

Customers

- similar to the improved interaction between employees and suppliers, customers will also benefit through dealing with a more satisfied workforce. This could manifest through improved customer service and more efficient logistics leading to more satisfied customers who then repeat-buy.

Shareholders

- given the above mentioned impact on employees, suppliers and customers, ultimately widespread job satisfaction should result in improved profitability over the long-term and thus improved returns for shareholders. This would in turn attract consistent interest from investors.

3.3. Job satisfaction enhancement

The various theories on motivation and behaviour can be used to deduce a suite of tactics for improving morale and enhancing job satisfaction. These tactics might include:

Spend time developing employees’ skills and potential.

Involve and engage the workforce through participative management.

Provide frequent and appropriate rewards and recognition.

Provide a positive working environment. This might involve access to childcare, a gym and nice restaurant, or outside space and quiet zones. The key is to understand what the employees want in their environment and to provide it.

Encourage and reward thoughtful risk-taking.

Invest time in evaluating and measuring job satisfaction. This might be done informally through conversation, obervation or more formally through employee surveys.

Take part in opportunities provided by the organization such as training. Opportunities, employee benefit programmes and philanthropic initiatives.

Organize work and set periodic (daily, weekly, monthly) goals.

Set some medium term objectives and take steps to ensure the opportunity is there to achieve them.



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Take time to relax, revitalise and refresh. Do something physical (e.g. go for a walk or visit the gym).

Appraise them approperiately.

Encourage social interaction.

Provide the opportunity to exchange the knowledge and skills via social interaction.

3.4. Job Stress

Stress in the workplace describes feelings of tension or exhaustion typically associated with excessive or overly demanding work.

Job Stress is a harmful physical and emotional condition arising from the interaction of individuals with their jobs.

Stress results from demands made on an individual’s physical and mental energies such as monotony, feelings of failure or insecurity. High levels of stress can be triggered by just one significant factor or a combination of many stress-creating factors.

The consequence of job stress is that changes occur within the individual that forces them to deviate or behave differently from their normal behaviour and performance patterns. This is normally accompanied by a reduction in the employee’s effectiveness and performance.

Medical Symptoms

Adrenal glands work over time

High / low blood pressure

Heart beats faster

Stomach problems or headaches

Behavioral symptoms

Changes in eating habits

Sleeping disorders

Procrastination

Feelings of isolation

Smoking

Drug addiction

Nail biting

Feeling anxious, irritable or depressed

Fatigue

Loss of concentration

Social withdrawal

Using drugs or alcohol to cope

Apathy and loss of interest in work

Triggers of job stress - environmental factors

Environmental factors that might trigger job stress include:

High rate of inflation

Shrinking economy and job uncertainty – potentially leading to budget cuts and redundancies

Shortages of essential commodities

Threats of political changes



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Law and order problems

Technological changes

Pollution and environmental hazards

Triggers of job stress - organizational factors

Organizational factors that might trigger job stress include:

Unhealthy working conditions

Work-related hazards – particularly dangerous working conditions

Excessive noise

Extreme pressure to perform

Role conflicts – jobs that create multiple and conflicting demands on individuals

Role ambiguities – jobs where there is ambiguity or confusion regarding the individual’s role in terms of duties, authority and responsibilities

Unsatisfactory interpersonal or hostile relations with supervisors, colleagues and subordinates

Jobs that do not offer much variety in their performance and are of a highly repetitive nature

Jobs that require adherence to stringent working conditions, lack autonomy and have low opportunities for career growth.

Jobs perceived to be of menial nature and considered to be of low value by society

Triggers of job stress - personal factors

Personal factors that might trigger job stress include:

Poor health

Marital problems

Undisciplined children

Death of a close relative or friend

Inadequate income to meet unavoidable expenses – often arising from jobs offering low remuneration resulting in difficult financial circumstances

Personal legal disputes

Example

PQR Mines Limited operates coal mines in the remote areas of the country. The workers in the mines are exposed to several environmental and work related stress factors which are as follows:

i. Unhealthy working conditions – entire work has to be performed in the underground mines with continuous exposure to coal ash, dust and heat. The miners have to work in crouched positions for long hours which adversely affects their posture and causes physical strains.

ii. Work-related hazards – workers have to work with drill machines and shovels and load the coal in trollies to transport coal to the mine heads and load them in trucks and rail wagons. Lapse of attention and care can result in serious injuries to the workers.

iii. Repetitive nature of the work – the entire process of coal mining does not offer any variety and is of a monotonous nature with very little scope for initiative for new learning and career progress.

iv. Low compensation levels – the miners are normally paid on the basis of quantity of coal mined. The rates are invariably on the low side as compared to the difficult nature of the work.



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v. Lack of entertainment activities – the mines are located in remote areas and offer few opportunities for entertainment and amusement.

vi. Home sickness – the miners live away from their home and families for prolonged periods which results in loneliness and weak family ties.

3.5. Managing Job stress

Employees should consider multiple strategies designed to help cope with and avoid stress in the long term. These might include:

Being assertive by Improving communication skills in order to improve relationships with management and colleagues

Identifying consistent ‘knee-jerk’ reactions that manifest in negative attitudes and lead to work stress. Manage these situations and avoid repeating the negative reactions in future

Taking responsibility for improving physical and emotional well-being

The above strategies can be implemented through a number of specific tactics such as:


- Don’t try to control the uncontrollable

- Shift from negative thinking to positive thinking

- Tidy up your act – be on time, tidy the desk.

- Make to-do lists. Plan the day and stick to the schedule

- Resist perfectionism (which is unrealistic)

Dispel stress

- Look for humour in situations

- Connect with others at work

- Talk it over with someone

- Take a break – go for a walk or visit the gym (some kind of physical activity will help enormously)

Improve your emotional intelligence (EI) – EI is the ability to manage and use your emotions in positive and constructive ways. Arguably, EI is as important as intellect when it comes to satisfaction and success at work. EI includes:

- Self-awareness

- Self-management

- Social awareness

- Relationship management


- Time management

o Plan regular breaks

o Leave earlier in the morning to arrive on time and avoid traffic hassal

o Don’t over-commit yourself leaving a schedule that is too tight. ‘Back-to-back’ meetings leave no time for spontaneity and flexibility.

o Create a balanced schedule



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- Task management

o Be willing to compromise

o Delegate responsibility

o Sub-divide projects into smaller manageable tasks

o Prioritize tasks, by urgent and important.


- Regular exercise or Gym

- Eat healthily and timely

- Avoid nicotine

- Early go to bed and get enough sleep

- Cultivate a support network

- Take out time for yourself at least 2 or 3 times in week.

- Avoid to much involvment in social media apps.


Improved management skills

- Cultivate a friendly social climate

- Consult with employees and include them in decision making

- Improve communication and sharing of information

- Reasonable trust in others

- Be positive

Example

FundWise, a medium-sized financial advisory firm had enjoyed growth in terms of profitability and client portfolios during the past few years. The increased clientele portfolio resulted in hiring of Salman and Saniya who were very satisfied with the working environment of the firm and their emoluments. However, during the past six months, some of the firm’s major clients have left resulting in significant decline in profitability of the firm. Persistent downward trend on stock exchange and introduction of new tax on trading of shares are the primary reasons for the decline.

The firm has no plan to pay bonus for current year and there is an on-going rumor that if profitability of the firm does not improve, some of the staff may be laid off.

This morning, the supervisor reprimanded Saniya openly for being late at work. She lives in a distant locality and this was not the first time she was late but she was never reprimanded like that before. Saniya is also concerned about increased work responsibilities. On the other hand, Salman is worried about payment of housing loan instalment which is due next month.

The job stress triggers at FundWise in the given situation are as follows:

i. Environmental factors:

There is persistent downward trend in stock exchange which is the major cause of low profitability of the firm.

Imposition of new tax by government on trading of shares is also hampering firm’s performance.



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ii. Organizational factors:

The working environment of the firm is getting hostile as Saniya has never been reprimanded openly for being late at work.

No bonuses are planned for the current year.

There is a rumor that some employees may be laid off.

iii. Personal factors:

Salman is under financial stress as he is worried about instalment due shortly on housing loan.

Saniya is stressed about reaching office on time and management of increased work responsibilities.

Salman and Saniya may apply following stress tactics to cope with existing stress:

i. Dispel stress by sharing it with someone close to them (colleague, close friend or family), look for humor in situations (sharing of random joke or funny story) or simply take a break (go out for a walk or visit the gym).

ii. Eliminate self-defeating behaviors by understanding that they cannot control the uncontrollable circumstances (downward trend on stock exchange), avoiding negativity with positive attitude, accepting that perfectionism is not always realistic etc.

iii. Prioritize and organize by appropriate time management (leave earlier for work to arrive on time) and task management (scheduling the tasks from most important to least one).



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STICKY NOTES

The perception process involves observing, organizing and interpreting other people, ideas, experiences and objects in the context of the person’s

own beliefs, values, backgroundand, history and expectations

Five senses (Sight, Hearing, Touch, Taste, Smell) are sources of perception.

Attitudes are individuals’ compositions of beliefs and feelings regarding specific situations, ideas, or other individuals

Job satisfaction is the measure of how content an individual is with their job.

Job stress in the workplace describes feelings of tension or exhaustion typically associated with excessive or overly demanding work.

Job stress can be reduced by incorporating the following coping strategies:


Dispel stress

Improve your emotional intelligence




Improved management skills



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References:




Kindersley


Makenova, Aigerim and Ybyrayeva, Zumred (2018). Unpacking the Influence of Online Students’ Perceived

Course Satisfaction/Dissatisfaction on their Performance. NAZARBAYEV University Repository. Spring, April,

2018. Retrieved from http://nur.nu.edu.kz/handle/123456789/3366

http://nur.nu.edu.kz/handle/123456789/3366


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CHAPTER 7

MOTIVATION

AT A GLANCE

Motivation is the process by which employees’ efforts at workplace are energized, directed, and sustained toward attaining a goal.

Early theories of motivation

Early theories concentrate on what motivates individuals in their work.

Maslow’s hierarchy of needs

Herzberg’s hygiene and motivator factors

Processes theories of motivation

Process theories of motivation are driven by a process to measure the strength, intensity, and reason of motivation among the people.

Vroom’s expectancy model

McClelland’s motivational needs theory

Contemporary theories of motivation and concepts

Contemporary theories represent current explanations of employee motivation.

Goal-setting theory

Reinforcement theory

Equity theory

Expectancy theory and high-involvement work practices

IN THIS CHAPTER

AT A GLANCE

SPOTLIGHT

1. Motivation: Definition and Genesis

2. Theories of Motivation

3. Contemporary Motivation

Concepts and Theories

4. Reward Systems and Motivation

STICKY NOTES

References

CHAPTER 7: MOTIVATION CAF 4: BMBS


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1. MOTIVATION: DEFINITIONS AND GENESIS

Motivation is one of the most extensively deliberated determinants of employee performance in the business management literature. The term ‘Motivation’ is derived from the Latin word "Movere" which means to move (Nwaeke, 2004). The word "move" alone does not provide clear meaning to our understanding of the term ‘motivation’ but it indicates a sense of positive drive or willingness to do something. In behavioral sciences, ‘motivation’ is defined as a stimulus1 that directs a human behavior towards personal and professional goal achievement/ attainment or satisfying psychological, physiological, and social needs. Stimulus as a motivational impetus causes a reaction, develops interest, creates excitement or channelize energy in human behavior. For example, Oscar Award is a stimulating object to perform on screen for all Hollywood film stars. A promotion or any monetary reward is an another example of stimulus for scaling the hallmarks of performance excellence.

In literature, motivation receives no precise implicit and explicit meaning; it is viewed with a divergent lens. Many authors accentuated the fact that the term motivation has no fixed meaning in contemporary psychology2 (Atkinson, 1964; Golembiewski, 1973; Nwaeke, 2004). On the contrary, others corroborated that the topic of motivation continues to seek more attention in Business Management and Behavioral Studies because it exerts an important influence on ‘action’ and ‘behavior’ in organizations.

Motivation is a process by which employees’ efforts at workplace are energized, directed, and sustained toward attaining a goal. There are three main drivers of motivation: energy, direction, and persistence. The energy driver measures intensity and vigor. A motivated person puts forth effort and works hard. However, the quality of the effort must be considered as well as its intensity. High levels of effort don’t necessarily lead to favorable job performance unless the effort is aligned with the organizational goals and benefits the organization. Consistent goal directed efforts contribute towards the desired employee performance. Finally, motivation includes a persistence dimension. Organizations expect employees to exhibit persistence and perseverance in putting forth continuous efforts to achieve organizational goals. Motivating high levels of employee performance is an important organizational concern and managers keep looking for answers through theoretical framework. In business context, this scholarly work clarifies the importance of motivating employees in an organization to deliver goal directed performance because it contributes to boost team morale.

In the twenty first century, early and contemporary theories of motivation are concerned with identifying the factors that affect the attitudes of employees (including managers) to their work and the amount of effort that they put in to doing their work. For example, a demotivated employee may refuse to work in excess of contracted hours’ even if this might mean the loss of revenue or a client. However, a motivated employee might do whatever it takes to secure the revenue or client.

Motivated Employee: takes responsibility and shows a commitment to achieving company targets and goals, as well as interest and concern for the business.

Demotivated Employee: has poor timekeeping, high levels of absenteeism and avoids responsibility

If managers understand the factors that motivate their employees, they might be able to take measures to improve motivation and effort.

Theories of motivation also help us to improve our understanding of our personal motivation to work and what we hope to get from our job.

1 A stimulus can be any object or event that elicits a sensory or behavioural response in a living being. 2 Contemporary psychology is a scientific study of behaviours and mental processes from a variety of perspectives, and each perspective offers an important piece of the psychology puzzle.

CAF 4: BMBS CHAPTER 7: MOTIVATION


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2. THEORIES OF MOTIVATION: EARLY, PROCESS, AND CONTEMPORARY

Fast track business research environment is producing modern literature on motivation and more valid explanations of motivation have been developed, but these early theories are important to study because they represent the foundation from which contemporary motivation theories were developed and because many practicing managers still use them. It might help to make a distinction between these theories as follows:

2.1 Early theories of motivation


There is often an assumption that motivating drivers are same for everyone. Rewards will satisfy a need and individuals will be motivated to obtain those rewards.

Early theories of motivation include:

Maslow’s hierarchy of needs

Herzberg’s hygiene and motivator factors

Processes theories of motivation

Process theories of motivation are driven by a process to measure the strength, intensity, and reason of motivation among the people. In other words, the key question is: ‘how are people motivated?’

It is argued that individuals are motivated differently, and the strength of their motivation depends on a variety of factors, such as:

needs

personality

perceptions about whether more effort will result in achieving goals

rewards

expectations about whether the rewards for achieving the goals will actually meet the individual’s needs.

Rewards and perceptions of rewards are usually a key factor in process theory.

Process theories of motivation include:

Vroom’s expectancy model

McClelland’s motivational needs theory

Contemporary theories of motivation and concepts

Contemporary theories represent current explanations of employee motivation. Contemporary theories of motivation include:

Goal-setting theory


Equity theory

Expectancy theory and high-involvement work practices.

2.1.1 Maslow: the hierarchy of needs

The best known theory of human motivation was enunciated by the US psychologist Abraham H. Maslow in 1943. The theory was widely recognized during the 1960s and 1970s, especially among practicing managers, probably because it was logical and easy to understand. But Maslow provided no empirical support for his theory, and several studies that sought to validate it could not.



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Theory Premise and Explanation:

The theory suggests that the integrated wholeness of human needs is the foundation stone in arranging themselves in the hierarchies of domination. The appearance of one need usually rests on the prior satisfaction of another, more dominant need. Maslow’s needs theory is focused on physiological, relatedness (social needs to interact), and growth needs (self-esteem and self-actualization). He argued that individuals have seven in-built needs, and his theory resides with the motivating power of each of the hierarchical needs (Maslow, 1943).

Two needs are of a ‘higher order’ that must be met before the other five needs can be satisfied. These higher order needs are:

a need for freedom of inquiry and expression: social conditions must allow free speech and encourage justice, honesty and fairness

a need for knowledge and understanding: a need to explore and experiment.

The other five needs can be arranged in a hierarchy of five levels. The need at a lower level is dominant until it has been satisfied. When the need at one level has been satisfied – and only then – the need at the next level becomes dominant.

A need that has been satisfied no longer motivates the individual.

An individual is motivated by the need at a level in the hierarchy that has not yet been satisfied.

The highest level of need – self-actualization – can never be fully satisfied.

The hierarchy of needs (the five levels of need) is usually drawn as a pyramid.

Exhibit 1: Maslow's Hierarchy of Needs

Physiological needs (basic needs)

These are the needs for food, drink, shelter, clothing and everything else that we need to stay alive. Most of these needs can be satisfied by money.



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Safety needs or security needs

Safety needs include security and protection from physical and emotional harm, as well as assurance that physical needs will continue to be gratified. Safety needs addresses job security needs at work. Individuals want to feel safe against the risks of unemployment, and they want protection against the consequences of medical conditions or attrition in case of retirement or termination or on medical grounds. People also want fair treatment at work. These needs can be satisfied by:

employment legislation and

the employer’s arrangements for a pension scheme for its employees and for the treatment of its employees who are affected by illness or injury.

Social needs

Social needs include needs for affection, belongingness, and acceptance which focuses on the interaction with other people, and to be part of a social group. At work, social needs can be met by working with bosses, subordinates, peers and other colleagues. However, the way in which work is organized has an important effect on whether the social needs of employees are fully met.

Esteem needs

Esteem needs consist of intrinsic esteem factors such as self-respect, autonomy and achievement and external esteem factors such as status, recognition, and attention. Esteem needs can be met by promotion and by the status of the job. However, promotion only offers short-term esteem. In the longer term, individuals get esteem from their work by having some say in how their work is organized.

Self-actualization needs

Self-actualization is the highest order of human need of growth for achieving one’s potential and self-fulfillment.

Self-actualization is a motivational need which arises after the lower order physiological, safety and esteem

needs have been satisfied. The need for self-actualization is satisfied internally while the lower order needs of

food, shelter and security are satisfied externally. Self-actualization need manifests in being able to be creative

in specific pursuits and accomplishing an outstanding job. In practice, few individuals are motivated and able to

reach the high level of satisfaction of self-actualization needs. This need is never fully satisfied. An individual at

this level in the hierarchy needs continuing success and achievements.

The significance of Maslow’s ideas

The significance of Maslow’s ideas is that it suggests an approach that management should take to improve the motivation of employees. Management must ensure that lower-level needs are satisfied before they try to motivate employees with initiatives aimed at the satisfaction of higher-level needs.

For example:

Pay is extremely important because it satisfies basic needs. Employees must be paid enough to satisfy their basic physiological needs (whatever these are perceived to be).

Unless employees feel secure in their job, there is no point in trying to increase motivation through job design that improves social interaction.

Making individuals feel part of a group must come before satisfying needs for esteem and status.

Explanation:

Maslow’s theory of hierarchical needs purports that each level in the needs hierarchy must be substantially satisfied before the next need becomes dominant. An individual moves up the needs hierarchy from one level to the next (See Exhibit 1.) after satisfying the previous level needs. In addition, Maslow separated the five needs into higher and lower levels. Physiological and safety needs were considered lower-order needs; social, esteem, and self-actualization needs were considered higher-order needs. Predominantly, lower-order needs are extrinsically satisfied whereas higher-order needs are met through intrinsic satisfaction.



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To have a better understanding of the theory lets walk up the ladder of Maslow’s theory using an example. Ahmed

a teenager belongs to a family not enjoying all the privileges of the society and is also not well received by it.

1. Physiological needs

Ahmed has not been fed well since a long time. His father fortunately finds a job and is able to provide his family

with the basic needs.

2. Safety needs

Ahmed lives in a neighborhood which is full of war lords and every now and then they indulge in gang wars

making the neighborhood unsafe place to live. His father through his office is offered a new house to live in.

3. Love and social belonging

New locality provided him with an opportunity to get admission in a better school where he joined the football

team and soon became an integral part of the team as full back. He no more felt lonely or left out.

4. Esteem needs

Ahmed was selected for inter school competition which made him jittery of losing but his performance made the

team win and he became a star.

5. Self-actualization needs

As years went by he became a football star opening his doors to a world of luxury and contentment. Because of his past he was able to appreciate the sacrifice that were made by his family and himself to have reached self-actualization and we acknowledged it all.

Self-actualization allowed Ahmed to spend his free time on philanthropic activities being member of many such societies.

Maslow’s theory explains motivation through the scientific beginnings of understanding and influencing human behavior. Managers using Maslow’s hierarchy to motivate employees do things to satisfy employees’ needs. But the theory also says that once a need is substantially satisfied, an individual is no longer motivated to satisfy that need. Therefore, to motivate someone, you need to understand what need level that person is on in the hierarchy and focus on satisfying needs at or above that level (Robbins & Coulter, 2012).

Limitations of the hierarchy of needs

The hierarchy of needs is a simple and logical idea about human motivation, but it has significant weaknesses and limitations. The main problem is its assumption that needs are the same for all people and can be satisfied for everyone in the same way.

Individuals have different needs, and they are not necessarily in the hierarchical order suggested by Maslow.

Many individuals may seek to satisfy several different needs at the same time.

The same need may cause different reactions and responses from different individuals.

There is an underlying assumption that the objectives of the organization will be achieved if individuals receive rewards of higher status (promotion) or self-fulfillment. Maslow does not show any link between self-fulfillment and improved organizational performance.

Maslow’s model is vague about the nature of self-actualization or self-fulfillment needs. More modern theories of motivation go into much more detail about the nature of high-level needs and their satisfaction.

It is a ‘content theory’ of motivation of the ancient time. It does not explain the strength of motivation, nor the effect on motivation of people’s perceptions.



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The theory also fails to recognize that self-actualization is not always possible. The environment in which the organization operates may not be suitable for self-fulfillment – for example the nature of the product or service of the organization, its technology or environment might mean that organizations should not (and cannot) offer their employees the satisfaction of self-actualization needs. An example might be working on the factory floor. It is difficult to achieve self-actualization working in a low-level job in a factory environment

Why we need Maslow in 21st Century: Exploring the relevancy of hierarchy of needs in the 21st century; the fate of Maslow’s theory of human motivation is still very bright in literature and echoes very significantly across the disciplines.

Most of the organizations are coping up with four burning motivation issues: motivating in tough economic circumstances, managing cross-cultural challenges, motivating unique groups of workers, and designing appropriate rewards programs. During tough economic conditions, managers must look for creative ways to keep employees’ efforts energized, directed, and sustained toward achieving goals.

On the other hand, cultural challenges have regional influence as most motivational theories were developed in the United States and have a North American bias. Some theories (Maslow’s need hierarchy, achievement need) don’t work well for other cultures.

Managers face challenges in motivating unique groups of workers. A diverse workforce is looking for flexibility. Professionals want job challenge and support, and are motivated by the work itself. Contingent workers want the opportunity to become permanent or to receive skills training. Recognition programs and sincere appreciation for work done can be used to motivate low-skilled, minimum-wage workers. Employee recognition programs consist of personal attention, approval, and appreciation for a job well done. Pay-for-performance programs are variable compensation plans that pay employees on the basis of some performance measure (Certo & Certo, 2006; Robbins & Coulter, 2012).

2.1.2 Herzberg and motivation-hygiene theory (two-factor theory)

Introduction: In the 1950s, Frederick Herzberg carried out some research into the factors that motivate individuals in their work, by interviewing 200 engineers and accountants. He developed a two-factor theory of motivation, which he set out in his book The Motivation to Work (1959).

Premise and Explanation - An excerpt from the book entitled (Management, 2012):

Frederick Herzberg’s two-factor theory is also known as motivation-hygiene theory.

Herzberg wanted to know when people felt exceptionally good (satisfied) or bad (dissatisfied) about their jobs. (These findings are shown in Exhibit 2.) He concluded that the replies people gave when they felt good about their jobs were significantly different from the replies they gave when they felt badly. Certain characteristics were consistently related to job satisfaction and others to job dissatisfaction. When people felt good about their work, they tended to cite intrinsic factors arising from the job itself such as achievement, recognition, and responsibility. On the other hand, when they were dissatisfied, they tended to cite extrinsic factors arising from the job context such as company policy and administration, supervision, interpersonal relationships, and working conditions. In addition, Herzberg believed that the data suggested that the opposite of satisfaction was not dissatisfaction, as traditionally had been believed. Removing dissatisfying characteristics from a job would not necessarily make that job more satisfying (or motivating).

Herzberg identified two groups or categories of factors: those causing dissatisfaction with work and those causing satisfaction.

He called these:

hygiene factors (= the factors causing dissatisfaction) and

motivator factors (= the factors causing satisfaction).



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Herzberg believed that the factors that led to job satisfaction (motivator factors) were separate and distinct from those that led to job dissatisfaction (hygiene factors). Therefore, managers who sought to eliminate factors that created job dissatisfaction could keep people from being dissatisfied but not necessarily motivate them. When hygiene factors are adequate, people won’t be dissatisfied, but they won’t be satisfied (or motivated) either. To motivate people, Herzberg suggested emphasizing motivators, the intrinsic factors having to do with the job itself (Herzberg, Mausner, & Snyderman, 1959; Robbins & Coulter, 2012).

Motivators Hygiene Factors

Achievement

Recognition

Work Itself

Responsibility

Advancement

Supervision

Company Policy

Relationship with Supervisor

Working Conditions

Salary

Relationship with Peers

Personal Life

Relationship with Subordinates

Status

Security

Extremely Satisfied Neutral Extremely Dissatisfied

Exhibit 1: Herzberg’s Two Factor Theory

Traditional View

Satisfied Dissatisfied

Herzberg’s View

Motivators Hygiene Factors

Satisfaction No Satisfaction No Dissatisfaction Dissatisfaction

Exhibit 2: Contrasting views of satisfaction and dissatisfaction

Explanation:

Herzberg’s theory enjoyed wide popularity from the mid-1960s to the early 1980s, despite criticisms of his procedures and methodology. Although some critics said his theory was too simplistic, it has influenced how we currently design jobs, especially when it comes to job enrichment (Certo & Certo, 2006; Robbins & Coulter, 2012). However, the conclusion drawn from Herzberg’s analysis is that management need to deal with two different categories of factors affecting the concerns of employees in their work.

Management need to make sure that hygiene factors are given proper attention. If employees are content with their hygiene factors, they will not be dissatisfied. For example, employees need to feel that they are being paid well enough in order to prevent them from being dissatisfied. However, satisfying the hygiene factors only prevents dissatisfaction, it does not create satisfaction.

In order to motivate individuals, the motivator factors need to be satisfied. Creating motivation therefore means providing conditions at work that will make individuals feel a sense of achievement and recognition. According to Herzberg, a key factor in creating motivation is job enrichment – making the work itself more interesting and fulfilling.



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Example:

Employee motivation involves complex issues requiring insight in theories of rewards and compensation, human psychology and understanding of sensitivities of individual employees.

Ten non-monetary factors which would help to create greater employee motivation in individuals towards extra efforts for superior performance are:

i. Efficient organizational structure

ii. Committed and competent leadership

iii. Fair and merit-based promotion system

iv. Congenial work environment

v. Prospects of growth

vi. Recognition of performance

vii. Award of status

viii. Job satisfaction

ix. Job security

x. Job enrichment

xi. Efficient system of handling grievances

xii. Freedom of association and expression

Example

Samad is currently employed as Marketing Manager in Hamid Limited, a leading juice manufacturing and marketing company and is satisfied in his present position in terms of emoluments, work environment and relationships with colleagues. Samad has recently been approached by Sigma Consultants, a firm of ‘head-hunters’ who have advised him of an opening at corporate management level position in Koonts Foods Limited (KFL). KFL is a renowned multinational company engaged in the manufacture of a wide range of food products and is in the advanced stage of implementing manufacturing facilities in Pakistan.

The motivator factors which may influence Samad’s decision to accept a position in KFL in terms of Herzberg’s motivation-hygiene theory are as follows:

i. Achievement

KFL is a renowned multinational company and an appointment at the company’s corporate management level would be considered as a significant personal achievement by Samad.

ii. Recognition

KFL is a leading manufacturer of a wide range of food products and the appointment would be a source of intrinsic satisfaction for Samad and fulfill his higher needs of recognition of his abilities to perform in a more diverse environment.

iii. The work itself

The work in KFL would create greater challenges for Samad’s competencies as the company would manufacture a wide range of food products and be a source of satisfaction and motivation to prove that he has the requisite abilities to perform in a more challenging work environment.

iv. Responsibility

Involvement in formulation and implementation of corporate strategies of KFL which is implementing manufacturing facilities in Pakistan would entail carrying higher levels of responsibilities and provide an opportunity for Samad to prove his commitment to his profession.



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v. Advancement

An appointment in KFL at corporate management level position would be a major step towards progress in Samad’s career prospects which are not available in his present position.

vi. Growth

The position with KFL would provide Samad opportunities for further growth and prospects to achieve high management position in KFL’s international operations

Practice Question

Ms. Khadija is concerned that her subordinates are dissatisfied with their work. Despite constant efforts such as empowering employees for making routine decisions, recognition of good performances and provision of ample growth opportunities, turnover in her department is still high.

In the light of Herzberg’s two-factor theory, evaluate Ms. Khadija’s efforts for eliminating job dissatisfaction with work among her subordinates. Also suggest probable approach Ms. Khadija should take.

Solution

According to Herzberg’s two-factor theory, there are factors that cause dissatisfaction with work (hygiene) and factors that cause satisfaction with work (motivator).

i. From the above situation, it is cleared that Ms. Khadija has been focusing on motivator factors such as empowering employees for decision making, recognizing good work and offering growth opportunities to eliminate the dissatisfaction among her subordinates. According to Herzberg, factors causing dissatisfaction and factors causing satisfaction are not antonyms to each other. The opposite of dissatisfaction is not satisfaction rather it is ‘not being dissatisfied’.

ii. Ms. Khadija, therefore, needs to make sure that hygiene factors such as company policy, supervision, working conditions, salary and relationship with colleagues are given proper attention to eliminate dissatisfaction. If employees are content with their hygiene factors, they will not be dissatisfied.

