E2: Enterprise Management: Managerial Level, Sixth Edition (CIMA Official Learning System)

CIMA Official Learning System

Managerial Level

E2 — Enterprise Management

Ann Norton Jenny Hughes

CIMA Publishing is an imprint of Elsevier Linacre House, Jordan Hill, Oxford OX2 8DP, UK 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA

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Contents

The CIMA Learning System xiii Acknowledgements xiii How to use your CIMA Learning System xiii Guide to the Icons used within this Text xiv Study technique xv Paper E2 — Enterprise Management xvii

1 The Nature of Strategic Management 1 Learning Outcomes 31.1 Introduction to the nature of strategic management 31.2 The concept of strategy 3 1.2.1 Common themes in strategy 41.3 Levels of strategy 41.4 A model of the rational strategy process 6 1.4.1 Mission, objectives and goals 7 1.4.2 The link between mission, goals and objectives 8 1.4.3 The goal structure 9 1.4.4 External environmental and competitive analysis 10 1.4.5 Internal analysis/position audit 12 1.4.6 Corporate appraisal (SWOT) 13 1.4.7 Strategic options and choice 14 1.4.8 Strategy implementation 16 1.4.9 Review and control 161.5 Criticisms of the rational model of strategy formulation 161.6 A formal top-down strategy process 18 1.6.1 Benefi ts of the formal top-down approach to strategy 19 1.6.2 Drawbacks of the formal top-down approach to strategy 201.7 Strategy and small businesses 211.8 Achieving competitive advantage – alternative perspectives:

resource-based view versus the positioning view 23 1.8.1 Competitive advantage and economic theory 23 1.8.2 The positioning approach 23 1.8.3 Resource-based view 24 1.8.4 Principles of resource-based theory 24 1.8.5 The implications of the resource-based view for strategy

development 271.9 Alternative approaches to formulating strategy 28 1.9.1 Emergent strategies 28 1.9.2 Logical incrementalism 29

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NTS 1.10 Stakeholders 31

1.10.1 The infl uence of stakeholders 32 1.10.2 The Mendelow matrix 32 1.10.3 Assessing power of stakeholders 33 1.10.4 Assessing interest of stakeholders 33 1.10.5 Strategies to deal with stakeholders 34 1.10.6 Confl ict between stakeholders 351.11 Meeting the objectives of shareholders 35 1.11.1 Maximisation of shareholder wealth as an objective 36 1.11.2 Competing objectives 36 1.11.3 Resolving competing objectives 371.12 Summary 38

Section A type questions 55

Section B type questions 56

Section A solutions 59

Section B solutions 61

2 The Nature of the Competitive Environment 67 Learning Outcomes 692.1 Introduction 692.2 Environmental impact assessment 692.3 Different stages in environmental analysis 70 2.3.1 Analysing the macro-environment 71 2.3.2 Analysing the micro-environment/industry environment 73 2.3.3 Industry life cycle analysis 78 2.3.4 Illustration of external environmental analysis – Example

of a car manufacturer 78 2.3.5 Evaluation of environmental models 80 2.3.6 Survival and success factors 812.4 Causes of environmental uncertainty 81 2.4.1 Impact of uncertainty 82 2.4.2 Has uncertainty really increased? 832.5 Competitor analysis 83 2.5.1 The importance of competitor analysis 83 2.5.2 Competitor analysis – key concepts 84 2.5.3 Levels of competitors 84 2.5.4 Gathering competitor intelligence 86 2.5.5 Forecasting competitors’ response profi les 882.6 Competitor accounting 89 2.6.1 Evaluation of barriers to entry 89 2.6.2 Estimate competitors’ costs 902.7 The global economic environment 90 2.7.1 The new global economy 912.8 National competitive advantages 93 2.8.1 Porter’s Diamond 93 2.8.2 Demand conditions 93

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TS 2.8.3 Related and supporting industries 94 2.8.4 Factor conditions 94 2.8.5 Firm structure, strategy and rivalry 94 2.8.6 Other events 94 2.8.7 National competitive advantage 94 2.8.8 Losing competitive advantage 95 2.8.9 Porter’s strategic prescriptions 95 2.8.10 Comment on Porter’s Diamond 952.9 Country analysis and political risk 96 2.9.1 Political risk 962.10 Sources of information for environmental analysis 97 2.10.1 Environmental scanning 97 2.10.2 Accessing environmental information 98 2.10.3 Detailed environmental analysis 98 2.10.4 Categorisation of information sources 992.11 Summary 99

Section A type question 101




3 Contemporary Perspectives in Strategy Development 109 Learning Outcome 1113.1 Introduction 1113.2 Internationalisation and globalisation 1123.3 Complex organisation forms 114 3.3.1 Strategic alliances 115 3.3.2 Illustrations of network organisations 1153.4 Theoretical basis of network organisations – transactions cost theory 117 3.4.1 Assest specifi city – an illustration 118 3.4.2 A critique of transactions cost theory 1203.5 Social responsibility and strategic decisions 122 3.5.1 Must social responsibility confl ict with benefi ting

shareholders? 122 3.5.2 An ecological perspective and environmental

responsibilities 124 3.5.3 Shareholder wealth and ethics 125 3.5.4 Implications of ethics for the chartered management

accountant 1273.6 Summary 128





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NTS 4 Understanding Project Management 149

Learning Outcomes 1514.1 Introduction 1514.2 Projects and project management – defi nitions 1524.3 Characteristics of a project 1524.4 The project life cycle 153 4.4.1 The project life-cycle phases 153 4.4.2 An alternative project life cycle – an iterative process 155 4.4.3 Project approaches 155 4.4.4 Other project management frameworks: 4, 5, 7 or 9? 1564.5 The project as a conversion process 158 4.5.1 Inputs 158 4.5.2 Constraints 158 4.5.3 Outputs 159 4.5.4 Mechanisms 1594.6 Strategy and scope 1594.7 Projects and the project manager 159 4.7.1 The roles of the project manager 160 4.7.2 The responsibilities of the project manager 160 4.7.3 Organisation 160 4.7.4 The project manager and project planning 161 4.7.5 The project manager and controlling 1614.8 The skills of the project manager 162 4.8.1 Leadership skills 162 4.8.2 Communication skills 163 4.8.3 Negotiation skills 163 4.8.4 Delegation skills 165 4.8.5 Problem-solving skills 165 4.8.6 Change-management skills 1654.9 Projects and people – project teams 166 4.9.1 Problems of project team-working 166 4.9.2 Unclear team goals and objectives 166 4.9.3 Lack of team structure 167 4.9.4 Lack of defi nition of roles 167 4.9.5 Poor leadership 167 4.9.6 Poor team communication 167 4.9.7 Lack of commitment 168 4.9.8 Project management and team-building 168 4.9.9 Project team meetings 1684.10 Project stakeholders 169 4.10.1 Managing stakeholder expectations 170 4.10.2 Stakeholder confl ict 1714.11 Projects and organisation structures and support 171 4.11.1 Matrix organisations 171 4.11.2 Project offi ce 1734.12 Why some projects fail 173

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TS4.13 Examples of projects 174 4.13.1 One successful project – ongoing 175 4.13.2 One not so successful project 1774.14 Summary 179





5 The Process of Project Management 209 Learning Outcomes 2115.1 Introduction 2115.2 The project management process 2125.3 Project initiation 212 5.3.1 Setting project objectives 212 5.3.2 Identifying project proposals 212 5.3.3 Formation of project proposals 213 5.3.4 Setting project requirements 213 5.3.5 Assessing project feasibility 214 5.3.6 Risk and uncertainty 218 5.3.7 Uncertainty 219 5.3.8 SWOT analysis 219 5.3.9 The project Initiation Document 2215.4 Project planning 222 5.4.1 Detailed project planning 223 5.4.2 Project objective constraints 2265.5 Tools and techniques to aid project planning 227 5.5.1 Work breakdown structure 227 5.5.2 Gantt charts 227 5.5.3 Network analysis 228 5.5.4 Slack or fl oat 231 5.5.5 An alternative method for constructing network diagrams:

activity on node 231 5.5.6 Milestones and control gates 232 5.5.7 Project evaluation and review technique (PERT) 233 5.5.8 Coping with risk and uncertainty 2335.6 Project management (PM) software 234 5.6.1 PM software functions 234 5.6.2 Advantages of using PM software 235 5.6.3 PM software pitfalls 2355.7 Executing or performing the project 2365.8 Monitoring and controlling the project 237 5.8.1 Making effective control decisions 238 5.8.2 Earned value management 239 5.8.3 PRINCE2 methodology 240 5.8.4 Other project management methodologies 241

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NTS 5.9 Project completion and closure 242

5.9.1 Organising project documentation 242 5.9.2 Collection of receipts and making fi nal payments 2425.10 Post-completion review and audit 243 5.10.1 Post-project review meetings 243 5.10.2 Post-completion audit 243 5.10.3 Justifying the cost of post-completion audit 243 5.10.4 Continuous improvement 2445.11 Summary 245





6 Management 289 Learning Outcomes 2916.1 Introduction 2916.2 Classical and contemporary theories of management 291 6.2.1 The Classical School 292 6.2.2 The human relations school 296 6.2.3 Systems theory 297 6.2.4 Contingency theory 298 6.2.5 Peter Drucker: management by objectives (MBO) 300 6.2.6 Contemporary perspectives on organisations 3016.3 Power, authority, responsibility and delegation 302 6.3.1 Power and authority 302 6.3.2 Authority as legitimate power 302 6.3.3 Organisational power 303 6.3.4 Responsibility 304 6.3.5 Delegation 3056.4 Management and the Role of Managers 306 6.4.1 Managers or Leaders 3076.5 Different Perspectives of Leadership 308 6.5.1 Personality, trait or qualities theories of leadership 308 6.5.2 Management styles 309 6.5.3 One best style? 3146.6 Contingency and Situational theories of leadership 314 6.6.1 John Adair action-centred leadership 315 6.6.2 Fiedler 315 6.6.3 Hersey and Blanchard 3166.7 Transformational leaders 3166.8 Entrepreneurs 3176.9 Organisational culture 318 6.9.1 Different levels of culture 320 6.9.2 Models for categorising culture 321 6.9.3 Culture and organisational effectiveness 323

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TS 6.9.4 Culture – The International Dimension 326 6.9.5 Culture and control 3266.10 Managing in different cultures 327 6.10.1 National cultures 327 6.10.2 Other cultural characteristics 328 6.10.3 Changing behaviour 3286.11 Mentoring 3296.12 Summary 330





7 Management of Relationships in the Working Environment 343 Learning Outcomes 3457.1 Introduction 3457.2 The meaning of groups and teams 3457.3 Types of groups 346 7.3.1 Formal groups 346 7.3.2 Informal groups 346 7.3.3 Reference groups 347 7.3.4 Self directed and autonomous groups 3477.4 Effective group performance 347 7.4.1 Formation and development 348 7.4.2 Group cohesiveness 348 7.4.3 Team roles 3497.5 Group dynamics and team performance 350 7.5.1 High-performance teams 3517.6 Problems with groups 3517.7 Communication 353 7.7.1 Oral and written communication 353 7.7.2 The communication process 3547.8 Effective meetings 356 7.8.1 The roles of team members in meetings 357 7.8.2 Problems with meetings 3587.9 Negotiation 359 7.9.1 The aim of negotiation 359 7.9.2 Phases involved in negotiation 359 7.9.3 Negotiation approaches 3607.10 Management of the fi nance function 360 7.10.1 Business Process Outsourcing (BPO) 360 7.10.2 Outsourcing non-core activities 361 7.10.3 Benefi ts of outsourcing 361 7.10.4 Drawbacks of outsourcing 361 7.10.5 Shared service centres (SSC) 362 7.10.6 Benefi ts of shared services 362

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NTS 7.10.7 Embedding fi nance personnel in business and strategic

decision processes 363 7.10.8 Contribution of fi nance to other functions 3637.11 The fi nance function and external stakeholders 363 7.11.1 External reporting 3647.12 Summary 365





8 Control Systems in Organisations 381 Learning Outcomes 3838.1 Introduction 3838.2 The meaning of control 3838.3 A review of management theorists and control 3848.4 Basic control models 3858.5 Types of organisational control 386 8.5.1 Personal centralised control 386 8.5.2 Bureaucratic control 386 8.5.3 Output control 386 8.5.4 Clan or cultural control 3878.6 Objectives of internal control systems 3878.7 Internal control systems 3878.8 Levels of control 388 8.8.1 Strategic control 389 8.8.2 Tactical control 389 8.8.3 Operational control 3908.9 Effective control systems 3908.10 Practical diffi culties with control systems 3908.11 An example of a control system in practice: HR and staff

performance appraisal 391 8.11.1 Strategic level 391 8.11.2 Tactical level – performance appraisal and the

employment contract 3918.12 Health and safety 393 8.12.1 Safety committee and representatives 394 8.12.2 Managing safety 394 8.12.3 Working with contractors 394 8.12.4 Health and safety training 3958.13 The nature of business ethics 396 8.13.1 Factors affecting ethical obligations 397 8.13.2 Developing an ethical organisation 398 8.13.3 Example of an ethical issue 399

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TS8.14 Professional ethics 400 8.14.1 Fundamental principles 400 8.14.2 Conceptual framework 4018.15 Corporate governance 401 8.15.1 What is corporate governance 401 8.15.2 The earliest considerations of corporate governance 402 8.15.3 The combined code principles of corporate governance 404 8.15.4 The benefi ts of corporate governance 4058.16 Summary 406





9 Confl ict and Discipline 421 Learning Outcomes 4239.1 Introduction 4239.2 The nature of confl ict in organizations 423 9.2.1 The symptoms of confl ict 424 9.2.2 Horizontal confl ict 424 9.2.3 Vertical confl ict 427 9.2.4 Handling confl ict 427 9.2.5 Managing intergroup confl ict 429 9.2.6 Industrial relations and confl ict 431 9.2.7 Resolutions of industrial relations confl ict 4329.3 Discipline 434 9.3.1 The meaning of discipline 434 9.3.2 Self-discipline 435 9.3.3 Disciplinary situations 435 9.3.4 Taking disciplinary action 435 9.3.5 Immediacy: Douglas McGregor’s ‘hot stove rule’ 437 9.3.6 Disciplinary procedures 437 9.3.7 ACAS code of practice 4399.4 Grievance procedures 4399.5. Tribunal applications 440 9.5.1 Resolving disputes without a tribunal hearing 4419.6 Dismissal, redundancy and job insecurity 4419.7 Fairness and commitment in the work place 442 9.7.1 Diversity and equal opportunities 446 9.7.2 Working time directives 448 9.7.3 Child care 4489.8 Summary 449



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NTS Section A solutions 457


Preparing for the Examination 465Revision technique 467 Getting down to work 468 Tips for the fi nal revision phase 468Format of the examination 469 Section A type questions 469 Section B type questions 472 Background 475 The World Youth Indoor Games, November 2004 475 Project sponsor 475 Farchester Games Co-ordination Committee (FGCC) 475 Defi nition and objectives of the project 476 Telecommunications and Information Technology 476 Software requirements 476 Project activities 476 Critical project dimensions 477 Project status 478 Section A solutions 481 Section B solutions 490

Exam Q & As 513

Index 515

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The CIMA Learning System

AcknowledgementsEvery effort has been made to contact the holders of copyright material, but if any here have been inadvertently overlooked the publishers will be pleased to make the necessary arrangements at the fi rst opportunity.

How to use your CIMA Learning SystemThis Enterprise Management Learning System has been devised as a resource for students attempting to pass their CIMA exams, and provides:

● a detailed explanation of all syllabus areas;● extensive ‘practical’ materials, including readings from relevant journals;● generous question practice, together with full solutions;● an exam preparation section, complete with exam standard questions and solutions.

This Learning System has been designed with the needs of home-study and distance-learning candidates in mind. Such students require very full coverage of the syllabus topics, and also the facility to undertake extensive question practice. However, the Learning System is also ideal for fully taught courses.

The main body of the text is divided into a number of chapters, each of which is organ-ised on the following pattern:

● Detailed learning outcomes expected after your studies of the chapter are complete. You should assimilate these before beginning detailed work on the chapter, so that you can appreciate where your studies are leading.

● Step-by-step topic coverage. This is the heart of each chapter, containing detailed explana-tory text supported, where appropriate, by worked out examples and exercises. You should work carefully through this section, ensuring that you understand the material being explained and can tackle the examples and exercises successfully. Remember that in many cases knowledge is cumulative: if you fail to digest earlier material thoroughly, you may struggle to understand later chapters.

● Readings and activities. Most chapters are illustrated by more practical elements, such as relevant journal articles or other readings, together with comments and questions designed to stimulate discussion.

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● Question practice. The test of how well you have learned the material is your ability to tackle exam-standard questions. Make a serious attempt at producing your own answers, but at this stage do not be too concerned about attempting the questions in exam condi-tions. In particular, it is more important to absorb the material thoroughly by complet-ing a full solution than to observe the time limits that would apply in the actual exam.

● Solutions. Avoid the temptation merely to ‘audit’ the solutions provided. It is an illusion to think that this provides the same benefi ts as you would gain from a serious attempt of your own. However, if you are struggling to get started on a question, you should read the introductory guidance provided at the beginning of the solution, and then make your own attempt before referring back to the full solution.

Having worked through the chapters, you are ready to begin your fi nal preparations for the examination. The fi nal section of this CIMA Learning System provides you with the guidance you need. It includes the following features:

● A brief guide to revision technique.● A note on the format of the examination. You should know what to expect when you

tackle the real exam, and in particular the number of questions to attempt, which ques-tions are compulsory and which optional, and so on.

● Guidance on how to tackle the examination itself.● A table mapping revision questions to the syllabus learning outcomes allowing you to

quickly identify questions by subject area.● Revision questions. These are of exam standard and should be tackled in exam condi-

tions, especially as regards the time allocation.● Solutions to the revision questions. As before, these indicate the length and the quality

of solution that would be expected of a well-prepared candidate.

If you work conscientiously through this CIMA Learning System according to the guide-lines above, you will be giving yourself an excellent chance of exam success. Good luck with your studies!

Guide to the Icons used within this TextKey term or defi nition

Equation to learn

Exam tip or topic likely to appear in the exam

Exercise

Question

Solution

Comment or Note

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Study techniquePassing exams is partly a matter of intellectual ability, but however accomplished you are in that respect you can improve your chances signifi cantly by the use of appropriate study and revision techniques. In this section we briefl y outline some tips for effective study dur-ing the earlier stages of your approach to the exam. Later in the text we mention some techniques that you will fi nd useful at the revision stage.

PlanningTo begin with, formal planning is essential to get the best return from the time you spend studying. Estimate how much time in total you are going to need for each subject that you face. Remember that you need to allow time for revision as well as for initial study of the material. The amount of notional study time for any subject is the minimum estimated time that students will need to achieve the specifi ed learning outcomes set out earlier in this chapter. This time includes all appropriate learning activities, for example face-to-face tuition, private study, directed home study, learning in the workplace, revision time, and so on. You may fi nd it helpful to read Better Exam Results by Sam Malone, CIMA Publishing, ISBN: 0 7506 6357 X. This book will provide you with proven study techniques. Chapter by chapter it covers the building blocks of successful learning and examination techniques. Check

The notional study time for Enterprise Managerial is 200 hours. Note that the standard amount of notional learning hours attributed to one full-time academic year of approxi-mately 30 weeks is 1200 hours.

By way of example, the notional study time might be made up as follows:

Hours

Face-to-face study: up to 60Personal study: up to 100‘Other’ study – e.g. learning in the workplace, revision, etc.: up to 40

200

Note that all study and learning-time recommendations should be used only as a guideline and are intended as minimum amounts. The amount of time recommended for face-to-face tuition, personal study and/or additional learning will vary according to the type of course undertaken, prior learning of the student, and the pace at which different students learn.

Now split your total time requirement over the weeks between now and the examina-tion. This will give you an idea of how much time you need to devote to study each week. Remember to allow for holidays or other periods during which you will not be able to study (e.g. because of seasonal workloads). With your study material before you, decide which chap-ters you are going to study in each week, and which weeks you will devote to revision and fi nal question practice. Prepare a written schedule summarising the above – and stick to it!

The amount of space allocated to a topic in the study material is not a very good guide as to how long it will take you. Rather, it is essential to know your syllabus. As your course progresses you will become more familiar with how long it takes to cover topics in suffi -cient depth. Your timetable may need to be adapted to allocate enough time for the whole syllabus.

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Tips for effective studying1. Aim to fi nd a quiet and undisturbed location for your study, and plan as far as possible

to use the same period of time each day. Getting into a routine helps to avoid wasting time. Make sure that you have all the materials you need before you begin, so as to minimise interruptions.

2. Store all your materials in one place, so that you do not waste time searching for items around the house. If you have to pack everything away after each study period, keep them in a box, or even a suitcase, which will not be disturbed until the next time.

3. Limit distractions. To make the most effective use of your study periods you should be able to apply total concentration, so turn off the TV, set your phones to message mode, and put up your ‘do not disturb’ sign.

4. Your timetable will tell you which topic to study. However, before diving in and becom-ing engrossed in the fi ner points, make sure you have an overall picture of all the areas that need to be covered by the end of that session. After an hour, allow yourself a short break and move away from your books. With experience, you will learn to assess the pace you need to work at. You should also allow enough time to read relevant articles from newspapers and journals, which will supplement your knowledge and demon-strate a wider perspective.

5. Work carefully through a chapter, making notes as you go. When you have covered a suitable amount of material, vary the pattern by attempting a practice question. Preparing an answer plan is a good habit to get into, while you are both studying and revising, and also in the examination room. It helps to impose a structure on your solu-tions, and avoids rambling. When you have fi nished your attempt, make notes of any mistakes you made, or any areas that you failed to cover or covered only skimpily.

6. Make notes as you study, and discover the techniques that work best for you. Your notes may be in the form of lists, bullet points, diagrams, summaries, ‘mind maps’, or the written word, but remember that you will need to refer back to them at a later date, so they must be intelligible. If you are on a taught course, make sure you highlight any issues you would like to follow up with your lecturer.

7. Organise your paperwork. There are now numerous paper storage systems available to ensure that all your notes, calculations and articles can be effectively fi led and easily retrieved later.

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Paper E2 — Enterprise Management

Syllabus OverviewPaper E2 moves away from the emphasis on functional knowledge within Paper E1 Enterprise Operations, towards an holistic, integrated view of management across the organisation. Building on important concepts in strategic management, this paper devel-ops tools and techniques for identifying the key types of competitive environment. The skills and tools of project management are also addressed. Finally, the paper introduces the skills and tools needed to work with, manage and develop teams. This includes both the legal aspects of managing individuals, as well as the softer elements of negotiation and leadership skills.

Syllabus StructureThe syllabus comprises the following topics and study weightings:

A Strategic Management and Assessing the Competitive Environment

30%

B Project Management 40%C Management of Relationships 30%

Assessment StrategyThere will be a written examination paper of 3 hours, plus 20 minutes of pre-examination question paper reading time. The examination paper will have the following sections:

Section A – 50 marksFive compulsory medium answer questions, each worth 10 marks. Short scenarios may be given, to which some or all questions relate.

Section B – 50 marksOne or two compulsory questions. Short scenarios may be given, to which questions relate.

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Learning Outcomes and Indicative Syllabus ContentE2 – A. Strategic Management and Assessing the Competitive Environment (30%)

Learning Outcomes

ContentLead Component

1. Discuss different competitive environments and key external characteristics of these environments. (4)

(a) Discuss the nature of competitive environments.

(b) Distinguish between different types of competitive environments.

● PEST analysis and its derivatives. (A, B)● The use of stakeholder mapping. (A, B)● Qualitative approaches to competitive analysis. (A, B)● Competitor analysis and competitive strategies (both qualitative and

quantitative tools of competitor analysis will be used). (A, B)● Sources, availability and quality of data for environmental analysis. (A, B)● Porter’s Five Forces model and its use for assessing the external

environment. (A, B)● Porter’s Diamond and its use for assessing the competitive advantage of

nations. (A, B)

2. Discuss important developments in strategic management. (4)

(a) Discuss concepts in established and emergent thinking in strategic management.

(b) Compare and contrast approaches to strategy formulation.

(c) Explain the relationships between different levels of strategy in organisations.

● Perspectives on the strategic management of the fi rm (including transaction cost, resource-based view and ecological perspective). (A)

● Approaches to strategy (e.g. rational, adaptive, emergent, evolutionary or system–based views. (B)

● Levels of strategy (e.g. Corporate, business-level, functional) (Note: candidates are not expected to identify or evaluate options). (C)

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E2 – B. Project Management (40%)

Learning Outcomes


1. Discuss tools and techniques of project management. (4)

(a) Identify a project, a programme and their attributes.

(b) Apply suitable structures and frameworks to projects to identify common project management issues.

(c) Construct an basic outline of the process of project management.

(d) Identify the characteristics of each phase in the project process.

(e) Apply key tools and techniques, including the evaluation of proposals.

(f ) Produce a basic project plan incorporating strategies for dealing with uncertainty, in the context of a simple project.

(g) Identify structural and leadership issues that will be faced in managing a project team.

(h) Compare and contrast project control systems.

(i) Discuss the value of post-completion audit.(j) Apply a process of continuous

improvement to projects.

● The defi nition of a programme, a project, project management, and the contrast with repetitive operations and line management. (A)

● 4-D and 7-S models to provide an overview of the project process, and the nine key process areas (PMI) to show what happens during each part of the process. (B)

● The benefi ts and limitations of having a single process for managing projects. (C)

● Key tools for project managers (e.g. Work Breakdown Structure, network diagrams (Critical Path Analysis), Gantt charts, resource histograms, gates and milestones). (E, F)

● Earned Value Management. (H)● Evaluation of plans for projects. (E)● The key processes of PRINCE2 and their implications for project staff.

(B, C, D, E, F, H)● Managing scope at the outset of a project and providing systems for

confi guration management/change control. (E, F, H)● The production of basic plans for time, cost and quality. (E, F)● Scenario planning and buffering to make provision for uncertainty in projects,

as part of the risk and opportunities management process. (J, F)● Organisational structures, including the role of the project and matrix

organisations, and their impact on project achievement. (F, G)● Teamwork, including recognising the life-cycle of teams, team/group

behaviour and selection. (G)● Control of time, cost and quality through performance and conformance

management systems. (J)● Project completion, documentation, completion reports and system

close-down. (I)● The use of post-completion audit and review activities and the justifi cation

of their costs. (I, J)


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E2 – B. Project Management (40%) (Cont’d)

Learning Outcomes


2. Evaluate the relationship of the project manager to the external environment. (5)

(a) Produce a strategy for a project.(b) Recommend strategies for the

management of stakeholder perceptions and expectations.

(c) Explain the roles of key players in a project organisation.

● Determining and managing trade-offs between key project objectives of time, cost and quality. (A)

● Stakeholders (both process and outcome), their power and interest, and their needs and expectations, marketing and communications to enhance perceptions. (B)

● Roles of support structures, including project management offi ces, as well as project sponsors (SROs), boards, champions, managers and clients. (C)


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E2 – C. Management of Relationships (30%)

Learning Outcomes


1. Discuss concepts associated with the effective operation of an organisation. (4)

(a) Discuss the concepts of power, bureaucracy, authority, responsibility, leadership and delegation.

(b) Demonstrate the importance of organisational culture.

(c) Identify the nature and causes of confl ict.(d) Discuss alternative approaches to the

management of confl ict.

● The concepts of power, authority, bureaucracy, leadership, responsibility and delegation and their application to relationships within an organisation and outside it. (A, B)

● Organisational culture: defi nition, classifi cation, importance. (A, B)● The sources of confl ict in organisations and the ways in which confl ict can

be managed to ensure that working relationships are productive and effective.(C, D)

2. Discuss the activities associated with managing people and their associated techniques. (4)

(a) Analyse the relationship between managers and their subordinates, including legal aspects affecting work and employment.

(b) Discuss the roles of negotiation and communication in the management process, both within an organisation and with external bodies.

(c) Discuss the effectiveness of relationships between the fi nance function and other parts of the organisation and with external stakeholders.

(d) Identify tools for managing and controlling individuals, teams and networks, and for managing group confl ict.

(e) Compare and contrast ways to deal effectively with discipline problems.

(f ) Explain the process and importance of mentoring junior colleagues.

(g) Analyse issues of business ethics and corporate governance.

● Disciplinary procedures and their operation, including the form and process of formal disciplinary action and dismissal (e.g. industrial tribunals, arbitration and conciliation). (A, E)

● The nature and effect of legal issues affecting work and employment, including the application of relevant employment law (i.e. relating to health, safety, discrimination, fair treatment, childcare, contracts of employment and working time). (A)

● Communication skills (i.e. types of communication tools and their use, as well as the utility and conduct of meetings) and ways of managing communication problems. (B, D)

● Negotiation skills. (B, D, E)● Managing the fi nance function to maximise its value to the organisation

through lean operation (e.g. business process outsourcing, shared service centres) and contribution to other functions (e.g. embedding fi nance personnel in business and strategic decision processes). (C)

● Management of relationships with professional advisors (accounting, tax and legal), auditors and fi nancial stakeholders (investors and fi nanciers) to meet organisational objectives. (B, E)


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E2 – C. Management of Relationships (30%) (Cont’d)

Learning Outcomes


● The principles of corporate governance and the CIMA Code of Ethics for Professional Accountants, and their relevance to the role, obligations and expectations of a manager. (G)

● How to lead and manage a team. (A, D, E)● The role of a mentor, and the process of mentoring. (F)● Motivating team members. (A, E)● The use of systems of control within the organisation (e.g. employment

contracts, performance appraisal, reporting structures). (A, D)


1

The Nature of Strategic Management

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3

1LEARNING OUTCOMES

By the end of this chapter you should be able to:

� compare and contrast approaches to strategy formulation;

� discuss concepts in established and emergent thinking in strategic management;

� explain the relationship between different levels of strategy;

� discuss the nature of competitive environments.

1.1 Introduction to the nature of strategic management

The strategic management process is essentially concerned with the decisions organisa-tions make about their future direction and the development and implementation of strat-egies which will enhance the competitiveness of organisations. There are many different approaches to strategic management but they all have the aim of establishing the purpose of the organisation and guiding managers on how to implement strategies to achieve organisational goals.

This chapter will start by defi ning the concept of strategy. It will explain the various activities involved in the strategic management process, based on the formal rational approach to strategy. The ways in which organisations can gain competitive advantage will also be explored. Some of the alternative approaches to strategic management will then be explained. The fi nal part of the chapter will discuss the concept of stakeholders and exam-ine how different stakeholders can infl uence the strategy process.

1.2 The concept of strategyStrategy has many different interpretations and dimensions. These characteristics distinguish strategic issues from operational issues in organisations. Listed below are just some defi nitions:

1. Strategy. ‘A course of action, including the specifi cation of resources required, to achieve a specifi c objective.’ CIMA: Management Accounting: Offi cial Terminology, 2005 edition p. 54.

The Nature of Strategic Management

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3. Strategy is the direction and scope of an organisation over the long term. Which achieves advantage in a changing environment through its confi guration of resources and competences with the aim of fulfi lling stakeholder expectations.’ Johnson et al. (2008).

4. ‘The basic characteristic of the match an organisation achieves with its environment is called its strategy.’ Hofer and Schendel (1978, p. 4).

5. ‘Corporate strategy is the pattern of major objectives, purposes and goals and essen-tial policies or plans for achieving those goals, stated in such a way as to defi ne what business the company is in or is to be in and the kind of company it is or is to be.’ Andrews, cited in Lynch (2006).

6. ‘Corporate strategy is concerned with an organisation’s basic direction for the future: its purpose, its ambitions, its resources and how it interacts with the world in which it operates.’Lynch (2006).

1.2.1 Common themes in strategyFrom these different defi nitions strategy is concerned with:

● The purpose and long-term direction of the business.● The scope of an organisation’s activities and actions required to meet its objectives

(broad or narrow).● Meeting the challenges from the fi rm’s business external environment, such as competi-

tors and the changing needs of customers.● Using the organisation’s internal resources and competencies effectively and building on

its strengths to meet environmental challenges.● Delivering value to the people who depend on the fi rm, its stakeholders, such as custom-

ers and shareholders, to achieve competitive advantage.

Whatever interpretation is put on strategy, the strategic actions of an organisation will have widespread and long-term consequences for the position of the organisation in the market-place, its relationship with different stakeholders, and overall performance.

1.3 Levels of strategy

Strategy occurs at different levels in the organisation. Figure 1.1 provides a simplifi ed model of the hierarchy at which different strategies are made. At the

top of the hierarchy is where corporate strategy is made; this provides the framework for the development of business strategy, which in turn provides the framework for functional strategies. The different levels of strategy formulation are therefore inter-dependent in that one level should be consistent with the strategies at the next level.

Corporate strategyThe corporate centre is at the apex of the organisation. It is the head offi ce of the fi rm and will contain the corporate board.

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Corporate strategy is typically concerned with determining the overall purpose and scope of the organisation, in other words what type of business or businesses should the organi-sation be in. Common issues at this level include:

● decisions on acquisitions, mergers and sell-offs or closure of business units;● relations with key external stakeholders such as investors, the government and regulatory

bodies;● decisions to enter new markets or embrace new technologies (sometimes termed diversi-

fi cation strategies);● development of corporate policies on issues such as public image, employment practices

or information systems.

Decisions at this level tend to complex and non-routine in nature because they often involve a high degree of uncertainty based on what might happen in the future.

The formal planning approach to strategy assumes that all strategy is formulated at cor-porate level and then implemented in a ‘top-down’ manner by instructions to the business divisions. During the 1980s, high-profi le corporate planners like IBM, General Motors and Ford ran into diffi culties against newer and smaller ‘upstart’ competitors who seemed to be more fl exible and entrepreneurial. One consequence was the devolution of responsi-bility for competitive strategy to strategic business units (SBUs).

Business strategyThis level of strategy is concerned with how an operating or strategic business unit approaches a particular market.

Corporate centreof organisation

Strategic businessunit

Corporatestrategy

Businessstrategy

Functionalstrategies



Financial strategy Marketingstrategy

Human resourcesstrategy

etc.

Figure 1.1 Organisation chart showing corporate, strategic business unit and functional strategies. From GIDO/CLEMENTS. Successful Project Management with Microsoft Project CD, 1E.

© 1999 South-Western, a part of Cengage Learning, Inc. Reproduced by permission. www.cengage.com/permissions

A strategic business unit (SBU) is defi ned by CIMA as: A section, usually a division, within a larger organisation, that has a signifi cant degree of autonomy,

typically being responsible for developing and marketing its own products or services. CIMA: Management Accounting: Offi cial Terminology, 2005 edition, p. 27.

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● marketing issues such as product development, pricing, promotion and distribution;● how should it segment the market – should it specialise in particular profi table segments.

Business strategy should be formulated within the broad framework of the overall objec-tives laid down by the corporate centre to ensure that each SBU plays its part. The extent to which the management of the SBU is free to make competitive strategy decisions varies from organisation to organisation and refl ects the degree of centralisation versus decen-tralisation in the management structure of the fi rm.

Functional strategiesThe functional (sometimes called operational) level of the organisation refers to main business functions such as sales, production, purchasing, human resources and fi nance. Functional strategies are the long-term management policies of these functional areas. They are intended to ensure that the functional area plays its part in helping the SBU achieve the goals of its corporate strategy.

1.4 A model of the rational strategy processThe traditional approach to strategic management is often termed the formal or rational approach, and can be described as a series of logical steps which involve:

● the determination of an organisation’s mission● the setting of goals and objectives● the understanding of the organisation’s strategic position● the formulation of specifi c strategies● the commitment of resources

A continuous analysis of the external environment and the organisation’s internal resources is needed in order to plan for the future development and survival of the business.

The rational strategy process is often conceived as consisting of four major steps:

1. Analysis of current position2. Formulation of strategic options3. Implementation of strategies4. Monitor, review and evaluation.

This process seeks to answer questions concerning where the organisation is now, where it should go in the future, and how it should get there. The rational model there-fore involves a number of interrelated stages. Figure 1.2 below illustrates a framework of the rational strategy process and shows the various stages which management may take to develop a strategy for their organisation.

Make sure you understand what activities occur during the stages included in the model, and can reproduce, this diagram.


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The basic idea from the model is that we start with the existing strategy of the organisa-tion and evaluate it using information collected from internal and external analysis. From this we can determine if the organisation should continue with its existing strategy or for-mulate a new strategy that will enable the organisation to compete more effectively. Having made a choice on the strategic direction, the next stage involves implementing the strategy and then evaluating performance to determine whether or not goals have been achieved.

Each of the different stages in the model above will now be elaborated on, introducing some of the tools and techniques of strategic management. However, Chapter 2 will pro-vide further explanation of some of the strategic management analytical tools, particularly those that can be used to examine the external environment and competitive environments.

1.4.1 Mission, objectives and goalsJohnson, Scholes and Whittington (2008) provide the following useful guide to help dis-tinguish between the terminology of strategy.

Position auditInternal analysis

Mission andobjectives

Corporateappraisal(SWOT)

Strategic optiongeneration

Strategyevaluation and

choice

Strategyimplementation

Environmental analysisExternal analysis

Competitor analysis

Review andcontrol

Figure 1.2 A model of a rational strategy process

Term Defi nition

Mission Overriding purpose in line with the values and expectations of stakeholders. What business are we in?

Vision or strategic intent Desired future state: the aspiration of the organisationGoal General statement of aim or purpose – may be qualitative in natureObjective Quantifi cation (if possible) or more precise statement of the goalStrategies Long-term direction expressed in broad statements about the direction the

organisation should be taking and the types of actions required to achieve its objectives

From the above table we can see that a mission is a broad statement of the purposes of the business. It will be open-ended and refl ect the core values of the business. A mission will often defi ne the industry that the fi rm competes in and make comments about its gen-eral way of doing business.

For example:

● British Airways seeks to be ‘the world’s favourite airline’● Nokia speaks of ‘connecting people’

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T● DHL ‘delivers your promises’● easyEverything group wants to ‘paint the world orange’.

Does your organisation have a mission statement? What is it? How is the mis-sion communicated to employees.

Roles of mission statementsMission statements help at four places in the rational model of strategy:

1. Mission and objectives. The mission sets the long-term framework and trajectory for the business. It is the job of the strategy to progress the fi rm towards this mission over the coming few years covered by the strategy.

2. Corporate appraisal. Assessing the fi rm’s opportunities and threats, its strengths and its weaknesses must be related to its ability to compete in its chosen business domain. Factors are relevant only insofar as they affect its ability to follow its mission.

3. Strategic evaluation. When deciding between alternative strategic options, management can use the mission as a touchstone or benchmark against which to judge their suitabil-ity. The crucial question will be, ‘Does the strategy help us along the road to being the kind of business we want to be?’

4. Review and control. The key targets of the divisions and functions should be related to the mission, otherwise the mission will not be accomplished.

Research conducted among companies by Hooley et al. (1992) revealed the following purposes of mission statements:

1. To provide a basis for consistent planning decisions.2. To assist in translating purposes and direction into objectives suitable for assessment

and control.3. To provide a consistent purpose between different interest groups connected to the

organisation.4. To establish organisational goals and ethics.5. To improve understanding and support from key groups outside the organisation.

1.4.2 The link between mission, goals and objectivesWhilst the mission is normally an open-ended statement of the fi rm’s purposes and strat egies, strategic objectives and goals translate the mission into strategic milestones for the business strategy to reach. In other words, the outcomes that the organisations seeks to achieve.

A strategic objective will possess four characteristics which set it apart from a mission statement:

1. a precise formulation of the attribute sought2. an index or measure for progress towards the attribute3. a target to be achieved4. a time-frame in which it is to be achieved.

Another way of putting this is to say that objectives must be SMART, that is,

● Specifi c – unambiguous in what is to be achieved● Measurable – specifi ed as a quantity


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● Attainable – within reach● Relevant – appropriate to the group or individual to whom it is applied● Time-bound – with a completion date.

Table 1.1 lists some examples of strategic objectives.

1.4.3 The goal structureThe goal structure is the hierarchy of objectives in the organisation. It can be visualised as the diagram in Figure 1.3 suggests.

Objectives perform a number of functions:

1. Planning. Objectives provide the framework for planning. They are the targets which the plan is supposed to reach.

2. Responsibility. Objectives are given to the managers of divisions, departments and oper-ations. This communicates to them:(a) the activities, projects or areas they are responsible for(b) the sorts of output required(c) the level of outputs required.

3. Integration. Objectives are how senior management coordinate the fi rm. Provided that the objectives handed down are internally consistent, this should ensure goal congru-ence between managers of the various divisions of the business.

4. Motivation. Management will be motivated to reach their objectives in order to impress their superiors, and perhaps receive bonuses. This means that the objectives set must cover all areas of the mission. For example, if the objectives emphasise purely fi nancial outcomes, then managers will not pay much heed to issues such as social responsibility or innovation.

5. Evaluation. Senior management control the business by evaluating the performance of the managers responsible for each of its divisions. For example, by setting the manager a target ROI and monitoring it, senior management ensure that the business division makes a suitable return on its assets.

You may be familiar with these fi ve functions (often recalled using the acronym PRIME) from your studies in budgetary control. Budget targets are a good example of operational level objectives. In this chapter, however, we are working at a higher level by considering the strategic objectives of the fi rm.

Table 1.1 Examples of strategic objectives

Mission Attributes Measure

Growth Sales volume 000s of unitsShare of market % of total volumeAsset base of fi rm Net assets

Quality Customer satisfaction Repeat purchasesDefects No. per ‘000Consistency Adoption of standard procedures

Innovation Peer group respect Industry awards receivedSpeed to market Development timeSuccessful new products % of sales from new products

Social responsibility Non-discrimination Workforce compositionEnvironmental pollution Cubic metres of wasteSafety Notifi ed incidents

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Having established where the organisation is in terms of its mission, goals and objec-tives, it must then determine where it wants to go in the future. This will be infl uenced by the nature of the external environment and the organisation’s internal capability.

1.4.4 External environmental and competitive analysisThe strategy of an organisation must allow it to achieve ‘a good fi t’ with its environment. As part of its strategic analysis, an organisation should look at the various factors within its environment that may represent threats or opportunities and the competition it faces.

The analysis requires an external appraisal to be undertaken by scanning the business external environment for factors relevant to the organisations current and future activities. To achieve this there are a number of strategic management tools that can assist in this process. These included the PEST framework which helps in the analysis of the macro or general environment and the fi ve forces model which can be used to analyse the competitive environment.

PEST framework

The PEST framework is used to categorise environmental infl uences into four headings that can be used to assess the external factors that might impact on

the organisation’s development in the future. These are used to understand the key drivers of change. A brief summary of the PEST framework is provided below, however, further discussion of the framework can be found in Chapter 2.

Mission statementTranslated into a small number of

strategicobjectivesreached by

following strategiescommunicated to management

as numeroustactical objectives

which in turn are implemented and reviewedthrough setting a large number of

operational objectiveswhich may be communicated to managers and staff

responsible through theirindividual performance targets

Figure 1.3 A goal structure

● Political. These are political or legal factors affecting the organisation, such as legislation or government policy, stability of the government, government attitudes to competition and so on.

● Economic. These are economic factors such as tax rates, infl ation, interest rates, exchange rates, consumer disposable income, unemployment levels and so on.

● Social. These are social, cultural or demographic factors (i.e. population shifts, age profi les, etc.) and refer to attitudes, value and beliefs held by people; also changes in lifestyles, education and health and so on.


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● Technological. These are changes in technology that an organisation might use and impact on the way work is done, such as new system or manufacturing processes.

Some authors have expanded the mnemonic PEST into PESTEL – to include explicit reference to ethical or environmental and legal factors.

If you are asked to apply the PEST model to an organisation, simply look for things that might affect the organisation, and put each of them under the most appropriate head-ing. A brief explanation as to why you feel each activity creates either an opportunity or threat will suffi ce.

The competitive environment – five forces modelAs well as the macro environmental factors, part of external analysis also requires an understanding of the competitive environment and what are likely to be the major competitive forces in the future. A well-established framework for analysing and understanding the nature of the competitive environment is Porter’s fi ve forces model (see Figure 1.4.).

Porter argues that competition in an industry is determined by its basic underlying economic structure – the fi ve competitive forces

1. rivalry among existing fi rms2. bargaining power of buyers3. bargaining power of suppliers4. threat of new entrants5. threat of substitute products or services.

The collective strength of these forces determines the profi t potential, defi ned as long-run return on invested capital, of the industry. Some industries have inherently high profi ts due to the weakness of these forces. Others, where the collective force is strong, will exhibit low returns on investment. This model will be explored further in Chapter 2.

The outcomes from the PEST analysis and fi ve forces analysis will help determine the opportunities for an organisation, and also the potential threats.

Rivalry amongexisting firms

Threat ofentry

Bargaining powerof suppliers

Substitute productsor services

Bargaining powerof buyers

Figure 1.4 Porter’s five forces model. Reprinted with the permission of The Free Press, a division of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing

Industries and Competitors by Michael E. Porter. © 1980, 1998 by The Free Press. All rights reserved.

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T 1.4.5 Internal analysis/position auditInternal analysis is needed in order to determine the possible future strategic options by appraising the organisation’s internal resources and capabilities. This involves the identifi -cation of those things which the organisation is particularly good at in comparison to its competitors.

The analysis will involve undertaking a resource audit to evaluate the resources the organisation has available and how it utilises those resources – for example, fi nancial resources, human skills, physical assets, technologies and so on. It will help the organisa-tion to assess its strategic capability. That is the adequacy and suitability of the resources and competences of an organisation for it to survive and prosper. Johnson, Scholes and Whittington (2008) explain that this depends upon having:

● threshold resources – the resources needed to meet the customers’ minimum require-ments and therefore to continue to exist;

● threshold competences – the activities and processes needed meet customers’ minimum requirements and therefore continue to exist;

● unique resources – the resources that underpin competitive advantage and are diffi cult for competitors to imitate or obtain;

● core competences – are activities that underpin competitive advantage and are diffi cult for competitors to imitate or obtain.

There is often confusion surrounding the terms ‘resources’ and ‘competences’ – essentiallyresources are what the organisation has, whereas competences are the activities and proc-esses through which the organisation deploys its resources effectively. This concept will be returned to later in this chapter when examining the resource-based view of strategy.

Michael Porter suggested that the internal position of an organisation can be analysed by looking at how the various activities performed by the organisation added (or did not add) value, in the view of the customer. Porter proposed a model, the Value Chain (Figure 1.5), for carrying out such an analysis. To be included in the Value Chain, an activity has to be performed by the organisation better, differently or more cheaply than by its rivals.

The value chain of any organisation can be divided into primary activities and support activities, each of these activities can be considered as adding value to

an organisation’s products or services.

Firm infrastructureHuman resource management

Technology development

Secondary orsupportactivities

Procurement

Primaryactivities

Inboundlogistics Operations Outbound

logisticsMarketingand sales Service

Figure 1.5 The Value Chain. Based on the work of Michael Porter


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The primary activities of the value chain are as follows:

● Inbound logistics. The systems and procedures that the organisation uses to get inputs into the organisation, for example the inspection and storage of raw materials.

● Operations. The processes of converting inputs to outputs, for example production processes.

● Outbound logistics. The systems and procedures that the organisation uses to get outputs to the customer, for example storage and distribution of fi nished goods.

● Marketing and sales. Those marketing and sales activities that are aimed at persuading customers to buy, or to buy more, for example TV or point-of-sale advertising.

● Service. Those marketing and sales activities that are clearly aimed before or after the point of sale, for example warranty provision, or advice on choosing or using the product.

The secondary (or support) activities of the value chain are as follows:

● Procurement. The acquisition of any input or resource, for example buying raw materials of capital equipment.

● Technology development. The use of advances in technology, for example new IT developments.

● Human resource management. The use of the human resources of the organisation, for example by providing better training.

● Firm infrastructure. Those general assets, resources or activities of the organisation that are diffi cult to allocate to one of the other activity headings, for example a reputation for quality, or a charismatic Chief Executive.

If you are asked to apply the value chain to an organisation, simply look for things that the organisation does well, and put each of them under the most appropriate heading. A brief explanation as to why you feel each activity has strength will suffi ce.

Undertake a resource audit and value change analysis for your organisation, or for an organisation that you are familiar with. This should help you in under-

standing the purpose of different strategic management frameworks.

1.4.6 Corporate appraisal (SWOT)Having undertaken an analysis of the trends and possible external environmental and com-petitive and internal developments that may be of signifi cance to the organisation, the next step is to bring together the outcomes from the analysis.

This is often referred to as corporate appraisal or SWOT analysis, standing for strengths, weaknesses, opportunities and threats.

During this stage, management will assess the ability of the business, following its present strategy, to reach the objectives they have set. They will draw on two sets of information:

(a) Information on the current performance and resource position of the business. This will have been gathered in a separate internal position audit exercise.

(b) Information on the present business environment and how this is likely to change over the period of the strategy. This will have been collected by a process of external environmental analysis and competitor analysis.

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T The four categories of SWOT can be explained in more detail as follows:

1. Strengths. These are the particular skills or distinctive competences which the organisa-tion possesses and which gives it an advantage over the competitors.

2. Weaknesses. These are the things that are going badly (or work badly) in the organisa-tion and can hinder the organisation in achieving its strategic aims, such as a lack of resources, expertise or skills.

3. Opportunities. These relate to events or changes outside the organisation, that is in its external business environment, which are favourable to the organisation. The events or changes can be exploited to the advantage of the organisation and will therefore provide some strategic focus to the decision-making of the managers within the organisation.

4. Threats. Threats relate to events or changes outside the organisation in its business envi-ronment which are unfavourable and that must be defended against. The organisation will need to introduce some strategies to overcome these threats in some way or it may start to lose market share to its competitors.

The strengths and weaknesses normally result from the organisation’s internal factors, and the opportunities and threats relate to the external environment. So, the strengths and weak-nesses come from internal position analysis tools such as the Value Chain, and the opportu-nities and threats from environment analysis tools such as PEST and the fi ve forces model.

1.4.7 Strategic options and choiceStrategic choice is the process of choosing the alternative strategic options generated by the SWOT analysis. Management need to seek to identify and evaluate alternative courses of action to ensure that the business reaches the objectives they have set. This will be largely a creative process of generating alternatives, building on the strengths of the business and allowing it to tackle new products or markets to improve its competitive position.

The strategic choice process involves making decisions on:

● What basis should the organisation compete and on what basis can it achieve competi-tive advantage?

● What are the alternative directions available and which products/markets should the organisation enter or leave?

● What alternative methods are available to achieve the chosen direction?

Achieving competitive advantageWhen developing a corporate strategy, the organisation must decide upon which basis it is going to compete in its markets. This involves decisions on whether to compete across the whole marketplace or only in certain segments (this is referred to as competitive scope). A further consideration is the way in which the organisation can gain competitive advan-tage, that is anything that gives on organisation an edge over its rivals and which can be sustained over time. To be sustainable, organisations must seek to identify the activities that competitors cannot easily copy and imitate (We will return to this later in this chapter when the resource-based view to strategy is introduced.).

Organisations must assess why customers chose to use one organisation over another. The answer to this question can be broadly categorised into two reasons:

1. The price of the product/service is lower.2. The product/service is perceived to provide better ‘added value’.


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Decisions on the above questions will determine the generic strategy options for achiev-ing competitive advantage – known as generic because they are widely applicable to fi rms of all sizes and in all industries. The two types of generic competitive strategies that enable organisations to achieve competitive advantage are referred to as low-cost strategies or dif-ferentiation strategies. For example, organisations can compete on price-based strategies serving prices to sensitive segments of the marketplace or they can choose to pursue a dif-ferentiation strategy which seeks to be unique on dimensions valued by buyers, such as product design, branding, product performance and service levels. In addition, organisa-tions need to decide on whether they are going to compete in the broad marketplace or whether they are going to focus on one or more particular segments or niches.

Identify an organisation that follows a price based strategy and one that achieves competitive advantage through differentiation. Then for each organisation

identify what the core competencies need to be to support the competitive strategy.

Strategic directionThe organisation also has to decide how it might develop in the future to exploit strengths and opportunities or minimise threats and weaknesses. There are various options that could be followed, including:

● Market penetration. This is where the organisation seeks to maintain or increase its share of exiting markets with existing products.

● Product development. Strategies are based on launching new products or making product enhancement which are offered to its existing markets.

● Market development. Strategies are based on fi nding new markets for existing products. This could involve identifying new markets geographically or new market segments.

● Diversifi cation. Strategies are based on launching new products into new markets and is the most risky strategic option.

Strategic methodsNot only must the organisation consider on what basis to compete and the direction of strategic development, it must also decide what methods it could use. The options are:

● Internal development. This is where the organisation uses it own internal resources to pursue its chosen strategy. It may involve the building up a business from scratch.

● Takeovers/acquisitions or mergers. An alternative would be to acquire resources by taking over or merging with another organisation, in order to acquire knowledge of a particular product/market area. This might be to obtain a new product range or market presence or as a means of eliminating competition.

● Strategic alliances. This route often has the aim of increasing exposure to potential cus-tomers or gaining access to technology. There are a variety of arrangements for strategic alliances, some of which are very formalised and some which are much looser arrange-ments. We will return to the topic of strategic alliances in Chapter 2.

Evaluation of strategic optionsThe evaluation stage considers each strategic option in detail for its feasibility and fi t with the mission and circumstances of the business. By the end of this process, management will

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T have decided on a shortlist of options that will be carried forward to the strategy imple-mentation stage. The various options must be evaluated against each other with respect to their ability to achieve the overall goals. Management will have a number of ideas to improve the competitive position of the business.

1.4.8 Strategy implementationThe strategy sets the broad direction and methods for the business to reach its objectives. However, none of it will happen without more detailed implementation. The strategy implementation stage involves drawing up the detailed plans, policies and programmes necessary to make the strategy happen. It will also involve obtaining the necessary resources and committing them to the strategy. These are commonly called tactical and operational decisions:

● Tactical programmes and decisions are medium-term policies designed to implement some of the key elements of the strategy such as developing new products, recruitment or downsizing of staff or investing in new production capacity. Project appraisal and project management techniques are valuable at this level.

● Operational programmes and decisions cover routine day-to-day matters such as meeting particular production, cost and revenue targets. Conventional budgetary control is an important factor in controlling these matters.

1.4.9 Review and controlThis is a continuous process of reviewing both the implementation and the overall con-tinuing suitability of the strategy. It will consider two aspects:

1. Does performance of the strategy still put the business on course for reaching its strate-gic objectives?

2. Are the forecasts of the environment on which the strategy was based still accurate, or have unforeseen threats or opportunities arisen subsequently that might necessitate a reconsideration of the strategy?

1.5 Criticisms of the rational model of strategy formulation

Many writers on strategy dispute the rational model of strategy formulation by question-ing some of the implicit assumptions. They would argue that organisational rationality is merely a textbook assumption from economics, with little basis in the real world.

1. Organisations are incapable of having objectives. This argument is derived from the insight of organisational sociology that organisations are really just collections of peo-ple. According to Cyert and March (1963), an organisation does not have goals of its own but rather it is the people within it that have the goals. Notions of profi t (or share-holder wealth) maximisation are merely artifi cially simplifi ed assumptions left over from economics. This leaves us with a picture of the goals pursued by a strategy being


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in fact the outcome of a bargaining process between various factions around the board-room table. The consequences of this view are:(a) Objectives may be in confl ict with one another.(b) Objectives will change from time to time according to which management faction

fi nds itself in the ascendancy.(c) Objectives are unlikely to be directly related to the economic benefi t of the

shareholder.(d) Management will inevitably fi nd itself adjudicating between the claims of the vari-

ous stakeholder groups such as investors, employees, customers and government. One consequence of this is their adoption of satisfi cing behaviour where they try to follow strategies aimed at pleasing ‘most of the people most of the time’. (If you consider the way you have to juggle between the elements of your daily life, job, study, home life, leisure, etc., you get the idea of what satisfi cing means.) A more sophisticated argument is that management will formulate strategy in the light of its beliefs about the status of the fi rm and the nature of the environment around it. These beliefs are inevitably partially irrational and so any strategy based on them is likewise not completely rational. This is sometimes called an interpretative view of strategy because any attempt to explain a given fi rm’s strategy must consider the beliefs (or paradigms) in the minds of its management.

2. Senior management should not be the only people involved in setting strategy. Writers argue that by making a separation between strategy formulation and strategy implementation, the rational approach is bound to lead to diffi culties. In the fi rst place, senior manage-ment are too detached, and will lack the detailed understanding of the problems of a given business division and the requirements of the particular customers and technolo-gies there. The result will be a strategy that is unlikely to address the division’s needs. Secondly, and more fundamentally, they will not consider the social processes, values and cultures of the staff in the division or, if considered, these ‘soft’ factors will be mis-interpreted. The resulting strategy will have unanticipated harmful effects on the moti-vation and commitment of those required to implement it. This view favours wider participation in strategy formulation through encouraging emergent strategies to perco-late up from below. We shall return to this view in more detail later.

3. In reality, strategy formulation is not a simple step-by step process aimed at fi nding the best way to meet the fi rm’s objectives. The model described in Figure 1.2 presents the process as moving in one direction. In reality, strategy formulation is a much more jumbled-up process and can include considerable backtracking and revisiting of ear-lier stages in the model. Indeed, some writers question whether objectives are ever set in advance and suggest that management may revise or set strategic objectives in the light of the corporate appraisal or to match the strategies developed during the stra-tegic option generation stage. Furthermore, the strategy formulation process is very political. The main infl uence on the information considered and the options gener-ated and accepted will be the power of particular personalities and factions in the management team.

4. The strategies that fi rms eventually follow are not the same as the ones they set out in their plans. At the time of strategy formulation, management suffer from bounded rational-ity. This means that they cannot have perfect knowledge of the future and so any strate-gies developed will fail to take into account all eventualities. Consequently, the actual strategy will need to be adapted to suit the circumstances as they unfold.

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T 5. Strategy is not something decided in advance by managers. This view is most famously associated with Mintzberg. He argues that strategy is often recounted by managers long after the event. In this post-rationalisation, they will tend to present all occurrences as intentional action and ignore all the things that happened by chance and those that did not work out. In this view, strategy emerges as a pattern from the piecemeal decisions of management. Another name for this view is adaptive because it sees the organisation as adapting to the circumstances around it.

6. Strategy should not be a rational process. This view is held by writers who are keen to re-establish the role of the individual manager and leadership in determining a fi rm’s suc-cess. The doctrine of action rationality proposed by Brunsson (1985) is a good example of this. Brunsson argues that excessive rationality in decision-making will rob a manager of the motivation and commitment necessary to implement the strategy successfully. Instead, they will be haunted by doubts that they may have chosen the wrong alternative, aware of some of the inconsistency between objectives, and conscious of all the things that might go wrong and the fact that the members of management that disagreed with the strategy are secretly hoping it will go wrong. It is better that managers should select a course of action from a small number of alternatives, focus on just the positive consequences and then formulate objectives based on the likely outcomes of the strategy once it has become established. This is very similar to the ‘ready-fi re-aim’ philosophy associated with some successful fi rms.

1.6 A formal top-down strategy processLarge organisations will often formalise process of strategy formulation. The following are typical features of the process:

1. A designated team responsible for strategy development. There are several groups of actors in this process:(a) A permanent strategic planning unit reporting to top management and consisting

of expert staff collecting business intelligence, advising divisions on formulating strategy and monitoring results.

(b) Groups of managers, often the management teams of the SBUs, meeting periodi-cally to monitor the success of the present strategies and to develop new ones. These are sometimes referred to as strategy away days because they often take place away from the offi ce to avoid the interruptions day-to-day functioning.

(c) Business consultants acting as advisers and facilitators to the process by suggesting models and techniques to assist managers in understanding their business environ-ments and the strategic possibilities open to them. You will be reading about many of these models and techniques later.

2. Formal collection of information for strategy purposes. The management team will call upon data from within and outside the fi rm to understand the challenges they face and the resources at their disposal. This information can include:(a) Environmental scanning reports compiled by the business intelligence functions

within the fi rm, including such matters as competitor behaviour, market trends and potential changes to laws.

(b) Specially commissioned reports on particular markets, products or competitors.(c) Management accounting information on operating costs and performance, together

with fi nancial forecasts.(d) Research reports from external consultancies on market opportunities and threats.


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3. Collective decision-taking by the senior management team. This involves the senior management team working together to develop and agree business strategies. Techniques such as brain-storming ideas on fl ip charts and using visual graphical models to summarise complex ideas will assist this process. Also, arriving at a decision will involve considerable confl ict as particular managers are reluctant to see their favoured proposal rejected and a different strategy adopted.

4. A process of communicating and implementing the business strategy. This can be accom-plished using a combination of the following methods:(a) Writing a formal document summarising the main elements of the plan. This will

be distributed on a confi dential basis to other managers and key investors, and also perhaps to other key stakeholders such as labour representatives, regulatory bodies, major customers and key suppliers.

(b) Briefi ng meetings and presentations to the stakeholders mentioned above. Frequently, reporters from the business press will be invited to ensure that the infor-mation reaches a broader public. Naturally, the fi ne detail will remain confi dential.

(c) The development of detailed policies, programmes and budgets based on achieving the goals laid out in the business strategy.

(d) The development of performance targets for managers and staff. These ensure that eve-ryone plays their part in the strategy (and perhaps receive fi nancial rewards for doing so).

5. Regular review and control of the strategy. Management will monitor the success of the strategy by receiving regular reports on performance and on environmental changes. Today, the sophisticated competitive strategies of many fi rms have necessitated the devel-opment of more complex performance measurement systems to supplement traditional budgetary control information. These are variously termed enterprise resource management systems and balanced scorecards. There has also been an increased emphasis on competitor and other environmental information to assist managers in steering their businesses.

Testing your appreciation of management’s need for non-fi nancial measures and environ-mental information will be a recurring feature of questions in this examination.

1.6.1 Benefits of the formal top-down approach to strategy

Business strategy formulation obviously uses a lot of organisational resource. What are the benefi ts?

1. Avoids short-termist behaviour. It ensures that management considers the long-term develop-ment of the business rather than focusing solely on short-term results and operational results.

2. Helps identify strategic issues. By encouraging management to consider the business envi-ronment in their plans and decisions, it will help them keep ahead of change and to be more proactive.

3. Goal congruence. There are many aspects to this:(a) It will help coordinate the different business units, divisions and departments and

ensure that they work together to realise the full potential of the corporation.(b) Asset investment decisions will be taken with the long-term needs of the business in

mind. This could include design or acquisition of buildings and capital equipment, information systems or acquisitions of other businesses.

(c) Tactical programmes will be congruent with the strategy. This might affect the types of staff recruited and developed, the location of production and distribution facilities or the sorts of products and brands created.

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T 4. Improves stakeholder perceptions of the business. If the fi rm demonstrates that it has a clear idea of where it is going, it enables others to make plans based on its future. This may lead to:(a) higher share price because investors are confi dent of higher future returns;(b) attraction and retention of staff and higher morale because employees can see that

their career aspirations may be met within the fi rm;(c) improved relations with suppliers who feel they can rely on orders in the future.

5. Provides a basis for strategic control. By having a process of formulation and implementa-tion, this ensures that:(a) There is someone looking after the development of strategy.(b) There are clear programmes and policies being developed to implement it.(c) There are targets and reports enabling review of the success of the strategy.

6. Develops future management potential and ensures continuity. This relates to the fact that formal strategy formulation is a collective process. This means that:(a) Different functional managers (e.g. fi nance or marketing) gain an appreciation of

the other disciplines of business and so develop into general managers.(b) Providers of information to the strategy process become more deeply involved in

the business and develop as a pool of expertise from which the next generation of managers may be recruited.

(c) Avoids succession problems when members of senior management retire or move on. The strategy of the fi rm is understood by all and will outlast the loss of key members of the management team.

1.6.2 Drawbacks of the formal top-down approach to strategy

Some writers are critical of the formal process discussed above, because:

1. It is too infrequent to allow the business to be dynamic. This view emphasises the infrequency of the ‘strategy round’, say every 5 years, and the time it takes to achieve any change to the strategy. If the environment changes unexpectedly, the fi rm’s performance may deteriorate as it continues to follow a business strategy which has now become inappropriate to its business environment, for example by continuing to make a product no one wants.

2. It forbids the development of radical or innovative strategies. The need to retain consensus among the management team means that radical ideas are too often rejected. Writers who advance this argument remind us of the inherent conservatism of committees and of the fact that some of the success stories of the past few decades, such as Microsoft, Intel, Virgin and (at points) Apple and Body Shop, have also been that of fi rms whose names are associated with radical and visionary entrepreneurs. These business leaders tend to follow the emergent strategy approach.

3. It suffers from diffi culties of implementation. The formal process is management-led and seeks to pursue the goals of the business. Successful implementation requires the par-ticipation, or at least acquiescence, of middle and junior management, together with operative staff. There is a danger that the formal process will not build the support of these people and hence will be misunderstood or resisted. The result will be that the goals of the strategy are not realised.