Herzberg’s two factor theory showed that to truly motivate employees a business needs to create conditions that make them feel fulfilled in the workplace. For example, Tesco (a supermarket chain) aims to motivate its employees both by paying attention to hygiene factors and by enabling satisfiers. It motivates and empowers its employees by appropriate and timely communication, by delegating responsibility and involving staff in decision making. It holds forums every year in which staff can be part of the discussions on pay rises. This shows recognition of the work Tesco people do and rewards them.

Example

Behbood Hospital Services (BHS), located in a populated city area, is a large-size hospital with facilities of general, semi-private and private wards, besides a busy Sout-patient department. BHS is a fully-equipped hospital with several operating theatres, a modern laboratory and other ancillary equipment. BHS has on its payroll renowned specialists/consultants, besides supporting staff consisting of junior doctors, qualified nurses, trainee nurses, lab technicians, receptionists and other staff. The Hospital enjoys a good reputation because of the competence, caring attitude and dedication of its human resources who function as a coordinated and motivated team. Both the specialists and the supporting staff are well aware of the fact that their close team effort and co-operation are critical for rendering efficient health-care services to the patients.

However, in the past 12 months, BHS has experienced an unusual phenomenon as some of the most competent specialists/consultants have submitted their resignations because they have received lucrative offers from the middle-eastern countries. In order to retain and recruit more



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qualified specialists, BHS management has decided to increase, across the board, basic salaries of the specialists/consultants by 25 per cent. The support staff which can be recruited with comparative ease would receive an increase of 10 per cent in line with the current rate of inflation.

The anticipated impact of the differences in the pay raises on the motivation and performance of the support staff and how this could affect the working of the Hospital and the quality of professional care of the patients are explained below:

i. Supporting workers would consider themselves as second rate and relatively less important for the hospital.

ii. Salary increase is important for retaining the supporting staff. However, as the increase in salary is equal to the inflation rate, therefore the incentive may not be sufficient to retain the staff. This nominal increase may result in higher employee turnover, particularly among the more competent staff.

iii. Financial rewards provide the means to achieve a number of different ends and the staff would consider the ten per cent raise, equivalent to the rate of inflation, as detrimental to their career aspirations with BHS.

iv. Team effort between the specialists and the supporting staff would suffer owing to the indifferent attitude of the staff.

v. There would be friction between the specialists and the staff resulting in decline in the quality of health care services.

vi. Morale of the supporting staff would suffer as money satisfies the need for self-esteem and is a symbol of intangible goals.

vii. Support staff may resort to a policy of strict work-to-rules and increase in absenteeism which would cause hardships to the patients.

viii. Support staff may consider that the management does not fully appreciate the importance of their efforts and contribution in the performance of the hospital and may therefore work with less commitment and dedication.

As the increase of ten per cent is across the board, the high performers may feel that their efforts are not properly recognized by the management and may lead to de-motivation among them.

2.2 Process theories of motivation

2.2.1 Vroom: expectancy theory

Victor Vroom published his ideas on expectancy theory in 1964. Expectancy theory is a theory for predicting the strength of an individual’s motivation to put in effort at work.

Premise: Expectancy theory suggests that an individual’s behavior is based on three determinants: expectancy, instrumentality and valence.

Expectancy: Expectancy is the strength of the individual’s belief that by putting in more effort, he/ she will improve his/ her performance.

Instrumentality: A belief that performing a given behavior (e.g., attending a training program) is associated with a particular outcome (e.g., being able to better perform your job) and is referred to as instrumentality.

Valence: is the value that a person places on an outcome (e.g., how important it is to perform better on the job). It is the strength of the individual’s need for rewards.

According to expectancy theory, various choices of behavior are evaluated according to their expectancy, instrumentality, and valence. Exhibit 4.2 shows how behavior is determined based on finding the mathematical product of expectancy, instrumentality, and valence. People choose the behavior with the highest value.



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Explanation:

Vroom argued that our behavior is the result of conscious choices that we make between different alternatives. We each have our own personal goals and needs for satisfying those goals. Some of these needs may be satisfied through work. We can be motivated to work if we believe that:

there is a positive correlation between the efforts we make and the performance that is the result of our efforts – in other words, the more effort we put in, the better the performance will be,

good performance will result in a desirable reward, and

the reward will satisfy an important need.

Effort Performance Rewards Satisfaction of needs

Exhibit 4.1: Vroom’s Expectancy Model

Rewards may be a mixture of:

extrinsic rewards – pay, bonuses, and so on

intrinsic rewards – promotion, sense of achievement, sense of recognition, and so on.

The motivation to obtain rewards is an important aspect of the theories of writers such as Vroom, Handy and McClelland, and it is important to understand that ‘rewards’ can consist of both extrinsic and intrinsic rewards.

In a simplified version of the expectancy model, expectancy is defined as the belief of the individual that by putting in more effort, he or she will get the desired rewards. In this simplified model, expectancy is therefore a combination of expectancy and instrumentality.

Model: Vroom’s expectancy model for measuring the strength of an individual’s motivation is:

Exhibit 4.2: Vroom’s Expectancy Model

Expectancy

(Effort → Performance) x

Instrumentality

( Performance →

Outcome)

x

Valence

(Value of an

outcome)

=

Motivation

(Strength of

motivation)

From a learning perspective, expectancy theory suggests that learning is most likely to occur when employees believe they can learn the content of the training program (expectancy); learning is linked to outcomes such as better job performance, a salary increase, or peer recognition (instrumentality); and employees value these outcomes (valence). The product of these employee behaviors determines the strength of motivation.

An employee would be motivated to put in higher amount of effort to perform better on the job. This would occur at an even rate if he knew what the rewards were going to be. For instance, an extra day off or increase in salary. Also, the employee who wants to earn more wouldn’t be tempted by additional day off. And the last thing to be considered is that the employee is well equipped for the job at hand with the resources, time and the required skills (Psychestudy, 2016).

Implications of expectancy theory

Expectancy theory has following implications for management.

Motivation depends partly on valence, which is the strength of an individual’s desire for particular rewards. Managers should therefore try to find out what their employees do want.

Motivation also depends on expectancy. Some individuals do not believe that they are able to achieve better performance by trying harder. They may lack self-confidence, or lack training. (Alternatively, they may not be in a position to affect performance, in which case motivation will be very low, and possibly nil.) Management must consider ways of trying to increase the expectancy of their employees, for example by providing training and development, giving them the resources they need to do the job, or by providing supervision and guidance.



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Instrumentality may also affect motivation. Managers must keep the promises that they have given of rewards for performance and try to make sure that employees believe that the managers will keep their promises.

Practice Question

Explain briefly the measures suggested by Vroom which managers should adopt to achieve optimum levels of motivation from their employees.

Solution

According to Vroom’s Expectancy Theory, managers should adopt the following measures to achieve optimum levels of motivation from their employees:

i. Provide resources to employees to enable them to complete their assignments and achieve the assigned goals.

ii. Provide training and employee development support to improve employees’ competency levels.

iii. Provide supervision and guidance to the employees.

iv. Pay appropriate rewards on achievement of good performance.

Practice Question

Discuss briefly whether pay is a motivator factor that will encourage individuals to work harder to achieve work objectives or performance targets.

Solution

Pay as a motivator

There are different views about the extent to which the prospect of higher pay (through higher basic pay, bonuses, promotion or other forms of reward) acts as a motivator to individuals to put in more effort to their work, or to try to achieve performance targets. Herzberg argued that pay is perhaps more likely to be a hygiene factor rather than a motivator factor. Individuals need to feel that they are being paid fairly, and will be dissatisfied if they believe that their pay is unfair. Maslow argued that pay is important because it can satisfy needs at some levels (including status needs), but cannot satisfy the highest-level need for self-actualization. Many organizations, however, use reward systems and bonus systems, and obviously believe that these systems do motivate individuals to perform better. This is because money can satisfy many of the needs of individuals, particularly needs in their private life. If the money rewards are high enough, many individuals will probably be motivated to achieve the targets or performance levels they need to reach in order to obtain the rewards that might be available. Pay is therefore a significant element in many ‘process’ theories of motivation, such as those of Vroom and Handy.

2.2.2 McClelland: motivational needs theory

Introduction: David McClelland (1917 – 1998) put forward a motivational needs theory, which he developed into a needs-based motivational model.

Premise: McClelland’s needs theory emphasized on the needs of achievement, affiliation and power. According to McClelland, “these needs can be learned. Need for achievement relates to a concern for attaining and maintaining self-set standards of excellence. Need for affiliation involves concern for building and maintaining relationships with other people and for being accepted by others. The need for power is a concern for obtaining responsibility, influence, and reputation” (Noe, 2010). The three needs are denoted as:

a need for achievement (‘n-ach’)

a need for authority and power (‘n-pow’)

a need for affiliation (‘n-affil’).



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Explanation:

The theory proposed that three acquired (not innate) needs are major motives at work and identified the characteristics of individuals who are motivated mainly by the needs for achievement, power and affiliation; the description is as follows:

N-ach person. This person seeks achievement. Targets for achievement should be realistic but challenging. The person also seeks advancement in the job, and has a need for:

- feedback: this is information about his achievements and progress towards the goals – the individual needs to know whether or not the goals are being met

- a sense of accomplishment from achieving the goals.

N-affil person. This person needs friendly relationships and is motivated by interaction with other people. He needs to be liked and held in high regard. He makes a good ‘team player’.

N-pow person. This person needs to be influential and effective and to make an impact. He has a strong need to lead and for his ideas to be accepted rather than the ideas of others. He needs status and prestige.

McClelland argued that:

N-ach people make the best leaders. However, they can demand too much from their employees, because they often assume that everyone else is motivated by the same need for achievement that they have.

N-affil individuals are usually poor leaders. This is because their need to be liked will often affect their objectivity and prevent them at times from making unpopular but necessary decisions.

N-pow individuals are also poor leaders. They are often determined individuals, with a strong work ethic and a commitment to their organization and its goals. However, they often lack ‘people skills’ (skills at dealing with other people) and also lack flexibility.

Achievement-motivated individuals are usually the ones who make things happen and get results. They set goals that they can influence (so the goals are achievable): this is a characteristic of successful businessmen and entrepreneurs. They consider achievement more important than financial rewards. Achieving a goal or successfully completing a task gives them more satisfaction than praise or thanks from others. Security and status are not prime motivators for them in their work. They are constantly looking for ways to do things better. Crucially, however, they need feedback about their performance. They must be told about their actual performance and what they have achieved. For achievers, pay is a form of feedback about their performance. High pay and bonuses are a measurement of their success in achieving goals.

Practice Question

According to McClelland’s motivational needs theory, need for achievement, need for power and need for affiliation significantly influence the behavior of an individual which is useful to understand from a managerial context.

Briefly discuss the characteristics of individuals who are motivated by each of the above three needs as suggested by McClelland. Also mention under which dominant need a person would most likely be a good leader.

Solution

Characteristics of individuals who are motivated by three needs as suggested by McClelland are discussed as under:

i. Need for achievement person

This person seeks achievement and advancement in the job. He needs feedback on progress towards achieving a goal and has a sense of accomplishment by achieving those goals.

A person with dominant need for achievement would most likely make a good leader.



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ii. Need for power person

This person needs to be influential and effective and seeks to make an impact. He has a strong need to lead and seeks status and prestige/empire building where his ideas are accepted over others.

iii. Need for affiliation person

This person needs friendly relationships and is motivated by interaction with other people. He needs to be liked and held in high regard. He makes a good ‘team player’. He might be reluctant to make an unpopular decision.

Example:

MAG Electricity Company is a power generation and distribution company which was established 50 years ago. A recent study by an HR management consultant reveals that:

Chief Financial Officer is driven by high need of power and influence. His priority is status and prestige.

Chief Information Officer seeks friendly relationship and wants to please everybody.

Head of Human Resource seeks situations in which he can attain personal responsibility for finding solutions to problems. He wants his efforts to be recognized and appreciated.

The ‘needs’ of the above individuals according to the McClelland motivational theory and how these needs affect their role in the organization have been described below:

Chief Financial Officer (CFO) (N-pow person) will always want to control and influence others. Mostly these types of employees are poor leaders. However, they are determined individual with strong work ethics and are committed to their organization and its goals. CFO can do well with goal-oriented projects or tasks. He can also be effective in negotiations or in situations which require convincing the other parties.

Chief Information Officer (CIO) (N-affil person) needs to be liked which may affect his objectivity and may prevent him from making unpopular but necessary decisions. He can act as a good team player rather than effective leader and can be more effective in group environment. Further, these types of employees don’t like uncertainty and risk, therefore, less risky projects or tasks may be assigned to them.

Head of Human Resource (HHR) (N-ach person) is a type of person who considers achievement more important than financial rewards and sets goals that are realistic but challenging. Further, they like immediate feedback on how well they have performed. They may have a tendency to seek challenges and demand high degree of independence.



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3. CONTEMPORARY MOTIVATION CONCEPTS AND THEORIES

3.1 Goal setting

A hierarchy of objectives and plans

As part of a strategic review, management should always re-consider the purpose of the entity that they manage, what it is trying to achieve. In the strategic planning process, goals, objectives and strategies should be decided with the aim of fulfilling the entity’s purpose. A business entity should have a hierarchy of aims and plans. A useful way of presenting this is shown below.

Overall purpose Mission

General overall aims Goals

Specific overall aims Objectives

Detailed longer-term targets Strategies and Strategic aims

Implementation targets and budgets Tactical plans and aims

Action plans and targets Operational plans and aims

Mission and mission statement

Definition: Mission: A mission is the purpose of an organization and the reason for its existence. Many entities give a formal expression to their mission in a mission statement. A mission statement defines what an organization is, why it exists, its reason for being.

‘A mission describes the organization’s basic function in society, in terms of the products and services it produces for its customers’ (Mintzberg).

A mission statement should be a clear and short statement. Drucker suggested that it should answer the following fundamental questions:

What is our business?

What is our value to the customer?

What will our business be?

What should our business be?

Some entities include a statement about the role of their employees in their mission statement, or include a statement on the ethics of the entity.

Example:

The World Bank – Mission statement

‘Our dream is a world free of poverty

To fight poverty with passion and professionalism for lasting results.

To help poor people help themselves and their environment, by providing resources, sharing knowledge, building capacity and forging partnerships in the public and private sectors.

To be an excellent institution able to attract, excite and nurture diverse and committed staff with exceptional skills who know how to listen and learn.’

Commercial entities also often emphasize the ethical aspects of their mission, perhaps as a method of motivating employees.



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The relevance of the mission statement

A mission statement can have several different purposes:

to provide a basis for consistent strategic planning decisions

to assist with translating broad intentions and purposes into corporate objectives

to provide a common purpose for all groups and individuals within the organization

to inspire employees

to establish goals and ethics for the organization

to improve the understanding and support for the organization from external stakeholder groups and the public in general.

Goals and objectives

There is some confusion about the meaning of goals and objectives, and the terms might be used to mean different things.

However, it is useful to think of goals and objectives as follows.

Goals are aims for the entity to achieve, expressed in narrative terms. They are broad intentions. For example, an entity might have the goal of maximizing the wealth of its shareholders, or the goal of being the world’s leading business entity in one or more markets.

Objectives are derived from the goals of an entity, and are aims expressed in a form that can be measured, and there should be a specific time by which the objectives should be achieved.

The objectives should be SMART:

Specific/stated clearly

Measurable

Agreed

Realistic

Time-bound (a time must be set for the achievement of the objectives).

Goals and objectives

A company might have a goal of maximizing the wealth of its shareholders. Its objective might therefore be to double the share price within the next ten years.

Objectives might be expressed as a hierarchy of corporate and strategic objectives:

A corporate objective might be to double the share price within the next ten years. This is the overall objective for the entity.

In order to achieve the corporate objective, it is necessary to set strategic objectives for key aspects of strategy. Examples of strategic objectives might be:

to increase the annual profit after tax by 125% in the next ten years

to introduce an average of three new products each year for the next ten years

to become the market leader in four market segments within the next ten years, an improvement in each case from the current position of second-largest competitor in each of these market segments.

Some strategic objectives are more important than others, and there is a hierarchy of strategic objectives. However, the main strategic objectives might be identified as critical success factors, for which there are key performance indicators.

Goals and objectives can therefore be used to convert an entity’s mission into specific strategies with strategic targets for achievement within a strategic planning period.



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Who decides mission, goals and objectives?

When an entity states its mission in a mission statement, the statement is issued by the leaders of the entity. For a company this is the board of directors. Similarly, the formal goals and objectives of an entity are stated by its leaders.

However, the decisions by a board of directors about the goals and objectives of an entity are influenced by the way in which the company is governed and the expectations of other stakeholders in the company.

How do goals contribute to self-motivation?

Goals contribute to self-motivation because they provide a justification to actions in the context of delivering a personal benefit associated with achieving the goal. They help do this by:

Focusing effort in a consistent direction

Improving an employee’s chances of success

Improving both motivation and satisfaction

Goals help to clarify the gap between where we are now, and the target we need to achieve. This knowledge allows us to understand what is then required to achieve the goal.

There are two orientations of goals:

A learning orientation means that the individual focuses on acquiring new skills and mastering new situations

A proof orientation focuses individuals on demonstrating and validating the adequacy of competence by seeking favorable judgments of competence.

In both scenarios the individual gains a sense of wellbeing and happiness from either learning something or proving a competence. This serves as a motivator as the individual naturally aspires to want to enjoy that feeling.

Managers often encourage employees to participate in the personal goal setting process and also in tracking their own performance. This participative approach tends to increase the acceptance and ultimate achievement of the goals.

An even wider application of goals and self-motivation can be achieved when personal goals are integrated with career goals. These may include social and family, hobbies and interests, physical and mental health as well as career and financial goals. For example, an employee who likes adventure, variety and travel would better suit in a job with opportunities to extensively travel compared to another employee who needs to maximize time with their family and new-born babies.

When work and personal goals are aligned they are both much more likely to motivate and succeed.

How to set effective goals

Techniques for setting effective goals include:

Participate in the goal-setting process

Ensure that the goals include intrinsically motivating work

Ensure there is a system that can provide feedback on the achievement of goals

Goals must be SMART (see above)

Align personal and commercial goals

When recording goals, state them in a positive statement

Set priorities

Problems created by goals

The most effective and motivating goals are those that are challenging yet remain achievable. The extremes either side are likely to be demotivating whether they are:

unrealistically challenging – result is the employee simply gives up

too easy – resulting in the employee slacking off, feeling under-utilized and lacking inspiration.



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Other problems that are perceived to be caused by setting goals include:

goals create inflexibility and can lead to a narrow focus. This means that an opportunity that falls outside the scope of recorded and stated goals is potentially overlooked as time spent on the opportunity will not help achieve the previously agreed goals.

goals may generate stress through a constant pressure and reference to needing to constantly perform at the highest levels in order to achieve or exceed stated goals. This can detract from taking enjoyment and interest from the task.

Practice Question

What do you understand by the term business goals? State any four reasons which may act as an impediment in the achievement of business goals.

Solution

Business goals are broad intentions of performance targets expressed in narrative terms that a business entity seeks to accomplish during a particular time frame.

Impediments in achievement of business goals may be due to the following reasons:

i. The employees are not involved in the goal-setting process and therefore have no ownership interest in the goals.

ii. The goals may not offer motivating work for the employees.

iii. The goals are not specific, measurable or realistic.

iv. The goals of the individuals and the business entity are not aligned.

v. The goals are not expressed in positive terms.

vi. There is absence of feedback system for timely monitoring of the achievements of the goals.

vii. The goals are not set in logical sequence for their achievement.

Example

The board of OT Limited (OTL) is currently formulating strategy for achieving its business goals during the next four years. The board is of the opinion that the level of business activity in the country would increase significantly and OTL should achieve a fair share of the envisaged growth.

The board of OTL should keep the following important matters in perspective while establishing its goals for the next four years:

i. The goals should be based on realistic growth parameters and pose reasonable challenges for the employees. Over-ambitious goals or internal/external constraints may frustrate the employees. On the other hand, if the goals are too easy to achieve, the employees may adopt a complacent or laid back attitude and not put in their best efforts.

ii. The employees should participate in the goal-setting process because their input and involvement would self-motivate them to make extra efforts to achieve the goals.

iii. The commercial goals of OTL should be aligned with the personal goals of the employees. OTL should study the types of rewards and incentives which would motivate the employees to put in their best efforts and design the compensation packages to elicit optimum efforts from the employees.

iv. OTL should be able to generate adequate resources to meet the goals and also ensure that the resources are allocated according to the requirements in order to achieve optimum utilization of the available resources.

v. The goals should be flexible so that any new opportunities which are not envisaged in the original goal plan are also recognized and targeted.



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vi. A performance monitoring system should be implemented to ensure that the performance is in line with the goals/ targets and timely corrective measures are taken to rectify any unfavorable variances from the set goals.

vii. A system of employees training and development should be implemented to enhance their work skills and ensure that they are fully conversant with the prevailing regulations.

Practice Question

Goals can contribute to self-motivation as they often provide a justification to actions in the context of delivering a personal benefit associated with achieving the goal.

a) List any four matters that management should keep in perspective while setting organizational goals.

b) List and explain the limitations that goals may create in an organization despite that these are realistically challenging.

Solution

a) Matters that management should keep in perspective

The management should keep following matters in perspective while setting organizational goals:

Goals should be SMART (specific, measurable, acceptable, realistic, time-bound).

Goals should be stated in a positive statement.

Employees should be encouraged to participate in the goal setting process.

Employees’ personal goals should be aligned with the organizational goals.

b) Limitations that goals may create in an organization

Goals may create following limitations to an organization despite being realistically challenging:

Inflexibility that can lead to a narrow focus. An opportunity that falls outside the scope of recorded and stated goals may potentially be overlooked.

Stress through a constant pressure and reference needing to constantly perform at the highest levels in order to achieve or exceed stated goals. This can detract from taking enjoyment and interest from the task.

Example:

Fancy Apparel Company

Fancy Apparel Company Limited is a garments’ manufacturing concern; operating in the local market producing apparels for the middle-class segment of the market. The company has ambitious plans to enter in the high-fashion ladies garment business. To achieve effective coordination, the management is of the opinion that various departments should be assigned specific goals of performance for the next two years in order to meet stringent delivery schedules. This is particularly important because a large number of new employees will be recruited who would work in a team environment with the existing work force.

The new aim of the company will be achieved by introducing and implementing a formal goal setting system. The company will achieve competitive advantage through clear vision of goal achievement. The other advantages for the company are as follows:

All the departmental heads and their subordinates would be fully aware of their responsibilities and duties which they would have to perform during the next two years.



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The goal setting system would strengthen the departmental head and subordinate relationship because it would promote an environment of team effort and the manager would not be considered as an arbitrary decision maker.

The goal setting system would have self-correcting characteristics as any slippages in performance would be identified immediately and corrective measures taken.

The goal-setting system would help to identify worker deficiencies and lead to development of training needs in the organization.

All individuals in the organization would know in advance the basis of their performance appraisal.

The goal setting system would help to closely monitor the market trends and adapt to the changes in the market tastes and preferences.

The goal setting system would help to achieve greater departmental coordination and lead to achievement of overall organizational goals.

3.2 Management by objectives (MBO)

Introduction

Management by objectives (MBO) is an approach that seeks to align employees’ objectives with the organization’s goals. The system was developed by Peter Drucker in the 1950’s and has proved popular ever since.

The MBO process

MBO involves six steps:

The organizational objectives should be expressed concisely in easily-understood mission and vision statements.

The organizational objectives must be cascaded down to employees. This involves setting goals and objectives for every business unit, department, team and employee – i.e. cascading down from level to level within the organization. Goals should be SMART.

Goal setting should be participative with team members understanding how their personal goals and values fit with the organization’s objectives.

Monitor the progress of individuals and teams against their achievement of goals.

MBO is designed to drive performance at all levels of the organization. Whilst the overall approach, participative nature and monitoring components of the goal setting process are all important, it is as equally important to adopt a comprehensive evaluation and reward system. The system should allow managers to strategically compensate employees for work they do and demonstrate that the achievement of objectives will be rewarded.

Repeat the above cycle.

Advantages of MBO

MBO ensures that team members are clear about their work and how it benefits the whole organization.

This enables employees and managers to distinguish between tasks that are necessary and those that do not contribute to the organization’s objectives.

MBO helps managers control teams and provides a robust reference point for team briefings, goal setting, performance appraisal, delegation and feedback.

MBO provides a sense of purpose for individuals



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Disadvantages of MBO

MBO is often challenging and lengthy to implement needing what can be perceived as an unnecessarily expensive underlying goal tracking system.

Implementing MBO requires commitment across the whole organization. Significant employee resistance can occur.

Practice Question

Ms. Fatimah has recently joined as CEO of a medium sized entity. She has noted that organizational objectives are not clearly defined and communicated to employees. Therefore, she has decided to implement the system of ‘management by objectives’ (MBO).

i. State the steps that Ms. Fatimah should follow in implementing the MBO process in her organization.

ii. Briefly discuss any two difficulties Ms. Fatimah may encounter in the implementation of MBO.

Solution

i. Ms. Fatimah should follow the following steps in implementing the MBO in her organization:

Clearly and concisely express the organizational objectives in easily understood mission and vision statements which may necessitate revision.

Translate organizational objectives at employee level. It would involve setting goals and objectives for each concerned employee.

Encourage the participation of concerned employees to align their personal goals with that of the defined organizational goals/objectives.

Once goals are communicated and agreed upon, Ms. Fatimah should monitor the performance of employees against the set goals/objectives.

Performance should then be evaluated in terms of goals/objectives achieved and reward system should be designed accordingly.

Repeat the above cycle.

ii. Ms. Fatimah may encounter following difficulties in implementation of MBO:

It would be challenging because of length of time involve.

It would require commitment at all levels of employees and there could be likely resistance from them.

3.3 Self-efficacy

Self-efficacy is the measure of the belief in one’s own ability to succeed in situations to complete tasks and reach goals.

Self-efficacy in action

By determining the beliefs, a person holds, regarding their power and ability to affect situations, self-efficacy strongly influences both the power a person has, to face challenges competently and the choices a person is most likely to make.

For example, when confronted with a challenge do employees naturally believe they can succeed or will their default reaction be that they are convinced they will fail?

People with strong self-efficacy are those who believe they are capable of performing well which means they are more likely to view challenges as something to be mastered rather than avoided.



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Human functions

Levels of self-efficacy impact human functions in a number of ways:

Motivation – people with high self-efficacy are more likely to make the effort to complete a task and persist with those efforts than people with low self-efficacy. However, this can also manifest as high self-efficacy people being over-confident, less thorough and less well-prepared compared to someone with low self-efficacy.

Behavior choice – high self-efficacy generally leads to tasks being undertaken whereas low self-efficacy generally leads to tasks being avoided. High self-efficacy beyond one’s ability level to complete a task can lead to poor execution of the task, whereas self-efficacy significantly below ability levels can lead to under-achievement and stifle growth. The optimal level of self-efficacy is considered to be slightly above ability.

Thought patterns and responses

- High self-efficacy people will attribute failure to external factors, whereas low self-efficacy people will blame themselves.

- Barriers and obstacles will stimulate high self-efficacy employees whereas they will tend to discourage low self-efficacy employees.

- Employees with high self-efficacy tend to take a broader overview of a task and embrace ‘big-picture’ thinking whereas low self-efficacy employees will limit their thinking and focus on achieving rather than exceeding.

- Low self-efficacy employees tend to think that tasks are harder than they actually are. This then can result in poor planning and increased stress levels.

Academic productivity – It has been argued that students with high self-efficacy demonstrate better academic performance than those with low self-efficacy. This is because they are more likely to proactively take control of their learning experience, participate in class and enjoy hands-on learning experiences.

Practice Question

People with strong self-efficacy are regarded as capable of performing well as they are likely to view challenges as something to be accomplished rather than avoided.

What do you understand by ‘self-efficacy’? Discuss any four attributes of a person with strong self-efficacy.

Solution

Self-efficacy is the measure of the belief in one’s own ability to succeed in various situations i.e. completing tasks, reaching goals, etc. Attributes of a person with strong self-efficacy:

i. He/she is more likely to make efforts to complete a task and persist with those efforts.

ii. He/she would attribute failure to external factors.

iii. He/she would likely be stimulated by barriers and obstacles.

iv. He/she tends to take a broader overview of a task and embrace ‘big-picture’ thinking.

3.4 Law of effect and reinforcement theory

Law of effect

The law of effect is the belief that a favorable after-effect strengthens the action that produced it. The converse is also true.

This means that responses closely followed by satisfaction will become firmly attached to the situation and therefore more likely to reoccur when the situation is repeated.



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However, if the situation is followed by discomfort, the connections to the situation will become weaker and the behavior of response is less likely to occur when the situation is repeated.

The law of effect was first published in 1905 and evolved from scientists investigating the link between stimulus (S) and response (R). They concluded that once the stimulus and response are associated, the response is likely to occur without the stimulus necessarily being present.

They noted that responses that produce a satisfying or pleasant state of affairs in a particular situation are more likely to occur again in a similar situation.

Conversely, responses that produce a discomforting, annoying or unpleasant effect are less likely to occur again in a similar situation.

The original experiments involved a cat learning to press a lever to exit a box. A more up-to-date example frequently quoted is drug addiction whereby someone who receives a pleasant sensation from trying a drug for the first time is likely to repeat the behavior.