4. There is loss of entrepreneurial spirit. Entrepreneurs are persons who break rules and make changes to conventional ways of doing business. On the other hand, a middle


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manager in a strategically managed fi rm will be rewarded for carrying out their allotted part in the strategy and for not breaking the rules. The effect will be to encourage con-formity among managers. This will lose the fi rm potentially successful ventures and per-haps also the services of gifted entrepreneurial managers who may leave in frustration.

5. It is impossible in uncertain business environments. Formal business strategy requires that the strategists are able to make reliable assumptions about the future and particularly about the opportunities and threats facing them. Critics argue that the business envi-ronment is now more uncertain than ever before. Because in their view, the future can-not be forecast. Some writers argue that management efforts should be diverted from trying to plan strategies and instead should focus on improving the ability of their busi-nesses to respond and adapt to change.

6. It is too expensive and complicated for small businesses. The manager of a small busi-ness is unlikely to be skilled in the techniques needed for developing the kinds of business strategy described above. Moreover, the opportunity cost in terms of the time away from direct management of the operational parts of the business are likely to be too great.

Having read this section, summarise the main advantages and disadvantages of the for-mal top down approach to strategy.

1.7 Strategy and small businessesAccording to Birley (1982), the formal top-down process described above may be unsuit-able for small businesses for four reasons:

1. Differences in goals. In a small fi rm, the goals of the business are often inseparable from the goals of the owner-manager and immediate family group. Small businesses often do not exhibit the economic rationality and single-minded pursuit of dividends and growth often associated with businesses governed by external shareholders. Birley suggests that small-business goals may pass through a life cycle from the foundation of the business:(a) Initial desire for independence and a chance to run their own business, coupled

with a desire for a satisfactory income and lifestyle.(b) Mid-life desire to achieve a balance between satisfactory fi nancial returns and a

good home life. This means that growth may not be a primary consideration.(c) When approaching retirement, the founder will have a number of possible

objectives:● to ensure that the business passes to children or loyal employees, regardless of their

skills or aptitudes;● to fi nd a buyer for the business, often with safeguards for staff.

2. Limited scope of product/market choices. Small-business managers typically consider a much narrower range of strategic options than do their large-business counterparts:(a) Because their business is already narrowly based on the specifi c trade skills and

knowledge of the proprietor. Any new product or market venture will seem very radical.

(b) The day-to-day survival of the business will depend on success in this narrow mar-ket, and management will not want to move too far away from it.

(c) Management’s knowledge, skills and horizons will tend to be limited to their cur-rent industry. They will not notice wider opportunities.

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T 3. Limited resources. Smaller fi rms lack the resources to invest in new strategic ventures and rapid growth. Therefore, they do not exhibit the sudden strategic leaps envisaged by the rational model:(a) less capital due to absence of external shareholders;(b) less managerial resource because proprietor is unwilling to delegate or share

control;(c) smaller current income stream means that any unsuccessful strategic investment

may destroy the fi rm.4. Organisational structure. Strategic implementation demands the setting up of an appro-

priate structure and selection of an appropriate team to carry it out. Small fi rms may not be able to do this due to:(a) desire by the proprietor to maintain absolute control;(b) impatience with targets, budgets and other systems that smack of ‘bureaucracy’;(c) diffi culties for other managers to work with founder who may exhibit set ways of

thinking and doing business.

Birley’s observations certainly ring true of many small, family-controlled businesses. However, there are many examples of (initially) small entrepreneurs who have managed to exhibit very different paths of strategic development. For example:

● Jeffrey Bezos (Amazon.com)● Richard Branson (Virgin Group)● Bill Gates (Microsoft Corporation)● Stelios Haji-Ioannou (easyGroup – founder of easyJet)● Julian Richer (Richer Sounds)● Anita Roddick (The Body Shop)● Alan Sugar (Amstrad Corporation).

These businesses follow strategies that have been termed variously freewheeling opportun-ism, proactive management or radical entrepreneurship. One distinguished writer has coined the term ‘The New Alchemists’ to describe them (Handy and Handy, 1999). Increasingly, their approaches to strategy have been emulated by the ‘dotcom’ fi rms of the new e-businessworld.

They have particular features in common with one another:

1. They grew in an industry that was already dominated by one or more large corpora-tions. Their success was almost always through exploiting the complacency or errors of the larger corporations.

2. The founder of the business had a particular vision of how they wanted the business to develop, which they stuck to.

3. The products or services they offer tend to be in markets that exhibit spontaneous pur-chasing behaviour, where service and reassurance are important or which have been subject to recent radical changes (or discontinuities) due to emergence of new technolo-gies, tastes or legislative frameworks.

4. They did not rely on conventional fi nancing sources to develop their businesses initially (and several subsequently had unsatisfactory relationships with equity markets).

5. They do not appear to use rational strategy formulation techniques, but rather rely on vision, the skills of the proprietor and a low aversion to risk.

6. The day-to-day involvement of the founder in the detailed running of the business has been critical.


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This has led to increased criticism of the top-down, rational model and greater interest in bottom-up creative approaches.

1.8 Achieving competitive advantage – alternative perspectives: resource-based view versus the positioning view

Theorists of business strategy disagree on the ways in which competitive advantage. Until the 1990s, most writers took a positioning view; however, more recently, a resource-based perspective has become popular. The two perspectives can be characterised as follows:

1. Positioning view sees competitive advantage stemming from the fi rm’s position in rela-tion to its competitors, customers or stakeholders. It is sometimes called an outside-in view because it is concerned with adapting the organisation to fi t its environment.

2. Resource-based view is based on competitive advantage stemming from some unique asset or competence possessed by the fi rm. This is an inside-out view of strategy because the fi rm must go in search of environments that enable it to harness its internal competences.

1.8.1 Competitive advantage and economic theoryThe debate over positioning versus resource-based approaches to strategy also has its ori-gins in economic theory. The two sides disagree on the sources and durability of the com-petitive advantages that lead to supernormal profi ts.

The concept of economic profi t is the same as the ‘supernormal profi t’ (or ‘economic rent’). According to economic theory, supernormal profi t arises whenever market power belongs to fi rms rather than consumers. In the short run, fi rms in competitive markets can enjoy supernormal profi ts until competitive entry erodes profi ts by increasing buyer choice and pushing prices down. However, the only fi rms that can enjoy supernormal profi ts in the long run are those that have erected barriers to entry. (this links back to some of the components of Porter’s fi ve forces model discussed in Section 1.4.4).

1.8.2 The positioning approachThe positioning approach to strategy takes the view that supernormal profi ts result from the following factors:

● high market share relative to rivals● differentiated product● low costs.

Examples of application of the positioning approach include the following:

1. Porter’s Five Forces theory argues that the long-term return on investment (ROI) of an industry is determined by fi ve forces and so an appropriate strategy for a given fi rm is to increase its profi tability by adopting a strategy that positions it against these forces in the long run better than its rivals. These strategies are the generic strategies of overall cost leadership, differentiation or focus and can be pursued by developing a unique confi gu-ration of its value chain or value system.

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T 2. Stakeholder theory suggests that the long-term competitive success of a fi rm will depend on its developing a sustainable relationship with the key stakeholders on whom it depends for resources, custom and permission to operate.

The distinctive outside-in perspective of the positioning view consists in its assertion that threats and opportunities are external and that management must mould the organi-sation’s size, structure, culture, skills and products in response to them.

1.8.3 Resource-based viewResource-based theorists (RBT) make the following criticisms of the positioning view:

1. The competitive advantages are not sustainable. Positioning advantages are short run. These advantages are too easily copied in the long run by rivals or will lose their power as the product life cycle enters its decline phase. Therefore, superior long-run profi tability cannot be explained or assured by possession of a world-beating prod-uct, a dominant market position or low-cost position. According to RBT writers (e.g. Barney, 1991), superior profi tability instead depends on the fi rm’s possession of unique resources or abilities that cannot easily be duplicated by rivals.

2. Environments are too dynamic to enable positioning to be effective. Positioning depends on the customer group, buyers, suppliers, rivals, and so on, to remain the same long enough for the fi rm to mount an effective response. However, faster product life cycles, the impact of IT, global competition and rapidly changing technologies make this impossible. RBT writers (e.g. Stalk et al., 1992) argue that superior competitive per-formance depends on developing business processes and structures that enable it to spot changing needs of customers immediately and to develop commercially viable responses quickly.

3. It is easier to change the environment than it is to change the fi rm. Some RBT writers (e.g. Pralahad and Hamel, 1990; Kay, 1997) are suspicious of the positioning school’s implied belief in a ‘rubber organisation’, that is one that can have its size and shape changed at will to fi t the environment. They argue that such organisational changes are likely to destroy the complex organisational architectures on which the fi rm’s present and future success depends. It is better to retain these architectures as a unique competi-tive resource and to leverage them to take the fi rm into industries where they are valued.

1.8.4 Principles of resource-based theoryA number of different writers have developed principles that underpin the RBT and that are needed to achieve sustainable competitive advantage.

Stalk et al. (1992) suggest four principles of capabilities-based competition:

1. The building blocks of corporate strategy are business processes, not products and markets.

2. Competitive success depends on the ability to transform these processes into strategic capabilities able to provide superior value to the customer.

3. Creating these capabilities requires group-wide investments that transcend traditional functional or business unit boundaries.

4. Therefore, the champion of capabilities-based strategy is the chief executive offi cer (CEO).


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Superior competitive performance will result from the fi rm using these competences to outperform rivals on fi ve dimensions:

1. Speed. More able to incorporate new ideas and technologies into its products.2. Consistency. All its innovations satisfy the customer.3. Acuity. Ability to see its environment clearly and forecast changing needs.4. Agility. Ability to adapt on many fronts simultaneously.5. Innovativeness. Ability to generate and combine business ideas in novel ways.

Barney (1991) argues that superior profi tability depends on the fi rm’s possession of unique resources. He identifi es four criteria for such resources:

1. Valuable. They must be able to exploit opportunities or neutralise threats in the fi rm’s environment. Here, Barney is accepting the view of resources taken in the SWOT model. However, the point he is making is that it is not enough just to have valuable resources.

2. Rare. Competitors must not have them too, otherwise they cannot be a source of rela-tive advantage.

3. Imperfectly imitable. Competitors must not be able to obtain them. Generally, this will result from them having come into the fi rm’s possession by a unique historical event (e.g. ability to point to a long history in the business or perhaps past purchase of a unique piece of land), or because they are hard to understand and duplicate if you are an outside competitor (e.g. a particular organisational culture or relationship with stakeholder groups).

4. Substitutability. It must not be possible for a rival to fi nd a substitute for this resource (e.g. not in the way that Microsoft used CD technology to substitute for the sales net-work, payments systems, printing and logistics of Encyclopaedia Britannica when it launched Encarta).

Kay (1997) writes of ‘distinctive capabilities’ arising from four sources:

1. Competitive architecture. These are the relationships that make up the organisation. These can be divided into:(a) internal architecture: relations with employees;(b) external architecture: relations with suppliers and customers;(c) network architecture: relations between a group of collaborating fi rms.These deliver distinctive capabilities that are greater than the sum of the parts in three ways:(a) through the creation of unique organisational knowledge, which arises from col-

laboration and interaction;(b) through establishing a cooperative ethic among the participants;(c) by implementing organisational routines.

Kay uses the examples of successful football clubs like Liverpool and Manchester United. He suggests that their football league performance is due to the networks they have built with youth clubs and their expenditure on recruiting players, their detailed analysis of other clubs’ games, a cooperative spirit that enables players to pass the ball rather than waste chances with lone shots at goal and deeply embedded routines of play.

2. Reputation. This is the high esteem that the public have for the fi rm. Among custom-ers, it is a reason to buy the product and to remain loyal, while for investors, suppliers and potential employees, it is a reason to become involved and give exceptional levels

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T of support to the fi rm. Kay argues that reputation must be built and maintained over time and requires detailed attention to all aspects of the fi rm’s products, procedures and processes. He uses the examples of car hire and accountancy services to demonstrate that reputation drives up margins.

3. Innovative ability. This is the ability to develop new products, services or solutions. These stave off competitors and enable the fi rm to enjoy the high margins of early life-cycle markets. Innovation frequently demands collaboration among staff and with sup-pliers and customers. Consequently, it builds on the architectures of the fi rm.

4. Ownership of strategic assets. This is close to the barriers to entry discussed in traditional economic theories of monopoly. The fi rm may have a unique source of materials or possess exclusive legal rights to a market or invention. Kay observes that these generally occur in markets with strong government involvement (e.g. medicines, defence equip-ment, etc.) and profi ts may be limited by government action too.

Prahalad and Hamel (1990) describe ‘core competence’ as ‘the collective learning in the organisation, especially how to coordinate diverse production skills and integrate multiple streams of technologies’. They propose three tests to identify a core competence:

1. Must provide access to a wide variety of markets. This is sometimes called the extend-ibility condition.

2. Must provide a signifi cant contribution to the perceived customer benefi ts of the fi nal product.

3. Must be diffi cult for competitors to imitate.

The authors cite as examples Honda’s skill with small reliable high-output petrol engines (cars, motorcycles, lawnmowers); Sony’s skills in miniaturisation (radios, televisions, CD players, personal stereos, laptops) and 3M’s skills in coatings (cassette and video tape, Post-It-Notes, photographic fi lm, abrasive papers). These skills enabled the fi rms to deliver pre-mium profi ts across and through diverse environments.

They argue that core competences can be destroyed by failure to invest in them. They share with Stalk et al. (1992) the view that excessive focus on functional or SBU divisions can cause harm, and describe two concepts of the corporation (Table 1.2).

Table 1.2 Two concepts of the corporation (adapted from Prahalad and Hamel, 1990)

SBU Core competence

Basis for competition Competitiveness of today’s products Inter-fi rm competition to build competences

Corporate structure Portfolio of businesses related in product-market terms

Portfolio of competences, core products and businesses

Status of the business unit

Autonomy is sacrosanct; the SBU ‘owns’ all resources other than cash

SBU is potential reservoir of core competences

Resource allocation Discrete businesses are the unit of analysis; capital is allocated business by business

Businesses and competences are the unit of analysis: top management allocates capital and talent

Value added by top management

Optimising corporate returns through capital allocation trade-offs among businesses

Enunciating strategic architecture and building competences to secure the future


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Close inspection of Table 1.2 suggests that Prahalad and Hamel’s formulation carries profound implications for the management accounting function. Management accounting is traditionally built on a responsibility centre model, whereas the view of the authors (and of several of the other RBT writers) is that the object of control should be competences and processes rather than business units and divisions. This issue will be returned to in detail in the next chapter.

1.8.5 The implications of the resource-based view for strategy development

Resource-based theory raises a number of issues:

1. Confl ict with conventional product/market-based views of strategy. The notion of core competences spreads beyond the ability of the fi rm to compete just in particular mar-kets and industries. Yet many of the models we have used, such as the Porter models and the product life cycle, tend to discuss particular products and markets and develop strategic prescriptions for them. This leads to two possibilities:(a) By using techniques that focus on products and markets individually, we may

develop strategies which deplete the fi rm’s wider core competences (e.g. by deciding to withdraw from a market or to cut costs by outsourcing a crucial source of organi-sational learning).

(b) Even where a fi rm is involved in a range of industries and has a unique core competence across them all, it is no guarantee of competitive advantage against more focused players in each market (e.g. in the 1980s, IBM had a unique global architecture, reputation and ownership of proprietary technology. This did not stop it from being beaten into second or third place by focused rivals in each of its sub-industries of software development, consulting, PCs and mainframe systems).

2. Challenges the rational model of strategy. The RBT view seems to argue that strategy should not be a process of deciding a product/market mission and competing in mar-kets by establishing what the customer wants and exploiting the weaknesses of rivals. Instead, it suggests that strategy involves deciding what makes the fi rm unique and building strategy on that, extending into any products or markets where it will work. The impacts of this are:(a) RBT strategy starts with the corporate appraisal, not with the mission of the

business. Indeed, the mission must adapt to fi t the most recent extension of core competence.

(b) There is a much higher emphasis on fi nding an environment to match the fi rm rather than vice versa (management seems to be saying ‘all we have is a hammer so our markets are anything that involves hitting things’). This reasoning could lead to very diverse strategies or perhaps a complete drying-up of strategic avenues (as they run out of things to hit).

(c) Investors cannot be clear what industry they are investing in. This may increase per-ceived risk and hence destroy shareholder value by reducing the share price.

3. RBT can lead to different conclusions. The basis of RBT is the suggestion that the fi rm should retain any unique strategic assets it has, outsource the remainder, and focus on building up relationships with internal and external stakeholders to develop its internal

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T knowledge so as to improve performance and innovation. Consequently, it fi ts well with modern concepts in network organisation management such as:

● teamworking● collaboration with suppliers and customers● fl exible working practices● creation of participative culture.

However, an alternative conclusion might be that unique knowledge is too valuable to risk losing in networks that could easily be ‘burgled’ by rivals, through enticing contract staff and suppliers/customers to defect. This might encourage management to deliberately keep knowledge under close control by bringing production in-house, putting staff on restrictive long-term contracts and segmenting trade secrets on a ‘need-to-know’ basis.

1.9 Alternative approaches to formulating strategy

Whilst it has been established that strategy deals with how an organisation achieves its objec-tives and can occur in a structured step-by-step way as suggested by the rational approach, the next section will consider some alternative perspectives on the strategy creation process.

1.9.1 Emergent strategiesThe research of Mintzberg (1987) suggests that few of the strategies followed by fi rms in the real world are as consciously planned as the rational model suggests. The real strategies of real fi rms are a long way from ‘mental maps’ designed by a rational process. Instead, they are a combination of the planned strategy and another unanticipated emergent strategy (Figure 1.6).

Mintzberg describes emergent strategies as ‘patterns or consistencies realised despite, or in the absence of, intentions’. By this he means us to understand that they just ‘happen along the way’, with differing degrees of management involvement.

The failure of intended strategies to be fully realised as deliberate strategies does not surprise Mintzberg. He regards it as unlikely that a fi rm’s environment can be as totally predictable or totally benign as it would need to be for all intended strategies to work out. The emergent strategy is often a response to unexpected contingencies and the resulting realised strategy may, in the circumstances, be superior to the intended strategy.

Mintzberg considers management’s role in this process and suggests that some strategies may be deliberately emergent. By this he means that managers may create the conditions for new ideas to fl ourish and strategies to emerge. This has the effect of focusing attention on

Intendedstrategy

Deliberatestrategy

Realisedstrategy

Unrealisedstrategy

Emergentstrategy

Figure 1.6 Mintzberg’s types of strategy


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the role of the manager as at the heart of the strategy and reduces the importance of the rational process we have been discussing. According to Mintzberg, the manager should try to ‘craft a vision’ through moulding the organisation and its strategy in the same way as a potter works clay on the wheel, developing it gently and with regard for its own natural characteristics. To do this, a manager must exhibit the following skills:

● Manage stability. Managers should be able to master the details of running their business and not feel compelled to constantly rethink the business’s strategic future. As Mintzberg says: ‘To manage strategy . . . is not so much to promote change as to know when to do so.’

● Detect discontinuity. This is the ability to detect the subtle environmental changes that may affect the business and be able to assess their potential impact on its future perform-ance. Mintzberg states: ‘The trick is to manage within a given strategic orientation most of the time yet be able to pick out the occasional discontinuity that really matters.’Know the business. Mintzberg believes that the ‘craftsman-manager’ will exhibit a hands-on feel for the business that goes beyond the cold and fragmented analysis available from reports and statistical analysis. He believes that formal strategy systems distance managers from their business and hence ensure that they lack the knowledge they need to run it.

● Manage patterns. Management should encourage strategic initiatives to grow through-out the business and watch to see how they develop and intervene once this is clear. Mintzberg says: ‘In more complex organisations this may mean building fl exible struc-tures, hiring creative people, defi ning broad umbrella strategies, and watching for the patterns that emerge.’

● Reconcile change and continuity. Managers must realise that radical changes and new pat-terns of strategy will create resistance and instability in the fi rm. They must keep radical departures in check, while preparing the ground for their introduction.

1.9.2 Logical incrementalismLogical incrementalism is the term developed by Lindblom (1959, 1979) to describe how government administrators ‘muddle through’ from year to year rather than carry out bold strategic initiatives (Figure 1.7).

NowTime

Past

Development

Radical strategy

Environment

Strategic drift

Logical incrementation

Figure 1.7 Logical incrementalism

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T Administrators will avoid radical strategies that take the organisation off in a new direction. Instead, they will accept that they cannot foresee the future and survive by muddling through, taking small steps based on what has been done and has worked in the past.

Lindblom is not recommending logical incrementalism. Rather, he is recording the real-ity of its existence. As he says, if the environment changes radically (a discontinuity), then logical incrementalism will not respond suffi ciently and hence the strategy will drift away from what is required by the environment.

Quinn (1978) takes a more positive view of logical incrementalism than Lindblom. For Quinn, a manager must map where he or she wants the organisation to go and then pro-ceed towards it in small steps, being prepared to adapt if the environment changes or if support is not forthcoming.

The managerial role functions as a management learning process with the following elements:

● The manager sits at the centre of a network of formal and informal communications with staff, customers and others. They will be attuned to the problems and issues con-fronting the organisation. They may use formal strategy models and techniques to understand these.

● Once they sense that a need for change has arisen and that events are pushing the fi rm in a particular direction, they will start to develop a general strategic vision for the organi-sation. Often they will wait until circumstances have made other managers responsive to ideas for a change to the organisation.

● Rather than present the strategy full-blown, and risk opposition, the manager will build political support for the ideas by revealing them to key committees or on management retreats.

● Commitment will be gained to an initial trial of the strategy. This will build further commitment among those charged with making the project a success and erode the con-sensus in favour of the old way of doing business.

● This consensus will build and press the strategic change forward incrementally.

The use of formal strategic frameworks is valuable in developing and communicating the changed strategy. This is the logical element in Quinn’s methodology because it ensures that the process leads somewhere. The incrementalism comes from the need to subordi-nate rapid change to the process of gaining consensus and avoiding resistance (similar to Mintzberg’s ‘Reconcile change and continuity’).

Quinn suggests four key roles for the manager in this process:

1. Improve the quality of information used in key decisions.2. Overcome personal and political pressures resisting change.3. Deal with the varying lead times and sequencing of events in the decisions.4. Build organisational awareness and support for the strategies.

As we can see, Mintzberg and Quinn are essentially making the same point: that strategies are not always planned or revealed in advance and that management skill is crucial. Unlike Lindblom, they do not see this as unacceptably conservative, but see it as realistic.

Logical incrementalism has been criticised as potentially being too slow to enable the organisation to cope with rapid changes in its environment.


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Evaluation of approaches to strategyThe syllabus focuses on how strategy may be developed and how as a chartered manage-ment accountant, you may assist in this process. For this, it is better that we take a rational approach as the basic framework. This said, we should still recognise what Mintzberg and others have alerted us to, that in the real world, strategies can be infl uenced by irrational factors and that implementation is a crucial step in successful strategies.

As Mintzberg has commented, most real-world strategies ‘walk on two feet’, balanced between the rational approach and the emergent approach.

As a footnote to the earlier discussion of ‘dotcom’ fi rms, it is worth recalling that during the latter part of 2000 several of the most ambitious examples of such businesses ran into serious fi nancial diffi culty and the share prices of the general sector declined sharply. Many business writers put this down to failures by management to develop satisfactory ‘business models’. In other words, the investors had put their money into business ideas that could not make a return for shareholders or which lacked a credible strategy.

This could support the view that a more formal approach to strategy brings benefi ts even in the age of e-commerce and e-business.

1.10 StakeholdersThere are a number of different individual and interest groups both inside and outside the organisation who will have views of the strategic development of the organisation and who can affect or is affected by the performance of the organisation, These groups or individu-als are referred to as stakeholders.

Stakeholders are defi ned by CIMA as ‘Those persons and organisations that have an interest in the strategy of an organisation . . .’ (Management

Accounting: Offi cial Terminology, 2005 edition, p. 53).

They include:

● shareholders and owners● management● employees● customers/clients● suppliers● local community● local and national governments● trade unions● media● regulatory bodies● pressure groups.

There are different classifi cations of the above stakeholders, for example internal stakehold-ers (employees and management); connected stakeholders (shareholders, customer and suppliers); and external stakeholders (governments, community, pressure groups).

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1. Issues of stakeholder power. This view observes that, like it or not, management must rec-ognise that stakeholders can affect the success of a strategy, depending on whether they support or oppose it. For example, customers refusing to buy products, shareholders selling their shares or staff striking would disrupt any strategy. The view concludes that management should consider stakeholders before setting strategic objectives.

2. Issues of organisational legitimacy. This more radical view suggests that fi rms are required to be good citizens because they are only permitted to exist by society on sufferance of not abusing their power. Consequently, although working primarily for the share-holders, management must ensure that its decisions do not ignore the interests of other stakeholders.

1.10.2 The Mendelow matrixMendelow (1991) developed a framework to help analyse stakeholders power and interest (Figure 1.8). Johnson, Scholes and Whittington (2008) suggest that this technique can be used in two situations:

1. To keep track of changes in the potential infl uence of different stakeholder groups. By plotting the matrix periodically, management can be alerted when a strategy may need to be changed to accommodate (or avoid a threat from) particular stakeholders.

2. To assess the impact of a particular strategic development on stakeholders. For example, managers proposing a factory closure could use mapping to identify where opposition to closure may come from and how it might be managed (e.g. by shifting redundant workers from quadrant D to C or B through generous pay-offs and thus reducing the votes for a strike).

Plot the different stakeholders of your organisation on Mendelow’s matrix. Then explain why you have put them in a particular quadrant.

Low

AMinimal effort

BKeep informed

CKeep satisfied

DKey players

Low

Pow

er

High

Hig

h

Level of interest

Figure 1.8 Mendelow’s power-interest matrix


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1.10.3 Assessing power of stakeholdersFactors that may be associated with a particular group having high power are:

1. Status of the stakeholders, for example:● their place in the organisational hierarchy● their relative pay● their reputation in the fi rm● their social standing (e.g. ministers of religion may carry considerable power due to

their social status).2. Claim on resources, for example:

● size of their budget● number and level of staff employed● volume of business transacted with them (e.g. suppliers and customers)● percentage of workers they speak for (e.g. a trade union).

3. Formal representation in decision-making processes:● level of management where they are represented● committees they have representation on● legal rights (e.g. shareholders, planning authorities).

1.10.4 Assessing interest of stakeholdersThis will be more complex because it involves two factors:

1. Where their interests rest. We assume that powerful stakeholders will pursue their self-interest. It is important to consider what they wish to achieve. It is possible to make some generalisations, for example:● managers – want to further the interests of their departments and functions as well as

their own pay and careers;● employees – require higher pay, job security, good working conditions and some

consultation;● customers – want fair prices, reliable supply and reassurance about their purchases;● suppliers – want fair prices, reliable orders, prompt payment and advance notifi ca-

tion of changes;● local government – wants jobs, contribution to local community life, consultation

on expansions and so on. In practice, we would need to interview the powerful stakeholders to fi nd out pre-

cisely what they wanted.2. How interested they are. Not all stakeholders have the time or inclination to follow man-

agement’s decisions closely. Again, some generalisations are possible about what will lead to interest, for example:● high personal fi nancial or career investment in what the business does;● absence of alternative (e.g. alternative job, customer, supplier or employer);● potential to be called to account for failing to monitor (e.g. local councils or govern-

ment bodies, such as regulators);● high social impact of fi rm (e.g. well-known, visible product, association with particu-

lar issues).

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An illustration of Mendelow’s matrix appears in Figure 1.9. It takes up the idea of a factory closure mentioned earlier and suggests where management could classify the stake-holder factions and how it might deal with them.

1.10.5 Strategies to deal with stakeholdersThe purpose is to consider what the matrix will need to look like for the strategy to be a success and then to develop strategies to align the actual matrix with the ideal matrix.

In the example in Figure 1.9, the key concerns where alignment is poor are:

● the negative attitudes of skilled labour, key managers and national suppliers;● the ambivalent attitude of shareholders and customers;● the potentially negative interventions of national media and central government;● the possible search for power from local council and media.

Johnson et al. (2008) suggests the following strategies to deal with each quadrant:

● Box A – direction. This means their lack of interest and power makes them malleable.They are more likely than others to accept what they are told and follow instructions.Factory management should not reappoint the casual staff but rather provide limited

redundancy support. There is no need to tell the small shareholders or customers.● Box B – education/communication. The positively disposed groups from this quadrant

may lobby others to support the strategy. Also if the strategy is presented as rational or inevitable to the dissenters, or a show of consultation is gone through, this may stop them joining forces with more powerful dissenters in C and D.

Low

Low

Pow

er

High

Hig

h

Level of interest

Casual unskilled (–)General public (–)Small shareholders (+)

A Small local suppliers (–)Local council (–/+)Un-unionised labour (–)Local press and media (–/+)

B

Skilled unionised labour (–)Key managers (–)National suppliers (–)Major fund managers (–/+)Research and DevelopmentStaff (–/+)

D

Central government (–)National media (–)Customers (–/+)Minor fund managers (–/+)

C

Figure 1.9 Illustration of Mendelow’s matrix applied to Dyson. From HELLRIEGEL. CustomPub: Organizational Behaviour: Canadian Edition, 1E. © 1998 Nelson Education Ltd.

Reproduced by permission. www.cengage.com/permissions


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Factory management should brief all groups here on the reasonableness of the case for closure and of the provisions being made for the redundant staff. Advance notice will give each more time for adjustment.

● Box C – intervention. The key here is to keep the occupants satisfi ed to avoid their gain-ing interest and shifting into D. Usually, this is done by reassuring them of the likely outcomes of the strategy well in advance.

Factory managers should assure the government and suppliers that the closure will result in a more competitive fi rm that is able to compete worldwide. A similar message may reassure investors if it is backed up with a reassuring short-term dividend forecast.

● Box D – participation. These stakeholders can be major drivers of the change and major opponents of the strategy. Initially, there should be education/communication to assure them that the change is necessary, followed by discussion of how to implement it.

The factory managers should involve the unions in determining the redundancy pack-age or redundancy policy. Key managers should be involved in deciding the basis on which early retirements should be handled and how redeployment or outplacement should be managed. Key shareholders will be consulted throughout to reassure them that costs will not be excessive.

1.10.6 Conflict between stakeholdersThe objectives of the stakeholder groups will inevitably be different and may be in direct confl ict. For example, the staff ’s desire for better pay and work conditions may confl ict with the shareholders’ desire for higher profi ts and the customers’ desire for lower prices. The job of management is to develop and implement strategy with these differences in mind. This can be further complicated in organisations where the employees are also shareholders!

Additionally, there will be differences between the goals of members of the same internal stakeholder group. Two examples are particularly important:

1. Differences between shareholders. This commonly manifests itself as a polarisation between those who broadly require their income as short-term dividends and those who are happy for profi ts to be retained to promote capital growth.

2. Differences between managers. The goals of managers and the departments they lead may confl ict. Consequently, many strategic objectives are the outcome of a political bargain-ing process at boardroom level.

1.11 Meeting the objectives of shareholdersTraditionally, the shareholders’ objectives have been translated into fi nancial objectives such as profi t or profi tability (e.g. return on capital employed or earnings per share).

These accounting measures have several drawbacks when used as strategic targets:

● They are not useful for start-up businesses. During their fi rst few years, many fi rms do not make a profi t or return a positive cash fl ow due to the high costs of set-up and getting established in the market. Profi tability measures are better suited to mature businesses.

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T● They are inherently short-termist. Because profi t is an annual measure, it encourages man-

agement to focus on short-term returns at the expense of the long-term development of the business. Hence, managers may decide to cut product development, promotion or staff development to improve profi t performance at the expense of the long term.

● They provide no control over strategic behaviour. The profi t fi gure is a fi nancial summary of the effects of a year’s economic activity. The competitive strategy of the fi rm will seek to do business in particular ways in order to make this profi t. This strategy should also feature in the goal structure.

● They can be manipulated by creative accounting. Consequently, the strategic targets of fi rms usually contain a mixture of fi nancial and non-fi nancial measures of performance. These ensure that:– managers follow courses of action consistent with the competitive strategy;– shareholders and others can form an opinion of the success of the fi rm’s strategy even

when fi nancial results are low; the strategic objectives can be more easily translated into tactical and operational;

– objectives for divisions and processes without an immediately discernible impact on profi ts (e.g. human resources, marketing, etc.).

The debate on the primacy of fi nancial targets widens when we recognise the impact of other stakeholders and the issues of corporate social responsibility.

1.11.1 Maximisation of shareholder wealth as an objective

Traditional economic theory specifi es that the objective of the fi rm is to maximise profi t. However, this assumption does not accurately refl ect the goals of the shareholder for a number of reasons:

1. It is a single-period measure (typically annual). The shareholder wants fi nancial returns across many years.

2. It ignores risk. Shareholders will require higher returns if risks are higher but will be satisfi ed with lower returns if risks are low.

3. It confuses profi t with cash fl ows to the investor. The investor wants cash fl ows, not a fi gure for profi t on the income statement.A more appropriate version of rational shareholder objectives is either (a) maximisation of

the present value of the free cash fl ows of the business, or (b) maximisation of the share price.

1.11.2 Competing objectivesIt has been shown that profi t-seeking, not-for-profi t and public sector organisations may have competing objectives arising from:

● confl ict between profi t and social responsibilities● differences in the goals of particular managers● confl icts between the goals of infl uential stakeholder groups.

This has important implications in the following areas:

1. Development of consistent strategies. If the organisation does not have clear objectives, or if its objectives are in confl ict with one another, then it will not be able to follow


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consistent courses of action. For example, a fi rm that seeks to satisfy objectives for short-term dividends while also pursuing long-term growth will eventually be forced to sacrifi ce one or the other due to lack of funds.

2. Deciding between strategic options. Options are evaluated against the objectives of the business before management agree to devote resources. However, if one option provides a good fi nancial return while another provides jobs in an area of high unemployment, a fi rm with both fi nancial and social responsibility objectives will not be able to choose.

3. Development of appropriate performance measures. The more objectives an organisation has, the more control measures it will need to monitor performance towards them. If the objectives are competing, there is a danger of confl icting signals or, worse, excessive focus on one at the expense of the rest. For example, a school will have many objectives such as producing good citizens, ensuring emotional development, catering for special needs, and so on. However, parents and government prefer to have a single measure to decide whether a school is performing well or badly and tend to focus on examination results. This immediately distorts behaviour in the school towards exam results at the expense of other equally worthy objectives.

1.11.3 Resolving competing objectivesThere are various techniques available:

1. Prioritisation. Management can specify that any strategy considered must at a mini-mum satisfy one or more specifi c objectives before they are prepared to consider it.

For example, management may set a minimum profi tability threshold for any strat-egy (say 15% return on investment). Once this is assured, they turn their attention to achieving it in a more socially responsible way.

2. Weighting and scoring. Each objective is weighted according to its relative importance to the organisation (a high weight denoting high importance). Each strategic option is scored according to how well it satisfi es the objective (a high score showing high attain-ment). A ranking is calculated for each option by multiplying its weighting by its score, and the strategic option with the highest overall ranking is accepted.

3. Creation of composite measures. These are used for strategy implementation and control rather than for strategy formulation and choice. Approaches include the use of balanced scorecard measures and techniques of data envelopment analysis (DEA).

DEA is used to assess performance of a group of branches or divisions (e.g. a group of schools, hospitals or universities), where each has the same set of multiple objectives to achieve. Data is fed into a sophisticated computer programme which identifi es for each objective the best performer among the group. It calculates the comparative perform-ance of the remaining branches against this ‘best in class’ branch. It can also give an overall performance metric for each branch, based on a composite index of its perform-ance against a notional ‘best in class at everything’ branch.

The above techniques are rational, mathematical ones. In their study A Behavioral Theory of the Firm (1963), management researchers Cyert and March identify some less obviously rational techniques by which competing objectives are resolved:

● Satisfi cing. Here, the strategy selected is the one that keeps all, or at least the most pow-erful, stakeholders happy. It usually emerges as a result of negotiation between the com-peting stakeholders.

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T● Sequential attention. Stakeholders are kept happy by taking turns to get their objec-

tives realised. Therefore, staff may get a large pay rise every 3 years but, in between, pay remains static while dividends are paid.

● Side payments. Where particular stakeholders’ objectives cannot be addressed, they are compensated in another way. For example, a shareholder may be compensated for a low profi t by a higher dividend, or a local community may have a new leisure centre built by a company whose new superstore will inevitably increase noise and traffi c congestion in the area.

● Exercise of power. Where management are deadlocked due to competing objectives, this is often resolved by one or more powerful fi gures using their power to force through their preferred option.

1.12 SummaryThis chapter provided an introduction to the strategic management process. The key top-ics introduced include:

● the different defi nitions of strategy;● the different stages in the rational strategy model;● the different ways of achieving competitive advantage and the choices organisations have

in strategy development;● the benefi ts and drawbacks of the formal top-down approach to strategy development;● the difference between the positioning approach and the resource-based theory view;● the alternative approaches to strategy, for example emergent strategies and logical

incrementalism;● the importance of stakeholders and the possible competing objectives.

ReferencesBarney, J. (1991), ‘Firm Resources and Sustained Competitive Advantage’. Journal of

Management, Vol. 17, No. 1, pp. 99–120.Birley, S. (1982), ‘Corporate Strategy and the Small Firm’. Journal of General Management,

Vol. 8, No. 2. Winter 1982–3. Reproduced in Asch, D. and Bowman, C. (eds) (1989), Ch. 6.

Brunsson, N. (1985), The Irrational Organisation: Irrationality as a Basis for Organisational Action and Change. Chichester: John Wiley.

CIMA (2000), Corporate Governance: History, Practice and Future. London: CIMA Publishing.

CIMA (2005), Management Accounting Offi cial Terminology. London: CIMA.Cyert, R.M. and March, J.G. (1963), A Behavioural Theory of the Firm. Englewood Cliffs,

NJ: Prentice-Hall.Hamel, G. and Prahalad, C.K. (1994), Competing for the Future: Breakthrough Strategies

for Seizing Control of Your Industry and Creating the Markets of Tomorrow. Boston, MA: Harvard Business School Press.

Handy, C. and Handy, E. (1999), The New Alchemists. London: Hutchinson.Hofer, C.W. and Schendel, D. (1978), Strategy Formulation: Analytical Concepts.

Minnesota: West Publishing.


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Hooley, G.J., Cox, A.J. and Adams, A. (1992), ‘Our Five Year Mission: To Boldly Go Where No Man Has Gone Before …’. Journal of Marketing Management, Vol. 8, pp. 35–48. Cited in Corporate Performance Evaluation in Multinationals (1993). London: CIMA.

Johnson, G., Scholes, K. and Whittington, R. (2008), Exploring Corporate Strategy (8th edn). Harlow: FT Prentice Hall.

Kay, J. (1997), Foundations of Corporate Success: How Business Strategies Add Value (2nd edn). Oxford: Oxford University Press.

Lindblom, C.E. (1959), ‘The Science of Muddling Through’. Public Administration Review, Spring, pp. 79–88.

Lindblom, C.E. (1979), ‘Still Muddling, Not Yet Through’. Public Administration Review,November/December, pp. 517–526.

Lynch, R. (2006), Corporate Strategy (4th edn). London: Financial Times Management.Mendelow, A. (1991), Proceedings of 2nd International Conference on Information

Systems, Cambridge MA.Mintzberg, H. (1987), ‘Crafting Strategy’. Harvard Business Review, July–August.

Reprinted in Mintzberg et al. (1998), op. cit., pp. 110–120.Prahalad, C.K. and Hamel, G. (1990), ‘The Core Competence of the Corporation’.

Harvard Business Review, May/June.Quinn, J.B. (1978), ‘Strategic Change: Logical Incrementalism’. Sloan Management

Review, Vol. 20, pp. 7–21. FallRockart, J.F. and Hoffman, J.D. (1992), ‘Systems Delivery: Evolving New Strategies’.

Sloan Management Review, Summer, pp. 7–19.Stalk, G., Evans, P. and Shulman, L. (1992), ‘Competing on Capabilities’. Harvard

Business Review, March/April.


Reading 1Approaches to strategic management have changed and evolved considerably over the last 20 years or so. Initially, most writers on strategy emphasised the importance of adopting a deliberate and systemic approach to the process of planning. More recently, there has been a move towards recognising the contribution of a more fl exible contingent approach within which strategies can sometimes emerge from chance events and from complex cognitive, cultural and political processes within organisations. An associated change of emphasis has been a switch in the focus of attention from a concern with fi nding the most advantageous position for the organisation in relation to its environment, to one of exploiting and build-ing the organisation’s competences and resources. Alan Marsden explains these issues in the following article.

Strategic management – which way to competitive advantage?Alan Marsden, Management Accounting, January 1998

Many readers of this magazine will associate strategic management with strategic planning. This approach to strategy generally involves a deliberate step-by-step approach. It com-mences with a set of tentative objectives which the CEO or senior management team con-siders necessary for the organisation to achieve its goals. The external environment is then analysed to determine potential opportunities and threats; an internal audit is conducted to determine the organisation’s strengths and weaknesses; strategic alternatives are evalu-ated to determine which strategy will best ‘position’ the organisation so as to capitalise on opportunities and strengths while minimising threats and weaknesses, and then a plan is prepared to assist in the implementation of the chosen strategy.

The approach may be illustrated by a diagram such as Figure 1, which is taken from the Management Accounting Offi cial Terminology (CIMA, 1996).

Development of the planning/positioning approach as the dominant frameworkThis approach to strategy has provided the dominant framework for textbooks on strategy from the time the subject emerged as a distinct specialism in the 1950s with the work of Igor Ansoff, Kenneth Andrews and others (1971), through to the early 1990s. Though the basic framework for analysis appears to have been formulated in the early 1950s, it has been elaborated and developed by a number of writers. Among these, the most important contributor has been Michael Porter (1980), with his development of the concept of the fi ve forces model used for industry analysis, the value chain as an instrument for assess-ing internal organisational strengths and weaknesses, and the generic strategies as a tool to assist in strategy evaluation.

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Though writers such as Philip Selznick (1957), Ansoff, Porter and others discussed the importance of internal analysis and developed both the competence-grid and the value chain as aids to this, the major focus has tended to be on the environment. The common assumption underlying the approach is that the environment largely determines the organisation’s freedom to manoeuvre. Therefore, the structure of the environment is of overwhelming importance and a strategy for delivering competitive advantage will be one that positions the firm within the environment. The problem for the strategist then becomes one of finding a position that is defensible against the threats from existing and potential competitors and from the bargaining power of suppliers and buyers.

One of the main purposes of corporate planning was, and is, that of the planning and management of growth. During the 1960s and 1970s, diversifi cation was very much in fashion as a means to corporate growth. It is perhaps not surprising, then, that during this period, we fi nd the development and use of portfolio planning matrices as frameworks for selecting strategies and allocating resources in the diversifi ed corporations.

The approach outlined was taken on board and used by planning departments in some of the world’s largest corporations. This was particularly true in the period of stability and economic growth that characterised the 1960s and early 1970s. A study in 1963 Gilmore (1979), found that the majority of the largest US companies had set up corporate planning departments. The typical format used by these departments was a fi ve-year corporate-planning document that set goals and objectives, forecast the main trends, such as those for market demand, the company’s market share and its revenue and net income, established priorities for different products and business areas and allocated resources.

The demise of the planning approachThe enthusiasm for corporate planning, however, was not to last. One reason for its demise appears to have been the increasing rate of change and the associated macroeconomic

ASETTING OBJECTIVES

Where do we want to go?

CENVIRONMENTAL

ANALYSIS

ECORPORATEAPPRAISAL

GLONG-TERMPLAN

1 Strategies

2 Resources required3 Personal responsibilities and motivation

(a) strengths/eliminatelow earnings

(b) expand high earnings(c) own production/buy-in(d) new products(e) acquisitions

FESTABLISHING

STRATEGY

BPOSITION AUDIT

Where are we now?

What is the environment inwhich we operate going tobe like?

What is the best way to getfrom B to A considering C,D and E?

1 Shareholder’s return/ earnings per share2 Products/markets3 Organisation4 Expansion/consolidation

Product demandCustomersCompetitionProduction technologyWorkforce

DGAP ANALYSIS

Ultimate objectivescompared with extrapolatedexistingPerformance–the ‘gap’

SWOT analysisStrengths, Weaknesses,Opportunities, Threats

Products/marketsProduction resources(a) People(b) Fixed assets(c) Finance organisationResults(a) Operating companies(b) For shareholders

Figure 1 Long-term plan

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instability with which companies had to cope from the mid-1970s onwards. Particularly damaging was the fi rst oil price shock of 1974. This produced fuel shortages and infl a-tion which few if any could have anticipated and this rendered the predictions of corpo-rate planners virtually useless. Organisations were faced not only with fl uctuations in the economy but also with technological change. One effect of this was that product life cycles became shorter and fi rms more frequently needed to update their production processes. Developments in transport and communications resulted in the development of global competition for many products and this intensifi ed competition. Another factor adding to this competitive situation was the growth of Japan and other South East Asian countries as manufacturers and exporters of an increasing range of goods. This additional competition resulted in an ever more active search by competitors to secure competitive advantage. The product of all these changes for the organisation was a dynamic and unstable environment in which any long-term plans became quickly outdated. A secondary reason for the fall in popularity of strategic planning was the failure of diversifi cation to increase profi tability. The use of portfolio planning models did not guarantee the synergy that companies sought in their various acquisitions and so this only added to the disillusion with the planning approach. There is some evidence that the reason for planning failure was partly infl uenced by the way in which the planning process was conducted in some organisations. Research by R.T. Lenz and M. Lyles (1985), for instance, found that in a number of organisations the planning process developed into an annual ritual for which managers had little enthu-siasm because it took up so much time and effort and often seemed to lead nowhere. They found that several factors contributed to this lack of commitment including the profes-sionalisation of planning, the excessive emphasis on quantifi able data, and the drive for administrative effi ciency in the planning process and the unqualifi ed acceptance and mis-application of various analytical techniques. The use of professional planners with their use of technical jargon tended to alienate some practising managers. The emphasis on quanti-fi able data led to the neglect of important qualitative changes in the environment because they were diffi cult to measure. The drive for effi ciency tended to result in the growth of bureaucratic procedures and to be detrimental to creative thinking, while the over-reliance on analytical tools like portfolio matrices often seemed to serve as a substitute for critical thought in the analytical process.

The recognition that strategies can emergeAll these developments affected the practice of strategic planning and led to a reappraisal of the approach by both managers and academics. In many companies, corporate planning departments were dismantled and responsibility for strategy formulation passed to manag-ers who had responsibility for its implementation. A more fl exible, less formal approach was adopted and the time horizon for long-term plans reduced.

Academics charted these developments and conducted empirical research into how strat-egy was actually formulated in companies.

The main fi ndings of this research can perhaps most easily be summarised by the use of a diagram provided by Henry Mintzberg (1994). He observed that while strategy is often thought of as a plan or a guide to a course of action into the future, it could also be regarded as a pattern of consistent behaviour over time. The difference between these is that a plan refers to intended future action, whereas strategy as a pattern refers to the observed decisions and actions after they have been taken. Mintzberg suggests that strategy as a plan can be called intended strategy, while the pattern of actions which evolve from past decisions might be called realised strategies. The available research shows that few planned

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strategies work out exactly as expected. That is to say that few plans are realised in all their intended detail. This occurs for a number of reasons, such as an unexpected change in the environment like a sudden fall in demand, a switch in the strategy of a competitor, pressure from a stakeholder group or the fact that the original strategy may have been misconceived.

As depicted in Figure 2, intentions that are fully realised can be called deliberate strate-gies, while those that are not realised at all can be called unrealised strategies. The strate-gic planning approach recognises both these possible outcomes, but it does not account for a third possibility, which Mintzberg calls emergent strategy and which applies to a situation where a realised pattern evolves that was never intended. The most frequently quoted example of this type of strategy development comes from a description provided by Richard Pascale (Spring, 1984) of Honda Motor Company’s entry into the US motor-cycle industry. The ostensible reason for Honda’s success is that the company redefi ned the US motorcycle industry via a brilliantly conceived intended strategy. According to Pascale, however, Honda’s intended strategy was nearly a disaster. The strategy that emerged did so, not through planning, but through unplanned action taken in response to unforeseen cir-cumstances. Pascale recounts how, when Honda executives arrived in Los Angeles in 1959, they did so with the intention of setting up a subsidiary to sell 250cc and 350cc machines to existing motorcycle enthusiasts. They had no intention of trying to sell smaller bikes such as the 50cc machines that were so popular in Japan because they could not envisage a market for these in a country where everything was bigger and better than back home.

As things turned out, the sales of the 250cc and 350cc bikes were disappointing. One of the reasons had to do with mechanical failure of some of their machines. The intended strategy looked to be failing. In the course of their work, however, the Honda executives were using 50cc machines to run errands around Los Angeles, and their presence attracted a lot of attention.

One day, the Honda team received a call from a Sears’ buyer who proposed selling the 50cc machines through the department chain outlets. For their part, the Honda team were reluctant to sell the small bikes because they feared it would alienate serious bikers who might associate the Honda Company with ‘wimp’ machines. Eventually, however, their failure to sell the expected quota of larger machines pushed them into selling the smaller 50cc machines and to sell them not through specialist motor cycle distributors but through general retailers. Sales took off and a new strategy was born.

Emergentstrategy

Unrealisedstrategy

Realisedstrategy

Deliberatestrategy

Intendedstrategy

Figure 2 Forms of strategy (Mintzberg, 1994)

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By 1964, nearly one out of every two motor cycles sold in the United States was a Honda. By chance, the Honda team had stumbled on a previously untouched market segment of consumers who were not motorcycle enthusiasts but simply wanted a small machine to nip around to the shops, the leisure centre and the park.

The critical point demonstrated by this example is that not all strategies are planned, and also that successful strategy can emerge without prior planning and often in response to unforeseen circumstances. It also illustrates the fact that strategy need not originate in the minds of the CEO or the senior management teams but can arise from the observa-tions and experience of the salesperson.

The view that the realised strategies of an organisation depend on many processes in addition to systematic analysis and deliberate planning is supported by the work of other researchers like Gerry Johnson (1988). In his examination of how strategy developed in Coopers, the retail clothing company, Johnson concluded that the strategy that emerged could be best explained in terms of the cognitive, political and cultural fabric of the organ-isation. The cognitive factors referred to consisted of the common sets of assumptions and beliefs that were taken for granted by managers in the retailing organisation studied. This tacit knowledge consisted of agreed notions about trading procedures, and methods of organisation and control that it was believed contributed to the effectiveness and effi -ciency of the organisation. This set of assumptions and beliefs may be regarded as a sort of paradigm, which infl uences the perceptions of managers, and therefore the decisions they make and the actions they take. The link between cognitive and political factors in the case of strategy development at Coopers derived from the fact that the buyers of merchandise in the company exercised a great deal of power. What’s more, the buyers shared the com-mon assumption developed over years of experience in the industry that a ‘commodity’ merchandise policy (a ‘pile it high, sell it cheap’ policy) was the one most likely to deliver competitive advantage. Johnson describes how, despite clear signals of fashion changes in the market and continuous pressure from middle management, the buyers, supported by top management, resisted change. Even when sales fell, the response of senior management was not to adopt a new strategy to cope with a rapidly changing market but to pursue the low-price strategy even more vigorously, by tightening controls and cutting control-lable costs. Johnson explains the reluctance of Coopers’ management to change their strat-egy as arising from the mindset produced by the prevailing paradigm. The set of beliefs, assumptions and way of doing things that had served the company well in the past were not easily abandoned. Evidence that the changing market required a change in strategy was dismissed as inconclusive or as temporary phenomena that would revert to its former pat-tern in the near future. In addition, because the prevailing paradigm was associated most strongly with senior executives in the company, any challenge to it constituted a political threat. Abandonment of the way of doing things, which they had continually defended, would result in a major loss of face.

In the case of Coopers, the situation was eventually resolved in an incremental fashion by many small adjustments over a period of time. In other organisations, it is not uncom-mon for a failing company to be forced to adopt a new strategy almost overnight. Senior managers committed to a way of doing things, which bring a company to the brink of ruin, are frequently replaced by those with new ideas.

What now for strategic planning?The accumulated evidence suggests that the strategic planning approach to the develop-ment of strategy has a number of limitations.

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T First, it is becoming more diffi cult to plan because of the accelerating rate of change. This does not mean that attempts to plan should not be undertaken. What it does mean is that the scanning and monitoring of the environment for trends and potential changes in these trends becomes even more important, and that additional resources have to be devoted to these by the organisation. It also means that organisations have to be fl exible and to accept change as something that has to be managed rather than resisted.

Second, research has shown that some of the problems experienced by organisations in their strategic planning have to do with the failings of those who use the approach, as the study by Lenz and Lyles has demonstrated. Here again, the problems are not such as to invalidate the approach but do require the effort and attention by managers concerned to avoid the pitfalls.

Third, research by Mintzberg, Pascale, Johnson and others has found that in practice, strategies can emerge that derive not only from the systematic and rational analysis used by strategic planners but also from chance observations, trial and error and cognitive and political processes. It is hard to avoid the conclusion from these studies that useful strategies can and do emerge in other ways than via the strategic planning process. But again, these fi ndings do not mean that the strategic planning approach should be abandoned. What these studies do is to inform us of the complex processes at work in the strategy-making process and, knowing of them, enable us to take account of these when formulating plans.

Positioning and its problemsIt is not only how managers can best formulate strategy that has concerned academics but also where managers should concentrate their attention. As previously indicated, the focus in the traditional planning approach tends to have been on the environment because research shows that it is more diffi cult to generate profi ts in some industries than others. Porter’s fi ve forces model, in particular, suggests that an industry’s profi tability potential is a function of the inter-actions among the fi ve forces (suppliers, buyers, competitive rivalry among fi rms currently in the industry, product substitutes and potential entrants to the industry). In Porter’s words, ‘the collective strength of these fi ve competitive forces determines the ability of fi rms in an industry to earn, on average, rates of return on investment in excess of the cost of capital’ (Porter, 1980). Because the strength of the fi ve forces varies from industry to industry, and can change as industry evolves, industries vary in their potential for profi tability.

In some industries, such as soft drinks and pharmaceuticals where the fi ve forces are favourable, many competitors can earn attractive returns. But in industries like rubber, steel and video games, the pressure from one or other of the fi ve forces is so intense that few fi rms can sustain a high level of profi t.

Given these differences in industry profi tability, it follows that any entrepreneur seeking to invest in a profi table venture should seek to enter an industry in which the fi ve forces are favourable and the chances of profi t-making are therefore greater than one in which competitive pressures are intense.

Having selected the most favourable industry, the second question the entrepreneur needs to address is how to best position the fi rm within the industry so as to earn a rate of return above the industry average. A fi rm that can position itself well can become very profi table even when the industry structure is unfavourable. The key to gaining a good position that will secure a competitive advantage and therefore a good rate of return depends on the strategy adopted by the organisation. The competitive forces operating in a particular industry determine the kind of strategy that will be effective for fi rms operating in the industry. For instance, producers of standardised silicon chips fi nd themselves driven by competitive forces to adopt a low-cost strategy because price competition is fi erce in an

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industry where the technology allows cheap mass production. There is, however, a market for a small number of customised chips for specialised equipment. Manufacturers with the knowledge, expertise and appropriate fl exibility to produce these can gain a competitive advantage by targeting this niche in the market and supplying at lower cost than the mass producers of standardised chips.

In some cases the competitive forces will be such that differentiation is the source of competitive advantage. If this is the case, the company will seek to differentiate itself by improving quality, by innovation, advertising and superior after-sales service.

This approach, which concerns itself with how companies might best position them-selves in the market, the industry and the wider environment and so achieve a strategic fi t with the environment, though still very popular among both theorists and practitioners, has come in for criticism in recent years.

The main shortcomings of the approach are, fi rst, that it relies on a static picture of competition and thus understates the role of innovation and, second, that it overemphasises the importance of industry structure and the wider environment, while de-emphasising the signifi cance of individual company differences in the possession of resources, capabilities and competence.

The fact that innovation can revolutionise industry structure is now widely recog-nised. The example of the development of the computer industry is one of the more dra-matic recent examples. Where a few companies existed ten years ago, now companies like Compaq, Dell, Sun Microsystems and Silicon Valley have gained market share from the established producers like IBM, Digital Equipment and Wang Labs. Fifteen years ago, the industry was dominated by the likes of IBM, but the revolution that Apple computers started when it introduced the fi rst personal computer has transformed the structure of the computer industry. As a result, a fi ve forces analysis conducted in 1980 would look com-pletely different from the one done today. Other recent examples are in banking, insurance and other fi nancial services. In the United Kingdom, companies like Direct Line Insurance, which pioneered telephone sales in insurance, has sparked off a revolution in the way in which insurance, banking and other fi nancial services can be sold and this is changing the structure of the industry.

The second criticism of the fi ve forces model and the positioning approach of which it is a part is that it overemphasises the importance of industry structure as a determinant of company performance. Research by Richard Rumelt (1991), for example, suggests that industry structure only explains about 10 per cent of the variance in profi t rates across com-panies. The implication of this fi nding is that individual company differences explain much of the rest of the variance. Other studies suggest that the variance in performance arising from industry structure is really nearer to 20 per cent, but this still suggests a quite limited infl uence by the industry structure. These studies have been taken as evidence by a growing number of academics to mean that the individual resources and capabilities of a company are far more important determinants of its profi tability than the industry in which it is located.

The competence-based alternativeThese problems with the positioning approach have been one reason for the search for an alternative. Another reason has been the observation that success for many companies appears to have little to do with positioning and much more to do with the exploitation of a company’s resources, competences and capabilities. Thus Prahalad and Hamel (1990) cite the core competence of miniaturisation as the basis for the success of the Sony Corporation. This competence, it is argued, has allowed Sony to make everything from the Walkman to

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T video cameras to notebook computers. Similarly, Canon’s core competence in optics, imag-ing and microprocessor controls has enabled it to enter markets as diverse as copiers, laser printers, cameras and image scanners. Marks & Spencer’s competitive advantage has been based on its consistent ability to deliver high-quality clothing and food products at reason-able prices. These examples have led Hamel and Prahalad and other researchers to focus on the resources, capabilities and competences of the organisation as the source of competitive advantage rather than the environment as in the traditional approach.

Because the new approach is still in the process of development, there is as yet lim-ited agreement on the terminology to be employed. Similar terms – core competences, dis-tinctive competences, capabilities, resources, strengths, intangible assets, skills – are used interchangeably by different authors. Currently, a number of writers are trying to derive a vocabulary for discussing what they have called a ‘competence-based approach to strategic management’ Sanchez et al. (1996). Whether or not this attempt will provide a vocabulary on which all can agree remains to be seen. Despite the confusing use of terminology, how-ever, it is possible to describe the main characteristics of what we shall call here the ‘com-petence-based approach’.

The approach assumes that an organisation is a collection of resources, capabilities and competences that are relatively unique and that these provide a basis for its strategy and its ability to compete. It is also assumed that fi rms can acquire different resources, skills and capabilities in the process of their development. But because it takes time to acquire and develop such resources and capabilities it follows that fi rms that already possess a relevant set of these can gain competitive advantage over rivals. For example, the skills and cap-abilities required for miniaturisation and considered to be the basis of core competence for Sony take many years to be honed to perfection and give Sony an advantage because they are not readily available to competitors. A diagram such as that in Figure 3 can be used to illustrate the competence-based approach.

In contrast to the traditional planning model which takes the environment as the criti-cal factor determining an organisation’s strategy, the competence-based approach assumes that the key factors for success lie within the fi rm itself in terms of its resources, capabili-ties and competences. The choice of the fi rm’s strategy is not dictated by the constraints of the environment but is infl uenced more by calculations of how the organisation can best exploit its core competence relative to the opportunities in the external environment.

1 Identify the firm’s resources. Study its strengths and weaknesses as compared with those of competitors

Resources: tangible and intangibleInputs into a firm’s production process

CapabilitiesCapacity of an integrated set ofresources

Core competence which providessustainable competitive advantageAbility of firm to outperform thecompetitors

Strategy selection and implementationAction taken to earn superior profits

Superior profitabilityEarning of above-average profits

2 Determine the firm’s capabilities. What do the capabilities allow the firm to do better than its competitors?

3 Determine the potential of the firm’s resources and capabilities to become core competences and to give the organisation a sustainable competitive advantage

4 Select a strategy that best allows the firm to exploit its core competence relative to opportunities in the external environment

Figure 3 The competence-based approach (adapted from R.M. Grant, 1991)

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The resources of the fi rm in the competence-based approach are typically classifi ed into two types: tangible and intangible resources. Tangible resources are inputs into a fi rm that can be seen, touched and/or quantifi ed. They include assets like plant and equipment, access to raw materials and fi nance, a trained and skilled workforce and a fi rm’s organisational struc-ture. Intangible resources range from intellectual property rights like patents, trade marks and copyrights to the know-how of personnel, informal networks, organisational culture and a fi rm’s reputation for its products. The dividing line between the tangible and intan-gible is often unclear and how they are classifi ed varies a little from one writer to another. Despite the problems with classifi cation, proponents of the competence-based approach are agreed on the relative importance of the two types of resources. Although it is clear that both types of resources are required for any business to operate, competence-based theorists argue that intangible resources are the most likely source of competitive advantage. The reason for this, it is argued, is that, being less visible, they are more diffi cult to understand and imitate than tangible resources. As such they are therefore more likely to be a source of competitive advantage. A survey of managers by Aaker in 1989 appears to confi rm this. Aaker found that a reputation for quality was rated as the most important basis for competitive advantage by the managers questioned.

Resources alone, however, are not a basis for competitive advantage. It is the way in which resources are integrated with each other to perform a task or an activity that provides the capability for an organisation to compete successfully in the marketplace. This being the case, the most important resource for any organisation is the skill and knowledge possessed by the organisation’s employees. It is this skill and knowledge acquired over time and embedded in the fi rm’s culture that infl uences how it operates and determines its success.

Whether or not resources and capabilities have the potential to become core compe-tences depends on how diffi cult they are for competitors to acquire and how valuable they are to the fi rm as a basis for competitive advantage. When they are rare, diffi cult to imi-tate, non-substitutable and they allow a fi rm to exploit opportunities or neutralise threats, then they can be considered core competences and serve as the basis of an organisation’s sustained competitive advantage.

As part of this new approach to strategy development, a number of writers have incor-porated the notion of strategic intent. This is a term coined by Hamel and Prahalad (1989) to mean the leveraging of a fi rm’s internal resources, capabilities and core competences to accomplish what initially appear to be impossible goals in the face of the competitive forces confronting it. Examples cited by various authors of strategic intent include the intention by Intel to become the number-one supplier to the computer industry, the belief and intention of Microsoft that it can provide the Yellow Pages for an electronic market-place of online information systems and the intention of Komatsu to encircle Caterpillar, its main competitor. Strategic intent is said to exist in an organisation when managers and employees have a fervent belief in their organisation and its products and when they are completely focused on doing what they do better than their competitors.

Because the idea of strategic intent implies ambitions that at a particular moment in time outstrip the organisation’s resources and capabilities for their achievement, theorists have also concerned themselves with how competences might be best acquired. As in the rest of this developing fi eld, a variety of perspectives exist. Thus, some writers such as Senge (1990) and Argyris (1994) stress the acquisition of competences through internal mechanisms of individual and collective learning, while others like Hamel and Prahalad (1989) put greater emphasis on strategic tools like alliances, licensing, mergers and acqui-sitions. Writers who favour internal means of acquiring competences do so because they

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T claim that such means give the advantages of secrecy, exclusivity and surprise. Those who concentrate on external means of acquiring competences defend their approach on the grounds of fl exibility and speed. As markets change, it is argued, old alliances can be dis-carded and new ones formed. As new resources, capabilities and competences become nec-essary for competitive advantage, it is quicker to buy them than to spend years of trial and error in their development. Such is the diversity of approach to the acquisition and building of competences that a contingent approach has been recommended as a way of selecting the most appropriate means of competence acquisition. This approach assumes that the characteristics and direction of the competence building activity of a company are mainly contingent on its strategic objectives.

Some of the claims for the competence-based approach are quite sweeping in nature. For example:

‘Like the ‘‘grand unifi ed theory’’ that modern physicists are searching for to explain physical behaviour at both the subatomic level and that of the entire cosmos, the combination of core competence and capabilities may defi ne the universal model for corporate strategy in the 1990s and beyond’ (Stalk et al., 1992, p. 64).

Summing up so far, then, we have the claim that changes in the business environment have rendered the positioning approach irrelevant and that the only sound basis for sus-tainable competitive advantage is the development and exploitation of those resources and capabilities which are, or will become, the core competences of the organisation. Indeed, the claim is made that core competences are more critical than the external envi-ronment as a basis for strategy determination because the environment is in too much of a state of change to base any strategy on it. The claim for the competence-based model as a superior form of explanation is based on examples of a number of fi rms that appear to be successful because they are particularly good in one or more functions and/or because they have acquired some unique resource which, combined with others, gives them a competitive edge. All this adds up, we are told, to the emergence of a new paradigm in corporate strategy.