Introduction:

Behaviorist B.F. Skinner derived the Reinforcement Theory, one of the oldest theories of motivation as a way to explain behavior and why we do what we do. The theory may also be known as Behaviorism or Operant Conditioning (which is still commonly taught in psychology today).

Premise:

Reinforcement theory states that people seek out and remember information that provides cognitive support for their pre-existing attitudes and beliefs,

The theory states that "an individual’s behavior is a function of its consequences." Such phenomenon is called operant conditioning.

Explanation:

People learn to behave to seek something they want or to avoid something they don’t want. Operant behavior is voluntary or learned behavior, not reflexive or unlearned behavior. The tendency to repeat learned behavior is influenced by reinforcement or lack of reinforcement that happens as a result of the behavior. Reinforcement strengthens behavior and increases the likelihood that it will be repeated. Lack of reinforcement weakens behavior and lessens the likelihood that it will be repeated.

The main assumption that guides reinforcement theory is that people generally do not like to be wrong. They feel uncomfortable when their beliefs are challenged and therefore seek out and remember information to help ‘prove their point’.

One common example often cited is the world of politics where pre-election polls demonstrate that relatively few people remain undecided during pre-election lobbying. The majority of voters have a consistent voting pattern and seek out information in the political lobbying that justifies their beliefs and vote.

Reinforcement theory includes three primary mechanisms:

Selective exposure - a change or shift in attitude can be interpreted as an admission that the original belief was inaccurate or inadequate. However, people generally do not like to be wrong. Therefore, people tend to avoid information that may discredit their views in order not to have their opinions challenged.

When faced with inconsistent information the person may justify rejecting the information by attacking the source’s credibility.

Selective exposure also manifests with people exposing themselves only to stimuli that are pleasurable and therefore avoid stimuli that may induce a negative reaction.



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Selective perception - when exposed to dissonant messages (given that in practice it is effectively impossible to avoid all such messages) people will skew their perceptions to coincide with what they desire.

To use the political example again, a voter may not agree with one of the policies of a politician that they otherwise support. Subsequently, one of three things may happen:

- The voter learns about the candidate’s policy then either changes their opinion of the candidate or alters their own stance on the policy.

- The voter can accept disagreement but instead lessen the issue’s personal importance.

- The voter engages in selective perception and misperceives the candidate’s position in order to better align with their own stance (even though in reality they remain mis-aligned).

Selective retention – this describes people only remembering items which are consistent with their own predispositions. Furthermore, the ease with which a person can recall information impacts the level and intensity of judgment related to the topic. Specifically, people who can easily recall an example related to the message are more likely to make an intense judgment about it. This mechanism is often referred to as ‘selective memory’.

Application:

Reinforcement theory has been used in several areas of study including animal training, raising children, and motivating employees in the workplace. Reinforcement theories focus on observable behavior rather than personal states, like needs theories do. Reinforcement theory concentrates on the environmental factors that contribute to shaping behavior. Simply put, reinforcement theory claims that stimuli are used to shape behaviors. There are four primary approaches to reinforcement theory: positive reinforcement, negative reinforcement, extinction, and punishment, which will be covered later in this chapter.

Positive reinforcement

Positive reinforcement is any pleasant or desirable consequence that follows a response and increases the probability that the response will be repeated" (Wood, Wood, & Boyd, 2014). Positive reinforcement involves the addition of a reinforcing stimulus following a desired behavior. The objective is to make it more likely that the behavior will re-occur in future.

Example:

Receiving public praise (“well done, great job”) or an award for doing something well

Receiving a bonus for achieving a sales target

Receiving a job-promotion for excellent performance. Here promotion is a reinforcing stimulus and excellent performance is a behavior.

ABC Company receives ‘Best Performance Award’ by Management Association of Pakistan for exhibiting best performance in Automotive Sector.

Positive reinforcement is normally most effective:

when it occurs immediately after the event

when delivered with enthusiasm

when it occurs frequently

Negative reinforcement

Negative reinforcement involves the removal of a stimulus following a desired behavior. The objective is to make it more likely that the behavior will re-occur because of the removal of the negative reinforcement in future.

Note the difference between punishment (aimed at preventing the re-occurrence of an activity) and reinforcement (aimed at increasing a behavior).

Example:



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An employee is loudly reprimanded for arriving at work late. However, if they arrive on time the reprimand does not happen. Therefore they are motivated to arrive on-time more frequently.

The seat-belt warning alarm that sounds in cars if the seat-belt is not used. The annoying alarm then disappears when the seat-belt is engaged which encourages the seat-belt to be worn in future in order to avoid hearing the alarm.

Negative reinforcement is normally most effective:

when it occurs immediately after the event; and

when it occurs frequently

Examples of Positive and Negative Reinforcement

Exhibit 5: Reinforcement Theory Grid

Reinforcement theory in business

Managers can target both positive and negative behaviors. However, it is argued that focusing on rewarding desired behavior helps employees develop positive habits and foster less resentment than focusing on punishing negative behaviors.

Reinforcement theory can be employed in the business environment by adopting the following tactics:

Set clear and reasonable expectations – limiting rewards to impossible or extremely difficult tasks can lead to anger and a sense of helplessness resulting in worse performance. Therefore, expectations should be clear and achievable.

Identify strong motivators – the best way to do this is to adopt a participative approach and mutually agree with the employees what an appropriate reward would be. For example, a parachute jump experience would not be a suitable reward for someone scared of heights.

Encourage desirable behaviors – behavior such as strong teamwork, quality production and punctuality should be reinforced in order to turn them into strong work habits over time. An effective technique is to target rewarding one behavior at a time in order to eradicate negative behaviors in that sphere before moving onto the next negative behavior to manage.

3.5 Equity and organizational justice



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Employees on the whole care about justice. The traditional approach leads them to consider then conclude on the fairness of outcomes, procedures and interpersonal treatment as well as consider apparent injustices.

Modern perspectives on organizational justice take this classic view to the next level and examines the reasons employees care about justice (called ‘content theories’) and the processes that lead to both the formation of fairness perceptions, as well as individual’s reactions to perceived injustice (process theories).

In summary, organizational justice embraces the broader topic of employee perceptions of fairness in the workplace. Perceptions can be broken out into four categories:

Distributive justice – this is conceptualized as the fairness associated with decision outcomes and the distribution of resources (e.g. pay or praise).

Procedural justice – this relates to the fairness of the process that leads to the outcome – e.g. did the accused receive a ‘fair trial’. Consider consistency, accuracy, ethics and absence of bias.

Interactional justice – this refers to the interpersonal communication element of delivering news with sensitivity and respect once a decision has been made. Interactional justice is sometimes split into two streams:

- Interpersonal justice – the perceptions of respect and propriety in one’s treatment

- Informational justice – the adequacy of the explanations given in terms of their specificity, truthfulness and timeliness.

Justice research can occur at a number of levels including:

Justice climate - how shared perceptions of justice form within work groups and organizations

Organizational and national cultures - how justice perceptions and reactions vary across cultural groups



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4. REWARD SYSTEMS AND MOTIVATION

4.1 Extrinsic and intrinsic rewards

For an individual, rewards from doing a job can be both extrinsic and intrinsic.

Extrinsic rewards are rewards that are outside the control of the individual. Another person, often the individual’s boss, has the power to provide extrinsic rewards. The main examples of extrinsic rewards are:

basic pay (and the size of a pay increase)

cash bonuses and incentive payments

when the employer is a company, rewards in the form of share options or a gift of some shares

pension benefits

free medical insurance (and other forms of insurance, such as disability insurance, or even life assurance)

the award of a company car, or a company helicopter or jet

subsidized loans (these are loans from the company at an interest rate that is lower than the normal market rate).

Intrinsic rewards are rewards that are within the control of the individual himself. They include:

a sense of achievement in doing the work

a sense of recognition for doing the work

enjoying the status that the job provides

pride in doing the work

personal satisfaction from doing the work

a sense of responsibility that the individual enjoys.

According to theorists such as Vroom and Handy, the strength of the motivation of an individual depends partly on how strongly the individual wants these rewards – and how big are the expected rewards.

What managers can do to motivate staff

There are differing views on how individuals are motivated. Consequently, there are differing views about what management can do to improve the motivation of their employees.

There is a view that management must get the ‘basics right’ first: they must offer a fair pay structure for staff and fair employment policies – to meet the physiological needs and security needs of their employees (Maslow) or to prevent dissatisfaction from employees (Herzberg).

Herzberg argued that management should take some measures to prevent dissatisfaction, but that a completely different approach is also needed in order to create motivation. Herzberg believed that job enrichment was a key to better motivation.

Adams argued that the rewards system should be seen to be fair: however, rewards can be intrinsic rewards as well as extrinsic rewards such as higher pay.

McGregor and Argyris argued in favor of a participative style of management, and getting employees involved in problem-solving and decision-making. They argued that this management style gets more out of employees, and this improves the performance of the organization.

McClelland argued that the best leaders were individuals with a need for achievement. Management should therefore try to identify and develop high achievers.

One of the factors affecting the strength of motivation is the belief that the individual’s efforts will lead to better performance. Managers should therefore try to increase the strength of this expectancy. Vroom argued that managers should give encouragement and advice to their employees, give them the resources they need to accomplish their tasks and, where necessary, give them suitable training.

It can also be argued that managers can motivate staff by providing inspiring leadership.



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The ability of managers to motivate their employees may also be affected by the differing needs of different employees. Whereas some content theorists (Herzberg) argued that all individuals were motivated by the same needs, there are differing views that:

different people have different needs (for example, McClelland, Vroom)

these needs can change over time (for example, Maslow).

It seems clear, however, that:

managers can influence the motivation of their employees

needs as well as rewards are an important factor in motivation, therefore

managers must try to understand what the needs of their employees are, and what rewards – intrinsic as well as extrinsic – will help to satisfy those needs.

The reward system and motivation

The reward system refers to the system of ‘extrinsic’ rewards that an organization can give to its employees. The most significant extrinsic rewards are usually:

pay (remuneration), and

promotion or advancement.

Elements of pay include basic pay, bonuses, commissions, premium pay for working overtime, pension rights and so on.

It is generally agreed that individuals need to be kept satisfied about their pay, in order to avoid feelings of dissatisfaction or inequality and unfairness. Dissatisfaction about pay will affect the attitudes and behavior of individuals in their work.

It is not certain, however, whether offering pay incentives will increase the motivation of employees. (It is also not certain that extra motivation will lead to better performance.)

McClelland would have argued that pay rewards might be seen as a measure of recognition and goal accomplishment by high achievers. Rewards in the form of higher pay or bonuses may therefore be an important motivator.

It may also be argued that getting paid more for better performance (for example receiving a cash bonus) is important for many individuals, because the money can be used to fulfil some important needs.

Process theories of motivation often place strong emphasis on financial rewards, because money can be used to buy satisfaction of many needs.

There is also a view that group reward systems are able to improve the collective motivation of teams.

However, as explained already, there is also a view that in many organizations, pay systems do not provide motivation, and employees can be motivated by other things, such as participation in decision-making or an ‘enriched’ job.

Performance-related pay for individuals

Even so, many organizations in practice do have systems for rewarding individuals for the achievement of certain levels of performance or performance targets.

Performance-related pay may be cash bonuses or other forms of incentive.

Cash bonuses are payments in cash that are related to meeting short-term targets, such as meeting budget targets such as achieving or exceeding a profit target. Sales representatives may be paid a sales commission based on the value of sales they have won during a period of time. Performance targets do not have to be financial targets: cash bonuses might be paid to an individual who achieves a specific non-financial target, such as completing a particular task on time or before a specified date.

Incentives for the achievement of longer term goals are often paid to senior managers, often in the form of company shares or share options.



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If companies use a system of performance-related pay, they presumably believe that the pay incentives are successful in motivating employees. If they did not think that this was the case, there would be no point in offering the incentives!

It is also important to remember that rewards are not always given in the form of pay. Promotion and recognition may be equally important to an individual. However, there is a limit to the number of individuals who can be rewarded with promotion, especially in small business entities.

Performance-related pay for groups

Cash bonuses might be paid to groups of workers, such as all the employees in a department, section or project team. For group bonuses to be effective as a motivator, however, it is important that individuals should identify themselves with the group and should believe that the efforts of the group as a whole are capable of earning a bonus.

A problem with group bonuses, however, is to decide how the total bonus for the group as a whole should be divided between the individual group members. If the basis for sharing the bonus is seen as unfair, a bonus payment might create resentment and arguments rather than act as a motivator.

Company-wide bonuses

Sometimes a company pays a bonus to all its employees, particularly if it has had a highly profitable year. For example in 2007, UK stores group Marks and Spencer announced strong profits growth for the previous year and a £91 million bonus to be shared by all its employees as a reward. Such a bonus might help to persuade employees to remain with the company, but it is doubtful whether it can be effective in motivating individual employees to do their work more efficiently or effectively.

Bonuses and performance

For a cash bonus scheme to be effective, the payment of a bonus should be clearly linked to the performance of an individual (for individual bonuses) or a group (for group bonuses). A clear link can only be established when the following conditions apply:

The performance of the individual or group can be measured.

The individual or group can affect the measured performance through efficient or effective working. As stated in some of the earlier descriptions of motivation theory, there should be a connection between effort (motivation) and outcome.

4.2 Constructive feedback and motivation

Contemporary or Process theories of motivation emphasize the importance of:

the link between putting in more effort and improving performance (or reaching targets), and

the link between reaching targets and obtaining rewards.

Individuals need to know how they are performing, and whether they are on course for achieving their goals.

If they are not on target for achieving their goals, they need to be given advice and guidance from their boss.

The process of providing information to individuals about their performance is an example of feedback. Feedback should be constructive and helpful, rather than critical, to maintain the motivation of the individual. If individuals are criticized in a negative way for failing to reach their goals, their motivation will disappear.

A system for providing constructive feedback about performance (but not the only system) is a system of job appraisal.



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STICKY NOTES

Motivation is a process by which employees’ efforts at workplace are energized, directed, and sustained toward attaining a goal.

Theories of motivation can be divided into three groups:


Process theories of motivation are driven by a process to measure the strength, intensity, and reason of motivation among the people.

Contemporary theories represent current explanations of employee motivation.

Maslow’s Hierarchy of needs - Maslow’s needs theory is focussed on physiological, relatedness (social needs to interact), and growth needs (self-esteem and self-

actualization). He argued that individuals have seven in-built needs, and his theory resides with the motivating power of each of the hierarchical needs

Frederick Herzberg introduced a two-factor theory known as motivation-hygiene theory. Herzberg identified two groups of factors: those causing dissatisfaction with work and those causing satisfaction. He called these:

hygiene factors (the factors causing dissatisfaction) and

motivator factors (the factors causing satisfaction).

Herzberg believed that the factors that led to job satisfaction (motivator factors) were separate and distinct from those that led to job dissatisfaction (hygiene factors)

Vroom’s Expectancy theory suggests that an individual’s behaviour is based on three determinants: expectancy, instrumentality and valence.

According to expectancy theory, various choices of behaviour are evaluated according to their expectancy, instrumentality, and valence. Vroom argued that our behaviour is the result of conscious choices that we make between different alternatives. We each have our own personal goals and needs for satisfying those goals.



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McClelland’s needs theory emphasized on the needs of achievement, affiliation and power. The theory proposed that three ‘acquired’ needs are major motives at work and the characteristics of individuals who are motivated by each need were different.

N-ach person. This person seeks achievement. Targets for achievement should be realistic but challenging goals.

N-pow person. This person needs to be influential and effective and to make an impact. He has a strong need to lead and for his ideas to be accepted.

N-affil person. This person needs friendly relationships and is motivated by interaction with other people. He makes a good ‘team player’.

Contemporary theories represent current explanations of employee motivation. These theories are:

Goal-setting theory


Equity theory

Expectancy theory and high-involvement work practices

For an individual, rewards from doing a job can be both extrinsic and intrinsic.

- Extrinsic rewards are rewards that are outside the control of the individual. Another person, often the individual’s boss, has the power to provide extrinsic rewards e.g. cash rewards, gifts, bonuses and monetary incentives.

- Intrinsic rewards are rewards that are within the control of the individual himself. They include a sense of achievement and recognition, enjoying job status, pride and prestige, internal satisfaction and responsibility or authority.



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Motivation: Definition and

Genesis

Theories of Motivation

Early or Content Theories

Maslow's Hierarchy of Needs

Herzberg's hygiene and motivator factors

Process Theories

Vroom's expectancy model

McClelland's motivational needs

theory

Contemporary Theories and Concepts

Goal Setting

Management By Objectives

Law of effect and reinforcement theory

Equity and organizational justiceReward Systems and

Motivation

Extrinsic Rewards

Intrinsic Rewards

Constructive feedback and motivation



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References:

Abulof, U. (2017). Introduction: WhyWe NeedMaslow in the Twenty-First Century. SYMPOSIUM: REVISITING MASLOW: HUMAN NEEDS IN THE 21ST CENTURY, 54, 508-509.

Atkinson, W. J. (1964). An introduction to motivation. Princeton: N.J., Van Nostrand .

Berelson, B., & Steiner, G. A. (1964). Human Behavior: An Inventory of Scientific Findings. New York: Harcourt, Brace & World.

Certo, S. C., & Certo, T. S. (2006). Modern management. , 2006. Pearson/Prentice Hall.

Clegg, S. (1996). Power. In M. Warner (Ed.), International encyclopeadia of business and management. London: RoutJege.

Denhardt, R. B., Denhardt, J. V., & Aristigueta, M. (2008). Managing Human Behavior in Public andNonprofit Organizations. Sage Publications, Inc.

Golembiewski, R. T. (1973). Motivation. In C. Heyel (Ed.), the Encyclopedia of Management (2nd ed.). New York: Van Nostrand Reinhold.

Herzberg, F., Mausner, B., & Snyderman, B. (1959). The Motivation to Work. New York: John Wiley.

Hoy, W. K., & Miskel, G. G. (1987). Educational Administration Theory, Research, and Practice. New York: Random House Trade.

Jones, M. R. (Ed.). (1955). Nebraska Symposium on Motivation 1955. Lincoln: University of Nebraska Press.

Kelly, J. (1974). Organizational Behavior. Homewood: Richard D. Irwin.

Maslow, A. H. (1943). A Theory of Human Motivation. Psychological Review, 50, 370-396.

Mathis, R. L., & Jackson, J. H. (1982). Personnel: Contemporary Perspectives and Applications (3rd ed.). Saint Paul: West Publishing.

Middlemist, D. R., & Hitt, M. A. (1981). Technology as a Moderator of the Relationship Between Perceived Work Environment and Subunit Effectiveness. Human Relations, 517 - 532.

Middlemist, R. D., & Hitt, M. A. (1981). Organizational behavior: Applied concepts. Chicago: Science Research Associates.

Mondy, W. R., Holmes, R. E., & Flippo, E. B. (1980). Management, concepts and practices. Boston: Allyn and Bacon.

Noe, R. A. (2010). Employee Training and Development (5th ed.). New York: McGraw-Hill Irwin. Retrieved from http://202.74.245.22:8080/xmlui/bitstream/handle/123456789/435/Employee%20Training%20and%20Development.pdf?sequence=1

Nwaeke, L. I. (Ed.). (2004). Reading in Management: A Professional Profile. Nigeria: Springfield Publishers Ltd. Retrieved June 11, 2018, from https://www.researchgate.net/profile/Lawrence_Nwaeke/publication/275033279_READINGS_IN_MANAGEMENT_A_PROFESSIONAL_PROFILE/links/552fe9c80cf20ea0a06f5faf/READINGS-IN-MANAGEMENT-A-PROFESSIONAL-PROFILE.pdf

Psychestudy. (2016). Expectancy Theory of Motivation. Retrieved from Psychestudy: https://www.psychestudy.com/general/motivation-emotion/expectancy-theory-motivation

Robbins, S. P., & Coulter, M. A. (2012). Management. Boston: Prentice Hall.

Staw, B. M. (1983). Motivation Research versus the art of faculty management. The Review of Higher Education, 6, 301-321.

Steers, M. R., Mowday, R. T., & Shapiro, D. L. (2004). The Future of Work Motivation Theory. Academy of Management Review, July 2004,, 379-387.



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Teo, T. S., Lim, V. K., & Lai, R. Y. (1999). Intrinsic and extrinsic motivation in Internet usage. Omega, 27(1), 25-37. doi:10.1016/S0305-0483(98)00028-0

Wood, S. E., Wood, E. G., & Boyd, D. (2014). Mastering the World of Psychology. New York: Pearson.

Zedeck, S., & Blood, M. (1974). Foundation of Behavioral Social Research in Organization. Belmont: Wardsworth Publishing Company.



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CHAPTER 8

LEADERSHIP

AT A GLANCE

Leadership is most commonly and simply defined as a process during which an individual (leader) influences a group of people (followers) to work towards a common vision, goal or aim.

The leadership theories can be classified in the following categories.

Trait Theory

Style theories

Contingency Theories

Trait approach for leadership is based on the basic assumption that people are born with special traits that make them leaders.

Style theories focus on what leaders do and their behavior. The style approach focuses on two general kinds of leader behaviors:

Structure- based behavioral theories

Relationship- based behavioral theories

Style theories comprise the following theories:

Lippitt and White’s leadership styles

Blake and Mouton’s Managerial (Leadership) Grid

Tannenbaum and Schmidt Continuum of Leadership

The Ashridge model

Likert’s leadership styles

Contingency theories of leadership are based on the view that the most effective leadership style in a given situation is contingent upon the circumstances of the situation. Contingency theories of leadership have been developed by:

Fiedler

Hersey and Blanchard

Handy

Leadership qualities are discussed in the following theories:

Adair’s action-centered leadership

Warren Bennis: leaders as enablers and originators

John Kotter: what leaders really do

Ronald Heifetz: leadership as an activity

IN THIS CHAPTER

AT A GLANCE

SPOTLIGHT

1. What is Leadership?

2. Theories of Leadership

3. Contingency Theories

4. Leadership Qualities

STICKY NOTES

References

CHAPTER 8: LEADERSHIP CAF 4: BMBS


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1. WHAT IS LEADERSHIP?

The term ‘leadership’ has been studied and sought after by many researchers and practitioners all around the world. The more it is studied, the less it is thought to be understood.

Leadership is most commonly and simply defined as a process during which an individual (leader) influences a group of people (followers) to work towards a common vision, goal or aim.

It is important to note that the most common description of the term leadership considers it to be a one-way process (Exhibit 1A). This concept is challenged by many and is not considered the complete picture portraying leadership. Leadership is a two-way, interactive process between a leader and followers, (Exhibit 1B )1. The greater emphasis during leadership, however, would remain on leaders themselves and their approach to influence others. Thus, the study of leadership revolves around leaders and how can leaders be more effective in their ways to influence people to achieve the goals or aims.

1 Heller & Van Til, 1983, Hollander, 1992, Jago, 1982

CAF 4: BMBS CHAPTER 8: LEADERSHIP


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2. THEORIES OF LEADERSHIP

Leadership theories explain how and why certain individuals become leaders. Are there only born leaders or leadership can be learnt? Why some people are elected in the leadership roles and why other people cannot be elected for such roles despite possessing the technical skillset?

The leadership theories can be classified in the following categories.

Trait Theory

Style Theories

Contingency Theories

2.1 Trait Theory

Trait approach for leadership is based on the basic assumption that people are born with special traits that make them leaders (Jago, 1982).

The philosophy behind this approach is ‘Great Man Theory’ that is, leadership qualities are innate and people are born with these traits therefore only “Great people” possess them.

In simple words, this theory states that leaders are born and others cannot be developed to become leaders.

Some of the more ‘obvious’ traits are listed below:

Physical vitality and energy

Intelligence and good judgement

Eagerness to accept responsibility

Enthusiasm and self-confidence

Competence in the tasks

Understanding their followers and their needs

Skill in dealing with people (interpersonal skills or ‘soft skills’)

Having a powerful need for achievement

A capacity to motivate others

Decisiveness

Trustworthiness

Assertiveness

Flexibility

Leadership and emotional intelligence

Recent researches on the trait approach to leadership have found a new trait, emotional intelligence, to be strongly associated with effective leadership. Emotional intelligence is described as the ability to be cognizant of one’s own emotions, control them, and express them judiciously, and to be sensible and caring with others. Leaders who are aware and sensitive to their emotions and the effect of their emotions on others are more effective leaders.

Strengths of Trait Theory

It has face validity. People accept the trait approach as it relates to their view of leadership that leaders are born and are some special, great people.

It is validated by a lot of research.



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It focuses on the leader and its traits, and hence has helped to understand effective leaders and the leadership process through the study of traits effective leaders possess.

The questionnaires based on the trait approach are used for both selecting leaders and for self-assessment of leaders.

Limitations of Trait Theory

Trait approach has failed to identify a definitive list of leadership traits

It does not take into consideration the effect of situation or context for effective leadership, and rather only focuses on the leader

It does not take into consideration the followers

It is not helpful in developing leaders, as the basis of the theory places inborn great people, as leaders with certain traits

Trait theory of leadership is now largely discredited as a means of identifying leaders. However, if an effective leader is identified and described, it is almost certain that he or she will possess some of the traits in the above list.

2.2 STYLE THEORIES

Style theories are very different from the trait theory. The latter focus on who leaders are, their traits and attributes. On the contrary, the style approach focuses on what leaders do, their behavior.

Style approach focuses on two general kinds of leader behaviors:

Structure- based behavioral theories: focus on the leader instituting structures. (Task Behavior)

Relationship- based behavioral theories: focus on the development and maintenance of relationships. (Relationship Behavior)

Style theories comprise the following theories:


Blake and Mouton’s Managerial (Leadership) Grid

Tannenbaum and Schmidt Continuum of Leadership

The Ashridge model


2.2.1 Lippitt and White’s leadership styles

In 1938/1939 Lippitt and White carried out an investigation into leadership styles, using groups of schoolchildren working on arts and crafts projects, such as making masks. Three different types of leaders were assigned to the groups, and the behavior of the children with each of the different types of leader was studied.

The three types of leadership style for the groups were:

Authoritarian or autocratic leadership style. The leader continually gave orders and instructions without offering any consultation.

Democratic style. The leader offered guidance and encouragement to the children and participated actively with the group.

Laissez-faire style. The leader gave the children the knowledge they needed to do the work, but did not become involved and did not participate in the activities of the group.



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The study looked at the effects of the different leadership styles on the behavior and the output of the group members. Their findings are summarized below:

Groups with democratic leaders Groups with

autocratic leaders

Groups with

laissez-faire leaders

Morale was high. Two types of behaviour were found in group members:

- Aggressive behaviour:

These individuals were rebellious. They constantly demanded attention from the leader and often blamed others when things went wrong.

- Apathetic behaviour:

These group members placed few demands on the leader and showed not much interest

These were the worst-performing groups.

Satisfaction of group members was low.

The quality of their output was higher than the quality produced by groups with an authoritarian leader.

The quality of the output of cildren in this group was less than the quality produced by groups with a democratic leader.

Quality of output was low.

The quantity of their output was lower than the quantity produced by groups with an authoritarian leader.

The quantity of their output was higher than the quantity produced by groups with a democratic leader.

Productivity (quantity produced) was low.

Relationships between the group members and between the group members and the leader were friendly.

Group members did not cooperate with each other.

The group members showed themselves capable of working independently, with the leader out of the room.

Group members were unable to work independently.

There was a reasonable amount of originality in the work done by the group members

The conclusions from the study were that:

The democratic style of leadership was ‘best’, providing high quality of output, reasonable originality and productivity, and a high satisfaction of group members.

However, some of the boys in the study preferred the authoritarian style of leadership.

Practice Question

Fast Car Rental enterprise is experiencing growing customer complaints. Chief Executive Mr. Bashir has instructed all the branches to strictly adhere to the customer satisfaction measures communicated by him.

i. Identify and explain which of the following best describes Mr. Bashir’s leadership style:

a) democratic

b) autocratic

c) laissez-faire

ii. Explain why you do not agree with the other choices?



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Solution

a) i) Autocratic - the leader continually gives orders and instructions without offering any consultation. Mr. Bashir notification, therefore, suggests that he is authoritarian / autocratic and does not provide a reason for his decision.

ii) Other choices do not seem appropriate because of the following reasons:

Democratic leader offers guidance and encouragement to the employees, and participates actively with the group, whereas in the given situation, there is no evidence of employees being somehow involved in the decision.

Under laissez-faire leadership style, the leader passes on the knowledge of work but does not get involved and participate in the activities of the team.

Example

Al Ghazal Trading (AGT) is a medium-sized enterprise owned by Mr. Khalique with a diversified portfolio of business activities. Although some of the staff members are associated with AGT for many years, they are rarely trusted with decisions and other important issues. On most of the occasions, decisions are imposed on the employees by Mr. Khalique.

Mr. Khalique is practicing Autocratic style of leadership.

The advantages and disadvantages of the leadership style which Mr. Khalique is practicing are as follows:

Advantages of autocratic leadership

i. As the decision making rests with a single authority, it helps in making a quick decision and in situations where quick decisions are needed, the autocratic leader proves to be advantageous for the organization.

ii. Autocratic leadership style is helpful where urgent short term results are required.

iii. Autocratic leadership style is effective in the case of inexperienced new employees who need specific instructions and close follow-up until they learn the job.

Disadvantages of autocratic leadership

i. Due to the lack of delegation of authority in autocratic leadership style, it seems that Mr. Khalique is extremely busy which can lead to stress and even health problems.

ii. Autocratic leaders may not make the best decisions as they do not take staff input or consult with staff who have experience and skills. This also badly impacts morale and reduces the team’s creativity/initiative.

iii. Employees feel frustrated as an autocratic leader tends to impose decisions on them forcefully.

iv. Autocratic leadership style is most effective when the leader is present. When a leader is not available, problems emerge. There is too much dependence on one person

Practice Question

Suggest and briefly discuss the leadership style that is likely to be most effective in an organization where subordinates have a high level of competence with a variable level of commitment.

Solution

The most effective leadership style would be ‘Participative’ leadership style where leader plans a high focus on developing a relationship with subordinates with low focus on a task. As the competence level of subordinates is high, a leader should delegate day-to-day decision making to the subordinates and he should only participate in non-routine decisions. For variable commitment, the leader should provide the support necessary to boost confidence and motivation of subordinates.



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2.2.2 Blake and Mouton’s Managerial (Leadership) Grid

Blake and Mouton proposed a managerial (leadership) grid to describe leadership behaviors. The grid identifies two main behaviors:

Concern for task

Concern for people

These two concerns are independent of each other and a leader or manager can be either weak or strong in showing either concern.

The model identified five different leadership styles based on the concern for people and the concern for production. Blake and Mouton devised a grid, often known as Blake’s grid, which shows these two elements of leadership, one on each axis of the grid. Each axis of the grid is numbered from 1 to 9.

A score of 1 indicates the lowest level of concern.

A score of 9 indicates the highest level of concern.

Individual managers or leaders can be placed on the grid, according to their concern for the task and their concern for people.

Exhibit 2A Blake and Mouton’s Managerial (Leadership) Grid

The five resulting leadership styles are as follows:

Style

(1,1): Impoverished style The leader gives little effort to getting work done and has a lazy approach. The

worst type of leader possible.

(1,9): Country club style Low concern for getting the task done, but high concern for people and

maintaining good relations.



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Style

(9,1): Authoritarian,

compliance style

The leader concentrates on efficiency and getting the work done, with little

concern for people. Will seek to eliminate people from the work if at all possible

(for example through automation).

(5,5): Middle-of the road

style: ‘organisation man’

Does enough to get the job done, but may not be pushing to extend the

boundaries of what is possible.

(9,9): Team management High concern for the task and high concern for people. Provides effective

leadership to the team. The most effective type of leader.

Managers/leaders show differing amounts of concern for the task and concern for people, and so maybe placed anywhere on the grid.

Blake and Mouton argued that the most effective leaders show high concern for both the task and for people.

Exhibit 2B Blake and Mouton’s Managerial (Leadership) Grid with major points/ styles explained

2.2.3 Tannenbaum and Schmidt Continuum of Leadership

Tannenbaum and Schmidt (1958) developed a model to describe different styles of leadership. They did not argue that one style was the best. Instead, they suggested that leaders might start with one style (an authoritarian or autocratic style), and then change their style (towards more delegation of authority to subordinates) as the group members gain experience and become more mature.

Tannenbaum and Schmidt devised their continuum that illustrates a range of potential leadership and management styles. The Tannenbaum and Schmidt Continuum recognizes that the chosen leadership style depends on a variety of factors, including the leader's personality, the perceived qualities of subordinates.



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It also allows for "situational" factors such as the need for urgency in leadership and decision-making.

The continuum represents a range of action related to the:

Degree of authority used by the leader or manager

Area of freedom available to subordinates

Their continuum is shown in the exhibit below. Every leadership style involves a varying balance between using authority and giving freedom to subordinates.

Use of authority

Area of freedom for subordinates

Tannenbaum and Schmidt identified seven levels of delegated freedom on their continuum.

Level

1 Tells The manager takes the decisions and announces his decision to the team.

2 Tells and sells

The manager takes the decisions, but then sells his decision to the group. He explains the reasons for the decision, emphasising the benefits for the team.

3 Tells and talks

The manager takes the decision, presents his decision to the team with the background ideas that led to the decision, and then invites questions. This makes it easier for the team to understand the decision and agree with it, and to understand the issues involved and the implications of the decision.

4 Consults The manager announces a provisional decision and invites the group members to discuss it. The manager then takes into consideration the views of the team members and may change his decision. The team members, therefore, have some influence over the decision.

5 Involves The manager presents the problem to the team, perhaps suggesting some options. He asks for suggestions about what should be done. He then decides. The team members are therefore closely involved in the decision. This style is appropriate when the team has a high level of knowledge and experience.

6 Delegates The manager explains the situation to the team, defines the parameters and asks the team to decide. The manager ,therefore, delegates the decision-making entirely, within the stated limits. This leadership style requires a mature team.

7 Abdicates The manager allows the team to identify the problems, develop options, make a decision and develop action plans for a solution – within the stated limits of his authority.

Example:

The style of leadership by Tannenbaum and Schmidt that is best suited for an organization which requires quick decision making and consists of highly competent staff at all levels are:

Delegated style – The decision has to be reached quickly and the staff comprises of competent individuals who fully understand the issues and can offer valuable input. OR

Abdicated style – Since the staff is highly competent and the leader is probably an extremely busy individual, he may purse an abdicated style of leadership particularly because the situation warrants quick decision and any delay may result in missed opportunities.



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2.2.4 The Ashridge Model

A research team from Ashridge College in the UK identified and explained four different styles of leadership:

Tells

Sells

Consults

Joins

Tells style

A ‘tells’ style of leadership is dictatorial. The leader makes decisions and imposes them on his subordinates, expecting them to be obeyed without question.

The main advantages of the ‘tells’ style are:

Speed of decision-making: the leader does not need to consult anyone before making the decision.

It will probably result in better decisions when the subordinate is inexperienced or lacks the required understanding to contribute usefully to discussions of problems.

The disadvantages of a ‘tells’ style are greatest when there is no requirement for fast decisions and the subordinates have experience and skills that they can contribute to discussions. When the leader has a ‘tells’ style:

The views of subordinates are ignored

Any initiative or creativity the subordinates might contribute is lost

There is too much dependence on one person, the leader.

Sells style

A ‘sells’ style of leadership is autocratic. An autocratic leader makes his own decisions but then tries to ‘sell’ them to his subordinates. This means that there is a small amount of consultation about decisions, but not much.

The advantages of a ‘sells’ style are that:

Subordinates at least know why certain decisions have been made

The leader is not dictatorial

However, with a ‘sells’ style the leader is imposing his views on subordinates and the communication is largely one-way.

Consults style

A ‘consults’ style is a democratic style of leadership. The leader asks for comments from subordinates before making a decision, and the comments from subordinates might persuade him to change his mind or alter his view about something.

The advantages of a ‘consults’ style are:

Greater interest and involvement for subordinates.

Possibly stronger motivation amongst subordinates.

The ability of subordinates to contribute their knowledge and experience to the decision-making process.

The opportunity for subordinates to gain better insights and understanding through being involved in the decision-making discussions.

The disadvantages of a ‘consults’ style are:

Subordinates might not have sufficient knowledge or experience to contribute effectively.

The decision-making process might be slowed down too much and is unlikely to be desirable at times of crisis when quick decisions are needed.



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Joins style

‘Joins’ style of leadership is called ‘laissez-faire’ style by some management theorists. With this style, the subordinate is allowed to get on with his work and do whatever he likes, within established guidelines and constraints.

The potential advantages are high motivation and commitment from subordinates.

The potential problems are that:

Individuals often need guidance from a leader.

Co-ordination between subordinates might be poor.

There is a risk that the actions of subordinates might undermine the authority of the leader.

The potential risks are too great if the subordinates are insufficiently knowledgeable and experienced.

Conclusion

Research by an Ashridge College team concluded that:

Subordinates prefer a ‘consults’ style of leadership.

The worst style of leadership is inconsistency in style.

2.2.5 Likert’s leadership styles

Writing in the 1960s, Rensis Likert identified four different leadership styles:

Features of the style

Exploitive

authoritative

The leader has a low concern for people. He uses threats and other fear-based methods

to get others to do what he instructs. Communication is almost entirely a downward process, from the leader to the subordinates.

Benevolent

authoritative

The leader is authoritarian, but also shows concern for people. He is a ‘benevolent

dictator’. He uses rewards to encourage performance. He listens to concerns of people

lower down in the organisation, but he is often told by subordinates what they think he

would like to hear. Most decisions are taken by the leader. There is not much teamwork among the subordinates.

Consultative The leader makes a genuine attempt to listen to his subordinates. He has substantial trust

in his subordinates, but not enough to let them take major decisions (which he takes

himself). There is some two-way vertical communication between leader and

subordinates, and some horizontal communications between subordinates, with a moderate amount of teamwork and cooperation.

Participative The leader engages subordinates in the decision-making process. He has complete

confidence in his subordinates, who feel a responsibility for the organisation’s goals.

People are psychologically close and work well together. Subordinates receive economic rewards based on achieving goals that have been set with their participation.

Likert argued that a participative style of leadership was ideal for the profit-oriented, human-concerned organization.

Practice Question

There is no defined best way of leading an organization. Leaders need to be adaptive and their optimal course of action is contingent upon the situation that they may encounter.



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Discuss the circumstances under which leaders should adopt:

i. Telling leadership style

ii. Participative leadership style

Solution

i. Telling Leadership Style:

This leadership style is most appropriate under the following circumstances:

When the task is of routine and repetitive nature where the primary focus is on timely completion of the task whereas the relationship with employees has no or low priority.

When employees have a comparatively high commitment towards completeness of task but lack experience or have low competence levels thereby needing guidance at each step.

When quick and accurate decision making is essential for completeness of task and leader has expertise on it.

ii. Participative Leadership Style:

This leadership style is most appropriate under the following circumstances:

When employees have high competence levels where they may contribute with their knowledge and experience for improved decision making.

When employees lack confidence and/or motivation thereby needing some support from leader to boost confidence and motivation.

When the task is of non-routine and/or complex/difficult in nature and focus is to gain employees’ commitment by building a good relationship with them.

When a task is not of great importance for the leader who wants to devote his/her efforts to attend other important tasks.

Applications of style approach

Style approach applies to nearly everything a leader does.

Can be applied at all levels in all types of organizations by using questionnaires that assess task and relationship behaviors

Strengths of style approach

Marked a major shift in the general focus of leadership research from traits and skills to behaviors.

Focuses on what leaders do and how they act rather than personal characteristics.

Identified task and relationship behaviors form the core of the leadership process.

Provides a broad conceptual map to understand the complexities, provide opportunity to assess leadership actions and subsequently change leadership style as required.

Limitations of style approach

Research on styles has not adequately shown how leaders’ styles are associated with performance outcomes.

Failed to find a universal style of leadership that could be effective in almost every situation.

Unclear whether high-high style is the best style in every situation.



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3. CONTINGENCY THEORIES

Contingency theories of leadership are based on the view that the most effective leadership style in a given situation will depend on the situation. In other words, the most effective leadership style is ‘contingent upon’ the circumstances of the situation.

Contingency theories of leadership have been developed by:

Fiedler


Handy

3.1 Fiedler’s contingency model

Fred Fiedler’s contingency theory of leadership was developed from research he conducted in the 1960s. He believed that a person’s dominant leadership style is a relatively fixed part of his personality, and is therefore difficult to change. However, effective leadership is contingent (dependent) on a good match between leadership styles and situation.

Fiedler developed a Least Preferred Co-worker (LPC) scale to determine the leadership style of managers/ leaders. It classifies leadership styles into two main categories:

task motivated

relationship motivated.

The classification is dependent on the score one gets using the LPC scale (Exhibit 3A & B). High Score indicates a relationship-oriented leader and a low score indicates task-oriented leader.

Exhibit 3A: Least Preferred Co-worker Scale, scoring and its interpretation.

Unfriendly 1 2 3 4 5 6 7 8 Friendly

Unpleasant 1 2 3 4 5 6 7 8 Pleasant

Rejecting 1 2 3 4 5 6 7 8 Accepting

Tense 1 2 3 4 5 6 7 8 Relaxed

Cold 1 2 3 4 5 6 7 8 Warm

Boring 1 2 3 4 5 6 7 8 Interesting

Backbiting 1 2 3 4 5 6 7 8 Loyal

Uncooperative 1 2 3 4 5 6 7 8 Cooperative

Hostile 1 2 3 4 5 6 7 8 Supportive

Guarded 1 2 3 4 5 6 7 8 Open

Insincere 1 2 3 4 5 6 7 8 Sincere

Unkind 1 2 3 4 5 6 7 8 Kind

Inconsiderate 1 2 3 4 5 6 7 8 Considerate

Untrustworthy 1 2 3 4 5 6 7 8 Trustworthy

Gloomy 1 2 3 4 5 6 7 8 Cheerful

Quarrelsome 1 2 3 4 5 6 7 8 Harmonious

(Tables from "A Theory of Leadership Effectiveness" by Professor F.E. Fiedler. © 1967)

https://www.amazon.com/gp/product/B0000CNPA1



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Least Preferred Co-worker Scale, scoring and its interpretation

LPC Scale Score LPC Interpretation Leadership Style

Score 73 or above High LPC Relationship-motivated leader

Score is 65 to 72 Middle LPC Mixture of both

Score 64 or below Low LPC Task-motivated leader

He concluded that the effectiveness of a leader depends on:

the leader’s style, and also

the extent to which the work situation gives the leader control and influence.

The work situation depends on three factors:

The relationship between the leader and the subordinates: If the leader is liked and respected, he is more likely to have the support of his subordinates.

The structure of the task. If the task is clearly defined, with clear goals, methods of working and standards of performance, it is more likely that the leader will be able to exert influence.

The position power of the leader. If the organization gives power to the leader, for the purpose to get the job done, this is likely to increase the influence of the leader.

For example, the leader may have to be authoritarian in his approach when a quick decision is needed, or when employees are used to being told what to do.

The work situation can be favorable to the leader, unfavorable to the leader, or something in between (intermediate favorableness). Fiedler defined a favorable work situation as:

good relationship between leader and subordinates

a highly-structured task, and

a large amount of position power for the leader.

So which leadership style was most effective? Fiedler found that it seemed to depend on the circumstances:

When the work situation is favorable, a task-orientated leader is more effective.

When the work situation is unfavorable, a task-orientated leader is also more effective.

When the work situation is somewhere between favorable and unfavorable (‘intermediate’), a relationship-orientated leader is more effective.

Fiedler was, therefore, one of the first management theorists who argued that the effectiveness of leadership style depends on the circumstances.

He went on to argue that individual leaders are task-orientated or relationship-orientated by nature, and it is impossible to change them. An organization should, therefore, assess whether a work situation is favorable, unfavorable or in between, and try to appoint a leader with the more appropriate style for the work situation.

Strengths of approach

It is supported by a great deal of empirical research

It is the first theory to emphasize the impact of the situation on leaders

It is predictive of leadership effectiveness

It does not demand that the leader fit and be effective in every situation

It provides useful leadership profile data



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Limitations of approach

It does not adequately explain the link between styles and situations

It relies on LPC scale, which has a has low face validity and workability

It does not provide a remedy or solution; demands change of the leader / situation

Practice Question

Mr. Akbar, a relationship-oriented leader, is employed by a large construction company. Mr. Akbar is having a difficult time as his subordinates do not trust him to look out for their well-being. The construction jobs he supervises tend to be novel and complex and he has no control over the rewards and disciplinary actions his subordinates received.

Using the case above, answer the following questions using Fiedler’s contingency theory of leadership:

a) What are the work situation factors in Fiedler’s model? Identify them in the above scenario.

b) What style of leadership would Fiedler suggest for the circumstances above? Justify your answer.

c) If each work situation factor becomes the opposite of what is presented in the case above, what leadership style would be preferred? Briefly explain.

d) Would Fiedler suggest the company to change the leader or change Mr. Akbar’s leadership style? Briefly explain.

Solution

a) Following are the work situation factors in Fiedler’s model:

Poor leader-member relations: Subordinates do not trust Akbar to look out for their well-being.

Low task structure: the construction jobs he supervises tend to be novel and complex.

Weak position power: he has no control over the rewards and disciplinary actions his subordinates received.

b) Fiedler would suggest task-oriented leadership style. According to him, when the work situation is unfavorable a task-oriented leader is more effective.

c) If each work situation factor becomes the opposite of what is presented in the above case, then task-oriented leadership style would still be preferred. According to Fiedler, even when the work situation is favorable, a task-oriented leader is more effective.

d) Fiedler would suggest changing the leader. According to him, individual leaders are either task-oriented or relationship-oriented by nature and it is not possible to change them.

3.2 Hersey and Blanchard: situational leadership theory

Paul Hersey and Kenneth Blanchard (1968) developed another contingency theory of leadership, which they called situational leadership theory. Like Fiedler’s contingency theory, their theory states that the most appropriate leadership style depends on the work situation.

Some of the assumptions in their theory are that:

A leader should adjust his or her leadership style to meet the requirements of the work situation. Leaders must be able to use any leadership style and should switch from one style to another as circumstances require. (In this respect their views differ from Fiedler’s. Fiedler did not believe that individuals can change their leadership style, because this is ‘personal’ or ‘natural’ to each individual. It was, therefore, necessary to pick an individual as a leader who could bring the most suitable leadership style to the job.)



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Subordinates or team members are at different levels of personal development. Some are more mature psychologically than others and some are more mature (experienced and skilled) in the job than others. The appropriate leadership style depends on the extent to which the subordinates are mature. For theory, Hersey and Blanchard identified subordinates’ maturity in terms of:

Competence in their job and their ability to undertake successfully the tasks they are given – job maturity

Confidence in their ability to deal with the challenges of the task

Commitment to the organization’s goals and commitment to undertake the task – psychological maturity.

They referred to the maturity of the team members as their ‘functioning maturity’.

Leaders are involved in:

directive activity – giving guidance and direction: this is similar to ‘concern for the task’ and can be described as ‘task behavior’.

supportive activity – giving emotional and social support to subordinates: this is similar to ‘concern for people’ and can be described as ‘relationship behavior’.

The amount of involvement by leaders in directive activity and supportive activity can range from low to high. The appropriate level of activity required from an effective leader varies with the work situation, which in turn depends largely on the maturity of the subordinates or team members.

Hersey and Blanchard identified four leadership styles, which can be presented in the form of a 2 x 2 matrix.

Exhibit 3B

The four leadership styles are explained in more detail below, together with the views of Hersey and Blanchard about which leadership style is most effective for a given work situation.

Leadership style

Characteristics Most effective when subordinates have…

Telling High task focus, low relationship focus. The leader defines the roles and tasks of subordinates and supervises them closely. Decisions are announced by the leader. Communication is mainly one-way, from the leader down to subordinates.

Low competence

High commitment

Selling High task focus, high relationship focus. The leader defines the roles and tasks of subordinates. He seeks ideas and suggestions from subordinates, so communication is two-way. The leader makes the decisions.

Some competence

Some commitment



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Leadership style

Characteristics Most effective when subordinates have…

Subordinates may need direction because they are inexperienced. They also need support and praise from the leader to build their self-esteem.

Participating Low task focus, high relationship focus. The leader delegates some day-to-day decisions to subordinates (for example, work scheduling). The leader facilitates and participates in discussions about other decisions with subordinates.

Subordinates are competent in their work but lack the psychological confidence of motivation. Some support is necessary from the leader to boost confidence and motivation.

High competence

Variable commitment

Delegating The leader is involved in discussions about problem-solving and decision-making, but control is with the subordinates. The subordinates decide how and when the leader will be involved. The subordinates can do the work themselves with little supervision or support.

High competence

High commitment

Example

Consider the following situations:

i. Salman delegates some day-to-day decisions to subordinates. He also facilitates and participates in discussions about some of the decisions with subordinates who are competent in their work but lack psychological confidence. He boosts their confidence and motivation from time to time.

ii. Ahmed defines the roles and tasks of subordinates and supervises them closely. Decisions are announced by him. Most of the communication is downwards.

iii. Hamid is involved in discussions about problem-solving and decision-making but control mostly vests with the subordinates. The subordinates can perform their work with little support. They refer to him only when they consider it necessary.

iv. Bashir defines the roles and tasks of subordinates. At times he seeks ideas and suggestions from subordinates. However, he makes most of the decisions but supports and praises the subordinates to boost their self-esteem.

In the context of Hersey and Blanchard’s style of situational leadership, the leadership style in each of the above situations and the situations when these styles would be most effective are as follows:

i. Participating

This style is most effective when the subordinates have high competence levels but have a varying degree of commitment.

ii. Telling

This style is most effective when the subordinates have low competence levels but a high degree of commitment.

iii. Delegating

This style is most effective when the subordinates have high competence levels and also a high degree of commitment.

iv. Selling

This style is most effective when the subordinates have some competence levels and also nominal levels of commitment.



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3.3 Handy’s best-fit approach

Charles Handy described his contingency approach to leadership styles as a best-fit approach. Four factors that influence the effectiveness of a leader:

the leader himself – his personality and character, and also his leadership style

the subordinates – the personalities of the individuals in the group, the character of the group as a whole, their preferences for a particular leadership style

the task – what are the objectives of the group’s tasks, what methods of working are used?

the environment – this factor covers a wide range of possible issues, including the organization structure, the culture and norms of the organization, the technology of the organization’s operations and the variety of tasks performed by subordinates in the group.

Leadership styles range between autocratic and democratic. A leader’s style is not necessarily one or the other. It can be somewhere in between the two extremes.

The characteristics of the subordinates in a group range between having a low opinion of themselves (and wanting to be told what to do) and having a high opinion of themselves (and so liking challenging work and freedom from supervision). Most groups are somewhere between these two extremes.

The tasks that are done by a workgroup can range between all routine and repetitive tasks at one extreme and all complex work at the other extreme. Normally, the characteristics of the work are somewhere between these two extremes.

Handy described a ‘best fit’ spectrum, in which the three factors of leader, subordinates and tasks are placed on a range or spectrum, each between two extremes. He called these two extremes ‘tight’ and ‘flexible’.

TIGHT FLEXIBLE

The leader Prefers an autocratic style Prefers a democratic style

Low opinion of subordinates High regard for subordinates

Dislikes uncertainty Accepts a reasonable amount of uncertainty

Subordinates Low opinion of their abilities High opinion of their abilities

Like certainty. Like to be told what to do Like challenging work

Prefer autocratic leaders Prefer democratic leaders

See their work as unimportant

The task The work requires no initiative. It is routine and repetitive, and trivial

The work involves important tasks with a long timescale for completion and results

Short timescale for completion Complex work, involving problem-solving or decision-making

Handy suggested that in any work situation there is a best-fit of leader, subordinates and task (and environment, which is not on the spectrum). The best fit occurs where all three items – leader, subordinates and task – are at the same position on the spectrum.

Whenever there is a mismatch on the spectrum of leader, subordinates and task, and change will be required to create a new best fit for the altered work situation.



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4. LEADERSHIP QUALITIES

What do leaders do?

The leadership theories described so far in this chapter have considered leadership style and which particular style of leadership is the most appropriate. Other writers on leadership have considered what leaders do, and what makes leadership different from management. Some of these theories are described in this section.

4.1 Adair’s action-centered leadership

John Adair’s action-centered leadership model is based on the view that effective leaders need a full command of three aspects of leadership:

achieving the task and meeting the demands of the task

managing and maintaining the team or group

managing individuals within the group and meeting the needs of individuals in the group.

A good leader keeps each of these three elements of leadership in balance. Adair argued that in any work situation, a leader is faced with problems and issues that will require the use of the three leadership skills. However, the particular skills that are needed to deal with any given situation will vary according to its nature. In other words, the skills required to deal with each problem will depend on the nature of the problem. An effective leader needs skills in all three areas.

Adair argued that all three aspects of leadership skills can be learned through training and development.

Sometimes a leader must show one of the leadership skills to deal with a problem, and sometimes he must show two of the skills or all three skills. The action-centered leadership model, indicating the skills required by the leader, can, therefore, be shown as three overlapping circles, which Adair calls the ‘three circles diagram’.

The leadership skills required for each of the three areas of leadership are summarized below.

Achieving the task Managing the team Managing individuals

Define the task and the objectives/goals

Agree standard of performance/behaviour

Understand the team members as individuals (personality, skills, needs)

Make the plan for achieving the task

Establish the culture of the group

Assist individuals

Identify and acquire the resources needed

Maintain ethical standards and discipline

Give support to individuals

Establish responsibilities for group members

Resolve conflicts between group members

Give praise to individuals



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Achieving the task Managing the team Managing individuals

Set standards and target performance standards

Change the balance/ membership of the group when necessary

Agree individual responsibilities and objectives

Establish reporting systems Develop the ability of the team members to work together

Make use of the strengths and skills of the individual

Control actual performance by comparison with the targets

Build team morale. Motivate the group as a team

Reward individuals (for example with more responsibility or higher status)

Monitor performance Develop the collective skills and maturity of the group

Train and develop individual team members

Review on completion of the task Facilitate communications – within the group and externally

Consult with the group

Give the group feedback on its performance

Provide group training

The emphasis that a leader gives to each of these skills will vary according to the situation, but a well-trained and effective leader can make use of the appropriate skills for each situation.

Note: Adair’s 50:50 rule

Adair suggested a 50:50 rule, that applies to his thinking about leadership. Leadership is influential, but effective leadership on its own is not sufficient.

50% of motivation comes from within the individual. The other 50% of motivation comes from influences outside the individual, including the influence of the leader.

50% of building a successful team comes from the team members and 50% comes from the leader of the team.

Example:

Mr. Inam had joined a company engaged in the manufacturing and sale of consumer products as a salesperson a decade ago. He has established a good reputation in the eyes of senior management and clients due to his charismatic personality and ability to gain new businesses/clients regularly. In recognition of his consistently good performance, he was given several promotions and has recently been promoted to the position of zonal sales manager. Mr. Inam would now be leading a large number of sales teams which would be a new experience for him.

Using John Adair’s action-centered leadership model the three aspects of leadership that Mr. Inam needs the full command of and the leadership skills he might require are as follows:

Achieving the task and meeting the demands of the task.

Managing and maintaining the team or group.

Managing individuals within the group and meeting the needs of individuals in the group.



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Mr. Inam would also need to keep each of the above three elements of leadership in balance.

Leadership skills required under each aspect is discussed below:

Achieving the task

For achieving the task, Mr. Inam would need the following leadership skills:

Defining the task and objectives i.e. what needs to be done.

Making the plan for achieving the task and objectives.

Identifying and acquiring the resources (people, processes, tools) to achieve the task.

Establishing responsibilities for each group member.

Setting performance standards in terms of expected performance, reporting deadlines, etc.

Establishing reporting systems i.e. what, when and whom to report.

Monitoring and controlling the performance by comparing actual performance with benchmarks.

Reviewing the performance on completion of the task.

Managing the team or group

For managing a team or a group, Mr. Inam would need the following leadership skills:

Establishing the culture of the group by clearly defining and maintaining ethical standards and discipline among group members.

Agreeing on the standard of performance and accepted behavior.

Monitoring the balance of the group by fixing gaps in the mix where necessary. – Resolving conflicts between group members.

Building team morale by ensuring team members remain motivated.

Developing the collective skills and maturity of the team.

Facilitating communications within the group as well as between the group and the external parties.

Providing feedback on the group’s performance from time to time.

Managing individuals

For managing individuals, Mr. Inam would need the following leadership skills:

Understanding individual team member in terms of skills, weaknesses, personality traits, etc.

Making adequate use of an individual’s strengths and skills.

Communicating and agreeing on an individual’s roles and responsibilities.

Providing appropriate support and guidance to individual team members.

Understanding the training and development needs of individuals and making appropriate arrangements thereon.

Recognizing and rewarding individual’s contribution employing financial rewards, greater responsibilities, promotions, etc.).

4.2 Warren Bennis: leaders as enablers and originators

Warren Bennis, writing from the 1980s, made a distinction between managers and leaders.

The role of the manager is to administer and maintain systems in order. Managers focus on systems and controls. Their main concern is for the ‘bottom line’ (short-term profit). He referred to management as transactional leadership, which is ‘doing things right’.



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The function of the leader is to innovate and develop. Leaders focus on people, not systems. Their main concern is for the longer-term, not the short-term profit figure. Bennis referred to leadership as transformational leadership, which is ‘doing the right things’.

His comparison of managers and leaders is summarized in the table below.

Managers Leaders

Transactional leadership Transformational leadership

Doing things right Doing the right things

Administer Innovate

Maintain Develop

Focus on systems and structures Focus on people

Reliance on control Inspire trust

Short-range view Long-range perspective

Imitates Originates

Accepts the status quo (no change) Challenges the status quo

Bennis has argued that leaders must get involved if they are to provide leadership. Here are two quotations from his work, suggesting how leaders should provide innovation (a ‘vision’) and earn trust from their followers.

‘It’s not a question of giving speeches, sending out memos and hanging laminated plaques in offices. It’s about living the vision, day in day out – embodying it – and empowering every other person in the organization to implement and execute that vision in everything they do.’

‘Leadership will have to be candid in their communications and show that they care. They’ve got to be seen to be trustworthy human beings. That’s why I believe most communication has to be done eyeball to eyeball, rather than in newsletters or videos or via satellite broadcasts.’

Leadership at all levels

Bennis argued that leadership is needed at all levels in an organization, and believes that everyone has the capacity and ability to provide leadership. He is opposed to the trait theory’ that leadership is a natural talent and that there are ‘born leaders’.

He has argued that the role of the leader is not to be an all-knowing problem-solver who knows the answer to every problem. Instead, a leader is someone who stimulates the group, encourages its creativity and maintains an atmosphere or culture in which the group members can find the solutions to the problems together.

Example

Mr. Alam is the CEO of a company which is known for its adoption of latest and modern techniques. The company usually takes the lead in adopting new ideas, be it new manufacturing equipment, information technology, marketing or human resource. Mr. Alam has also been able to develop a highly motivated and talented team of workers and managers.

Mr. Alam is excellent in terms of communicating new ideas and always receptive to creativity. He has also laid stress on staff development and training and has introduced policies which are help identify and groom them. His vision is to provide opportunities for the long-term growth of the company as well as its employees.

The style of leadership followed by Mr. Alam and the characteristics of such style of leadership as enumerated by Warren Bennis are as follows:

Mr. Alam is a transformational leader as he guided his business through needed changes. Transformational leaders inspire others with their vision, often promote this vision over the opposition, and demonstrate confidence in themselves and their views.