Problems with the competence-based approachA review of the literature, however, would suggest that a more cautious view of the so-called new paradigm should be adopted. The reasons for caution include the following. First, it is not a new approach because its key features are the same as those contained in a general framework for strategic management fi rst formulated over 30 years ago. Second, it is partial and one-sided and thus in danger of neglecting the environment, which is still critical to the survival of organisations. Third, the case for its superiority is based on a few examples of successful companies that have been chosen because they appear to confi rm the theory. Companies that are successful for other reasons have been neglected.

Finally, even when the leading exponents conduct an analysis of the same case, they disagree about the basis of competitive advantage.

Turning fi rst to the claim that the competence-based approach represents a new para-digm. Over thirteen years ago, Waterman (Thomas, 1984) noted that the focus on distinc-tive competence is not new. Under a heading ‘Distinctive competence the forgotten trail’,

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Waterman recalled that the fi rst writer to discuss the idea of organisational distinctive com-petences was Phillip Selznick in 1957 when that writer noted that:

The terms, institution, organisational character and distinctive competence all refer to the same basic proc-ess – the transformation of an engineered, technical arrangement of building blocks into a purposive social organisation.

Waterman also goes on to confi rm that the standard textbook on business policy (another name for strategic management) over 30 years ago was by Learmond et al. and that the focus of strategy-making at that time was clearly on analysing and building dis-tinctive competences. Since that time, Waterman argues, the concern with competences has been downgraded as ‘Analysis of strategic position within a competitive system has all but butted out concern with the boring details of execution (which sum up to that elusive competence).’

One of the important premises of the model is that strategies should be unique and built on distinctive (now called core) competences. In their work, both Andrews and Ansoff stressed the importance of internal analysis as part of the strategic planning process. Ansoff (1965) supplied perhaps what is the most detailed account. Adopting what stu-dents today will recognise as the strengths and weakness approach to the internal analysis of the business, Ansoff describes how to develop what he calls a grid of competences. He recommends that for such a grid to be widely applicable, it must be constructed in terms of competence areas which are common to most industries. To be applicable to a single fi rm, these areas must list specifi c skills and resources which differentiate between success and failure in different types of business. Ansoff recommends taking the fully integrated manufacturing fi rm as the most comprehensive framework of capabilities and using this as a point of reference. Frameworks for analysis of fi rms in trade, fi nance and services can then be obtained through modifi cation of the general model. The individual skills and resources can then be organised according to major functional areas. Functions such as R&D, operations, marketing and so on are listed together with the equipment, personnel skills, organisational capabilities and management capabilities for each function.

The list of the major skills and competences identifi ed in the competence profi le, as Ansoff called it, can then be rated with respect to those found in other fi rms which have the same capabilities. This rating will produce a ranking for each skill or capability accord-ing to whether it is judged to be outstanding, average or weak. The result of this process of analysis and rating will be to provide a competence profi le for the fi rm which can be used in conjunction with the analysis of the external environment as an aid to strategy formula-tion and planning.

Ansoff seems to use the word competence and capability interchangeably, as many of his modern counterparts do. But whatever the merits of his approach, it is evident that he and his contemporaries were very much aware of the need to assess a fi rm’s capabilities and resources as a basis for planning and strategy formulation. It is also clear that in all funda-mental respects the approach adopted was similar to that being promoted by modern day competence-based theorists. There are, of course, some differences. Modern theorists have refi ned the terminology. In particular, the importance of intangible resources is stressed and the concept of strategic intent emphasised by Hamel and Prahalad can be seen to have built on Ansoff ’s work and added new insights.

In brief then, there is nothing radically new in the competence-based approach; it is sim-ply an elaboration of one part of the overall strategic management framework formulated over 30 years ago.

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T The second problem with the competence-based approach is that in seeking to distance itself from the positioning approach, it is in danger of overemphasising internal analysis to the extent of neglecting the problems which the accelerating rate of change in the environ-ment poses for organisations. While fully accepting that organisations continually need to adapt to change by developing their core competences, it is also evident that the analysis of the environment is now even more vital in order to know how to adapt!

The third concern with the new resource-based approach is a methodological one. In many respects the methodology reminds one of the Peters and Waterman (1982) study of excellent companies. Existing successful companies are selected and examined. The factors which appear to have contributed to their success are listed and put forward as the key characteristics which contribute to the success of these and other organisations, and con-sultants go on to prescribe these as the basis for future success. Several of these excellent companies have since failed and critics such as Guest (1992) have pointed out that a major problem with the methodology adopted by Peters and Waterman was that no comparisons were made with companies not considered to be excellent. As a result, it is diffi cult to know whether the characteristics contributing to excellence were evident to a greater extent in excellent companies than in other organisations. The same weaknesses appear to be evi-dent in the approach adopted by the new resource-based theorists. Researchers spot some excellent companies – often Japanese high-tech consumer-electronics companies whose products are characterised by relatively short product life cycles – and abstract what appear to be those resources, capabilities and core competences which contribute to success.

A fourth problem with the case made by the resource-based school is that they are unable to agree on what it is that contributes to the competitive advantage of the organisa-tion even when they are conducting an analysis of the very same case. The disagreement between Stalk et al. and Prahalad and Hamel (1990) in respect of Honda’s success illus-trates this point very well. According to Prahalad and Hamel, Honda’s competitive advantage derives from core competences which they defi ne as the combination of indi-vidual technologies and production skills that underline a company’s myriad product lines. Their example of Sony’s technical competence at miniaturisation suggests that much of competence has to do with the technical knowledge and skill which a fi rm accumulates over time.

By contrast, Stalk et al. attribute organisational success to a capability that is defi ned as a set of business processes strategically understood. By business processes it is apparent, from their Honda example, that they are referring to what are usually thought of as business functions, such as distribution, after-sales service, research and development and so on. But they also emphasise the effective weaving of business process together and the need for cross-functional integration as prerequisites for a capability to exist. In fact, the defi nition of capability by Stalk et al. includes so much as to invite confusion.

In short, there are some problems with the competence-based approach. There is as yet a lack of agreement on terminology that results in a lack of clarity. Also, the claim that competences are the critical basis of competitive advantage has not been conclusively established because of the limitations of the methodology applied by some researchers. In fact, it is questionable whether or not it makes sense even to try to establish whether position in the industry/marketplace or the organisation’s competences are the key to critical advantage when the performance of any company is so evidently dependent on both. There is also a danger of the impact of the environment being neglected because of an overenthusiasm with the rediscovery that the competences of the company are vital in the determination of strategy.

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These problems are not insurmountable. Some of them, such as the problem with ter-minology, are currently being addressed and the less extreme advocates of the competence-based model readily agree that the approach can complement rather than confl ict with the positioning approach.

ConclusionsThis review of developments in strategic management suggests the following state of play. The environment in which organisations operate is changing faster than ever and it is therefore necessary for it to be continuously monitored and the position of the organisa-tion within it to be regularly assessed.

Recent studies have re-established the importance of resources, capabilities and compe-tences as critical sources of competitive advantage, and concepts for use in their analysis are currently being developed. The planning process has been questioned partly because of its limited success in application but also because it fails to take account of cognitive, political and cultural processes which often infl uence both how the strategy is formulated and its con-tent. The fi ndings do not appear to challenge the need to conduct analysis or to plan, but it is useful for people involved in planning to have knowledge of the cognitive and political processes at work so that they can take account of them and avoid any negative effects.

ReferencesManagement Accounting Offi cial Terminology, CIMA Publishing 1996, p. 38. (See the 2005

edition for all other references).Andrews, K.R. (1971), The Concept of Corporate Strategy. Holmwood, IL: Irwin. Ansoff,

H.I. (1965), Corporate Strategy. New York: McGraw-Hill.Porter, M.E. (1980), Competitive Strategy: Techniques for Analysing Industries and

Competitors. New York: Free Press.Porter, M.E. (1985), Competitive Advantage: Creating and Sustaining Superior Performance.

New York: Free Press.Selznick, P. (1957), Leadership in Administration: A Sociological Interpretation. Evanston,

IL: Row, Peterson.Gilmore, F.F. (1979), Formulation and Advocacy of Business Policy (rev. edn). Ithaca, NY:

Cornel University Press.Lenz, R.T. and Lyles, M.A. (1985), ‘Paralysis by Analysis: Is Your Planning System

Becoming too Rational?’ Long Range Planning, August, pp. 64–72.Mintzberg, H. (1994), The Rise and Fall of Strategic Planning. Pearson Education.

Reprinted by permission of Pearson Education. Copyright (c) 1991, by the Regents of the University of California Management Review Vol. 33, No. 3, by permission of The Regents.

Pascale, R.T. (Spring 1984), ‘Perspective on Strategy: The Real Story behind Honda’s Success’. California Management Review, Vol. 26, No. 3, pp. 47–72.

Johnson, G. (1988), ‘Re-thinking Incrementalism’. Strategic Management Journal, January/February pp. 75–91.

Porter, M.E. (1980), Competitive Strategy: Techniques for Analysing Industries and Competitors. New York: Free Press.

Rumelt, R.P. (1991), ‘How Much Does Industry Matter?’ Strategic Management Journal,Vol. 12, pp. 167–185.

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T Pralahad, C.K. and Hamel, G. (1990), ‘The Core Competence of the Corporation’. Harvard Business Review, May/June.

Sanchez, R., Heene, A. and Thomas, H. (1996), ‘Towards the Theory and Practice of Competence-based Competition’ in Sanchez, R., Heene, A. and Thomas, H. (eds), Dynamics of Competence Based Competition: Theory and Practice in the New Strategic Management. Oxford: Elsevier.

Grant, R.M. (1991), ‘The Resource-based Theory of Competitive Advantage: Implications for Strategy Formulation’. California Management Review, Vol. 33 (Spring), pp. 114–135.

Aaker, D.A. (1989), ‘Managing Assets and Skills: The Key to Sustainable Competitive Advantage’. California Management Review, Vol. 31, No. 2, pp. 91–106.

Hamel, G. and Pralahad, C.K. (1989), ‘Strategic Intent’. Harvard Business Review, Vol. 67, No. 3, pp. 63–76.

Senge, P. (1990), ‘The Leader’s New Work: Building Learning Organisations’. Sloan Management Review, (fall), pp. 7–23.

Argyris, C. (1994), ‘Good Communication That Blocks Learning’. Harvard Business Review, Vol. 72, No. 4, pp. 77–85.

Hamel, G. and Pralahad, C.K. (1989), ‘Collaborate with Your Competitors and Win’. Harvard Business Review, Vol. 67, No. 1, pp. 133–139.

Stalk, G., Evans, P. and Scholman, L.E. (1992), ‘Competing on Capabilities: The New Rules of Corporate Strategy’. Harvard Business Review, March/April, pp. 57–69.

Thomas, P.J. (1984), ‘Strategy Follows Structure: Developing Distinctive Skills’. California Management Review, Spring.

Ansoff, H.I. (1965), Corporate Strategy. New York: McGraw-Hill.Peters, T. and Waterman, R. (1982), In Search of Excellence. New York: Harper & Row.Guest, D. (1992), ‘Right Enough To Be Dangerously Wrong: An Analysis of the In Search

of Excellence Phenomena’, in Salaman, G. et al. (eds), Human Resource Strategies.London: Sage.

Pralahad, C.K. and Hamel, G. (1990), ‘The Core Competence of the Corporation’. Harvard Business Review, May/June.

Discussion questions● Explain how strategies can emerge.● Contrast the ‘positioning approach’ to strategy formulation with the ‘competence-based’

approach.

READING E2

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Revision Questions

Section A type questions

Question 1Newco plc is a recently privatised company that supplies energy to the general public. One of the objectives underlying Newco plc’s change of ownership was that it would be enabled to set its own goals and targets without reference to third parties.

The chief executive of Newco plc has publicly stated that the aim of the business will be ‘to supply the best possible service to the greatest number of consumers at the cheapest possible cost.’ It is believed, within Newco plc, that the cheapest possible cost will only be achieved by the introduction of a number of changes to improve operating effi ciency.

The holders of this view are, like the chief executive himself, people who have been brought into Newco plc within the last 2 or 3 years. This group is small in numbers but seems to be very infl uential.

RequirementDiscuss the extent to which the chief executive’s aim is compatible with the interests of the shareholders. (10 marks)

Question 2N Airline operates in the short haul fl ight industry. Unlike many of its competitors who are constantly seeking to reduce costs, often at the expense of customer service, the foun-dation of N’s business strategy is based on providing a superior quality of service. Its mis-sion is to be market leader, providing unrivalled customer service, in fl ight comfort and reliability in the short haul airline industry. It views its customers as central to strategic developments, and values its staff in building success.

Requirements(a) Distinguish between the concepts of mission and objectives. (4 marks)(b) Illustrate how the mission for N Company could be translated into strategic objectives.

(6 marks)

Question 3T is the owner manager of a small business that designs and produces high quality garden furniture. The business started out as a hobby using T’s creative design and carpentry

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REVISION QUESTIONS E2

talents, and he has been surprised by his success. Over the last year the business has experienced unplanned growth and by chance T has just won a contract to supply a local chain of DIY stores.

The local Chamber of Commerce has recently sent him an invitation to attend a number of seminars titled ‘Formal Strategic Planning for Small Business’. However, T is doubtful that the content of the seminars will be of any relevance to him and feels he can-not afford time away from his business. His view is that it is best to let the strategies and developments for his business emerge.

RequirementExplain the reasons why T is right to be doubtful about the relevance of formal strategic planning for his business. (10 marks)

Section B type questions

Question 4Tub plc was founded in the early 1980s by two brothers. As employees in their father’s home-decorating business they became aware of the opportunities available in the growing home improvement and DIY (‘do-it-yourself ’) markets. Spotting a gap in the middle-price range of the market for bathroom and kitchen fi ttings, they set up a company to manu-facture these items. The demand for their products outstripped their ability to supply, and they expanded rapidly. Most of this expansion was fi nanced from retained profi ts but, as they happened to be located in an area of economic decline, they qualifi ed for a state grant towards the cost of their new premises.

By 1995 Tub plc had organised itself around eight operating companies covering the different products and sales activities of the group. Some of these sold directly to housing developers, some to major retail DIY multiples and one of the companies coordinated the group’s export operations.

Each company had its own independent board of directors on which the brothers sat with one vote each. The brothers could be out-voted and in fact had been at various times in the past. The senior management believed in decentralisation, arguing that it promoted enterprise and that it was easier for small companies to grow than for larger ones to do so.

Tub plc has invested heavily in new technology, automating processes wherever possible. It has developed good relationships with its suppliers and developed just-in-time purchas-ing and production systems. It is also able to deliver its products within 48 hours of orders being placed. It has progressive human resource management policies in place.

At the present time the company has no new products coming on-stream and its research and development function is tiny and confi nes itself to modifying existing prod-ucts for what is a diffi cult overseas market.

The environment in which the company operates is currently very diffi cult. Economic recession in the early 1990s and a housing market which continues to remain stagnant are causes for concern.

Requirements(a) Identify the key issues involved in formulating the corporate strategy of a company

such as Tub plc. (8 marks)


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(b) How would you go about setting the business strategy of the various operating compa-nies within the Tub group? (10 marks)

(c) In what ways might the strategies of the organisational functions within each of the operating companies contribute to the overall strategy? (7 marks)

(Total marks � 25)

Question 5F Company is a medium sized business that manufactures electrical kitchen appliances including food processors, toasters, juicers and coffee makers. In the last 12 months the company has lost market share to its competitors, and has underperformed on most of its key performance indicators. Its future survival is threatened as new entrants are steal-ing market share, and the customers are demanding new product and design features. G, the company’s management accountant, suggests that F Company’s diffi culties are because they have been too complacent, not responded to changing environmental conditions and have not undertaken any formal strategic planning. He is also concerned that different areas of the company appear to be pursuing confl icting objectives.

To help the company develop a sustainable competitive advantage, G proposes that a more formal top-down approach to developing business strategy should be adopted. He is also of the view that greater emphasis should be placed on understanding the external environment.

However, at a recent meeting where G outlined the benefi ts that a more formal approach to planning would bring, he was surprised that P disagreed. P, the HR director, argued that the dynamic environment that F operates in means that the formal approach is a waste of management time. She suggests that the company should assess how sustainable competitive advantage can be achieved through using its resources, skills and capabilities.

Requirements(a) Explain the benefi ts and drawbacks associated with F Company adopting a top-down

approach to the formulation of business strategy. (12 marks)(b) Compare and contrast the different views held by of G and P on how F Company can

gain competitive advantage. (13 marks) (Total marks � 25)

Question 6B Bakery is a family owned fi rm employing around 250 employees. It has been in business for over 50 years and supplies bread and confectionary products to a number of differ-ent businesses, including supermarkets and pub-chains. The fi rm has experienced mixed fortunes over the years in terms of business performance, but in the last few years has experienced a growth in orders for some of its new product ranges, particularly its organic products. These products have been developed as a result of the Managing Director’s wife’s interest in healthy eating. However, the Bakery has recently lost some key accounts as a result of being unable to produce some of its products at a competitive price.

Six months ago the fi rst non-family Board member, CT, joined the company as Operations Director. CT is surprised to fi nd that the fi rm does not have a mission nor any formal planning process in place. He is even more concerned that the Bakery does not have any clear objectives or key performance indicators. In a recent conversation with

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He was somewhat taken aback by the response from the Managing Director who said that in his 30 years with the fi rm it had grown and been successful despite the absence of formal plans. He commented that planning creates lots of analysis that does not result in action and he prefers strategies to emerge. His view is that planned and intended strategies often turn out to be invalid.

Requirements(a) Distinguish between the views of the Managing Director and the Operations Director

on how strategy occurs. (17 marks)(b) State the arguments that the Operations Director could use to persuade the Managing

Director of the benefi ts of having a formal strategic plan. (8 marks)(Total marks � 25)


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Solutions to Revision Questions 1Section A solutions

Solution 1

Common errors● Not comparing and stating the extent of differences;It is generally assumed that the fundamental objective of a profi t-seeking company is to maximise the shareholders’ wealth. The chief executive of Newco plc did not include the shareholders’ interests in the statement of objectives, but expressed a view which suggests a strong marketing orientation. Stating the objectives of the fi rm as supplying ‘the best pos-sible service to the greatest number of customers at the cheapest possible cost’, the interests of customers are stressed. This, then, is an intermediate objective which focuses on market-ing. However, by emphasising an intermediate marketing objective, management may not focus suffi cient attention on the maximisation of shareholders’ wealth.

In a public utility company like Newco plc, many shareholders will also be customers and there will be a confl ict of interest between these two groups. Expenses incurred to provide the best possible service, will result in lower levels of profi t for shareholders. While this situation may please the customers, it is likely to create dissatisfaction among shareholders. On the other hand, excessive concern with cost-cutting will increase profi ts available for sharehold-ers, but may cause customers to seek better service from competitors. This could be against the long-run interests of the shareholders as profi tability is likely to decrease if sales decline.

One of the fundamental beliefs of marketing is that of mutually benefi cial exchanges between the supplier and the customer and this is likely to be achieved if the service can be provided at the cheapest possible price. Both shareholders and customers will obtain benefi t from the fi rm if excellent service is provided at a relatively low price and if the service is available to the greatest number of consumers. It is therefore possible that the chief execu-tive’s statement focuses attention on the best method of achieving the ultimate objective of the organisation, the maximisation of shareholders’ wealth.

Solution 2(a)A mission is a broad statement of the overall purpose of the business and should refl ect the core values of the business. It will set out the overriding purpose of the business in line with the values and expectations of stakeholders. It will also be concerned with the scope

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T and boundaries of the organisation, in N’ cases short haul fl ights. Sometimes it is simply referred to as ‘What business are we in?’

Objectives differ in that they state more precisely what is to be achieved and where pos-sible, provide quantitative measures of performance. These could be expressed in fi nan-cial terms, but also marketer based objectives. The characteristics objectives should possess include:

● A precise formulation of the attribute sought● A measure for progress towards the attribute● A target to be achieved● A time frame in which it is to be achieved.

The acronym often used when setting objectives is SMART: that is objectives should be specifi c, measurable, attainable, and relevant and time bound.

(b)N Company could set objectives relating to its growth aspiration in terms of the numbers of passengers using the airline, or in terms of market share, for example gaining 20 per cent of short haul fl ights by the end of 2006. Growth could also be measured in terms of the number of destinations or landing slots.

The objectives relating to superior quality of service could be set based on customer satisfaction. This information could be collected through market research, against a set of customer satisfaction criteria and might include factors such as ease of booking, in fl ight comfort, helpful staff. Another measure of quality could be the percentage increase in repeat customer bookings; percentage of fl ights departing and arriving on time. A further objective could be in terms of percentage reduction in the number of complaints received.

Solution 3The formal approach to strategic planning usually results in a consciously thought out or deliberately intended strategy. It assumes that strategy making is a rational process with strategies based on careful analysis of the opportunities and threats posed by the external environment, and consideration of the organisation’s strengths and weaknesses, relative to other players in the industry.

Whilst there can be benefi ts to adopting such an approach, the formal process may not be suitable for a small business such as T’s for the following reasons.

● A formal approach can be very expensive, time consuming and complicated for small businesses. T is right to be concerned about the opportunity cost, not only in terms of attending the seminars, but also in terms of spending time on planning which could take him away from the main operations of his business.

● Formal planning may also be considered too static and a process that tends to be infre-quent. In a rapidly changing environment it could be argued that the outcomes on which formally planned strategies are based often become quickly outdated, with the result that the intended strategy fails.

● T may be worried that such a process will just end up as a bureaucratic process with systems and targets unhelpful to a small business. The formal approach could get in the way of T’s interest and creative talent, since it could be conceived as a rigid approach bound up in processes, undermining T’s core competencies.

SOLUTIONS TO REVISION QUESTIONS E2


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● One of the aims of formal strategic planning is to achieve goal congruence between dif-ferent business areas and stakeholders. However in the case of a small business the goals are likely to be inseparable from the goals of T as the owner manager. In a small busi-ness, such as that run by T is could be argued that the formal approach is not appropri-ate because the success is more dependent of the ideas of T. It is unlikely that T will have the economic rationality in his approach to running the business which is more often associated with businesses governed by external shareholders.

● Even if new options are identifi ed from formal planning T is likely to consider narrow product/market choices because his business is essentially based on his own specifi c knowledge and skills arising from his hobby. Despite winning the contract from the DIY stores, as a small business it is doubtful that T will have the resources to invest in new strategic ventures and may be unwilling to share or delegate control to others. Indeed T may not have aspirations for growth.

● T says that he prefers to let his strategy emerge. This approach arises from ad-hoc, unan-ticipated or uncontrollable circumstances. It is often referred to as developing from patterns of behaviour in response to unexpected events. In the case of the scenario the unplanned growth was as a result of the order from the local chain of DIY stores. This was not a consciously thought out nor a deliberately intended strategy.

Whilst there are many valid reasons why T might not see the seminars of any benefi t to him, some of the strategic planning frameworks/models might be helpful in making future decisions about the business. For example, it would be sensible for T to monitor the envi-ronment and conduct an informal analysis of his strengths, weaknesses, opportunities and threats to help him to stay ahead of the game.

Section B solutions

Solution 4

Common errors● confusion over the word ‘setting’● lack of defi nitions for levels of strategy● liability to link these levels● lack of application to the case.

Hofer and Schendel distinguish between corporate strategy (what business to be in), busi-ness strategy (which market segments to serve and how), and functional strategy (detail by department).

The corporate strategy of a company like Tub plc will convert its ‘mission’ – what it is all about as a business – into practical policies on markets to be served and how to gener-ate and manage growth.

Tub plc’s corporate strategy is to grow its businesses in particular markets in the kitchen and bathroom furnishings sector, building a stronger group by gradually and organically building up stronger individual companies through related diversifi cation, and fi nancing this growth internally.

In formulating the corporate strategy of Tub plc, the directors need to consider Tub plc’s overall strengths and weaknesses in relation to competitors, customers and suppliers in

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T each market served, and assess current trends so that opportunities can be maximised and threats minimised. Group corporate strategy will decide such questions as where to focus group resources (core businesses).

Other group-level strategic choices cover such areas as:

● Degree of investment in automation. Tub plc has favoured automation as a source of com-petitive advantage.

● Culture and people strategies. Tub plc has adopted good HR policies, encouraging local empowerment of managers, and has built good relations with distributors. The business also uses a TQM approach.

● Management structure. Tub plc provides a minimalist superstructure with a coordination role, capable of using its scale advantages wherever useful – for example, buying power, HR standards, technology, marketing.

Within the overall corporate strategy – which appears to be as much a framework of goals as a formal plan – operating companies follow their own business strategies for growth. Thus, while overseas activities are coordinated in one group entity, the emphasis each business puts on overseas activity appears to be determined locally. At group level, Tub plc’s management may well balance ‘cash cows’ with ‘rising stars’ to ensure that the group remains in healthy balance as it goes forward. This is also a key issue in managing corporate strategy.

Business strategy refers to how a business unit approaches its markets. For example, Marks & Spencer (a large UK retailer) has extended its presence in out-of-town shopping centres, extended its activities into fi nancial services, and refi ned the standardisation of its product range and presentation style. As another example, McDonald’s has increased its range of non-beef products in the United Kingdom following a health scare surrounding British beef.

I would determine the business strategy of Tub plc’s companies by reference to the group strategy and the capacity of the companies to benefi t from collaboration, by reference to their individual competences and local competitive conditions, and by matching resources to opportunities in each company.

I would analyse the strategic position of each company (using techniques such as SWOT analysis, value chain analysis, and Porter’s fi ve forces analysis) to explore the alternatives, and then choose a set of strategic moves that would be clear-cut and measurable in imple-mentation. Each business strategy would be designed (crafted) to build incrementally upon the emergent strategic themes in that business. I would then make sure that the feedback loop worked, so that information from the market on the impact of one strategic decision could be fully and promptly factored in the evolution of future strategic plans. I would not embark upon detailed large-scale planning, but rather seek to keep the entrepreneurial local opportunism that has characterised much of Tub plc’s past success. To support and focus the ongoing process, I would aim to formalise a strategic review exercise on a biennial basis.

Porter has identifi ed three generic business strategies (cost leadership, differentiated brand marketing, and niche focus) which a company might adopt in response to its analy-sis of its strengths, weaknesses, opportunities and threats. This is also the resource-based approach to strategy formation – which tends to focus not so much on where we should be heading in relation to our markets, but on what tools we have to work with.

Functional strategies are important as this is the level at which strategy is implemented in detail. The accumulated effect of the strategic steps taken in each function of a business (fi nance, marketing, production, etc.) determines the strategic development of that business.



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For example, a fi nance department strategy may be to buy a new computerised information system that will help control the business better, enabling value to be added in various ways across the company. Similarly, the functional strategy of the production department may be to automate the production of product X so that it can be made in volume around the clock and at lower cost, creating a strategic opportunity for the company to compete on price and a stra-tegic pressure to increase its share of that market and skew its investment in that direction.

Steps taken by functional departments need to be tied into the business unit strategy because otherwise departmental actions can thwart or counter the thrust of the overall business (or add too little value within the overall value chain of the business). Functional strategies within operating companies do accumulate upwards (like building blocks) into business unit development and hence into overall group strategy. Sometimes, one devel-opment in a corner of a large group can spread out and infl uence its whole direction, for example, one of the R&D units in a large pharmaceutical group developed a drug that was such a success that it dominated the development of the whole group.

In developing functional strategies, there is both a top-down and a bottom-up commu-nications exchange. This helps to ensure that the right strategic decisions are taken, that the detail will work, and that everyone is aware of the plan and personally engaged in its fulfi lment. Functional strategies provide readily measurable implementation, are digestible elements of the overall plan, and convert theory into practice at the sharp end.

Solution 5(a)G’s idea of introducing a formal top-down strategy process would mean building a des-ignated team who is responsible for the strategy development for F Company, or alterna-tively setting up a strategic planning unit who report to senior management. This would involve setting up systems for the formalised collection of information needed for the strat-egy process, and is similar to the traditional rational planning model. There would need to be a process of communication and implementation of the business strategy. This is often achieved by having a formal document that provides a summary of the key elements of the plan, which is usually long term, ranging from 3 to 10 years depending on the industry involved. Each year the strategy should be reviewed and adjustments made in the light of changing conditions.

There are a number of benefi ts associated with this approach as G suggests. The fi rst is that such an approach can avoid short-term behaviour and help identify key strategic issues facing the Company. By considering the longer term and the nature of the environment, F Company should anticipate competitor actions and be more proactive in their planning to keep ahead.

The formal approach should help in terms of achieving goal congruence and providing direction for the different areas of the business. Perhaps G’s background in management accounting is another reason that he is a proponent of such an approach since it provides a basis for strategic control. Responsibilities and ownership for the development of strategic development are clearly articulated and there are a clear set of programmes and policies associated with implementation. Targets and reports will enable the success of the strategy to be reviewed.

This approach should demonstrate that F Company has a clear idea of where it is going, which should improve stakeholder perceptions of the business. Investors may be more con-fi dent of higher returns which could lead to higher share prices; relationships with suppliers

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T could improve because they can rely on orders in the future; it could also help in terms of employee retention and staff morale.

Despite the benefi ts of the formal approach to strategic planning, there are drawbacks to process. A formal approach could mean that the timing of the process is too infrequent to allow the business to be dynamic. If the business environment changes unexpectedly then F’s performance may deteriorate further. It could be argued that there is evidence that this is already happening. It is diffi cult in an uncertain business environment since formal busi-ness strategies require that the strategist can make reliable assumptions about the future and particularly about the opportunities and threats that face them.

A formal approach does not encourage the development of more radical and innovative strategies and often results in the loss of entrepreneurial spirit since it encourages rewards to be given to managers who carry out their part of the strategy sticking to the convention way of doing business. The formal top-down approach does not encourage contributions from staff who are lower down the hierarchy. Yet it is often these staff who are most in touch with the customer and can see the impact of competitor activity.

(b)The commonality between G’s perspective and that of P is the economic view of competi-tive advantage, that is, something that enables F Company to generate superior returns on shareholder investment. Competitive advantage can be defi ned as the signifi cant advan-tages that the organisation has over its competitors, allowing the organisation to add more value than its competitors in the same market. The disagreement is over the sources of competitive advantage.

G’s traditional perspective on strategic management is based on the view that competi-tive advantage is derived from the fi rm’s position in relation to its environment, competi-tors, customers or other stakeholders. This is usually referred to as the positioning view; the outside-in view; or strategic fi t.

The environment is the critical factor in determining the organisation’ strategy, so effort should be focused on or involves scanning the external environment to determine potential opportunities and threats and nature of competition in order to determine a strategy which will best position F Company. They would then need to mould the company’s structure, culture, skills and products to fi t the environment.

The strategy for delivering competitive advantage is one that positions the organisa-tion within the environment that is defensible against potential competition. Supernormal profi ts result from achieving high market share relative to competitors; through differenti-ated products; or low cost.

The approach to achieving competitive advantage suggested by P is a more recent para-digm of strategic management, sometimes referred to as the resource-based view (RBV). This is an inside-out-view where competitive advantage is gained from the exploitation of the organisation’s resources, competences and capabilities. In other words, the distinctive groups of skills that allows an organisation to provide particular benefi ts and deliver com-petitor advantage.

Those supporting this view criticise the position view stating that the competitive advantage is not sustainable in the long run, since advantages are often easily copied by rivals. Whereas adopting the RBV means that superior profi tability depends on the fi rm’s possession of unique resources or abilities that cannot be easily imitated by rivals. The RBV argues that the individual resources of F Company will provide a stronger basis for strategy development than the positioning approach.



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The assumption is that an organisation is a collection of resources, capabilities and competences that are relatively unique and can provide the sources basis for its strategy and its ability to compete better than those of competitors.

Resources can be tangible, such as plant and equipment, access to raw materials and fi nance, trained/skilled workforce or intangible such as brand, intellectual property. However, it is the way the resources are used which provides the capability to compete. For resources to be unique, Barney (1991) suggests that they must add value, be rare, diffi cult to imitate and cannot be easily substituted.

P could assert that the environments facing F Company are too dynamic to enable a position approach to be effective, since it assumes the fi rm is fl exible enough to change its size and shape to fi t the environments and can develop business processes and structures that enable it to spot changing customer needs speedily and to develop commercially via-ble responses. However, the environment for F Company is characterised by faster product life cycles, and rapidly changing technologies making this very diffi cult.

The RBV is based, has developed from the work of Prahalad and Hamel’s work on core competences which focuses on the strategic intent of an organisation to leverage its inter-nal capabilities and core competencies to confront competition.

P’s views could be considered to have some similarities to those of Mintzberg, who argues that strategy is best considered as an emergent process. In a rapidly changing and dynamic environment Mintzberg contends that formal planning is inadequate and rather, it is better that the organisation retains fl exibility and be ready to adapt strategy as its com-petitive environment changes.

Solution 6(a)The Managing Director refers to his preference for the emergent approach to strategy development. This perspective was suggested by Mintzberg based on the idea that most of what organisations intend to happen, often do not happen and few strategies followed by organisations are consciously planned.

Mintzberg argues that strategy formulation is a continually evolving process in which strategies emerge, perhaps as the result of the processes of negotiation, bargaining and compromise, rather than due to the deliberate planning process as characterised in the rational approach being suggested by the Operations Director. He contends that intended strategies become invalid and not implemented because the pace and unpredictability of developments in the business environment overtakes it. For example there could be changes in the bakery’s external market such as changes in the market for the products it produces and in the nature of the competition.

The argument is that strategy should not be considered a linear process, but rather an iterative process in which problems raised in implementation are fed back so that the strat-egy can be adjusted to take account of changing circumstances.

Mintzberg further maintains that the strategy development process is not so much about thinking and reasoning, as it is about involvement, a feeling of intimacy and har-mony, developed through long experience and commitment. This is perhaps the point being made by the Managing Director who has worked in the bakery for many years. So, strategies can form, rather than be formulated as proposed in the rational approach

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T Emergent strategies result from a number of ad-hoc choices or responses to circum-stances. They can be described as developing out of patterns or behaviours that are realised despite or in the absence of specifi c intentions. This means that they just happen along the way with differing degrees of management involvement. They are not consciously thought out, but do needed to be shaped by management to the create advantage for the organisation. This can be illustrated by the ideas of the Managing Director’s wife’s interest in healthy eating, with ideas being brought into the bakery

Unlike the planning approach, which implies rational and systematic analysis of com-petitors and markets and or strengths and weaknesses, the emergent approach requires management to craft strategy. The role of the manager is to craft a vision through mould-ing the organisation and its strategy.

The rational approach that is being proposed by CT, the Operations Director, assumes a step by step systematic approach to strategy development. It involves the careful and deliberate formulation, evaluation and selection of strategies for the purpose of preparing a cohesive long term course of action to attain objectives. The three main stages are strategic analysis, strategic choice and strategic implementation.

The process is iterative, often linked to an annual planning cycle. The fi rst stage, strate-gic analysis, which if undertaken by the Bakery would help in understanding its current position in terms of the environment in which it operates, and determine what oppor-tunities and threats exist. It would also help in formulating what the Bakery’s mission and objectives should be which could then be communicated to employees in the Bakery. Analysis of the Bakery’s internal capability would reveal what its resources and competen-cies are and where it adds value. In other words, gaining a better appreciation of what its strengths and weaknesses are.

The next stage would involve generating strategic options for the Bakery, exploring how it might develop in the future, given its current position. The different options would be evaluated in terms of whether each is feasible, suitable, and acceptable to the Bakery’s key stakeholders.

The strategies selected need to implemented, in other words strategy needs to be trans-lated into action plans to make them happen.

(b)The Operations Director could articulate the following benefi ts of having a strategic plan.

● It can help the Bakery take a longer term view than a short term reactive approach and help to approach an uncertain future.

● It should help encourage the directors in the bakery to consider the business environ-ment which should inform plans and decisions, helping identify future strategic issues and promote a more proactive approach.

● It can help the Bakery in allocating its resources more effectively.● It can provide standards against which the performance of the organisation is measured

and controlled. It can also provide a basis for strategic control so that there are targets and reports enabling review of the success of strategy.

● It can help in the co-ordination of activities, and link to operational plans in the various parts of the Bakery. In other word promotes congruence of operational plans with strategic direction.

● In a family owned business it can avoid succession problems, for example if the MD retires the strategy of the fi rm will still be understood and outlast the loss of a key member of the management team.


2

The Nature of the Competitive Environment


69

2LEARNING OUTCOMES

By the end of this chapter you should be able to:

� discuss the nature of competitive environments;

� distinguish between different types of competitive environments.

2.1 IntroductionStrategy is concerned with the ability of the organisation to fi t with, or cope with, its envi-ronment. Since an organisation does not operate in a vacuum it is important that it con-tinually scans its external environment in order that it can develop appropriate responses to take advantage of opportunities, or to minimise threats. An understanding of the external environment is, therefore, a critical element in the development of strategy and can help in determining how to achieve a sustainable competitive advantage.

This chapter examines the different operating environments of the organisation. It introduces models and frameworks that can be used to analyse the external environment, including the macro environment, competitive environment and national competitive environment. It also explains the range of information sources which management may draw upon in the continuous process of environmental scanning.

2.2 Environmental impact assessmentAccording to CIMA environmental impact assessment is:

The Nature of the Competitive Environment

‘A study which considers potential environmental effects during the planning phase before an investment is made or an operation started.’ CIMA:

Management Accounting: Offi cial Terminology, 2005, p. 48.

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T This suggests that environmental analysis is undertaken during the strategy formulation process and assumes that the fi rm has a formal and rational strategy process. The informa-tion is gathered as a preliminary to the corporate appraisal and may include special reports on particular factors affecting the present or proposed strategy.

However environmental scanning can also be a continuous process so that the organi-sation being constantly aware its environment, watching out for emerging opportunities and threats. This will be a key part of an emergent approach to strategy, where it is recom-mended that as many staff as possible are involved in order to maximise the information and create greater acceptance of the need for change.

2.3 Different stages in environmental analysisThe environment may be thought of as all the factors outside of management control which can affect the performance of the business and the success of its strategies.

Management frequently use models to help them make sense of the environment of their organisations. These models separate the mass of factors impacting on the fi rm into groups, or segments, to aid closer analysis.

The model shown in Figure 2.1 illustrates the different levels of the environment which together help in understanding the key trends and forces in the external and competitive environments and the key characteristics of these environments.

The fi rst level concerns the nature of the environment in terms of the degree of tur-bulence and uncertainty. It provides an understanding of the basic conditions surround-ing the organisation. The level of turbulence can be explained in terms of the degree to which the external environment is likely to change, and also predictability which is concerned with the degree to which change can be predicted. Uncertainty can be deter-mined by examining the degree of complexity within the environment and the degree of dynamism. This involves assessing whether the environment is simple or complex to understand and whether it is static or dynamic, facing rapid change. Johnson et al.

Industry/micro-environment

Industry/micro-environment

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Static Dynamic

ComplexSimple

Figure 2.1 Different levels in the environment


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(2008) suggest that uncertainty increases when environmental conditions are more com-plex and dynamic. Where turbulence and uncertainty are high the organisation will need to structure itself so that it is adaptable and fl exible in order that it can cope with rap-idly changing circumstances. The concept of uncertainty is explored further later in this chapter.

The next level in the model is the macro-environment, which includes developments in the wider business environment relating to political, economic, social and technological changes. It is these factors that can create opportunities or threats and impact on the stra-tegic development and ultimately business success or failure.

The inner level is the micro-environment, which encompasses the competitive pressures within the industry and power of customers and suppliers.

It is important to note that the various levels cannot be viewed in isolation, rather they are interrelated. For example a change in legislation could alter the nature of the competi-tion the organisation faces.

2.3.1 Analysing the macro-environmentThe PEST model was introduced in Chapter 1 as a popular framework for analysing the external forces driving change in the rational approach to strategy development.

PEST is an acronym which categorises factors under the following headings:

● political/legal infl uences● economic infl uences● social and demographic patterns and values● technological forces.

It is the factors within each of these dimensions that can affect, either directly or indirectly, the organisation’s business strategy and performance. Once this analysis has been under-taken the headings can be used as a checklist to assess the relative importance of the differ-ent infl uences in order to identify the key drivers of change.

Although PEST analysis is often viewed as the ‘industry standard’ for macro-environmental analysis some writers prefer the greater detail provided by a PESTEL analysis. This separates legal from political and specifi es ecological separately, for example:

Political:● taxation policy● foreign trade regulations● government stability.

Economic factors:● business cycles; GNP trends; interest rates● infl ation; unemployment disposable income.

Sociocultural factors:● demographics● income distribution● lifestyle changes; attitudes to work and leisure● consumerism.

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T Technological factors:● government spending on research● new discoveries/development● rates of obsolescence.

Ecological factors:● protection laws● energy consumption issues● waste disposal.

Legal factors:● monopolies legislation● employment law, product safety, etc.

There are other examples of frameworks using acronyms for example:

DEEPLIST: demographic, economic, environment, political, legal, informational, social and technological.

Another variation is LoNGPEST, which adds a second dimension to the external environment which is the levels at which infl uences occur. for example local, nation and global:

● Lo refers to the local level in which the organisation operates, for example the immedi-ate city or region.

● N is concerned with the home country in which an organisation has its headquarters.● G represents the global level, which becomes anything outside the local and national

environments.

The practical point for any organisation is that it is irrelevant which acronym is used as long as the process is practised within the company and that they remain aware of the business environment and the changes that are occurring within it.

Scenario-based analysisIf the environment facing an organisation is turbulent, unpredictable, and has high levels of uncertainty then some commentators argue that undertaking a PEST analysis is mean-ingless since it is based on the current situation and extrapolating forward.

An alternative approach would be to undertake scenario analysis which is concerned with developing detailed and plausible views of how the business environment of an organisation might develop in the future and then examine the strategic signifi cance on the organisation (Johnson et al., 2008). This would involve building various scenarios, which are essentially models of possible future environments for an organisation. Managers can develop strategies and contingency plans for the different scenarios, and as the environ-ment unfolds then they can adapt and adjust strategies accordingly.

Activity

Undertake a macro-environmental analysis for your organisation, or one with which you are familiar. From the analysis identify what the key issues are and explain the implications for the organisation.


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2.3.2 Analysing the micro-environment/industry environment

One of the key drivers for change is often in response to the nature of competition. As discussed in Chapter 1, the factors driving change at the micro-level can be anlaysed using Porter’s fi ve forces model. This framework identifi es the fi ve basic competitive forces that infl uence the state and structure of competition in an industry, and which collectively determine the long-term return on the capital and the profi t potential of the industry as a whole.

According to CIMA Porter’s fi ve forces is:

External infl uences upon the extent of actual and potential competition within any industry which in aggregate determine the ability of fi rms within that indus-

try to earn a profi t CIMA: Management Accounting: Offi cial Terminology. 2005, p. 50.

The model can be used in several ways:

1. To help management decide whether to enter a particular industry. Presumably, they would only wish to enter the ones where the forces are weak and potential returns high.

2. To infl uence whether to invest more in an industry. For a fi rm already in an industry and thinking of expanding capacity, it is important to know whether the investment costs will be recouped. The present strength of the forces will be evident in present profi ts, so management will wish to forecast how the forces may change through time. Alternatively, they may decide to sell up and leave the industry now if they perceive the forces are strengthening.

3. To identify what competitive strategy is needed. The model provides a way of establish-ing the factors driving profi tability in the industry. These factors affect all the fi rms in the industry. For an individual fi rm to improve its profi tability above that of its peers, it will need to deal with these forces better than they. If successful, it will enjoy a stronger share price and may survive in the industry longer. Both increase shareholder wealth.

The fi ve competitive forces are explained below.

Threat of entryNew entrants can affect the profi tability of the industry in two ways:

1. Through the impact of actual entry. A new entrant will reduce profi ts in the industry by:(a) Reducing prices either as an entry strategy or as a consequence of increased indus-

try capacity. There is also the danger that a price war may break out as rivals try to recover share or push out the new rival.

(b) Increasing costs of participation of incumbents through forcing product quality improvements, greater promotion or enhanced distribution.

(c) Reducing economies of scale available to incumbents by forcing them to produce at lower volumes due to loss of market share.

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T 2. By forcing fi rms to follow pre-emptive strategies to stop them from entering. In view of the above danger, fi rms may take action to forestall entry of new rivals by:(a) Charging an entry-deterring price which is so low as to make the market unattrac-

tive to new, and possibly higher cost, rivals.(b) Maintenance of high capital barriers through deliberate investment in product or

production technologies or in continuous promotion of research and development. New rivals would be unlikely to gain suffi cient scale to recover these investments.

Porter suggests that the strength of the threat of market entry depends on the availability of barriers to entry against the entrant. These are:

1. Economies of scale. Incumbent fi rms will enjoy lower unit costs due to spreading their fi xed costs across a larger output and through the ability to drive better bargains with their suppliers. This gives them the ability to charge prices below the unit costs of new entrants and hence render them unprofi table.

2. Product differentiation. If established fi rms have strong brands, unique product features or established good relations with customers, it will be hard for an entrant to rival these by a price reduction, and expensive and time consuming to emulate them.

3. Capital requirements. If large fi nancial resources will be needed by a rival to enter, the effect will be to exclude many potential entrants. Porter argues this will be particularly effective if the investment is needed in dedicated capital assets with no alternative use or in promotion. Few would-be entrants will want to take the risk.

4. Switching costs. These are one-off costs for a customer to switch to the new rival. If they are high enough, they will eliminate any price advantage the new rival may have. Examples include connection charges, termination costs, special service equipment and operator training costs.

5. Access to distribution channels. If the established fi rms are vertically integrated, this leaves the entrant needing either to bear the costs of setting up its own distribution or depending on its rivals for its sales. Both will reduce potential profi ts.

6. Cost advantages independent of scale. These make the established fi rm to have lower costs. Examples are unique low-cost technologies, cheap resources, or experience effects (a fall in cost gained from having longer experience in the industry, usually infl uenced by cumulative production volume).

7. Government policy. Some national governments jealously guard their domestic indus-tries by forbidding imports or using legal and bureaucratic techniques to stall import competition. Also, some governments prefer to allow existing fi rms to grow large to give them the economies of scale that they will need to compete in a global market.

Therefore, they try to restrict industry competition.

Pressure from substitute productsSubstitute products are ones that satisfy the same need despite being technically dissimilar. Examples include aeroplanes and trains, e-mail and postal services, and soft drinks and ice cream.

Substitutes affect industry profi tability in several ways:

1. They put an upper limit on the prices the industry can charge without experiencing large-scale loss of sales to the substitute.

2. They can force expensive product or service improvements on the industry.3. Ultimately, they can render the industry technologically obsolete.


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The power of substitutes depends on:

1. Relative price/performance. A coach journey is cheaper than a rail journey which is in turn cheaper than a fl ight. However, a coach is slower than a train. The trade-off is far less clear between e-mail and postal services for simple messages, since e-mail is both quicker and cheaper!

2. The extent of switching costs.

Bargaining power of buyersBuyers use their power to trade around the industry participants to gain lower prices and/ or improvements to product or service quality. This will impact on profi tability. Their power will be greater if:

1. Buyer power is concentrated in a few hands. This denies the industry any alternative mar-kets to sell to if the prices offered by buyers are low.

2. Products are undifferentiated. This enables the buyer to focus on price as the important buying criterion.

3. The buyer earns low profi ts. In this situation, they will try to extract low prices for their inputs. This effect is enhanced if the industry’s supplies constitute a large proportion of the buyer’s costs.

4. Buyers are aware of alternative producer prices. This enables them to trade around the market. Improvements in information technology have signifi cantly increased this, by enabling a reduction in ‘search costs’.

5. Low switching costs. In this case, the switching costs might include the need to change the fi nal product specifi cation to accept a different input or the adoption of a new ordering and payments system.

Bargaining power of suppliersThe main power of suppliers is to raise their prices to the industry and hence take over some of its profi ts for themselves. Power will be increased by:

1. Supply industry dominated by a few fi rms. Provided that the buying industry does not have similar monopolistic fi rms, the supplier will be able to raise prices. For example, the ‘Wintel’ domination in personal computers developed because IBM did not insist on exclusive access to Microsoft’s operating systems or Intel’s processors.

2. The suppliers have proprietary product differences. These unique features of images make it impossible for the industry to buy elsewhere. For example, branded food suppliers rely on this to offset the buyer power of the large grocery chains.

Rivalry among existing competitorsSome industries feature cut-throat competition, while others are more relaxed. The latter have the higher profi tability. Porter suggests that the factors determining competition are:

1. Numerous rivals, such that any individual fi rm may suddenly reduce price and trigger a price war. If there are fewer fi rms of similar size, they will tend to, formally or infor-mally, recognise that it is not in their interest to cut prices.

2. Low industry growth rate. Where growth is slow, the participants will be forced to com-pete against one another to increase their sales volumes.

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T 3. High fi xed or storage costs. The former, sometimes called operating gearing, put pressure on fi rms to increase volumes to take up capacity. Because variable costs are low, this is usually accomplished by cutting prices. This is common in transportation and telecom-munications. Similarly, high storage costs are often the cause of a sudden dumping of stocks on to the market.

4. Low differentiation or switching costs mean that price competition will gain customers and so be commonplace.

5. High strategic stakes. This is where a lot depends on being successful in the market. Often this is because the fi rms are using the market as a springboard into other lines of business. For example, banks may fi ght for a share of the current (chequing) account or mortgage markets in order to provide a customer base for their insurance and invest-ment products.

6. High exit barriers. These are economic or strategic factors making exit from unprofi table industries expensive. They can include the costs of redundancies and cancelled leases and contracts, the existence of dedicated assets with no other value or the stigma of failure.

Illustration: Porter’s five forces applied to the confectionery industryUsing Porter’s Five Forces Model, a structural analysis of the UK Confectionary industry shows:

● The threat of entry: low. Main barriers to entry:– economies of scale, particularly chocolate to compete with the leaders;– high advertising spend necessary for brand awareness– access to distribution channels: concentrated retail supermarket;– cost advantages independent of size;– experience in production and distribution of major operators.

● Threat of substitutes: moderate/high. Growth in light food snacks, introduces possibili-ties: healthier snacks; fun fruit packaging; savoury snacks.

● Supplier power: moderate– milk, sugar subject to EU prices, therefore infl ated but stable;– cocoa subject to price fl uctuation, but larger manufacturers can hedge against this by

backward integration.● Buyer power: potentially high

– as there is a concentration of buyers (the six largest retailers account for 60% of total UK food);

– competition for shelf space is high;– there is a threat of backward integration, especially with brand only products being

introduced BUT;– only 30 per cent of confectionery is sold through supermarkets; other outlets include

petrol stations, off-licences, vending machines, and so on, so the effect is offset a little.

● Competitive rivalry is high● Substitutes threaten, competitors are in balance:

– there is slow market growth;– there are high exit barriers (capital intensive);– major spending on advertising.


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Evaluation and developments of Porter’s modelPorter’s model owes much of its success to the fact that it provides a unitary analytical framework in which to insert, in addition to some original concepts, many of the partial theories of industry analysis developed by studies of industrial economics, such as econo-mies of scale, the degree of concentration and entry barriers. However, although clear from a theoretical point of view the model becomes increasingly diffi cult to apply as industries become harder to defi ne and delimit. It is harder to defi ne where an industry’s boundaries lie and which industries should be considered suppliers and which customers and, moreo-ver, what their cost structures are. It is increasingly diffi cult to defi ne the boundaries of the telecommunications industry, or to say who the competitors are in the publishing indus-try. Similarly it is diffi cult to defi ne the competitive dynamics of the electronic publishing industry. This was recognised by Brandenburger and Nalebuff (1996) with the introduc-tion of the concept of the value net. This adds complementors to the fi ve forces of the Porter model. However, unlike the other fi ve forces, which are competitive in nature, the more complements there are and the closer their relationship to the products supplied by the industry the better. For instance a conventional analysis using the fi ve forces of the micro chip industry would suggest that Intel can gain competitive advantage by develop-ing faster and faster products. But this is only part of the story, as is well understood by Intel. Most of us would already have more computing power than we needed but for the development of ever more power hungry applications. So Intel realises that to create a mar-ket for its faster and faster chips it must co-operate and share information with the manu-facturers of computers, cell phones bandwidth and other products which will increase the demand for faster and faster chips. The complementor concept is particularly relevant in the information economy, since no one traditional industry can build it alone. Hardware needs software and the Internet needs high speed phone lines or other connections. This means that we will often fi nd companies conducting development work with their suppli-ers or customers via joint ventures so that value may be captured.

It is worth remembering that although complementors are not competitors in the indus-try they can affect the competitiveness of the industry infl uencing the demand for prod-ucts or services and by infl uencing the purchasers’ choice between different suppliers. As such they are relatively powerful if there are few substitutes for the service they provide. A further example of a complementor is the fi rm that makes the hand-held stock taking device that is seen in supermarkets. As the employee keys in the stock they see on the shelf the information goes to the supermarket system and to the suppliers system – speeding the restocking process and benefi ting both the supermarket and their supplier.

It is important to remember that Porter’s model is an analytical model and it is about the strength of the forces that impact upon the industry it is not enough to just describe the forces.

For instance, you can usually recognise fi erce competition because there are price wars and heavy discounting, expensive advertising and promotional efforts, litigation and expensive commitments to investment and product development. You should expect to see declining margins and ROCE for all fi rms other than the market leaders.

Activity

Use the fi ve forces framework to assess the competitive environment for the indus-try your organisation operates in, or for another industry sector (for example, airline industry, supermarkets).

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T 2.3.3 Industry life cycle analysisIndustry life cycle analysis essentially charts the development of a market from intro-duction to growth to maturity and eventually decline, (see Table 2.1). It is similar to the product life cycle framework which assumes products are conceived, their sales grow, they mature and eventually, having gone into decline they die.

There are two forces which drive the evolution of the industry life cycle. These are growth in demand and the diffusion of knowledge. At each stage of the life cycle we can make the following assumptions.

This will obviously have implications for the strategy that a company chooses to adopt at the various stages of the life cycle.

Over time the nature of the research and development effort in the industry will change and this is the second driving force, the diffusion of knowledge. Initially there will be signifi cant expenditure on product innovation and this will bring about the birth of the industry but, as time passes the effort will shift to process innovation with the aim of seek-ing cost advantage and improved product reliability as more competitors enter the market.

As with the Porter’s fi ve forces model industry life cycle analysis should not be used in isolation. The model should be used in conjunction with a general environmental analysis as well. We have demonstrated here that the life cycle itself is dependent upon technologi-cal change but political forces can change the shape of the curve and the duration of each of the stages. Tax breaks to encourage innovation would be an example.

Table 2.1 Industry life cycle

Introduction Growth Maturity Decline

Products Poor quality, no standards

Better quality, differentiated

Superior quality standardization

Varied quality, little differentiation

Buyers Curious, rich Widening Mass market SophisticatedCompetitors Few Many new entrants Competition,

shakeoutsFewer remain

Margins High Fair Falling Low

2.3.4 Illustration of external environmental analysis – Example of a car manufacturer

The best way to understand how the various models can be used s by reference to an exam-ple. Let us consider the situation of a motor manufacturer with operations based in the United Kingdom (say Ford, General Motors, Honda, Nissan or Toyota).

1. Direct competitors. These are the other car companies selling products in the United Kingdom. The actions of these competitors will affect prices, levels of sales, promo-tional expenditure and product specifi cation. They are large and well funded and to a greater or lesser extent are trying to attract the same customers. New competitors have arrived from low-cost overseas economies (e.g. Seat, Skoda, Hyundai, Daewoo, Kia and Proton). The wave of mergers and acquisitions (Renault/Nissan, Ford/Jaguar/ Mazda/Volvo/LandRover, General Motors/Saab, Daimler-Benz/Chrysler) and fi nancial crises (Kia, Daewoo, BMW/Rover) increases the uncertainty in this market.


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2. Distribution channels. Car manufacturers sell cars through two channels:● small fi rms and private motorists may buy from garage showrooms;● vehicle leasing companies are major volume customers which then provide cars to

large and small business users. Both channels will seek to obtain the vehicles at low prices to increase their sales mar-

gins. Amalgamation between garage chains has signifi cantly increased buyer concentra-tion in recent years and this has put pressure on the profi ts of car manufacturers. As such it is an example of buyer power. Another trend has been the growth of ‘car search’ fi rms, which are able to provide motorists with cheaper cars through imports or special arrangements with particular dealers.

3. Suppliers of inputs. These affect the costs of production, quality and fl exibility of the car manufacturer. The chief inputs used by car manufacturers based in the United Kingdom are labour, auto components, transportation services, information services and energy. Many car manufacturers have deliberately changed their relationships with suppliers from one based on bargaining around prices to one based on partnership. Relations with organised labour are based on openness and consultation, while sup-ply–chain partnership agreements are formed with the component suppliers.

4. Potential entrants. During the 1990s UK car manufacturers faced competition in the home market from the arrival of low-price competitors from the Pacifi c Rim. Additionally the US Chrysler Corporation, absent since the demise of Hillman in the 1970s, reappeared with Jeep, Voyager and Neon brands imported from production bases in the United States and Austria. These entrants will increase industry supply and, through providing distribution channels and fi nal consumers with more choice, reduce prices, cut sales volumes and raise product expectations.

5. Substitute technologies. These can reduce demand for the fi rm’s product or render it obsolete altogether. As demand declines, the industry becomes oversupplied which introduces pressure on prices as each struggle to survive. Within the car industry there has been clear switching between classes of car as motorists have reduced their demand for ‘hot hatchbacks’ and small saloons and embraced small sports cars, multi-purpose vehicles and estate cars. Some manufacturers were obviously wrong-footed by this trend to substitutes. Car fi rms will also need to keep a weather-eye on developments in rail transport and the increasing popularity of two-wheeled vehicles in metropolitan areas.

6. Political/legal. Many issues face the car manufacturer here, including:● the apparent shift in government transport policy towards public transport;● the Offi ce of Fair Trading investigation into car prices and allegations of restrictive

trade practices affecting car distributors;● European Union ‘Social Chapter’ regulations on maximum working hours and labour

rights;● environmental and safety regulations affecting the design of cars and the processes by

which they are made;● European Union free-trade policies enabling easier importing of lower-price cars to

the UK from continental Europe.7. Economic. Examples under this heading include:

● UK policy on joining the European single currency and its effects on input and sale prices;

● general health of the UK economy and its likely growth over the coming 5 years – this will affect demand for cars;

● taxation of cars and petrol;

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T● employers’ contribution to employee insurance and welfare;● patterns of global economic development affecting target export countries.

8. Social. This broad heading includes:● attitudes to car safety and performance;● tastes and fashions in car colours and styling;● extent to which cars are still seen as a status symbol or lifestyle accessory;● lifestyle changes (e.g. activity sports);● size of families and growth of ‘second families’.

9. Technological. This affects the product but also the demand for products:● technological developments affecting cars (e.g. driverless technology, navigation

systems, etc.);● development of internet and interactive TV, opening the possibility for the

manufacturer to sell direct to the fi nal consumer;● increased teleconferencing and homeworking, reducing the need for private transpor-

tation.

2.3.5 Evaluation of environmental modelsThe main benefi ts of environmental models are:

1. They ensure that management consider a wide range of potential impacts when devising strategy. There would otherwise be a danger that they would concentrate on competi-tors and suppliers and not see the broader forces at work.

2. They allow division of the work of environmental analysis. For example, one team can look at buyers, while another examines the economy and reports back to the strategy team.

3. They provide a common language for discussion of strategy between the managers. Most managers will know the ‘Five Forces’ and PEST analysis models used above.

4. They provide insight into key strategic issues. Some models have empirical research to back them up which may help the team identify key threats.

However, management should be aware of the limitations of the models/frameworks:

1. They can distort reality. The real business environment does not fall into neat segments. This is just a structure put on it by strategy writers. Had we chosen a model with a differ-ent categorisation we might have obtained a completely different perspective. For example, combining legal with political suggests that political power works in a legal framework. If we separate legal from political we might recognise that in some of the countries we deal with the law is ignored and real political power lies with particular elite groups.

2. They present the environment as external. The models assume that there is an internal domain called the fi rm which management can control and that there is a boundary between this and the environment which they cannot control. For example, distribution channel, suppliers and customers are seen as separate and external. This is very hard to square with modern strategy theory which sees them as stakeholders and partners. Marketers would argue that customers are at the centre of the organisation, not some external force off to the right-hand side. Human resource managers would certainly not agree that staff are an input from the environment with the same status as spare parts.

3. They may cause management to overlook networks and interdependencies. In the example in Section 2.1.4, one car company will see another as a competitive rival. This ignores the fact that they are joint venture partners in a particular technology, that the rival owns one of the car hire fi rms it sells to and that they are all members of the same trade association lobbying government.


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4. They overload management. Management cannot expect to develop a strategy to deal with all the environmental issues raised by the models. Some writers suggest that management should monitor just the small number of key factors for success and deal with those.

The fact that such segmentation models are still popular is evidence that they are a use-ful tool. However, management should ensure that they refl ect on the assumptions under-lying them and their value in practice.In practical terms it is important to:

1. Remember that most important factors will transcend the categorisation as political, economic, societal or technological. For instance the advent of G.M. crops may be a technological issue at fi rst sight which may offer economic benefi ts and is enjoying some political support. But its social acceptability is in some doubt. Remember that PEST (or which ever acronym is in use) is only an aide memoire – rigid characterisa-tion is unnecessary and counterproductive.

2. Indicate how much and in what direction a particular theme will affect the nature of the fi rm’s business.

3. Outlook how these themes may strengthen or weaken in the future.

2.3.6 Survival and success factorsAt the end of an environmental analysis a company should be able to recognise the survival factors and success factors that relate to the industry in which they operate or wish to operate.

For instance;

Where there are powerful buyers with low switching costs,● Survival – meeting minimum buyer requirements.● Success – a strongly differentiated product, strong relationships and bonds of trust with

high negotiating skills.

Where there are low barriers to entry,● Survival – very diffi cult without success factors!● Success – strongly differentiated product and low costs.

Where the industry is enjoying fast growth,● Survival – technology and cash for growth.● Success – advanced technology, cash for growth and superior relationships with

researchers and funders.

Where the industry is mature,● Survival – minimum economic scale.● Success – signifi cant scale or other cost advantage and strong buyer relationships.

2.4 Causes of environmental uncertaintyCIMA defi nes uncertainty as:

The inability to predict the outcome from an activity due to a lack of informa-tion about the required input/output relationships or about the environment

within which the activity takes place. CIMA: Management Accounting: Offi cial Terminology, 2005, p. 97.

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T Uncertainty can also be defi ned as ‘the diffi culty in making reliable assumptions about the future’.

Managers’ perception of uncertainty will be increased by two factors – complexity and dynamism.

1. Complexity. This is the number of variables which can impact on the fi rm and how dif-fi cult they are to predict or understand. Also if the relationships between the variables is complex, this will also increase uncertainty. For example, in fi nancial markets the very large number of international banks, the wide variety of assets now available and their complex structuring have all contributed to making fi nancial forecasting very complex.

The car industry has an increased number of competitors and multinational busi-ness means that each manufacturer sources parts from, and sells cars in, a multitude of countries each with its own specifi c sets of environmental variables. This has signifi -cantly increased the complexity of its environment.

2. Dynamism. This is the rate of change of the business environment. Increased dyna-mism means that management’s models of ‘how things work’ will become out of date much quicker. It also suggests that competitors will be able to respond more quickly to a fi rm’s initiatives.

Examples of the factors which have increased dynamism include:(a) Swifter information communications. These mean that something happening on

one side of the world will have global impacts very quickly. The speed with which fi nancial crises spread is often cited as an example.

(b) Accelerated product life cycles. Modern competitive strategy leads most fi rms to invest heavily in research and development to render rivals’ products obsolete. The cumulative effect is to reduce the lifetime of all products. Management will fi nd it very hard to predict the sales of their products or their ability to recoup investment expenditure on them.

2.4.1 Impact of uncertaintyHigh uncertainty affects business strategy in several ways:

1. Reduces the planning horizon. If a fi rm operates in an uncertain environment its man-agement are unlikely to develop plans for more than a few years ahead because they accept that they will be subject to large margins of error.

2. Encourages emergent strategies. Some writers believe that high uncertainty brings into question the idea of planning a strategy at all. For example, Stacey (1996) suggests that formal strategy processes have failed to recognise the impact of chaos theory. The latter recognises that prediction in any open system is impossible due to the diversity of fac-tors which may affect it. He cites long-range weather forecasting as a casualty when it was abandoned once it was recognised that a falling leaf in Brazil could eventually affect weather patterns in Europe. These writers argue for an emergent approach to strategy and therefore suggest that management should focus on creating more-fl exible organi-sations and encouraging strategic awareness among staff.

3. Increases information needs of the organisation. Where the environment is no longer pre-dictable, management will require more regular information and on a greater range of factors to make it more certain. This will increase further still if the organisation elects to adopt emergent strategy formulation because the number of recipients of such infor-mation will increase.