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4.3 John Kotter: what leaders really do

John Kotter also considered what leaders do (His most well-known book is entitled ‘What Leaders Really Do’.) He has argued that leadership is largely concerned with:

anticipating change

dealing with change, and

‘adopting a visionary stance’ – in other words, having a vision about what the organization is trying to achieve and what it must do to get there.

More change demands more leadership, and Kotter advocated the creation of a culture of leadership within business organizations.

Like Bennis, Kotter has compared management (transactional leadership) and leadership (transformational leadership), as follows.

Managers Leaders

Transactional leadership Transformational leadership

Creating the agenda

Planning and budgeting Establishing directions

(Develop a detailed plan and create a detailed map of how to achieve planning targets.)

(Develop a vision for the organization and identify the direction in which it should go. Concern with strategy.)

Human relations aspects

Organize the work and fill staff in the positions

Align the people with the vision.

(Decide which individual best fits each particular job.)

(There is a communication problem – getting people to understand and then believe in the ‘vision’)

Execution of tasks Control. Problem-solving leadership Motivate and inspire

Outcomes Produces a degree of predictability in outcomes

Produces change – often dramatic

4.4 Ronald Heifetz: leadership as an activity

Heifetz has argued that leadership is an activity, not a personal quality. We often confuse ‘leadership’ with ‘authority’.

Authority is often seen as the possession of powers based on a formal management role within an organization The manager has the right to tell subordinates what to do because he is simply exercising his ‘legitimate power’. Subordinates do what the manager tells them, to avoid dismissal, demotion or other disciplinary measures.

However, employees may follow an individual, not because of his formal authority, but because the individual shows leadership qualities. A leader is someone who can make sense of situations that are out of the ordinary and knows how to act in these situations. The leadership of this kind gives the individual informal authority.

Successful leaders need this informal authority as well as the formal authority granted to them by their position.

Heifetz (‘Leadership Without Easy Answers, 1994) suggested that there are two types of challenge for leaders in business. Each type of a challenge needs different leadership qualities. The two types of problem are as follows:

Technical problems. These are problems that have a relatively simple answer. Current knowledge can be applied to find a solution to the problem.



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Adaptive problems. These are problems where the answer involves a need for people to change – change their culture and outlook. People are resistant to change; therefore the solution to the problem involves getting people to learn new ways.

Technical problems can be solved by managers (transactional leaders). For adaptive problems, transformational leadership is needed. Heifetz has referred to problems requiring significant change as ‘adaptive work’.

Six principles of leadership and adaptive change

Successful leadership depends on judgement, and making decisions about when to act, and how far to go each time. The change should not be introduced too quickly, but only at a pace that individuals can accept. Leaders must act within the context of ‘permission to change’ from the people affected and ‘restraint’ – not going further at any time than other people are willing to tolerate.

Heifetz suggested that there are six principles of leadership for adaptive change.

1 Get on the balcony

A leader must have the ability to observe changes that are happening and to mobilize others to respond. It should be as if the leader is on a balcony with a clear view of all the entity’s activities. The leader must then be able to mobilize the right people in the right way to do the required adaptive work.

2 Identify the adaptive challenge

A leader has to see what response is needed to the new challenge and change. Heifetz used as a comparison an example of a band of chimpanzees that knows how to respond to a threat from a leopard but does not have the leadership to know how to respond to a new challenge from a human with a gun.

3 Regulate distress Having identified the adaptive challenge, the leader must generate just the right amount of ’distress’ among other people in order for everyone to see and understand the need for change. Change and progress must be introduced at the right pace – a leader must progress at the ace that other people are willing to accept. The leader must always point others in the right direction by asking them key questions.

(Heifetz even suggested that the assassination of a political leader is a failure of leadership. A political leader who tries to bring in changes too quickly might expose him to the assassination, from people who dislike the pace at which the changes are happening.)

4 Maintain ‘disciplined attention’

The leader must get conflict out into the open and use this as a source of creativity. Constructive conflict among individuals leads eventually to collaboration and agreement. The leaders most likely to succeed are those who make followers aware of their responsibilities.

5 Give work back to the people

Leaders should not control and direct. They should provide support and allow people to find solutions to problems through their efforts. Change is a collaborative process.

6 Protecting voices of leadership from below

Leaders should give a voice to other people in the organization and should allow others (below them in the ‘hierarchy’) to raise contentious issues.



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Sticky Notes

Leadership

Theories of Leadership

Trait theory

Style Theories


Blake and Mouton’s Managerial

(Leadership) Grid

Tannenbaum and Schmidt Continuum of

Leadership

The Ashridge model


Contiengency Theories

Fiedler’s contingency model


Handy’s best fit approach

Qualities of Leaders

Adair’s action-centred leadership

Warren Bennis: leaders as enablers

and originators

John Kotter: what leaders really do

Ronald Heifetz: leadership as an

activity



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References:

Blake, R. R., & McCanse, A. A., (1991). Leadership dilemmas: Grid solutions. Houston, TX: Gulf Publishing Company.

Blake, R. R., & Mouton, J. S., (1985). The managerial grid III. Houston, TX: Gulf Publishing Company.

Blanchard, K., Zigarmi, P., & Zigarmi, D. (1992). Game plan for leadership and the one-minute manager: Increasing effectiveness through situational leadership. New York: William Morrow.

Bowers, D. G., & Seashore, S. E. (1966). Predicting organizational effectiveness with a four-factor theory of leadership. Administrative Science Quarterly, 11, 238-263.

Fiedler, F. E., (1964). A contingency model of leadership effectiveness. Advances in experimental social psychology. New York: Academic Press.

Heller, T., & Van Til, J. (1983). Leadership and followership: Some summary propositions. Journal of Applied Behavioral Science, 18, 405-414.

Hersey, P., & Blanchard, K. H. (1969). Life-cycle theory of leadership. Training and Development Journal, 23, 26-34.

Hollander, E. P. (1992). Leadership, followership, self, and others. Leadership Quarterly, 3(1), 43-54.

Jago, A. G. (1982). Leadership: Perspectives in theory and research. Management Science, 28(3), 315-336.

Katz, R. L. (1995). Skills of an effective administrator. Harvard Business Review, 33(1), 33-42.


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CHAPTER 9

TEAM MANAGEMENT

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AT A GLANCE

Team Management is an important role of any manager or leader as the organization’s achievements and results are dependent on the collective output of its individuals. These individuals in turn form smaller groups depending on commonalities which may be formal or informal and connected through a binding purpose or thought.

Workgroups consist of two or more individual employees or management personnel who join forces to achieve specific objectives. Workgroups, depending on the reasons of their formation, may be differentiated into two categories:

Formal, or

Informal

Teams are groups of individual people who influence each other, and are mutually and collectively accountable for achieving common tasks aligned with organizational objectives.

The terms workgroups and team may be used interchangeably but may have differences in how they operate in a workplace.

Team work has its advantages and disadvantages which are important to understand to utilize them better. There may be two approaches to view effectiveness of teams:

Individual Approach

Team Approach

An important contribution to ideas about the management of teams is of ‘team roles’. A researcher named Belbin studied the behavior of individuals in teams and the ‘team role’ that each individual plays. He defined a team role as the tendency to behave, contribute and interrelate in a particular way.

There are nine team roles that are grouped into three broad groups:

Doing/acting (implementer, shaper, completer)

Problem-solvers and thinkers (plant, monitor, specialist)

Showing concern for people (coordinator, team worker, resource investigator)

IN THIS CHAPTER

AT A GLANCE

SPOTLIGHT

1. Introduction to Workgroups, Teams and Teamwork

2. Teams roles

3. Team formation and development

4. Effective and ineffective teams

STICKY NOTES

References

CHAPTER 9: TEAM MANAGEMENT CAF 4: BMBS


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Group formation passes through a specific sequence that can be predicted in their evolution. This five step process of team development was introduced by Bruce Tuckman.

In Tuckman’s complete analysis, there are five stages of team development:

forming

storming

norming

performing

Dorming (Or adjourning or de-forming)

Theodore Newcomb suggested that people are attracted to others on the basis of sharing similar attitudes and values. Once formed, people then attempt to maintain balance within those relationships of the attraction, common attitudes and values. This is called the Balance theory.

An objective of a team manager should be to create an effective team. He needs to understand what makes an effective team, and why a team might be ineffective, so that he can assess the effectiveness of his own team.

There are various ways of measuring and evaluating performance. Three basic approaches to performance measurement are measurements of:

economy

efficiency, and

effectiveness.

The are some basic and essential principles for team management, as elaborated below:

Define team principles:

Clarify roles and responsibilities:

Define key tasks and requirements:

Analyze work processes:

Prioritize problems

Recognize contributions:

Motivation and incentives:.

Group cohesion describes the strength of the bond uniting the group which is important for the group to continue working with stability. There are a number of factors discussed in more detail that affect group cohesion.

CAF 4: BMBS CHAPTER 9: TEAM MANAGEMENT


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1. INTRODUCTION TO WORKGROUPS, TEAMS AND TEAMWORK

1.1 Working in groups

The organization as a whole can be seen as a group of individuals working together to achieve a common goal or set of objectives. The larger group is divided into smaller sub-groups based on the specific tasks they need to perform. A workgroup can be seen as a group of employees with a common sense of identity. There are two types of workgroups:

informal workgroups

formal workgroups

1.1.1 Informal workgroups

An informal workgroup is a group of employees that does not have a formal or an official identity. It is a group of individuals who get on well with each other and interact socially. They might have lunch together regularly, or might talk about personal interests and family matters over a cup of tea or coffee. Some informal groups might meet together outside work, at social gatherings or meetups.

Informal workgroups often develop a collective attitude to their work since they have a similar mind set and preferences. This attitude can be positively reinforced for the benefit of the organization to gather larger support for the company’s cause with little effort. But if the group or a few individuals from the group decide to go against management due to any reason, it could get dangerous as the entire group would stand together in opposition.

Informal workgroups can also be important because of the way they communicate with each other. Sometimes, news of an event or a new development at work gets around much more quickly through informal communications (e-mail messages to colleagues and phone calls) – ‘through the grapevine’ – than it does by more formal communication channels.

1.1.2 Formal workgroups

Formal workgroups are created in order to organize work. The employer establishes workgroups to perform specific roles or functions. Each workgroup has a number of jobs to be performed, and employees are appointed to fill the job vacancies. When one employee leaves his job, another person is appointed in his place, and the formal workgroup continues unchanged.

Employees work together in their workgroups, each performing their own job within the group. The workgroup has a formal leader (a manager or supervisor), and will develop its own characteristics and ‘culture’.

The purpose of a formal workgroup is to:

combine the efforts of several employees, working together,

utilize the strengths of individuals to enhance collective performance.

to achieve a common goal.

Comparison of formal and informal workgroups

Formal workgroups Informal workgroups

Members of the formal work team are appointed by management.

An informal workgroup comes together through the social interaction of its members.

Membership of a formal workgroup is ‘permanent’. Employees continue to work in the group until they leave their job or until they are moved to other work by the employer.

Membership of an informal work team depends on the social interactions between members. New members may join the group at any time, and existing members may leave.



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Formal workgroups Informal workgroups

A formal workgroup has a clear set of work tasks, with specific objectives. These are set by management.

An informal workgroup is not organised by management and does not have a specific objective or tasks.

The workgroup has a formal existence. The informal group does not exist in a formal or clearly-defined sense.

Workgroup members have formal roles and job titles.

Informal workgroup members do not have set roles or titles.

A formal workgroup has a formal decision-making structure. Decisions are commonly taken by the group leader.

Informal workgroups might not make any decisions that affect their work. However, if they do, the group members will reach a collective agreement.

Management assess the performance of a foirmal workgroup by its performance (efficiency and effectivess in carrying out its tasks)

An informal workgroup is not assessed. However, its collective attitude to management can range from supportive at one extreme to hostile at the other. Employee attitudes to management can be determined by the shared attitudes of informal groups.

Formal workgroups work together through established procedures and systems.

Informal workgroups can be much more efficient (than formal methods) in communicating information.

Practice Question

Overseas Construction Group (OCG) is in the process of establishing a workgroup to implement a major motorway project in a Central Asian country. Explain briefly the considerations which the management of OCG should keep in perspective in the formation of the workgroup.

Solution

OCG should keep the following considerations in perspective in the formation of a formal workgroup to implement a major motorway project in a Central Asian country:

i. The management of OCG should have a clear purpose and specific objectives which should be achieved by the formal workgroup.

ii. The workgroup should have effective leadership with requisite leadership skills.

iii. The area of authority of the workgroup should be clearly defined.

iv. The workgroup should have the necessary skills, expertise and experience to complete the assigned task.

v. The workgroup should be given the resources to complete its tasks successfully.

vi. The workgroup should have a clear time scale for completion of the task.

vii. The workgroup should be able to communicate effectively and exchange all relevant information.

viii. The workgroup should have strong group loyalty.



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Practice Question

a) Individuals in an organization form various formal and informal groups for the purpose of achieving similar goals or to simply exchange ideas, thoughts and attitude with other group members.

Required:

Briefly describe the differences between formal and informal groups in terms of:

(i) Formation (ii) purpose (iii) decision making (iv) termination of membership

Solution

b)

Formal Groups Informal Groups

Formation

Formed by management to perform specific roles or functions.

Formed through the social interactions of its members.

Purpose

Combine the efforts of individuals working together to achieve a common goal.

Satisfy social and psychological needs (i.e. sharing of personal interests, thoughts and attitudes).

Authority

Decisions are commonly taken by group leader (a manager or supervisor).

Decision is reached through collective agreement./They follow decision of influential member in the group.

Termination

Members continue to work in the group at the discretion of management unless they leave the job.

There are no restrictions and members may join or leave the group at their own discretion.

1.2 Teams

Teams are groups of individual people who interact and influence each other, are mutually and collectively accountable for achieving common tasks that are aligned with organizational objectives, and perceive themselves as a social entity within an organization. A team shares organizational resources in order to achieve common goals. Teams should be

effective- meet goals which are clearly stated; and

efficient-use resources with minimum wastage and maximum output.

To be effective and efficient, a team should:

make people feel part of the team and reward them appropriately

relate effectively to people outside the team (customers, clients, colleagues)

adapt to the environment (resources, goals, effectiveness)

carry out goal-orientated tasks (production, systems, efficiency)



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The differences between a workgroup and a team

For the purpose of your examination, you should be able to make a distinction between a workgroup and a team. A team is a workgroup, but not all workgroups operate like a team. The words 'group' and 'team' are, for the most part, interchangeable. But there are distinct differences between groups and teams.

A work team has members who work interdependently on a specific, common goal to produce an end result for their business. A work group is two or more individuals who are interdependent in their accomplishments and may or may not work in the same department.

The main difference is that a team's strength or focus depends on the commonality of their purpose and how the individuals are connected to one another. On the other hand, a group can come from having a large number of people or a cohesive willingness to carry out a focused action - political reform, for example.

While these differences might be subtle, we have to understand that a group is a number of individuals forming a unit for a reason or cause, and a team is a collection of accomplished people coming together for a common goal that needs completion.

A team is a workgroup in which the team members work effectively together, and:

all the team members identify with the team and see themselves as part of a team, and

the team reaches decisions by agreement and consensus.

Decisions taken by a team have the support of the entire team, which means that a team cannot exist in a group where decisions are taken by the group leader (manager or supervisor) and imposed on the group, whether the group members agree with the decision or not.

Since teams take decisions by consensus, it is impossible for large workgroups to act as teams. In a work, teams are often quite small.

For a similar reason, it is difficult to build a team when the workgroup members are spread across different geographical locations. Team members need to meet and communicate on a regular basis.

1. A leader dominates and controls a work group, while in a team, the leader is a facilitator.

In a work group, a leader usually dictates how the work group should run and function. All direct reports will look to the leader for direction and decisions.

In a team however, a leader facilitates the discussions with the team members. Each member’s input is taken into consideration and made part of the final decision.

2. The goals of a work group is often set by the leader or the head of the organization, while in a team, the members usually set the goals.

An organization often has pre-determined goals that the work group adopts as a part of their plan, but a team comes together to decide on their shared goals and objectives.

3. In a work group, the leader is obvious and he conducts the meeting; while in a team, the members are often actively participating in the discussions.

In a work group, members often just give ‘yes’ or ‘no’ answers to the leader in the meeting or at most some minor suggestions because the meetings are usually a relay of information.

In a team, members are often actively participating and discussing about the issues at hand, offering their input spontaneously. This often creates a synergistic solution to many problems as the issue is seen from different perspectives.

4. In a work group, the leader assigns work to the members, while in a team, everyone decides together on the work assignments.

Work is usually decided from the top-down in a work group; roles and responsibilities are clearly defined and each individuals knows what their function is.

In a team, the work is usually decided collectively, and then the work is distributed accordingly to each individuals strengths, abilities and competence areas.



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Project teams

The word ‘team’ may be used to mean a project team. A project team has the following characteristics:

A project team is created to perform a specific task, and is then disbanded. The team is often made up of individuals from different functional areas of the organization (the team is ‘multi-disciplinary’).

Other workgroups are more permanent, and are established to fulfil specific roles. They may be organized by function (for example workgroups in production, in marketing, in accounting, and so on).

1.3 A successful work team

A successful work team has several characteristics. Some of the characteristics of a successful team apply to effective workgroups in general whereas others relate more specifically to teams

The team should have a clear purpose.

Its area of authority should be clearly defined. The team members should know what they can do, and what they do not have the authority to do.

The team should have effective leadership. One of the tasks of the team leader is to create an effective team: team leadership skills are therefore essential.

If the team is a project team that is required to complete a specific task, there should be a clear timescale for completion of the task.

The team should be given the resources that it needs (equipment, materials, money) to complete its tasks successfully.

The team members should have the necessary skills or experience to complete their task successfully. Every individual does not need all the necessary skills; however, collectively, the team members should have all the skills, expertise and experience required.

The team members should have the motivation and commitment to achieving the objectives of the team.

There should be good communications between the team members. There should be an effective and rapid exchange of all relevant information.

Each member of the team should perform a role that adds to the effectiveness of the team. The role of team members is partly to carry out technical or operational tasks. Team roles are also concerned with adding to the effectiveness of the way in which the team functions as a unit. Team roles are described below.

There should be strong team loyalty and good teamwork. Morale or team spirit should be high, and there should be respect for the team manager.

The work of the team should produce benefits for the business. Providing benefits to the business is essential, because this defines ‘success’.

1.4 Individual and team approaches to work

A function of management is to get the best performance possible from the employees who work for him (or her). There are two approaches to achieving effective performance.

Individual approach. This approach is based on the view that work should be properly organized, and employees should be appointed to carry out specific job functions. If each individual performs his job effectively, the entire workgroup will perform effectively. The effectiveness of the workgroup is the total sum of the effectiveness of each group member.

Team approach. This approach is based on the view that a workgroup will be more effective if its members work together as a team. Effectiveness comes from the ways in which the group members work with each other, as well as from the way that individuals perform their own job. A task of management should therefore be to develop an effective team, not just effective individuals.



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A useful way of comparing these two approaches might be to think about a football team or any other type of sports team. The effectiveness of the team depends to a large extent on the individual talents and skills of the team members, and their ability to perform the function for which they are in the team, such as goalkeeper or goal scorer. However, the team will not be successful unless its members can also play well together.

When team members do not work together well, the effectiveness of the team as a whole is less than the effectiveness of each team member taken individually.

When team members work well together, the collective effectiveness of the team as a whole can be much greater than the effectiveness of each team member taken individually.

The effectiveness of individuals is important. However, the effectiveness of teams could be even more important.

1.5 Advantages and Limitations of Teamwork

The advantages of team work are as follows:

sharing of information and ideas

meeting psychological needs of people for being with others

specialization is possible

improved learning and decision-making

synergy (1+1=3)

individual biases can be overcome

The limitations of teamwork are:

stifling of individuality

cost in time and effort of building a team

decisions may be made on basis of keeping team members happy rather than being critically examined

the dangers of group pressure



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2. TEAM ROLES

2.1 Team roles: the ideas of Belbin

An important contribution to ideas about the management of teams was made by Belbin (Aritzeta, Swailes, & Senior, 2007; Fisher, Hunter, & Macrosson, 1998). Belbin studied the behavior of individuals in teams and the ‘team role’ that each individual plays. He defined a team role as ‘our tendency to behave, contribute and interrelate with others in a particular way’.

He suggested that in a successful team, the team members should have a balance of certain behavioral skills. He identified nine types of behavioral characteristics that team members should have between them, see Exhibit below. (An individual may have more than one behavioral characteristic, which means that a team can possess all nine characteristics without the need for nine team members.)

The nine team roles are grouped into three broad groups:

Doing/acting. Some team members are good at getting things done. When they see what needs to be done, they do it or encourage others to do it.

Problem-solvers and thinkers. Teams are often confronted with problems and difficulties that need to be resolved. Some team members need to be good at finding answers to problems.

Showing concern for people. A team is a group of individuals acting together in a work environment. A successful team needs members who have skills in bringing the team together, by showing concerns for others, by helping others or through communicating well with others and showing a concern for the team as a unit.

Belbin’s Nine Roles of a Team.

Broad Group Team role Description

Doing/ acting Implementer A well-organised and predictable person. He takes basic ideas and makes them work in practice. However, he can be slow.

Shaper A person with energy, and full of action. He challenges other members of the team to move forward and make progress. However, he can be insensitive to the feelings of others.

Completer/ finisher

A person who is reliable in seeing a task through to the end and getting it finished. He sorts out minor problems and makes sure that everything is working well. However, he can worry too much and may not trust other people.

Problem solving/ thinking

Plant A person who solves difficult problems with original and creative ideas. However, he is a poor communicator and may ignore details.

Monitor/ evaluator

A person who ‘sees the big picture’. He thinks accurately and carefully about issues. However, he may lack energy and an ability to inspire other people.

Specialist A person who is driven by a pursuit of knowledge and information, and wants to go into detail. The ‘specialist’ role is a behavioural characteristic rather than functional specialism. However, he becomes an expert in some key areas and will solve problems in those areas. He may be disinterested in all other areas of the team’s activities.



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Broad Group Team role Description

Concern for people and feelings

Coordinator A respected leader who helps everyone else in the team to focus on their particular tasks. However, he may be seen as wanting to control things too much.

Team worker A person who cares for individuals and the team, and who is a good listener. He works hard to resolve social problems between other team members. However, he may find it hard to take difficult decisions.

Resource-investigator

A person who explores new ideas and possibilities with enthusiasm, and discusses them with others. A good ‘networker’. However, he may be over-optimistic and may lose energy after an initial period of enthusiasm.

None of these nine roles is the role of team leader. The coordinator in a team may be the team leader, but this is not essential.

A useful way of trying to learn the nine team roles identified by Belbin is to think about the consequences for a team of not having a team member capable of performing any one of the roles in the list.

Managing a team: using the ideas of Belbin

Belbin suggested that teams will work most successfully when there is a suitable balance between these nine roles amongst the team members, and when team members:

understand their role in the team

work to their strengths, and

try to manage their weaknesses.

A team manager can use the ideas of Belbin when developing a team to perform a particular function or task. The manager can assess the role or roles played by each team member, and look for roles that the current team members do not fulfil. These gaps should then be filled by recruiting new members to the team, or by encouraging existing team members to fulfil the missing role (if this is possible). If necessary, some existing team members should be replaced by new members who will perform the missing roles.

Belbin’s ideas can be applied in practice fairly easily. Questionnaires have been developed that enable individuals to assess which behavioral characteristic (or characteristics) they have, and which team roles they can perform well. Management can use this assessment of individuals to ensure that teams consist of individuals who together possess all the characteristics of a successful team.



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3. TEAM FORMATION AND DEVELOPMENT

3.1 The ideas of Tuckman on team development

Bruce Tuckman (1965) provided an analysis of how small teams develop and change character over time. The appropriate form of team leadership changes as the team goes through each new stage of development.

In Tuckman’s original analysis, there were four stages of team development:

forming

storming

norming

performing

In 1977, he added a fifth stage:

dorming (also called adjourning, de-forming and mourning) (Bonebright, 2010).

Forming

In the initial stage of its existence, a team is forming. The team is a collection of individuals, but their individual roles and responsibilities within the team are unclear. There is a high level of dependence on the team leader for guidance and direction. The team leader must therefore direct the team members, and tell them what to do.

Storming

The second stage in team development is storming. During this stage, decisions do not come easily. There is usually conflict between team members, and the attitudes, norms and preconceptions of individuals are challenged by other team members. Team members compete with each other for status and position within the team. There may be cliques and factions, and power struggles between them. However, there is an improvement in the clarity of the purpose of the team and its goals. The role of the leader is to act as coach to the team members, and to encourage them to focus on the team’s tasks rather than on relationships and emotional issues. The leader also encourages team members to find compromises to settle conflict.

Norming

During the norming stage of team development, the team develops norms of behavior and operating. The roles of the team members become clear. The way in which decisions are taken is also established. Major decisions are taken by the team collectively, with all team members contributing to the decision-making process. Commitment to the tasks of the team and team unity is strong. The team leader can use a participative style of management, so that team members take on greater responsibility for decisions.

Performing

During the fourth stage of team development, performing, the team operates at its full potential. The team members are strategically aware and they understand why the team exists and what it is trying to achieve. The team members are also able to get on with their jobs without interference from the team leader, and do not need to be told what to do. The role of the team leader is to delegate new tasks and oversee performance. Disagreements may occur between team members, but these are resolved in a friendly and constructive way.

Dorming (adjourning)

In 1977, Tuckman added a fifth stage of team development to his earlier analysis. There are various ways of describing this phase.

The group may break up, having achieved its purpose. The members of the team may feel a sense of loss, and the break-up of the team may be stressful for them, particularly if it is unplanned and unexpected.



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Alternatively, the team may lose its efficiency, and might lose its ability to make good decisions. Members of the team may share common views that ignore developments in their business environment and changing circumstances. Keeping the group in existence becomes the prime objective of the team members, rather than achievement of the team’s work objectives. It may be necessary to break up the team.

Practice Question

a) State whether you would consider the following as a ‘group’ or a ‘team’. Also give two reasons in support of your answer in each of these situations.

i. A union of clerical staff of Ravi Bank Limited which has 1200 branches in the big cities.

ii. The board of directors of Syntax Sugar Mills Limited comprises of representatives of the provincial government, cane growers, institutional investors and private shareholders.

iii. An investigation body of three officials constituted by the government to conduct an enquiry into the cause(s) of a major train accident.

iv. Country ABC has nominated three individuals comprising of the president of the football federation, a renowned foreign football coach and an ex-captain of the national team to identify talented young players in the country and provide them training for participation in the Asian Games to be held in 2018.

Solution

a)

i. The union of clerical staff of Ravi Bank Limited is a group.

The union can have perpetual life.

The union can have a number of different objectives.

The union can function in an entirely disconnected manner.

The union does not necessarily have to rely on the efforts of all the individual members.

ii. The board of directors Syntax Sugar Mills is a group.

The directors represent different entities and may hold divergent and conflicting viewpoints as they represent different interests.

The board of directors has a perpetual life.

The members of the board of directors may function independently and the final decision would depend on the outcome of voting rights exercised in the meetings.

iii. The body constituted by the government to conduct an enquiry in the cause of a railway accident is a team.

The life of the investigation body is limited as it would be dissolved after the submission of its report.

The members would require a high degree of coordination of tasks and activities to prepare their report.

The body may comprise of individuals with varied skills and qualifications such as engineers, police officials, forensic experts, etc.



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iv. The individuals nominated to identify talented young players and provide them training for participation in the Asian Games constitute a team.

The team would cease to exist after it has completed its assignment of identifying talented football players and providing them the necessary training.

The team has a specific objective to identify talented players and provide them training for the Asian Games.

The nominated individuals have to place high degree of reliance on all the members to perform in a coordinated manner to achieve the stated objective.

3.2 The value of Tuckman’s analysis

Not all teams go through all the stages of development and some teams progress more quickly than others to the performing stage. Others get stuck and fail to reach the performing stage.

However, Tuckman’s analysis is useful for the management of small teams for the following reasons:

Management should be aware that it takes time to develop a new team, and should be patient in allowing the team to progress to the ‘performing’ stage of its development.

However, it should also be possible to identify when a team is not progressing as it should and is stuck, for example, in the norming stage of development.

Tuckman’s analysis also gives some insight into the style of management that might be best-suited to the team at each stage of its development, in order to encourage the team to develop as rapidly as possible.

For further understanding, let’s go through the Case of a Team Moving Through the Five Stages.

Background and Team Members

A team has been pulled together from various parts of a large service organization to work on a new process improvement project that is needed to improve how the company manages and supports its client base. The team leader on this project is Sandra from the Chicago office who has 15 years’ experience as a project manager/team lead managing process improvement projects.

The other members of the team include:

Peter: 10 years’ experience on various types of projects, expertise in scheduling and budget control (office location: San Diego)

Sarah: 5 years’ experience as an individual contributor on projects, strong programming background, some experience developing databases (office location: Chicago)

Mohammed: 8 years’ experience working on various projects, expertise in earned value management, stakeholder analysis and problem solving (office location: New York)

Donna: 2 years’ experience as an individual contributor on projects (office location: New York)

Ameya: 7 years’ experience on process improvement projects, background in developing databases, expertise in earned value management (office location: San Diego)

Sandra has worked on projects with Sarah and Mohammed, but has never worked with the others. Donna has worked with Mohammed. No one else has worked with other members of this team. Sandra has been given a very tight deadline to get this project completed.

Sandra has decided that it would be best if the team met face-to-face initially, even though they will be working virtually for the project. She has arranged a meeting at the New York office (company headquarters) for the entire team. They will spend 2 days getting introduced to each other and learning about the project.