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4. May lead to conservative strategies. Managers will tend to stay closer to the ‘strategic reci-pes’ that have worked in the past because they fear trying anything new due to not being able to forecast its effects. This approach is fl awed because under conditions of high uncertainty there is no reason to believe that old ‘recipes’ will still work.

2.4.2 Has uncertainty really increased?The modern assumption is that the business environment has become more uncertain and that more information is needed by management in order to restore certainty. Hatch (1997) observes that ‘Environments do not feel uncertain, people do’, and the only thing which has demonstrably increased is the amount of environmental information available to management. She ventures that perhaps the world has always been dynamic and com-plex but that we never fully appreciated it before.

Hatch’s suggestion is deliberately far-fetched to make a point. The more environmen-tal data we provide to managers, the more uncertain and stressed-out they may become. This gives weight to the argument, noted before, that in strategy formulation manage-ment should pay attention to only a few key success variables and ignore the rest.

2.5 Competitor analysis2.5.1 The importance of competitor analysis

CIMA: Management Accounting: Offi cial Terminology, 2005, (p. 47) defi nes competitor analysis as: Identifi cation and quantifi cation of the relative strengths

and weaknesses (compared with competitors or potential competitors), which could be of signifi cance in the development of a successful competitive strategy.’

Weak competitive response

Moderate competitive response

Strong competitive response

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Figure 2.2 Impact of competitor responses on profit

Figure 2.2 shows the impact of varying levels of competitor action on the profi ts of the business. These may include:

● price cuts● launching of a rival product● aggressive expansion of production which reduces the fi rm’s market sales● inclusion of costly modifi cations to the product which the fi rm must also undertake.

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T The unit of analysis here may be a product, customer segment, geographical region or technology. The implications for management’s choice of product/market strategy is clear. A suitable strategy is one which yields satisfactory fi nancial returns after taking into account the potential responses of competitors.

According to Wilson and Gilligan (1997) competitor analysis has three roles:

1. to help management understand their competitive advantages/disadvantages relative to competitors;

2. to generate insights into competitors’ past, present and potential strategies;3. to give an informed basis for developing future strategies to sustain or establish advan-

tages over competitors; To these we may add a fourth:4. to assist with the forecasting of the returns on strategic investments for deciding

between alternative strategies.

2.5.2 Competitor analysis – key conceptsThere are some key concepts which are helpful when undertaking competitor analysis. These are market size, market growth and market share.

A useful starting point to competitor is to gain an understanding of market size. This is usually based on the annual sales of competitors. A challenge in doing this is in actually defi ning the ‘market’ (e.g. if undertaking an analysis of Easyjet, is the market the airline market, or the budget airline market – which is most helpful?)

A second step involves estimating how much the market has grown, for example, over the last year. The importance of growth is relevant to strategy development, since if an organisation has a strategy which involves quick growth, then it would be more attracted to a market which is growing rapidly.

A third step involves gaining an understanding of market share. This relates to the specifi c share an organisation has of a particular market. A larger share is usually regarded as being strategically benefi cial since it may make it possible to infl uence prices and reduce costs through economies of scale. The outcome is increased profi tability.

2.5.3 Levels of competitorsKotler (2008) identifi es four levels of competitors:

(a) Brand competitors. Firms who offer similar products to the same customers we serve and who have a similar size and structure of organisation as ourselves, for example:● Pepsi and Coca-Cola● Unilever and Procter & Gamble.

(b) Industry competitors. Suppliers who produce similar goods but who are not necessarily the same size or structure as ourselves, or who compete in a more limited area or prod-uct range, for example:● British Airways and Singapore Airlines● Unilever ice creams and Mars ice creams● Nestlé and Cadbury’s.

(c) Form competitors. Suppliers whose products satisfy the same needs as ours, although they are technically quite different, for example:● speedboats and sports cars● book publishers and software manufacturers.


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(d) Generic competitors. Competitors who compete for the same income as the company, for example:● home improvements and golf clubs● foreign vacations and new homes.

The extent to which these pose a threat to the fi rm depends on factors such as:

1. Number of rivals and the extent of differentiation in the market. Greater numbers of rivals increases the complexity of the industry, but because they are smaller it reduces the dan-ger of one competitor breaking from the rest in an attempt to deliver a knockout blow. Instead each will try to carve a niche and hence increase differentiation. This makes it less likely that one can invade the market of another.

2. Entry and mobility barriers*. These are costs that the fi rm must pay to get admission to the industry or to the fi rm’s particular segment of it. For example, the Levi Strauss brand has a strong presence in the market for casual clothing. It proved an insuperable impediment when the fi rm tried to make tailored suits.

3. Cost structure. If the rival has a high-cost structure this effectively denies entry to a market that contains a cost leader. For example, the high-cost structure of an exclusive department store would effectively deny it access to lower market segments.

4. Degree of vertical integration. Highly vertically integrated fi rms have considerable strength in a market. However, they are also infl exible because they are committed to buying from their own upstream supply divisions. International oil fi rms have repeatedly lost out to discounting petroleum retailers able to buy supplies on the world’s spot markets.

As a rule of thumb it is likely that the most signifi cant present or potential competitors are the ones who conform most strongly to one or more of the following descriptions:

● they presently serve the same or similar customers to ourselves;● they have a similar or cheaper distribution network;● they are at the same stage of production as ourselves;● they utilise a similar technology in providing their goods and services;● they utilise similar types of management and staff skills;● they have a similar geographical spread.

These explain the sudden arrivals of:

● retail stores in the banking services markets;● electronic goods manufacturers in the photographic equipment market;● household electricity providers also offering telephone services, gas and water.

*You should distinguish carefully between entry barriers and mobility barriers. Entry barriers are fairly straightforward and refer to the situation where a new entrant tries to enter the industry. Mobility barriers are different and relate to a situation where an existing player in the industry attempts to change their com-petitive position. For instance, Skoda, who had a reputation for building cheap and low-quality cars, had to overcome signifi cant mobility barriers to become recognised as a supplier of high-quality vehicles. They left one strategic group and joined another. They were only able to do this because the take-over by Volkswagen allowed them to improve their production methods and image. Even then it took them roughly 4 years to change customer’s perception. Similarly, within the UK Tesco moved from a strategic group which could, at best, be described as ‘pile it high and sell it cheap’ to a quality supermarket. This involved a change of senior management, very expensive refurbishment and a period of more than 10 years!

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T Competitor analysis must, therefore, focus on two main issues; acquiring as much relevant information about competitors and subsequently predicting their behaviour.

The prediction of the competitors’ behaviour can be considered to have two main purposes:

1. to forecast their future strategies and how to counteract them,2. to forecast their likely reactions to a fi rm’s strategic decisions.

2.5.4 Gathering competitor intelligenceCompetitive intelligence is not just about the gathering of information but about devel-oping an understanding of the players in the industry. Lynch (2006) suggest that a starting point is to undertake competitor profi ling, that is the basic analysis of leading competitors to examine their objectives, resources, market strength, products and services and current strategies. The purpose is to identify the specifi c competitive advantage of rival organisations. The gathering of information should not be viewed as a one of task, but rather as a continual process recognising that organisations are subject to change all the time.

Grant (2002) has produced a four-stage framework for competitor analysis:

1. Identifying the current strategy. This can be identifi ed from what a company says and does. More often than not what they do will be more important than what they say –their explicit statements of intent in the annual reports and at presentations to fi nancial analysts may not be matched by the actions that represent their emergent strategy.

2. Identifying competitor’s objectives. Knowledge of competitors’ goals is an essential com-ponent of any analysis. Whether they are driven by short-term cash or profi t goals or whether they have the reserves to focus on long-term objectives will result in them exhibiting signifi cantly differing behaviours. From this perspective it is important to recognise the goals of a parent organisation where such exists and their attitude to the performance of subsidiaries. If a company appears happy with its current level of per-formance then there are unlikely to be any changes to their present approach.

3. Identifying a competitors’ assumptions about the industry. A competitors’ decisions are governed by their perceptions and assumptions about industry structure and the play-ers with whom they compete. These perceptions will often be driven by the value sys-tems of the senior management and according to Spender (1989) these perceptions will converge over time, limiting the players in an industry to behave in a particular way, ‘rationally’, as time goes by. This often explains the complacency of existing play-ers when a new entrant picks off a new segment of a market with out reaction from the incumbents.

4. Identify the competitors’ resources and capabilities. Without a rigorous analysis of the resources that a competitor possesses there can be no realistic prediction of the serious-ness of a possible challenge. It is easy to determine what they are doing but the empha-sis here should be on what they are capable of doing. Ideally a company should know as much about its competitors as it knows about itself, this is, of course, unlikely to be achieved but is something for which a company should strive. We shall be considering the analysis of resources in a later chapter and can leave this section until then.

Once the information has been gathered and the analysis, used to predict competitor behaviour, conducted it must be presented in the most accessible format to those who will make the decisions on a timely basis. Thereafter the rivals should be continuously moni-tored for signs of activity and the industry scanned for the emergence of potential rivals.


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If the technique is well developed it will become one of the fi rm’s core competencies allowing a more confi dent, proactive, approach to the market place contributing to competitive advantage rather than leaving the fi rm to react, often defensively, to the strate-gic initiatives of other players in the industry.

It is worth noting that much of the information required for successful competitor anal-ysis will be qualitative. Fleisher and Bensoussan (2002) give a full listing of the informa-tion that an organisation should gather about their competitors. The broad headings are as follows:

● Products and services● Marketing● Human resources● Operations● Management profi les● Sociopolitical● Technology● Organisational structure● Competitive intelligence capacity● Strategy● Customer value analysis● Financial.

An extract of a few of those categories will give an indication of the detailed qualitative nature of much of the information (Table 2.2).

Table 2.2 Detailed qualitative information for competitor analysis

Products/services Competitive intelligence capacity

Number of products and services Evidence of formal CI capacityDiversity and breadth of product lines Reporting relationshipsQuality, embedded customer value Profi leProjected new products/services CEO and senior management level of supportCurrent market shares by product and product lines Vulnerability

IntegrationData gathering and analysis assets

MarketingSegmentation strategiesBranding and image Customer value analysisProbable growth vectors Quality attributesAdvertising/promotions Service attributesMarket research capability Customer goals and motivationsCustomer service emphasis Customer types and numbersKey customersSociopoliticalGovernment contactsStakeholder reputationBreadth and depth of portfolio of sociopolitical assetsPublic affairs experienceNature of government contractsConnections of board membersIssue and crisis management capability

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T 2.5.5 Forecasting competitors’ response profilesKotler (2008 ) identifi es four response profi les:

1. The laid-back competitor. Does not respond to competitive moves.2. The selective competitor. Reacts to attacks on certain markets but not in others, or cer-

tain types of attack (e.g. to price cuts but not to promotion offensives).3. The tiger competitor. Always responds aggressively to any threat, in order to send a mes-

sage to all contenders that it will retaliate.4. The stochastic competitor. No predictable pattern to responses. Often does not respond

to moves, and then on one occasion decides to retaliate.

Kotler advises management to consider the reasons why a competitor does or does not have a track record of responding. For example, the following might be reasons to think again about taking advantage of an apparently docile rival:

● they believe the market is not worth defending any more;● they know the market is one in which it will be hard to dislodge customers;● the management have their eyes on sequel products and so do not care if their present

one is knocked out.

Cost structures are an important factor to consider in terms of competitor response:

(a) High fi xed-cost structure. Rivals will respond more aggressively to threats to their sales volumes. This is because their high operational gearing means that any fall in revenues will cause drastic cuts in profi ts. Such costs tend to characterise:

● vertically integrated fi rms;● fi rms employing capital-intensive production technologies;● fi rms in industries with fi xed supply schedules which must be maintained regardless

of demand (e.g. scheduled transportation, football clubs, and broadcasting).(b) High unit costs. These make it impossible for the rival to effectively respond to price

cuts. These are often masked by high prices based on high market positioning. Cutting prices is impossible without damaging this positioning.

(c) High exit costs. These are the one-off costs of leaving an unprofi table industry. Examples of exit costs include:

● dedicated assets which cannot be used elsewhere;● costs of redundancies;● decommissioning costs such as making former storage and workings safe;● danger of the stigma of failure attracting rivals to attack in other parts of its

business.Where the rival cannot exit easily they are forced to stay and fi ght in the hope that

something can be salvaged. Their response will be aggressive.

Lynch (2006) also identifi es a number of strategies that can be used against competitors and potential new entrants, for example:

● Attack competition. This can be achieved though head on attack against the market leader – this often requires substantial resources and investment and attacking where the leader is weak.

● Flanking or market segmentation which involves choosing a fl ank/market segment that is relatively undefended with the aim of taking a signifi cant market share.

● Occupy totally new territory where there is no existing product or services through innovation or seeking market niches.


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● Guerrilla movement which is a rapid sortie to seize a short term profi table opportunity. This requires good information to identify opportunities.

● Blocking fi rst mover advantage by not allowing the competitor to establish a dominant position before a response is made. This could be achieved by launching an imitation prod-uct or a product with enhanced features, seeking to leapfrog or outfl ank the fi rst mover.

In addition, Lynch suggests an alternative set of competitive strategies based on innova-tion: These include:

● Rewriting the rules of the game – existing players in the market will usually understand how competitors are engaged i.e. the rules of the game. However, new players can enter the market rewriting the rules on how they operate and gain advantage.

● Technological innovation – for example enabling revolution in distribution, as illus-trated by Amazon’s success.

● Higher levels of service.● Co-operation – for example by joining with other players, though joint ventures or

strategic alliances can give strength to beat larger rivals.

2.6 Competitor accountingCompetitor accounting is a term used by Ward (1992) to refer to the calculation of the relative costs and of competitors and their likely strategies to evaluate their potential effects on the profi ts of the fi rm.

2.6.1 Evaluation of barriers to entryBarriers to entry include:

(a) initial capital costs(b) legal and patent protections(c) the costs and economies of scale of incumbent fi rms(d) extent of vertical integration(e) brand barriers(f ) scale of investment in R&D(g) potential defensive action by incumbent fi rms (e.g. price cutting)(h) if economies of scale are important and the learning curve is effective.

Most barriers can be overcome by an outsider, provided that they are prepared to spend the money, for example:

● investing in the capacity, R&D, branding, etc.● acquiring an incumbent fi rm● riding out the losses caused by high initial costs or competitive retaliation.

You should always assume that entry barriers are low – until the evidence proves otherwise!Competitor accounting must estimate the present value of the costs that an entrant will

incur to overcome these barriers and compare this with the present value of the returns an entrant could achieve:

(a) If costs exceed revenues, then there will be no fi nancial incentive to join and the threat of market entry is low.

(b) If revenues exceed costs, then there is a fi nancial incentive to join. The threat of entry is higher and the incumbent fi rms must downgrade assessments of the market’s attractiveness.

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T Where entry is likely, the incumbent fi rm may take entry forestalling action by increasing the entry barriers artifi cially:

(a) deliberate adoption of highly capital-intensive production techniques(b) high R&D spending to increase costs of participation(c) high advertising leading to strong branding and a psychological switching cost(d) reduction of price to reduce segment attractiveness.

Competitor accounting should compare:

(a) the present value of profits lost through undertaking these pre-emptive strate-gies; with

(b) the present value of profi ts lost as a consequence of market entry and advise manage-ment of whether to resist entry and even whether to invest further in the industry.

2.6.2 Estimate competitors’ costsKnowing these can help strategic decisions by giving a guide to:

(a) their likely future pricing behaviour;(b) their response to strategic action, say price reductions, by the company;(c) their ability to remain profi table as prices fall and therefore whether they will stay in

the market or not;(d) their potential prices in a tender or sealed bid for a contract.

Sources of data on competitors’ costs include:

● from partnership agreements in a joint venture;● physical analysis of competitors’ products;● banks and fi nancial markets;● ex-employees of competitors;● generalisation from own cost base;● industrial experts and consultants;● physical observations (e.g. stand outside, or inside, their factory);● published fi nancial statements;● competitor press releases;● trade and fi nancial media coverage;● inspection of wage rates for grades of staff in the fi rm’s area;● availability of space for expansion on their present site;● availability and cost of their fi nance;● the characteristics of the market segment they serve;● the work methods they employ.

This will entail the management accountant working with other experts such as produc-tion engineers, marketers, human resource specialists, etc.

2.7 The global economic environmentEarlier on in the chapter the concept of LoNGPEST was introduced to recognise that the environment of a fi rm exists at a number of levels. Here we are exploring specifi cally the economic environment:


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1. The local and nation economic environment. This relates to the immediate economic infl uences on the city/region and country (in which the fi rm operates and sells. Factors here include:● stage of the economy in the trade cycle● macro-economic policies of domestic governments● levels of interest, infl ation and exchange rates.

2. The global economic environment. The global environment contains such factors as:● changing patterns of global trade and economic development● development of regional economic groupings● international impacts on currencies and interest rates.

One of the factors increasing the complexity of the fi rm’s environment has been the increased infl uence of global economic forces on the economies of particular states. This has been accompanied by an increase in the infl uence of supranational economic bodies such as the European Union (EU) or the G8 summits of the major industrial nations. Having said that it is always worth considering economic forces at regional and local levels as well since, within a country, there will be differences from place to place in a number of factors. For instance, propensity to save, which is important to the fi nancial services indus-try, changes markedly across the UK.

2.7.1 The new global economyIn his infl uential book Global Shift, Peter Dicken (1998) identifi es two dynamics affecting world economic development:

● Internationalisation. The extension of trade across national economic boundaries. This more extensive pattern of trade does not fundamentally affect national economic and political boundaries.

● Globalisation. A qualitatively different process in which there is a functional integration of internationally dispersed activities.

Dicken cautions against getting swept up in the idea that globalisation of business is demolishing cultural and political boundaries between countries. Signifi cant national dif-ferences remain. However he accepts that there has been a signifi cant change in the extent of globalisation brought about by:

● Extension of production chains across national boundaries. The main impetus here has been the strategy of multinational enterprises (MNEs) to disperse their production facilities across several continents to take advantage of resource and cost differences and also to avoid the vulnerability that arises from being dependent on a single country for production facilities and markets. Elsewhere these have been termed production networksto convey the fact that production and sales fl ows move in many directions, rather than the more traditional model of less developed countries providing raw materials into a chain where the fi nished goods always end up in a developed nation (Knox and Agnew, 1998).

● Patterns of foreign direct investment (FDI). Traditional economic theory would suggest that the capital-rich countries of the USA, Western Europe and Japan might invest in devel-oping productive capacity in less developed countries in order to exploit cheap labour and materials. In fact, the bulk of FDI has been between already well-capitalised economies. This has led to the formation of a core triad of comparatively rich and well-capitalisedeconomic zones centred on North America, Western Europe and Japan/ Australasia and

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T a periphery of newly industrialising nations such as the dragon states of Malaysia, Korea, Taiwan and, lately, China, Latin America and parts of the Indian subcontinent.

● The creation of supranational organisations. Countries within these economic zones are moving towards common regulations and taxation systems. Although national economic differences remain to some extent within the three triads, there are obviously moves towards harmonisation of laws, taxes and even currencies. In Europe this is through the EU, in North America via the North American Free Trade Agreement (NAFTA), in the Pacifi c Basin via the Asia–Pacifi c Economic Forum (AFTA) and through similar pacts in Latin America such as the MERCOSUR customs union.

● Technology acting as an engine of economic transformation. Although warning against crude technological determinism (i.e. the idea that technology alone determines patterns of economic and social development unmediated by the political and social culture), Dicken notes that technology has shrunk the world through improved transportation and communication, speeded up product lifecycles by hastening innovation and swept away traditional craft-based production systems. This effect has caused remarkably simi-lar products and lifestyles to develop across the countries touched by it.

● The development of ‘webs of enterprise’ through the spreading of multinational enterprises.These multinationals forge trading links between countries that previously did not trade. They also seem to possess an institutional power that rivals and transcends the political institutions of the nation-states in which they are based.

● The impact of particular industries on transferring cultures, lifestyles and personnel across national boundaries. The industries Dicken singles out for inspection are textiles and clothing, automobiles, electronics and fi nancial services. He notes that the fi nancial services have tended to follow the manufacturing industries. These industries have been the major cause of FDI. Through imposing common working practices and encouraging international staff mobility they exert a convergence infl uence on national cultures.

Dicken predicts a number of challenges facing governments and individuals in the industrialised nations as a consequence of the increased growth of the globalised economy:

● Increased unemployment in the older industrialised countries, particularly among the unskilled, poorly educated or immobile.

● Widening differences in incomes and living standards within industrialised countries.● Increased demand for fl exibility in workforces, both numerically (through more exten-

sive use of part-time workers) and functionally (through multiskilling).● Changes in government policies towards ones aimed at removing obstacles to economic

adjustment, promotion of small fi rms, increased harnessing of new innovative technolo-gies and attracting foreign investment.

● Increased pressures for global governance to keep pace with the global businesses that authorities wish to regulate.

For less industrialised nations Dicken sees considerable problems with their ability to cope with worse poverty and unemployment.

Other writers broadly agree with Dicken’s hypothesis. Knox and Agnew (1998) discuss the possibility of wide divergences emerging within national economies between the prosperousurban areas and the less involved rural areas. One can imagine these problems particularly affl icting the large continental countries such as the United States or Australia.


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2.8 National competitive advantagesThe internationalisation and globalisation of markets raises issues concerning the national sources of competitive advantages that can be substantial and diffi cult to imitate. Porter (1992) in his book, The Competitive Advantage of Nations, explored why some nations tend to produces fi rms with sustained competitive advantage in some industry more than oth-ers,. He set out to provide answers to:

1. Why do certain nations house so many successful international fi rms?2. How do these fi rms sustain superior performance in a global market?3. What are the implications of this for government policy and competitive strategy?

Porter concludes that entire nations do not have particular competitive advantages. Rather, he argues, it is specifi c industries or fi rms within them that seem able to use their national backgrounds to lever world-class competitive advantages.

2.8.1 Porter’s DiamondPorter’s answer is that countries produce successful fi rms mainly because of the following four reasons as illustrated in Figure 2.3.

2.8.2 Demand conditionsThe demand conditions in the home market are important for three reasons:

1. If the demand is substantial it enables the fi rm to obtain the economies of scale and experience effects it will need to compete globally.

2. The experience the fi rm gets from supplying domestic consumers will give it an infor-mation advantage in global markets, provided that:(a) its customers are varied enough to permit segmentation into groups similar to

those found in the global market as a whole;(b) its customers are critical and demanding enough to force the fi rm to produce at

world-class levels of quality in its chosen products;

Firm strategy,structure and rivalry

fierce, capablenational firms

Demand conditionssophisticated anddemanding with

international outlook

Related andsupporting industrieshome-based suppliersand related industries

that are internationallycompetitive

Factor conditionsadvanced specialisedwith good technical

know-how

Plus roles of• Chance• Government

Source: Porter (1992)

Figure 2.3 Four elements of national competitive advantage. Reprinted with the permission of The Free press, a Division of Simon & Schuster Adult Publishing Group, from The Competitive Advantage of

Nations. © Michael E. Porter 1990, 1998. All rights reserved

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T (c) its customers are innovative in their purchasing behaviour and hence encourage the fi rm to develop new and sophisticated products.

3. If the maturity stage of the plc is reached quickly (say, due to rapid adoption), this will give the fi rm the incentive to enter export markets before others do.

2.8.3 Related and supporting industriesThe internationally competitive fi rm must have, initially at least, enjoyed the support of world-class producers of components and related products. Moreover success in a related industry may be due to expertise accumulated elsewhere (e.g. the development of the Swiss precision engineering tools industry owes much to the requirements and growth of the country’s watch industry).

2.8.4 Factor conditionsThese are the basic factor endowments referred to in economic theory as the source of so-called comparative advantage. Factors may be of two sorts:

1. Basic factors such as raw materials, semi-skilled or unskilled labour and initial capital availability. These are largely ‘natural’ and not created as a matter of policy or strategy.

2. Advanced factors such as infrastructure (particularly digital telecommunications), levels of training and skill, R&D experience, etc.

Porter argues that only the advanced factors are the roots of sustainable competi-tive success. Developing these becomes a matter for government policy.

2.8.5 Firm structure, strategy and rivalryNational cultures and competitive conditions do create distinctive business focuses. These can be infl uenced by:

● ownership structure● the attitudes and investment horizons of capital markets● the extent of competitive rivalry● the openness of the market to outside competition.

2.8.6 Other eventsPorter points out that countries can produce world-class fi rms due to two further factors:

1. The role of government. Subsidies, legislation and education can impact on the other four elements of the diamond to the benefi t of the industrial base of the country.

2. The role of chance events. Wars, civil unrest, chance factor discoveries, etc. can also change the four elements of the diamond unpredictably.

2.8.7 National competitive advantageSuccessful fi rms from a particular country tend to have linkages between them; a phenom-enon that Porter calls clustering.

Clustering allows for the development of competitive advantage for several reasons:

● transfer of expertise (e.g. through staff movement and contracts)


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● concentration of advanced factors (e.g. telecommunications, training, workforce)● better supplier/customer relations within the value chain (i.e. vertical integration).

Clustering may take place in two ways:

1. common geographical location (e.g. Silicon Valley, City of London)2. expertise in key industry (e.g. Sweden in timber, wood pulp, wood-handling machin-

ery, particleboard furniture).

2.8.8 Losing competitive advantageNations may lose their competitive advantage through the erosion or deterioration of the factors which created the advantage to start with:

1. Factor deterioration. This occurs due to poor economic policies such as:● failure to maintain and improve the country’s skill base● lack of investment in technology and product● failure to have developed beyond primary advantages when they run out.

2. Local demand conditions. Here local customers may fall out of step with world demands or inappropriate government policies cause a collapse or distortion of demand at home.

3. Collapse of supporting clusters. This is usually due to fi rms pursuing diversifi cation strate-gies and ceasing to concentrate on their core business. The effect is that the members fail to remain world class against their more focused rivals overseas.

4. Decline of competitive rivalry. An excessive concentration between fi rms or pursuit of diversifi ed business strategies reduces the keenness of the competition at home. This leads to shoddy products and excessive prices abroad.

2.8.9 Porter’s strategic prescriptionsPorter suggests that the fi rm identifi es its most promising strategy in the following ways:

1. Identify which clusters in the home country give a competitive advantage – either through(a) permitting lower costs of production than global rivals;(b) allowing a differentiated product.

2. If these advantages are likely to be world class, the fi rm should compete in global markets.3. If these advantages are not world class, the fi rm should fi nd a niche market at home or

abroad where it can use its available strength.

2.8.10 Comment on Porter’s DiamondAlthough not as popular as his models of Five Forces, value chain and generic strategies, this model has still achieved a lot of recognition for Porter. It is not, however, without its diffi culties:

1. Companies not countries. The industries that must succeed globally have their own man-agement and strategies. By focusing on their country of origin Porter does not explain why a given country produces both stars and duds in the same industry. For example, Toyota and Honda are both Japanese car makers which are a success. Nissan and Mazda are less successful and have been rescued by Renault and Ford, respectively.

2. Ignore multinational or global corporations. The idea that Microsoft is an American com-pany or ICI is British seems outdated when we consider that their staff, shareholders and

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T customers are from all over the world. Porter’s model seems to apply better to fi rms that are exporting and less well to ones who are actually setting up outside of their home country.

3. Ignores the target country. Commercial success or failure will depend more on the envi-ronment in the target country than it will on the environment in the home country. Therefore it is necessary to analyse the target country too.

4. Less applicable to services. Porter’s examples are restricted to manufacturing and closely allied industries such as banks and management consultancies. It is hard to see how his model would apply to Starbucks or McDonald’s where so much of the product and staffi ng depends on the local economy and not a US industrial base.

2.9 Country analysis and political riskAs we have already discussed an analysis using Porter’s diamond will ignore the environ-mental factors in the target country. It is important, therefore, that as well as conducting a PEST analysis for the home country of a company a similar analysis is conducted for any country within which a fi rm is currently operating or considering operating. Particular emphasis should be placed on determining any political and cultural differences.

2.9.1 Political riskPolitical risk can be considered to arise at the macro- or micro-level. Macro- political risks will affect all foreign fi rms in the same general way. Expropriation, the seizure of private businesses with little or no compensation to the owners would be an example as would indigenisation laws which require that national citizens hold a majority share in all enterprises. In recent years with the liberalisation of trade in Eastern Europe, the entry of China to the WTO and the negotiation of a trade agreement between Vietnam and the US macro-political risk has diminished somewhat but still needs to be monitored by multinationals.

Micro-political risk tends to affect selected sectors of the economy or specifi c foreign com-panies and is often driven by the dominance of those fi rms. These risks often take the form of industry regulation, taxes on specifi c types of business activity and local content laws.

Rugman and Hodgetts (2003) have produced a useful summary:

Sources of risk:● political philosophies that are changing or are in competition with each other;● changing economic conditions;● social unrest;● armed confl ict or terrorism;● rising nationalism;● impending or recent political independence;● vested interests of local business people;● competing religious groups;● newly created international alliances.

Groups that can generate political risk:● current government and its various departments and agencies;● opposition groups in the government that are not in power but have political infl uence;● organised interest groups such as teachers, students, workers, retired persons, etc;● terrorist or anarchist groups operating in the country;


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● international organisations such as the World Bank or United Nations;● foreign governments that have entered into international alliances with the country or

that are supporting the opposition within the country.

Effects of political risk:● expropriation of assets (with or without compensation);● indigenisation laws;● restriction of operating freedom concerning, for example, hiring policies and product

manufacturing;● cancellation or revision of contracts;● damage to property and/or personnel from terrorism, riots, etc.;● loss of fi nancial freedom such as the ability to repatriate profi ts;● increased taxes and other fi nancial penalties.

When forecasting political risk whether the company does this on a formal or ad hoc basis, it is usual to focus on two areas:

1. the political system in which the company is doing business;2. the goods/services to be produced and the operations to be carried out.

As regards the political system the major concerns would be the prospect of political up-heaval in the country, the likelihood of the government giving preference to local fi rms or the prospect of a government acting on a totalitarian fashion. They would also consider the strength of lobby groups within the target country. For instance, within the United States, lobby groups have considerable strength in the areas of steel, textiles, softwood tim-ber and semiconductors and have been able to bring considerable pressure to bear on their government to bring about favourable decisions.

Products and operations also face an element of political risk. For instance where a gov-ernment requires a joint venture to exist with a local partner there is both a limit to control and the risk of theft of product knowledge or technology. Where local laws do not offer patent protection this can be a signifi cant risk. Similarly a requirement to source a fi xed percentage of components locally can be a source of risk as can the governments approach to monopolies, cartels and price fi xing.

2.10 Sources of information for environmental analysis

Undertaking environmental analysis for an organisation requires access to a wider range of information.

2.10.1 Environmental scanningIt is important to distinguish between different intensities in the use of environmental informa-tion. Environmental scanning is low-intensity gathering of information. Effectively it is keeping a close watch on developments. Responsibility for scanning arguably rests at three levels:

1. Line management. In addition to their regular operational responsibilities line managers, or a designated manager, will be responsible. Given the operational concerns of these members of the team, this scanning is unlikely to extend beyond the medium term and will be limited to the technologies and products they control.

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T 2. Strategic planning. Conducted by members of the strategic planning team. While their time frame of analysis will be longer than that of line managers, their lack of under-standing of the operational and technologies details may mean they miss many impor-tant leads. For this reason more modern ‘bottom-up’ approaches to strategy may be preferable.

3. Specialist unit. Persons with specifi c responsibility for scanning. They may be called names such as ‘business intelligence units’.● Jain (1990) suggests that the following benefi ts arise from environmental scanning:● helps fi rm to identify and capitalise upon opportunities rather than losing out to

competitors;● provides a base of objective qualitative information;● makes the fi rm more sensitive to the changing needs and wishes of its customers;● provides information to help the strategy formulation process;● provides intellectual stimulation for the strategists;● improves public image by showing that the fi rm is sensitive to its environment;● provides a continuing broad-based education for managers in general and strategists

in particular.

2.10.2 Accessing environmental informationWilson and Gilligan (1997) note that successful environmental scanning requires two ele-ments to be present:

1. The generation of an up-to-date database of information.2. The dissemination of this information to decision-makers.

This raises the important issue of how the knowledge of staff and managers can be effec-tively pooled and accessed. Possible techniques include:

● regular management meetings;● encouragement of broader participation in the business strategy process;● creation of an internal environmental information database for knowledge to be entered

into under specifi ed codes or headings.

2.10.3 Detailed environmental analysisThis is more focused and looks at the specifi c issues. It may be necessary in a number of situations:

1. In deciding on the viability of a particular product which is being considered for launch or continuation.

2. As part of an analysis of a particular business unit and its performance.3. To assist with deciding whether to develop business divisions and products for another

country.

The process of scenario planning, which we will discuss in the next chapter is often used as a means of considering the specifi c issues that a company needs to monitor more closely in this way.


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2.10.4 Categorisation of information sourcesIn an excellent if now rather dated guide, Tudor (1992) provides the following categorisa-tion of information sources:

1. Primary sources:(a) Annual reports and statements of competitors or fi rms in the target market or

industry and those of their suppliers.(b) Transcript services from newspapers, analysts and on-line data sources such as pro-

prietary company information services.(c) Statistical sources such as government censuses and surveys of household expendi-

ture, production and demographics.(d) Newspapers and newsletters such as the business press or industry bulletins (using

databases such as Lexis/Nexis which gives access to the world’s press.(e) Magazines and journals including the trade media, business and management jour-

nals, technical journals.(f ) Analysis services such as FAME.(g) Patents registered with the national patents offi ce.

2. Secondary sources:(a) Directories and yearbooks covering particular industries (who’s who) and owner-

ship patterns (who owns what).(b) Market research reviews and reports produced by specialist research fi rms including

Mintel, Economist Intelligence Unit, etc.(c) Abstracts, index journals and current awareness services. These are specialist data-

bases (on paper, CD-Rom or on-line) which index technical articles under codes and keywords. The fi rm can set up a profi le of keywords relevant to its industry and source the material written on it.

(d) Government publications such as special reports of select committees on particular industries, economic forecasts and reports.

(e) Grey literature. A generic phrase covering theses, conference reports, special research papers, maps and photographs.

3. Computer-based information services:(a) CD-Rom-based abstracts and journals.(b) On-line databases of professional and academic journals, newspapers and business

information.(c) Internet resources such as:

● homepages of rival fi rms● economic information from national governments● homepages of management consultants and professional bodies● discussion groups● academic papers via sources such as Google Scholar.

2.11 SummaryThe key points to remember are:

● the components of PEST and LoNGPEST ;● the components of the Five Forces model and the factors which infl uence them;

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T● the elements contributing to uncertainty (complexity and dynamism);● the frameworks for competitor analysis;● the threats that competitors can pose and alternative competitive strategies;● factors leading to globalisation and the elements of the Porter Diamond;● the nature of political risk;● the main sources of environmental information.

ReferencesBrandenburger and Nalebuff (1996), Co-opetition, Doubleday.Dicken, P. (1998), Global Shift: Transforming the World Economy (3rd edn). London: Paul

Chapman.Fleisher, C.S.F. and Bensoussan, B.E. (2002), Strategic and Competitive Analysis. Upper

Saddle River NJ: Prentice Hall.Gardner, H.S. (1998), Comparative Economic Systems (2nd edn). Fort Worth: Dryden

Press.Grant (2002), Contemporary Strategy Analysis: Concepts, Techniques, Applications (4th edn).

Oxford: Blackwell.Hatch, M.J. (1997), Organisation Theory: Modern, Symbolic and Postmodern Perspectives.

Oxford: Oxford University Press.Jain, S.C. (1990), Marketing Planning and Strategy. Cincinnati, OH: South Western

Publishing Company (cited in Wilson and Gilligan (1997), op. cit.Johnson, G., Scholes, K. and Whittington, R. (2008), Exploring Corporate Strategy (8th

edn). Harlow: FT Prentice Hall.Knox, P. and Agnew, J. (1998), The Geography of the World Economy (3rd edn). London: Arnold.Kotler, P. (2008), Marketing Management: Analysis, Planning, Implementation and Control

(9th edn). Englewood Cliffs, NJ: Prentice-Hall.Lynch, R. (2006), Corporate Strategy (4th edn). Harlow, FT Prentice-Hall.Porter, M.E. (1980), Competitive Strategy: Techniques for Analysing Industries and

Competitors. New York: The Free Press.Porter, M.E. (1992), ‘Four elements of national competitive advantage’ Figure 3.1 page

72. Reprinted with the permission of the Free Press, A Division of Simon & Schuster Adult Publishing Group from The Competitive Advantage of Nations. © 1990, 1998 by Michael E. Porter. All rights reserved.

Ram, S. and Samir, I.T. (1998), ‘Competitor Analysis Practices of U.S. Companies: An Empirical Investigation’. Management International Review, Vol. 38, No. 1, pp. 7–23.

Rugman, A.M. and Hodgetts, R.M. (2003), International Business (3rd edn). Harlow:Prentice-Hall.

Stacey, R.D. (1996), Strategic Management and Organisational Dynamics (2nd edn). London: Pitman.

Spender, J.C. (1989), Industry Recipes: The Nature and Sources of Management Judgement.Oxford: Blackwell.

Tudor, J. (1992) Macmillan Dictionary of Business Information Sources. Basingstoke: Macmillan.

Ward, K. (1992) Strategic Management Accounting. London: Cima/Butterworth-Heinemann.Wilson, R.M.S. and Gilligan, C. (1997), Strategic Marketing Management. Oxford:

Butterworth-Heinemann.

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2Revision Questions

Section A type question

Question 1W Company is a fashion retailer which designs and sells its own brand of women’s clothes through its chain of shops in F country. However, it is facing tough operating conditions in its home market where strong competition means there is little opportunity for future growth. The Board has taken the strategic decision that expansion can only be achieved through market development abroad.

Initial research has identifi ed L country as offering the potential to be a possible suit-able location for W Company to develop a new market. Further information now needs to be collected on the external environment and competition in L country in order to help evaluate the viability of the strategy being proposed.

If the outcomes from the research are positive W Company intends to fi nd an existing retail chain in L country that it can acquire, rather than set up a new operation through internal development.

RequirementApply appropriate strategic management models/frameworks to explain the key external environmental and competitive factors on which information should be collected to help W Company evaluate its proposed strategy to move into L country. (10 marks)


Question 2A clothing company based in the United Kingdom believes that its domestic market is limited and is proposing to expand by the manufacture and sale of its products abroad. At this stage it has not identifi ed where it will locate its manufacturing facility. The company believes that there are major advantages to be gained by setting up a factory in a country with a low-wage economy.

The company recognises the need to understand the marketing environment of the country within which it establishes its manufacturing facility. It appreciates that, besides labour, there are other local environmental issues that need to be fully considered before entering negotiations to build a factory.

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other country. (15 marks)(b) Explain the possible cultural infl uences on the effectiveness of the workforce in respect

of local education and training, technology, working hours and domestic amenities.(10 marks)


Question 3Michael Porter, in his book Competitive Advantage: Creating and Sustaining Superior Performance, suggested that a fi rm must assess the industry’s market attractiveness by considering:

● the extent of the rivalry between existing competitors;● the bargaining power of suppliers;● the bargaining power of buyers;● the threat of substitutes;● the threat of new entrants.

Requirements(a) If a fi rm wishes to monitor the bargaining power of buyers, recommend the factors

that should be included in the monitoring system implemented by the fi rm.(10 marks)

(b) Explain four different methods whereby a fi rm can reduce the threat of new entrants to an industry. (10 marks)

(c) Explain the reasons why fi rms often continue to operate in an industry which is gener-ating below normal returns in the short run. (5 marks)



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Solution 1The strategic management frameworks that could be used to assess the external factors that could help in the Board of W Company to decide whether or not to pursue its market development strategy in L country are PEST and Porter’s fi ve forces model.

The PEST framework is a useful way of organising information on the macro- environmental infl uences that can be used to assess the external factors that might impact on W’s development in L country. This would involve an analysis of the political/legal, economic, social-cultural and technological factors. The headings can be used as a check-list to assess the relative importance of the different infl uences on W Company’s proposed strategy. In addition Porter’s fi ve forces model will be helpful in analysing the nature of the competitive environment in L country.

With regard to the information that should be gathered on the general environment in L country it will be important to assess the nature of the political and economic environ-ment. This would include exploring the legislative and government policies and attitudes to competition that could impact on W Company’s development. For example, is the gov-ernment of L country encouraging inward investment by offering grants to companies or do they have policies in place to protect its own industries? W Company would also want to consider the political stability in L country, if there is political instability and unrest, it may not be a positive step to enter the market.

Information should be collected on the nature of the economic climate such as the rate of economic growth, level of tax rates, interest rates, exchange rates, levels of consumer disposable income and the percentage of household income spend on clothing and spe-cifi cally fashion items. All of these factors could impact on the demand for W Company’s women’s fashion clothes.

Research should be undertaken to determine whether the social factors are encouraging for W Company, for instance in terms of the customer attitudes, values and beliefs of people in L country and the extent to which they would be likely to buy fashion clothes from a foreign retailer. Information on demographic factors, such as the number of women in the age groups that W Company intends to target would be useful. Information on social factors would also help in determining the cultural context of L country, in order to gain an understanding of any potential cultural differences, not only of customers, but also future employees.

Technological factors that would need to be explored relate to the communications infrastructure and any technological issues that might impact on the way the retailers

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T operate. This could relate to computer tracking of stock, as well as ordering and payment systems. Also, the state of the transport systems needs to move stock around the country would need to be assessed.

The PEST framework can be expanded to consider environmental/ethical factors. Interest here will centre of the cost of packaging and disposal of waste, but also about ethi-cal conduct in the management of employees.

An analysis using the fi ve forces model will help W Company assess the level of com-petition and the attractiveness of the market in L country and hence whether it is an attractive one to enter. This would involve researching the power of buyers and suppliers in L country and the extent to which substitute products exist. One of the most impor-tant aspects of the model for W Company relates to the level of barriers to entry that it might face. If there are high barriers to entry, for example as a result of already established fi rms in L country having strong retail brands or if there are legal or bureaucratic factors in place to deter foreign business entering the marketplace, this would make it an unattrac-tive proposition. It also highlights the need to assess the current competitive rivalry, for instance information will be needed on the number of retailers currently operating in the industry and industry growth rates (i.e. is it a developing or mature industry). Presumably W Company would only want to enter the market in L country if the forces are weak and potential returns are high.

Section B solutions

Solution 2● This question is very closely structured. Part (a) is obviously a reference to the four ele-

ments of PEST. You should structure your answer under these four headings and try to fi nd more than one example of each. Note that the examiner asks you to contrast the fac-tors between the United Kingdom and the low-wage economy’. It is a good idea to visu-alise a low-wage economy in your mind (say India or Mexico) and that will help bring ideas to mind. What is different between the two economies?

● Part (b) also has four elements:– local education and training– technology– working hours– domestic amenities.Again you should structure your answer under these headings and fi nd at least two

examples of each.● Be careful not to repeat yourself between sections (a) and (b).● You are required to relate these factors in (a) and (b) to the strategy of the clothing man-

ufacturer. In part (a) you should consider the impact of the PEST factors on it as both a manufacturer and a seller in the country. In part (b) your comments are restricted to the impact of the cultural factors on its role as a manufacturer only.

● Note how key points have been underlined to add emphasis. The marker can almost make sense of the paragraph by reading the underlined sections.(a) Before making a decision to set up manufacturing facilities abroad, the company

should consider the environmental factors which can be subdivided into the economic, the political and legal, the cultural, and the technological business environments.1. Economic environment. When appraising a foreign investment, the management

needs to consider many factors.



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A particular issue is the cost of materials and of labour with an adequate level of skills. This will affect the decision on what level of technology to employ and how much expatriate management and staff to use. The experience of oper-ating within the domestic market will mean that the management is aware of both the supply and skills of the local labour force available. However, the man-agement may not have this information for the foreign country.

Another economic issue will be the effect of the exchange rate regime on the costs and earning from the overseas subsidiary. Because it is freely convert-ible, the foreign exchange market establishes the UK exchange rate. However, the low-wage economy may have a nonconvertible currency. This will affect the ability to repatriate profi ts and also the costs of goods exported back to the home economy.

Other issues you might mention, given time, include the relative growth rates of the economies, infl ation rates, extent to which markets are developed, extent of state involvement in the economy, attitude to free-trade and the per-missibility of foreign ownership of businesses.

2. Political and legal environment. The political risk must be investigated before making any decision to set up a manufacturing process abroad.

For example, the problem of remittance of profi ts or management fees to the parent company does not arise in the domestic situation and the ability to remit funds is a key objective of fi rms that invest abroad. Governments in host countries may have policies to forbid such fl ows, thereby forcing the fi rm to invest funds in developing businesses and assets in the host country.

There may be differences in political stability. The UK political system is mature and governments are elected and bound by the rule of laws passed dem-ocratically. In some low-wage economies these democratic safeguards are not in place. This means that agreements reached to safeguard investments or give access to markets may be rescinded without warning and even assets sequestrated.

3. Cultural environment. The customs and values of the country are often impor-tant in determining the ultimate success of an investment. The fi rm knows these for its home market in the UK but to sell overseas it will have to be sure that the design of the clothing and the styles and fabrics are acceptable in the new markets. Market research and past experience should provide the company with information to forecast accurate future sales.

The languages spoken in the foreign economy may be different from the UK and this will present communication problems for management from the UK.

4. Technological environment. The UK is a developed industrial nation and hence has electricity and a workforce familiar with the disciplines of factory life. These may not be present in the new economy. Management needs to investigate the foreign infrastructure. This will ensure that facilities are adequate to allow the fi rm to operate with a reasonable level of effi ciency.

Factors that may be considered are:● The availability of telecommunications within the country and the quality of

connections back to the United Kingdom. This will have implications for man-agement control.

● The reliability of electrical power. The fi rm may decide it needs to provide its own generators as a primary or back-up power source.

(b) In planning the move of the manufacturing operations, it is essential that the man-agement know about any issues which are particularly important to the workers.

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T 1. Education and training. The foreign employees are likely to need training in order to work effi ciently. Their level of previous experience will be vital to the success of the investment in their country. The fi rm may discover that in addi-tion to the need for training in specifi c skills the workforce lack basic skills of numeracy and literacy which will affect their abilities to follow written job instructions and understand machine read-outs.

2. Technology. At the macro-level some low-wage economies already have substan-tial experience of factory working. Others are agricultural societies where the day is measured by the progress of the sun and hence notions of keeping factory hours is altogether strange.

At a micro-level local workers may not have experience of particular tech-nological processes such as computer-controlled machinery or computer-assisted design for clothing or laying out of jobs. This would necessitate use of expatriate workers in the short run and considerable training. Once trained, these local staff present a staff-retention problem because other fi rms will wish to employ them.

3. Working hours. Social and religious factors can sometimes differ in a foreign environment. Specifi c areas include the importance of the family unit, attitudes to the aged and special conditions regarding holidays and ‘free time’. In particu-lar, additional holidays may be required by groups of workers in order to allow them to perform religious rites or undertake signifi cant social commitments. In some situations, the management may consider these demands to be excessive. However, a lack of understanding may result in problems within the workforce.

4. Provision of local housing and amenities. In some countries, it is expected that an employer will provide facilities for the staff. This will reduce the travelling time of the workers, but may increase the amount of capital employed in the project. It is likely that the employer who provides housing will be seen as ‘caring’ and this may be important for achieving acceptance within the foreign country.

This can extend to the provision of other amenities such as clean water, health care and education for workers and their families. These enable the fi rm to be seen to make a contribution to the local society, safeguard future labour sources and may permit lower wage costs.

Solution 3This is a very standard revision of basic theory in part (a). Parts (b) and (c) require addi-tional thought.

(a) The bargaining power of buyers represents a major factor in establishing the attractiveness of an industry. It is therefore important that the power of buyers is mon-itored in order that organisations are aware of the forces which are important in the development of a strategic plan. Factors which will infl uence the relative bargaining strength of the buyers include:● the number of different buyers and sellers in the market;● the relative size of both the buying and selling organisations;● the buyer’s purchases are large in relation to the total sales of each seller, as a major

customer can often dictate terms and conditions, especially if the cost structure of the seller includes a high level of fi xed costs;

● the level of profi t earned by the buyers is low;



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● the product is undifferentiated;● the ‘switching costs’ are low;● the quality of the component purchased is not particularly important in the fi nal product;● the extent to which buyers can undertake backward integration.

There will be a number of different sources of information that could be obtained to ena-ble a fi rm to monitor the bargaining strength of buyers. These include:

● Details can be obtained from the fi nancial reports of companies buying the product. The gross margins they report give an indication of the potential for their suppliers to raise prices if the buyer power could be reduced.

● The uniqueness of the technical specifi cation of the product could be considered to reveal whether it is unique or whether several suppliers are capable of making it.

● A survey of the structure of the supply industry will reveal the number and location of alternative suppliers. Estimates can be made of their ability to supply and the costs of transport that might be involved.

● Information may be published by specialist organisations such as industry groups, and ad hoc reports could be commissioned.

(b) There are a number of different barriers to entry that are likely to reduce the number of potential entrants to the industry. Potential competitors can be deterred and com-petitive advantage retained by any of the following:1. Patents, licences and government/legal constraints. It is possible for a fi rm to use any

of these as a form of protection and to prevent new entrants to the industry. Once this type of legal barrier has been obtained by a fi rm, it can be of great value in retaining competitive advantage.

2. Branding or customer loyalty (differentiation). Often at considerable expense, an organisation will try to establish customer loyalty which will ensure that people will buy the product in preference to other brands and substitutes that are available.

3. Economies of scale including the learning curve. In some industries, large-scale opera-tions can produce the products at a lower cost than the smaller producers. This provides an example of ‘overall cost leadership’ which can be very signifi cant in planning for competitive advantage.

4. Access to cheaper factors of production. Some fi rms are able to produce products at a lower cost, as they have been able to obtain materials, labour, fi nance or other expenses at a lower rate than their competitors.

5. Switching costs. The ability to change to another supplier without many costs being incurred. Incumbent fi rms can increase these by offering volume discounts, special delivery facilities or electronic ordering systems.

6. Control of unique distribution channels. If a fi rm can exclude other producers from distributing their products through the most effective distribution channels, then this can represent a signifi cant entry barrier.

7. The scale of investment needed to establish the operation. If the amount of investment is so large that most competitors are unable to consider entering the industry, this represents a way in which potential competitors can be excluded and the existing fi rms have competitive advantage and possibly even a monopoly.

8. Technological advantages that result in cost leadership. Successful research and devel-opment often results in a fi rm having a process that reduces the cost of production so that competitors are unable to compete on a level playing fi eld’ This gives the fi rm that has invested in the R&D an important advantage over their competitors and will exclude potential entrants to the industry.

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T (c) There are exit barriers that result in fi rms remaining in an industry, even though the returns are below the normal level. When a fi rm realises that the probability of success is low or acknowledges that there is excess capacity in the industry, a decision to close may be appropriate. However, decisions of this kind are often postponed. This is likely to occur if the closure will result in substantial costs being incurred by the fi rm. These are termed exit costs. In general terms, the costs of closure are estimated to be higher than continuing the operation.

Particular costs are redundancy payments to staff or long-term supply contracts that will result in damages being due as a result of breaking the contract. In these situ-ations, the closing may be delayed until a more appropriate time.

The ownership of assets with no resale value or assets shared with other processes could be another factor that delays the decision to close an operation. Similarly, com-mon costs that are absorbed by a particular process may infl uence the decision to close down a portion or the whole of an operation.

Apart from the exit costs, a fi rm may decide to stay in an industry because the market has a strategic importance to the fi rm. For example, a commercial bank may continue to provide current (checking) accounts despite their low profi tability because they are the cornerstone of a client relationship from which more valuable products can be sold.


3

Contemporary Perspectives in Strategy Development


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After completing this chapter you should be able to:

� discuss concepts in established and emergent thinking in strategic management.

3.1 IntroductionMost commentaries on contemporary trends in strategic management commence with observations about the changes in the business environment. These changes are seen as the result of a number of developments including the drive by multinational companies to seek new markets as domestic markets become saturated. In addition, the liberalisation of trade and the deregulation and privatisation of industries, and developments in the tech-nology of communication and transportation have helped to produce a global market and mean that companies are able to compete more easily anywhere in the world, with the effect that competition becomes even fi ercer.

Presented with opportunities for greater and cheaper access to foreign markets on the one hand, and with the threat of increasing competition on the other, companies have been forced to change the way they manage and operate their businesses.

Some of the recent developments in the fi eld of strategic management and contem-porary ideas on meeting the challenges of the dynamic environment facing organisations are explored in this chapter. The implications of the move to more complex organisation forms such as strategic alliances and ‘network’ organisations will be discussed.

Another important trend is the spotlight on social responsibility and the ethical consid-erations when developing strategy. This chapter will go on to review the debates surround-ing social responsibility, and the reasons why there is a need to consider the interests of more than just shareholders when making strategic decisions.

Contemporary Perspectives in Strategy Development


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As discussed in Chapter 2, a major challenge for business growth will be the ability to deal effectively with the demands of a global economy. As global competition becomes increasingly evident, organisations must choose the geographical boundaries in which they are going to operate, for example retain a strong domestic force, or at the other extreme, become a global player. In most industries organisations can no longer afford to formulate and implement strategies in response to just local conditions; they must be willing to adapt to the conditions of a ‘borderless world’.

There are, however, many different interpretations of the concept ‘globalisation’. It can be argued that there is a move away from national economic systems towards a system where national markets are merging into one huge global market place, with the tastes and preferences of consumers from around the world beginning to converge. Organisations can now choose the whole world as their geographic market place, developing a global strategy with standardised products, produced and sold in the same way throughout the world to meet standardised customer demand.

Alternatively, globalisation can be viewed from a structural perspective, where opera-tional units are fully integrated across national boundaries and functions such as HRM, Marketing and R&D are grouped together, independently of national boundaries, in search of the most economic production costs. Global companies can seek to gain com-petitive advantage by producing large volumes of standardised products at low cost. One means of gaining low unit costs derives from economies of scale; the other derives from producing in low-cost locations. Large corporations locate their manufacturing plants where labour and other costs are lowest, and locate their headquarters, research and devel-opment, marketing and other functions in those parts of the world that enable their activi-ties to be conducted most effi ciently and effectively. Improvements in the technology of transportation and communication are allowing fi rms to reconfi gure their value chains so as to gain greater value from the use of scarce resources.

There are, then, wide ranging reasons to explain the move towards globalisation. These include:

● limited growth in traditional and home markets;● increased competition in home markets;● consolidation and development of trading blocks;● liberalisation of trade, giving rise to huge increases in investment across national

boundaries;● free trade opening up new opportunities in emerging markets;● potential cost and market share advantages;● lower production costs in less developed countries;● development in communication networks – ability to communicate more easily and rap-

idly due to new technology;● developments in transportations technologies and networks;● global fi nancing.

A number of factors will infl uence an organisation’s ability to operate effectively as a glo-bal player, for example in terms of organisational structure, cultural issues and the need for a set of specifi c leadership skills. All these factors have implications for global effectiveness and development and implementation of strategies.


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Although on the one hand, markets are becoming global, there is also a trend towards customisation – with the product/service adapted to some extent for local conditions, hence the need to ‘think global, act local’; this is sometimes termed ‘glocalisation’. Porter states that any organisation structure competing in a global market has to balance two dimensions:

1. global dimension for world-wide coordination to achieve economies of scale;2. local dimension that enables country managers to respond to local customer needs.

Bartlett and Ghoshal’s contribution to the debates on internationalisation strategies has been their work on transnational corporations which seeks to combine the local respon-siveness of the international subsidiary with the coordination advantages found in global product companies. They suggest that in managing across borders, organisations have to make choices on the need for local independence and responsiveness (high to low) and the need for global coordination (high or low). The transnational structure attempts to achieve both high local responsiveness and high global coordination. Whilst each national operation will operate independently, it is a source of ideas and capabilities for the whole organisation.

How organisations organise themselves to become global players raises some key chal-lenges. Conventionally, this has been done by establishing or acquiring subsidiaries in other countries, but more recently, alliance and networks are becoming a vital aspect to achieve success within a global marketplace.

Much of the growth of global corporations was achieved by consolidating smaller, local organisations. This was achieved by merger or acquisition, with organisations often acquiring new subsidiaries cross-border at a rate of several each year. The arguments for acquisition often centre on the concept of ‘synergy’– that the whole organisation has a greater value than the sum of its parts. Such synergies can arise from the sharing of resources or skills, or the exploitation of economies of scale. A simple example of the lat-ter is the increase in purchasing power of a large organisation: Buying ‘in bulk’ raises the opportunity to demand greater levels of discount from suppliers. Other motives for devel-oping through mergers or acquisitions may be to enhance the capability of the company, for example to address a lack of resources or competences and to speed up learning, gain-ing access to effi ciencies and expertise that would be diffi cult to achieve as quickly through internal development.

By the 1990s, many strategists were beginning to question the logic of large conglomer-ate organisations. The more diverse the mix of business within an organisation, the fewer synergies are available to it. While a large organisation should be able to exist with a rela-tively simple management structure, for example, the reality is often greater complexity in the organisation structure, and large numbers of managers. Added to this, the inevi-table costs of control and compliance, such as time-consuming reporting procedures and the need to integrate information systems, and the cost of being part of a large organisa-tion might outweigh any synergies. There is also a perception that smaller organisations can be more focused on customer needs, and more responsive to the changing business environment. Strategists were also familiar with the ‘excellence principles’ of Peters and Waterman, which included ‘stick to the knitting’ – fi nd a ‘core competence’ and build a business model around it.

All of the above factors led to an increase in de-mergers during the 1980s and 1990s, including some that were very large and high profi le. An example of this is ICI which


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the two de-merged organisations exceeded the pre-de-merger value of ICI, suggesting that investors agreed that the de-merger added value. Xeneca has since merged with Astra, another large pharmaceutical company. Similarly, Vodaphone (a telecommuni-cations company) was de-merged from the Racal group (an electronics conglomerate) as the board of Racal recognised that the risks and market conditions of Vodaphone did not ‘fi t’ with the remainder of the business. Once again, the investors valued Vodaphone more highly as an independent business than as part of Racal.

Increasingly organisations are forming collaborative relationships through international strategic alliances as part of their global strategies. Access to markets can be greatly facili-tated by developing an alliance with a local partner who is familiar with the market that a company wishes to enter. The economic rationale for such developments therefore has to do with access to markets, with the sharing of knowledge and expertise and with econo-mies of scale and scope.

The increase in the number of these networks has been greatly facilitated by develop-ments in communication technology. Such networks, sometimes called ‘virtual organisa-tions’, consist of a number of partner organisations that collaborate with each other to produce, market and distribute goods and services. The links between these interdepend-ent organisations are made much easier with the development of electronic mail and allow communication and coordination not achievable in the past. The organisation is ‘virtual’, in the sense that an organisation with a corporate centre does not exist. Instead, the ‘organ-isation’ as a set of cooperative linkages between partner companies operates in many ways as if it had an independent existence.

3.3 Complex organisation formsComplex forms of organisation are usually thought of as occupying the ground between pure forms of market transactions and hierarchical organisations. They are regarded as an alter-native way of coordinating resources. The idea seems to have grown out of Williamson’s idea of ‘transaction costs’ – that market relations incur such costs, while in trying to avoid them by internalisation, hierarchical forms of organisation result (see later in this chapter). Unfortunately, the lack of competition within hierarchical organisations itself results in a lack of control on costs, as mentioned earlier.

The complex forms attempt to overcome the inadequacies of both market and hierarchical forms through collaboration between existing organisations.

The drivers for cooperation are of two sorts – cost reduction and market pen-etration. The cutting of costs internally has resulted in a wave of outsourcing of non-core activities and research and development alliances. Market penetration is perhaps more common and allows economies of scale such as ShellMex and BP achieved in the 1950s with their joint distribution network, or more recently, where construction consortia bid for motorway contracts and the building of the Eurotunnel between the UK and France.

Such organisations would range from cooperatives between organisations and their suppliers, to all forms of partnerships and strategic alliances in which coordination of resources was based on cooperation between the parties concerned. This relies on network relationships outside the boundaries of the organisation.


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3.3.1 Strategic alliancesA strategic alliance can be defi ned as where two or more organisations share resources and activities to pursue strategies. There are different forms of alliance, some which depend on formalised inter-organisational relationships and others which are much looser arrange-ments and informal networks between organisations. For example, joint ventures which involve two or more organisations setting up a newly created organisation, but where the sponsoring organisation remains independent. This form of alliance is often used where organisations want to enter new markets. Consortia are short-term legal entities and will usually be focused on a particular project, with sunk costs from each of the partners and which terminate at the end of the project.

Franchising, allows the franchisee to undertake specifi c activities, such as manufactur-ing, distribution or selling, whilst the franchiser is responsible for managing the brand and marketing (e.g. Coca-cola, The Body Shop, McDonald’s). Licensing gives the right to man-ufacture a patented product, for a fee.

Johnson, Scholes and Whittington (2008) suggest the ingredients of successful alliances include:

● a clear strategic purpose for all parties in the alliance;● compatibility between parties;● defi ning and meeting performance expectations – having clear goals, governance, and

organisational arrangements;● trust and integrity between the partners to the alliance.

Can you identify organisations who have developed strategic alliances? What were the reasons for the strategic alliance? What are the potential benefi ts and

drawbacks of such a relationship?

3.3.2 Illustrations of network organisationsTo illustrate the notion of a network organisation, a good example to use is the online bookseller Amazon.com. Amazon provides a customer website interface that enables the visitor to search and browse the catalogue of books (and other items such as CDs and collectibles). The customer can order the product online and expect to receive it by cou-rier within a few days. Amazon sits in the middle of a network of other organisations. It has contract arrangements with book warehouses throughout the world to process and dispatch its orders so that it need keep only the 80,000 top-selling titles in stock. These warehouses keep Amazon notifi ed of their stock position (which is automatically trans-ferred to the customer web pages as approximate delivery times). It also has arrangements with couriers, credit card operators and publishers to provide it with the information and services it will need. From the customer’s point of view, it ‘feels’ like one organisation: the books arrive in an Amazon carton and they have their own account with the company. The company also keeps them informed about new books in areas similar to ones they have bought before.


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ENT Yet in fact, Amazon owns relatively few physical assets and staff to back up its service

(an alternative term ‘virtual organisation’ perhaps expresses this).A similar analysis can be applied to the following industries:

UK local government authorities (LGAs). The local taxpayer receives environmental health, library, leisure, law and order and education services. However, the LGA relies on a series of contracts with private and public sector contracting companies to pro-vide this service.

UK hospitals. A patient in the hospital will receive medical treatment, food and accommodation services. However, the hospital may use private contractors for clean-ing, laundry and catering while at the same time relying on other hospitals for the use of specialist scanning and dialysis equipment. Many of its staff will be employed on a contract basis from agencies.

Airlines. The customer of the airline will have the impression that everything is sup-plied by the airline itself. In fact, it is likely that the telephone booking service, aircraft maintenance, on-board catering, check-in, luggage handling and depar-ture lounges are provided under contracts from other fi rms. The passenger may also fi nd that part of their journey is provided by another carrier under a similar arrangement.

UK railways. A passenger will buy their ticket from a train-operating company and travel according to the timetable the company has laid down. The train itself may be owned by a separate leasing company, depart from a station and along lines operated by a third company, yet maintained by a fourth. The on-board catering will be pro-vided by a fi fth fi rm and the train cleaned by a sixth fi rm.

Ghoshal and Bartlett (1997) describe another form of network organisation which they term an individualised corporation. They argue that networks will take the place of formal organisational structures such as hierarchies and rigid divisions. Corporations will allow their individuals to form virtual teams in order to become more creative, inspiring them to use their initiative and knowledge to build organisational learning and competences.

The various examples demonstrate that network organisations can choose to ‘buy-in’ a range of value-creating activities through:

1. Contract staffi ng. The use of contract staff (or ‘temps’) to cope with pressure points in the workload is a long-established practice. Network organisations will often take this as the norm and extend it beyond operative staff to include workers with consid-erable intellectual capital, such as systems experts and lawyers, while retaining only a very small cohort of core staff. This shamrock organisation will be discussed in the next chapter.

2. Use of specifi c capital assets. The leasing of assets has been common for many years in high capital cost industries like airlines and shipping. However, the network organisa-tion frequently leases IT facilities, turnkey factories and specially built machines and highly customised offi ce accommodation.

3. Outsourcing elements of production or service provision. Ancillary services such as offi ce cleaning have often been outsourced by management who do not wish to be bothered with it. However, the network organisation goes considerably further by outsourcing the production of its products or the distribution of its products. For example, many processed food companies no longer make the food they brand and sell and fast-food restaurants do not operate their restaurants.


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4. Reliance on outside organisations for referral of business. Many network organisations have mutual customer-sharing arrangements and will cross-sell their products. For example: through-ticketing on airlines and railways; car-hire fi rms, airlines and hotel chains net-work for corporate travel and fl y-drive holidays; fi nance houses network with car and electrical retailers to provide low-cost consumer credit and joint promotions.

Writers on network organisations refer to the ‘permeable organisation boundary’ because it becomes hard to see where one organisation ends and another begins. Staff from one organisation physically work at the other’s offi ces, customers are seemingly passed from organisation to organisation without realising it, and data about customers and products are passed around in order to coordinate activities.

There are a number of issues posed by the development of network organisations:

1. How do fi rms decide which activities and assets to ‘buy-in’ and which to own and oper-ate directly?

2. Why have network organisations become so important in recent years?3. How can management develop systems to control operations in a network

organisation?

3.4 Theoretical basis of network organisations – transactions cost theory

Transaction cost theory is rooted in the institutional economics of Ronald Coase and Oliver Williamson. Williamson (1981) suggests that organisations choose between two mechanisms to control resources and carry out its operations – hierarchies or markets.

1. Hierarchy solutions. Here, management decide to own the assets (or employ the staff directly) and use the policies and procedures of the fi rm to control their use and per-formance. Vertically integrated companies are ones which have a high reliance on the managerial hierarchy for control.

2. Market solutions. Management decide to buy-in the use of the assets or staff from out-side companies under the terms of a contract. Outsourcing is a contemporary example of increased reliance on the market. Hierarchies will be used if the transactions costs of the market solution are too high.

It may be helpful to think of Williamson’s theory as a more complex version of the familiar ‘make-or-buy’ decision. Management will make in-house the things that cost them more to buy from the market. However, Williamson looks beyond just the unit costs of the product or service under consideration. He is specifi cally interested in the costs of control that (together with the unit costs) make up transactions costs.

Transaction costs are the organisational counterpart of friction in a physical system. They are costs arising at the interface between economic agents, particularly between stages in a production or supply process.

Where the enterprise relies on outside suppliers for an input or service (a market solution), in addition to the price for the bought-in input, it will incur the following transaction costs:

(a) negotiating and drafting a legal contract with the supplier; (b) monitoring the supplier’s compliance with the contract (quality, quantity, reliability,

invoicing, etc.);


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(d) penalty payments and cancellation payments if the fi rm later fi nds it needs to change its side of the bargain and draft a new contract with the supplier.

These costs arise because both the fi rm and its supplier wish to be protected against loss and use the contract to defi ne the risks each mutually takes on.

1. Bounded rationality. At the time the contract is negotiated, neither party is able to per-fectly anticipate the future and how the contract will unfold. For example, a fi rm seek-ing to buy components cannot know for sure the volumes they will need because they cannot perfectly forecast fi nal product sales. Likewise, the innovations of a competi-tor may force them to vary the specifi cation of their product that may require differ-ently specifi ed inputs. Similarly, the supplier will not know their production costs with certainty.

2. Opportunistic behaviour. Each agent is seeking to pursue their own economic self-inter-est. This means they will take advantages of any loopholes in the contract to improve their position. For example, a small change in the specifi cation of the product will be alighted on by the supplier as an opportunity to charge higher prices because they know the buyer is bound by contract to purchase from them.

The more that these two factors are present, the greater will be the transactions costs arising from a market solution. This is because:

(a) Bounded rationality makes the parties quibble more over the drafting of the contract and over the interpretation of it (particularly, if circumstances have moved against them since the contract was drawn up).

(b) Legal enforcement of the contract will become more expensive. (c) Opportunistic behaviour will lead to expensive variations in contract terms or damages

claims for breach of contract.

If these transaction costs become too high, the organisation may reduce its costs by tak-ing the supply in-house through development of its own upstream supply facility under the direct control of management (a hierarchy solution). The decision of which mechanism to use, markets or hierarchies, is (or should be) based on management’s desire to minimisetransactions costs.

Williamson considers the circumstances that lead one fi rm to trade with another and therefore to incur transaction costs. This he roots in the concept of asset specifi city.Asset specifi city is the extent to which particular assets are of use only in one specifi c range of operations.

3.4.1 Assest specificity – an illustrationConsider the example of Eurotunnel plc. This company has a single asset, a tunnel under the English Channel linking the British Isles to the main European continent, which opened in 1994 having cost nearly £5 bn to build. Apart from some telecommunications potential, this extremely expensive asset has no conceivable alternative use other than as a rail tunnel. In addition to operating its own shuttle services for passengers and freight, over 30 per cent of the company’s revenues come from other railway companies which pay Eurotunnel to use the tunnel. This includes the Eurostar consortium that operates specially built trains between London and various destinations in France and Belgium.


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This is a situation of high asset specifi city. High asset specifi city arises where a supplier must invest in expensive assets with no alternative use in order to supply a client. This poses a substantial risk to the supplier because if the contract is withdrawn, it will not be able to recoup its investment. Few will take this risk without a guarantee of orders in the long term. Eurotunnel plc is locked into the train operators. At the same time, the train operators are locked into Eurotunnel because their investment in rolling stock and stations would be useless without the tunnel.

Williamson examines the effect of such high ‘asset specifi city’ on transaction costs. Williamson predicts that such high asset specifi city will therefore result in bilateral (or quasi-bilateral) contracts between the fi rm and its supplier. High asset specifi city results in the buyer being denied the opportunity to periodically choose between rival produc-ers on an external market, instead being forced to enter a long-term contract with the sole supplier. Eurotunnel has the exclusive right to operate the tunnel until 2086, but perhaps more signifi cantly, the rail operators signed Usage Contract agreements with Eurotunnel in 1994 until 2006 under which they are committed to certain minimum fi nancial payments to Eurotunnel. In return, they have the right to use up to 50 per cent of the tunnel capacity. It can be seen that the high asset specifi city of Eurotunnel has led to high transactions costs in the form of the contracts and franchise agreements around it.

Williamson’s conclusion is that high asset specifi city will lead fi rms to bring supply in- house rather than bear the high transactions costs of the market. Indeed, he suggests that extremely high asset specifi city may result in no suppliers coming forward on the mar-ket. In this connection, it is signifi cant to note that Eurotunnel began life as a political creation of the British and French governments rather than as a private business initiative. Williamson suggests that asset specifi city can be of six types:

1. Site specifi city. The assets are attached to a particular geographical location, for example: ● locating a components plant near the customer’s assembly plant; ● building hotels near a certain theme park or tourist attraction; ● building of pipelines and harbours to service an oilfi eld.2. Physical asset specifi city. This is a physical asset with unique properties, for example: ● reserves of high-quality ores; ● a unique work of art or building.3. Human asset specifi city. Particular skills or knowledge, for example: ● specifi c technical skills relevant to only one product; ● knowledge of systems and procedures peculiar to one organisation.4. Dedicated asset specifi city. A man-made asset which has only one application, for

example: ● Eurotunnel; military defence equipment; Sydney Harbour Bridge.5. Brand name capital specifi city. A brand and associations that belong to one family of: ● products and would lose value if spread wider, for example: ● Coca-Cola; McDonald’s.6. Temporal specifi city. The unique ability to provide service at a certain time, for example: ● the right to conduct radio broadcasts at an allotted time;

● rights to exploit an asset for only a limited number of years.

Williamson admits that these categories often occur together. For example, Eurotunnel combines temporal (limited franchise till 2086), dedicated asset and site specifi city.


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number of ends by strategy writers and business consultants.

1. Identifi cation of distinctive competences. According to the transactions cost approach, this will be an operation or asset that cannot be provided by another organisation without increasing the transactions costs or risks of the fi rm. Any asset or operation that does not have these characteristics is not a suitable basis for a competitive strategy because a rival will be able to buy it in cheaper.

2. To support organisational restructuring. Organisations should sell-off upstream or down stream divisions that can be provided at lower transactions costs by the market. The same argument applies to particular business processes such as IT, logistics and human resource development which are increasingly outsourced.

3. To predict the impacts of developments in information technology. It is believed that the costs of searching the market for suppliers, maintaining the supplier/buyer relation-ship and monitoring fulfi lment have been reduced by developments in information technology (IT). These are often put under the umbrella of e-commerce or e-business. Predicting the reduction in the costs available from the substitution of these virtual value chains is used to drive strategic initiatives and investments.

3.4.2 A critique of transactions cost theoryAccording to Williamson, corporations reduce transactions costs by vertically integrating, and in doing so, become more multi-divisionalised and more internally complex.

This casts an interesting light on organisational behaviour; for example:

● Does Disney Corporation operate visitor and cast accommodation at its theme parks because it is cheaper than offering the fi nancial safeguards necessary to encourage hotel operators to invest in such specifi c assets?

● Is the reason that Procter & Gamble develops its own brands for foods and detergents that the uncertainties about brand values and strategy make it very expensive to draft contracts to lease brands from brand owners? Did the same consideration lie behind Grand Metropolitan’s decision to buy Pillsbury rather than simply license the Burger King brand from it?

● Do large fi rms undertake in-house staff and management development programmes because colleges and potential recruits are unwilling to bear the costs of training them-selves in such specifi c skills?

● Are some staff paid far more than they could otherwise get on the job market because they possess specifi c skills which the fi rm cannot buy from the labour market?

The network organisation, however, seems to challenge Williamson’s theory because it represents a breakdown in hierarchies and features a much greater use of the market to provide inputs and customers. Several transactions costs based explanations may be offered for this phenomenon:

1. Organisations may have underestimated the costs of internal control. Firms undertake activities internally when the transactions costs of external provision are too great. However, this assumes that management can accurately quantify the costs of control-ling the internal operation. These costs will include:– staff recruitment and training;– provision of managerial supervision;


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– production planning;– payments and incentive schemes to motivate performance;– the development of budgetary control systems to coordinate activity;– divisional performance measurement and evaluation;– provision and maintenance of fi xed assets, such as premises and capital equipment.

These costs of managerial control are traditionally regarded as overheads rather than something resulting from the decision to undertake production internally. A conven-tional absorption costing system may allocate overheads to products, but these overheads are not relevant costs for decision-making purposes such as ‘make or buy’. Hence, the deci-sion to produce internally overlooks many of the costs associated with it.

More modern management accounting techniques recognise the costs of control and this may have led to increased recognition of the savings from outsourcing.

2. Transaction costs may have been reduced by the impact of information technology. Examples include: computer integrated manufacturing (CIM) enables ordering of components and coordination of suppliers to be streamlined by automatic triggering of electronic orders transmitted by electronic data interchange and, more recently, the internet. Common computer assisted design (CAD) systems allow collaboration in research and development with geographically remote suppliers.

Communications technology such as teleconferencing, e-mail and intranets permit much lower cost and timely maintenance of supplier relationships than was possible using face-to-face methods.

Firms now have access to global partners because the cost of searching for suitable sup-pliers or buyers is reduced by IT. One example provided by Hagel and Armstrong (1997) is the possibility of industry members forming virtual communities by using common websites to advertise their requirements and to invite tenders from suppliers.

One infl uential theory adopting a transaction costs perspective is the Electronic Markets Hypothesis of Malone et al. (1987). This suggests that more fi rms will be prepared to undertake asset specifi c investment because the electronically facilitated global market makes them less reliant on a single customer. Similarly, the buyer will have a choice of suppliers rather than a single monopoly supplier. The authors suggest a signifi cant shift to increased outsourcing will occur as fi rms become able to network in an ‘unbiased mar-ket’ rather than being faced with the choice between internal production or reliance on a monopoly partner.

Transactions costs may have been reduced by the development of trust in contractual rela-tions. Williamson suggests that a major source of transactions costs is the potential for opportunistic behaviour by the contracting parties, and the legal and monitoring cost that arise from these. Nirmalya (1996) and others suggest that the mutual suspicions that give rise to these costs can be removed if a relationship of trust is developed between the con-tracting parties. This is also picked up by Ouchi (1981) who suggests that the high uncer-tainties and impossibility of measuring performance means that contract relations must be based on shared values, or clan control, rather than either of Williamson’s market or bureaucratic means.

The creation of hierarchies was not economically justifi able at any time. For Williamson to argue that organisations are structured in such a way that they minimise transactions costs, he depends on one of two propositions:

(a) that management structure organisations in this way because they seek to improve shareholder value; or


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ENT (b) only those fi rms that succeed in minimising costs will survive in the long run (i.e. fi rms

that fail to do so are no longer around because market forces have eliminated them).

Neither assumption can go unchallenged. First, many writers, including Williamson himself, have suggested that the lax framework of corporate governance allows the manage-ment of a fi rm to pursue personal goals rather than maximise the wealth of shareholders (e.g. Williamson, 1964). Therefore, it is quite possible that many hierarchies were created to enhance managers’ feelings of prestige and power rather than in an attempt to avoid transac-tions costs. Indeed, the suspicion arises that many organisations developed as they did from reasons of history and circumstance rather than to serve any particular purpose. Second, the notion of market forces driving high-cost fi rms out of business overlooks the fact that vertically integrated fi rms have substantial market power and may avoid these competitive pressures.

Transaction cost analysis may explain the trend to network organisations if it can be shown that external pressures are forcing fi rms to reduce costs. For example, it may be that increased shareholder pressure or market competition is forcing managers to break down their empires in order to gain the lower transaction costs available from external partnerships.

3.5 Social responsibility and strategic decisions

Social responsibility can be defi ned as ‘taking more than just the immediate interests of the shareholders into account when making a business decision’.

Issues commonly associated with social responsibility include:

● environmental pollution from production or consumption of products;● standards of factory and product safety;● non-discrimination in employment and marketing practices;● avoidance of the use of non-renewable resources;● non-production of socially undesirable goods;● production of non-degradable packaging or products.

In business decisions, a confl ict may be encountered between what furthers the fi rm’s interests and what satisfi es society.

3.5.1 Must social responsibility conflict with benefiting shareholders?

Deciding to be socially responsible may confl ict with shareholders’ interests in several ways:

1. Firm may incur additional costs. Examples of these extra costs include: ● paying staff more than the minimum wage set by market forces or legislation to avoid

accusations of exploitation; ● treating emissions and waste to reduce environmental pollution; ● increasing product and plant safety levels; ● costs of monitoring compliance with social responsibility policies.


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2. Firm may reduce revenues. Examples include: ● charging lower prices for products to avoid being accused of exploiting the consumer

(e.g. pharmaceutical products); ● refusing to supply particular governments; ● not promoting a socially undesirable good to particular consumer groups (e.g. ciga-

rettes or alcohol to the young).3. Shareholder funds may be diverted to socially worthwhile projects. This relates to charitable

donations by fi rms to the arts, relief of social need or sponsorship of national projects (e.g. the UK Millennium Dome). This money could otherwise be dividend, perhaps.

4. Management and staff time may be wasted on social projects. The management and staff are paid to run the business, not to indulge in social engineering.

There are counter-arguments to suggest that social responsibility in business will improve shareholder returns:

1. Essential to being a sustainable enterprise. A ‘sustainable enterprise’ is one whose com-petitive strategy does not fundamentally confl ict with the long-term needs and values of society. Put simply, a non-sustainable enterprise is living on borrowed time and has no long-term future. It is in the interests of shareholders that fi rms become sustainable, if earnings are to continue into the future.

For example, some writers question whether oil companies can be sustainable enter-prises because their core business seems inevitably to lead to damage to the natural environment. These practices may be tolerated at present, the argument runs, but must eventually be brought to an end by legislation and fi nancial penalties prompted by the rising tide of public concern about environmental degradation. Oil companies are aware of this criticism and have responded by developing processes to ‘clean up their act’.

Other industries which may need to address the issues of sustainability include: ● tobacco industry (cigarettes harm quality of life and may be lethal); ● car industry (pollution, accidents, congestion); ● armaments industry (e.g. landmines are now close to being outlawed worldwide); ● mining and quarrying industry (fi nite resources, destroys habitat, poor safety record); ● brewing and distilling industry (promotes anti-social behaviour and alcoholism).2. Attracts socially conscious investors. Ethical investment funds will be attracted to fi rms

with a TO good social responsibility score. This will cause their shares to trade at a pre-mium price. This represents a direct rise in shareholder wealth.

3. Attracts socially conscious consumers. The consumers will pay a premium price for prod-ucts they regard as ‘sound’. Examples include ethical cosmetics, organic foods, recycled paper products and ‘fair trade’ coffee.

4. Improves relations with governments and other regulatory bodies. Many fi rms depend on the goodwill of governmental bodies for the granting of production licences, planning permission or convivial legislation. A good record in social responsibility may help con-vince the decision-maker to use discretion in the fi rm’s favour.

5. Reduces stress on management and staff and permits improved morale. This argument points to the fact that feelings of ethics and social responsibility are not solely external to the fi rm. The management and staff of the fi rm are members of society too and have similar values. If business decisions force managers and staff to contradict their private ethics on a daily basis, the impact will be to reduce morale and increase staff turnover. This will harm fi nancial performance. A socially responsible fi rm, on the other hand, may be able to attract these staff.


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ENT 3.5.2 An ecological perspective and environmental

responsibilitiesThe ecological perspective of strategy is closely aligned with social responsibility. It is concerned with the relationship of the organisation with the natural environment in which it operates.

One approach suggested by Bennett and James (1996) lays down six areas in which this might be monitored:

1. Production. This is primarily concerned with minimising the amount of materials and energy used to generate output.

2. Environmental auditing. It focuses on improving relationship with the ecological envi-ronment and will cover such things as compliance with legislation, treatment of waste, product and process hazard and emissions.

3. Ecological approach. This can be a life-cycle approach in which the product is traced from the extraction of the raw material through production and consump-tion of the product till disposal of the final exhausted product. At each point, the ecological impacts are noted and targets set for reducing them. Alternatively, a single site or project can be looked at and its impacts on its immediate locale considered.

4. Quality. This anticipates a continuous improvement in the environmental perform-ance of the business. Therefore targets are constantly amended to achieve better performance.

5. Accounting. Dummy shadow prices are attached to the social costs of projects to create a separate set of accounts showing the environmental consequences of the fi rm’s activities. These affect strategy through their inclusion in the investment appraisal and fi nancial reporting process. Any strategies taken to reduce the impact of the fi rm on its environment will cause the ecoprofi t to increase and also improve the ecobalance sheet.

6. Economic. It charges environmental costs to any process, usually through budgets, to encourage management to avoid causing the environmental damage.

Table 3.1 shows the voluntary environmental indicators of the UK chemical industry. It should be noted that often these measures are suggested by the fi rm’s need to comply with legislation or the directives of regulators.

Table 3.1 Voluntary indicators adopted by the UK chemical industry

Health and safety FatalitiesNon-fatal major accidentsDiseasesAccidents in relation to man hours

Environment Amount of ‘special waste’Discharges of ‘red list’ substancesSite-specifi c data expressed in an ‘environmental index’

Distribution Number of transport incidents in relation to million tonne/milesEnergy Energy consumption per tonne of productComplaints Number of complaints made by public and regulators.

Source: Gray et al. (1993). Reproduced by permission of ACCA.


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3.5.3 Shareholder wealth and ethicsWhist issues of business ethics will be considered later in the Learning System it is appro-priate here to consider the debates concerning ethics on strategic decision makings. Social responsibility and business ethics may affect the mission and objectives of the organisation and may dilute the importance of shareholder wealth as a primary objective. The views of a number of researchers who have presented arguments for and against the primacy of shareholder interests are discussed below.

Friedman: profit is the sole objectiveThe economist Milton Friedman (1963) supports the ethical argument in favour of share-holder supremacy with the dictum: ‘The business of business is business.’ His argument can be presented as following a number of steps of reasoning:

● All economic systems are mechanisms to serve the needs of the population of the system.● History has shown the market economy to be superior to other forms of systems, such as

feudalism and socialism, in providing the greatest benefi ts to the greatest number of people.● In a market economy, the needs of society are transmitted to fi rms by price signals ema-

nating from the market.● By following these signals, fi rms coordinate their activities to meet society’s needs.● The search for profi t is what incentivises fi rms to respond to market needs.● Therefore, by being profi t motivated, fi rms will produce the best outcomes for society.● If management ignore the profi t motive or the state tries to intervene in the market

mechanism, say by laws or taxation, they merely change the identity of the winners and losers. They do not actually remove the problem (‘there’s no such thing as a free lunch’).

A follower of Friedman’s argument would respond to the ethical issues in the store closure example above in several ways:

● without a profi t motive shoppers might not have any stores at all;● the rising prices of the remaining store are an essential element if any stores are to remain

in the town centre;● although it is inevitable that there may be some individual losers, the greater effi ciency

of the out-of-town store will benefi t society generally in the form of lower prices;● forcing stores to remain in town centres for the benefi t of a small number of shoppers

would deny the majority a better and cheaper service – this would raise alternative ethi-cal issues about sacrifi cing the interests of one group of shoppers for another group’s interests.

Sternberg: shareholder wealth is natural purposeA different pro-shareholder argument is advanced by Elaine Sternberg (1994). Friedman stresses the ethical superiority of profi t-seeking behaviour by reference to its consequences(i.e. higher standard of living for all). Sternberg, on the other hand, approaches from a perspective of natural justice, that is that to do other than maximise shareholder wealth takes business outside of its proper place in society. Sternberg’s argument can be simplifi ed as follows:

● Organisations are social institutions. We understand their nature and their place in soci-ety by considering what they do and how they are different from one another.


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● Business organisations are distinguished from others by their pursuit of shareholder wealth. No other organisation, say governments, charities, trades unions or armies do this. The latter are different because they have other fi nal purposes.

● If businesses start to become involved in social responsibility by considering other goals, they are changing their purposes and invading the domains of charities and government agencies. This would be a corruption of their essential nature and the natural order of things and would constitute the theft of assets or incomes from their rightful owners, the shareholders.

● Business cannot afford to ignore its impacts on customers and other stakeholders how-ever, because in doing so it would forsake repeat business and alienate support. This would destroy its long-term value.

● The key principles of business ethics are therefore distributive justice (distributing organi-sational rewards among people according to the contribution they have made) and ordi-nary decency (building long-term trust by not resorting to dishonest or coercive means in the short run).

For Sternberg, ‘good ethics is good business’ because just and decent behaviour will increase the value of the business to its shareholders. A follower of Sternberg would view the store closure example very simply. The store chain is maximising its shareholders’ wealth, while the problem of disadvantaged shoppers is being addressed by other social organisations (social services, family, alternative profi t-seeking fi rms) which is a fulfi lment of their essential nature. The natural order is preserved. Also, the closure of the store is consistent with the principles of ordinary decency, despite being a regrettable necessity.

A stakeholder view of business ethicsMost arguments against the primacy of shareholder interests in business ethics have their roots in a branch of philosophy called social contract theory (e.g. Rawls, 1999). They impose on the business the duties of being a good corporate citizen. A simple version of this argu-ment would proceed as follows:

● A business has a social contract with society. Under this contract it enjoys rights, such as to be able to carry on its business uninterrupted, make profi ts, enforce commercial con-tracts and be defended by the rule of law.

● This social contract does not confer the right to behave entirely selfi shly because no rational society would ever agree to allowing one of its members or groups, including business organisations, to follow its own selfi sh interests at the expense of the rest of society.

● Therefore, the enjoyment of rights under the social contract also imposes on business a duty to behave reasonably towards society and to be socially responsible in its decisions and actions.

● The precise scope of rights and obligations will change through time according to the prevailing morals in society at large. For example, attitudes to different social groups, the natural environment and animals have all changed markedly in the past 30 years and it is the job of business to keep up with these.

● Firms that breach this social contract may ultimately have their rights revoked or cur-tailed (e.g. anti-trust laws, nationalisation, fi nes or consumer and employee protec-tion legislation). However, this is a last resort and shows that management have done something wrong. It demonstrates that management does have an ethical obligation to society.


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Taking the store closure example, a follower of this social contract approach would argue that management has a moral duty to consider the impact of its decision on all groups of society and not just its shareholders. Management should realise that it is not just the future profi ts that are at issue here; there are the past profi ts to remember too. Its right to make profi ts in the past impose on it a duty to be reasonable and responsible now. The people it is disadvantaging are its past customers with whom it had a moral contract; it cannot just walk away. The least it should do would be to provide a free bus service to its store, whether or not it is profi table to do so, to maintain its obligations to its former customers.

An egotistical viewThe stakeholder view would provoke strong reactions from a follower of the late Ayn Rand, an infl uential American novelist and founder of the objectivist school of ethics (Rand, 1989). Her argument for the ‘virtue of selfi shness’ can be expressed as follows:

● The essence of human existence is the need for the individuals to assure their own survival.

● Therefore, the only rational (i.e. ethical) goal is the pursuit of individual survival through self-interest.

● If any person shows (or is compelled by law to show) consideration for the interests of others, this intrudes on achieving their own self-interest and they are effectively allowing themselves to become subordinate to other people’s needs. Taken to extremes, this leads to slavery and oppression.

● Capitalism (stripped of any benevolent religious belief systems, which are themselves a form of oppression) is the only social and economic system which enables and rewards pursuit of unbridled self-interest.

● Owners of fi rms are therefore only ethical if they ruthlessly pursue economic self-interest.

The objectivist approach has no truck with a notion of social responsibility because it believes there is no such thing as society (other than as a concept invented by would-be oppressors). Rather, we are a collection of egoists. Objectivism would advocate leaving to their fate the people in the store example, on the basis that to compel the store (or the families and state) to help them would be to deny the self-interest of the helpers.

3.5.4 Implications of ethics for the chartered management accountant

Clearly, there is no simple solution to business problems once we start bringing ethics into it. It all depends on your viewpoint. Most of us end up taking a pragmatic view onthese issues. We learn to accept that the business decisions we sometimes make are not always easy to square with our highest principles. We know that if we do not do it, some-one else will, and so the followers of Friedman and Sternberg may sometimes have to use corporate funds to make a donation to charity because ‘it is what’s expected’. Similarly, subscribers to social contract views may be forced to announce redundancies and price rises to ward off a falling share price. It is back to the issues of satisfi cing we discussed in Chapter 1.

We also know that most people do not delve into ethics as we just have and hence do not come to decisions with consistent or well-formed ethical viewpoints. Some just work


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ENT on gut feeling and ‘common sense’ (itself a phrase derived from a particular theory of eth-

ics). Others pick up and discard ethical arguments to suit their interests. Many lie to them-selves and others about their ethical justifi cations for actions.

The important messages to bear in mind with ethics are that:

1. Not everyone makes the same ethical assumptions that you do. What may seem totally wrong to you is acceptable to them and vice versa. This can be a real problem for man-agers dealing with people:

● from other social cultures (e.g. in foreign trading and business relations); ● from other types of organisation (e.g. businesses dealing with the voluntary or caring

services); ● of different ages (i.e. morals change through time but not everyone changes with

them). It is important that we appreciate other people’s viewpoints if we are to con-duct business effectively.

2. Different stakeholders may have different expectations of the fi rm’s behaviour;3. Moral and ethical debates drive the actions of pressure groups and legislators: ● objectivism enjoyed an infl uence over senior politicians in the United States, United

Kingdom and Australia during the 1980s, before giving way to the ‘stakeholder society’ of the 1990s;

● religious fundamentalism is a major factor in the political processes of the United States and the Middle East.

Ethical debates and fashions are therefore a major force in the fi rm’s environment.

3.6 SummaryThis chapter has looked at contemporary perspectives in strategic management. The key points covered include:

● industries are becoming increasingly global and organisations must decide how to respond to the challenges of globalisation;

● the implications for organisations of moving to more complex organisational forms such as strategic alliances and network organisations;

discussion of the theoretic base of network organisations – transaction cost the theory;● social responsibility and business ethics may affect the mission and objectives of the fi rm

and may dilute the importance of shareholder wealth as a primary objective.

ReferencesFriedman, M. (1963), Capitalism and Freedom. Chicago: University of Chicago Press.Ghoshal, S. and Bartlett, C.A. (1997), The Individualised Corporation. London: Random

House.Hagel, J. and Armstrong, A.G. (1997), Net Gain: Expanding Markets Through Virtual

Communities. Boston, MA: Harvard Business School Press.Johnson, G., Scholes, K. and Whittington, R. (2008), Exploring Corporate Strategy (8th

edn). Harlow: FT Prentice Hall.Nirmalya, K. (1996), ‘The Power of Trust in Manufacturer-Retailer Relationships’.

Harvard Business Review, November–December.


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Ouchi, W. (1981), Theory Z: How American Businesses can Meet the Japanese Challenge.Reading, MA: Addison-Wesley Pub Co.

Rand, A. (1989), The Virtue of Selfi shness. Signet Books.Rawls, J. (1999), A Theory of Justice (revised edn). Oxford: Oxford University Press.Sternberg, E. (1994), Just Business: Business Ethics in Action. London: Little, Brown.Williamson, O.E. (1964), The Economics of Discretionary Behaviour. Englewood Cliffs, NJ:

Prentice-Hall.Williamson, O.E. (1981), ‘The Economics of Organisation: The Transactions Cost

Approach’. American Journal of Sociology, Vol. 87, No. 3, pp. 548–577.


131

Social responsibility – the changing business paradigmTim Hollins, The Financial Times, 15 November 2000. Copyright © Tim Hollins 2000. Reproduced by kind permission of the author

Tim Hollins, a Corporate Social Responsibility consultant, and formerly Head of Group Social Investment for the Royal Dutch/Shell Group, gives a personal view of social respon-sibility in the new century.

Corporate citizenship is nothing new, but the way we practise it is constantly evolving. That’s what makes it so exciting.

For more than a century companies have prided themselves on thinking beyond the bottom line and contributing to society, not only by producing the goods and services that society needs, but also by acting as good corporate citizens. In the 19th and early 20th centuries corporate citizenship was more often than not based on the religious or philanthropic principles of a company’s founder. In the seventies and eighties, a growing sense of the relationship between ‘community relations’ and corporate reputation led to an increasing professionalisation of corporate citizenship, and a recognition of it as ‘legiti-mate enlightened self-interest’. Typical phrases used at that time were that ‘you can’t have healthy high streets without healthy back-streets’, and that ‘good community relations offered ‘win, win, win’ opportunities – good for individuals, good for the community and good for the company.

A new description of what corporate citizenship was about also began to be used: ‘Social Investment’ – The notion that by investing in society we all – business, not-for-profi t organisations and communities were – looking for clear and measurable returns, similar to other forms of investment. The language of business has become increasingly prevalent in corporate social investments of all companies – ‘business planning’, ‘project management’, ‘leverage’, ‘measurement and evaluation’ are part and parcel of the language of both social investment managers and their not-for-profi t partners.

And, alongside this evolution of corporate citizenship, have emerged a number of paral-lel developments. Environmental management and reporting has made enormous strides forward in the last decade; an increasing number of companies are addressing issues of ‘social accountability’ and ‘social auditing’, and a small number are tinkering with notions of ‘economic added-value’, to get a better understanding of which parts of society, and which stakeholders, are benefi ting from the company’s economic activity. Developments in corporate governance and ethics have added to a much wider perception of the totality of corporate social responsibility.

3Reading

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ENT The challenge for the 21st Century Company is to bring all these developments

together, to integrate thinking about social and environmental management, about social investment and social accountability into a coherent framework of practice that makes good business sense as well as benefi ting society.

Here in Shell we are increasingly talking about ‘social performance’ as the all- encompassing approach to these various elements, to sit alongside (but inextricably inter-woven with) economic and environmental performance. For an oil and energy Group, operating in over 140 widely differing countries and cultures, this is a hugely complex challenge.

At one level, it is clear there is a direct correlation between access to energy and a coun-try or community’s economic and social development. There is also a direct relation-ship between the rise of energy availability around the world in the 20th century and the enormous increase in food production that has benefi ted so many. But, however essential energy is to development, nobody would deny that, both in the way it is produced and in the way it is used, it also presents many social and environmental challenges. It is also evident that while many countries and communities are benefi ting from international eco-nomic development and energy provision, there are still many for whom opportunities are few and the disparities increasingly great. For Shell, all these challenges are intrinsic to the commitment it has made to contribute to Sustainable Development.

It is more than 3 years since Shell committed itself in its Business Principles to con-tribute to sustainable development through its operations. Sustainable development – the responsible stewardship of resources today so that the needs of tomorrow can be met – is a concept which Shell believes is fundamental to broader development, as well as to Shell’s own long-term success. It encompasses not just concern for the environment, but also con-cern for the impact of change on societies and cultures, and concern to ensure that, under-lying all development, is economic sustainability at a local level, enabling individuals and communities to better control and manage their own futures. As Sir Mark Moody-Stuart, the former Chairman of Shell’s Committee of Managing Directors says, ‘Building a sus-tainable future is the single most important challenge facing our society as we enter the 21st century’.

For all companies this sort of approach means re-appraising and re-thinking many of the ways we have previously sought to contribute to society. It means seeking to bring together our understanding of the different facets of our interaction with society – our interaction with employees and contractors, with suppliers and customers, with communities and public authorities. Without detracting from our fundamental business competitiveness, it means looking for opportunities to add social value. And in our social investments it means looking at our ‘contributions’ much more directly in relation to the social impacts and opportunities our own businesses present.

Shell has always been one of the world’s most signifi cant corporate contributors. In the last 18 years Shell companies have contributed over $1 billion to an enormous range of community programmes and causes around the world. But while that is something to be proud of, the challenges in this new century are to relate what we contribute in this way to the social issues and opportunities presented by being one of the world’s largest inter-national oil and energy providers, to contribute our knowledge and our breadth of expe-rience as well, to look for synergies where we can share good ideas and practice and to partner with others who have common objectives, to make our contributions go further.

As part of its response to these challenges, the Shell Group recently set up a new international Shell Foundation to complement and reinforce our business approach to

READING E2


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sustainable development and social performance. The Foundation focuses on two spe-cifi c programme areas:

● Sustainable Energy – projects that encourage more sustainable and equitable energy use by reducing environmental impacts of energy use or increasing access of poor communi-ties in developing countries to sustainable energy;

● Sustainable Communities – projects that help disadvantaged communities to improve their livelihoods, and manage their own futures;

● A separate group social investment programme focuses on youth enterprise – projects that stimulate the entrepreneurship among young people on which healthy and sustain-able economic and social development depends.

The aim of the Shell Foundation is to act as a new bridge between the Shell Group and the many groups in civil society who are interested to explore with us how respon-sible business can become one of the most powerful drivers for genuine sustainable development.

Shell is one among many companies that are tackling the undeniably complex chal-lenges of social performance and sustainable development. We have come a long way from the beginnings of corporate citizenship in the nineteenth century; the road ahead should be a fascinating one!

Websites: www.shell.com www.shellfoundation.org

Discussion questionExplain how an organisation like the Royal Dutch/Shell Group can maintain its business competitiveness while at the same time meeting its obligations to be socially responsible.

The corporate scandals that beset US corporations like Enron, World com and Arthur Anderson at the start of the 21st century tend to be attributed to the unethical conduct of particular individuals. But the following article suggests that organisational culture played a major role.


135

3Revision Questions


Question 1Many organisations now include explicit reference to their commitment to act in a socially responsible manner in their mission statement. This then forms an integral part of organisa-tional strategies and policies. However, some shareholders see social responsibility as confl ict-ing with their main interest in the company, which is creating maximum shareholder wealth.

RequirementExplain the main arguments for and against the view that socially responsible business decisions can achieve sustainable competitive performance and improve shareholder value.

(10 marks)

Question 2Eastborough is a large region with a rugged, beautiful coastline where rare birds have recently settled on undisturbed cliffs. Since mining ceased 150 years ago, its main industries have been agriculture and fi shing. However, today, many communities in Eastborough suffer high unemployment. Government initiatives for regeneration through tourism have met with lit-tle success as the area has poor road networks, unsightly derelict buildings and dirty beaches.

Digwell Explorations, a listed company, has a reputation for maximising shareholder returns and has discovered substantial tin reserves in Eastborough. With new technology, mining could be profi table, provide jobs and boost the economy. A number of interest and pressure groups have, however, been vocal in opposing the scheme.

Digwell Explorations, after much lobbying, has just received government permission to undertake mining. It could face diffi culties in proceeding because of the likely activity of a group called the Eastborough Protection Alliance. This group includes wildlife protec-tion representatives, villagers worried about the potential increase in traffi c congestion and noise, environmentalists, and anti-capitalism groups.

RequirementDiscuss the ethical issues that should have been considered by the government when granting permission for mining to go ahead. Explain the confl icts between the main stakeholder groups. (10 marks)

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Question 3N Company is a manufacturer and retailer of electrical goods such as cameras, PCs, TVs, and hi-fi equipment. The company has its head offi ce, four manufacturing plants and a chain of 350 retail outlets in K country. It also has a call centre, which is on the same site as its head offi ce, to deal with customer queries and provide service sup-port for PCs. Following the appointment of a new CEO, the senior management of N Company is evaluating options for its future strategic development. The company faces a challenging time with the growth and increased strength of competition in the sector.

N Company has previously had excellent employee relations and staff have enjoyed superior reward and recognition packages. However, the recent arrival of D, then new CEO, has unsettled staff. They have heard that D is proposing a major restructure aimed at improving effi ciency and controlling costs. They understand that this will mean some of the manufacturing plants will be closed and more emphasis placed on selling cheaper ‘bought-in’ products. In addition, certain activities related to the facilities management of the company, such as catering, cleaning, store maintenance are likely to be outsourced. It also seems that the senior management is investigating the possibility of moving the call centre to another country where operating costs are lower.

RequirementUse transaction cost theory to analyse the restructure strategy D is proposing in N Company. (10 marks)


Question 4C plc, a quoted chemical manufacturing company, has until recently achieved a steady increase in profi tability over a number of years. It faces stern competition and the directors are concerned about the disquiet expressed by major shareholders regarding performance over the last 2 years. During this period it has consistently increased dividends, but its share price has not grown at the same rate as it did previously.

K plc, a direct competitor, is similarly experiencing a reduction in profi tability. Its shareholders are diverse, with the majority being fi nancial institutions. K plc has been criticised for under-investment and has achieved no product development over the last 2 years. Following a concerted media campaign, K plc is facing prosecution for discharging untreated pollutants into a river.

C plc is seriously considering making a bid to acquire K plc. The directors of C plc, however, are divided as to whether K plc should be closed down or permitted to continue production post-acquisition if a bid is made. In either situation, signifi cant staff redundan-cies would follow.

Requirements(a) State the strategic factors which C plc would need to consider before making a bid to

acquire K plc. (8 marks)

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(b) (i) Discuss the social and ethical implications for the managers and staff of both C plc and K plc if the acquisition goes ahead. (8 marks)

(ii) Discuss the environmental issues which would face the directors of C plc if it proceeds with the acquisition of K plc. (7 marks)


Question 5Router plc, a mining company, has said in its mission statement that it will ‘endeavour to make the maximum possible profi t for its shareholders while recognising its wider respon-sibilities to society’.

Router plc has an opportunity to mine for gold in a remote and sparsely populated area. The mining process proposed, in this instance, means that all vegetation will be removed from the land concerned; after mining has fi nished, there will remain substantial lagoons full of poisonous water for at least 100 years. The mining process is a profi table one, given the current world price of gold. However, if the company were to reinstate the mined land, theprocess would be extremely unprofi table. The company has received permission from the government to carry out the mining. The few local residents are opposed to the mining.

Requirements(a) Discuss the extent to which Router plc’s mission statement is contradictory. (5 marks)(b) Explain how Router plc could establish a procedure whereby its wider responsibilities

to society could be routinely considered when making strategic decisions. (8 marks)(c) Advise Router plc how it could deal with strategies that present a confl ict of objectives.

(6 marks)(d) Discuss the ethical dimensions of the decision to mine for gold. (6 marks)


Question 6‘Asset specifi city’ is a term used within Transactions Cost Theory. It has been defi ned as the extent to which particular assets are only of use in one specifi c range of operations. It has further been suggested that asset specifi city falls into six categories: site specifi city, physical asset specifi city, human asset specifi city, dedicated asset specifi city, brand name capital spe-cifi city and temporal specifi city.

Supporters of resource-based views of strategy contend that a fi rm’s sustainable competitive advantage is generated from its possession of unique assets that cannot be easily irritated by other fi rms. These unique assets have been called core competencies or distinctive capabilities.

Network organisations have been defi ned as those which are reliant on relationships with other organisations to carry out their work.

Requirements(a) Briefl y explain what transaction costs are and how resource-based views of strategy can

be used for competitive advantage. Interpret the six categories of asset specifi city by explaining what they mean. (15 marks)

(b) Discuss whether analysis of transactions cost has any infl uence on the increase in numbers of network organisations. (10 marks)



139

Solutions to Revision Questions

Section A solutions

Solution 1Social responsibility is the concept that gives rise to how an organisation should conduct itself within society and the need to deal with the impact of business decisions on dif-ferent stakeholder groups. However, the debates about the extent to which organisations should consider issues under the heading ‘social responsibility’ when they are formulating and implementing business strategies continue to provoke confl ict and tension between different stakeholders. Organisations need to weigh up the costs of social responsible busi-ness decisions against the benefi ts.

Acting in a socially responsible manner concerns the extent to which the organisation should move beyond the minimum obligation provided through regulation and corporate governance. This will vary from fi rm to fi rm but can include issues related to a range of factors such as:

human rights, for example job security and good conditions of work for the employees, non-discrimination in employment;

providing products that are fi t for the stated purpose; marketing practices, and impact of product/service on customers (e.g. health and exclusion);

non-production of socially undesirable products;environmental impact of products/services – from creation to disposal, for example

issues relating to environmental pollution and production on non-degradable products.

The diversity of opinion on the issue of social responsibility stems from one school of thought, advocated by Milton Friedman, based on the view that the management of an organisation should only be concerned with strategies that maximise the wealth of share-holders. An alternative view is founded on stakeholder theory which emphasises that the actions of an organisation should be designed to balance different stakeholder interests.

Confl icts can occur between shareholder interests and socially responsible business deci-sions for a number of reasons. One argument against is the perception that extra costs will be incurred in implementing socially responsible strategies. Examples of this may be related to paying staff more than the minimum wage to avoid accusations relating to the exploitation of labour, the cost of treating emissions and waste to reduce environmental pollution.

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Shareholders may view socially responsible actions as reducing revenues. This can mani-fest in terms of refusing to do business in certain countries, or not promoting certain prod-ucts to particular customer groups. They may also think that management time is being wasted on socially worthwhile projects instead of ‘running the business’. They may also take the view that funds that may otherwise have been paid out in dividends are instead being used to make charitable donations.

However, there are counter-arguments to support the business case that pursuing socially responsible strategies can build shareholder value.

The fi rst argument is based on the future sustainability of the organisation. In other words, an organisation whose strategy or core business confl icts with the needs and values of society is unlikely to survive in the long term. Examples, of this can be seen in indus-tries such as tobacco, in terms of health related problems; oil refi ning, where the impact of pollution on the environment is a major issue; British Nuclear fuel has had to promote an image of having the deepest concern for the safety of nuclear waste. A more recent example is the negative publicity McDonald’s has received for encouraging what some perceive to be promoting unhealthy eating for children. Another example would be the negative public relations received by some organisations who have moved manufacturing to countries to gain the benefi ts derived from lower labour costs and to improve profi t-ability. These organisations are criticised for the exploitation of labour as in the cases of Nike and Gap.

The risk for organisations who do not respond is that customers will not buy their products and ultimately they will lose customers. Therefore, to ensure future earnings of shareholders, organisations must operate in a socially responsible manner and amend their strategies. Using the example of McDonald’s, they have responded to the criticisms by introducing ‘healthier’ menus.

Another positive outcome is that socially responsible organisations could attract socially conscious consumers who may be willing to pay a premium price for products. Examples of these types of products currently in the news are organics foods, and fair-trade products such as coffee and chocolate.

Finally, it could be argued that acting in a socially responsible manner can have posi-tive outcomes on corporate image. This in turn can attract ethical investment funds to the organisation which can have a positive effect on share price and hence represent a direct increase in shareholder wealth. Charitable donations and sponsorship are also useful meth-ods of public relations and can refl ect well on the organisation.

All these arguments would suggest that there is evidence of positive links between social and fi nancial performance.

Solution 2There are many ethical dimensions to granting outline permission for mining to go ahead. Ultimately, the government is weighing one set of claims against another and seeking to achieve a ‘right’ decision within the context of the common good. The role of govern-ment: it may take a view that it should not be seen as an obstacle to the free operation of business. Alternatively, it may acknowledge a duty of care to its citizens who might be dis-advantaged by the project.

Another issue concerns its efforts at regeneration: does mining ‘fi t’ the overall strategy?There may be environmental costs (scars on the landscape), but these are to be balanced

against gains such as jobs and profi ts for shareholders. Government may feel that the area

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is already an eyesore and one more mine will make little difference. They might reason, alternatively, it is counter-productive in the context of their tourism strategy.

Issues of quality of life raise ethical concerns (traffi c and mining pollution versus regen-eration of local economies). Similarly, concerns over safety within the confi nes of the mine and on roads emerge as a potential ‘cost’ of the scheme.

It is not possible to proceed without making certain generalisations and assumptions. The main stakeholder groups and their confl icting objectives include:

● Digwell’s shareholders and other investors who expect a good fi nancial return on the investment in the mining project. This may, however, involve disturbing birds and wildlife, which is a concern for bird protection groups. Local unemployed people prob-ably welcome the venture as consistent with their aspirations to gain meaningful work. Meanwhile, local communities and environmentalists may be concerned by the disrup-tion to the local way of life, including increased road traffi c and pollution.

● Staff, customers and suppliers of Digwell have the overall objective of long-term success of the company in order to safeguard their interests. Anti-capitalism groups, however, look for the downfall of this and other capitalist symbols in order to build a differently structured society.

● Employees are looking for higher pay, job security, good working conditions and some consultation. Customers want fair prices, reliable supply and reassurance about quality.

● Suppliers desire fair prices, reliable orders and prompt payment.● Government is a key stakeholder as the planning agency. Issues associated with its objec-

tives are discussed above. They want jobs, to actively contribute to local community life, and to be a participant in major developments.

Just as there are confl icts of objectives within government so there are likely to be confl icts between groups and differences within other groupings. Some common confl icts of expec-tations amongst shareholders, for instance, include; growth or profi tability, short-term gains or investment, industrial effi ciency or maintenance of job levels, mass appeal or qual-ity concerns, and so on.

Solution 3The basis of transaction cost theory is rooted in market economics. As organisations grow, overhead costs grow and there becomes a need to search for economic advantage, a situa-tion facing N Company. Transaction cost analysis deals with the way in which resources are organised for producing a product or delivering a service and is focused on economic effi ciency. It suggests that whilst asset specifi city may drive vertical integration, outsourc-ing every activity that is not core should be considered by organisations. The CEO, in his attempt to increase effi ciency, is assessing if any of N Company’s activities can be per-formed at less cost by external contractors.

The foundation of the theory, developed by Williamson, is that an organisation chooses between two mechanisms to control and carry out its operations in production or the delivery of service. The two mechanisms are hierarchy, where products are produced within the organisation by use of internal hierarchical arrangements or markets where products are bought in, in other words obtained through the market mechanism. Essentially, it is a more complex development of the ‘make or buy’ decision.

Hierarchy solutions occur when management decide to own the assets or employ staff directly, in other words internalise transactions. The policies and procedures of the

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company are used to control resources and their performance. It would seem that this is the way N Company has tended to operate to date, as a vertically integrated organisation, doing as much as possible in-house, for instance, the manufacturing and retailing of their product range.

Market solutions are when management decide to buy in the use of assets or staff from outside under the terms of a contract. This involves an increased reliance on the market and organisations incur transaction costs.

The proposal to outsource and buy in products would suggest that the senior manage-ment of N company are considering a shift from hierarchy solutions to market solutions. The restructuring plans are based on the assumption that both downstream activities (manufacturing) and upstream activities (call centre) can be provided at lower transaction costs by markets.

An important aspect of the theory is that it bases costs beyond just the unit cost of the product or service, to include also the cost of control. Transactions costs are those costs associated with performing a transaction, in other words the costs that arise at the inter-face between economic agents. In N Company’s case the future scenario will be one where it increases reliance on outside suppliers, but it should take into consideration the costs connected with managing the transactions and operating under the terms of the contract. The costs of supply are not the same as merely the price paid per unit. There are additional costs such as those associated with supplier selection, specifying what is required, writing and managing the contract, coordination, enforcing the contract, communications with the supplier etc

It is argued that developments in IT have reduced some of the costs related to searching the markets for suppliers and in maintaining the supplier/buyer relationship. The market solution will enable N Company to benefi t from have access to resourcing from global partners. However, there are some issues regarding outsourcing such as problems of con-trol, security and asset specifi city. N Company must consider the extent to which suppliers could exploit their vulnerability, particularly if they use just one manufacture as their main supplier.

The other side of the argument is that in vertically integrated companies there can be a lack of internal competition which can result in a lack of control of costs. These are often internal overhead costs of production and staff costs, and this perhaps refl ects the position N Company currently fi nds itself in.

Section B solutions

Solution 4(a)Despite an increase in dividends, the rate of increase in the share price of C plc has decreased. This is an indication that the investing public is concerned about the future earning capacity of the company and the disquiet of the major shareholders also refl ects these concerns. It seems likely that the ‘stern competition’ is responsible for this situation.

One of the ways of achieving growth and, possibly, boosting earnings may be to acquire another firm. Management is considering acquiring K plc, which will mean that the combined businesses will have a much greater production capacity

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if the K plc plant is not closed. The crucial issue will be what C plc can do with the additional facilities and whether it is possible to benefit from the acquisition. Competition in the industry will be reduced by the acquisition of one of the com-panies and savings are likely to result from the rationalisations and the economies of scale which should occur.

However, management must be aware of the effect on the management and staff of both companies involved in the acquisition. Although it is usual for acquisitions to be justi-fi ed on the basis of the synergy which results from the combination of the organisations, there is often doubt regarding the extent of these benefi ts. This is particularly noticeable in markets in which there is excess capacity. It is also generally recognised that the manage-ment of the combined business poses a diffi culty which reduces the synergistic effects of the acquisition.

The cost of the acquisition will be very important in determining its ultimate success. It is possible that during the acquisition, another company may bid for K plc and this may raise the price to a level which makes it diffi cult for C plc to ensure the acquisition is fi nancially successful. C plc’s expected cost of capital will be a major infl uence in determin-ing the result of the acquisition.(b)(i) It is likely that fewer employees will be needed in the combined business. In partic-ular, the providers of specialist expertise may be particularly vulnerable as duplication of this type of activity may not be required. It is likely, therefore, that a signifi cant number of redundancies will occur. This will create a feeling of insecurity among staff. It is important that all staff are informed of the policy in respect of redundancies. This will be particularly important in the acquired company, especially if the bid is hostile. The rationalisation process will create uncertainty within both fi rms and it is important for the motivation of employees that the issue is handled with openness and honesty.

Changes in employees’ working conditions within the combined fi rm is an impor-tant issue. If it is not handled well, it is likely that the overall synergy of the acquisition will be adversely affected. Uncertainty about employment will be a problem for the staff and a clear statement on the rationale for the acquisition and the employment policies to be adopted would appear essential. Remuneration, training programmes and assistance in fi nding alternative employment are topics which should be discussed to improve staff morale within the fi rm. It will demonstrate the attitude of the directors to the staff redun-dancies. It is important that employee motivation is retained if the acquisition is to reach its potential. Management must, therefore, handle the social and ethical implications of the acquisition sensitively, especially in respect of the staff redundancies which appear to be inevitable.

(ii) After acquiring K plc, some environmental issues will need to be tackled by manage-ment. The pollution problem, in particular, will have to be addressed. It is clear that the matter of the untreated pollutants should be investigated immediately so that the level of pollution is brought under control. As a priority, the company should seek to establish acceptable levels of effl uent pollution and the fi rm would be wise to participate in estab-lishing these standards.

At the same time, steps will have to be taken to reduce the adverse publicity that may arise through the prosecution pending against K plc. It would seem to be necessary for the company to adopt and publicise an environmental policy within the community to ensure that the negative effects of the pollution problem are minimised.

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It is likely that considerable expenditure will be needed to rectify the position. The continued success of the fi rm may depend on the way in which the pollution problem is handled. The projected success of the combined businesses will determine the amount of expenditure that might be incurred to reduce the pollution problems.

Solution 5● This question tackles the problem of a mission statement with particular reference to the

social responsibility of a fi rm if there is a confl ict between profi tability and pollution.● In part (a), note that the mission statement uses the term ‘profi t’, a short-term measure,

rather than ‘shareholder wealth’, the presumed economic objective of businesses. This allows you to contrast the confl ict of social responsibility with profi t in the short run, while using the sustainable enterprise to indicate that in the long run the interests of shareholders and society may not be in confl ict.

(a) The mission statement that Router plc has published states that the fi rm aims to make the ‘maximum possible profi t’. It is quite common for objectives of this kind to be included in mission statements. In addition, the ‘wider responsibilities to society’ are rec-ognised. This company objective is diffi cult to measure and there will be instances where the maximisation of profi t on behalf of the shareholders confl icts with ‘wider responsi-bilities to society’. The gold-mining project provides an example of such a confl ict. It is expected to provide a profi table opportunity, but will result in ‘substantial lagoons full of poisonous water for at least 100 years’.

In the short run, this reveals a signifi cant confl ict between the interests of the share-holders and the public, particularly those living in the vicinity of the proposed mine. While it is often possible to reduce adverse environmental effects, these remedies will involve the business in costs that will reduce the profi t available for distribution to the shareholders.

However, theories of the sustainable enterprise suggest that in the long run the fol-lowing of socially responsible policies may safeguard shareholder wealth. Router requires that the authorities grant it operating licences and that shareholders continue to hold its shares. If it develops a reputation as a ‘dirty fi rm’, both may change their minds. This would cause a fall in both profi ts and share price. This would of course be a fall in share-holder wealth.

(b) There are various ways that social responsibility may be incorporated into the fi rm’s decisions:

1. Include costs of environmental restoration in project appraisals. It is essential that the eco-nomic costs of a project are incorporated into the project evaluation. It is usual for a fi rm to include all relevant fi nancial costs in a project evaluation; but it is also impor-tant that the effect of the investment should be considered. In this example, Router must include the cost of reinstatement in its calculations. This will result in the rejec-tion of the project, as it does not meet the profi tability criterion.

2. Include social responsibility in the fi rm’s mission and objectives. It is necessary that policy decisions of this type are widely publicised within the fi rm to ensure that all managers are aware that the environmental factors must be incorporated into all decisions. Router has a commitment in its mission statement and there should be a written undertaking given by each manager that social issues will be taken into account.

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3. Employ outside consultants to advise on, or audit, decisions. The appointment of a person either from within the fi rm or an outside consultant to monitor the position could be a useful method of implementing the environmental policy. It is possible that man-agers could neglect the ‘wider responsibilities’, especially if they are under pressure to boost the results of the company. In this situation, there may be a temptation to under-state the costs by omitting the cost of coping with the ‘wider responsibilities to society’. A procedure, therefore, should be introduced to ensure that the environmental effects are properly considered and this should include the regular use of outside ‘experts’ or impartial non-executive directors to assess the environmental effects before decisions are taken within the company.

4. Develop a social consultation panel. Router could convene a panel of stakeholder rep-resentatives to act as a consultative committee to discuss its decisions. In this case, the inclusion of local people and environmentalists on such a panel would point up the issues mentioned in the case.

(c) It is usual for an organisation to have a number of objectives. It is common to fi nd that the objectives confl ict and a profi t-maximisation objective will always be compro-mised by any other objective which reduces the revenue received or increases the cost of an organisation. Furthermore, such confl icts may arise from the fact that organisations are led by a group of managers and therefore the confl icting personal agendas of each must be considered.

Methods of dealing with this include:

1. Establish a hierarchy of objectives. By prioritising objectives and scoring alternative projects against them, it becomes possible for management to choose the option with the highest weighted score. This one will best meet its overall objectives.

2. Satisfi cing. Where the confl ict of objectives means that no single objective can be max-imised, management may decide to adopt the course of action that is most acceptable to all by giving each stakeholder group something of what it wants; in this case perhaps to dig the mine but also provide some small amount of environmental restitution so that some of the damage is averted.

3. Sequential attention. This involves giving each stakeholder group’s interests consider-ation over time, though not necessarily for every project. The effect is to keep them on board. In this case perhaps, the mine will be abandoned because the consequences are so great, but the next project, with lesser environmental damage, will be adopted. The environmentalists on the management team will feel that they have achieved something.

4. Side payments. These are compensatory payments to buy acquiescence. In this case per-haps quality housing might be provided for the labour force which would remain after the works had fi nished. This could be pointed to as some compensation for the envi-ronmental damage and population displacement.

(d) In an article in the August 1992 edition of CIMA Student, the author identifi ed common features and issues of ethical questions:

● different perceived long-and short-term advantages and disadvantages;● advantages to one group compared with disadvantages for another;● issues of public responsibility and the accountant’s duty as a professional; and● diffi cult implementation problems.

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The principal ethical issues in mining are:

1. The use of non-renewable resources. The mining operation results in a non-replaceable asset being extracted from the mine. This deprives both present owners and future gen-erations. It is, therefore, important to ensure that proper and equitable compensation is provided to the original owners of the resources. Moreover, the resources extracted should not be wasted or used for frivolous purposes out of consideration for future generations.

2. The use of power in the negotiations. The negotiations will raise a number of issues which will bring an ethical component to the negotiations. In the negotiations, it is important that the profi t motive does not cause the developer to act improperly and exploit the present owner of the mining rights. Where the country is poor, it is too easy to give inadequate return for the value extracted.

3. The environmental damage that will remain. ‘Lagoons full of poisonous water for at least 100 years’ is clearly not an acceptable outcome for society. Router has an ethical responsibility to minimise the effect of this pollution. It would appear to be essential for the company to develop a plan to deal with the problem. It is likely to reduce the profi tability of the project as there are bound to be signifi cant costs to treat the effl u-ent, but to minimise the effect would appear to be the minimum responsibility of the company.

4. Impacts on the quality of life of local residents. The project must consider the effect of the mining operation on the local residents. Although they may benefi t from the establish-ment of the mine in the area in which they live, it is likely that the pollution will also affect them. It is essential that Router explains the steps which will be introduced to minimise the effects on the local environment. This may reassure local residents that the company is adopting a responsible attitude towards the ethical aspects of the min-ing operation in their area.

5. Safety of processes. Mining is an industry noted for its poor safety record. Router must ensure that it conforms to best practice in the safety measures it follows, which may be more stringent than the legal minimums in the country of operation.

Solution 6(a) Transactions cost analysis is concerned with more than just unit costs of products or services. It is also concerned with the costs of control specifi cally relating to the delivery of a product or provision of a service. Transactions costs come about between stages in a production or supply process and it may be both internal to, and external from, the fi rm itself. In respect of an external supply, such costs may include drafting legal contracts and monitoring supply and quality. Similarly, internal costs of quality control and human resource management may be included as transactions costs. Such costs exist because all parties want to have protection against loss, and contractual arrangements may be used by each to protect their position.

Resource-based views of strategy take the view that unique assets which cannot be easily replicated by other fi rms can act as a defence. They may be viewed in Porter’s terms as a defence barrier allowing the fi rm to reduce threats and exploit opportuni-ties within a highly competitive environment. Such unique assets may enable a fi rm to achieve supernormal profi ts, that is those which cover more than the normal opportunity cost of capital.

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The six categories of asset specifi city may be interpreted as follows:

1. Site specifi city relates to the assets which are connected to a particular geographical position, for example, locating a goods distribution organisation close to a motorway network.

2. Physical asset specifi city is concerned with identifying particular physical assets or pos-sessions with particular attributes such as valuable mineral deposits or natural ingredi-ents with particular healing qualities.

3. Human asset specifi city is associated with very specialist knowledge or skills such as that possessed by surgeons or an employee who has particular knowledge of a specialist process.

4. Dedicated asset specifi city relates to an asset which was built for a single purpose or application, such as bridges or dedicated buildings.

5. Brand name capital specifi city concentrates a brand name to one family of products or services such as might be employed by a food manufacturer, type of engine or air travel service provider.

6. Temporal specifi city is concerned with providing a specialist product or service at a spe-cifi c time, as might be employed by a television broadcaster.

Some of these categories may be employed together by the same provider; for example, a broadcaster might employ human asset specifi city in terms of a presenter delivering the broadcast at a specifi c time (temporal specifi city) from a purpose-built studio (dedicated asset specifi city).

(b) Network organisations establish relationships with other organisations to supply goods and services. They are concerned with more than just outsourcing as they look to other organisations to supply core products as well as ancillary services. There are many examples of such organisations, particularly in respect of leisure services and supply of produce such as fl owers being delivered to domestic households through a worldwide network.

Oliver Williamson stated that the reduction of transaction costs occurs by verti-cal integration resulting in organisations becoming more divisionalised and complex. Many organisations do carry out their own branding, training, ancillary service pro-vision and often pay more than the going market rate in order to retain key staff. This approach seems to be at odds with the theory of networking as described above. Networking is reliant on market forces to provide goods and services in order to meet customer demands. The principle is quite straightforward: if the market can supply the product or service at an appropriate level of quality more cheaply than the firm itself, then let it do so. This aims to increase shareholder value by reducing organisational costs.

The reasons for the diversity existing may be as a result of:

● Firms underestimating the cost of internal control to provide goods and services in-house. This is a constant concern of organisations which may have been exacerbated by the traditional form of absorption costing. Essentially, many fi rms believe that the provision of a good or service by an outside contractor may be ‘more expensive’, but this may be based on false assumptions regarding in-house costs because of arbitrary and sometimes absurd apportionments of fi xed overheads. Activity-based costing has done much to identify true overhead costs associated with specifi c products and services.

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● Advances in information technology have led to a reduction in transaction costs. The perception of the need to rely on a single source of supply, possibly a monopoly supplier is no longer as prominent as it once was. Electronic developments have in themselves led to greater awareness of choice and outsourcing.

● The development of trust between contracting partners have also led to greater outsourc-ing. Many organisations have entered long-term relationships with suppliers and cus-tomers, resulting in much higher degrees of trust and collaboration for mutual benefi t.

● The traditional economic theory of a hierarchical organisation as provided by classical organisational theorists has become outdated. Although such organisations have been able, in general, to provide management with high degrees of control, they have not nec-essarily operated in the best interests of shareholders. In fact, large hierarchical organi-sations have often developed as a result of agency theory and managers building their own empires, securing their own positions and creating power domains. These have not necessarily had increasing shareholder value as the main driver. Such organisations may have, in fact, been operating ineffi ciently, but they survive because of their sheer size and market power.

Transactions Cost Analysis has forced fi rms to look more seriously at their own sup-ply costs. It has caused them to look in more detail at how well they meet their share-holder requirements. This, in turn, has led them to take note of market forces in delivering their product or service in a cheaper manner. Thus, it can be argued that Transactions Cost Analysis has to some extent infl uenced the increase in the number of network organisations.

Transactions Cost Analysis fi rmly embraces the concept of continual improvement. This, in itself, may be facilitated by networks of contracts, both internal and external. All employees within an organisation have customers, whether they are internal or external. The increasing development of network organisations is clear, but fi rms must be wary of losing their core competencies by other network fi rms recruiting key staff. Some staff, for example, are placed on restrictive long-term contracts to protect the fi rm. This, in turn, may lead to reduced overall effi ciency, but it is a natural response by a fi rm to protect its position.

4

Understanding Project Management


151

4LEARNING OUTCOMES


� identify a project, a programme and its attributes;

� apply suitable structures and frameworks to projects to identify common management issues;

� construct an outline of the process of project management;

� identify the characteristics of each phase in the project process;

� identify structural and leadership issues that will be faced in managing a project team;

� explain the roles of key players in the project management organisation;

� recommend strategies for the management of stakeholder perceptions and expectations.

4.1 IntroductionThere are a vast array of projects going on within organisations varying in size and com-plexity, and there are an increasing number of organisations that are now project-based (i.e. the majority of their work is accomplished through projects). However, the manage-ment of projects is often not straightforward and many projects fail as a result of ineffec-tive project management.

In this fi rst chapter on projects, the defi ning features and characteristics of projects will be considered. This will be followed by an explanation of project management and some of the various project management frameworks and structures. The critical role of the project manager will be discussed, and the skills they need to be effective in that role will be investigated. The issues involved in developing a successful project team will be explored, including the various communications and meetings that are needed during a project. The key stakeholders in project management will then be determined, along with their differ-ent roles in the process of project management. The fi nal part of the chapter will consider why some projects fail and provide two examples of successful and unsuccessful projects.

Understanding Project Management


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T 4.2 Projects and project management – definitions

If you study the literature on projects, you will see that there are certain similarities in the defi nitions of projects and their characteristics.

The Association of Project Managers defi nes a project as: ‘A human activity that achieves a clear objective against a time scale.’ An alternative, the Project

Management Body of Knowledge (PMBoK) defi nes a project as ‘a temporary endeavour undertaken to create a unique product or service’. You could also defi ne a project as ‘a unique undertaking to achieve a specifi c objective that requires resources and activity’.

Have you organised a ‘holiday of a lifetime’ or a special celebration such as a Wedding, or at work, helped with the implementation of a new way of working? Do they not meet the defi nitions given?