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The Initial Meeting (Stage 1: Forming)

The day of the face-to-face meeting in New York has arrived. All team members are present.

The agenda includes:

Personal introductions

Team building exercises

Information about the process improvement project

Discussion around team roles and responsibilities

Discussion around team norms for working together

Introduction on how to use the SharePoint site that will be used for this project to share ideas, brainstorm, store project documentation, etc.

The team members are very excited to meet each other. Each of them has heard of one another, although they have not worked together as a team before. They believe they each bring value to this project. The team building exercises have gone well; everyone participated and seemed to enjoy the exercises. While there was some discussion around roles and responsibilities - with team members vying for "key" positions on the team - overall there was agreement on what needed to get done and who was responsible for particular components of the project.

The onsite meeting is going well. The team members are getting to know each other and have been discussing their personal lives outside of work - hobbies, family, etc. Sandra is thinking that this is a great sign that they will get along well - they are engaged with each other and genuinely seem to like each other!

The Project Work Begins (Stage 2: Storming)

The team members have gone back to their home offices and are beginning work on their project. They are interacting via the SharePoint site and the project is off to a good start. And then the arguments begin.

Peter has put up the project schedule based on conversations with only Mohammed and Ameya on the team. Donna and Sarah feel as if their input to the schedule was not considered. They believe because they are more junior on the team, Peter has completely disregarded their concerns about the timeline for the project. They challenged Peter's schedule, stating that it was impossible to achieve and was setting up the team for failure. At the same time, Sarah was arguing with Ameya over who should lead the database design and development effort for this project. While Sarah acknowledges that Ameya has a few years more experience than she does in database development, she only agreed to be on this project in order to take a lead role and develop her skills further so she could advance at the company. If she knew Ameya was going to be the lead she wouldn't have bothered joining this project team. Additionally, Mohammed appears to be off and running on his own, not keeping the others apprised of progress nor keeping his information up to date on the SharePoint site. No one really knows what he has been working on or how much progress is being made.

Sandra had initially taken a side role during these exchanges, hoping that the team would work it out for themselves. However, she understands from past experience managing many project teams that it is important for her to take control and guide the team through this difficult time. She convenes all of the team members for a virtual meeting to reiterate their roles and responsibilities (which were agreed to in the kick-off meeting) and to ensure that they understand the goals and objectives of the project. She made some decisions since the team couldn't come to agreement. She determined that Ameya would lead the database development design component of the project, working closely with Sarah so she can develop further experience in this area. She reviewed the schedule that Peter created with the team, making adjustments where necessary to address the concerns of Donna and Sarah. She reminded Mohammed that this is a team effort and he needs to work closely with the others on the team.

During the virtual meeting session, Sandra referred back to the ground rules the team set in their face-to-face meeting and worked with the team to ensure that there was a plan in place for how decisions are made on the team and who has responsibility for making decisions.



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Over the next few weeks, Sandra noticed that arguments/disagreements were at a minimum and when they did occur, they were worked out quickly, by the team, without her involvement being necessary. Still, she monitored how things were going and held regular virtual meetings to ensure the team was moving in the right direction. On a monthly basis, Sandra brings the team together for a face-to-face meeting. As the working relationships of the team members started improving, Sandra started seeing significant progress on the project.

All is Going Smoothly (Stage 3: Norming)

The team has now been working together for nearly 3 months. There is definitely a sense of teamwork among the group. There are few arguments and disagreements that can't be resolved among the team. They support each other on the project - problem solving issues, making decisions as a team, sharing information and ensuring that the ground rules put in place for the team are followed.

Additionally, the team members are helping each other to grow and develop their skills. For example, Ameya has worked closely with Sarah to teach her many of the skills he has learned in database design and development and she has been able to take the lead on accomplishing some of the components of their aspect of the project.

Overall, the team members are becoming friends. They enjoy each other's company - both while working on the project and after hours via communicating on email, via instant messaging, on Twitter, or over the telephone.

Significant Progress is Made! (Stage 4: Performing)

The team is now considered a "high performing team." It wasn't easy getting to this stage but they made it! They are working effectively as a group - supporting each other and relying on the group as a whole to make decisions on the project. They can brainstorm effectively to solve problems and are highly motivated to reach the end goal as a group. When there is conflict on the team - such as a disagreement on how to go about accomplishing a task - the group is able to work it out on their own without relying on the team leader to intervene and make decisions for them. The more junior members - Donna and Sarah - have really developed their skills with the support and help of the others. They have taken on leadership roles for some components of the project.

Sandra checks in with the team - praising them for their hard work and their progress. The team celebrates the milestones reached along the way. When necessary, Sandra provides a link from the team to the executives for decisions that need to come from higher up or when additional support is needed.

The project is on time and within budget. Milestones are being met - some are even ahead of schedule. The team is pleased with how well the project is going along, as is Sandra and the executives of the organization.

Time to Wrap Up (Stage 5: Adjourning)

The project has ended. It was a huge success! The internal customer is pleased and there is definitely an improvement in how the company supports its clients. It has been a great 8 months working together with some ups and downs of course. Each of the individuals on the project will be moving to other projects within the organization, but no one is going to be on the same project. They will miss working with each other but have vowed to remain friends and keep in touch on a personal level - hopefully to work together again soon!

The team has gotten together in the New York office to discuss the project, including documenting best practices and discussing what worked effectively and what they would improve upon given the chance to do it again. Sandra has taken the team out to dinner. They are joined by the project sponsor and some other executives who are extremely pleased with the end result.

The End!

Source:

https://www.projectsmart.co.uk/the-five-stages-of-team-development-a-case-study.php



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3.3 Balance theory of group formation

Theodore Newcomb (Rodrigues & Newcomb 1980; Newcomb, 1978) suggested that people are attracted to others on the basis of sharing similar attitudes and values relating to subjects such as work, marriage, lifestyle, politics, religion and authority. Once formed, people then attempt to maintain balance within those relationships of the attraction, common attitudes and values.

Consider the situation where your best friend dislikes someone you love. In this situation there is an imbalance as either the ones you love should also be loved by your best friend, or conversely the ones you dislike should also be disliked by your best friend.

In this situation, the imbalance will naturally lead to a change of attitudes. You may conclude that your best friend is not your best friend after all, or you may conclude that you don’t love the person as you thought you did. The resultant change in attitude will then restore balance in your relationship.

Balance theory concludes that where tensions arise between or within people they will attempt to reduce those tensions through either:

Self-persuasion; or

By trying to persuade others

So, if we feel ‘out of balance’ we are motivated to restore a position of balance.

Note that balance does not need to reflect only positive emotions – two people who share mutual dislike represents a state of balance as equally as two people who share mutual attraction. An imbalance would occur if one party liked the other when the other party disliked the first party.

Balance theory and Tuckman

Balance theory can be applied to Tuckman by considering where attitudes change and imbalances are eliminated.

The journey from ‘form’ to ‘perform’ sees differences and conflicts removed and accepted rules and roles established through negotiation and persuasion in the storming and norming phases.

By the time we reach ‘perform’ stage, balance has been achieved with mutual recognition of skills and roles, and interpersonal relationships with accepted modes of communication established.



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4. EFFECTIVE AND INEFFECTIVE TEAMS

4.1 Characteristics of effective and ineffective teams

An objective of a team manager should be to create an effective team. He needs to understand what makes an effective team, and why a team might be ineffective, so that he can assess the effectiveness of his own team.

Many writers on the theory of business management and organization have suggested what the characteristics of effective and ineffective teams are. Some of these characteristics are shown in Exhibit below:

Effective work teams Ineffective work teams

Success. An effective team is one that is successful at achieving its goals or objectives.

Lack of success. An ineffective team fails to achieve its objectives or goals.

Teams that are only partially successful are likely to be ineffective in some ways.

Focus. An effective team is aware of its goals and objectives, and keeps these in mind all the time. They use their time and resources well.

Lack of focus. An ineffective team sometimes loses sight of its objectives. Team members might allocate their time badly.

Collective decision-making. An effective team reaches decisions through discussion and agreement.

Decision-making is dominated by one team member. In an ineffective team, one person (or perhaps a very small group) makes the decisions, by imposing his views on the rest of the team. Other team members might disagree, but do not speak out.

Good communication. In an effective team, the team members communicate with each other well, and keep each other well-informed. They are also truthful in communicating with each other.

Lack of communication. In an ineffective team, communication might be poor. Team members might not be fully truthful with each other.

Collaboration. In an effective team, the members will cooperate and collaborate. Each team member will do whatever is necessary to get the job done, even if this means doing work that is unfamiliar and outside their normal experience.

Doing your own job. In an ineffective team, the team members do not give each other support. Each team member does his own job and is unwilling to do anything that is not specified in the job description.

Positive conflict. Positive conflict occurs when there is disagreement, but the team members are willing to discuss their differences fully, and reach a suitable agreement about what the solution should be. Some conflicts are inevitable in teams: the way that the conflicts are resolved is important.

Failure to resolve differences. In an ineffective team, the team members fail to resolve their differences properly. Disagreements are not discussed fully. They are often resolved by an ineffective compromise that ‘patches up’ the differences of opinion, and the compromise might not last for long.

Mutual support. In an effective team, each team member is aware of the contributions provided by the other team members.

Lack of mutual support. In an ineffective team, the team members are not properly aware of what the other team members have achieved.

Team spirit. In an effective team, team members identify themselves with the team and feel a part of the team. Team spirit and team loyalty is strong.

Lack of team spirit. Members of an ineffective team do not have any team spirit and simply get on with their job.



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4.2 Evaluating team performance: success in achieving objectives

One of the tasks of management is to evaluate the performance of the workgroup for which they are responsible. Performance evaluation is linked to planning, coordination and control. Measuring and evaluating team performance is also necessary when there is a system of team incentives and rewards.

There are various ways of measuring and evaluating performance. Three basic approaches to performance measurement are measurements of:

economy

efficiency, and

effectiveness.

Economy is measured by the success of the team or workgroup in controlling its costs. Cost control may be judged by comparing actual spending with the planned spending limit. (There is often a spending limit for each workgroup or team in the annual budget for the organization.)

Efficiency (or productivity) measures the amount of resources used for the tasks that have been achieved. For example, the productivity of a workgroup may be measured by the output per member of the team during a period of time, or the output per labor hour. Alternatively, productivity may be measured by the sales achieved per member of the team (for example, annual sales revenue per member of the sales team).

Effectiveness measures success in achieving goals and targets. Targets may be short-term or long-term. They may also be:

quantitative – measuring the volume of work achieved or the size of results

qualitative – measuring output in terms of quality (percentage of rejected items, level of customer satisfaction, and so on)

timescale for achievement – whether a particular task is completed before a target date for completion.

Team performance may also be measured in other ways, such as the level of job satisfaction amongst team members. However, it is doubtful whether a clear link exists between work satisfaction and achieving the goals of the organization.

4.3 Tools and techniques for building team effectiveness

The effectiveness of a team can be improved through good team management. A team leader should try to build a team by appointing individuals to fulfil all the necessary roles, and he should give it time to develop.

The manager should keep the team aware of its objectives and targets. He should encourage openness in communication and a full discussion of problems and ideas. As the team develops, he should allow the team to reach its own collective decisions.

Team management process

The are some basic and essential principles for team management, as elaborated below:

1. Define team principles: Teams perform better when they have identified principles and priorities for the team, developed consensus on these priorities and principles, accepted them and abided by them. The principles and priorities may be both task dependent or generic. The generic principles and priorities may include honesty within team, owning and abiding by the decisions made in the team, respecting all team members, amongst others.

2. Clarify roles and responsibilities: Clarifying roles, responsibilities and expectations from individual team members help individuals to focus on their goals and tasks and give their best to achieve them. It also avoids unnecessary confusion, duplication of tasks and incomplete tasks due to miscommunication.

3. Define key tasks and requirements: The key tasks to be performed must be explicitly defined, along with each step towards completion of the tasks. The standard operating procedures may help enhance the quality and efficiency of task completion.



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4. Analyze work processes: The quality of the tasks performed by the team should be evaluated, ideally by an independent team, to ensure quality. The use of previously defined quality standards is beneficial for both the task completion and quality assurance teams as it clarifies quality criteria and expectations.

5. Prioritize problems: One of the important tasks for a team is to predict any potential problems or challenges that may arise during task accomplishment and plan/ prepare as how to overcome those. This step is often missed, however, essential for success of a team.

6. Recognize contributions: It is important to recognize contributions and encourage members both during task accomplishment and after the goal has been achieved. It a good practice for a team to take ownership of the success, and appreciate peers and colleagues for a task well done.

7. Motivation and incentives: It might also be possible to improve team effectiveness by offering incentives for the successful achievement of team objectives and targets.

4.4 Group cohesion

Group cohesion describes the strength of the bond uniting the group. When cohesion is strong the group will remain strong and stable and continue to exist. Conversely when cohesion is weak the group may ultimately disband.

Factors that impact group cohesiveness are stated in table below.

Factor Explanation

Size of group Smaller groups tend to display greater cohesion than larger groups

Heterogeneous vs. homogeneous

Homogeneous groups who share common characteristics such as race, gender and religion will typically demonstrate greater cohesion than groups who are more diverse (heterogeneous) sharing fewer common characteristics.

Group success This is arguably a ‘self-fulfilling prophecy’ – the more successful a group the greater the incentive to be part of it and hence the greater the cohesion. The less successful the lower the cohesion.

Barriers to entry and prestige

Human nature means that the more difficult it is to become a member of a group the greater the desire for outsiders to join the group. Subsequently the group becomes prestigious and more cohesive. A good example might be an elite academic institution.

Task cohesion The greater the need for a task to be completed by a group rather than individuals (e.g. a sports team or military operation) the more cohesive the group becomes as members on the whole accept the need to work together to achieve the shared objective.

Rewards and punishment

The availability of reward for membership and/or punishment for leaving can have a bearing on the attractiveness of being part of a group and hence influence group cohesion.

Competition from external groups

A lack of competition from alternative groups can lead to erosion in cohesion as members do not feel any pressure to perform. However, with the emergence of competition, groups typically become more cohesive as their competitive instincts amplify and the desire to defeat a rival drives them on.

Location Groups who enjoy segregation from others will tend to be more cohesive as strong interpersonal communication patterns develop and a sense of visible identify builds.

Leadership style An effective leadership style that matches the skills and personalities of the group can have a significant impact on promoting group cohesion. An ineffective leadership style for that particular group of people is likely to have the opposite effect and erode group cohesion.

Social cohesion Social cohesion is the degree to which group members enjoy each other’s company and how much they like each other. Group cohesion will be highest when members enjoy the social side of being part of the group.



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STICKY NOTES

Team: A team is a group of people using shared resources in order to achieve common goals. Workgroups are groups formed by individuals to perform a common goal or promote similar thoughts and purpose. Work groups can be formal or informal.

The difference between a team and a workgroup is that a team's strength or focus depends on the commonality of their purpose and how the individuals are connected to one another. On the other hand, a group can come from having a large number of people

or a cohesive willingness to carry out a focused action - political reform, for example.

There are two approaches to maximize team performance: Individual approach and Team Approach.

Team roles can be broadly categorized into 3 groups: Doing/Acting, Problem Solving/Thinking and Concern for people,

Belbin has introduced nine roles for a Team subdividing the 3 categories:

Doing/acting (implementer, shaper, completer)

Problem-solvers and thinkers (plant, monitor, specialist)

Showing concern for people (coordinator, team worker, resource investigator)

Tuckman's research identified five stages of Team Development: forming, storming, norming, performing and dorming.

Characteristics of Effective Teams: Achievement of Goals, Focus, Collective Decision-making, Good Communication, Collaboration, Positive Conflict, Mutual Support and Team

Spirit.

Team Management Process has 7 steps for effectiveness: define team principles, clarify roles and responsibilities, define tasks and requirements, analyze work process,

prioritize problems, recognize contributions, motivation and incentives.



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References:

Aritzeta A., Swailes S., & Senior B., (2007). Belbin’s Team Role Model: Development, Validity and Applications for Team Building. Journal of Management Studies, 44:1, 96-118.

Fisher S. G., Hunter T. A., & Macrosson W. D. K., (1998). The structure of Belbin’s team roles. Journal of Occupational and Organizational Psychology, 71, 283-288.

Tuckman B. W., (1965). Developmental Sequence in Small Groups. Psychological Bulletin, 63(6), 384-399.

Bonebright D. A., (2010). 40 years of storming: a historical review of Tuckman’s model of small group development. Human Resource Development International, 13(1), 111-120.

Rodrigues, A., & Newcomb, T. M. (1980). The balance principle: Its current state and its integrative function in social psychology. Revista Interamericana de Psicología, 14(2), 85-136.

Newcomb, T. M. (1978). The acquaintance process: Looking mainly backward. Journal of Personality and Social Psychology, 36(10), 1075-1083.



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CHAPTER 10

NEGOTIATION SKILLS AND

CONFLICT RESOLUTION

_

AT A GLANCE

In a workplace setting, it is imperative that people from different backgrounds and areas of work would come together to complete organizational tasks. This can result in differences of opinions and disputes. Negotiation is a tool people use to settle differences among themselves. It is a process by which compromise or agreement is reached while avoiding argument and disagreements. Negotiation is a fundamental element in the social life of organizations.

It is important for a manager to have knowledge about the formal process of negotiation and the different techniques that could be used to reach a successful consensus after negotiations end. There are a number of skills that would be helpful during several stages of the negotiations process. such as:

active listening,

analysis,

problem solving, etc.

communication and interpersonal skills There are a number of negotiation techniques that can be used which are divided into:

High risk techniques, and

Low risk techniques

Conflict resolution and negotiation are topics that are closely related. People into a conflict when the another person opposite to us has a different mind-set. It usually common in a workplace to face differences of opinion. Conflict can arise between two or more employees, superiors or customers and suppliers.

A manager should study about the sources of conflict to understand the reasons behind them. Conflict could mainly arise in the form of:

Intra-individual conflict

Inter-group conflict

IN THIS CHAPTER

AT A GLANCE

SPOTLIGHT

1. What is negotiation?

2. Conflict Resolution

STICKY NOTES

References

CHAPTER 10: NEGOTIATION SKILLS AND CONFLICT RESOLUTION CAF 4: BMBS


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Conflicts can present numerous benefits in a workplace despite having many challenges. For example, it can help in bringing about radical changes to alter existing power structures and deep-rooted and outdated approaches which may have led to complacency in the organization. But on the other hand it could lead to resistance, demotivated teams which can in turn bring about disturbance in operations or undermining of quality of products s and services which could affect business targets especially in factories and assembly line setups.

Functional (constructive) conflict is a conflict which supports the goals of the group and helps to improve its performance.

The classic process of conflict resolution is:

Set the scene

Gather information

Agree on the problem

Brainstorm possible solutions

Negotiate a solution

CAF 4: BMBS CHAPTER 10: NEGOTIATION SKILLS AND CONFLICT RESOLUTION


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1. WHAT IS NEGOTIATION?

1.1 Negotiation

Negotiation can be defined as a basic means of getting what you want from others. It is back-and-forth communication designed to reach an agreement when you and the other side have some interests that are shared and others that are opposed (Fisher et al, 1991).

Negotiation happens commonly in daily life. Almost all people are engaged in negotiation at some point in their daily lives, both during personal or professional interactions. Customers negotiate with sellers, governments negotiate contracts and political agreements with other countries, labor unions negotiate with administration. Even though the situation, setting and circumstances differ, the basic elements of negotiation remain similar.

Negotiation is a method by which people settle differences. It is a process by which compromise or agreement is reached while avoiding argument and dispute.

Each party in the negotiation has something that the other party needs or wants (Patterson, 2005).

1.2 Stages in the negotiation process

The various stages of the negotiation process are:

Preparation and Planning: This includes understanding the nature of the conflict and perceptions of the parties to the conflict. The outcome of the negotiation process from the most favorable to the minimum acceptable is determined. The weaknesses and strengths of the other party are identified and a strategy is developed for conducting the negotiations.

Definition of Ground Rules: This includes agreement on procedures for conducting the negotiations, including names of the participants, venue and time limits, if any, for conduct and conclusion of the negotiations.

Clarification and Justification: After both the parties have presented their initial viewpoints, each party offers its explanations, clarifications, and justifications. This exchange of information brings into focus the importance of the issues to the parties and rationale for fairness of their respective positions.

Bargaining and Problem Solving: The parties make concessions and yield from their initial positions in order to reach consensus and move towards a mutually acceptable agreement

Closure and Agreement: The consensus reached between the parties is stated in a formal agreement and include a procedure for its implementation and monitoring.

Distributive bargaining and integrative bargaining

Distributive bargaining and integrative bargaining are the two approaches typically adopted in the negotiation process. These approaches differ in their bargaining characteristics as follows:

Goals: In the distributive bargaining approach, each party strives to obtain the maximum advantage for its own self-interest, whereas in an integrative bargaining approach both the parties attempt to expand the scope and size of the benefits to be able to maximize them to their mutual advantage.

Motivation: In the distributive bargaining approach, the motivation for each party is to adopt a win-lose position in which the gain of one party is at the expense of the other, but in the integrative bargaining approach the motivation is that both the parties should emerge as winners in a win-win situation.

Focus: In the distributive bargaining approach the focus is to assume a particular position and stick to it to obtain the opponent’s agreement to a specific target or as close to it as possible, whereas in an integrative bargaining approach the focus is on understanding the respective positions of each of the parties and try to reach a mutually acceptable outcome.

Interests: In a distributive bargaining approach, the interests of each of the parties are opposite, whereas in an integrative bargaining approach there is a convergence of interests of both the parties to arrive at a mutually acceptable position.



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Sharing of Information: In a distributive bargaining approach, each party withholds information to out maneuver the other party, but in an integrative bargaining approach both the parties share information to satisfy the interests of each of the parties.

Duration of Relationship: In the distributive bargaining approach, the duration of relationship between the parties is of a short-term nature, whereas in the integrative bargaining approach the engagement or relationship between the parties is of a long-term character.

1.3 Skills of an effective negotiator

The ability to negotiate requires a blend of interpersonal and communication skills used together to achieve the desired result.

Following are the traits of an effective negotiator:

Skill Explanation

Problem analysis Negotiators must have the skills to analyse a problem to determine the interests of each stakeholder in the negotiation.

The negotiator will understand the issue, who the interested parties are and the outcome goals.

Active listening Effective negotiators are able to listen actively to other parties during the debate, reading their body language as well as listening to the verbal communication.

This will help the negotiator identify areas for compromise during the meeting.

The most effective negotiators will spend more time listening rather than talking.

Verbal communication

Negotiators must be able to communicate effectively and clearly to the other parties during a negotiation. Clear statement of the case will help avoid misunderstandings.

The negotiator must state their reasoning as well as their desired outcome.

Problem solving The skilled negotiator has the ability to visualise solutions to problems rather than focus purely on the ultimate goal without understanding how to achieve it.

Interpersonal skills

Effective negotiators are able to maintain good working relationships with those involved in the negotiation process.

This requires patience and the ability to persuade others without using manipulation and maintaining a positive atmosphere during a difficult negotiation.

Preparation Thorough preparation before entering a bargaining meeting is critical to the success of the negotiation.

Preparation should include determining goals, identifying areas for compromise and alternatives to the stated goal.

Furthermore, skilled negotiators study the history of the relationship between the parties and past negotiations to identify areas of agreement and common goals.

Past precedents and outcomes often set the tone for current negotiations when researched effectively.

Emotional control Whilst negotiations on contentious issues can be frustrating it is vital that the negotiator has the ability to keep in control of their emotions during the negotiation.



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Skill Explanation

Collaboration and teamwork

The most effective negotiation tends to be collaborative rather than hostile with a ‘them against us’ mentality.

It is ultimately of mutual benefit for those involved in a negotiation on both sides of the issue to work together to reach the agreeable solution.

Decision making ability

Good negotiators are typically leaders with the ability to act decisively during a negotiation and actually make a decision. This approach can lead to a quicker and more efficient agreement of a compromise to end the stalemate.

Ethics and reliability

Demonstrating the highest ethical integrity and reliatiliby promotes a trusting environment for negotiations.

It is important that both sides trust the other party to honour their promises and agreements and that the negotiator has the skills to execute promises after the bargaining ends.

Good posture and body language

Look confident and stay focused.

Don’t be in a hurry to close the deal

Aim for a ‘win-win’ situation where all negotiators achieve at least some of their objectives.

Avoiding deadlock

Serious efforts are required to avoid deadlocks in negotiations. Quite often the deadlock appears when the negotiation process is in an advanced stage. Some of the measures that a skilled negotiator may adopt to avoid a deadlock in the final stages of negotiations include:

Offer a comprehensive and convincing explanation of the reasons why the concessions sought by the other party cannot be accepted.

Express willingness to review the matter or concessions or benefits sought by the other party, in the future.

Attempt to close the deal by offering some benefits in the future by giving additional concessions or benefits in an ancillary contract while finalizing the main contract.

State discreetly the consequences of failure to reach an agreement and emphasize the advantages and benefits of concluding the deal without any further loss of time.

1.4 High risk and low risk negotiation techniques

In addition to the skills discussed above that a successful negotiator needs to demonstrate they will also adopt a number of tactics during the negotiation, some of which will carry greater risk than others. Some of the more common tactics are mentioned below.

High risk negotiation techniques

‘Take it or leave it’1– This is a highly aggressive strategy that may produce anger or frustration in the other parties. Furthermore, an apparent unwillingness to compromise may mean that no deal is reached and both parties lose out.

1 This strategy is named after Lemuel Boulware-a former vice-president of General Electric



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Waiting until the final moment – This technique involves using stalling tactics knowing the deadline is near. At the last minute a reasonable but favorable offer is then made, leaving the counterparty little choice but to accept. However, this may then verge on the ‘take it or leave it’ approach and risk losing all.

Losing the temper – This is actually a sign of weakness and can be interpreted as unprofessional and potentially manipulative. It is more likely to lead counterparties to harden their position.

‘The chicken’ – This is a slang term that describes combining a bluff with a threat of action – for example a strike or lock-out. However, this high-risk tactic increases the probability of deadlock. Furthermore, if the bluff is called but the threat is not realized then power and credibility are lost.

Low risk negotiation techniques

Inflated opening position – By inflating the opening position this may illicit a counter-offer that may show the opponents position or elevate the point of compromise. However, care must be taken not to be seen to be unethical or untrustworthy.

Silence – This can be effective and shift the power to the one being silent. Be careful not to provoke anger or frustrate the other parties.

Flattery – Subtle flattery and charm can help put the other party at ease. Ensure you are respectful though and consider differing perspectives due to age, sex and cultural factors.

Oh poor me –This approach could lead to sympathy although may as easily bring out the aggressive and killer instinct nature in the other party.

Address the easy points first – this can help build trust and momentum towards the more challenging issues.

Example

In your capacity as manager of legal department of XYZ Limited you have been assigned to lead a team of two officers to conduct negotiations with the representatives of the workers union. The union is demanding a substantial increase in salary and fringe benefits.

The stages of the negotiation process for conduct of meaningful negotiations between the officials of XYZ Limited and the representatives of the workers union are as follows:

i. Preparation and planning: This would include understanding the nature of demand for increase in salary and fringe benefits and perceptions of the representatives of the union. The outcome of the negotiation process and its impact on the company should also be ascertained. The weaknesses and strengths of the workers union should be considered and a strategy should be developed for conducting the negotiations.

ii. Definition of ground rules: This would include agreement on procedures for conducting the negotiations, names of the union representatives, venue and timings for conduct and conclusion of the negotiations.

iii. Clarification and justification: After the union representatives have presented the list of their demand, XYZ officials would offer explanations of the company’s viewpoints. This would bring into focus the impact of the demands on the company in terms of the practices followed by similar organizations.

iv. Bargaining and Problem Solving: The union representatives would be persuaded to yield from their initial position in order to reach consensus and move towards a mutually acceptable agreement.

v. Closure and Agreement: The consensus reached with the workers representatives would be stated in a formal agreement including the procedure for its implementation.



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1.5 Conciliation and arbitration

At times parties to a conflict are unable to resolve their differences through direct negotiations. In such situations, they may induct a third party to help them to find a solution.

There are four basic third party roles: mediator, arbitrator, conciliator and consultant.

Role Explanation

Mediator A mediator is a neutral third party who facilitates a negotiated solution through reasoning and persuasion and by offering suggestions for pursuing different alternatives.

Mediators are generally used in labour management negotiations and in civil court disputes.

Mediation is most effective in situations where there is a moderate level of conflict.

Mediators must be perceived to be neutral and not coercive.

Arbitrator An Arbitrator is a third party with the authority to dictate an agreement.

Arbitration can be voluntary, i.e. requested by the parties, or compulsory i.e. forced on the parties by law or contract.

Arbitration is more likely than not to lead to a settlement.

Conciliator A Conciliator is a trusted third party who provides an informal communication link between the opposing parties.

The roles of conciliator and mediator may overlap at times.

In practice, a conciliator also engages in establishing the facts, interpreting messages and persuading the disputing parties to reach agreement.

Consultant A Consultant is a skilled and impartial third party who attempts to facilitate problem-solving through communication and analysis as he has specialized knowledge of the intricacies of the conflict.

Instead of putting forward specific solutions, the consultant helps the parties to develop mutual understanding and work with each other.

This approach therefore, has a long-term focus to build new and positive perceptions and attitudes between the conflicting parties.



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2. CONFLICT RESOLUTION

2.1 Sources of conflict

Intra-individual conflict

Conflict among staff can adversely affect the quality of service or product as personal effectiveness is eroded and staff lose their motivation.