Project management is the term used to describe ‘the application of knowl-edge, skills, tools and techniques to project activities in order to meet or exceed

stakeholder needs and expectations from the project’, or ‘the integration of all aspects of a project, ensuring that the proper knowledge and resources are available when and where needed, and above all to ensure that the expected outcome is produced in a timely, cost-effective manner. . . .’ (CIMA: Offi cial Terminology, 2005 edition, p. 94)

There are other defi nitions of project management that refer to a group of loosely connected techniques, some of which are useful in bringing projects to a successful conclusion. Others refer specifi cally to the coordination of resources necessary to complete projects as required.

All have a common ground of planning, meeting standards and communication. These can be seen in the processes involved in project management discussed later in this chapter.

4.3 Characteristics of a projectIn distinguishing between projects and business as usual, projects can be considered to have the following characteristics:

● stakeholders – all those who are interested in the progress or the fi nal outcome of the project including the users, the customers (if someone is buying the output of a project, e.g. a computer system, a building, etc.), the shareholders of the customer (who want value-for-money) and those who provide the money for the project (sponsors);

● uniqueness – it may never have been undertaken before and each project will differ from every other in some respect;

● objectives – projects have to meet two sets of objectives: the one relating to accomplish-ing customer requirements of scope (the deliverables), quantity, quality and cost; and the other relating to the achievement of the organisation’s objectives (the business case), profi tability, prestige and so on;


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● resources – people, fi nance (contained in budgets), information, materials, ideas, time and so on;

● schedules – plans for events over time for resources and contingencies;● quality – measured in terms of customer satisfaction and the organisation’s image;● uncertainty – inevitably, uniqueness leads to a context of risk in the deliverables,

the activities, the contingencies associated with suppliers, subcontractors and with time/cost;

● fi niteness – a fi xed time scale;● change – there is no practice or rehearsal and once the project is completed, the team

will ideally move on to the next project.

4.4 The project life cycleLarge-scale projects usually follow separate phases, which occur in sequence. Such projects are ‘born’ when a need or want is identifi ed and a sponsor is found who is prepared to pro-vide funds in order to satisfy this need or want. Sometimes, a need may be identifi ed very quickly, whereas in other cases, it may take months to clearly identify the need, gather data about the problem or opportunity and ultimately defi ne clear requirements. Figure 4.1 presents the four phases of the project life cycle of large projects.

4.4.1 The project life-cycle phasesThe different phases of the project life cycle include:

Identification of a needThe fi rst phase of the project life cycle involves identifi cation of a need, opportunity or prob-lem. Initially, a feasibility study will be conducted to check the size of potential benefi ts and evaluate in broad outline potential alternative solutions and their lifetime costs. The feasibility study can be done by internal staff as a mini-project or by requesting proposals

Identifya need

Effort

Time

Develop aproposedsolution

Project performance(including monitoring

and control )

Project closure

Figure 4.1 The project life cycle (Gido and Clements, 1999)


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T from contractors. If contractors are used, the project’s requirements will be presented by the company in a document called an invitation to tender (ITT) or a request for proposal(RFP). The company, as the customer, will ask contractors with a proven history of success at similar projects to submit proposals on how they propose to solve the problem or satisfy the need, together with schedules of time and cost estimates. For example, a company that has decided to upgrade its computer system may send out an ITT to several consulting fi rms. This process will provide additional detail to the organisation’s fact-fi nding exercise, to develop its own requirements and decide exactly which requirements are achievable. It must be noted, however, that not all projects involve formal requests for proposals.

At the end of this phase, the company will decide whether to proceed with the project. If it does, then a project team is formed and a project initiation document (PID) is raised. This will include a statement of requirements (SOR or project brief ), a shortlist of potential contractors, a vision and a business case for the project. The business case is an important guide to decision-making throughout the project, and the vision encourages motivation and congruent goals in the project team.

Development of a proposed solutionThe second stage of the project life cycle is the development of a proposed solution. All short-listed contractors and/or internal design teams will submit fi nal proposals to the company, which then evaluates them and chooses the most appropriate solution to satisfy the need.

This option-evaluation process is fi rst fi ltered on quality criteria for compliance with the statement of requirements. Then a choice will be made based on time and cost. Again, a milestone review will decide whether to proceed further with the project. If it does and an external contractor is chosen, a contract will be signed between the company and the contractor.

Project Performance/ImplementationThe third stage of the project life cycle is the implementation of the proposed solution. Once a proposed solution has been selected, the work to build the required product or service can commence. Even if the product is ‘off-the-shelf ’, for example an accounting system, there is often build-work required to tailor it or customise it more specifi cally to the requirements, for example amending the chart of accounts in the software to match that of the organisation. This phase is the actual performance of the project and will involve doing the detailed planning, and then implementing that plan to accomplish the project objective.

The overall solution is subdivided into separate deliverables to be achieved at fi xed mile-stones through this stage of the project. Achievement of these deliverables may be linked to stage payments. The project’s objectives of functionality, quality, cost and time are mon-itored against each deliverable to ensure they are being met.

Project Closure/CompletionThe fourth stage of the project life cycle is the completion or closure of the project. When a project closes, important tasks need to be carried out, such as confi rmation that all deliv-erables have been provided and accepted, and all payments have been made and received. Project performance is evaluated and appraised in order to learn from the project for future reference. Obtaining customer feedback is important in improving the quality of future project provision. The business case is also revisited to check whether any subsequent actions are needed to ensure achievement of the anticipated benefi ts.


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4.4.2 An alternative project life cycle – an iterative process

Project life cycles may vary in terms of time frame from a couple of weeks to several years, dependent on the complexity, size and content of the project. It is also important to rec-ognise that not all projects will follow the exact phases of the project life cycle as presented above. Phases may be simultaneous or less structured and formal.

For smaller projects and for those where requirements are uncertain, the life cycle above may be too slow and involve customers too little during development. In these cases, the project life cycle may be repeated several times before a solution is agreed, rather than lin-early as shown in Figure 4.1. Approximate requirements, the best ideas from competitors and the best parts of previous projects may be built with customers into a model or proto-type. Key features of the proposed system are implemented in a simulated operational environment that can be used as a ‘predictive model’. By trial use of the model, require-ments are revised and the cycle is repeated until agreement is reached. This would reduce risk because team members can gain experience as this process evaluates complex processes, tests and validates design techniques and tools, designs test facilities, assesses aspects of sys-tem integration and can be used to persuade suppliers and users to accept the proposed solution.

The feedback from this iterative process can identify risky parts of project design or problems of integration and operation (Source: Field and Keller, 1998).

In some cases, the model then becomes the fi nal solution with no further implementation.

4.4.3 Project approachesWhichever project life cycle is used (linear or iterative), a project may adopt a particular method or approach to identify all the requirements (and hence, project tasks) that will be needed to achieve the project objective. These methods effectively identify the start-ing point for the project, that is, what will be examined fi rst. There are many different approaches that could be adopted. Here are some of the more well known:

● Functional decomposition. This involves determining a desired state and then determin-ing all the components that would go into making that state possible. Then each of the components are analysed in turn to determine how to make those possible. This ‘decom-position’ continues until all the requirements are known. This approach is often used when a ‘back to the drawing board’ objective has been set.

● Gap analysis. By comparing the current system/process to the desired system/process, a set of ‘gaps’ can appear. The project can then be orientated to fi lling in those gaps and so ‘moving from A to B’. This is fundamentally an incremental approach, building on what has gone before.

● Reverse engineering. This is essentially taking an existing object apart to see how it works in order to duplicate it or enhance it. In project terms, reverse engineering is going back to the basic design blocks to see how a thing works, to see where errors or weaknesses have occurred and to correct or improve them. It is especially useful in IT projects, where, for example, there is a constant need for updating and renovating business-criticalsoftware systems as business requirements change or technological infrastructure is modernised.


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T 4.4.4 Other project management frameworks: 4, 5, 7 or 9?

There are many other project management frameworks, some of which look at different aspects of project management, and others that take ‘life-cycle’ approaches. Whichever framework is used, its purpose is essentially to help in understanding the various processes so that projects can be effectively managed and deliver the desired outcomes. Some alter-native frameworks are discussed in the next section.

The 4-D modelThis model is often used for very creative projects, or for those that involve intervention in the culture of an organisation. The four stages of the project, according to this model, are as follows:

● Discover. What gives the current system or organisation life? Appreciate the good things about what we do and what the organisation already has that can be built on.

● Dream. What might be? What is the organisation/world calling for? Envision the results of the project. This provides the opportunity for people to be creative and think beyond boundaries and constraints.

● Design. What is the ideal solution? Construct the elements and assemble them.● Deliver. How do we empower, learn and survive? Plan for continuous improvement.

You can see, from the above, that this model follows the project life cycle quite closely. Apart from the ‘creative’ terminology used for the stages, the main difference between this model and the project life cycle is that this model puts more emphasis on the ‘dream’ stage. This is, of course, understandable if we are dealing with creative projects. The rest of the model follows the project life cycle quite closely, though there is little emphasis on the implementation and completion stages of the life cycle. This is, of course, a common criticism of ‘creative’ staff – that they are great at dreaming up big ideas, but very poor at implementing them.

Another 4-D model is that proposed by Maylor (2003). He identifi es the stages as:

● Defi ne the project. This involves determining what the project is about, its reason for existence. It is at this stage that the possible alternatives to the problems presented can be explored.

● Design the process. This will involve determining how the project will be done, what will be involved in each part and when it can start and fi nish. Planning, estimating and resource analysis will be critical issues at this stage.

● Deliver the project. In other words, do it. The key issues here will be the organisation, leadership and control of the project along with problem solving. It will concern how the project should be managed on a day-to-day basis.

● Develop the project process. This stage concerns continuous improvement, through assess-ment of the process, evaluation and changes for the future.

The 5-project management process areasAccording to PMBoK which is adopted by the Project Management Institute, the fi ve process areas of project management can be shown in diagrammatic form, as shown in Figure 4.2.


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This model is also very similar to the ‘general’ project life cycle discussed earlier. However, it appears to place greater emphasis on the ‘planning’ and ‘controlling’ activities, as is to be expected from a professional project management institute.

The 7-S modelThe 7-S model of culture proposed by McKinsey, referred to in Chapter 2, is also some-times used in project management. It provides a framework which can be used to consider the set of issues surrounding project management. For example:

● Strategy. This will provide the high level requirements needed to fulfi ll the project objectives.

● Structure. This reminds management that the nature of the appropriate structure for the project needs to be determined.

● Systems. Systems are the methods for project work to be designed, monitored and controlled.● Staff. This involves the selection of staff to work on the project, along with motivation,

team management and staffi ng levels.● Style. This refers to how the project manager leads the project and project team.● Skills. These are the distinctive capabilities needed by staff working on the project.● Shared Values. These refer to the guiding beliefs and the signifi cant principles guiding the

project.

(Maylor adapts the 7-S framework to include Stakeholders – to refl ect the importance of the various individuals and groups who have an interest in the project process or outcome.)

The 9-project management, knowledge areasThe Project Management Institute also proposes that there are nine key knowledge areas in project management, each of which is relevant in some or all of the fi ve process areas discussed above:

1. Integration management. Plan development, plan execution and overall change control.2. Scope management. Initiation, scope defi nition, scope planning, scope verifi cation and

scope change control.3. Time management. Activity defi nition, activity sequencing, activity duration estimating,

schedule development and schedule control.

Initiation Planning

Executing

Closing

Controlling

Figure 4.2 The project process areas (based on the work of the Project Management Institute). From GIDO/CLEMENTS. Successful Project Management with Microsoft Project CD, 1E. © 1999 South-Western, a part of Cengage Learning, Inc. Reproduced by permission.

www.cengage.com/permissions


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T 4. Cost management. Resource planning, cost estimating, cost budgeting and cost control.5. Quality management. Quality planning, quality assurance and quality control.6. Resource management. Organisational planning, staff acquisition and team development.7. Communications management. Communications planning, information distribution,

performance reporting and administrative closure.8. Risk management. Risk identifi cation, risk quantifi cation, risk response development

and risk response control.9. Procurement management. Procurement planning, solicitation planning, solicitation,

source selection, contract administration and contract close-out.

This model is not intended as an alternative to the project life cycle (or 5 project manage-ment process areas, in this case), but rather as a view of the knowledge and skills required in order to carry out each of the stages of the life cycle. So, for example, at the ‘initiating’ stage, the project manager would need to consider integration management activities, scope management activities, and so on. All of these knowledge areas are considered in this text.

4.5 The project as a conversion processA more fl exible view of a project is to use a systems approach; that is, the project can be viewed as a conversion of some resources (input) into a fi nal product or objective (output), as described by Maylor (2003). The project will take place under a number of constraints, often outside the project boundary, and the conversion process is carried out by a number of mechanisms that transform the resources during processing.

4.5.1 InputsThere will normally be a project brief, that is, a document that provides a statement of cus-tomer needs that is to be the foundation of the fi nal project. There are likely to be explicit project requirements and also those that emerge during the course of the project as a result of the customer’s changing needs or perceptions. The initial project brief is often open to interpretation and the expert opinions of the organisation carrying out the project, and is likely to be negotiated with the customer.

4.5.2 ConstraintsThese may take any of the following forms:

● fi nancial – the budget amount and timing of capital needed;● legal – for example, planning permission requirements, health and safety regulations;● ethical – behaving within ethical boundaries is becoming increasingly important as cus-

tomers are becoming concerned about the ethical behaviour of organisations;● quality – technical requirements specifi ed and desired by the customer;● environmental – organisations must consider environmental legislation and control;● logic constraints – planning that certain activities take place before others can start;● time and quality – discussed earlier in this chapter;● indirect effects – the desire to minimise disruption to other areas of the business as a

result of change in one area;● politics – for example, crossing departmental boundaries may be beyond the scope of the project.


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4.5.3 OutputsThe output is the satisfi ed need – achievement of the deliverables required. An output may be tangible or intangible, but it must satisfy the current customer project objectives, for example, a new computer system plus effective training for the staff.

4.5.4 MechanismsThe mechanisms by which the output is achieved and processing carried out include the following:

● people – those involved directly and indirectly;● knowledge and expertise – brought to the project by the people participating;● capital – the money securing the resources;● tools and techniques – methods of organising resources;● technology – the physical assets performing the conversion process.

4.6 Strategy and scopeYou may fi nd the terms ‘project strategy’ and ‘project scope’ used in textbooks or articles. These two may well be sections in a project initiation document, and you may be asked to produce them in your examination.

In Chapter 1, strategy was defi ned as

‘A course of action, including the specifi cation of resources required, to achieve a specifi c objective.’ CIMA: Management Accounting: Offi cial Terminology,

2005 edition, p. 54.

This defi nition also applies equally to project management. A project should have a comprehensive high level defi nition of what it is to achieve, how that will happen, and the resources to be used.

The scope of a project is the extent of work needed to produce the project’s deliverables. It is generally expressed as a list of tasks, often a summary of the work breakdown structure (this will be explored in Chapter 5).

4.7 Projects and the project managerIt is the people carrying out the project who determine the overall success or failure. Obviously, using the correct procedures is important, but those procedures are only the tools people use to carry out their job. The skills, attributes and knowledge that the project members, and especially project managers, bring to the project are critical to its success; therefore it is important to understand:

● the roles of the project manager● the responsibilities of the project manager● the skills of the project manager.


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T 4.7.1 The roles of the project managerThe key role must be to ensure the success of the project objective. As projects are interdis-ciplinary and cross organisational reporting lines, the project manager has a complex task in managing, coordinating, controlling and communicating project tasks.

Norris et al. (1993) see the role of the project manager as one of managing people (the project team, customers and suppliers), carrying out processes (the work/tasks being done) and producing the product (the fi nal deliverable).

4.7.2 The responsibilities of the project managerThe ultimate responsibility of the project manager is to ensure the successful completion of the project objectives to the satisfaction of the fi nal customer. In essence, the project manager takes responsibility for providing leadership to the project team who carry out the project tasks in order to achieve the project objectives. The project manager will lead and coordinate the activities of the project team to ensure that activities are performed on time, within cost and to the quality standards set by the customer. An important aspect of project management is to ensure that the team members are organised, coordinated and working together. The specifi c responsibilities of the project manager are discussed in more detail in the following sections.

4.7.3 OrganisationThe project manager is responsible for ensuring that the necessary resources are available to carry out the project. This will involve those tasks that can be carried out internally and those that may need to be subcontracted externally.

For tasks to be carried out internally, the project manager is responsible for assigning particular people within the organisation to carry out the work. The project manager will delegate responsibility for performing project tasks to team members, who will then be accountable to the project manager for the accomplishment of the task within budget and on time. In complex projects, this may often involve the project manager delegat-ing responsibility to team leaders responsible for a group of specifi c tasks. For example, in projects to implement information systems, the project manager may delegate authority to a senior programmer to ensure that all programming tasks are carried out across the whole of the system development.

ExerciseList the activities that the project manager must do in order to perform the organising function.

Solution● secure project resources● assign tasks to internal/external providers● assign responsibility● organise team.


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4.7.4 The project manager and project planningIt is important to understand the responsibilities of the project manager within the plan-ning stage. The primary responsibility is to defi ne the project objective clearly with the customer, then to communicate this objective to the rest of the project team, making it clear what constitutes a successful project outcome.

The project manager must engender participation of the team members in the planning process, in order to instil involvement, commitment and ownership of the project.

This may involve setting up a project-reporting information system, to record and mon-itor the progress of the project against the plan and then communicate the plan and actual comparisons to team members on a regular basis. Responsibility structures may be used (i.e. ensuring that team members receive information on their own area of infl uence), but this must be carefully weighed against ensuring that project team members do not forget that their particular area of control is likely to affect other areas and will ultimately affect the overall achievement of the whole project objective.

ExerciseList the activities that the project manager must do in order to perform the planning function.

Solution● Defi ne the project objective.● Agree the objective with the customer.● Communicate the objective to the team.● Set up a system to compare actual results with the plan.

4.7.5 The project manager and controllingFollowing the planning stage of the project, the project manager is responsible for moni-toring and controlling its progress towards successful completion. Along with the project team members carrying out the particular tasks, the project manager will collect and analyse actual project data on costs, schedule and progress. If the project manager con-siders that corrective action needs to be taken in order to get the project back on target, then action must be instigated at this level. It is important that the project manager takes the advice of team members before deciding on a particular course of corrective action, because participation in the decision-making process will help to foster commitment of team members to the successful completion of the project objective. Control activities, when required, must be carried out as quickly as possible.

ExerciseList the activities that the project manager must do in order to perform the controlling function.


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Solution● Implement and monitor the project information system.● Take action if variations occur.● Communicate with the team on the progress of the project.

4.8 The skills of the project managerThe project manager requires a set of skills that will encourage and lead the project team to succeed and to create customer confi dence in the project team. The following project management skills will be discussed in the next section:

● leadership skills● communication skills● negotiation skills● delegation skills● problem-solving skills● change-management skills.

4.8.1 Leadership skillsLeadership is the ability to obtain results from others through personal direction and infl uence. Leadership in projects involves infl uencing others through the personality or actions of the project manager. The project manager cannot achieve the project objectives alone; results are achieved by the whole project team. The project manager must have the ability to motivate the project team in order to create a team objective that they want to be part of.

Good project management requires both participation and consultation. The project manager should provide overall direction but should not be autocratic or prescriptive in leading the team. As project managers are responsible for bringing together a team of experts, it would be inappropriate in most cases to tell them how to do their jobs!

Project managers require the skills to empower the project team members. With empowerment comes ownership of and responsibility for their part of the project, and this will encourage team members also to feel part of the overall project achievement. The project manager should encourage open communication between team members in order to encourage team spirit and support.

Another important attribute of leadership is recognition. Motivation will be enhanced if the project manager continually recognises the achievements of the team members via encouragement, praise or formal monetary rewards. Recognition must be carried out throughout the life of the project so as to maintain motivation of the team.

In an article in Computer Weekly, ‘IT Projects Need Leaders’ (26 October, 2001), David Taylor, President of the IT directors’ association Certus, discussed how sad he was to receive an advertising fl yer from a training organisation because the contents of the 2-daycourse (Methodologies, Process, Prince2, Bar Charts, Project Management Meetings, Software Skills), though important, did not seem to cover the aspects of successful project delivery that he had identifi ed. These were communication, leadership, persistence, inspi-ration, motivation, focus and action. The course was about project management (impor-tant in its own right) and not project leadership which he considered to be essential.


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He wrote: ‘Too many companies advertise for project leaders with specifi c technical experience, who have consistently delivered quality systems, and who really understand processes.’ He went on to indicate that he looked for scars, communication and radical thinkers:

● Scars. He asks about the biggest mistake the applicant has ever made on a project. If none, then he is not interested. The deeper the scars the better, because learning has occurred.

● Communication. Do they look you in the eyes when speaking to you, are they confi dent, are their heads high? Forget the project when considering this essential skill.

● Radical thinkers. ‘If we do what we have always done, we will get exactly what we have always got.’ He looks for people who can think outside the planet, not just outside the box.

The last point can certainly be evidenced in the innovative approach to many aspects of the Eden Project discussed earlier in this chapter. Taylor wrote that you can turn projects around if leaders are appointed, and are given the freedom to do what they have to do to get the project delivered.

4.8.2 Communication skillsAs indicated by Taylor in the section above, project managers must be effective commu-nicators. They must communicate regularly with a variety of people, including the cus-tomer, suppliers, subcontractors, project team and senior management. Communication is vital for the progression of the project, identifi cation of potential problems, generation of solutions and keeping up to date with the customer’s requirements and the perceptions of the team.

Project managers should communicate by using a variety of methods:

● regular team meetings● regular meetings face-to-face with the customer● informal meetings with individual team members● written reports to senior management and the customer● listening to all the stakeholders involved in the project.

It is important for the project manager to have regular and open communication with both the customer and the team members. The customer needs to be kept regularly informed of the progress of the project and needs to let the project manager know as soon as possible when changes are required. The project team members must have a formal forum on a regular basis where the whole teams get together to discuss project issues. Team members will also require less formal communication methods in order to bring individual concerns to the attention of the project manager. The project manager must therefore be available for open informal discussions with team members, when required. The project manager must also provide timely feedback to both the team and the customer.

4.8.3 Negotiation skillsProject managers will have to negotiate on a variety of project issues, such as availability and level of resources, schedules, priorities, standards, procedures, costs, quality and peo-ple issues. Negotiation is a process of satisfying a project’s needs by reaching an agreement


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T with others. The project manager may have to negotiate with someone over whom he or she has no direct authority (e.g. consultants), or who has no direct authority over him or her (e.g. the customer). Project managers need to be able to manage the outcome of a negotiation so that the differences in what each side gets are kept to an absolute minimum and confl ict is avoided. Table 4.1 highlights the kind of negotiations a project manager is likely to be involved in. To help ensure successful negotiation, a logical process can be followed:

1. Identify and defi ne the problem.2. Generate a number of possible solutions that could be accepted.3. Evaluate these alternatives and their outcomes to the project.4. Reach agreement by compromise or by selecting the alternative proposal most suitable

to both parties.5. Implement the results of the negotiation.

It is likely that throughout the project’s life, the project manager will be involved in many negotiation processes and the main objective must bring in a successful project, that is, one achieving the project objective(s).

Negotiation skills are covered in more detail in Chapter 7.

Table 4.1 Negotiations of the project manager (adapted from Field and Keller, 1998)

Negotiation point Possible issues Negotiate with

Resource Funding Senior managementStaff Line managersEquipment Purchasing/estates departmentsTime scale Customer/senior management

Schedules Order of activities Customer/teamsDuration of activities Line managers/team membersTiming of activities Line managers/team membersDeadlines Customer/line managers

Priorities Over other projects or work Senior managementBetween cost, quality and time Customer/team membersOf team members’ activities Team members

Procedures Methods Team membersRoles and responsibilities Team members/customerReporting Senior management/customerRelationships Team members

Quality Assurance checks Customer/teamsPerformance measures Customer/teamsFitness for purpose Customer/team members

Costs Estimates Accountants/team membersBudgets Customer/senior managementExpenditure Customer/accountants

People Getting team to work together Team membersGetting required skills Team members/line managersWork allocations Team members/line managersEffort needed Team members/line managers


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4.8.4 Delegation skillsA further key skill required for a project manager is that of delegation. A project man-ager will communicate and clarify the overall project objective to the team members, and will then further clarify the individual team member’s role in achieving that objective by a process of delegation. Delegation is about empowering the project team and each team member to accomplish the expected tasks for his or her area of responsibility. The project manager has neither the time nor the skills to carry out all the project tasks, so he or she must delegate responsibility to those who do have the skills. Delegation is also partly about allowing team members to learn from their mistakes and, if they are able, to correct them by themselves, without fear of blame. Delegation ensures effective performance by the project team and fosters conditions necessary for teamwork and coordination. There may be times during a project’s life when the project manager needs to step in to stop serious errors occurring, but a good project manager will be able to spot potentially dangerous situations quickly and take control of the decision-making process.

4.8.5 Problem-solving skillsProject managers will inevitably face numerous problems throughout the project’s life. It is important that the project manager gathers information about the problem in order to understand the issues as clearly as possible. The project manager should encourage team members to identify problems within their own tasks and try to solve them on their own, initially. Delegation should foster this approach. However, where tasks are large or critical to the overall achievement of the project, it is important that team members communicate with the project manager as soon as possible so that they can lead the problem-solving effort. Appropriate team members should be involved to analyse and present information in order to generate a solution. Again, an important attribute of project management is communication, in particular listening skills, as various opinions and possible solutions are being generated. As the project manager is the person who retains the ‘big picture’, he or she is in the optimum position to consider how the decision will affect the overall project.

4.8.6 Change-management skillsOne thing is certain in projects, and that is change. Changes may be:

● requested by the customer● requested by the project team● caused by unexpected events during the project performance● required by the users of the fi nal project outcome.

Therefore, it is important that the project manager has the skills to manage and control change. The impact that change has on accomplishing the project objective must be kept to a minimum and may be affected by the time in the project’s life cycle when the change is identifi ed. Generally, the later the change is identifi ed in the project life cycle, the greater its likely impact on achieving the overall project objective successfully. Most likely to be affected by change is the project budget and its timescale.

At the start of a project, procedures need to be put in place regarding how changes are to be documented and approved. If a customer requires a change, the project manager must request the appropriate team member to estimate the effect on project schedule and cost.


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T The project manager should then present these estimates to the customer for approval prior to implementing the change. Only after agreement by the customer should project sched-ules and budgets be updated to include the additional costs or activities. If change is initi-ated by the project team or the project manager, then the project manager must present a proposal to the customer for approval.

Some changes are necessary as a result of unexpected events such as the loss of a key member of staff or materials shortage. These will have an impact on the project schedule and/or cost and will require modifi cations to the plan.

Project changes may also occur as a result of user requirements of the fi nal project. In many projects, such as the introduction of computerised information systems, the project manager is responsible not only for designing, developing and implementing the new system, but also for ensuring that the users accept the fi nal product. This will involve the project manager in regular communication throughout the development, design and implementation stage with the users in order to overcome fears and resistance to change. Again, good communication skills are vital in this situation as the users are likely to be suspicious and fearful of the change process, and this requires the project manager to lis-ten carefully to those concerns and to communicate regularly to the users the objectives and benefi ts of the project undertaken. Discussion groups, open meetings and one-to-one meetings provide a good opportunity for users to express their concerns and fears. The project manager must listen carefully and considerately to these fears and concerns and must attempt to involve the users in the process of implementation as much as possible.

4.9 Projects and people – project teamsThe issues relating to the formation and development of teams are covered in the sections on groups and confl ict in Chapters 7 and 9. You should think about the issues raised there in relation to project teams.

4.9.1 Problems of project team-workingThere may be barriers that hinder the achievement of the team objectives. The following section highlights some of these potential issues and makes suggestions for overcoming them.

4.9.2 Unclear team goals and objectivesIt is the responsibility of the project manager to explain the project objective to the team. He or she must demonstrate the importance of the project and the benefi ts its success will have for the organisation and the team members. This should be presented and discussed at the fi rst project meeting and the project manager must ensure that all team members understand these goals and the benefi ts of achieving them. The project manager needs to review the project objectives on a regular basis, with the team and with individual team members, to ensure that the objective remains an important target and that the team remains focused. Being vague about the goals of the project or not reinforcing the impor-tance of the achievement of the goal on a regular basis is likely to lead to a lack of team focus and a failure to meet the project objective.


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4.9.3 Lack of team structureTeam members may not know or understand what roles or activities the other team mem-bers are contributing, or may feel that there are no established procedures. Therefore, it is important for the project manager to involve the team members in project planning at an early stage. The project manager must also determine and communicate team-operating procedures, such as communication, reporting, approvals, and so on. Using tools such as critical path analysis (see Chapter 5) and the project budget and baseline plan, the project manager can demonstrate to the team how everyone’s work fi ts together to achieve the project objective. All project procedures should be documented and kept in one location for reference by all team members.

4.9.4 Lack of definition of rolesTeam members may not clearly understand their roles in the project or may feel that their lines of responsibility and duty overlap with those of another team member. The project manager must meet with each team member early on in the life of the project to describe and discuss individual roles, duties and responsibilities, and to explain how they interact with other team members. When the project plan is formulated by the team, each team member must be given a plan of work, normally a work breakdown structure (WBS), which identifi es individual tasks and when they need to be carried out. This plan must be given to each team member by the project manager so that all the team members can understand clearly what they have to do, and also what the other team members are doing. Also, as stated earlier, all team members should be issued with a critical path analysis of the project and the baseline plan so that they can view all tasks together and see how their activities fi t into the overall plan.

4.9.5 Poor leadershipThe project manager must create an environment in which the team members can feel free to contribute and provide feedback. It is important for the project manager to set guide-lines for team operations, but he or she must be able to balance the requirements of many individuals within this framework of project rules. The project manager must be fl exible enough to listen and take advice from his or her team, but must also be strong enough to enforce his or her own suggestions and decisions when necessary. Fairness and objectivity when dealing with team members is critical.

4.9.6 Poor team communicationIt is important that the project manager holds regular team meetings and status reviews to communicate progress and to provide a forum for team discussion and airing of views. Participation in team meetings should be encouraged, and certain team members should be required to report on the status of their activities. Project documents, such as plans and budgets, must be kept up to date and circulated to the team regularly. The project manager should encourage open and frank discussion among the team members, both formally and informally. Physical location of team members can often be an important factor in helping or hindering communication.


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T 4.9.7 Lack of commitmentTeam members may not be committed to the overall project objective, perhaps as a result of poor communication. The project manager must speak to each team member in order to communicate his or her importance to the achievement of the project. The project man-ager needs to determine the motivating factors important to each individual and should ensure that the project environment is a motivating one. The project manager must con-tinually encourage individuals and support progress. Effective team members need to be committed and want to feel accountable for their individual activities.

Commitment may also be lacking where an individual is being split between work on the project and a full-time job. The project manager should recognise and deal with the situation by clarifying priorities and, if necessary, bidding for the individual to join the team on a full-time basis.

4.9.8 Project management and team-buildingTeam-building should be an ongoing process throughout the life of the project, and should be the responsibility of all the team members. Team-building should foster honesty, open communication and trust and also a strong commitment to the achievement of the project objective. Possible methods of team-building could be as follows:

● physically locate the team in one place● periodically call team meetings (rather than project meetings)● socialise outside the work environment.

4.9.9 Project team meetingsAs discussed above regular project team meetings are an important way to improve rela-tionships and to communicate the objectives of the project to the whole team.

There are a range of different types of project team meeting; below are just three examples.

Project status review meetingsThe purposes of such meetings are to inform others about project status to date, to iden-tify any issues or problems and to identify subsequent action plans for the remainder of the project. These meetings should involve the team members, the project manager and the customer. They should be scheduled regularly so that potential problems can be identi-fi ed and acted upon quickly.

ExerciseList some of the items that may be on the agenda of a project status review meeting.

Solution● Achievements since last meeting.● Cost, schedules, scope – current status.● Cost, schedules, scope – forecasts.


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● Cost, schedules, scope – variances.● Corrective action plan.● Assignment of action plan tasks.● Assignment of deadlines for action plan tasks.

Project design review meetingsProjects that involve a design element are likely to require a number of design review meet-ings. This may be a forum to present new technical specifi cations for customer approval or to present design problems for problem-solving.

Project problem-solving meetingsAs soon as a problem occurs within a project, a problem-solving meeting should be called for appropriate team members to attend, in order to identify and resolve the issue. A quick response to the identifi cation of a problem is critical and it is important that the appro-priate team members are made aware and are allowed to participate in the problem solu-tion. It is important that the project manager provides clear guidelines on the authority of the problem-solving team to make decisions and the allocation of responsibility to named individuals for action to solve the problem.

4.10 Project stakeholdersWe have already discussed at some length about the project managers and their relation-ship with the team members. However, there are a number of other stakeholders who need to be considered (Figure 4.3). Different textbooks have different lists of stakeholders, and there are often different names for the same stakeholder.

The following is a selection of the most common; you should make sure that you are aware of the needs of each stakeholder, in respect of the project, and the confl icts between those needs.

● Project sponsor. The sponsor is the person or organisation providing the resources for the project, that is, the person responsible for ensuring that the project is successful at the business level. They often authorise the project, and are responsible for its budget. They must also be satisfi ed that a business case exists to justify the project. They will also be particularly concerned that the project does not go over budget. The sponsor may also chair the steering committee (or project board) to which the project manager reports progress. If we take the example of the development of a new accounting system, the sponsor might be the Head of IT, simply because they control the budget for IT capital investments.

● Project owner (also referred to as project client). The project owner is the person for whom the project is being carried out. They are interested in the end result being achieved and their needs being met. They are more interested in scope and functionality than in budget. They would normally sit on the steering committee, and may also represent the users. In the case of the new accounting system, the owner would be the Finance Director or Financial Controller.

● Customers/users. The customer/user is the person or group of people whose needs the project should satisfy. The fact that this stakeholder is a ‘group’ leads to its own prob-lems. It may be diffi cult to get agreement from the customers as to what their needs


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are; indeed there may be confl icts within the customer group. Conventional logic dictatesthat users should be, if possible, invited to participate in the project. This may simply mean representation on the steering committee, or may involve being part of the project team. Users, like the project owner, are primarily interested in the scope of a project. However, they may try to ‘hijack’ the project to satisfy their own personal objectives, rather than those of the organisation. This may bring them into confl ict with the project owner, despite theoretically being ‘on the same side’. In the case of the new fi nance sys-tem, the users would come from the different parts of the fi nance function.

● Suppliers/subcontractors/specialists. The project will often require inputs from other par-ties, such as material suppliers or possibly specialist labour, such as consultants. Each of them will have their own objectives, some of which confl ict with those of the project. For example, suppliers will seek to maximise the price of the supply, and reduce its scope and quality, in order to reduce cost. This confl icts directly with the objectives of the sponsor and customers. In the case of the new fi nance system, suppliers may provide hardware and software, and specialists might include members of the organisation’s IT, purchasing or internal audit departments.

4.10.1 Managing stakeholder expectationsEven the simplest project is likely to have a large range of potential stakeholders with dif-ferent levels of interest and power. Identifying stakeholders, assessing their interests in the project and then using that information to manage the relationships with such groups is a vital project management activity. Once these have been identifi ed, it is useful to draw

Project sponsor –Makes investment decision

Project owner –Wants end results

Project brief, allocation offunds, terms of reference

Project proposals,schedules, status reports

Project customer –End-User

Project manager –Responsible for achieving overall

project output

Project team –Responsible for achieving projecttasks that make up overall project

Figure 4.3 Project stakeholder hierarchy (adapted from Gido and Clements, 1999)


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up a systematic plan to secure and maintain their support or to foresee and react to any problems. This will allow the project manager to concentrate on those critical stakeholder relationships and thus reduce the vulnerability of the project when unexpected events arise.

Once the project manager has established the key stakeholder groups, a table can be drawn up listing each stakeholder’s goals, past behaviour towards the projects, what can be expected of their future behaviour and how they may react to future changes. You may choose to use the Mendelow matrix, outlined in Chapter 1. This will allow the project manager to assess the risks associated with various stakeholder groups, and indicate where attention needs to be focused.

4.10.2 Stakeholder conflictAs in any group management situation, projects are susceptible to confl ict between the various stakeholders. Although it is not possible to list all of the potential confl icts, as they are specifi c to each project, several obvious confl icts can be identifi ed by looking at the objectives of each stakeholder as summarised in Section 4.10, above; for example:

● While the project owner will be seeking the ‘best’ possible solution, the sponsor will be interested in the project being completed ‘within budget’.

● The project owner and sponsor will want the best possible solution at the lowest possible cost, suppliers will want to maximise their profi t from the project. This is the same con-fl ict that always exists in customer-supplier relationships.

You should think about the other likely confl icts in a typical project and how you, as project manager, would manage them.

4.11 Projects and organisation structures and support

This chapter has covered a number of issues relating to project organisation structures. However, we need to consider the relationship of the project to the organisation within which it exists.

In conventional (functional or divisional) structures, there is often a lack of clarity as to how authority is divided between line managers and project managers. If a project is rela-tively small or short term, for example an information system redevelopment, this may not be a major issue. However, if the project forms a major part of the business of the organi-sation, such as in a construction company, this may necessitate an organisation structure such as a matrix, where lines of authority are clearer.

4.11.1 Matrix organisationsA matrix structure seeks to add fl exibility and lateral coordination to the traditional verti-cal hierarchy. One way of doing this is to create project teams made up of members drawn from a variety of different functions or divisions: each individual then has a dual role, as he or she maintains functional/divisional responsibilities as well as membership of the project team (see Figure 4.4). Hence, both vertical and horizontal relationships are emphasised, and employees within a department will report to both a functional and a product manager,


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each of which has equal authority. There is a dual chain of command which violates classi-cal management principles. A matrix structure suits rapidly changing environments because the equal balance of power between functional and project management aids communica-tion and coordination. It is an organic structure which facilitates adaptation to unfamiliar and unexpected problems. People can be fl exibly relocated across products or projects, aid-ing the speedy implementation of new ones.

The matrix organisation structure has been widely criticised, but is still used by many organisations in industries such as engineering, construction, consultancy, audit and even education. The characteristics of the organisation that lead to a matrix being the most suit-able organisation structure are as follows:

● The business of the organisation consists of a series of projects, each requiring staff and resources from a number of technical functions.

● The projects have different start and end dates, so the organisation is continually reas-signing resources from project to project.

● The projects are complex, so staff benefi t from also being assigned to a technicalfunction (such as fi nance of logistics) where they can share knowledge with colleagues.

● The projects are expensive, so having resources controlled by functional heads should lead to improved utilisation and reduced duplication across projects.

● The projects are customer-facing, so the customer requires a single point of contact (the project manager) to deal with their needs and problems.

If implemented successfully matrix structure can:

● improve decision-making by bringing a wide range of expertise to problems that cut across departmental or divisional boundaries;

● replace formal control by direct contact;● assist in the development of managers by exposing them to company-wide problems and

decisions;● improve lateral communication and cooperation between specialists.

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Projectmanager 1

DivisionA

Production

Marketing

Production

Marketing

Technicaldevelopment

DivisionB

Projectmanager 2

Projectmanager 3

3

3

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3

Figure 4.4 Matrix Organisation (new diagram taken from old chapter 2 on structures)


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There are, however, disadvantages with a matrix structure:

● a lack of clear responsibility;● clashes of priority between product and function;● functions lose control of the psychological contract;● career development can often be stymied;● diffi cult for one specialist to appraise performance of another discipline in multi-skilled

teams;● project managers are reluctant to impose authority as they may be subordinates in a later

project;● employees may be confused by reporting to two bosses;● managers will need to be able to resolve interpersonal frictions and may need training in

human relations skills;● managers spend a great deal of time in meetings to prioritise tasks.

4.11.2 Project officeThe effective management of any project requires a lot of administrative work to keep the project in order. In a small project, the project manager will probably take care of the administration with the support of an administrator or a secretary. However, for large com-plex projects may need project support teams. In organisations where the there is a signifi -cant number of large scale projects there will often be a permanent project offi ce/project support offi ce. The function of the project offi ce is to assist in all aspects of the manage-ment of project work and provide administrative support to an ongoing programme of projects.

The project offi ce provides a central function comprising staff who have the specialist skills and knowledge of how to run the project process. Tasks which may be undertaken include, scheduling, using network analysis and updating, servicing progress meetings, (e.g. making arrangements, sending out the agenda and minutes), monitoring costs and budg-ets, maintaining project fi les, preparing contracts and monitoring progress. Project man-agement and planning software will usually be kept under the control of the project offi ce.

There are considerable benefi ts from having a consistent approach to running projects through a project offi ce. If projects follow the same processes then staff transfer between projects is easier and staff do not have to learn new ways of working. In addition, it is ben-efi cial to retain information on projects and learn from experiences. The project offi ce can be the central repository for this knowledge. This can be used to inform future projects to improve the quality and accuracy and avoid mistakes made in earlier projects.

In summary the project offi ce can provide administrative support, but in some organisa-tions it is central to the overall control of projects.

4.12 Why some projects failThere are a number of factors that are crucial to projects. To continue with this theme: NSM Research carried out a survey of 867 IT professionals, asking them under fi ve headings to identify which of the 60 factors could affect the success of an IT project. This independ-ent market research agency was commissioned by the Coverdale Organisation (a manage-ment consultancy) and Computer Weekly. The results were published in Computer Weekly in


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This section will help you to become familiar with real projects. Use examples to support your answers.

an article entitled ‘The Project Killers’ on 28 February 2002. The results in Table 4.2 are taken from that article.

Forrester, a research fi rm, informed the world that about two-thirds of major IT projects fail to deliver some of their original objectives and more than a quarter fail altogether.

You can see from Table 4.2 that the technical or IT-specifi c factors were viewed as far less relevant to project success than the way people fail to work with each other. Factors such as communication, leadership and clarity of purpose can produce a desired result.

Signifi cant elements of the project management process, such as the defi ning of clear objectives, setting realistic estimates in terms of budgets and time, and identifying resources, will impact seriously on the success of projects: they can head in the wrong direction from the start.

Steve Goodman, who works for Coverdale, is experienced in blue-chip IT companies’ major IT projects. He said: ‘With one project team we agreed a work breakdown structure and then asked them separately to estimate the time required for each task. For one task estimates ranged from half a day to 2 weeks.’

Imagine then that you are building the Jubilee Line that had 10 000 separate tasks!A huge impact on project success occurs when objectives are changed in the course of

the project. The associated skill set contains the ability to communicate well and to lead. These skills should be used to communicate and to obtain agreement with clearly defi ned, measurable objectives, necessitating the understanding of the various stakeholders.

Understanding the technology and technical competence are of far less importance to a project leader, though they are more important for the project team and essential to sup-pliers and third parties. Project teams have to have clear roles and responsibilities, team-working and motivation more than technical competence or formal training. The support and involvement of senior management was essential: without it, projects fail.

Suppliers and other third parties have to be tightly managed and assurance about their technical competence given and checked by third-party references, for example.

4.13 Examples of projects

Table 4.2 Survey results

The 10 most common factors contributing to real IT project failures

Time/resource estimates unrealistic: 75%Objectives not clearly defi ned or measurable: 71%Project manager: poor communication skills: 64%Objectives changed during project: 61%Project manager: poor leadership skills: 59%Senior management: not showing strong support: 56%Stakeholders: not taking ownership of the project: 56%Role and responsibilities of the project team not defi ned: 54%Resources not identifi ed/made available at the start: 54%Project team: did not work as a team: 53%


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4.13.1 One successful project – ongoingThe Eden ProjectImagine a large hole fi lled with water: an abandoned china clay pit at Bodelva in Cornwall, 5 km east of St Austell. The pit was 180 years old with an area of about 35 hectares and 80 m in depth. There were 13 natural springs feeding in the water, some 700,000 m3 to be dealt with annually (22 litres per second.) It seems the most unlikely site for one of the most successful projects seen in the United Kingdom that linked the imagination of Tim Smit, who saw the site and had the vision in 1994 and the skills of the principal project teams.

The project was to construct a botanical garden and education centre within that china clay pit, to be opened to the public as soon as possible. The mission statement was (and is) to: promote the understanding and responsible management of the vital relationship between plants, people and resources . . . and to inspire positive initiatives that will lead to a sustainable future for us all.

To this end, a sheltered micro-climate was to be created below the surrounding ground level by the construction of enormous greenhouses (called biomes) to enable large numbers of the world’s tropical and Mediterranean species to be planted.

The customer/employer of the project was Eden Project Ltd and the Financial Project Manager was Davis Langdon Management (DLM), which was involved in the project from early 1996.

A crucial part of the project was the receipt of £25,000 from Restormel District Council. This was seed-corn money that enabled the development of the millennium funding bid to be fi nanced.

Tenders for the construction contract were advertised in early 1997. Eight tenderers were selected, including one Anglo-German joint venture. The contractors were inter-viewed and, after investigations, two were shortlisted: Tarmac and McAlpine JV. The fundamental requirement contractually was to place a design and construct lump sum contract with a guaranteed maximum price, with the successful contractor investing equity into the project.

During the fi nal negotiations, both tenderers were invited to make fi nal proposals including the form of contract they considered most appropriate. Both chose the New Engineering Contract (NEC) and savings/bonus provisions with an activity schedule. This means they chose an NEC target-cost contract, that is, a model contract based on best practice because it supported project management and provided a secure basis for partner-ing. McAlpine JV (a joint venture between Robert McAlpine JV and Alfred McAlpine Ltd) won the contract in February 1997 because of its expertise in both heavy civil engineer-ing and building construction, its offer of equity investment and its construction manage-ment proposals being the most favourable. This meant that it became responsible for the whole design, procurement, construction and commissioning of the total built form for a total cost of around £59.8 m. The contract was under deed (i.e. legally enforceable) with a 12-year liability period. It was also agreed that McAlpines would have two executive direc-tors join the Board of Directors of Eden Project Ltd: an essential realisation of the partner-ing concept that had underpinned the contractor’s appointment.

In May 1997, £37.5 m was granted by the Millennium Commission as one of its ‘land-mark projects’, one of the largest funded by the National Lottery to celebrate the third millennium.

In the next 18 months, Eden Project Ltd raised matching funds, obtained planning per-mission (including the new requirement to build a 4 km road from the project to the A390


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T south of Bugle linking the main A30 trunk road which ran the length of Cornwall), bought the clay pit, appointed the in-house development team and fi nalised the project brief.

The site was not fi nally bought until October 1998, during which time the owner con-tinued to extract china clay from it as the contract and project team struggled to develop the design. The design team, Nicholas Grimshaw and Partners Ltd, were taken on when the contract was agreed. Eden Project Ltd’s (the client’s) expectations were also value-engi-neered down to the budget (the residue of funding less the inescapable ex-contract costs), programmes and method statements were prepared, geophysical and geotechnical surveys and wind tunnel tests were commissioned and work was done towards the site start.

In August 1998, the estimated construction costs had to be reduced by 25 per cent (over £11 m excluding the agreed £12.5 m for the biome superstructures already negotiated) to achieve the inadequate budget.

In October 1998, some site clearance work started, but the fi nal construction contract was only signed at the end of January 1999 before work could start in earnest. Throughout the entire project, all parties worked at risk, with very small primer payments made by the Millennium Commission against rigid ‘schedules of delivery’. There were eventually 87 suppliers and subcontractors managed by McAlpine for the client.

The contract was in two phases:

Phase 1: The buildings (the Visitor Centre) and infrastructure (roads, car parking, drainage and so on). This was completed in fi ve different stages to allow the customer to start fi tting out individual rooms. Completed sections of topsoiling and associated works in the pit were also undertaken separately to enable the horticultural planting to start. Topsoil had to be cre-ated from china clay waste/sand, composted ‘green’ waste and composted bark, as there was none in the pit. Much innovation had been required as the pit was fi lled to a depth of 20 m below the water table, necessitating sophisticated water management and continual pump-ing of 100 litres per second off site. Starting in December 1998, 2 months of torrential and unceasing rain fell, and construction had to stop. Work did not recommence until March 1999, when diggers and bulldozers were used round the clock to make up the time lost.

Phase 2: All the works within the pit, including the two biome structures and the temper-ate biome with supporting buildings on the rim such as the energy centre and the centralproduction unit for on-site catering, with the fi nal infrastructure. These biomes were cov-ered with triple-layered ‘cling-fi lm with attitude’ or ETFE (ethyl-tetra-fl uoro-ethylene copolymer) foil. This is strong, lightweight, anti-static and highly transparent to ultra-violetlight, has better insulation properties than glass and is recyclable. It should be maintenance-free for 25 years and last 30 years. The biomes were designed by Mero UK Ltd and achieved two world records: for the largest volume and the tallest free-standing scaffold ever erected for the temporary steelwork: a vast scaffolding birdcage! The weight of the steel framework was less than that of the moist air inside the humid zone biome. Part of these facilities, the humid tropics biome and some of the biome link with the main reception area, dining facilities, lavatories and similar facilities between the biomes, were taken over piecemeal to allow the employer to start work in those areas. Horticultural planting started in September 1999, with the fi rst trees planted in the Humid Tropics Biome in October 2000.

Phase 1: The Gateway to Eden – was opened to the public in May 2000 while construction was still underway: 500,000 visitors came to watch the Big Build. Phase 1 closed in January 2001 so that the link building and modifi cations to the Visitor Centre could be completed.

March 2001: The Eden Project was completely opened to the public. In June 2001, the one-millionth visitor had come to see the project. (The target had been 750,000 per annum.)


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The project has been successfully completed, though a month late. It came in on budget. The fi nal cost was £86 m. There was only one subcontract dispute, amicably set-tled. The absence of these disputes enabled the focus to remain on the considerable physi-cal, technical and budgetary issues. The client and investors were satisfi ed. The revenue from the admissions, catering and retailing facilities has been 300 per cent over estimates made in the business plan for Phase 1. Harmonious relationships (required by contract clause 10.1: ‘the parties to act in a spirit of mutual trust and co-operation’) had under-pinned activity and, for the most part, the reaction of project partners was that it had been exciting, harmonious and profi table.

On 24 October 2001, McAlpine JV won the British Construction Industry Major Project Award for contracts above £50 m. The judges said: ‘The Joint Venture partnership had enough faith in the project to work at risk for a long period: dealt with incidental problems including weather, geology and budget cuts with enthusiasm and skill, and pro-duced a result which has become an instant legend in its own lifetime.’

The next development phase of the Eden Project commenced in 2002.Sources: Internet downloads: ‘Eden Project – a Landmark for the NEC’, by Tim Carter,

Davis Langdon Management: NEC Users’ Group Newsletter, Issue No. 16, www. newengi-neeringcontract.com. Material reprinted by permission of Thomas Telford.

McAlpine Joint Venture Eden Project St Austell: BCIA Awards 2001 – Major Project Award: The Eden Project The Architects’ Journal: Eden Project: www.ajplus.co.uk/eden/ facts.

4.13.2 One not so successful projectNational Air Traffic Services (NATS)In 1987, the Civil Aviation Authority made a case to the government of the day for a new air traffi c control system and centre. The deadline for operations was 1996, when it was felt that the life of the existing system (the London Air Traffi c Control Centre) would have reached the end of its useful life. The new centre had to have a 40 per cent increase in capacity.

Between 1989 and 1990 the management strategy for the project was defi ned, but the project team estimated an operational start date of 1998: 2 years longer than agreed.

An independent consultancy (the Mitre Corporation) was hired to help with the scop-ing of the project and its estimate of completion was 13 years to build a fully operational system as envisaged. The new deadline would be 2003. The project was authorised to go ahead on the basis of going live in 1996. Comment by an audit team revealed that the senior management at NATS were keen to show a ‘can-do’ mentality rather than admitting that the 1996 date was not feasible.

At the end of 1991, IBM and Thompson CSF won the system contract that had been subject to competition. Their budget of £1 m for the project defi nition phase was in the main used up by the next year. The contractors refused to invest large sums themselves. A systems implementation contract was let to IBM, with a large number of requirements still undefi ned. There were no fi rm offers from subcontractors at this time: fi rms such as Siemens Plessey, Logica and Frequentis were involved.

The system, which was based on IBM’s RS/600 AIX-based architecture, on a token ring network, comprised 200 workstations showing both aircraft data and radar information. The requirements had been set by a small and unrepresentative group of air traffi c controllers.

In 1994, Loral bought IBM’s Air Traffi c Division and conducted a secret audit of the NATS systems that showed 21,000 defects in nearly 2 m lines of code. The whole project, including the building at Swanwick, Hampshire, was said to cost £350 m. (Having


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T assumed that this was the total bill, MPs did not appreciate being told that this was only the capital funds draw-down.)

In 1995, though the system was working well on 30 workstations, it proved impossible to scale it up on the whole operational confi guration. By November, acceptance tests were halted. A quarterly progress report from NATS to the Department of Transport stated that the system would be online by the summer of 1997. This despite the knowledge of the contractors and NATS project team that there were potential delays in the schedule.

These problems became public in 1996. The contractor submitted a plan that showed system acceptance in August 1997. NATS turned this down, insisting that the acceptance date should be June 1997, with the operational deadline 6 months later.

However, Lockheed Martin bought out Loral and by the end of 1996, the operational date had shifted to March 1998. Despite the original fi xed-price IT contract of £132 m, the price that would eventually be paid to Lockheed was £337 m. Of the 160 individual payments to the contractor, only 15 were originally specifi ed for the software. The remain-der was for additional options taken up by NATS after the award of the contract. The IT contract was nearly half the cost of Swanwick.

A new operational deadline of October 1999 was approved by NATS in September 1997. There were calls for an independent audit of the NATS project to the House of Commons Select Committee on Transport chaired by Gwyneth Dunwoody. The new gov-ernment agreed. By October 1998, the operational deadline was agreed as 2001–02.

In June 1999, an audit by Arthur D. Little into the fi nances and management of the project warned that the fi nal cost would be £180 m more than announced to date. The Swanwick costs were now £700 m, though tens of millions of pounds had not been included in the costs. Reference was made by the auditors about the inhibiting nature of the culture at NATS that prevented open debate about project problems or the potential for problems.

NATS, through its Private Finance Initiative partner EDS, installed well-written soft-ware releases that drastically reduced the number of bugs in the system from hundreds to zero, in 2001. The operational date for Swanwick was confi rmed as January 2002. The New En Route Centre, as Swanwick is called, fi nally received the acceptance of its safety case by the Civil Aviation Authority and became operational on 27 January 2002.

(This description was based on an article in Computer Weekly, 24 January 2002: ‘A Brief History of an Air Traffi c Control System’, by Tony Collins, p. 14.)

AfterwordThe Eden Project goes from strength to strength and their relationship with McAlpine JV continues. Eden Project Ltd has contracted McAlpine JV for the construction of Phase 4 due to start in late 2003 and to be fi nished in 2005. Phase 4 will include building another biome, an education centre and more visitor facilities. Success clearly breeds success.

Meanwhile, NATS is still hitting the headlines with problems. EDS successfully sued NATS (May 2002) after NATS terminated the EDS contract after 3 years. It had been due to run for 14 years. NATS had accused EDS of failing to meet critical milestones. The set-tlement was for an undisclosed sum thought to be many millions.

The air traffi c control system itself continues to have problems which have left passen-gers delayed for considerable periods of time at Heathrow and other airports.

Over a year after it became operational, the NATS system has been blamed for unread-able screens, a near-miss between a 747 and a 767, and the diversion of planes to other traffi c control centres due to operator overload.


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ExerciseHaving read the descriptions of the two projects, can you identify six differences that were crucial to the success of one project and the relative lack of success of the other?

Solution

Successful projects Unsuccessful projects

1. A vision that was sold to all (communication) 1. Contract let to IBM with many requirements still unclear/time estimates poor

2. Innovation: leading-edge engineering made the project exciting

2. Changed objectives after project start

3. Genuine partnership (McAlpine JV were willing to invest time and money in the project because they had belief in it)

3. Poor communication

4. Understanding the client’s needs (opening during construction to get revenues fl owing)

4. No consistent contractual ownership

5. Good management of the large number of third parties and suppliers

5. Poor cost management seen in cost overruns

4.14 SummaryIn this chapter, you have looked at the various aspects of projects, defi ning them and examining their characteristics. The key points to remember are:

● the characteristics of a project;● the project life cycle and how a project may be seen as a systematic conversion process;● the different frameworks for understanding the process in project management;● the difference between strategy and scope;● the project manager’s role, skills and attributes;● the membership, role and communication issues relating to project teams;● the stakeholders within a project, and how to manage them;● why some projects fail.

ReferencesField, M. and Keller, L. (1998), Project Management. London: The Open University.Gido, J. and Clements, J. (1999), Successful Project Management with Microsoft Project CD,

A Practical Guide for Managers 1st edition. Reprinted with permission of SouthWestern a division of Thomson Learning. www.thomsonrights.com. Fax: 800 730 2215.

Maylor, H. (2003), Project Management. Ft Prentice Hall.Norris, M., Rigby, P. and Payne, M. (1993), The Healthy Software Project: A Guide to

Successful Development and Management. John Wiley & Sons Ltd. Reprinted with permission of John Willey, UK.


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Readings

The Life Cycle of Technical ProjectsPierre Bonnal, Centre Européen pour la Recherche NucléaireDidler Gourc, École des Mines d’Albi-CarmauxGermain Lacoste, École Nationale d’Ingénieurs de TarbesProject Management Journal. Copyright © 2002 by PMI Publications. Reproduced with permission of PMI Publications via Copyright Clearance Center

It is quite diffi cult to attribute the concept of project life cycle to one author in partic-ular, since this concept has gradually derived over time. However, A Guide to the Project Management Body of Knowledge (PMBoK ®Guide) (PMI Standards Committee, 1996) pro-poses some defi nitions or models; others can be found in the Project Management Handbookedited by Cleland and King (1988) and in many project management textbooks. As project life cycle also is handled daily by project management practitioners, additional or alternative models can be observed directly in real-world projects. While going through these model proposals, one can remark that each author in some way enforces what is specifi c to the par-ticular context for which the model has been made. For instance, a well-known project life-cycle model proposed by the U.S. Department of Defense emphasises the aspects related to the demonstration of the feasibility and viability of the project (two phases), while the spec-ifi cation and the execution of the project consist of one phase each. Another project life-cycle model proposed by Muench for information systems projects (PMBoK ®Guide) insists on taking into account the recursive processes often associated with these project contexts.

The aim of this paper is to review project life-cycle models, specifi cally those presenting some interests in the fi eld of technical projects. Reviewing all the models that have been proposed during these last two or three decades would be a cumbersome endeavour; hence, the authors limited this paper to an overview of the major project life-cycle proposals – before proposing additional models.

The life-cycle models reviewed in this paper are organised around fi ve broad approaches, in an attempt to appraise the benefi ts of each. These approaches are:

● Straightforward project life-cycle approach● Control-oriented project life-cycle approach● Quality-oriented life-cycle approach● Risk-oriented project life-cycle approach● Fractal project life-cycle approach.

The referenced papers and practices have been summarised, are believed to be appropri-ate, and may, therefore, not truly refl ect the original authors’ aims. Reference to the infor-mation source is provided when available for more complete coverage.

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T Straightforward approach to technical project life cycleTechnical projects can be broken down into phases, also called stages or steps by some authors. In this paper, the authors will not differentiate between these three substantive; the term ‘phase’ is preferred. These phases can be divided into subphases, then sub-subphases, and so on. The number and labels of these phases are deeply dependent on the fi eld for which the model has been made. Obviously, the breakdown into phases of a small project is different from the ones used for large-scale projects. The phasing of engineering and con-struction projects also are different from those used for the development and industrialisa-tion of commercial goods. In spite of such differences, projects in a broad sense – technical endeavors more specially – have two very basic phases in common: a preproject phase and the project itself.

The preproject phases aim to identify possible projects, called project concepts, and to appraise them in terms of benefi ts for the organisation that intends to employ them. When such phases are completed, it is up to the decision-makers to decide whether or not to go ahead. Approved and funded projects then are implemented in the second phase, that is, the project phase.

Several characteristics make these two phases different. For instance, Chrisotofol, Aoussat, and Duchamp (1993) mention that a preproject phase requires creativity, while a project phase must be managed with rigor. This is typically a situation that can be observed on real-world projects. For instance, a designer arrives in the offi ce of an engineer with sev-eral plant layout proposals, and the engineer notices that basic quality assurance principles have not been respected, for example, no title blocks on the drawings, no more drawing numbers, and missing dimensions. One can argue that more rigor could be detrimental to the creativity of the designer. These two concepts, creativity and rigor, can be opposed because creativity is generally associated with disorder, while rigor and order are almost syn-onymous. One can derive from this that these two phases should be carried out by different people with different skills, that is, by product engineers or managers, by architects in pre-project phases, and by project managers in project phases. Although this statement seems obvious, it is not always the case, especially when projects are complex. Some project fail-ures can be explained because this dichotomy of skills has not been respected or considered.

The work loads and the duration of these two very basic phases also are different. Few people are generally involved in preproject phases over quite long and imprecise periods of time, while hundreds or thousands of people can be involved in project phases over the shortest possible time periods. This list of differences easily could be extended.

This breakdown into two very basic phases is theoretic in the sense that it intends to embrace all kinds of endeavors. Real-world projects obviously follow more pragmatic schemes. The project life-cycle approach proposed hereafter has been derived from several models commonly presented in the literature (Kerzner, 1994; Meredith & Mantel, 1995; Morris, 1988) and additional observations informally made by the authors from real-world practices. Three phases are considered: an initiation phase, followed by a feasibility phase, and a project implementation phase.

The inputs of the initiation phase, also called ‘concept phase’ or ‘identifi cation phase,’ are keeping pace with technological innovations, economical trends, requests from cus-tomers, distributions or sales people, new products put on the market by competitors, or brainstorming processes. The initial phase aims to sort all this information to identify some project concepts. This does not mean that all the concepts made out of this phase are to be carried out. A rational attitude towards such initiation phases is to identify as many

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project concepts as possible and to eliminate the discordant ones through a preselection procedure with respect to the objectives of the organisation. One can discuss whether or not this fi rst phase belongs to the project in a broad meaning, but common sense leads the authors to think that the initiation phase is an endless process that continuously initiates new feasibility phases.

Selected project concepts – outputs of initiation phases – then are used as inputs for the second phase, the feasibility phase. This phase aims to analytically appraise project con-cepts in the context of the organisation. This second phase can be understood as follows: on the one hand, there are the organisation’s needs, which in some cases can be expressed with the simple words of the strategic charter of the organisation to which the feasibility is carried out; on the other hand, there are the capabilities and the know-how of the organi-sation. With this information, the decision-makers should be able to decide whether or not to go ahead with each project concept proposed.

For technical projects, Clifton and Fyffe (1977) proposed to split this feasibility phase into subphases separated by intermediate decision points. The fi rst subphase consists of a market feasibility analysis to confi rm the viability of the project concept from a pure marketing point of view. If the results suggest that there is nothing to earn, the feasibility analysis of the project concept shall be stopped at that point. Otherwise, a technical feasi-bility analysis, or feasibility study, is to be carried out. Such an analysis serves to demon-strate that the project is technically feasible. It also provides the information required for estimating the costs associated with the implementation of such project concepts and for identifying, quantifying, and mitigating technical risks. Very often, environmental analyses are appended to technical feasibility studies to ensure that the project does not go against external constraints related to ecological issues, social profi tability, laws, and applicable regulations. Based on the results of these technical feasibility analyses, another go or no-go decision is made to determine whether or not to initiate a fi nancial feasibility analysis. Its aim is to establish if a project concept, once materialised, will generate profi ts for the organisation. Basically, the outputs of such a feasibility analysis can be a single fi gure. If it is positive, one can go ahead, but if it is negative, the project concept can be abandoned and eliminated from the project concept portfolio.

It is reasonable to think that this fi gure shall be balanced with the internal (technical) and external (environmental) risks, the range and the accuracy of the information used, and the size and the complexity of the project proposed. The feasibility phase is known to be terminated when a decision-maker decides not to transform the project concept into a project. Morris (1988) recalled that at that point, in the case of a plant, the capacity is decided, the locations are chosen, the fi nancing is arranged, the overall budget and sched-ule are agreed, and a preliminary organisation is established.

The way a project implementation phase, also called a ‘materialisation phase’ or ‘realisa-tion phase,’ is conducted depends on the organisational context within which the project is implemented. It is initiated when the project has been appraised to be feasible and prof-itable. Once launched, nothing is supposed to interrupt the realisation of the project. For technical projects presenting low complexity, the processes associated with this phase are quite straightforward. For speculative or complex projects, this phase can be split into a few subphases separated by intermediate decision points at the end of which the future owners and/or the stakeholders of the fi nal deliverable can decide whether or not to con-tinue the implementation of the project. For instance, in the petroleum industry it is quite common to have this materialisation phase broken down into three subphases.

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T● A basic design phase carried out by an engineering company or an industrial architect,

during which the documentation for tendering and contracting the physical construc-tion or for procuring equipment is prepared. This phase is considered completed when engineering, procurement, and construction contracts are awarded, and when purchase orders for long-lead equipment are issued.

● A detailed design phase, immediately followed by a construction phase, carried out by one or more contractors during which the fi nal deliverable (a plant, equipment, etc.) is made and commissioned.

● A post-project phase, turnover phase, or start-up phase during which the responsibility of the materialised deliverable is transferred from the engineers, the architects and/or the general contractors to the owners.

What makes the two design phases different is that, in a basic design phase, the fi nal deliverable is seen as a set of functions to satisfy, while in the detailed design and construc-tion phase, the fi nal deliverable is handled as a breakdown or parts and pieces to procure or fabricate and to assemble.

The outputs of the basic design phase are similar to that of a feasibility study, except that they are more detailed; schedule and budget are reappraised based on an expanded descrip-tion of the product and of the project. The milestone associated with the completion of this basic design stage is important, because the project can be stopped at that point if the conclusions of the feasibility analyses are not confi rmed. Even if this breakdown into sub-phases slightly differs when transposed into other technical project contexts, for example, automotive industry, defense, or big-science projects, the whole philosophy remains.

Control-oriented modelIn the Project Management Handbook (op. cit.), Morris cites a project life-cycle approach attributed to Kelley (1982) (Figure 1). Kelley considers a project as a servomechanism with two levels of retroactivity: one using and acting on the product, that is, the deliverable of the project, and another level using and acting on the project, that is, the processes of mak-ing it deliverable. This model is interesting because it highlights one of the major duties of a project manager – checking that the product that is being made fulfi lls its specifi cations all along the implementation phase and that the project progresses satisfactorily to get the deliverable on time and on budget.

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EconomicsTechnology

Feasibility Definition Procurement

Product Control

Turnover

Project Control

Execution OperationPlanning

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Figure 1 Control-Orientated Project Life-Cycle Model (Kelley, 1982)


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Quality-oriented modelThe project life-cycle approach shown in Figure 2 cannot be attributed to one author in particular. It is widely used in project management classes, especially in those devoted to the management of IT projects. It can be easily transposed to the fi elds of techni-cal projects. In it, the time runs from left to right – the level of conceptualisation of the project at a given time is featured on an orthogonal axis. At the early stage of the project, this level is high. This is because the purpose of a basic design phase is to specify a set of functions that the fi nal deliverable can satisfy. As the defi nition of the fi nal product progresses, the level of conceptualisation gets lower. The lowest level is reached when parts and pieces are being manufactured or when individual equipment is installed. This level grows when manufactured parts and pieces are assembled to form subassemblies, then assemblies, or when installed equipment is networked. The highest level of conceptualisa-tion is reached again when the project is terminated and the fi nal deliverable is delivered.

Considering the evolution of the quantity of objects handled, this quantity follows an opposite scheme. At the early stage of the project, few functions are suffi cient to describe the fi nal product. With the project implementation progress, these few functions can be transformed in some physical systems and subsystems, which are made of assemblies and subassemblies; the leaves of that hierarchical scheme are fi nally made up of the elementary parts and pieces of the fi nal deliverable. The project assembly breakdown structure allows for reconstruction of the fi nal product for delivery.

According to a broadly known principle of quality management, ‘I say [and write] what I will do, she/he checks what I’ve said [and written], then I do what I’ve said, and I prove I’ve done it.’ The project life-cycle model shown in Figure 2 can be considered as qual-ity-oriented, because it helps to understand the integration of this principle in the project management fi eld. It has been said that the purpose of a basic design phase is to specify and endorse the fi nal deliverable as a set of functions to satisfy; the project manager and his or her team are committed to making a product that fulfi lls these functions. The fi nal accept-ance of the deliverable should be conducted in such a way that the fulfi llment of these functions can be demonstrated without ambiguity. For this to be objectively feasible, a fi nal acceptance procedure should be written in accordance with the statement (the project charter) that the project manager and his or her team are committed. At lower levels, the same principle applies. A system should be commissioned according to the technical

Level of Conceptualisation

High

Time

LowConceptualisation Phase

Materialisation Phase

TurnoverPhase

What Was Specified What is Done

Figure 2 Project Life-Cycle Model Highlighting Project/Product Quality Matters

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T specifi cation that describes it and so on, down to the manufacture, the assembly, and the installation. This system should include procedures describing the basic actions to be han-dled and control reports demonstrating that these procedures have been followed and that performance and quality aims have been reached.

This model is helpful to demonstrate that the documentation associated with a prod-uct/project shall not be issued erratically but shall follow rhythms of issuing to get and use at the right time documents describing the product/project at the right level of conceptualisation.

Risk-oriented modelRisk management is another important issue associated with the project management body of knowledge. The model proposed by Lacoste (1999) (Figure 3) partially deals with this issue. This project life-cycle model is made of two very basic phases. The issues associ-ated with the preproject phase remain the same: on the one hand, the requirements (what one needs) and, on the other hand, the know-how and the capabilities of the organisa-tion (what one can). For instance, a project concept could consist in developing a new product to fi ll up a market niche. The feasibility phase consists in verifying that the mar-keters’ requirements are compatible or consistent with respect to the know-how of the organisation.

Typically, the following studies are to be carried out: a market feasibility study to con-fi rm the opportunity of developing the new product, a technical study to ensure the feasi-bility of the new product with respect to the means and the know-how of the organisation (the new product can be feasible but out of reach for the organisation), a fi nancial study to check if the organisation can fi nancially afford the development to verify that this product does not go against external constraints.

The project phase itself is divided into three subphases: a planning phase (Phase B in Figure 3), during which scenarios are elaborated, followed by an execution phase (Phase C) during which the fi nal deliverable is made, and a closeout phase (Phase D), during which the experience acquired is recorded. This model differs from other project life-cycle pro-posals because a scenario phase is inserted between the feasibility phase – more precisely the decision to go ahead – and the implementation of the project.

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Requirements“What One Needs”

Know-How“What One Can”

Phase D

ProjectPreproject

Go/No-Go Decision

Phase B

Phas

e C

LIM

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FeasibilityPhase A

Execution

Scenarii

Figure 3 A Risk-Orientated Project Life-Cycle Model (Lacoste, 1999)


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This intermediate phase is concerned with three out of the four project risk manage-ment processes (as per the PMBoK ® Guide): the identifi cation of the risks (opportuni-ties or threats) that are likely to affect the project’s execution and the conformance to the specifi cation of the fi nal deliverable, its evaluation, and its mitigation. The main aim of the scenario phase is to plan risk responses. During the execution phase, it is the duty of the project manager to make use of the risk response planning elaborated in the scenario phase to steer the execution of the project within acceptable limits. All along the realisa-tion of this phase, it is also up to the project team to record the uncertain events that occur and the responses implemented to restrain in the case of threats or to enhance their outcomes for opportunities. This important information must feed the know-how reposi-tory of the organisation.

Fractal approach to project life cyclesIn the closing talk of a workshop devoted to project management seen from a sociologist point of view (In French, the neologism ‘projectique’ was created to defi ne this new fi eld of knowledge; neologism could be translated into ‘projectics.’), French academician Joël de Rosnay (1993) scrutinises the evolution of project management from a linear motion – the emergence and development of project planning and scheduling techniques in the ’50s and ’60s – via a reticular countenance, the introduction of the management by projects in organisations in the ’80s and ’70s – to reach a fractal dimension.

A fractal approach to project life cycles (henceforth, fractal life cycle) can explain situa-tions that are diffi cult to model otherwise. Especially those concerned with the overlapping or fuzziness of interfaces between phases, the spreading of responsibilities, and decisions that are made complicated when OBSs deal with the matrix organisation of projects, and, more generally, the uncertainty and imprecision associated with the execution of any project. One of the dualities that distinguishes preproject and project phases can be heard from the mouths of many R&D project managers: ‘In a preproject phase, don’t plan too much if you intend to remain creative. Plan your project correctly if you intend to deliver it in conformance with specifi cation, on time and on budget.’ When looking to an endeavor with this in mind, it seems that some of it goes against universal project manage-ment practices. However, once gazed through a fractal lens, endeavors can be seen as quite homogeneous mixture of creativity and of strictness, all along any project life cycle from an early feasibility stage to the completion of a project.

For some examples, see Figure 4. Even if creative behaviours shall animate feasibility phases, in all the cases the deliverable of these phases are reports. These reports must be written and the actions of writing them are no more than projects. When the analysts in charge of carrying out such phases agreed on content, a more or less formal decision is made to go ahead. The quality of these feasibility analysis reports, including their issuing on time and on budget, depends on the level of elaboration of the plans.

The feasibility of a technical product/project is sometimes appraised with conclusive results made out of tests and measurements using prototypes. In such contexts, proto-types are sub-projects of the feasibility study project. The issuing of a technical speci-fi cation describing a prototype is a sub-sub-project of the prototype subproject and so on. This way of reasoning also is applicable to the writing of technical specifi cations of systems and subsystems, to the performing of calculations or to the drawing of some plant layouts in basic design phase. So is the design and fabrication of a special tooling in a construction phase or the treatment of noncomformities of equipment in a commissioning phase.

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Using such a model, one can note that decisions are spread in all dimensions: hierarchi-cal or temporal. At project level, the go/no-go decisions are made by stakeholders or the future owner of the fi nal deliverable. At subproject level, it is up to the project manager to make decisions. At lower levels, decisions are made by project engineers or work package managers. The activities of a project manager do not only consist of making decisions at the project level, but, in many cases, he or she has a role of stakeholder, expecting that the delivery of a document, an assembly, or whatever he or she is able to request will conform with what he or she asked and delivered on time and on budget. This model also shows that project managers contribute (by their creativity) to processes that are upstream deci-sion points in appraising pre-subproject opportunities.

Down to project management practicesBefore presenting what a project practitioner can gain in being aware of few project life-cycle models, the authors will discuss feelings regarding a common statement that can become a serious pitfall if not appraised carefully. Accurately forecasting the work to be done, the duration, and the resources needed to complete a project is not suffi cient to ensure its performance. It is obvious that this contributes to the success of a project; but it is not enough. Issues such as possible rework, change control, product and project quality, or project risks also shall be taken into account when planning and scheduling the project.

Because project life cycles can be understood as ‘generic macro schedules,’ every sched-ule should be made according to project life cycles and, for technical projects in particular, to the four project life cycles presented earlier. However, commonly implemented plan-ning and scheduling techniques are such – deterministic, nonrecusive (i.e., those that do not allow loops), nondiscursive (i.e., those that do not accept decision points) – that it is diffi cult to make schedules that can be consolidated at the life-style model levels. On the other hand, project life cycles – the ones presented in this paper, but also others – strongly use images as defi nitions. Even if the consolidation is diffi cult to make, the authors believe that having such images in mind when managing a project can contribute to the reality of the world.

The four project life-cycle models presented in this paper enforce four important aspects of the project management process: control, product and project quality, risks, and some-thing the authors have called the fractal aspect of a project process. Before concluding, the

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Preproject (Feasibility) Phase

Go/No-Go Decision Final Deliverables

Time

e.g., Realisation of a Prototypee.g., Fabrication of a Tooling

Project (Execution) Phase

e.g., Writing a Specificatione.g., Writing a Feasibility Document

Figure 4 A Fractal Approach to Project Life Cycles


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authors present some key points a project practitioner can use to take into account these issues when planning and scheduling her or his project.

Rare are the project activity networks that take into account the control issue. A ten-dency in technical project management practices, however, is to multiply reviews, such as preliminary design reviews, critical design reviews, production readiness reviews, progress reviews, closeout reviews. It is obvious that the purpose of these reviews is, through the reviewers’ recommendations, to make decisions. As a consequence of a review, an activ-ity that was supposedly completed may be redone, an additional activity neither planned nor scheduled may be carried out, or simply to go ahead. It is up to the project manag-ers to quantify these possible additional activities and to spread them as contingencies all along the project execution. This life-cycle model also highlights that the risks associated with the product (related to the product defi nition) and those associated with the project (related to the materialisation of the product) shall be handled differently because their consequences concern different phases of the project.

As for state-of-the-art practices, project managers are strongly invited to break down their projects in tree-like structures. One can not that there exists a wide taxonomy of such structures:

● Project/product breakdown structure (PBS) aims to split the fi nal deliverable of the project into systems, then subsystems, assemblies, subassemblies – down to elementary parts;

● Functional breakdown structure (FBS) is similar to the PBS, but it is oriented to the functions the fi nal deliverable should satisfy;

● Assembly breakdown structures (ABSs) aim to detail the sequence of operations to get an object assembled or a plant constructed;

● Organisational breakdown structure (OBS) describes the organisation of the project in terms of responsibility; the OBS is limited to decision-makers while the resource break-down structure (RBS) takes into account all the resources involved in the project;

● Work breakdown structure (WBS) is a structured list of all the work packages and activi-ties that have to be carried out to complete the project;

● Cost/contract breakdown structure (CBS) gives a breakdown of the project from a cost control and/or from a contract monitoring point of view.

The quality-oriented project life-cycle model is useful to the project practitioners because it helps them to understand the links that exist between all these structures and hence, to use the right ones at the right time over the project execution period. During the design and the commissioning phase of the project, that is, at the early and late stages of the project, the FBS is very helpful to identify and list all the design documents (calcula-tion notes, specifi cations, drawings) and the commissioning procedures to issue. The ABSs are mostly used during the materialisation of the project. They are prepared as the design progresses. The WBS and the OBS/RBS, which are the inputs to the schedule, are made and updated according to the PBS, FBS, and ABSs. If all these structures are correctly interlocked, and the quality-oriented project life-cycle model is helpful for that purpose, the quality of the project plans and schedules is increased.

The project risk management is one of the knowledge areas of the PMBoK ® Guide. The risk-oriented project life-cycle model presented is helpful to understand how the six phases of the risk management process are articulated. Phase A (at a macro level) and phase B (at a micro level) aim to prepare scenarii, that is, to identify and quantify risks, develop plans to respond to these risks, and set up limits not to overstep. Phase C then is conducted in

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T such a way that the limits previously defi ned are not exceeded. Last but not least, phase D shows that a continuous feedback mechanism is fundamental to fi ll up the know-how repository of the organisation. The risk-oriented project life-cycle model enforces the fact that planning and scheduling on the one hand and risk estimating and monitoring on the other hand are deeply interlocked all along the project.

This approach seals the breakdown of a project into sub-projects and so on down to ‘elementary projects.’ Then all these projects, whatever their level of complexity, comply with a very simple life-cycle model made of two phases: a preproject (feasibility) Phase and a project (execution) phase separated by a go/no-go decision point.

This fractal view very often is implemented on technical projects, especially on large-scale industrial projects. Practically, a time management system is made of two or more levels. Three levels can be benefi cial for understanding what follows.

The fi rst level of such a planning and scheduling system deals with strategic issues, and the master schedule aims to refl ect the strategy of the project. This schedule is issued prior to the go decision. It covers the long term, that is, the whole duration of the project from the go decision to the closeout. It is the tool the project manager uses to communicate with the external world.

The intermediate level of planning and scheduling deals with tactic issues. For instance, in the case of a large-scale project it is diffi cult for someone to have a precise and detailed view of the installation and commissioning phases when the project is just launched. Hence, this intermediate level is made of several overlapped coordination schedules covering the midterm. The fi rst coordination schedule to be issued covers the design phase of the project. It is followed by a procurement coordination schedule, a construction and installation coordination schedule, and fi nally a commissioning coor-dination schedule. This intermediate level of planning and scheduling is made of work packages that are roughly defi ned at the early stage of the project and which become more precisely detailed as the project progresses. The way the work packages are consoli-dated at the top level is obviously a prerequisite to the issue of the corresponding coordi-nation schedule.

Still within the scheme, the bottom level of planning and scheduling deals with opera-tional issues. Generally, detailed schedules cover short-term periods, from a few weeks to a few months; they are made of the elementary activities. As for work packages, the way elementary activities are consolidated at the corresponding coordination level constitutes a prerequisite to the issue of the detailed schedule. Many project practitioners are familiar with such practices. In some domains, for instance in the offshore oil platform or nuclear waste reprocessing plant construction industries, four or fi ve levels of schedules are com-mon practices.

Real-world schedules, whatever their level, seldom do take ‘preproject activities’ into account, if ever. One can argue that ‘creativity’ is something diffi cult to estimate and, therefore, to schedule. Nevertheless, the time spent in dealing with these preproject activi-ties must be considered in the project overall work load. The consequence is that project work breakdown structure viewed through this fractal lens is much more exhaustive and closer to reality. The project shall benefi t from that.

ConclusionsProjects are characterised by their specifi city: an endeavor that has a start and a fi nish, a precise and unique aim that is carried out by a team set up for the purpose of the project.

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The purpose of a project life cycle is to fi nd something common to all projects among all these differences. Project life-cycle models, whatever they are, are located on a continuum going from the simplest project life cycle, which is made of two very basic phases and applicable to all types of projects, to project schedules that are precise and detailed but only applicable to one specifi c project. Because project life cycles are models, their purpose is to explain the real world in a simpler and understandable way. Because the world of projects does not consist of a very small number of variables, it is diffi cult to imagine – and perhaps impossible to make – a model that could integrate all the variables that make all projects specifi c. In order to understand the projects they are involved in, project managers and team members must share a common view of their projects and especially on the way a project progresses. It is the purpose of project life-cycle models to illustrate simply the ‘progress philosophy’ of the projects to promote a better understanding and a better com-munication within the projects.

ReferencesCleland, D.I. and King, W.R. (eds) (1988), Project Management Handbook (2nd edn).

New York: Van Nostrand Reinhold.Clifton, D.S. and Fyffe, D.E. (1977), Project Feasibility Analysis: A Guide to Profi table New

Ventures. Chichester, United Kingdom: John Wiley.Christofol, H., Aoussat, A. and Duchamp, R. (1993), Construction d’un mode’le frac-

tal du processus de conception de la coloration d’un produit. J.-P. Claveranne, J.-M. Larrasquet, and N. Jayaratna, (eds) Projectique. A la recherche d’un sens perdu. Paris: Economica, pp. 336–345.

de Rosnay, J. (1993), Conference de cloture. J.-P. Claveranne, J.-M. Larrasquet, and N. Jayaratna (eds) Projectique. A al recherche d’un sens perdu. Parris: Economica. pp. 403–407.

Kelley, A.J. (1982), ‘The New Project Environment’. New Dimensions of Project Management. Lexington, MA: Lexington Books.

Kerzner, H. (1994), Project Management: A Systems Approach to Planning, Scheduling and Controlling (5th edn). New York: Van Norstrand Reinhold.

Lacoste, G. (1999), Risques et analyse des risques (Cours de DEA Syste’mes Industriels).Toulouse, France: Ecoles Doctorales Syste’mes, ENSIGC.

Meredithy, J. and Mantel, S. (1995), Project Management, a Managerial Approach (3rd edn). Chichester, UK: John Wiley.

Morris, P.W.G. (1988), ‘Managing Project Interfaces: Key Points for Project Success’. In D. Cleland, and W. King, (eds), Project Management Handbook (2nd edn). New York: Van Nostrand Reinhold, pp. 16–55.

PMI Standards Committee (1996), A Guide to the Project Management Body of Knowledge.Upper Darby, PA: Project Management Institute.

The skills of project managementThe scenario below analyses the importance of project leadership skills and of project team management. The case discusses the transformation of Boeing, as led by the new chief executive, Philip Condit. The article specifi cally highlights the importance of interdisci-plinary teamwork and the need for a more fl exible approach to project management, all of this being achieved by strong, charismatic leadership.

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● the importance of teamwork;● the importance of strong leadership and the need for effective interpersonal skills.

Destroying the old hierarchiesSeth Lubove, Forbes, June 1996. Reprinted by permission of Forbes Magazine 2002 Forbes IncAt a recent charity event, Boeing Co’s new chief executive offi cer, Philip Condit, donned a cowboy hat and belted out a rendition of the country and western classic ‘Could I Have This Dance?’ A karaoke machine provided the accompaniment.

No one could imagine Condit’s predecessor, Frank Shrontz, 64, a lawyer by training and a former Pentagon deputy, singing in the shower, much less in front of strangers. The change in personalities at the top of the world’s largest aircraft manufacturer is rich in symbolism.

The seventh man to run Boeing since its founding by timberman William Boeing in 1916, fi fty-four-year-old Condit is a Boeing lifer who faces the tough task of redefi ning Boeing’s often confrontational relationship with its 108 000-employee workforce, tightly unionised by the militant International Association of Machinists and Aerospace Workers. Nobody states the problem better than Ronald Woodard, the blunt-spoken president of Boeing’s Commercial Airplane Group: ‘We have to understand that we are a manufac-turing enterprise. We aren’t an engineering, technology-development enterprise.’ There’s a world of meaning in that seemingly bland statement.

Booming on the surface, Boeing is in fact a company in transition. Much as they are technological marvels, today’s passenger jets are basically commodities to Boeing’s custom-ers, the world’s airlines. Their job is to move people and goods from point A to point B at minimum cost consistent with safety. Boeing makes great airplanes, but so do Airbus and McDonnell Douglas. Who gets the sale depends to a large degree on price, terms and availability.

That’s what Boeing’s Woodard means when he talks about making people understand that Boeing is a manufacturing company, not a high-technology company.

Boeing jets represented two-thirds of the dollar value of all commercial airplanes ordered in 1995. Boeing’s defence division, already the prime contractor on NASA’s space station, is competing on the Joint Strike Fighter jet project, a potential $160 billion contract. Wall Street expects per share earnings to rise by 20 per cent this year (before charges in 1995) to $2.75 on sales of $22 billion. The Street expects earnings to go on rising through the decade.

But that will happen in what is now a commodity business only if Boeing can do what companies like General Electric do so successfully: take costs out of the product and con-tinue to take out.

Condit made his mark when he oversaw development of Boeing’s latest generation air-plane, the 777, known internally as the ‘triple seven’. Smaller than Boeing’s humpback 747, the 777 is more distinctive for what you don’t see than for its profi le. It’s a pilot-friendly and airline-friendly product. For the fi rst time, the pilot’s commands to the rud-der and fl aps are communicated electronically, rather than by cables and levers. Airlines can internally reconfi gure such areas as galleys and lavatories within as few as seventy-two hours, compared with two to three weeks on older aircraft. No marketing detail was too small; even the toilet seats gently sink on to the toilet bowls, instead of loudly smacking. First put into service by United Airlines last June, the 777 is Boeing’s fi rst plane designed entirely on computers.

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But for Boeing, Condit’s biggest change was in the organisation of the program. Adopting the theme of ‘Working Together’, Condit broke down the old-fashioned proce-dural walls within the company. In the past, design engineers worked independently of the production and operations people who actually built the plane. Here it is, the designers would say; now go build it.

Condit instead organised hundreds of integrated ‘design-build’ teams, composed of members of all these groups. Each consults the other, so that the production teams aren’t stuck with overly costly, hard-to-build design specifi cations, for example. This sort of reform, common now in manufacturing, came late to Boeing. ‘None of us is as smart as all of us,’ Condit says, explaining his new integrated design strategy. He wants to reorganise the whole company along these lines. Explains Ron Woodard: We’re trying to destroy all the old functional hierarchies.’

This is where the job gets tough. Any signifi cant changes involving the workforce still have to get past the Machinists’ Local, Boeing’s largest union, with about 33 000 mem-bers. (Boeing’s engineers are represented by another, less combative union, the Seattle Professional Engineering Employees Association.)

Say what you may about the shrinking clout of private-sector unions in this country, the fact is that the Machinists can still bring Boeing to its knees, as they proved during last fall’s sixty-nine-day strike. ‘The thing that’s different is ten years ago we could have had a strike and delivered airplanes late to customers, and they didn’t care,’ says Woodard. But today, a strike means lost sales.

Frank Shrontz hammered at reducing cycle times and cutting costs, to the point when Boeing now delivers an airplane within ten months of the order, compared with eight-een months previously. He pushed toward greater standardisation of parts and shrank the workforce from 161,700 in 1990 to 108,000.

But Condit knows that making further gains in reducing costs and improving delivery time depends on making improvement in that amorphous area known as human relations. In naming Condit as his successor, Shrontz cited Condit’s interpersonal skills – not necessar-ily his engineering abilities – as the characteristic he considered most important for the next leader of the company. ‘We can make pronouncements up here all day long,’ says Shrontz, sitting in his orderly offi ce overlooking historic Boeing Field. ‘Phil is motivational. We need to motivate people to understand the importance of the change and to help make it happen.’

Unlike Shrontz, who was rarely seen on the shop fl oor, Condit frequently pops into plants unannounced, usually tie-less and dressed casually. Recently, he walked unescorted on to a 777 undergoing fi nal assembly in Boeing’s Everett, Washington, plant and asked the supervisor to leave the plane so the workers could speak without feeling intimidated.

During the strike last fall, when most Boeing executives kept a low profi le, Condit walked over to a group of picketers outside his Seattle offi ce and chatted amiably about the proposed contract for forty minutes. He even signed striking union member Tony Russell’s picket sign. Addressing the message to Russell’s wife, another Boeing employee, Condit wrote: ‘We all need to work together’.

Back at work now, Russell, a tool builder, is already seeing some differences in his job. Under the old, military style of management, if Russell detected something wrong in his engineering plans, he’d have to go through his supervisor and the problem would move through the chain of command until it eventually reached the engineer.

Now Russell speaks with the engineer directly. When he was building the scaffolding for the 777 line, for instance, Russell noticed that the metal deck he received was bigger than the deck on the blueprints. Russell called the engineer and quickly fi xed the problem.

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T Multiply this sort of shortcut throughout a company as large as Boeing and you can see how much expensive time was wasted before. You can see, too, why it used to take the company eighteen months to deliver a product as complex as a giant jet.

When Phil Condit chats up workers on the factory fl oor, he’s not just going through a public relations exercise. He is obviously sincere when he talks about making the work-ers partners rather than just a factor of production. Traditionally, when Boeing needed additional hands, it would run a classifi ed ad in the newspaper for, say, qualifi ed assembly mechanics. It would get maybe 2500 applicants and hire perhaps 1500, just so many bod-ies in the machine.

In keeping with the new attitude, Boeing is putting more time and effort into the hir-ing process. In April, announcing that it would hire 8200 new hands, Boeing also said it would put applicants through extensive aptitude tests.

A cynic might say that Boeing wants to weed out potential malcontents, but that misses the point: Boeing is also recognising that an effi cient workforce is one that genuinely believes in what it is doing and gets along well as a team. Thus such questions as: How does a worker respond in a confrontation with a supervisor? None of this is new in manu-facturing circles (Forbes, 9 Oct 1995), but it’s a big change for Boeing.

Selection of supervisors and managers, too, will change. Rather than promoting a per-son who is good at, say, riveting, and making him a supervisor of rivets, the company will look for managers who can motivate, rather than intimidate, the workforce.

To underscore the emphasis on communications, at least symbolically, Boeing now sends annual reports to all its employees, not just shareholders. The company also put 75,000 employees through a program that discussed the realities of a tough market. The message: We no longer have it made just because we’re Boeing; the customers tell us our planes cost too much and take too long to deliver.

‘It has been a cultural change, a fundamental change in the way we think, act and do,’ says C. Gerald King, president of Boeing’s Defence and Space Group.

The machinists’ union is responding – cautiously. It says it is willing to relax job specifi -cations to allow cross-training of workers. But William Johnson, president of the local that represents the Boeing workers, is hard-nosed about subcontracting, or what the union calls ‘off-loading’ work, now done in-house. Boeing makes 52 per cent of its planes’ parts in-house and wants to shrink down to 48 per cent. Management thinks it can save an estimated $600 million annually by such outsourcing. More important: outsourcing is a way to win favour from foreign airlines by agreeing to let factories on their home turf do some of the work.

In settling the latest strike, union and management compromised on outsourcing. Boeing agreed to give the union warning on any major subcontracting deals and to retain surplus workers for other jobs in the company. ‘In the old days we would have fi red them,’ says Larry McKean, senior vice-president of human resources.

But what is perhaps the biggest current irritant in management/labour relations at Boeing remains the constant pressure on the workforce to meet constantly shrinking deliv-ery schedules. Front-line managers – and the workers below them – are evaluated on how fast they can get the planes out the door. If the work falls behind, the team must go on overtime. ‘They’re trying to get into cross-training, but we don’t really have time,’ says a frantic Robert Boudreau, a lead mechanic on the 777 wing line, as he motions to a sched-ule that indicates his team is days behind on its work.

Many workers are cynical about the new togetherness the company tries to foster – ‘buzzers’ is their slang for the buzzword phrases like ‘total quality management’ and ‘world-class competitiveness’.

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Daniel Mahoney, general counsel of the engineers union, sums up the dilemma neatly: ‘You just can’t have peer democracy in the workplace. We have these extraordinary leaders in management who are willing to treat the rank and fi le with great respect and listen to their ideas. But at the same time they have a responsibility to get the best product out on time.’

But Mahoney doesn’t deny that Phil Condit is doing his best to reconcile those seem-ingly irreconcilable objectives. Condit plans incentive pay and rewards for achieving indi-vidual performance goals. To make this point, he banishes Boeing’s model airplanes to a display case outside of his offi ce and in their place displays his mother’s black-and-white photos of children from around the world. He says he wants his employees to think, ‘Gosh, the company is really interested in my welfare’. And there can be no doubt: Condit really means it.

He rightly says that many new ideas are just old ideas the people forgot. Visit the restored converted barn where William Boeing fi rst began building planes, he says. Designers were on the top fl oor; production was downstairs. If production people had a problem with a blueprint, they just walked upstairs for an answer. Can Boeing get back to that as an employer of over 100,000 people spread over 76 million square feet of factory fl oor? No, but Condit is determined to show that at the new Boeing, while aircraft are now a commodity, people no longer are.

Discussion points1. The article states that the previous CEO Frank Shrontz considered interpersonal skills

to be one of the most important characteristics of his successor. Discuss some of the key management skills needed to run a project or enterprise, as shown in the article.

2. The biggest change made by Condit on the 777 project was the organisational design. ‘Working Together’ challenged all previous ways of operating and brought together the design and production areas of Boeing. This structure was supported by teams. Does this management approach resemble the work organisation used in project management?

Outline solutions1. The key management skills required for the effective management of projects will be

discussed in the light of the case study.● Leading. Philip Condit demonstrated his leading from the front when overseeing

the development of the ‘triple seven’, the Boeing 777, by breaking down the proce-dural walls within the company under the slogan ‘Working Together’. He did this by organising hundreds of integrated design-build teams, which removed the barriers between the design and production units. His predecessor had driven down the costs in the organisation, so Condit had to focus on people. He was an excellent motiva-tor as he adopted a policy of being viewed as facilitating the project. So he was seen popping up at the plants unannounced, dressed in a way that did not set him apart from the workforce. He asked supervisors to leave so that he could hear the ‘real story’ from the fi nal assembly workers. He saw workers genuinely as partners in the project. He altered selection processes so that he got promotees or new entrants with commitment and with the right interpersonal skills. He had an impact on the culture of the organisation by setting an example of inclusivity and concern for the teams on the project to his other managers. This concern he translated into better pay and conditions, that is, putting his money where his mouth was.

● Communicating. Condit communicated his vision for cooperative working on the project in a variety of ways. By talking directly to the workforce, he demonstrated

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T his concern for the successful outcome of the 777 project. He turned up and did not appear as a ‘suit’, that is, alienating the people he wanted to talk to by appearing as a remote fi gure from Head Offi ce. His non-verbal communication (the way he dressed) reinforced his aim of collaborative working. He added to this impression by his karaoke activities at a charity event. He effectively listened to what he was told, even to the extent of discussing a disputed contract face to face with striking pickets. He signed a picket sign with the words ‘We all need to work together’, again com-municating his desire for the common goals of the project. He gave out a consist-ent message of collaborative work. His removal of the model planes at Head Offi ce replaced by pictures of the world’s children, again sent out a message that conformed to the idea that people mattered. Annual reports were sent out to all employees and 75,000 employees were put on a training programme so that they could grasp the market problems that Boeing was (and is) affected by. They were seeing in their daily lives that changes were being made, though the reality was that the planes had to be smarter. The concessions on outsourcing showed that there was a determination to listen to what the company was being told and they would act on it.

● Negotiating. In the fi nal analysis, Boeing is in business. There was the acceptance by the counsel to the union that Boeing had to get the best product out on time, and if it did not produce planes to customers’ delivery requirements and at reasonable cost, no amount of people management would keep people at work. The negotiations over outsourcing revealed that though this was seen as an effective way of reducing costs ($600 m was quoted in this article), Boeing compromised about it. It would give the recognised union warning about any large outsourcing deal but would re-deploy any surplus workers. In the past, it would have sacked them.

There were attempts to increase the fl exibility of the workforce by cross-training but there was a need for time to do it effectively. It was not available. The union was cautiously starting to relax job specifi cations to allow this process to happen. The time pressure of reducing schedules was constant and an important perform-ance indicator was the speed of delivery. Teams had to work overtime to make up the time. This was an issue to be negotiated in the future. Employee relations were not always excellent, as seen in the number of strikes there were. Strikes meant lost sales and Boeing had to change its people management to deal with issues such as lack of respect and the treatment of the workers as a commodity. Condit led the way on this, as may be seen in the changes to recruitment and reward policies.

● Delegation. Delegation may be defi ned as the handing over of authority for a piece of a boss’s work to a subordinate, while retaining responsibility for it. In the article there are examples of delegation and of non-delegation.

Condit did not delegate the face-to-face communication with employees because he clearly felt that he had to lead from the front on people issues. He had to set his own managers the example. However, he would have delegated the everyday activi-ties of management because of the size of the organisation.

An example of delegation was seen in the way Tony Russell, a tool-builder, could talk directly to the designers when there was a problem with his engineering plans. This empowerment from his supervisor meant that problems, such as the sizing of the metal deck, could be sorted out very quickly.

A reinforcement of the delegation of responsibility could be seen in the new criteria for hiring new staff and for promotion. Technical expertise was no longer suffi cient

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in itself: the interpersonal skills and commitment had to be consonant with the new culture of empowerment.

● Change management. Condit found himself in a situation where much change had been imposed on the organisation by his predecessor, Frank Schrontz. This had been based on radical cost-cutting by standardising parts, reducing delivery times and reducing staff from 161,700 in 1990 to 108,000 in 1996. Condit could not stop the process of change, as customers felt that the planes were still too costly and took too long to be delivered.

His way of change management was to educate the workforce in the realities of the market, and by giving them annual reports so that they could see the fi gures for themselves. He involved the workforce by communicating with them directly and by effectively listening. He discussed the situation with them in detail (the discussion about the new contract with the strikers, for example). He changed the organisa-tion of work to facilitate the faster delivery of the planes because problems would be solved on the design-operational interface faster: they were on the same side with the same goals. Boeing negotiated the new deal on outsourcing with the retention of the surplus workers. It facilitated cross-training, though the time constraints had themselves proved a constraint. The new reward and incentives package was being negotiated to support the acceptance of greater responsibility and tighter delivery schedules.

The old methods of change management under the military style of manage-ment would have included coercion (there are no jobs in this section, you’re sacked) or manipulation (if you do what we ask, you’ll be rewarded: if you don’t, you’ll be sacked).

Note that the desired information that the Examiner wants from you, the student, is expressed by reference to the evidence in the article or case study.

2. Teams are a critical feature of projects which help organisations achieve future objec-tives and ensure the future life of the business. The process of dealing with and man-aging organisational change will require input from diverse areas such as design, marketing, production, fi nance and sales to get a holistic view of the organisational objectives. Without this, organisations may make incorrect decisions about itself and its projects.

Using the Boeing example, in the early stages of the organisation, there was great synergy between the designers and production staff because of attitude and close prox-imity. If Boeing could not get back to that ideal as a large organisation, it managed the empowerment of staff so that they saw themselves as teams with goal congruence. The proselytisation of this team spirit by Condit under the slogan ‘Working Together’ emphasised the need to focus on the super ordinate objective: To deliver fast to cus-tomer requirement. The creation of the design-build teams set up synergies that helped save time and money. This was supported by empowerment of individuals within teams such as when Tony Russell visited the designer about his metal deck which was bigger than that on this blueprints. The problem was fi xed between them. There were no arti-fi cial barriers to the solution of the problem because they both had the same objectives: swift delivery of the best product. This approach would save time and thus money, ena-bling Boeing’s attractiveness to its customers.


Revision Questions


Question 1The board of the ZM company are discussing a report that they commissioned concerning the company’s computer systems. In the report, the IT director notes that many computer systems are old and need signifi cant upgrading to enable ZM to maintain any competitive advantage for its products. However, there are insuffi cient resources in-house either to pro-pose new systems or to perform any upgrade.

RequirementBriefl y explain the phases of the project life cycle showing, where possible, how each phase relates to the ZM company. (10 marks)

Question 2H Company designs and manufactures sports equipment and is currently positioned as the market leader in the industry. However, whilst operating in a growth market, there are new competitors entering the market with innovative new product offerings. The Marketing Director is aware that to retain market leader position, the company must improve its practices involved with new product development (NPD), and the time taken to get from the product idea to launch needs to be much quicker.

The company has a functional structure with the Marketing Director heading up the marketing function, the R&D Director heading up the function responsible for research and product development; in addition, there are separate functions for Production, Human Resources, Finance, Sales and IT.

The Marketing Director feels that the functional structure is impeding the NPD pro-cess. Having recently read an article on organising for NPD, he is proposing that the best way to manage the process would be through introducing a matrix structure and the use of cross functional teams. However, at a recent meeting of the functional heads, the Research and Development Director said that, in his experience, the potential diffi culties in using a matrix structure offset the benefi ts.

RequirementDescribe the advantages and disadvantages of H Company using a matrix structure in project management work for NPD. (10 marks)

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Question 3RequirementThe project manager does not and cannot complete a project on his or her own. It requires effective teamwork and team motivation. Explain what the project manager can do to help foster a motivated project team environment. (10 marks)

Question 4RequirementExplain the role of the project manager in respect of the:

● people;● process; and● product involved in a project. (10 marks)


Question 5IntroductionFive fi rms from four countries are playing major roles in a large project devoted to the development and implementation of an extensive communications network. Figure 4.5 shows the fi rms, together with the roles they play in the project and their countries of origin.

The clientThe client, Comnet, is one of the major telecommunication providers in Germany. It has recently gone through a process of reorganisation (1996) and has since been investigating the potential of a new telecommunications network. Christian Rueber, head of telecoms development, spent last year leading a team of engineers, programmers and software ana-lysts from Comnet in selecting a contractor who would supply the telecoms network. After several months of tendering from numerous suppliers, Comnet selected a UK company called Dantec to service the project. (The selection was based on numerous fi nancial selec-tion techniques and cost-benefi t analysis.) The fi nal contract was signed between the two parties in October 1997.

The prime contractorDantec is a telecommunications development and installation company based in the north of England. It has several years of experience in installing small-to medium-scale telecom-munications networks throughout Europe, and has worked with Comnet previously on a successful small-scale network installation. Richard Norton, the project manager, has been in charge of the project throughout the tendering process, although this is his fi rst role in charge of a full network installation. Richard’s background is as a telecoms engineer, and he has only very recently moved into a managerial role. Many of the project team at Dantec consider Richard to be lacking in managerial experience to handle such a large project. However, the management team at Dantec are more than happy with his progress –after all, he successfully won the contract!



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Having signed the contract, Richard gets together his project team for the fi rst project coordination meeting, where they begin to draw up a schedule of events and key milestone activities. Each member of the team is made aware of their individual team’s responsibili-ties in the overall project. One of the key aspects of the project is the need for Dantec to subcontract some of the major hardware and software supply to another company. By the end of October, after several further planning meetings, the fi nal master project plan is complete, including the delivery dates for the subcontracted work.

Dantec entered into a contract with Solar, a computer manufacturer in the United States, for the required computer hardware as well as the operating systems needed to implement and control the network. Dantec have many years’ experience of working with Solar on several previous successful projects. Phil Rogers, the general manager of net-works coordination division, is placed in charge of the Comnet project requirements. In November, Phil Rogers agrees the dates and targets set for Solar, proposed in the master plan drawn up by Dantec the previous month.

Solar’s roleSolar, with the approval of Comnet, entered into negotiations with Yotamo and Exactest. Yotamo was given the responsibility for the development of major elements of the soft-ware that could meet the functional requirements of the overall communications system. Exactest was obligated for additional ancillary software for some specifi c components of the overall system as well as for the development and implementation of a testing strategy for all functional software developed under contracts with Solar, irrespective of which fi rm wrote the software.

Responsibility for integrating the hardware and software components developed by Solar, Yotamo and Exactest also rested with Exactest, well renowned for its high-level skills in integration. Dantec, as prime contractor, was responsible for integrating all project deliverables to the fi nal client in Germany.

COMNETThe client(Germany)

DANTECThe prime contractor

(UK)

YOTAMOMajor software supplier

Japan

SOLARMajor hardware supplier

USA

EXAC TESTSoftware testing and integration

USA

Figure 4.5 Project roles and country of origin

RequirementsCritically assess the role of Richard Norton of Dantec in the overall telecommunications project. Your answer should include:

(a) an assessment of his main tasks internally as the project manager at Dantec; (8 marks) (b) an assessment of main responsibilities in relation to both the main client Comnet, and

the major supplier Solar. (5 marks) (c) an assessment of the potential managerial problems likely to be encountered by

Richard Norton as a result of his particular background and previous experience.(12 marks)


Question 6GPConnect (GPC) is the name given to a project being undertaken by the Southern Regional Health Authority (SRHA) to connect all medical centres and hospitals within the region to a national information network, called the ‘Healthweb’.

You are a senior management accountant working for one of the southern region hospi-tals, and, as part of the project team, it is your responsibility to communicate with all SRHA medical centres and hospitals on the progress of the project, as of today, 23 May 2002.

The SRHA is one of four regional government-controlled authorities, responsible to the central government Department of Health. Each regional health authority manages and controls the provision of medical care to the public within its local area. The SRHA is responsible for fi fty medical centres and ten hospitals within the region, all of which are publicly funded (i.e., the SRHA is not responsible for private medical centres and hospitals).

The SRHA has been set a target by the central government to have 80 per cent of all medical centers and 90 per cent of all hospitals within the region connected to the Healthweb by July 2003. Prior to the project commencement, most information within the hospitals and medical centres was kept by a manual, paper-based system, and all data exchange was done by means of telephone or by post. The senior management team of the SRHA set up a project board in January 2002 to oversee the progress of the project and to specify the project objectives.

RequirementsYou have been asked by the executives of your own hospital to prepare a memorandum to the other senior managers in the hospital which should discuss the relationship of the project manager to:

(a) the project sponsor (i.e., the central government); (b) the project board; (c) the medical and administrative users (in medical centres and hospitals).

Include in your answer a discussion of the potential confl icting project objectives of the above stakeholders. (25 marks)


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Solution 1Project planning. The initial phase of any project involves the identifi cation of a need or a problem that needs to be resolved. In this situation, the board of ZM have recognised that a new computer system is required. However, the lack of in-house resources means that the organisation must either hire new staff or outsource some or all of the systems devel-opment work. Given the lack of in-house expertise, the latter option appears to be more favourable.

If the ZM company decides to use external contractors, then proposals will be required to address the needs within ZM and propose solutions to those needs. An Invitation to Tender (ITT) will be issued to obtain quotes for this work.

Responses to the ITT will include details of the work to be done, along with time and cost summaries for that work. On receipt of this information, the board of ZM will have a greater understanding of amendments required to the company’s systems, as well as ideas concerning the costs and benefi ts of those changes.

Development of a proposed solution. These proposals can now be reviewed and the pos-sible solutions discussed. It is likely that the solutions will be analysed by a small working group with the responsibility of suggesting one solution to the board.

When a choice of solution has been made, a contract will be drawn up between ZM and the contractor containing details of the proposed work, timescale and cost to be incurred. The stage is completed when the contract is signed.

Implementation. In this situation, the contractor will fi rst liaise with staff at ZM to produce a detailed plan for the new system and then implement that plan to achieve the system objectives. There is a lot of detailed work involved in this stage. The stage is com-plete when the board of ZM is satisfi ed that the new system has been implemented, on an appropriate timescale and to the expected level of quality.

Completion. The last stage of the project life cycle is completion of the project. There are various activities that must be carried out before a project can be termed ‘complete’. These activities include:

● confi rmation that all deliverables have been provided;● checking that all payments have been made;● ensuring that performance has been evaluated and is satisfactory; and● checking that a list of learning points has been made for reference for future projects.

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T The length of project life cycles will vary from project to project. However, in the case of ZM, the life cycle is unlikely to be less than 6 months. Given the signifi cance of the sys-tems changes, individual projects may last well in excess of 1 year.

Solution 2As the Marketing Director in H Company has noted, the ability to develop new products and get them to market quickly requires the cooperation of a range of individuals from various functions. H could fundamentally reorganise to form a matrix structure. This type of structure is based on a dual chain of command and is often used as a structure in project management. In the case of H Company it would involve establishing a cross functional team to design and develop new sports equipment products. Each individual would have a dual role in terms of their functional responsibility as well as membership of a project team. For instance, an individual could belong both to the marketing function and to the NPD project. Employees would report both to a functional manager and a project manager.

As the Marketing Director suggests, this structure does bring a number of benefi ts to NPD project work. The matrix structure is particularly suited to a rapidly changing envi-ronment, such as that facing H Company, creating fl exibility across the project, with the aim of speedy implementation It can improve the decision-making process by bringing together a wide range of expertise to the new product development process, cutting across boundaries which can be stifl ed by normal hierarchical structures. Lateral communication and cooperation should be improved. From an employee’s perspective it can facilitate the development of new skills and adaptation to unexpected problems, broadening a special-ist’s outlook.

Whilst there are benefi ts, the Research and Development Director is also correct in his view that there are downsides to the matrix structure. One of the main problems is associ-ated with the lack of clear responsibilities and potential clashes and tensions between the different priorities of the project tasks and the specialist function. Employees may end up being confused by having to report to two bosses and deciding whose work should take precedence. There is also the question of who should do the appraisal of their performance?

The complexity of the matrix structure can often make it diffi cult to implement. Inevitably, confl icts will arise due to the differences in the backgrounds and interests of staff from different functional areas.

Solution 3Guidance and common problemsThis question again provides you with an opportunity to demonstrate your basic project management knowledge. A straightforward question such as this could appear in this examination, but again, you must be prepared to apply this knowledge to a scenario.

The project manager needs to understand his or her team members fi rst in order to understand what motivates them. The project manager should attempt to create a project environment that is supportive and where team members feel enthusiastic and want to work towards the overall project goal.

How does the project manager create such an environment?By encouraging participation in project decision-making and by delegating decisions to

the team members, thus encouraging involvement and ownership. Project management



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techniques for motivation may include regular project meetings whereby team members can participate and air their views and put forward their experience. Also, the project man-ager should have regular contact individually with team members, encouraging them to put forward their own ideas and suggestions for project improvement. The project man-ager needs to demonstrate that he/she values the contribution made by team members and that their contribution is important to the overall project.

Solution 4Guidance and common problemsThe question provides a useful guide for remembering some of the key roles of the project manager. It is therefore a useful memory jogger, just in case an examination question is not so helpful!

The overall role of the project manager is to ensure the success of the project. This objective implies that the manager will have signifi cant project management skills and be able to manage the three ‘Ps’ outlined below.

People. The manager needs to manage the people involved with the project. ‘People’ in this sense means not only the project team, but also the client staff who will be work-ing with the project team. The manager will therefore need to delegate and monitor the work of the more junior members of the team, and also provide strategic progress reports for the decision-makers at the client’s. This split of jobs is likely to be quite diffi cult and time-consuming.

Process. The project process itself will have to be managed. The project manager must therefore be involved with setting the objectives for the project and then have systems in place to monitor the progress of the project. The use of Gantt charts or network diagrams will help in this respect.

Product. The outcome from the project will (hopefully) be the completed installation of a new or revised system. Part of the ongoing monitoring of the project is therefore directed at ensuring the project does provide the fi nished project.

The manager will therefore be involved in checking that the specifi cation has been met, and appropriate sign-offs and review meetings are held to confi rm project completion.

Section B solutions

Solution 5Role of Richard NortonAs the main contractor, Dantec has the major responsibility for coordination of all parties involved in the project, that is Richard Norton is the link point to all parties, both internal and external. He should be the focus of the negotiation process, setting time scales and milestones (and ensuring that all parties agree and achieve these project targets).

(a) Internally, the responsibilities of Richard Norton are as follows:● coordinate complex internal team, including: technicians, programmers, installation,

network experts, marketing, fi nance, and so on;● project planning and scheduling;

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T● control of coordinating internal deadlines;● preparation of the project master plan;● the formulation of internal resource needs: people, materials, fi nance, time;● control of the fi nancial budget;● internal negotiator and arbitrator;● team motivation.

(b) Responsibilities to Comnet and Solar. Externally, Richard Norton also has a number of key roles.● The primary communication link between the complex supply chain within this

project and the fi nal customer.● The coordination of internal and external activities and milestones, to ensure agree-

ment and consensus.● Ensuring that technical negotiations take place between the various contracted par-

ties and that, again, agreement on technical issues is reached.● Contractual negotiations for all parties.

(c) It is apparent that Richard Norton is likely to face problems as a result of his lack of managerial experience in a complex project. His technical skills are strong as a result of his previous background. This will be of importance when in negotiations and discus-sions regarding technical issues. However, good project managers must be able to bal-ance this technical ability with a strong managerial ability.

There are potential team leadership problems as a result of his inexperience in a senior management position. Key skills required in project management include both leadership and inspiration, which may be diffi cult to foster when the project manager has little prior experience at this level.

Communication with some team members may be diffi cult, particularly those with experience who may resent a project manager with less experience than themselves. This could lead to lack of motivation, particularly in a multi-disciplined team (in fact, the team is already slightly dubious about the choice of project manager).

He may also have a lack of contractual negotiation experience, particularly in such a large and complex project as this. It will be important for Richard Norton to foster and build on management support as early as possible in the project’s life.

Technical knowledge will obviously be important in this type of project, therefore Richard Norton could build support by proving his technical ability; this should help to gain team confi dence (but may be insuffi cient to build the confi dence of non-technical members).

It is also likely that Richard Norton will face challenges in the fi nancial control and budget-ing of the project if he has no experience of this particular aspect of project management. This is likely to be important in such a large project with high fi nancial resource requirement.

Solution 6Project management relationships and confl icts (a) Project manager and project sponsor

T, as the company responsible for carrying out the GPC project, is contracted directly by the central government (the project sponsor). Therefore, the project manager will need to work through the project sponsor for any contractual dealings with T.

The project sponsor is usually the party responsible for payment of projects, but in this case the amount of funding from the central government is not clear, neither



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in the initial funding nor the on-going running costs. Therefore, the project manager will need to work with the sponsor to resolve potential confl ict over project costs. The role of the central government in this project as a fund provider may cause confl ict between central government and the SRHA.

The project manager has little direct reporting/communication with the central government, as responsibility for the project progress is mainly to the project board.

However, the ultimate achievement of long-term project objectives is to the central government, who, as the project sponsor, will be evaluating strategic level objectives and who will be concerned with ensuring that the whole project is not seen to waste public resources.

(b) Project manager and the project boardThe project manager is responsible for achieving the objectives set by the project board. The project board is responsible for the overall running of the project, and their objectives are to delegate the achievement of the sponsors’ targets without disrupting the achievement of their own business objectives.

Direct communication between the project manager and the project board is neces-sary, with on-going regular reporting of project milestone review meetings.

The project board will be concerned with the achievement of management/busi-ness level objectives, in particular that the project improves business effi ciency and effectiveness.

(c) Project manager to medical and administrative usersThe project manager is responsible for the overall delivery of the fi nal working system to the end users. The objectives of the users are to care for their patients, while mini-mising their workload. The fi rst role of the project manager is to ‘sell’ the benefi ts of the new system to the users, as without their backing the project is unlikely to suc-ceed. Good communication between the project manager and the end users is essential to the implementation of a successful project. The project manager is responsible for reviewing the needs of each group of users to ensure that systems design meets the needs of the users as far as possible within the project constraints, and ensuring that training is effective. In addition, the project manager will need to manage both medi-cal and administrative staff expectations of the system as the project progresses.

The administrative and medical staff will be evaluating the operational day-to-day objectives of the project.

Possibility of confl icting objectivesThe sponsor’s objectives are the achievement of improved service to patients. This may confl ict with the objectives of the staff, who will seek to minimise their workload while providing good care for their patients. Staff are likely to have concerns about the imple-mentation workload, the on-going costs and workloads and the patient record security.

There is also likely to be confl ict between the sponsor and the project board over fund-ing. Although a technology fund has been set up by the central government, it is evi-dent that this funding has not been easy to obtain, causing a fi nancial burden upon the SRHA and the individual hospitals and medical centres. A number of doctors have already expressed concern over resources being spent on the new system rather than on direct patient care, but the central government has made it quite clear that this project is not discretionary. However, the central government are sending out rather mixed signals by allowing individual hospitals and medical centres to decide upon their individual method of operation.

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T In addition, the central government and project board may be concerned with funding and cost minimisation, whereas the end users may see this as cost-cutting, thus reducing the value of the end product.

As a public sector project, fi nancial objectives should not be primary ones. Quality and customer perspective should be of more importance to all of the stakeholders. However, public funds must not be seen to be wasted.


5

The Process of Project Management


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5LEARNING OUTCOMES


� produce a strategy for a project;

� identify the characteristics of each phase in the project process;

� produce a basic project plan, incorporating strategies for dealing with uncertainty, in the context of a simple project;

� apply key tools and techniques, including the evaluation of proposals;

� identify methodologies and systems used by professional project managers;

� compare and contrast project control systems;

� discuss the value of post completion audit;

� apply a process of continuous improvement to projects.

5.1 IntroductionThis chapter develops on some of the themes introduced in the previous chapter by work-ing through the different stages involved in the project life cycle. It will start by exploring the project initiation stage, setting of project objectives, developing project proposals and the role of feasibility studies. Risk is a feature of virtually all projects, therefore the dif-ferent ways of minimising and managing project risk will be discussed. Project planning is crucial to the effective management of any projects. The different aspects involved in project planning will be examined, including some of the tools and techniques that can help the process of project management.

To ensure that the outcomes of a project are delivered, controls need to be in place throughout the life of a project. Different aspects of project control will be explored and the project methodologies that can be used (such as PRINCE2). The fi nal stage of the project life cycle involves project closure. The different activities at this stage will be dis-cussed, along with consideration of how learning from projects can facilitate continuous improvement.

The Process of Project Management


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The project management process follows the stages of the project life-cycle. According to the Project Management Institute this can be represented by a fi ve-step process. The stages are:

1. Initiation. This phase sets out the development of a vision for a project and the estab-lishment of goals and objectives. At this stage, the key individuals will be brought together to form the project team. The scope, objectives and customer expectations of the project will need to be determined.

2. Planning. This involves defi ning the resources required to complete the project, devis-ing a schedule, developing a budget and planning how the project team will achieve the constraints of time, budget, performance specifi cations and resources.

3. Executing. This is sometimes referred to as project implementation and performance and involves putting the plan into action, providing leadership and coordination to project team members and others (e.g. subcontractors or consultants) that will result in achieving project objectives. This stage stresses the need to keep resources and team members focused upon the project tasks.

4. Controlling. This stage is concerned with measuring the project’s progress and assessing whether it differs from the plan. If it differs, corrective action needs to be taken; this may lead to re-planning, which may in turn lead to a goal change. At this stage, the project manager must decide among alternatives for solving problems.

5. Closing. This phase is about ensuring that the project is fi nally completed and conforms to the latest defi nition of what was to be achieved.

5.3 Project initiation5.3.1 Setting project objectivesProjects are initiated when a need or an objective is identifi ed. Objectives are those things that the organisation wants to achieve. Typically, top-level objectives are profi t-oriented, or in non-profi t-making organisations objectives will be to improve the standard of liv-ing or education, and so on of members. It is usually a function of the board of directors to determine the high-level organisational objectives. These objectives are then converted from ‘whats’ into ‘hows’ by undertaking projects.

5.3.2 Identifying project proposalsTurning objectives into realisable projects can be diffi cult for organisations for a number of reasons:

● Prioritising objectives is not always straightforward, as different members of the organi-sation will have different priorities.

● There is likely to be more than one way to achieve any objective.● Not all objectives can be attained within the same time frame because of limited resources.

At a strategic level, a project manager may have very little or no input at all in the proc-ess of identifying projects. However, as the key organisational strategies are identifi ed and increasingly defi ned by discussions, brainstorming, and negotiation, strategies will become programmes of change. A project becomes a strategy to achieve an objective. For example,


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if a corporate objective for a pharmaceutical company is to expand its Asian markets, a research project into an endemic disease might achieve this. This process of identifying objectives, refi ning and classifying them, rating them according to need and organisational importance, and fi nally establishing the links between objectives and strategies, leads to the fi nal formulation of a project.

5.3.3 Formation of project proposalsAs the organisation determines its objectives and the strategies to achieve these objectives, gradually a set of priorities will emerge, that is those strategies that are considered the most effective to realise objectives. It is likely at this point that the organisation will have a number of strategic options. As yet, no attempt will have been made to determine the ben-efi ts of achieving a particular objective, nor determine whether it is feasible. This will be considered later in this chapter.

Obviously, this must be done before a project can be carried out, that is a project cannot exist without an objective to achieve. As organisations are unlikely to have the resources to carry out all strategies, it is important to identify those strategies that provide the most benefi t and achieve the organisation’s most important objectives. Also, as the organisation identifi es its key objectives more clearly, the proposals for action become more detailed and more accurate judgement can be made on costs and benefi ts.

Checklist for project proposal selectionPrioritising potential projects

1. List potential projects. 2. Determine the need or opportunity for each project. 3. Establish rough delivery dates. 4. Establish preliminary costings and budget schedule. 5. Establish the overall feasibility of each project. 6. Establish the risk associated with each project. 7. Review project list, objectives, feasibilities and risks with project team and senior

management. 8. Eliminate unfeasible or inappropriate projects (based on issues such as cost, lack of

technology, skill, confl ict with long-term organisational objectives, confl ict with other projects).

9. Prioritise the rest.10. Select the most important project.

5.3.4 Setting project requirementsA requirement is a statement of what is expected of a project or product; it must be clearly defi ned and appropriate to meet the organisation’s objectives. If a project requirement is set out clearly from the outset, the project has a greater chance of success, and less chance of escalation of costs due to rework, continual changes and customer dissatisfaction.

A requirement is different from a specifi cation, in that the requirement is the statement of the reason for what is being done or developed, whereas a specifi cation is the statement of the detailed characteristics of the project or product such as size or performance criteria. It is important that the customer and project team agree that the requirement is appropriate and meets the organisational needs and objectives (Field and Keller, 1998).


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Once objectives and strategies have been identifi ed and ranked, and requirements and specifi cations have been identifi ed, the next stage is to identify those strategies that should be investigated, in order to examine their feasibility (i.e. how achievable they are). Feasibility studies may be carried out on a number of potential strategies and the aim of the study is to decide on which proposal to choose.

Sometimes the potential project manager is involved in the feasibility study stage, but not always. However, it is important for project managers to understand the process of feasibility assessment. Feasibility studies compare the ‘no change’ option of achieving objectives, with two or three alternative proposals for change. Criteria used are technical capability, fi t with business goals, fi nancial benefi t, social impact and risk sensitivities.

Technical feasibilityThere are a number of key aspects regarding technology. The technical features of a strat-egy that need to be considered are as follows:

● Development, that is will it require further testing prior to usage or are we confi dent that the material, technology and processes have been thoroughly tested and are readily usable and available?

● Applicability, that is, is the technology suitable to satisfy the objective and the project effectively?

It is also important to assess a variety of technical aspects of the proposals. These are likely to vary greatly and may require numerous experts to evaluate them. For example, when building the London Eye, a number of technical, engineering, environmental and safety issues needed to be evaluated by a number of experts. (The delay in opening was caused by safety concerns which was not good for the image of the project, however good the concept and design. These were resolved.) A software developer will need advice from hardware manufacturers before developing programs for a particular computer system con-fi guration. Marketing campaigns must take account of specifi c market, customer and eco-nomic conditions.

Other technical considerations could include the following:

● The ease of use of the technology.● The degree of disruption during the construction and installation phase.

Features analysis is a further method used to gather information regarding different products in order to aid comparison and evaluation. Features are those elements of the project that are considered to be important or necessary requirements, focusing attention on the features of any requirements that are going to be important in the achievement of satisfying a need. Features analysis identifi es those features in the requirements likely to be vital to the fi nal outcome of the proposal. When important features have been identifi ed, they can be assigned a weightage indicating the relative importance of one feature to all others.

Social and ecological feasibilityIt is becoming increasingly necessary to assess social factors affecting feasibility. These may include awareness of the social issues within a group or offi ce (e.g. introducing a


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computerised system), or larger social awareness regarding the effect of projects or products on workers or employment. Relevant considerations might include questions such as: Will the introduction of computerised systems lead to redundancy? How will the general public be affected or what position would people take about a project such as constructing a new road or nuclear power plant on a community?

Ecological considerations may be driven by the understanding that customers would prefer to purchase alternative products or services as they are more ecologi-cally sound and less harmful to the environment. Environmental considerations may be stimulated primarily by health and safety legislation. It is important for organisa-tions to consider the raw material input, the production processes and the disposal of the product at the end of its life.

Fit with business goalsSome great project proposals, with high potential fi nancial gain, may divert the company from its primary goals.

ExerciseMake a brief list of technical, ecological and social questions you would need to ask to assess a proposal to collect and recycle household waste (such as bottles, cans, newspapers, etc.) within a local town by building a recycling plant.

SolutionTechnological factors

Does the technology exist to carry out the recycling?How developed is the recycling process?

Ecological factorsHow much energy is consumed in the processing?Is the process clean or dirty?What waste products are produced, and how can they be utilised or disposed of?Is the location of the site likely to affect the local environment?Does the local road network have the ability to support the new site?

Social factorsAre local people interested in recycling?Are there available locations to place recycle points, or should collections be made from

homes?Will it affect local employment?How much disruption would there be in building a recycling plant in the town?Will the local community object to the plant?

You have probably thought of many more questions to consider.

Financial feasibilityA technique often used in a feasibility study is the cost-benefi t analysis. Cost-benefi t analysis helps to identify and evaluate the costs of the proposal over its anticipated life


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ENT (such as purchase, building, maintenance, repair, etc.). The other side to cost-benefi t is

the identifi cation and evaluation of the benefi ts of the project over its life.The types of costs and benefi ts involved in a project will depend upon the precise nature

and scope of that project and can vary greatly.For every item of the project proposal, it is necessary to identify:

● its value (in monetary terms or in terms of benefi ts);● whether it is capital or revenue;● when it occurs;● whether it is a one-off cost or recurring.

The different costs can be considered in terms of:

Revenue costs

Any cost incurred by the project other than for the purchase of assets are reve-nue costs. These costs are those incurred on a regular basis and include not

only repair and running costs of the assets but also the general overheads not neces-sarily directly incurred by the project. Examples are costs such as rent and rates, gen-eral management salaries and depreciation. The project itself will also incur direct revenue costs such as materials and the salaries and wages of the direct workers.

Finance costs

Finance for projects is required to pay for the original assets and may also be required to cover the recurring running expenses of the project. Financing

costs are usually incurred as interest charges that have to be paid on the balance of funds outstanding. Therefore, if a project proposal requires funding, it is important to know exactly how much it requires, when payments would be due and how much interest would be paid.

These are incurred in the acquisition of assets. Capital costs will include the purchase price of an asset (e.g. land and building, equipment, plant) plus any

additional costs of installation and maintenance. Capital expenditure usually occurs at the beginning of the project.

Capital costs

Sources of fi nance include the following:

● fi nance borrowed from a lending institution (bank)● capital invested by shareholders


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● retained profi t from the business● grants or subsidies from government (for specifi ed projects only)

ExerciseList the types of capital, revenue and fi nance costs associated with building a factory.

SolutionCapital costs

Land purchaseBuilding costsEquipment purchase.

Revenue costsRent and ratesStaff costsUtility expenses.

FinanceBank loans for land, buildings, equipment.

The assumptions upon which the fi nancial feasibility is made need to be made clear. Also, any political sensitivities need to be identifi ed, since these are the most common rea-sons for project failure.

Financial evaluation techniquesA detailed analysis of fi nancial evaluation techniques is beyond the scope of this syllabus, but here is a brief reminder of the main fi nancial appraisal techniques using defi nitions from CIMA’s Offi cial Terminology (2005 edition):

● The payback method. The time required for the cash infl ows from a capital investment project to equal the cash outfl ows.

● Discounted cash fl ow. The discounting of the projected net cash fl ows of a capital project to ascertain its present value.

● Accounting rate of return. Based on profi ts not cash fl ows, this is a form of return on capital employed.

● Return on investment. A form of return on capital employed comparing income with operational assets used to generate that income.

Although it is unlikely that you will be asked to carry out detailed calculations of the above fi nancial techniques, you may be required to discuss their relevance to a project decision. Remember, you would not rely on a single measure to determine the fi nancial feasibility of a project.