Some of the more common drivers of individual conflict might include:

Blaming colleagues for past mistakes

Employees feeling that favoritism has been shown by management in allocating work to employees

General disagreements – for example about the method for performing a particular task

Non-congruent goals between personal goals and commercial goals

Rivalry for scarce resource (e.g. bonus pool or hours) between management

Poor personal hygiene

The perception that someone is working harder, or longer hours, than other employees and not being fairly rewarded

Personality clashes – for example one employee being free thinking, creative, spontaneous and unorganized compared to another who is more scientific, logical and organized

Inappropriate dress for work – e.g. culturally or religiously unacceptable, unprofessional or simply inappropriate for some other reason

Inter-group conflict

Inter-group rivalry and conflict can arise through poor leadership and lack of effective management. Some of the more common factors include:

Lack of Leadership – Leadership which is not able to articulate the goals and objectives and provide a clear-cut sense of direction to the staff would create confusion within an organization.

Lack of Coordination – Lack of proper control and coordination could result in loss of focus creating conflict and affecting the performance of a team.

Unrealistic Targets –The targets may be unrealistic and over ambitious and not attainable. This may adversely affect the motivation and morale of staff and create internal conflicts which would adversely affect the quality of services rendered to the customers.

Role Ambiguity – A team may be faced with problems of conflicting roles, lack of clear job descriptions, or overlapping of responsibilities.

Incompatibility among the Staff – When a team is resourced from multiple groups they may struggle to work in a team environment due to their internal differences arising from strong group affiliations and loyalties.

Biased attitude of management – Staff in one team or of a particular category of staff may be treated in a biased manner affecting terms of rewards, perquisites, job designations and working conditions.

Lack of Recognition – The management may not give due recognition or reward to those employees who may have made significant contribution towards achievement of the company’s goals in the past. They may, therefore, not be fully motivated.

Other factors that can be responsible for creating group conflicts in business include:

Interpersonal Differences/Group Politics – The inherent differences in personality, temperament and outlook of individuals are often the main sources of interpersonal and group conflicts. Discerning managers recognize these differences and make efforts to create a conducive environment in which people with interpersonal differences are able to work together as cohesive groups.



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Differences in Values and Beliefs – Values and beliefs of individuals are shaped by their upbringing and life experiences and therefore differ considerably. Values such as honesty, affiliations, beliefs and competitiveness are often deep rooted in individuals and may at times result in discrimination, consciously or subconsciously, in their group interactions which can cause conflicts.

Differences in Allocation of Resources – Groups have different interests in the allocation of resources such as salaries and perquisites, deployment of staff and equipment and allotment of space. Each group has its own goals and perceptions of favoritism in allocation of resources which gives rise to inter-group conflicts. Incompatibility of goals and objectives and allocation of resources thus give rise to inter- group conflicts.

Task Interdependence – In business organizations, various groups have to share outputs and inputs from different departments/divisions for completion of their allocated tasks. Inability to adhere to time schedules, quality of workmanship and allocation of responsibilities can result in group conflicts.

Ambiguous Roles – Uncertainty among the different departments about their specific roles and authorities and responsibilities in the organization can give rise to inter-group conflicts. The ambiguities are often the result of weaknesses in organization structures.

Communication Problems – Absence of an environment of open communications and withholding of important information from others can affect the performance and undermine the trust between groups and can give rise to group conflicts.

2.2 Benefits and challenges of conflicts

Conflict can result in both positive and negative results for the business.

Benefits

Some of the benefits that can arise from conflict include:

Helping to bring about radical changes to alter existing power structures and entrenched attitudes which have led to complacency in the organization.

Encourages innovation and testing of new ideas and eliminate groupthink attitude.

Brings emotions in the open and therefore result in release of internal hostile feelings.

Results in constructive levels of tension within the organization and motivates individuals to work to their optimum levels.

Open communication and improved dialogue

Improved customer service and product design

Long-standing problems are brought to the surface and resolved

Sound viewpoints are clarified and accepted

Interest and creativity is stimulated

It generates an environment where employees can test their capabilities

Challenges

Some of the challenges that can arise from conflict include:

Demotivated staff

Breakdown in communication

Reduced quality of product or service

Disciplinary action

Internally-focused destructive decisions are taken rather than customer-focused decisions

Creation of an environment of distrust and suspicion

Concentration of efforts within narrow group interests

Undermining of team effort



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2.3 Functional (constructive) conflict

Functional (constructive) conflict is a conflict which supports the goals of the group and helps to improve its performance.

In functional conflicts, it is important to separate personalities of the parties from the issues which cause or create conflicts. The individuals involved in functional conflict do not take disagreements personally but in a spirit of harmony to examine and understand all the aspects which have a bearing on the issue to achieve optimal results for achieving the goals of the group.

Functional conflict can contribute to improving the performance in an organization by:

Evaluating the current position objectively and promoting reassessment of group activities and goals as an on-going process.

Stimulating creativity and innovation among the participants who express their opinions and views in an open and constructive manner.

Creating initiatives for changes in an orderly manner without causing disruptions or affecting the smooth coordination of activities of the organization.

Releasing of pent-up tensions of the participants because the individuals feel that their opinions have received consideration.

Providing opportunities to dissidents to self-evaluate their own analytical abilities and the expertise they bring on important issues.

Introducing a culture in which groupthink or ‘rubber-stamping’ of decisions taken by the comparatively more articulate or dominating personalities is discouraged.

2.4 Dealing with conflict

Thomas and Kilmann in their book “The Joy of having created the TKI (Thomas-Kilmann Instrument) Assessment” (2015) stated no two individuals have exactly the same expectations and desires, conflicts are a natural part of our interaction with others. Keeping this view as a base, identified five key styles of dealing with conflict. The styles vary in the degree of assertiveness and cooperativeness.

They argued that people typically have a preferred conflict resolution style although the situation may be the overriding factor in determining the most effective resolution style to adopt.

The styles are:

Competitive

Value of own issue/goal: High

Value of relationship: Low

Goal: I win, you lose

People take a firm stance and know what they want. Typically they are in a position of power. A useful style in an emergency when a decision needs to be made quickly or when the decision is unpopular.

This can however leave people feeling unsatisfied and resentful if used in less urgent situations.

Compromising

Value of own issue/goal: Medium

Value of relationship: Medium

Goal: I win some, you win some

This style attempts to find a ‘win-win’ solution that will keep everyone at least partially satisfied. All parties need to relinquish something.

This approach is useful when the cost of conflict is greater than the cost of compromise. Also when a deadline looms and the parties are in deadlock.



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Avoiding

Value of own issue/goal: Low

Value of relationship: Low

Goal: I lose, you lose

People naturally tend towards this style to avoid conflict altogether. Tactics might include delegating controversial decisions, not wanting to hurt anyone’s feelings and accepting default decisions.

May be appropriate where win-win is impossible, the issue is trivial, or when others are in a better position to solve the problem. However, in many situations this is seen as an ineffective and weak approach to take.

Collaborative

Value of own issue/goal: High

Value of relationship: High

Goal: I win, you win

The collaborative style aims for win-win and often relies on strong leadership who acknowledges that everyone is important.

Collaboration is necessary when there is a need to bring together a variety of viewpoints to achieve the optimum solution, where there is a history of prior conflicts in the group, or when the situation is simply too important to trade-off.

Accommodating

Value of own issue/goal: Low

Value relationship: High

Goal: I lose, you win

This style indicates a focus on satisfying the needs of the counterparty ahead of one’s own needs. The risk is that the accommodator can be persuaded to surrender a position even when surrender is unwarranted.

Accommodating is appropriate when the issues are more important to the other party, when peace is more valuable than ‘winning’, or when a favor is owed. However, the approach is unlikely to consistently deliver the most favorable outcomes.

2.5 The conflict resolution process

The classic approach to resolving conflict is:

Set the scene –Use active listening (restating, paraphrasing, summarizing) to ensure all parties understand the position and perceptions of others. Establish any ground-rules and agree the resolution process that will be taken.

Gather information – Establish the underlying interests, needs and concerns. Also aim to understand the motivations and goals and how your actions might impact them.

Ensure to focus on business issues and remain objective. Leave personalities out of the discussion.

Agree on the problem – Varying underlying needs, goals and interests can mean that people perceive problems very differently. It is important to establish exactly what the problem is that needs fixing.

Brainstorm possible solutions – Whilst an effective facilitator will have performed this step in advance of the resolution discussion, participative brainstorming will help ensure that all parties feel they inputted into finding a solution. This will significantly improve buy-in and commitment to any resolution that is agreed.

Negotiate a solution – Once both sides have better understood the position of the other it may well be that a mutually satisfactory solution has appeared.



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Example

Group conflicts are inevitable part of organizational interactions and are often viewed as indicative of negative connotations. However, there may be some positive outcomes of the conflicts also.

Under following situations, conflict may be beneficial for an organization:

i. Existing systems are challenged, which often brings about positive change based on new realities / improves customer service and product quality.

ii. Innovation and new ideas are encouraged / Group think attitude is eliminated.

iii. Constructive level of tension is established / Competitive atmosphere is created. It encourages individuals to put their best efforts.

iv. Emotions are opened out resulting in the release of long standing hostile feelings / Open communication and improved dialogue / Long standing problem is brought to surface and resolved

Example

The management of Unified Textile Limited (UTL) is concerned over increased conflicts between HR Director and Production Head. The situation has recently escalated when HR Director refused to approve overtime payment for certain production staff. HR Director is of the view that production department is not being efficiently managed and overtime can be reduced significantly by appropriate assignment of duties. Production Head believes that his department is always dealt with heavy-handed dominating approach by HR Director and his request for recruitment of additional staff is still pending HR’s approval.

The following steps may be taken by the CEO of UTL to resolve the conflict between HR Head and Production Head:

i. Collect information to understand the situation.

ii. Encourage both parties to understand each other’s view point.

iii. Try to bring about a consensus on what the problem is.

iv. Establish ground rules for resolution of the dispute.

v. Discuss possible solutions in a joint session.

vi. Encourage a mutually acceptable solution.

vii. In case dispute exists on one or more issues, use my judgement to resolve such issues.

Example

Star Engineering Limited (SEL) is a successful manufacturer of a wide range of equipment for use by industrial enterprises. A culture of congenial and friendly relations prevails in the organization. However, the management also encourages positive conflict as a means to achieve its business objectives.

Positive conflict may have contributed to the success of SEL in the following manners:

i. Better quality of the decisions – Positive conflict ensures thorough consideration of all aspects of the issues and viewpoints of the participants to arrive at better quality decisions.

ii. Creativity and Innovation – Positive conflict encourages creation of new ideas and innovations and better designs of products to meet the requirements of the customers and also help to achieve the objectives of SEL.

iii. Provide a forum for discussions of problems and release of tensions – Positive conflict encourages individuals to give vent to their tensions and inner feeling on any issues. Objective discussions enable individuals to reassess their own positions/viewpoints /perceptions.



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iv. Encourage an environment of change and self-evaluation – Positive conflict increases the performance levels as compared to an environment in which everybody accepts the present methods and levels of efficiencies.

Practice Question

Managers recognize that inter-group conflict is a phenomenon of group behavior. Briefly explain the following approaches which managers may adopt in resolving inter-group conflicts: (i) Collaborative (ii) Compromising (iii) Avoiding

Solution

Collaborative approach – The manager attempts to find an integrative solution through open discussions and seeks to merge the viewpoints of the groups having different perspectives. The consensus facilitates in reaching an optimum solution to the conflict by clarifying their differences and arriving towards a win-win solution.

Compromising approach – The manager seeks a middle ground and asks all the parties to give up something of value to keep them at least partially satisfied. Resolution of the conflict is important as prolonged conflict may lead to disruption of work and failure to meet deadlines.

Avoiding approach – The manager withdraws from or suppresses the conflict and emphasizes the common interests of the parties to continue to perform their activities. Tactics in the avoiding approach may include delegating of controversial decisions and refraining from hurting the feelings of the parties. In this approach, the manager may seek to obtain more information or gain time to resolve the problem.



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STICKY NOTES

Negotiation: formal process that occurs when parties are trying to find a mutually acceptable solution to a complex conflict

• Negotiation process: Preparation and Planning Definition of Ground Rules Clarification and Justification Bargaining and Problem Solving

Closure and Agreement

Skills of an effective negotiator: Problem analysis, Active listening, Verbal communication, Problem-solving, Interpersonal skills, Preparation,

Emotional control, Teamwork, Decision-making, ethics, confidence & patience.

Sources of Conflict: Intra-individual and Intergroup. Other reasons for conflict may be due to differences in values and beliefs, differences in resource

allocation, Ambiguous tasks, communication problems and task interdependence, etc.

Dealing with conflict: competitive, compromising, avoiding, collaborative & accommodating.

Conflict resolution process: set the scene gather information agree on the problem

brainstorm possible Solutions negotiate a solution



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References:

Kilmann, R. H., and Thomas, K. W., (1977). Developing a Forced-Choice Measure of Conflict-Handling Behavior: The "MODE" Instrument. Educational and Psychological Measurement, Vol. 37, No. 2, pages 309-325.

Fisher, R., Ury, W., and Patton, B., (1991). Getting to Yes: Negotiating Agreement Without Giving In. 2nd edition, Penguin Books, New York.

Lewicki, R. J., Minton, J. W. and Saunders, D. M., (1999). Negotiation. 3rd edition, Irwin McGraw-Hill, Boston, 1999.

Thompson, L., (1998). The Mind and Heart of the Negotiator. Prentice Hall, Upper Saddle River, New Jersey.

Thomas and Kilmann “The Joy of having Created the TKI (Thomas-Kilmann Instrument) Assessment” (2015)



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CHAPTER 11

MANAGEMENT

INFORMATION SYSTEMS

AT A GLANCE

A computer is an electronic device that processes data, converting it A computer is an electronic device that processes data, converting it into information that is useful to people. A computer system comprises four key components: Input, processing, output and storage. A computer network consists of two or more computing devices that are connected in order to share the resources and the information. Types of networks include: LAN, WAN and MAN.

Information technology (IT) is the use of computers to store, retrieve, transmit, and manipulate data, or information, often in the context of a business or other enterprise.

Information system (IS) is the collection of technical and human resources that provide the storage, computing, distribution and communication for the information required by all or some part of an enterprise.

There are three types of IS including: operational, technical and Strategic.

Following are the IT based systems:

- Transaction processing systems:

basic business systems that serve the operational level of the organization. Types include: batch processing and real-time processing.

- Management Information Systems:

computerized database of financial information organized and programmed to produce regular reports on operations for every level of management.

- Decision support systems:

a set of related computer programs and the data required to assist with analysis and decision-making within an organization.

- Executive information systems: a computer based system that serves the information that is needed by the various top executives.

IN THIS CHAPTER

AT A GLANCE

SPOTLIGHT

1. General concepts of information technology

2. Specific IT-Based Systems

STICKY NOTES

References

CHAPTER 11: MANAGEMENT INFORMATION SYSTEMS CAF 4: BMBS


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- Expert system:

is a computer program which uses databases of expert knowledge to offer advice or make decisions in such areas as medical diagnosis, processing a loan application and on a social level.

- Financial reporting systems:

is the process of producing statements that disclose an organization's financial status to management, investors and the government.

- Order processing and inventory control systems:

provides tracking data on orders and inventory at every step.

- Inventory Control System:

manages all aspects of a company's inventories: purchasing, shipping, receiving, tracking, warehousing and storage, turnover, and reordering.

- Personnel systems:

are mechanisms that facilitate the promotion of business and strategy and the growth of individuals and organizations. They are also important in that they represent what management expects from employees.

- Integrated IT systems:

combine different functions together in order to work as one entity.

- Enterprise resource planning (ERP):

is a software that allows an organization to use a system of integrated applications to manage the business and

automate many back office functions related to technology, services and human resources

CAF 4: BMBS CHAPTER 11: MANAGEMENT INFORMATION SYSTEMS


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1. GENERAL SYSTEM CONCEPTS OF INFORMATION TECHNOLOGY

1.1 Computer systems

Definition

A computer is an electronic device that processes data, converting it into information that is useful to people. Any computer, regardless of its type, is controlled by programmed instructions, which gives the machine a purpose and tell it what to do.

The following types of computers in this category are:

Desktop computers

Work stations

Note book computers

Tablet computers

Hand held computers

Smart phones

Super computers

Mainframe

Mini computers

A computer system comprises four key components:

Input devices

Definition

An input device is any hardware device that sends data to a computer, allowing you to interact with and control it. Input devices accept data and instructions from the user or from another computer system.

Common input devices

Keyboard Accepts letters, numbers, and commands from the user.

Mouse Lets you select options from on-screen menu; you use a mouse by moving it across a flat surface and pressing its buttons.

Trackball & Touchpad Variations of the mouse that enable you to draw or point on the screen.

Joystick Swiveling lever mounted on a stationary base that is well suited for playing video games.

Scanner Can copy a printed page of text or a graphic into the computer's memory.

Digital camera Can record still images, which you can view and edit on the Computer.

Input Output Central processing unit (CPU)

Storage



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Microphone Enables you to input your voice or music as data.

Touch sensitive screens

The screens are sensitive to pressure; a user interacts with the computer by touching pictures or words on the screen.

Optical mark reader(OMR)

OMR involves marking a pre-printed form with a pen or typed line (or cross) in an appropriate box. The card is then read by an OMR device which senses the mark in each box.

Uses can include national lottery entry forms and ballot voting slips.

Voice data entry (VTE) Many computers can now accept voice input via a microphone and voice data entry (VDE) software.

One particularly useful application is found in language translation programs that support simultaneous translation. Another example might be in a smartphone where you can enter commands orally rather than by typing.

Bar codes & QR(Quick response) codes

Barcodes are the groups of black and white marks with variable spacing and thickness found on product labels such as those at the supermarket. Each code is unique and can be read automatically by an electronic barcode reader. This keeps inventory movement up to date and also converts into a customer invoice instantly.

QR codes are matrix or two-dimensional barcodes. Originally popular in the automotive industry they have seen a recent rise in popularity elsewhere given their fast readability and greater storage capacity than standard barcodes.

Digital cameras Used in many situations whether it is for the development of marketing material, recording of crime scenes by the police, or by an auditor on a year-end inventory count.

Example:

Advantages/ benefits and limitations/shortcomings of input devices/methods other than keyboard through which information/data can be entered are given below:

Input devices/ methods

Advantages/ benefits

Limitations/ shortcomings

(i) Touch-sensitive screens and touch pads

Saves space

Integrated graphical interfaces are user-friendly

Difficult for accurate data entry

Labor intensive and slow

Relatively expensive

(ii) Magnetic ink character recognition (MICR)

High speed

High degree of accuracy

Documents are expensive to produce

Risk of damaged documents

(iii) Optical mark readers (OMR)

High speed

High degree of accuracy

Documents are expensive to produce

(iv) Scanners/optical character recognition (OCR)

Handles inputs of graphics and texts

Quick results

Slow to scan multiple images

Unable to scan large files

Not suitable for low quality input images



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Input devices/ methods

Advantages/ benefits

Limitations/ shortcomings

(v) Mouse and trackball devices

Easy to use

Not expensive

Slow

Prone to errors

(vi) Voice data entry (VDE)

Convenient application

Simple to use

Questionable accuracy

Affected by external interference (noise)

(vii) Barcodes and EPOS Accurate

Instant application

Not possible to read damaged barcodes

Incompatible in cases of different types of barcodes

(viii) Digital cameras Versatile application

Accurate

Instant results

High quality image editing

High quality images are expensive and difficult to manage.

(ix) Facial recognition system

Crime fighting tool

Prevent voters/time fraud

Identity theft / privacy concerns

Not always accurate / in case of 2D-systems accuracy may be affected by glasses, long hairs, etc.

(x) Joystick Easy to use

Comfortable/less taxing on hands

Limited compatibility

Applicable to only few types of games

(xi) Light pen Accurate

Suitable for artistic and design work

Saves space

Awkward positioning / Long usage may cause wrist strain

Specialized monitors are required

Expensive to deploy on a large scale

Practice Question

Match the devices with their possible uses:

S. No Devices Uses

(i) Monitor Grading of MCQs

(ii) Barcodes Operating ATM machines

(iii) Optical mark reading Recording of crime scene by police

(iv) Magnetic ink character recognition (MICR)

Visual output from computer for text and graphics

(v) Digital cameras Secure processing of cheques and deposit slips

(vi) Touch pads Efficient inventory management



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Solution

The possible of uses of devices has been matched as follows:

S. No. Devices Uses

(i) Monitor Visual output from computer for text and graphics

(ii) Barcodes Efficient inventory management

(iii) Optical mark reading Grading of MCQs

(iv) Magnetic ink character recognition (MICR)

Secure processing of cheques and deposit slips

(v) Digital cameras Recording of crime scene by police

(vi) Touch pads Operating ATM machines

Output devices

Definition

An output device is any peripheral that receives data from a computer, usually for display, projection, or physical reproduction.

Common output devices

Monitor Monitor displays the video and graphics information generated by the computer.

Types of Monitor:

Cathode Ray Tube (CRT)

Liquid Crystal Display (LCD)

Light emitting Diode (LED)

Printer External hardware device responsible for taking computer data and generating a hard copy of that data commonly used to print text, images, and photos.

Types of Printer:

Impact Printer

Non-Impact Printer

Speakers A hardware device connected to a computer's sound card that outputs sounds generated by the computer. Speakers can be used for various sounds meant to alert the user, as well as music and spoken text

Headphones They are similar to speakers, except they are worn on the ears so only one person can hear the output at a time.

Projector An output device that can take the display of a computer screen and project a large version of it onto a flat surface.

Projectors are often used in meetings and presentations so that everyone in the room can view the presentation.

Storage devices

Definition

A storage device is used in the computers to store the data which provides one of the core functions of the modern computer.



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Types of storage

Primary storage

Also known as main memory/internal memory.

Main memory is directly or indirectly connected to the central processing unit via a memory bus. It temporarily stores data which is directly accessible by the CPU. The CPU continuously reads instructions stored there and executes them as required. It is much smaller in size as it has no mechanical parts but much quicker to access.

It is volatile in nature and is erased when power is turned off.

Example:

RAM

ROM

Cache

Internal storage allows the data and applications to be loaded very rapidly into memory.

Secondary storage

It is used for data not currently being processed but may need to be accessed at later stage. Computer usually uses its input/output channels to access secondary storage and transfers the desired data using intermediate area in primary storage.

It takes longer to access as data is not directly accessible by CPU.

It is the external memory and is non-volatile as data remains intact even when powered off.

Example:

Hard disk

Cloud Drive

USB

A number of these devices are portable and therefore data can be easily moved from one location to another

Tertiary storage

Typically, it involves a robotic mechanism which will mount (insert) and dismount removable mass storage media into a storage device.

It is a comprehensive computer storage system that is usually very slow, so it is usually used to archive data that is not accessed frequently. This is primarily useful for extraordinarily large data stores, accessed without human operators.

Examples:

Magnetic tape

Optical disc

Off-line storage or Disconnected storage

It is a computer data storage on a medium or a device that is not under the control of a processing unit.

It is used to increase general information security. It must be inserted or connected by a human operator before a computer can access it again.

Examples:

Storage of data on portable devices at:

Offsite locations

Offline webserver

Offline portable devices

In case of a disaster, e.g. fire which may destroy the original data, a remotely located medium which is unaffected can enable disaster recovery



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1.2 Computer hardware

Definition

The mechanical devices that make up the computer are called hardware. Hardware is any part of your computer that has a physical structure. A computer’s hardware consists of interconnected electronic devices that you can use to control the computer’s operation, input, and output.

Example

Keyboard, mouse, printer, disc drives etc.

1.3 Computer networks

Definition

A computer network consists of two or more computing devices that are connected in order to share the components of the network (its resources) and the information stored there.

Networks are used to:

Facilitate communication via email, video conferencing, instant messaging, etc.

Enable multiple users to share a single hardware device like a printer or scanner

Enable file sharing across the network

Allow for the sharing of software or operating programs on remote systems

Make information easier to access and maintain among network users

Definition: System architecture

The term system architecture refers to the way in which the components of a computer system such as printers, PCs and storage devices are linked together and how they interact.

A centralized architecture involves all processing being performed on a single central computer.

Decentralized architectures spread the processing power throughout the organization at several different locations. This is typical of the modern workplace given the significant processing power of modern PCs.

Typical network configurations include star networks, ring networks, bus networks and tree networks.

Client-server computing

Client-server computing describes one level of interaction found between computers in systems architecture.

A server is a machine that is dedicated to providing a particular function or service requested by a client within a network system.

Servers can range in power from ‘top-end’ super servers, capable of driving thousands of network users, to ‘low-end’ servers which are typically a powerful personal computer (PC). Different types of servers might include file servers, network servers, print servers, e-mail servers and fax servers.

File servers are used to manage the data files that are accessible to users of the network. All the shared data files for the system are held on a file server, or are accessible through a file server.

Network servers are used to route messages from terminals and other equipment in the network to other parts of the network. In other words, network servers manage and control the routing of messages within computer networks.



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Network configuration and design

Configuration Refers to the way in which computers are linked together, organization may just have a single “stand alone” computer that can only be used by one person at a time.

Organization may also have hundreds or thousands of computers, all able to be used simultaneously and to communicate with each other.

Centralized processing

Having all the data/information processing done in a central place. It is more secure as all the data and processing is handled at single place. But if the central system is down the whole system crashes.

Decentralized processing

Having all the data/information processing carried out at several different locations. Although data may be transmitted between the computers periodically, it implies limited daily communications. Contrast with distributed computing and centralized processing.

Multi-user and distributed system

A multi-user operating system allows multiple users to access a computer system. Time sharing system can be classified as multi-user systems as they enable a multiple user access to a computer through the sharing of time.

A distributed operating system manages a group of independent computers and makes them appear to be a single computer.

LAN – Local area network

A local area network (LAN) is a group of computers and associated devices that share a common communications line or wireless link to a server. Typically, a LAN encompasses computers and peripherals connected to a server within a distinct geographic area such as an office or a commercial establishment. Computers and other mobile devices use a LAN connection to share resources such as a printer or network storage.

Example:

in a small-office network or several hundred users in a larger office. LAN networking comprises cables, switches, routers and other components that let users connect to internal servers, websites and other LANs via wide area networks.

WAN – Wide area network

A wide area network (WAN) is a network that exists over a large-scale geographical area. A WAN connects different smaller networks, including local area networks (LANs) and metro area networks (MANs). This ensures that computers and users in one location can communicate with computers and users in other locations. WAN implementation can be done either with the help of the public transmission system or a private network.

Example:

Internet is the example of WAN.

A WAN covers a large geographical area. Most WANs are made from several LANs connected together.

Differences between LAN and WAN

LAN WAN

It covers small geographic area such as an office, school or a group of buildings.

It covers a broad area, i.e., it communicates across regional, metropolitan or national boundaries over long distances.

Due to its localized nature, the speed of transfer of data is high.

Data transfer speed is slow as the information/data has to travel greater distances.

Typically owned, controlled and managed by one person or a single organization.

It exists under collective or distributed ownership and management covering long distances.



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LAN WAN

It offers advantages of low set-up and maintenance costs.

Set-up costs are typically higher due to the need to connect to remote areas. Due to wider coverage, it is difficult and expensive to maintain the system.

Relatively low rate of data transmission errors. The data transmission error rate is relatively higher than LAN.

Metropolitan area network (MAN)

A metropolitan area network (MAN) is a network that interconnects users with computer resources in a geographic area or region larger than that covered by even a large local area network (LAN) but smaller than the area covered by a wide area network (WAN). The term is applied to the interconnection of networks in a city into a single larger network (which may then also offer efficient connection to a wide area network). It is also used to mean the interconnection of several local area networks by bridging them with backbone lines.

The latter usage is also sometimes referred to as a campus network. Example include: radio station within city

1.4 Information technology and information systems

Definition: Information technology

Information technology (IT) is the use of computers to store, retrieve, transmit, and manipulate data, or information, often in the context of a business or other enterprise.

Many companies now have IT departments for managing the computers, networks, and other technical areas of their businesses. Its jobs include computer programming, network administration, computer engineering, web development, technical support and many other related occupations.

Definition: Information systems

Information system (IS) is the collection of technical and human resources that provide the storage, computing, distribution and communication for the information required by all or some part of an enterprise.

System objectives

Generate a reasonable financial return for shareholder

Maintain a high market share

Increase productivity annually

Offer an up-to-date product range of high quality and reliability

Acknowledge social responsibilities

Grow and survive autonomously

Control systems

A control system is a system of devices or set of devices, that manages commands, directs or regulates the behavior of other devices or systems to achieve desired results.

Types of Control systems

An open-loop control system takes input under the consideration and doesn’t react on the feedback to obtain the output. This is why it is also called a non-feedback control system. There are no disturbances or variations in this system and works on fix conditions.

A closed loop system is also referred as a feedback control system. These systems record the output instead of input and modify it according to the need. It generates preferred condition of the output as compared to the original one. It doesn’t encounter any external or internal disturbances.

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https://en.wikipedia.org/wiki/Information

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Key differences between the two control systems are as follows:

Open loop control systems Closed loop control systems

They do not have in built control. The control comes from outside of the system

They do have in built control. Actual output is compared with the planned output and appropriate corrective action is taken.

Following are the elements of a control system:

Input, process, output

Sensor- measures the output from the system and determines a new value

Comparator- compares the new value with that of the standard

Standard- the predetermined limit set within the system

Effector- effects the feedback into the system which can be positive or negative

Examples of open loop control systems

Pharmaceutical industry – if a license for a particular drug is withdrawn by the

government (external influence/control), the pharmaceutical company will be

forced to stop production of that drug.

Automatic washing machine – runs according to preset time irrespective of whether

washing is complete or not.

Traffic light signal – changes signals on preset timing irrespective of traffic flow.

Examples of closed loop control systems

Budgetary control systems through which results are monitored, deviations from

plans are identified and corrective actions are taken.

The Market Research department of a manufacturing company may monitor the

demand and profitability of product lines and advise management to cease, decrease

or increase production of certain product lines.

Stock or credit control system where the system automatically checks responses.

Air conditioner functions depending upon the temperature of the room.

1.5 Types of information system

Information systems assist employees across all levels of the business as follows:

Strategic

Tactical

Operational



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Operational information

Operation information is concerned with daily routine tasks and activities. Taking orders, paying bills, selling products, clearing cheques etc. are the daily activities performed in different organizations. Organizations need information system to streamline these daily routine tasks. The information system used in this level of management is termed as Transaction Processing Systems (TPS).

TPS is used to collect data that are produced on daily basis from the routine works. TPS has user interface, i.e., form with fields to input data to the system. TPS enables to store and arrange data in the format which can be processed by other information system easily. More than 90% of data for the information systems are collected by TPS.

Reports required:

daily report of sales

daily report of customer complaints

daily report of absent employees

daily report of fuel consumed

Example:

Electronic Point of Sale terminals used in Superstores.

The advantages of an Electronic Point of Sales system for a supermarket which has a high rate of daily sales turnover are as follows:

i. the transactions are processed instantly with savings in time and effort

ii. the system reduces risks of human errors

iii. the system generates up-to-date record of balances of inventories on a continuous basis

iv. the system allows reading of debit and credit cards for instant payments of goods by customers

v. the system supports signals from mobile phones to identify customers for making payments

vi. the system provides for accurate reporting of sales.

Tactical information

Tactical information is concerned with short term decisions. Middle level managers have to make several short term decisions, such as: increasing sales, allocating salesperson, deciding how many products to keep in store etc.

Management Information System (MIS) and Decision Support System (DSS) are the two information systems used in the middle level management. MIS takes data from TPS and produces fixed reports like how many products sold last week, how much deposits were made in last month etc. The information provided by MIS can be used to make short term decisions.

Information required at this level includes:

data of competitors participating in the tenders for a major contract

data of performance of suppliers of raw materials

data of slow moving inventory items for offering discounts

data of resourcefulness for appointment of new dealers



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Example:

Suppose six salespersons are allocated in the front desk, they can serve 78 customers in one hour. From the MIS report of the last week it is seen that there are 89 customers coming to store per hour. That means customers are not getting efficient service, they have to wait for service. So, how many salespersons are required to serve up to 89 customers per hour. This type of decision can be made easily with the help of DSS.

Strategic information

Strategic information is concerned with the long term decisions like increasing capacity of the organization, launching new product etc.

Executive Support System (ESS) is an information system used in the top level management. ESS takes data from MIS and DSS. Using that data enables top executive managers to make long term decisions, keeping track of changes in the environment.

Information required at this level includes:

data about the size and composition of the market

data of competitors

data about availability of highly skilled workers/employees

data about availability of key raw material inputs

Example:

Suppose MIS report showed that existing human resource is not able to serve customers properly, there is a requirement of new employees with better knowledge and skill level to handle existing flow of customers. This problem can be solved by top level managers with the help of ESS, which will enable managers to calculate how much funds have to be allocated for new required human resources, what type of human resources are required, how many new employees are required.

1.6 Role of information systems

Information system is generally used in five ways:

Planning Usually interpreted as a process to develop a strategy to achieve desired objectives, to solve problems and to facilitate action.

Controlling Process of comparing the actual performance with the set standards of the company to ensure that activities are performed according to the plans and if not then taking corrective action.

Recording transactions

Record transactions throughout a business such as sales, purchases, errors, returns, customer complaints and quality control inspections, deposits and cash movements.

Performance measurement

Process of collecting, analyzing and/or reporting information regarding the performance of an individual, group, organization, system or component.

Decision making

Involves the selection of a course of action from among two or more possible alternatives in order to arrive at a solution for a given problem.



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2. SPECIFIC IT-BASED SYSTEMS

2.1 Transaction processing systems

Definition

Transaction processing systems (TPS) are the basic business systems that serve the operational level of the organization. A transaction processing system is a computerized system that performs and records the daily routine transactions necessary to conduct business.

Explanation

Data entry

Data entry describes any of the techniques used to initially record data into a system. A few examples of data include:

Sales information

Purchase information

New employee details

Updates to existing employee details

Data could be entered manually by a person keying the information in. Some systems are more advanced and support technology-based data entry such as optical character recognition or magnetic ink character recognition.

TPS are of the following types:

batch processing

real-time online processing:

Batch processing

Batch processing is the collection of a group of similar transactions over a period of time, and their processing at a single time as a batch.

This type of processing has been associated with mainframe centralized type systems. The method has been reduced in importance with the development of more advanced types of processing. It still remains an important form of processing as many systems used now, are based on batch processed systems.

Advantages

Relatively easy to develop

Less processing power is required as deals with similar updates

Checks in place as part of the systems run

Less hardware required, therefore cheaper.

Disadvantages

Often delays between when a transaction is made and when the master file is updated and the output generated.

Management information is often incomplete due to out of date data.

Often master files kept off line therefore access may not always be available.



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Real time online processing

Online processing

Online processing refers to equipment that operates under control of the central computer but typically from a different location through some kind of terminal.

Examples include:

An ATM machine for a bank – the ATM is linked to the bank’s central computer system and updates the user’s account immediately

Flight booking system at a travel agency

If a service is no longer online (available) it is described as being offline. When a system is offline its services are no longer available.

You may have experienced something similar when browsing the internet. For example when you have a Wi-Fi connection your web-browser is considered to be ‘online’ and will update. However, if there is no Wi-Fi signal and hence no connection the browser is considered to be ‘offline’. In this case you will not be able to download any new information to the computer.

Real time processing

Real time processing is the processing of individual transactions as they occur without the need for batching them together.

This type of processing allows the user to update the master files immediately.

Advantages

Information more up to date therefore providing better management information.

Increased ability for data to be online.

Disadvantages

Increase in expense as the system becomes more complex to run and to develop.

Increased hardware capacity which increases costs.

Key differences between batch processing and real time processing:

Batch processing Real time processing

It involves processing of similar transactions (carried out over a period of time) at a single time as a batch

It involves processing of individual transactions as they occur without waiting to batch them together.

It is inexpensive and easy to develop as less hardware is needed.

It is expensive and more complex to run and develop because more hardware capacity is needed.

It lacks timely updation and information available to management is often incomplete

It is updated instantaneously and provides updated information to the management at all times.

Finance and accounting TPS

The major functions would typically include: budgeting, the nominal ledger, invoicing and management accounting

The system might be split into a number of modules including: nominal ledger, accounts payable, accounts receivable, budgeting, treasury management.

Human resources TPS

The major functions would typically include: personnel records, benefits, salaries, labor relations, training

The system might be split into a number of modules including: payroll, employee records, employee benefits, career path systems (appraisal)



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Example

The transaction system of Daraz.com deals with the part of the business where customers purchases goods, they control the entire trading operation of the business and are responsible for recording sales, keeping track of inventory, stock order and delivery schedule.

Example

Differences between batch processing and online processing from the standpoints of:

i. processing of transactions

ii. updating of files and

iii. management information

Batch processing Online processing

Processing of transactions

Data is accumulated into batches and processed periodically.

Data is processed as soon as it is generated.

Updating of files Data is updated after the batch has been processed.

Data is updated simultaneously with the processing of the transaction.

Management information

Updated management information is not readily available.

Updated management information is available instantly.

2.2 Management Information Systems

Definition

A management information system (MIS) is a computerized database of financial information organized and programmed in such a way that it produces regular reports on operations for every level of management in a company.

Explanation

The term MIS also designates a specific category of information systems serving management-level functions. MIS serve the management level of the organization, providing managers with reports and often online access to the organization’s current performance and historical records. Typically, MIS are oriented almost exclusively to internal, not environmental or external events. MIS primarily serve the functions of planning, controlling, and decision making at the management level. Generally, they depend on underlying transaction processing systems for their data.

It is usually also possible to obtain special reports from the system easily. The main purpose of the MIS is to give managers feedback about their own performance; top management can monitor the company as a whole. Information displayed by the MIS typically shows "actual" data over against "planned" results and results from a year before; thus it measures progress against goals.

Data Entry Transaction

Processing System

Document and

Report Generation

Database

Maintenance

Inquiry

processing



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Example

Amazon uses system to track the purchase history of customers and provide recommendation on similar products. They are integrated with human resources, logistics, accounting. Once an order is placed, the system automatically searches the nearest distribution center for the delivery, this helped the company reduce customer contact by 50% due to reduction of delivery mistakes. Amazon is also testing drones to deliver items; drones have potential of being faster and cheaper than delivery cost.

2.3 Decision support systems

Definition

A set of related computer programs and the data required to assist with analysis and decision-making within an organization.

Explanation

Decision-support systems (DSS) also serve the management level of the organization. DSS helps managers make decisions that are unique, rapidly changing, and not easily specified in advance. They address problems where the procedure for arriving at a solution may not be fully predefined in advance. Although DSS use internal information from TPS and MIS, they often bring in information from external sources, such as current stock prices or product prices of competitors.

Clearly, by design, DSS have more analytical power than other systems. They use a variety of models to analyze data, or they condense large amounts of data into a form in which they can be analyzed by decision makers. DSS are designed so that users can work with them directly; these systems explicitly include user-friendly software. DSS are interactive; the user can change assumptions, ask new questions, and include new data.

Characteristics of a typical DSS

i. They assist tactical level managers in making intelligent guesses

ii. They apply formula and equations to facilitate mathematical modeling

iii. They enable real-time-systems to solve problems through queries and modeling

iv. They use inputs and variables for the model through the user interface

v. They contain a natural language interpreter for querying the system

vi. They integrate user interface with data management and modeling software from the key components

vii. They create spreadsheet packages as tools for the development of a decision support system.

MIS

Teaching

Methodology

Better

Tourists

Information

Better Banking

System

Transportation

Planning

Office

Automation

Increased

Production



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Example

American metals company that exists primarily to carry bulk cargoes of coal, oil, ores, and finished products for its parent company. The firm owns some vessels, charters others and bids for shipping contracts in the open market to carry general cargo. A voyage-estimating system calculates financial and technical voyage details. Financial calculations include ship/time costs (fuel, labor, capital), freight rates for various types of cargo, and port expenses. Technical details include a myriad of factors, such as ship cargo capacity, speed, port distances, fuel and water consumption, and loading patterns (location of cargo for different ports).

2.4 Executive information systems

Definition

Executive information system (EIS) is ‘a computer based system that serves the information that is needed by the various top executives. It provides very rapid access to the timely information and also offers the direct access to the different management reports.

Explanation

Senior managers use executive support systems (EIS) to help them make decisions. EIS serves the strategic level of the organization. They address non-routine decisions requiring judgment, evaluation, and insight because there is no agreed-on procedure for arriving at a solution.

EIS is designed to incorporate data about external events, such as new tax laws or competitors, but they also draw summarized information from internal MIS and DSS. They filter, compress, and track critical data, displaying the data of greatest importance to senior managers. For example, the CEO of Leiner Health Products, the largest manufacturer of private-label vitamins and supplements in the United States, has an EIS that provides on his desktop a minute-to-minute view of the firm’s financial performance as measured by working capital, accounts receivable, accounts payable, cash flow, and inventory.

Example

Sutter Home uses digital dashboard 5 as its EIS. The dashboard uses mostly external data, including information from internet. This software organizes the information in order to help executives make decisions based on trends in market place. This information includes data of competitors, with the help of this system output Sutter home determines marketing complains, investment plan etc.

In-House

Proprietary

Database

Processing

Models

Data Knowledge

Database

External and

Internal

Environment

DSS

Processing by manager using knowledge and experience

Quality Decision



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2.5 Expert system

Definition

An expert system is a computer program which uses databases of expert knowledge to offer advice or make decisions in such areas as medical diagnosis, processing a loan application and on a social level.

Explanation

The major components of an expert system are:

i. Knowledge base: It is a database of human experience, scenarios and detail information about the subjects, gathered from various resources.

ii. Inference rules: These are set of logical judgements applied to the knowledge base each time a user describes a situation to the expert system.

iii. User interface: It permits the end user to describe the problem or goal.

The expert system is developed to solve complex problems in a particular domain, at a level of extra ordinary human intelligence and expertise. It contains high quality knowledge which is required to exhibit intelligence, typically designed to provide capabilities similar to those of a human expert, it can be used to drive vehicles, provide financial forecasts or do things that human experts do.

In order to have a successful expert system, certain essentials are required:

a subject area which can be suitably defined;

the problem cannot be solved through conventional transaction processing system.

an expert who can provide the knowledge;

users who know what they want and how they want to use it;

a knowledge engineer who can translate the expertise into facts and rules for the system.

A short but useful glossary of technical terms which may be encountered in the world of expert systems is included.

The advantages of an expert system are as follows:

i. It enables individuals who lack expertise in any subject to be able to make expert decisions.

ii. It is accurate and offers advice on a consistent basis.

iii. It has flexibility to change input details to explore alternative solutions.

Discussion

Planning

Execution & Control

Tracking

Performance Monitoring

EIS



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iv. It can handle several problems simultaneously through a multi-access system.

v. Staff costs are reduced because less expert staff is required.

vi. It gives the opportunity to capture expertise before it is lost.

vii. Improved allocation of human resources as experts is able to concentrate on more complex issues.

viii. Expert advice is available all the time.

Expert system may bring following benefits for an organization:

Allows non-experts to make expert decisions.

Faster, more accurate and consistent decisions.

Relieved experts who may concentrate on more complex issues.

Reduce staff costs as less number of experts required.

2.6 Financial reporting systems

Definition

Financial reporting is the process of producing statements that disclose an organization's financial status to management, investors and the government. (Abinanti (1996))

Explanation

Financial reporting is a very important statement that shows the financial status or position of the company through Balance Sheet, Profit & loss account etc. This helps the investors to analyze the company for investment. Financial reporting contains reliable and relevant information which are used by multiple stakeholders for various purposes. A sound & robust financial reporting system across industries promotes good competition and also facilitates capital inflows. This in turn helps in economic development.

The finance function is also responsible for controlling a number of areas besides accounting, which affect most or all other functions. These include budgeting, forecasting, processing financial data, reporting financial results, maintaining accounting records.

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Example

DHL a logistics company maintains and manages its firm’s financial records receipts, disbursements, depreciation, payroll to account for the flow of funds in a firm. Finance and accounting share related problems on how to keep track of a firm’s financial assets and fund flows.

2.7 Order Processing

Definition:

An order processing system captures order data from customer service employees or from customers directly, stores the data in a central database and sends order information to the accounting and shipping departments, if applicable. Order processing systems provide tracking data on orders and inventory at every step.

Explanation

Order processing starts with the receipt of an order from a customer. It may be obtained by a salesperson, be telephoned in, or arrive by mail. Regular buyers and sellers are often linked electronically. As the buyer’s inventories become low, an electronic purchase order is generated.

2.8 Inventory Control System

Definition:

An inventory control system is a system with all aspects of managing a company's inventories; purchasing, shipping, receiving, tracking, warehousing and storage, turnover, and reordering.

Explanation

Inventory control is a critical piece of an organization’s operations and bottom line therefore it is too important to leave to human error or antiquated systems. The ultimate goal of your inventory control should be to maximize your organization’s use of inventory.

The characteristics/features of an inventory control system are as follows:

i. The system can report accurately the current inventory level at any time.

ii. A rule should be associated with each item that will trigger a reorder such as minimum inventory level.

iii. The age of the inventory can be tracked. This will assist sales managers in identifying ageing stock and employ tactics to reduce it. This is particularly important with perishable inventory.

Companies

Annual Reports

Users

Auditors

Securities

Commission

Professional

Bodies

Others



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iv. The system should be able to highlight shortages.

v. The system should be able to show individual and total cost of inventory items.

vi. The system should maintain supplier details.

vii. Both inward and outward delivery dates must be maintained to enable the warehouse manager to manage receipts and dispatches of goods.

viii. The location of the inventory should be recorded to ensure it can be found easily and efficiently.

Example:

SavBig has recently been established as a large departmental store. It is in the process of introducing an inventory control system. The functions/characteristics of an inventory control system to be used in a departmental store are as follows:

i. Reporting of existing levels of inventory.

ii. Tracking exact location of inventory.

iii. Triggering a replenishment order specifying the number of units to be reordered as soon as inventory level reaches the defined threshold.

iv. Tracking the age of inventory and ensuring that inventory levels do not build up unnecessarily.

v. Maintaining of suppliers’ data in terms of pricing, lead time, etc.

vi. Maintaining a list of alternate suppliers in the event primary supplier fails to make supply on time. (vii) Managing trends and retrieving key historical data to predict the future inventory needs.

vii. Recording of expected inwards and outwards delivery dates.

viii. Showing individual and total cost of inventory.

2.9 Personnel systems

Definition

Personnel systems are mechanisms that facilitate the promotion of business and strategy and the growth of individuals and organizations. They are also important in that they represent what management expects from employees.

Explanation

Personnel system would include areas such as recruitment and selection, promotion, training and professional development, pay and classification, affirmative action, labor relations, benefits administration, record-keeping, worker’s compensation, civil service, disciplinary procedures, redundancy, staffing needs, personnel management and control, personnel management reporting / personnel management information which are studied in depth when designing the personnel/human resource system.

Typically conduct an overview assessment of the organization's current personnel/human resource operations, and make necessary recommendations as to how it should strengthen its systems. The analysis includes a review of the personnel/human resource department (or operations) as it currently exists; employee relations; a checklist audit of core HR functional areas; potential areas for outsourcing and/or co-sourcing; the HR needs of the municipality as a whole; market analysis, and recommended job descriptions and proposed organizational structure.

Appropriate security around a Personnel Management System is important because it contains significant amount of sensitive and confidential information.



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Example

The personnel system is likely to maintain a file of each employee showing rate of pay, tax code and similar information.

Following information can be obtained from personnel system:

Report on headcounts.

Report of salaries and wages.

Report of employee absences.

Report of age profile of employees.

Report of tenure profile of employees.

Report of employee’s disciplinary record.

2.10 Integrated IT systems

Definition

An integrated system is a system that has combined different functions together in order to work as one entity. (Obrain (2006))

Explanation

An integrated system can be broken down into parts called subsystems, and each such highest-level subsystem can in turn be broken down into a finite number of smaller subsystems. The process can be continued until we reach the first-level subsystems, which are called the elements of the integrated system. The elements either are objectively incapable of subdivision or are regarded by agreement as indivisible. Thus, the subsystem is, on the one hand, itself an integrated system consisting of several elements (lower-level subsystems) and, on the other hand, an element of a higher-level system.

Advantages of integrated systems

Offers a more complete view

Enables better informed decisions

Should ultimately lead to a more efficient operation

Which would lead to greater customer satisfaction and hence profitability

Performance management system

Succession planSalary/

Incentive system



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Disadvantages of integrated systems

Greater risk that if one module fails the whole system could fail

More complex and therefore prone to error

More expensive than standalone systems

May require a greater level of support as the system is likely to need to be bespoke (tailored) specifically to the organization

Example

Daraz.com has powerful systems that can integrate information from many different functional areas and organizational units and coordinate firm activities with those of suppliers and other business partners.

2.11 Enterprise resource planning (ERP)

Definition

Enterprise resource planning (ERP) is software that allows an organization to use a system of integrated applications to manage the business and automate many back office functions related to technology, services and human resources.

Explanation

ERP provides a single information system for organization-wide coordination and integration of key business processes. Information that was previously fragmented in different systems can seamlessly flow throughout the firm so that it can be shared by business processes in manufacturing, accounting, human resources, and other areas. Discrete business processes from sales, production, finance, and logistics can be integrated into company-wide business processes that flow across organizational levels and functions.

The enterprise system collects data from various key business processes in manufacturing and production, finance and accounting, sales and marketing, and human resources and stores the data in a single comprehensive data repository where they can be used by other parts of the business. Managers emerge with more precise and timely information for coordinating the daily operations of the business and information flows.



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Example

The organization receives the order and begins production. The enterprise system stores production information, where it can be accessed by customer service representatives to track the progress of the order through every step of the manufacturing process. Updated sales and production data automatically flow to the accounting department. The system transmits information for calculating the salesperson’s commission to the payroll department. The system also automatically recalculates the company’s balance sheets, accounts receivable and payable ledgers, cost-center accounts, and available cash.

Accounting

Human Resources

Supply Chain

Sales and Marketing

Quality Management



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STICKY NOTES

Information system

General conceptsof information

technology

Input

Output

Storage

Network

LAN

WAN

MAN

Specific It-Based Systems

Information system

Transaction processing

systems

Management information

systems

Decision support systems

Executive information

systems

Specializedinformaion

Expert system

Financial reportingsystems

Order processing and inventory

control systems

Personnelsystems

Integrated IT systems

Enterprise resource system

(ERP)



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References:

O’Brien, J (2006). Management Information Systems – Managing Information Technology in the Internetworked

Enterprise. Boston: Irwin McGraw-Hill.

Laudon, K.,&Laudon, J. (2010). Management information systems: Managing the digital firm. (11th ed.). Upper Saddle

River, NJ: Pearson Prentice Hall.

Bidgoli, Hossein, (2004). The Internet Encyclopedia, Volume 1, John Wiley & Sons, Inc.

Pant, S., Hsu, C., (1995), Strategic Information Systems Planning: A Review, Information Resources Management

Association International Conference, May, Atlanta.

Joshi, Girdhar (2013). Management Information Systems. New Delhi: Oxford University Press. p. 328.

Alavi, M. (1992, March). Revisiting DSS Implementation Research: A Meta-Analysis of the Literature and Suggestions

for Researchers. MIS Quarterly

Alavi,M. & Carlson,P. (1992 Spring). "A Review of MIS Research and Disciplinary Development," Journal of

Management Information Systems,w

Gurbaxani, V. & Whang, S. (1991, January). The Impact of the Information Systems on Organizations and

Markets. Communications of the ACM



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INDEX

a Adair’s 50: 50 rule 208

Adair’s action-centered leadership 207

Adhocracy 99-100

Ageing population 51

Anti-collusion regulations 37

Ashridge model 198

Attitude 141

behavior 143

b Balance theory of group formation 230

Barcodes and EPOS 257

Bargaining power of 64

customers 66

suppliers 66

Batch processing 266

Belbin: team roles 223

Bennis: leaders as enablers and originators 209

Blake and Mouton’s grid 195

Bonuses, cash 181

Bureaucracy 14

Burns and Stalker 96

c Carbon footprint 56

Centralization 92

Change agent 107

Sponsor 107

stakeholders of 107

levers of 108

Models of 110

Client-server computing 260

Company - limited 37

Competition law 36

Competitive

factors 59

rivalry 66

Computer

hardware 260

network 260

systems 255

Conflict:

resolution 244

sources 244

Consequences of change 117

Constructive feedback and motivation 182

Consumer protection 37

Contingency theory of organization structure 96

Contingency theory, leadership 201

Contract law 37

Contrast effects 139

Control systems 262

Co-operatives 73

Corporate culture 122, 126

Cultural web (Schein) 123

Culture: definition 122

d Data entry 266

Data protection and security 36

INDEX CAF 4: BMBS


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Data protection law 35

Deadlock, avoiding 241

Dealing with conflict 246

Decision support systems 264

De-layering 53

Demand and supply 47

Demographic patterns 52

Digital cameras 256

Distributive bargaining 239

Divisional organization 83

Dorming (adjourning) 225

Downsizing 53

Drucker

management theory 20, 173

mission statement 168

e Economic activity: calculation; expenditure

approach 39-40

Economic

cycle 41

policy 45

measures 47

stagnation 43

Efficiency 232

Elastic demand 49

Employment law 34

Enterprise resource planning (ERP) 276

Entrepreneurial organization 82

Environmental scan 31

Equity theory 179

Executive

directors 75

information systems 270

Expectancy theory:

implications 164

Vroom 163

Expert systems 271

Explicit attitudes 142

External

relationships 93

stakeholders 76

Extrinsic rewards 180

f Fayol: principles of management 12

Fiedler’s contingency model 201

File servers 260

Financial reporting systems 272

Fiscal policy 46

Five Forces model (Porter) 64

Foreign exchange rates and international payments

disequilibrium 45

Forming 225

Freedom of contract 37-38

Functional

constructive conflict 246

organization structure 82

g Gemini 4Rs 114

Goal setting 168

Goals 169

Government

economic policy aims 39

policy for demographic change 52

h Halo effect 139

Handy’s best fit approach 206

Health and safety law 35

Heifetz: leadership as an activity 211

CAF 4: BMBS INDEX


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Hersey and Blanchard: situational leadership

theory 203

Herzberg and motivation-hygiene theory

(two-factor theory) 159

Hierarchy of needs:

limitations 158

(Maslow) 155

Hofstede 128

i Implicit attitudes 142

Incentives 181, 233

Incremental change 104

Individual

approaches to work 221

Inelastic demand 49

Inflation 41

implications for the distribution of wealth 42

Information system

types 263

Information technology 262

Input devices 255

Integrated IT systems 254

Integrative bargaining 239

Interest rates: managing 46

Inter-group conflict 244

Internal relationships: centralization versus

decentralization 92

Internal stakeholders 75

International

economic policies 46

payments and foreign currencies 44

payments disequilibrium 44

payments 44

Intra-individual conflict 244

Intrinsic rewards 164

j Job satisfaction 144

Job stress: 146

coping strategies 148

triggers 148

Johnson and Scholes

cultural web 123

Value chain 61

k Kanter 21

Keyboards 255

Kotter (Leadership) 211

l Law of effect 175

Leadership

and adaptive change 212

contingency theories 201

definition 8

qualities 207

style/s 197

trait theories 191

Legal authority 33

Levers of change 108

Lewin:

force field analysis 110

unfreeze, change, re-freeze 111

Likert’s leadership styles 199

Lippitt and White’s leadership styles 192

Lobby groups 38

Local area network (LAN) 261

INDEX CAF 4: BMBS


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m Machine bureaucracy 99

Macroeconomic 39

factors 39

policy 39

Magnetic ink character recognition (MICR) 266

Mainframe 255

Management

by objectives 173

classical and scientific theories 11

definition 2

information systems 268

Management skills: 5

Managing strategic change 108

Maslow: the hierarchy of needs 155

Matrix organization structure 86

Mayo (human relations school) 17

McClelland: motivational needs theory 165

McGregor: Theory X and Theory Y 17

McKinsey’s 7S approach 115

Mechanistic organization 96

Mendelow’s power/interest matrix 79

Microeconomic

factors 47

Mintzberg

five building blocks for organizational

configurations 97

six organizational configurations 98

Mission

statement 168

Missionary organizations 99

Monetary policy 46

Monopolies 37

Monopoly pricing 47

Motivation 153

Motivation-hygiene theory 159

n National economic policies 45

National income growth and inflation 41

Negotiation 239

skills of an effective negotiator 240

process 239

Network servers 260

Networks 260

Non-government organizations 74

Norming 225

Not-for-profit organizations 74

o Off-line storage 259

Online processing 267

Operations Research (Management science

approach) 3

Order processing and inventory control systems 254

Organic organization 97

Organization culture: factors that shape organization

culture 123

Organization type/s: 73-74

(distinguishing features

non-government

business organizations

not-for-profit

public sector)

Organizational

culture 122

justice 179

Ouchi (Theory Z) 18

Output devices 258

Outsourcing 54

CAF 4: BMBS INDEX


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p Paradigm 125

Partnership 74

Perception 135

Perceptual selectivity 137

Performance-related pay 181

Performing 225

Person culture 127

Personal data 35

Personnel systems 274

PEST analysis 30

Physical environment 56

Planned change (or proactive change) 104

Political and legal influence on business 33

Power culture 126

Price elasticity of demand 49

Primary storage (internal memory) 259

Printers 258

Project teams 221

Projection bias 139

Projector 258

Public Limited Company (PLC) 74

Public sector organizations 74

r Reaction to change 106

Real time processing 267

Reinforcement theory 175

Reward system and motivation 180

Rewards: extrinsic 180

intrinsic 180

Role culture 126

s Sale of goods legislation 38

Schein 125

three levels of culture

Scientific management 11

criticisms 12

underlying principles 11

Secondary storage (external memory) 259

Selective perception 139

Self-efficacy 174

Senior managers 75

Sensation 137

Seven S approach (McKinsey’s) 115

Shareholders 75

SMART 169

Social and demographic factors in the environment 51

Sole trader 74

Span of control 90

Stakeholder/s

external 76

internal 75

Standard form contracts 38

Stereotyping 139

Stewart (bureaucracy) 15

Storage devices 258

Storming 225

Stress 146

Supranational bodies 34

SWOT analysis 59

System architecture 260

t Tannenbaum and Schmidt’s leadership

continuum 196

Task culture 127

Taylor (Scientific management) 11-12

INDEX CAF 4: BMBS


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Team/s 217

approaches to work 221

development 225

effective 231

effectiveness: tools and techniques for building

team effectiveness 232

formation 225

ineffective 232

performance: evaluating 232

roles 223

Technostructure 24

Tertiary storage 259

Theory Z (Ouchi) 18

Thomas and Kilmann 246

Threat from

potential entrants 65

substitute products 65

Touch-sensitive screens and touch pads 256

Transaction processing systems 264

Transformational change 104

Triggers for change 104

Tuckman

team development 225

analysis 227

u Unemployment 42

Unemployment types 43

cyclical unemployment 43

frictional unemployment 43

regional unemployment 43

seasonal unemployment 43

structural unemployment 43

technological unemployment 43

transitional unemployment 43

Unplanned change (or reactive change) 104

Urwick: Principles of organizations 14

v Value chain

Johnson and Scholes 61

primary 61

secondary 62

Virtual

company 54

organization 94

Voice date entry (VTE) 256

w Weber (bureaucracy) 14

Wide area network (WAN) 261

Work group/s 122

and a team: difference 220

formal 217

informal 217

Work team: successful 221

Worldwide economic recession 44