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Identifying different types of project risk will allow us to plan to reduce them or avoid them. The following sections provide an overview of risk terminology and the various approaches to its management.

Risk can be defi ned as the probability of an undesirable event. Risk identifi cation means recognising that a hazard exists and trying to defi ne its characteristics.

Risks can be classifi ed under three headings.

Quantitative riskThis is a risk that can be expressed as a fi nancial amount. Estimation of risk is usually based on the probability of the event occurring, multiplied by the fi nancial or non- fi nancial consequence of the event. It can be considered to be the product of three values:

1. the likelihood of an event occurring – p(E);2. the likelihood that the event will lead to a loss – p(L);3. the monetary cost of the worst possible potential loss associated with that accident – M.

The value of the quantitative risk is therefore p(E) � p(L) � M.

Socially constructed riskPeople often believe some things to be risks, even when statistics indicate they are not (and vice versa). We are all ‘risk illiterate’, in that we do not think logically about risk. Socially constructed risk may well exceed quantitative risk, so when seeking to put people’s minds at rest, quantitative risk assessment may not be enough. We must also manage people’s perceptions of risk. An example of this can be seen on commercial airlines. Most evidence suggests that, in the event of a serious accident, wearing a ‘lap strap’ beat belt on a plane does nothing to reduce the risk of injury. It does, however, make people feel a lot more secure, so it reduces the socially constructed risk.

Qualitative riskSince risks cannot always be quantifi ed accurately, but some way of categorising risks is useful, we need a pragmatic solution. If we look at a subjective assessment of the scale and likelihood of risk, we can generate a table such as the following:

Potential scale orsignificance of loss

High C AB

Medium BCD

Low CDE

Low MediumLikelihood

High


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Having done this, in our risk management programme we should address the category A risks fi rst, then the Bs and so on. Do not worry too much about the Es.

Managing riskRisk management (RM) comprises risk assessment (identifying and analysing risk) and risk control (taking steps to reduce risk, provide contingency and monitor improvements). Risk management can be seen as a series of steps:

● Risk identifi cation – producing lists of risk items;● Risk analysis – assessing the loss probability and magnitude for each item;● Risk prioritisation – producing a ranked ordering of risk items;● Risk management – deciding how to address each risk item, perhaps by avoiding,

transferring or reducing the risk;● Risk resolution – producing a situation in which risk items are avoided or reduced;● Risk monitoring – tracking progress toward resolving risk items and taking corrective action.

Examples of risk management approaches would include the following:

Avoidance● Abort the plan.● Escape the specifi c clause in the contract.● Leave the risk with the customer or supplier.

Transference● Subcontract the risk to those more able to handle it, such as a specialist supplier or insurer.

Reduction● Take an alternative course of action with a lower risk exposure.● Invest in additional capital equipment or security devices to reduce the risk or limit its

consequences.

5.3.7 UncertaintyUnlike risk, uncertainty is impossible to evaluate because it is impossible to assign a prob-ability to an uncertain event. If the event is uncertain, we cannot put in place manage-ment controls to reduce the probability of its occurrence, simply because we do not know that probability. Instead, we must use contingency planning to construct a series of action plans, each to be implemented if an uncertain event occurs. An example of a contingency plan is given after the following SWOT analysis.

5.3.8 SWOT analysis

SWOT is an analytical tool that can be used in two ways:

1. applied to a whole company, it can be used to identify strategies needed by the business (this use of SWOT was discussed in Chapter 1);

2. applied to a specifi c project, it can be used to assist in project selection.


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and weaknesses normally result from the organisation or project’s internal factors, and the opportunities and threats relate to the external environment.

The four categories of SWOT can be explained in more detail as follows:

1. Strengths. These are the things that are going well (or work well) in the organisation or project, such as its competitive advantage or the skills and competencies and morale of the individuals within it, and major successes.

2. Weaknesses. These are the things that are going badly (or work badly) in the organisa-tion or project. They include skills that are lacking within the organisation as a whole or the project team.

3. Opportunities. These relate to events or changes outside the organisation or project, for example in its external business environment. The events or changes can be exploited to the advantage of the organisation and will therefore provide some strategic focus to the decision-making of the managers within the organisation.

4. Threats. Threats relate to events or changes outside the organisation or project (in its business environment) that must be defended against. The company will need to pro-vide some strategies to overcome these threats in some way or it may start to lose mar-ket share to its competitors.

When evaluating a project proposal, it is important to establish whether the proposal helps to achieve the organisation’s objectives. SWOT can establish whether a particular project proposal has suffi cient strengths that are compatible with the achievement of the organisa-tion’s objectives, or provides the organisation with suffi cient opportunities to do so in the future. It will also highlight the threats and weaknesses of particular proposals.

An example of a SWOT analysis in the context of project managementLet’s assume that we are part way through a project to renovate a house. The project’s SWOT analysis might look as follows:

Strengths:

● relationships with key sub-contractors are good;● the project is on schedule, and the current forecast is for completion on time.

Weaknesses:

● the project is over budget in the areas of plumbing, construction of the fi replace and re-wiring the lounge.

Opportunities:

● the local furniture store is having a sale;● a decorator has been identifi ed, as a result of recommendation by a satisfi ed customer.

Threats:

● the builder is concerned that the cost and time estimates for the bathroom may be too low. He says he won’t know for sure until he is part way through the work;

● the supplier says that the paint we have ordered is not in stock with the supplier – it may take 6 weeks to arrive.


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Contingency planningThe SWOT analysis for our project (see above) has identifi ed two threats. These are uncer-tainties, rather than risks, as we are unable to assign probabilities to them. What we have to do is to plan for action to be taken if these threats materialise.

Actions to be planned in case the bathroom estimate is too low would include; contact-ing lenders to discuss possible additional fi nance, re-planning the remaining project with a longer duration for the bathroom works to see what the effect would be.

The contingency plan for paint supply might include; identifying other possible paint suppliers, investigating other manufacturers’ product ranges to see if a close alternative can be identifi ed, discussing an alternative design to allow the use of a paint that is easier to obtain.

You will note that the purpose of contingency planning is to speed up the planning process in the event that the uncertain event occurs. The contingency plans may never be used, but we can do our contingency planning when it suits us. If we wait for the uncer-tain event before doing any planning, this may further delay the project.

ExerciseWhat aspects of project management are likely to involve some degree of uncertainty?

SolutionMost aspects of project management are open to some degree of uncertainty! For example, the schedule and costs are open to uncertainty owing to unforeseen events, such as adverse weather conditions, a shortage of resources or increase in costs of raw materials.

5.3.9 The project Initiation DocumentAt the beginning of a project, a Project Initiation Document (PID) should be produced – this is sometimes referred to as the ‘project charter’. The purpose of the document is to defi ne the overall mission, scope and deliverables required, and the roles and responsibili-ties, in order to provide the overriding terms of reference for the life of the project. There are two primary reasons for having a PID:

1. for authorisation by the project steering committee or project board;2. to act as a base document against which progress and changes can be assessed.

A typical PID will contain the following:

● the background to the project, explaining its purpose and why the project is necessary;● the project scope (i.e. the range of tasks included in it);● the project objectives;● the approach to be taken to the project, for example whether it is primarily to be carried

out in-house, or by suppliers;● the project key deliverables and desired outcomes;● any areas excluded from the project;● any constraints, such as budget or available resources;


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● any interfaces between this project and others, or with other organisations or parts of the organisation;

● any assumptions on which the PID is based;● the project organisation structure;● the project manager and team – roles and responsibilities and signatory powers;● the communication plan (reports, meetings, etc.);● the controls in place in the project (i.e. any mechanisms to ensure that the project

objectives are achieved, such as a steering committee, reports, meetings, etc.).

The PID can be used to ensure that the project team and project shareholders are in general agreement about the nature and parameters of the project.

5.4 Project planningA major responsibility for the project manager is the planning of the project. The early stages of the project must be spent carefully establishing a baseline plan that provides a clear defi nition of how the project scope will be accomplished on time, to budget, and using available resources.

In the planning stage, a number of separate detailed plans will be drawn up. For exam-ple, separate plans for:

● time● cost● quality● resources● contingency● communication.

The content of each of these plans is as follows:

● The time plan lists all the activities, who will do what and how long each is planned to take. This includes the milestone fi nish dates of each stage of the project life cycle, and the estimated completion date of the whole project.

● The cost plan uses a rate per hour for each activity in the time plan, plus cost of pur-chases from the resource plan, plus contingency costs to create a budget for the project. This will be time phased to provide a cash fl ow forecast.

● The quality plan includes identifi cation of the customers, the key outcomes each expects, acceptance criteria that has been agreed with them, a test plan for how each outcome will be tested, and responsibility for each test. This may include safety and security planning. It will also include an audit plan for the project management process.

● The resource plan checks peaks and troughs of workload to ensure the plan is feasible and lists purchases to be bought.

● Contingency planning includes assessment of risk and decides what additional activities and buffer of cost and time need to be added to the plan to ensure a reliable budget and completion date. A risk register will identify contingency plans for each of the key risks and allocates responsibility for monitoring each.

● The communication plan identifi es the key people in the project, their likely concerns, message needed, planned method of communication and who will be responsible.


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5.4.1 Detailed project planningDetailed planning involves the following steps:

Dividing the project into work packagesBreaking the project into work packages requires the identifi cation of individuals respon-sible for elements of work. A work breakdown structure (WBS) must be created, this is a hierarchical tree of the work elements that need to be accomplished by the project team during the project. The work breakdown structure clearly identifi es the person or people responsible for each activity or work package. This then involves dividing a project into work packages with defi ned deliverables and responsibilities for each package and allows the project manager to delegate. Work packages can be further divided by defi ning the tasks and activities that comprise them, but only where this is essential to allow delegation and control, otherwise motivation and creativity is reduced and monitoring becomes costly.

Estimation of resources and costsUsing rates per hour and cost of purchased resources needed, the WBS can be used to cal-culate a total of how much the project will cost. Those responsible for each work package are asked to estimate the time and resources needed for their work package and the tasks and activities that comprise it. Evidence from past similar projects is used wherever possi-ble to improve the accuracy of time estimates.

It is necessary to plan how long it will take to complete each activity, and how much of each resource each activity will require to complete the activity on time. It is also necessary to provide a cost estimate based on the type of resources required and the quantities antici-pated for each activity.

Risk analysis is also done to estimate what additional contingency allowance is needed for time and cost. Also, the time and cost are built into the plan for communications.

Define the activities graphicallyBecause some work packages occur in parallel, you cannot add together all the times of the WBS to estimate how long the project will take. Therefore, to calculate total time, a network diagram (also referred to as critical path analysis) is created showing the required sequence and interdependencies of work packages to achieve the project objectives in a more ‘user-friendly’ format (see later in this chapter).

Determine the project schedule and budgetA baseline budget needs to be produced that presents a realistic assessment of the time and funding required, and the available resources to complete the project objective. This forms the baseline plan for the whole project – a complete guide for accomplishing the project scope on time and within cost.

The baseline planThis should include a number of details:

● the start and end date of the whole project;● the start and end date of each activity;● the resources needed for each activity (this may be shown as resources needed per activ-

ity per month);● the cost estimate (budget) for each period;● the fi nal cost estimate for the project.


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The plan below would be issued to stakeholders such as corporate management, the contracting company, customers and the project team. There may be ‘commercial-in- confi dence’ elements in it that would only be shown to the senior management. There are no set layouts or contents of management plans. Some illustrative examples have been used.

Section title Contents

Overview or summary

Overview of the plan: project objectives; organisation of the project team; schedule of work; especially the milestones; resources required including the budget and an assessment of signifi cant risks.

Project name For example, project for the upgrade of a computer system for the Exam Company.Project players and responsibility

The project authorisation document will identify roles and responsibilities such as the project board, the project manager, and the project team.

For example: Henry Smith, Project Manager.Responsible for: initiating the project; selecting the project team; preparing and

implementing plans; managing the successful delivery of the project to time, cost and quality applications.

Project objectives For example, to design and implement an upgraded examination system for the Exam Company, the customer, maintaining pre-existent standards but catering for an increase in candidate applications.

Project scope and contract

This is identifi ed in the project authorisation document. Reasons for undertaking this project, what is to be achieved in terms of the deliverables (e.g. the completion of the contract with all user training by 30 September 2003 at a cost of £x), the WBS (higher levels) time and cost limits, assumptions made when drawing up the plan and any items that will not be included for clarity’s sake. From previous experience, the customer may have insisted on using particular equipment, say blue-chip hardware such as Compaq, with Oracle software.

Methodology The project team will use project management techniques consistent with accepted UK standards. Henry Smith is an experienced and methodical project manager.

Assumptions These may refer to site access, costs of supplies, the cost of borrowing money, infl ation, the availability of particular staff and so on. A major assumption for the Exam Company project is that the system is accessible in the quiet period between major application periods or examination dates.

Technical plan The technical features of the project are identifi ed. They will include requirements, specifi cations, system-diagrams, site plans, tools, techniques, support functions, standards and any relevant document relating to the provision of the new exam administration system. In-house or subcontracted provision of modules will be specifi ed.

Quality and management

The quality plan identifi es our customer, the Exam Company, the key outcomes it expects, acceptance criteria agreed, a test plan of how each outcome is to be tested, and responsibility for each test. Safety and security planning will be essential, as this system must be 100 per cent secure. An audit plan will be included.

Communication plan

This will identify the key personnel in the project (or stakeholders), what their interest in the project is and their concerns that will need to be addressed consistently, what communication is planned and the responsible person. In our project, Henry Smith will be responsible for communicating with Jane Elliott, the Exam Company’s IT manager on a weekly basis to update her on the progress and to tackle any concerns she has. Monthly status projects, monthly resource reports (fi nancial – critical to this project – and human resource reports) will be issued and any milestones will be reported on in writing. Should any critical status reports be needed, they will be made outside the weekly meeting.


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Section title Contents

Organisation and personnel

The organisation plan describes the structure of the project team and each person’s responsibilities. Included will be any sub-contract staff and staff from the Exam Company with any input to the project. Organisation charts will be drafted by position if staff need to b recruited. If so, recruitment methods, sources and training required will be identifi ed with start times. In our project, we need to recruit one extra software engineer to bespoke the application.

Project schedule This will describe the main phases of the project and highlight all key milestones. It is usually illustrated by a Gantt chart with a network diagram. As Jane Elliott is familiar with computer-based projects, an activity on node format will be used.

Resources and facilities including budget breakdown

This includes checks on peaks and troughs of workload to ensure the plan is feasible and to ensure procurement is achieved by the provision of lists.

The cost plan will give a rate per hour for all work and the costs of purchases.Contingency costs are included to give the project budget.Time phasing will give a cash fl ow forecast.The Exam Company has made it clear that no extra project money will be

available, so Henry Smith must ensure as much as possible that his costings and time/resources management are accurately assessed. The contracting company will be bearing the risk of over-run and any other contingencies.

Risk assessment and risk management

The risks are identifi ed and contingency plans made, including extra activities and cost and time buffers to be added to ensure reliable budget and completion date. The risk register identifi es each contingency plan for each key risk and allocates responsibility for monitoring. In the Exam Company project, unauthorised access to candidate details or results is the greatest outcome risk. Security must be 100 per cent. This may mean that the best encryption software will be needed for online applications. There will be cost implications which Henry Smith has taken account of. He must also make contingency costing in line with his contingency plans.

Acceptance The project manager will submit the fi nal system for acceptance to the customer, in our example the Exam Company. It may sign off the project or return it with a specifi c statement of requirements that will make it acceptable.Acceptance will be in writing. The managing director of Exam Company will sign off the project with Jane Elliott.

Change management Requests for change may be initiated by Henry Smith or the Exam Company represented by Jane Elliott. These will be reviewed and approved by the project board with decisions in writing.

Post-implementation audit

After the project, when all change requests have been reviewed to ensure completion, input should be sought from the project team, any subcontractors, suppliers and the customer. It will include a summary of performance reviewing all aspects of the project, including the way it was managed, the tools used, the time it took, the delivery of quality as required, the costs incurred against estimates, the performance of the team and its relationship with all other project members. The lessons learned to prevent recurrence of any problems should be identifi ed. An action plan with recommendations for prevention should be drawn up. All documentation should be reviewed after fi ling.

Think about a project you have worked on or are currently involved in. List the plan-ning activities you carried out before starting the project.


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The successful accomplishment of the project objective is usually constrained by four factors: scope/functionality, schedule/time, cost and customer satisfaction/

quality. While each of these is described in detail below, it is worth thinking about the confl icting nature of these various constraints.

Time and cost tend to be positively correlated in projects (i.e. when time increases, so does cost), as taking longer to complete a project generally means that human resources are needed for longer. However, this is not always the case. If there is a degree of urgency in a project, it may be possible to reduce the timescale to completion by allocating addi-tional resources, or by scheduling expensive overtime working. Both of these situations will increase cost while reducing time.

Project scope tends to be positively correlated with both cost and time, in that increasing the number of tasks to be performed within the project will normally lead to an increase in both the cost of the project and its overall duration. Managing variations to scope is one of the most complex aspects of project management. The manager must ensure that every time the customer asks for a change or addition to the scope of the project, the customer is informed of (and ‘signs off ’) the cost and time consequences of that change. Such changes should also be fully recorded and documented to avoid arguments about what changes were required and authorised.

Similarly, customer satisfaction also tends to be positively correlated with both time and cost, though there will be diminishing returns in terms of satisfaction from increases in time and cost spent.

Project scope/functionalityThe scope of the project is all of the work that must be carried out to satisfy the project’s objective. The customer will expect the work to be carried out to completion and that there is nothing expected which is missing. For example, when building a house the project scope will include clearing the land, building the house and landscaping, all within the agreed quality standards expected by the customer. Leaving windows or walls unfi nished, a hole in the roof, or a garden full of rubble, will be unlikely to satisfy the customer! In computer systems, the scope is often defi ned by all the functions that the system is expected to fulfi l.

Project schedule/timeThe schedule is the timetable for activities involved in achieving the project objective. The project will have a fi nite date for completion, either set by the customer or negotiated and agreed upon with the customer. For example, planning a wedding will require organisation of all activities to occur at a specifi c time and on a specifi c wedding date.

Project costThe cost is the amount the customer agrees to pay for the fi nal project or product. The project cost is based on the budget, which includes a cost estimate of the resources that will be used in the project. This will include salaries of the people working on the project, project materi-als, equipment purchase or hire, subcontractors’ or consultants’ costs and facilities costs.


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Customer satisfaction/qualityThe objective of any project is to complete the scope within the budget and by the agreed date to the customers’ satisfaction and quality requirements. It is important to ensure that prior to the project planning the project team has a clear understanding of the customer specifi cations and requirements, that the customer is kept informed of project progress throughout the project life, and that the plan includes progressive testing to ensure that quality requirements are fully met. Quality in computer systems can be measured in the number and type of errors (‘bugs’) it still contains, response times, fi tness for purpose (i.e. matches the business process it is intended to support) and so on.

Take a few moments to think about a project that you have been involved in. Consider the constraints involved in the project and how you carried out the planning process to achieve the fi nal objective of the project.

5.5 Tools and techniques to aid project planningBecause of the complexity of tasks involved in many projects, communication of responsi-bility for those tasks is often facilitated by means of graphical planning techniques. By con-verting complex projects and their constituent tasks into a graphical and therefore more understandable picture, the project manager can more easily communicate the project activities to the project team and the project sponsors. The following sections will intro-duce a number of these planning techniques used by project managers.

5.5.1 Work breakdown structureAs already discussed, one of the most important stages of project management is the defi nition of the project objective and the breakdown of work into a comprehensive list of activities. The WBS provides a systematic approach for breaking projects into manageable units in order to ensure that all of the activities required to complete the project are included and carried out.

● Breaks complex tasks into manageable pieces.● Sets out the logical sequence of project events.● Provides a logical framework for making decisions.● Provides an input into subsequent project processes, such as estimating time and resources.● Provides a framework for continuous assessment of the project progression.● Provides a communication tool.

5.5.2 Gantt chartsGantt charts are a simple representation of a project from the view of the time taken for each activity and the resources required for each activity at any point in time. They are often used to monitor actual progress against plan on a week-by-week or possibly day-by-day basis.

An example of the use of Gantt charts can be seen in question 7 at the end of this chap-ter. Gantt charts can be produced separately for each person to show their total workload. Arrows can be added to show the interrelationship between different activities, and slack time shown on each activity, as discussed below.

However, the main advantage of Gantt charts is that they are a useful communication tool, being easy to understand and providing a compact overview of responsibilities and progress on the project.


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technique known as network analysis (or critical path analysis, CPA) must be used.

5.5.3 Network analysisThe main aim of network analysis (critical path analysis) is to analyse activities that occur in parallel, in order to identify start and fi nish times for each activity, and the project as a whole. One of the key features of critical path analysis is the identifi cation of activities that are critical, that is activities where any delay will lead to a delay in the project over-all. Critical path analysis can also be used as an aid to allocating resources by identifying those activities that are critical and therefore require additional resources to ensure they are completed on time.

We shall now consider the main elements of constructing a critical path analysis, begin-ning with some defi nitions. Each activity in the network is designated by a symbol of the following type:

● Earliest event time (EET). This is the earliest time at which any subsequent activity can start; this will be determined by the time taken by preceding activities.

● Latest event time (LET). This occurs at the same time or later than the EET. It is the lat-est time at which all previous activities must have been completed to prevent the whole project form being delayed.

We illustrate these defi nitions by looking now at a simple example. Consider a project comprising eight activities, labelled A, B, …, H. Some activities are dependent on others; for example, the table below indicates that Activity B cannot begin until Activity A is com-plete, and similarly Activity H cannot begin until Activities E, F and G are all complete.

Activity Preceding activity Expected time taken

A – 5B A 4C A 5D A 3E B 5F C 6G D 7H E, F, G 7

The fi rst event is assumed to start at time 0 (i.e. the start of Activity A). The network is then constructed by building the activities from left to right, making sure that activi-ties follow only after any preceding activities have been completed. First, the EET is calculated.

Earliest event time(EET)

Latest event time(LET)

Event label


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Calculation of the EET

The EET for Event 3 (i.e. the completion of Activity B) is:

� (EET at Event 2, i.e. the completion of Activity A) � (Duration of Activity B)

� 5 � 4

� 9

The EETs for the completion of Activities C and D are calculated in exactly the same way.

The fi rst complication occurs at Event 6, that is the start of Activity H, which cannot begin until E, F and G are completed. In this case, there are three possible EETs:

EET at Event 3 � Activity E � 9 � 5 � 14

EET at Event 4 � Activity F � 10 � 6 � 16

EET at Event 5 � Activity G � 8 � 7 � 15

In this instance, the earliest time that all preceding activities will have been completed is 16 days (i.e. H cannot start until all of E, F and G are fully complete). Therefore, Event 6, the start of Activity H, has an EET of 16.

The EET for the last event (i.e. the completion of Activity H) is the earliest time that the project can be completed, given the duration of the preceding events. The earliest time that this project can be completed is 16 days � 7 days for Activity H � 23 days.

Calculation of the LETThe calculation of the LET begins at the right-hand side of the network diagram. The LET of the fi nal event is always the same as the EET (assuming that the project is to be completed in the shortest possible time). For the worked example above, this would be 23 days, as indicated on the network diagram.

Moving from right to left, the next event is number 6 (the start of Activity H), and the LET is calculated as follows:

LET at 6 � (LET at Event 7) � (Activity H duration)

� 23 � 7

� 16

5

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A

5

52

C

6

104

F

3

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85 G

4

B

59

3E

7

166

23

237

H


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ENT The same calculations can be carried out for Events 3, 4 and 5:

LET at Event 3 � 16 � 5 � 11

LET at Event 4 � 16 � 6 � 10

LET at Event 5 � 16 � 7 � 9

Note that for Events 3 and 5 the EET and LET are different. This will be explained later.

A complication arises when trying to establish the LET for Event 2 as there are three possible LETs:

LET at Event 3 � Activity B duration � 11 � 4 � 7

LET at Event 4 � Activity C duration � 10 � 5 � 5

LET at Event 5 � Activity D duration � 9 � 3 � 6

In this case, the LET will be 5; if it occurs later than this the whole network will be delayed. This can be input into the network diagram at Event 2.

Above is the completed network diagram, and at this point it is now possible to identify the critical path. This is the sequence of activities that begin and end in events where the EET � LET.

In this case, the critical path is Activity A � C � F � H � 23 days. This is shown on the diagram by the bold lines.

5

0

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A

5

52

C

6

10

104

F

3

D7

8

95 G

4

B

59

113

E

7

16

166

23

237

H

5

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A

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5

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C

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10

104

F

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4

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5.5.4 Slack or floatThis can be calculated by taking the difference between LET and EET. Obviously, the critical path has no slack (because activities on the critical path, by defi nition, have EET � LET), but if activities do not occur on the critical path, slack may occur. For example, Activity E has an earliest start date of day 9, but it could in fact start on day 11 (or start on day 9 and take 2 days longer) and the project would still be completed on time, that is there are 2 days of slack.

5.5.5 An alternative method for constructing network diagrams: activity on node

This method is based on project software such as Microsoft Project.Each activity is shown in a rectangular box or node. Activity fl ows from left to right as

for the activity on arrow diagrams you have previously studied.Each node is subdivided in the following way:

Task/Activity, e.g. A, B, C, etc.

Identity number of the activity Duration of the activityEarliest start time Latest start time

To calculate the earliest start time (EST): look at the box for the preceding activity and add the bottom left fi gure to the top right fi gure. Proceed through the whole diagram from left to right, completing all the EST boxes. Should there be two preceding activities, take the higher fi gure.

To calculate the latest start time (LST): this is worked out right to left. Start with the fi nal duration fi gure and subtract the next duration fi gure from it, working backwards throughout the diagram until all boxes are completed. Should there be two previous activi-ties (working backwards remember), take the lower fi gure.

ExerciseWorked Example

Activity ID number* Preceding activity Duration in weeks

A 1,037 – 5B 1,038 – 4C 1,039 A 2D 1,040 B 1E 1,041 B 5F 1,042 E 5G 1,043 C, D 4H 1,044 F 3

* The ID number would come from the computerised listing of activities.


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duration of the various paths:

ACG � 5 � 2 � 4 � 11 weeks

BDG � 4 � 1 � 4 � 9 weeks

BEFH � 4 � 5 � 5 � 3 � 17 weeks

These durations will be the starting points for working out your backwards pass to cal-culate your latest start times.

So, fi nal duration 17 weeks – 4 weeks, the latest possible start time for this activity is 14 weeks.

Similarly G: total duration is 17 weeks – 4 weeks, the latest start time for G is 13 weeks.To calculate the latest start times from right to left and to identify the critical path, the

duration of the previous activity needs to be deducted from the latest start time at the fol-lowing activity. For example, the latest start time for activity C is given by:

(Activity C duration) � (Latest start at Event G) � Latest start at C

2 � 13 � 11

As you can see from the precedence diagram below, the critical path is BEFH.

5.5.6 Milestones and control gatesOne of the main reasons for constructing a network diagram is to improve the control of the project duration. In order to facilitate this, a number of ‘milestones’ can be identifi ed in the network. Milestones are not specifi cally shown on a network diagram (except, of course, for the end of activities), but they are often shown on a Gantt chart as a small tri-angle or other symbol.

A milestone, as the name implies, is an event that is clearly identifi able as a measure of how far the project has progressed, and how far it has to run. This involves partitioning the project into identifi able and manageable phases that are well defi ned key events and unam-biguous targets of what needs to be done and by when, and should be established during the project planning phase. Milestones are important in assessing the status of the project and quality of the work. Monitoring the achievement of milestones enables the project manager to keep control over the project’s progress, and allows any delays to be identifi ed immediately.

A

1,039

1,043 4

713

11 5

2

1,038

0

4

0

1,037

6

5

0

1,041

4

5

4

1,042

9

5

9

1,044

14

3

14

1,040

11

2

4

B

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The characteristic of a good milestone is that there should be no room for doubt about whether it has been past. This requires the identifi cation of stages in the development of the project that are recognised as steps towards the fi nal project deliverable, developed from the information in work breakdown structures and network analysis. So, milestones should relate to the completion of stages in the project with clear outputs, which should signal the accomplishment of a particular milestone. For example, the end of an activ-ity, the production of a report, delivery of a completed work package, or attendance at a meeting.

Some milestones take a very specifi c form. They are key points in the project life cycle which give the project sponsor or steering committee an opportunity to review project progress, and make a decision whether to proceed further or to terminate the project. Such milestones are known as ‘control gates’ and represent the signifi cant completion of mile-stones. A gate can only be ‘passed’ if the process meets pre-defi ned performance standards. This could take the form of technical reviews or completion of documents. ‘Gates’ should be identifi ed in the project plan, and a gate review will be required to formally pass each gate. If at the gate review the criteria have not been met, the project should not continue. This may mean changes are needed to the overall project plan.

5.5.7 Project evaluation and review technique (PERT)The issues of risk and uncertainty in project management were covered in earlier in this chapter.

Network analysis is often complicated by an uncertainty of events so that a single time given for an event is likely to have a degree of error. To overcome this uncertainty, PERT uses three time estimates for each activity in the network:

1. An optimistic estimate (denoted by the letter o) – the duration it would take if condi-tions were ideal.

2. A probable estimate (denoted by the letter m) – the duration it would take if condi-tions were normal, or as expected.

3. A pessimistic estimate (p) – the duration it would take if a number of things went wrong.

The expected duration is then calculated (using expected values) and the network drawn. The degree of risk in each activity can be estimated using standard deviations. This would allow calculation of any necessary contingency to be added to the plan, in order to reduce the risk of overrun.

5.5.8 Coping with risk and uncertaintyAlthough the use of PERT is one way to cope with risk in time planning, there are ways of planning in a contingency for risk that are less complex. Wherever risk is identifi ed as taking the form of alternative outcomes, a series of contingency or scenario plans may be constructed for each alternative. Not only would this allow the project manager to look at the project network incorporating each different alternative, but it would also allow the manager to ‘switch’ to the appropriate plan for whichever contingency arose.

Another, much more simplistic, way to incorporate risk is to add artifi cial slack into risky activities. This is known as ‘buffering’, but should not be encouraged because it leads to a build-up of slack in the programme and may lead to complacency.


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It is clear that many project management techniques are complicated and involve large amounts of constantly changing data. It is not surprising, therefore, to learn that all of these techniques can now be carried out quickly and effectively using project management software applications. Today, numerous PC-based PM software packages exist, with fea-tures such as easy access to graphical user interface, planning activities, work-scheduling facilities, ability to view relationships among tasks and other projects, resource manage-ment and project progress monitoring and control.

5.6.1 PM software functionsThe following is a list of functions that would commonly be found within a standard project management software package, such as Microsoft Project:

● Budgeting and cost control. At any time during the project, actual costs can be com-pared with budgeted costs for individual resources or activities, or for the whole project.

● Calendars. Calendars can be used for reporting purposes and to defi ne working periods.

● Graphics. The ability to create and modify graphics, such as Gantt charts, is a useful fea-ture of PM software. It will allow the tasks in Gantt charts to be linked so that preceding activities can be shown.

● Multiple project handling. Large projects often have to be broken down into smaller projects to make them more manageable. Alternatively, project managers may be respon-sible for more than one project at a time. Most PM software packages will store numer-ous projects quite easily.

● Planning. All PM software allows the user to defi ne the activities that need to be per-formed. It will maintain detailed task lists and create critical path analyses. It will allow the project manager to plan several thousand activities, by allocating resources, setting start and completion dates and calculating expected time to complete.

● Scheduling. Most systems will build Gantt charts and network diagrams based on the task and resource list and all of their associated information. Any changes to those lists will automatically create a new schedule for the project. It is also possible to schedule recurring tasks, to set priorities for tasks, to schedule tasks to start as late as possible, and to specify ‘must end by’ and ‘no later than’ dates.

● Resource planning. A critical issue in project planning is resource management, that is ensuring the project has the correct level of manpower, equipment and material at the right place at the right time and in right quantities.

● Resource histograms. These provide the project manager with a visual display show-ing the usage and availability of resources over the project’s life. This allows the project manager to see quickly and easily where there are either too few resources or where there are surplus resources to carry out a particular activity. The project manager then has the ability to reallocate resources or to obtain additional resources to ensure that critical activities are achieved on time and therefore the critical path is achieved. An example of a resource histogram is shown on top of next page.


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● Reporting. The project manager has to report on the progress of the project to the stake-holders. PM software provides the facility to generate standard reports, such as progress to date, budget reports, allocation of resources reports, individual task or WBS reports and fi nancial reports.

5.6.2 Advantages of using PM software● Accuracy. Particularly in large projects, manually drawing network diagrams can be prone

to error. PM software has inbuilt error checks and automatic calculation facilities.● Affordability. Most PC-based software costs between £200 and £400, which for busi-

nesses is an affordable investment. Costs of maintaining the data need to be added to this.

● Ease of use. Windows-based packages with graphical user interfaces make the use of PM software easy and quick. A 3-day training course is usually needed.

● Ability to handle complexity. For large, complex projects, PM software is indispensable in managing and controlling large volumes of activities.

● What if analysis. The software allows the user to see the effect of different scenarios by altering elements of the project data. This enables the project manager to plan for con-tingencies and to assess consequences.

● Timesheet recording. In order to ease the project manager’s burden of recording the actual effort and revised estimates to complete a task, a number of PM software packages allow this data to be captured from individual team members. Typically, project team mem-bers will capture the time already spent and the time expected to complete a task on a timesheet. They can input this on a daily or weekly basis that is then plotted directly against the plan and can show project managers where variances exist and whether the critical path is in jeopardy.

5.6.3 PM software pitfallsDespite the extensive use of project management software, projects can still go spectacu-larly wrong – over schedule and over budget. It is important to realise that PM software is a tool and can be used wisely or unwisely. Here are some common pitfalls:

● Emphasis on maintaining the plan rather than managing the project. In a large project, maintaining the detail estimates against actuals of a plan can be a full-time task. This leaves little time for issue-management and man-management. Hence, it is often better

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ENT for project managers to delegate the input/maintenance responsibility to a project

administrator and receive regular reports as a basis for managing the project.● Mythical man-month. Peter Drucker’s book (of the same name) highlighted the problem

of assuming that if a task takes 10 days then ten men applied to the task can do it in a day. It is important to manage resources realistically. This especially applies when tasks are over-budget. Adding new people into a project at a late stage can make it later since the new team members will be slower at grasping what is required and actually divert the attention of other team members.

● Estimates. For planning purposes, the accuracy of estimates is vital to the identifi cation of the critical path and the key milestones of the project. However, estimates can vary wildly. They are subjective, based on the estimator’s experience or inexperience (or even mood) and subject to company politics (e.g. the paying customer does not want to hear bad news). Also, estimates have been made at a fi xed point in time with a particular set of assumptions. A task that was thought simple can prove anything but. Estimating is receiving more and more attention and there are several estimating techniques which can be used (which are beyond the scope of this section). Needless to say, a comprehen-sive plan built on incorrect estimates may look impressive but is fatally fl awed: garbage in; garbage out.

● Skill levels. Plans tend to talk about resources when actually they are referring to human beings with all the uncertainty that it brings. Human beings are not interchangeable items like nails or screws. Where one individual may fi nd a task within his/her skillset, another person may struggle. It matters which person does which task. If the most com-petent person has given all the task estimates, then it is unlikely that the overall sched-ule refl ects the true performance capacity of the team. Further, people have careers and home-lives and can leave a project. A project manager must be aware of the effect that the departure of a key person would have on the plan.

● Work breakdown. Some plans fail because the work breakdown into tasks does not match with how people work. Work breakdown assumes discrete units of work that someone will spend a fi xed amount of time on a task before moving to the next task. Quite often real-world tasks merge into several tasks, for example making tea may mean making cof-fee while the kettle has boiled and so on. People see additional required tasks while they are working and tackle them simultaneously. A static plan (with PM software) cannot keep up with all these changes. Hence, recording time against the plan as opposed to what people are actually doing can make managing the plan (as opposed to managing the project) a nightmare task, to the extent that the PM software is abandoned in favour of a simpler monitoring system.

5.7 Executing or performing the projectOnce the project plan has been developed and agreed by the customer and project team, the project can commence. The project team will perform the tasks they are responsible for, as and when scheduled in the plan.

As an example, the activities involved in design, development and installation of an organisational information system could include the following work elements in perform-ing the project (Gido and Clements, 1999, p. 66):

● Undertaking detailed design work, including systems specifi cations, fl ow charts, pro-grammes and a list of required hardware.


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● Carrying out design reviews on a continual basis, which may result in modifi cations and design changes. This may result in a change in the project scope, price or schedule. It may also involve re-planning the original schedule.

● There will also be a plan prepared for systems testing once the system has been designed. This may involve the customers who may wish to participate in testing or at least review the test procedures.

● Carrying out the writing and construction of the software.● Testing the software.● Purchasing, assembling and testing the hardware, including detailed testing of sub-

assemblies of hardware, and then a fi nal test of the entire hardware system interface.● Integrating hardware and software and testing the whole system.● Planning installation, for example selecting the optimum changeover method and the

time that is least disruptive to the organisation’s operations.● Preparation of training materials to enable users to understand, operate and maintain

the system.● Carrying out the installation and changeover procedure.● Carrying out training.● Conducting fi nal acceptance testing of the new system to demonstrate that the system

meets the original objectives.

Think of a project such as organising a conference or planning a relocation. Determine:

● the major work elements● the resources required● a time estimate.

5.8 Monitoring and controlling the projectAs the project evolves, it is important to monitor it continually in order to ensure that it is progressing as expected towards the fi nal objective. This requires a continual measure-ment of actual activities, including monitoring activities started and completed, how long it has taken so far (and how long it is estimated to take up to completion), and how much money has been spent on that activity. This measurement of actual resources committed at any time or to date must be compared against the plan of activities to assess progress and monitor any deviations. If, after comparison of actual versus plan, a deviation is discovered (such as overspending or taking longer than anticipated), the project manager must report the deviation and, following authorisation if necessary, take corrective action to get the project back on target.

The most important aspect of project control is ensuring that monitoring progress is carried out on a regular basis and that corrective action is considered and implemented immediately. Effective project control will involve a system to regularly gather project data on actual project progress and performance, and carrying out corrective action where nec-essary as soon as possible. A regular project reporting period should be set up (e.g. daily, weekly or monthly), depending on the complexity or duration of the project. More com-plex projects are likely to require more frequent progress assessment.


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ENT In most projects, the project manager reports to a steering committee or project board.

A system of reports and meetings should form part of the project plan:

● Reports from the project manager to the project board should be made on a regular and frequent basis. In most projects, written reports are made monthly, with a major sum-mary report quarterly (or on completion of a life-cycle stage). These reports should have a standard format, both within and between projects, so the recipients become familiar with their content. Areas covered by the report would obviously focus on progress in terms of cost, scope, and time, with any anticipated variances from plan highlighted. There should also be provision for exception reports, should a major contingency arise.

● The project manager should meet with the project board to discuss progress. In many projects, such a meeting might take place quarterly, and the project manager would present their summary report. This will allow the project board to ask questions that are not covered by the written report. It should also be possible for the project manager to meet with the project board in exceptional circumstances.

A progress report is likely to cover the following issues:

● Current status in terms of schedule cost and scope.● Progress towards resolution of previously identifi ed issues.● New or potential problems and issues.● Planned corrective actions.● Milestones expected to be achieved before the next reporting period.● Date of next report.

Corrective action requires consideration of alternatives before implementation. For instance, adding extra resources in order to get a project back on time will incur extra costs and may therefore overrun the project budget. The project manager needs to consider very carefully the implications of any corrective action upon the project scope, budget and schedule. Figure 5.1 demonstrates the control process.

5.8.1 Making effective control decisionsIt is vitally important that the data collected about the actual progress of the project are reported on a regular, timely basis. Making decisions about changing the project plan or adding more resources can only be effective if the project manager is using the most up-to-date, accurate project information. The project manager should not gather actual data at the beginning of the month and then wait until the end of the month before using it to update the schedule or budget. It is also important for the project manager to agree any changes in the plan with the customer, as changes are likely to affect cost, schedule or scope of the original baseline plan.

When the updated schedule and budget have been calculated, a comparison must be made against baseline budget and schedule in order to determine if any variances have occurred. If it is considered that the project is satisfactorily on target, then no corrective action is required. If corrective action is required, the next decision is to determine how to revise the schedule or budget. These decisions may be very diffi cult, as they will often require a trade-off of cost, time and scope. For example, getting the project back on time may require extra resources and therefore additional costs or a compromise on the original scope. Reducing excess expenditure may mean using less or lower-quality resources, which again may affect the overall scope and performance of the fi nal project.


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Once a decision is taken, the changes must be incorporated into the schedule and budget. This project control process will be carried out continually throughout the dura-tion of the project. If it is considered that the project is likely to have a high control risk, the monitoring progress should be carried out more frequently.

Project control processes cannot be overemphasised in their importance to the success of the project. The project manager must take a continually proactive approach in control-ling a project. If this is carried out successfully, the third phase of the project life cycle will end when the project objective has been met and the customer requirements have been achieved.

5.8.2 Earned value managementEarned value management is a method of assessing the progress on a project which takes account not only what has been done (and spent) to date but also what value has been

Figure 5.1 Project control process (Gido and Clements, 1999, p. 68)

Establish baseline plan(schedule,budget)

Start project

During eachreport period

Wait until nextreport period

Collect data onactual performance

(schedule, costs)

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ENT added for that effort or expenditure. Hence, it is a technique for monitoring progress as

part of overall project monitoring and control. It can be used to determine how well the project is meeting scope, time and cost goals by using information from the project and comparing it to the baseline plan. Project management software, such as Microsoft Project provides functions for entering data and viewing earned value information.

The following list provides the different values that are needed to assess earned value on a project.

● Planned value (PV) is the proportion of the approved total cost estimate to be spent on an activity during a given period.

● Actual cost (AC) is the total direct and indirect costs incurred in carrying out work on a particular activity during a given period.

● Earned value (EV) is an estimate of the value of the physical work completed. This is based on the original planned costs for an activity and the rate at which the project team is completing work on the activity.

● Rate of performance (RP) is the ratio of actual work competed to the percentage of work planned to have been completed by a particular point in time.

The results from earned value management analysis can inform project progress, and variances on time and cost.

5.8.3 PRINCE2 methodologyControl in this context is any mechanism designed to ensure that a project achieves its objectives. The PRINCE2 (Projects IN Controlled Environments version 2) meth-odology contains a large number of control elements and, although initially intended for the management of IT projects, it can be applied to projects of all kinds, small and large.

The main purpose of PRINCE2 is to deliver a successful project, which is defi ned as:

● delivery of the agreed outcomes● on time● within budget● conforming to the required quality standards.

Features of PRINCE2● Enforces a clear structure of authority and responsibility on the project team. The struc-

ture of supervision and reporting ensures that each party has clear objectives and that they are supported in achieving these objectives.

● Ensures the production of a number of ‘management products’ associated with the man-agement and control of the project: for example, the project initiation document, the project budget, the project plan and various progress reports.

● Includes a number of different types of plan, ensuring that all the participants in the project (both internal and external to the organisation) have a clear understanding of the tasks to be completed, the relationships between them and their roles in the tasks’ completion.

● Contains several quality controls, such as clearly defi ned and documented technical and management procedures. These ensure that work is completed both on time and at the appropriate level of quality.


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Key processes are identifi ed as part of the PRINCE2 framework, these include:

● Directing the project. This is usually carried out by the senior management team, who defi ne the need for the project, the resources to be allocated and whether the project should continue. PRINCE2 call team this the project board. The constituents of the Board will vary to suit the requirements of a particular project The project board will decide on the project manager and team responsibilities. The project manager is then given authority to manage the project within constraints set by the project board.

● Planning a project. This is an ongoing activity, using project management tools and tech-niques, to sequence the activities, also considers duration, resources requirements and associated risks.

● Starting up a project. This involves the appointment of the project manager and project team and assigning objectives.

● Initiating a project. Setting out the project strategy and criteria against which the project will eventually be judged.

● Controlling a stage. This involves all aspects of control and problem-solving to ensure the project meets its objectives.

● Managing product delivery. Co-coordinating the various aspects of the project –particu-larly where multiple project teams are involved.

● Managing the stage boundaries. This involves reporting on the progress and problems encountered in a particular stage and their implications for the next stage.

● Closing a project. Reporting and feedback on performance relative to the original objec-tives, to help make improvement to future projects.

Whilst these could all be considered to be elements of good project management, the difference is the level of structure and documentation that is required. This helps in pro-viding controls on the planning and execution of projects and forces the identifi cation of potential problems.

The PRINCE2 methodology is discussed in detail in a reading later in this chapter. (Comparing PRINCE2® with PMBoK®, by Max Wideman.) You should study this read-ing now.

5.8.4 Other project management methodologiesA number of other methodologies have emerged in the project management market-place. Whereas PRINCE2 is largely in the public domain (due to sponsorship by the UK Government), other methodologies have been developed by proprietary interests often with accompanying consultancy and software services. They are, however, gaining in pop-ularity in various industry sectors and hence are worth inclusion.

Here is a list of alternatives to PRINCE2:

● IDEAL/INTRo – IDEAL is a process-improvement and defect-reduction methodology from the Carnegie Mellon Software Engineering Institute (SEI). INTRo is a particular application of the methodology for rolling out technology, for example a new computer system. The institute has a reputation for researching and improving the project man-agement process (particularly in the software development and deployment arena).

● PMBoK (Project Management Body of Knowledge) – The US-based Project Management Institute (PMI) has defi ned best-practice project management princi-ples and processes into a volume entitled PMBoK. It describes nine key areas in terms


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ENT of inputs, outputs, tools, techniques and how they fi t together. A number of vendors

encapsulate PMBoK into their own service and software offerings.● SixSigma – It is another process-improvement and defect methodology that has its roots

in improving manufacturing and product development processes. However, there are now extensions to apply the statistical measurements (upon which SixSigma is based) and corrective measures to more generic project management processes.

ExerciseExplain the benefi ts of a well-defi ned project reporting system.

Solution● It ensures that all team members are aware of the importance of regular monitoring and

control.● It is necessary to compare actual performance with plan.● It must be done regularly to ensure progress is maintained.● Reporting can be daily, weekly or monthly, depending on the complexity and timescales

involved.

5.9 Project completion and closureThe fi nal stage of the project life cycle is the closure of the project once the project work is fi nished. The main purpose of closure procedures is to evaluate the overall project and to learn from the experiences gained. This should help the project organisation improve its performance on future projects. Project termination activities would include the following:

● organising and fi ling all project documentation;● receiving and making fi nal payments to suppliers of resources;● agreeing formally with the customer that all agreed deliverables have been provided suc-

cessfully, so that full payment can be received;● reviewing project organisation and methods to recommend future improvements;● rewarding the project team and ensuring they have jobs to move on to;● reviewing the business case to check that intended benefi ts are likely to be achieved.

5.9.1 Organising project documentationThe project organisation must ensure that all appropriate and related project documenta-tion is collected, organised and stored effi ciently for future reference. It is also necessary to keep information for future audit purposes.

5.9.2 Collection of receipts and making final paymentsSome contracts may include a progress payments clause whereby the customer will make a fi nal payment on the successful completion of the project. In some contracts, this may be a signifi cant proportion of the total contract price – as much as 20 per cent. This is an obvious incentive to ensure that the project organisation carries out the project successfully.


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Likewise, the project organisation must ensure that it has paid for its materials or contractors at the end of the project. Once payments and receipts have all been recorded, fi nal contract accounts can be analysed and the contract profi tability established.

5.10 Post-completion review and audit5.10.1 Post-project review meetingsEvaluation meetings should be carried out both internally with the project team members, and externally with the customer. The internal review is an opportunity for the organisa-tion to discuss the successes and failures of the project process and to establish what can be learned in future for the benefi t of other projects. It is also an opportunity for the project manager to discuss with individual team members their role in the project and the means by which they could improve their own individual performance on future projects.

An evaluation of the project from the customer’s perspective is also a crucial aspect of project closure. It is important to establish whether the project succeeded in satisfying the customer’s requirements and to obtain feedback that could be helpful to improve future project processes. It also allows the customer the opportunity to voice any concerns regard-ing how the project was carried out, and provides a framework for open dialogue and improved customer relationships.

An evaluation of the project from the business perspective is essential. Are the benefi ts intended in the feasibility study likely to be realised? If not, what ongoing actions need to be taken?

5.10.2 Post-completion auditWhen the project solution has been delivered, the fi nal phase – an audit of the entire project – is conducted.

Assessment of the following should take place:

● the extent to which the required quality has been achieved;● the effi ciency of the solution during operation compared with the agreed performance

and standards;● the actual cost of the project compared with the budgeted expenditure and the reasons

for over- or under-expenditure identifi ed;● the time taken to develop the solution compared with the targeted date for completion,

and reasons for a variance identifi ed;● the effectiveness of the management process and structures in managing the project;● the signifi cance of any problems encountered and the effectiveness of the solutions gen-

erated to deal with them.

If the project objectives have been stated in terms of learning outcomes, the extent to which these have been achieved would also be investigated. The audit would lead to the production of a report to the management, structured around the above points.

5.10.3 Justifying the cost of post-completion auditThe primary benefi t derived from the post-completion audit is to augment the organisa-tion’s experience and knowledge. Although this benefi t may be diffi cult to quantify, it may


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analysis. In this case, the expected savings to future projects should be offset against the cost of the audit.

5.10.4 Continuous improvementMany organisations view project management as a strategic competence, from which they can gain a competitive advantage. This is particularly true of organisations in project-based industries, such as engineering and consultancy. Such organisations have begun to see that using project management without continuous improvement to the methodology allows for the repetition of mistakes and poor practices.

Excellence in project management requires the development of a methodology, a culture that believes in the methodology, and continues improvements to the methodology.

One such approach is the Project Management Maturity Model (PMMM), proposed by Kerzner (2001), which provides guidance on how to become excellent in project manage-ment. The PMMM consists of fi ve levels, and each level represents a different degree of maturity in project management.

Level 1 – Common knowledgeIn this level, the organisation recognises the importance of project management and the need for a good understanding of the basic knowledge of project management, along with the accompanying language/terminology. The emphasis here is on training and education.

Level 2 – Common processesIn this level, the organisation recognises that common processes need to be defi ned and developed such that successes on one project can be repeated on other projects. Also included in this level is the recognition that project management principles can be applied to and support other methodologies employed by the company, such as total quality man-agement and time-to market.

Level 3 – Singular methodologyIn this level, the organisation recognises the synergistic effect of combining all corporate methodologies into a singular methodology, the centre of which is project management. The synergistic effects also make process control easier with a single methodology than with multiple methodologies. However, in some fi rms the information systems personnel may still have a separate methodology.

Level 4 – BenchmarkingThis level contains the recognition that process improvement is necessary to maintain a competitive advantage. Benchmarking must be performed on a continuous basis. The company must decide whom to benchmark and what to benchmark.

Level 5 – Continuous improvementIn this level, the organisation evaluates the information obtained through benchmark-ing, and must then decide whether or not this information will enhance the singular methodology.


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When the levels of maturity (and even life-cycle phases) are discussed, there exists a common belief that all work must be accomplished sequentially (i.e. in series). This is not necessarily true. Certain levels can and do overlap. The magnitude of the overlap is based upon the amount of risk the organisation is willing to tolerate. For example, the company can create a centre for excellence in project management before benchmarking is undertaken.

Project management maturity models allow companies to more easily identify corpo-rate-wide training initiatives for each level, as well as the establishment of a professional development career path for project managers.

As companies begin recognising the importance of strategic planning for excellence in project management, the marketplace may see several more maturity models similar to the one described above. Like strategic planning, these models should be generic such that they can be applied and custom-designed to individual companies.

5.11 SummaryThis chapter has looked at the life cycle of a project. The key points to remember are:

● the fi ve project management stages (try using the acronym IPECC);● the different aspects of feasibility;● the different costs incurred in a project;● the difference between risk and uncertainty, and the ways to manage risk;● SWOT analysis when used in project management;● the different aspects of project plans;● the constraints acting on a project;● the common techniques used by project managers (Gantt charts, critical path analysis

(CPA) and project evaluation and review technique (PERT));● the use of PM software, which may contain facilities such as planning, budgeting,

reporting and scheduling;● the key aspects of project control, including milestones and gates;● the features of PRINCE2;● the process and justifi cation of post-completion review and audit.

ReferencesField, M. and Keller, L. (1998), Project Management. London: International Thompson

Publishing.Gido, J. and Clements, J. (1999), Successful Project Management with Microsoft Project

CD, A Practical Guide for Managers. (1st ed.), Reprinted with permission of South Western, a division of Thomson Learning: www.thomsonrights.com. fax: 800 730 2215.

Kerzner, H. (2001), Strategic Planning for Project Management Using a Project Management Maturity Model. John Wiley & Sons, Digital Download.


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Identifi cation of project proposals and setting project requirementsThe fi rst article covered in this section reinforces the need for sound project management techniques and processes in large-scale, complex projects. The case discusses the Sydney Olympic Games from a project management viewpoint, focusing attention on strict constraints of time, and the increasing problems of managing the two other major project factors of cost and quality.

This case study should aid you in understanding:

● the importance of project identifi cation and defi nition;● the critical relationships between cost, quality and time;● the need to break complex projects into a number of smaller, more feasible project

actions.

The Sydney 2000 Olympic Games: a project management perspectiveDavid Eager, Proceedings of the PMI Annual Seminar. Copyright © 1996 by PMI Publications. Reproduced with permission of PMI Publications via Copyright Clearance Center

SummaryThe Sydney 2000 Olympic Games is a large-scale and very complex project involving a diverse range of activities and large numbers of people. Given the nature and vast scale of this project, sound and exemplary project management techniques and principles are essential for its success. The strict time constraints set for the project increase the diffi cul-ties of managing cost and quality. The project will be regarded as successful if it is fi nished on time, on budget, and to the required quality. Good quality means meeting the needs specifi ed by the organiser, to the standard and specifi cation laid down, with a predictable degree of reliability and uniformity, at a price consistent with the organiser’s budget and to the satisfaction of the end-users. This review discusses issues that need to be addressed to make this project a success.

IntroductionThe bid was prepared by Sydney Olympics Bid Limited which drew on funds from the private and public sectors and worked in close co-operation with the Australian Olympic Committee. It enjoyed broad public support with 90 per cent of the people across Australia supporting the bid. More than 100,000 volunteers offered their services. The bid

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ENT was centred on the theme Share the Spirit and called on the people of Sydney to join in the

excitement of the bid, and invited the world to come and share the spirit of Sydney at the Olympic Games in the year 2000. The bid also included a comprehensive set of environ-mental guidelines recognising the principle of ecologically sustainable development. The guidelines promote energy conservation; water conservation; waste avoidance and minimi-sation; protection of air, water and soil from pollution; and protection of signifi cant natu-ral and cultural environments.

Some signifi cant featuresThe New South Wales Government underwrites the games and is responsible for the provision of new permanent venues and facilities needed for the games. It also provides support services, particularly in the areas of transport, security and healthcare. The con-struction of new sporting facilities and refurbishment of existing facilities for the games is being undertaken by the State Government’s Olympic Co-ordination Authority, namely: Sydney Organising Committee for the Olympic Games (SOCOG).

The staging of the 2000 Games is the responsibility of SOCOG, which was established in November 1993 by legislation in the New South Wales Parliament.

Except for some football preliminaries, all Olympic events are planned to be held in metropolitan Sydney in venues within 30 minutes’ travel from the Olympic Village. No training facility will be more than 45 minutes away from the village. The focus is mainly on two Olympic zones, namely: the Sydney Olympic Park, situated at Homebush Bay about 14 km west of the Sydney city centre, and the Sydney Harbor zone located near the Sydney city centre and accessible by road, rail and ferry from Sydney Olympic Park.

A series of test events in the years preceding the Olympic Games is planned with the aim of trialling the Olympic venues, training the technical offi cials and volunteers who will help conduct the events at the Olympic Games, and selectively trialling arrangements for accreditation, transport, security, broadcasting, media and other services.

Infrastructure – preparation work for the gamesA signifi cant number of Sydney’s Olympic venues already exist. Most of the remaining facilities required for the games will be constructed as part of the redevelopment pro-gramme being undertaken at Homebush Bay.

Key elements of the Homebush Bay area include the construction of new sporting facili-ties, establishment of a new showground and major exhibition centre, development of resi-dential and retail areas, and the establishment of a commercial centre for high-technology industries. A main press centre and the Olympic village with accommodation for 10,000 athletes and team offi cials also comes under the umbrella of the Olympic Park.

Recently completed major transport projects such as Sydney Harbor Tunnel, M4 and M5 Motorways, and Glebe Island bridge, together with the major projects currently in progress, such as City West Development, Ultimo-Pyrmont light rail system, Airport City Link and the railway loop line to link the Olympic Park with the Sydney rail network’s main western rail line, will ensure that an effective transport system will be available for the Olympic Games.

During Sydney’s bid, a campaign to register volunteers was conducted by the St George Bank which attracted more than 100,000 people. Sydney will require 35,000 people from all walks of life to form a volunteer workforce essential for the smooth running of the 5 games.

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Revenue for the games is expected primarily from television rights fees, sponsorships, coin marketing royalties, licensing fees, and ticket sales.

It is estimated that during the period 1994–2004 the Olympics could add A$7.3 billion to Australia’s gross domestic product, create 150,000 full- and part-time jobs, and bring an extra 1.3 million visitors to Australia. In order to safeguard sponsorship fees and sponsors’ and licensees’ benefi ts from ambush marketing, the New South Wales Government has legislated the Sydney 2000 Games (Indicia and Images) Protection Bill 1996.

Defi nition of the projectThe objective of the Sydney Olympic Games Programme is to stage the year 2000 Olympic Games at specifi ed locations in Sydney. Although the New South Wales Government is underwriting the project activities, there is no clearly defi ned client for the programme. There are many stakeholders and customers, including the citizens of New South Wales, the New South Wales Government, the Australian people, the International Olympic Organisation, the international community as a whole, the athletes, and Australian and international business communities. The scope of the project comprises organising all the games and ceremonies, putting in place technology and resources required to stage the games, public relations, and fundraising. Criteria for the success of the project include trouble-free performance of the games, the level of public enthusiasm and enjoyment gen-erated by the activities, and resultant sustained economic activity generated within New South Wales and Australia, and continued interest in the Olympic Games for the future.

SOCOG was appointed to manage the project by legislation. In addition to SOCOG there are other organisations that directly contribute to the success of the games. International Olympic Committee, Australian Olympic Committee, Sydney City Council and Olympic Co-ordination Authority (New South Wales Government) have been made party to the host city contract. Olympic Co-ordination Authority is responsible for all the infrastructure projects, almost all of which are not being built specifi cally for the Olympic Games. These projects are either already under way or are being re-programmed to accom-modate the games. Completion of these projects on time is vital to the success of the Olympic Games. The general rule of thumb used by the Government has been to relocate infrastructure projects initially external to the games under the games umbrella.

The infrastructure construction is the responsibility of the government and is overseen by the Olympic Co-ordination Authority. To make matters more complicated, the scope of work of SOCOG is restricted to organisation of the events. The games budget in nominal terms is A$1.847 billion (US$1.4 billion).

There is an explicit need to control the cost of all its activities very carefully. Any major cost overruns will alienate the public and will have adverse effects on the success of the games.

The project can be broken into the following major areas of work (as a work breakdown structure):

● events● venues and facilities, including accommodation● transport● media facilities and co-ordination● telecommunications● security arrangements● medical care● human resources, including volunteers

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● cultural Olympiad● pre-games training● information technology projects● opening and closing ceremonies● public relations● fi nancing● test games and trial events● sponsorship management and control of ambush marketing.

Each of these items could be treated as a project in its own right. Further, an enor-mous co-ordination effort will be required to ensure these, and therefore the entire games project, are delivered on time.

Critical project dimensionsTime is the most critical dimension of the Sydney 2000 Olympic Games project. As the project must be completed and ready for staging the Olympic Games on the stipulated dates, any shortcomings in the time dimension will have to be offset by sacrifi cing the other two dimensions, namely: cost and quality. However, performance on all three dimen-sions is vital for the success of the project.

Time dimensionSydney is fortunate in having suffi cient infrastructure capacity either existing or under construction to cater for an event of this magnitude. It is anticipated that the infrastruc-ture projects under construction will be completed well in advance of the commencement of the Olympic Games. Any delays in the completion dates could be accommodated with-out much diffi culty. The criticality of the time dimension applies mainly to other activities and timing of individual activities such as events, opening and closing ceremonies, and so on. To ensure that the time dimension is achieved, the Sydney Organising Committee for the Olympic Games has adopted strategies such as: holding frequent co-ordination meet-ings with the organisations and parties responsible for delivering the required items, setting target dates well in advance of the main event, designing test events, and trialling events as milestones for the critical items.

For the construction projects, estimation of the time dimension should be relatively straightforward. Expertise is available within the construction industry to produce reason-able estimates. Critical path methods, precedence block diagrams and programme evalua-tion and review are employed to control the uncertainties in the time dimension. Proper plans must be prepared for these construction activities. All persons who may be affected by these programmes should have an opportunity to comment on the plan. Instruments should be put in place to monitor the progress against the programme continually. The programme should include enough leeway or fl oat to allow minor problems to be accom-modated without causing major changes to the timing of the overall programme. Elements which are expected to have most impact on the programme must be identifi ed and defi ned as early as possible, and an adequate series of milestones must be established to allow mon-itoring of the progress of the programme.

At this early stage of the programme or project life cycle the time required to com-plete tasks for particular events introduces uncertainties. These uncertainties are related to the nature of the tasks involved. Some non-construction projects – such as developing software to monitor the games’ progress, establishing the games’ database and systems to disseminate the information to general public – have larger uncertainties inherent in

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the system. Some new technologies may have to be developed to adapt to the advances in the way the information is distributed to the public and media. For example, the Atlanta 1996 Olympic Games had a dedicated Internet facility to give the public access to games information. Since Internet technologies are changing very rapidly, the way information is given out to the public may also change in line with advances in technol-ogy. It is diffi cult to predict what these advances may involve until much closer to the actual event.

Cost dimensionThe cost estimates of the construction projects are not refl ected in the games’ budget as the infrastructure projects are undertaken outside the games project.

Sydney’s games’ budget is based on conservative assumptions and estimates of games’ receipts and payments. Receipts are mainly from television rights and international and local participation. The fi nancial planning process included:

● consultations with both national and international experts in the fi elds relevant to both receipts and payments;

● consultations with the Barcelona Organising Committee, the International Olympic Committee, and the Australian Olympic Committee;

● review and analysis of results and budgets from previous games and bid candidature;● independent analysis of construction costs by quantity surveyors Rider Hunt;● independent review of the estimates by auditors Price Waterhouse.

The NSW Audit Offi ce cost estimates appear to have been produced using appropriate methodologies. However, even though the cost estimates were prepared using appropriate methodologies it is necessary to develop strict cost control mechanisms in order to keep the overall project costs to the minimum. It is worth noting that the major portion of the games’ budget is for the events and ceremonies, and the nature of these programmes is such that there are considerable uncertainties inherent in these items. Further, the time and cost dimensions of these events are tightly interrelated. Consequently, any slippage in timing of the programming, training and testing of these activities could lead to large cost escalations.

Due to the predicted rapid change in technology it is highly likely that there will be variations in requirements or design. As a general rule, it is undesirable to allow too many such changes, since they are a major source of cost escalation in any project and especially in projects such as this. Some variations may be to a cost advantage, but this is the excep-tion rather than the norm.

Cost escalations would lead to disillusionment among the public and would dimin-ish the public appeal of the games, thus affecting public support and a vital source of volunteer games staff. Any cost overrun will have to be met by the taxpayer, as the New South Wales Government has underwritten the host city contract. This could also become a major political issue. Maintaining the costs within budget is vital to the games’ success.

Quality dimensionThis is the most diffi cult dimension of the project to defi ne. The quality is threefold:

1. good quality versus high quality2. fi t for purpose3. conforming to the customer requirement.

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ENT As part of the host city contract, the International Olympic Committee has specifi ed

certain quality requirements for the Sydney 2000 Olympic Games. The New South Wales Government has specifi ed certain environmental guidelines that all Olympic ven-tures should follow. Within the public mind there is also a concept of the level of quality and excellence the Olympic Games should achieve. The SOCOG itself will set its own quality standards mainly in performing its duties. Sponsors will demand a certain quality standard. Some of these standards are currently only at the conceptual stage. As the project progresses through its life cycle these standards need to emerge. Each programme compo-nent will have its own defi nition of quality and standards.

One of the major areas of quality which should not be underestimated nor forgotten is the aspect of security. Responsibility for management of Olympic Games security lies with the Olympic Security Planning and Implementation Group (OSPIG). It would appear that there is a signifi cant weakness in the security planning process, in that it lacks coordinated project control. Rather than being developed as a strategic programme, activities are being undertaken as disparate tactical operations. This has occurred because Olympic Security is being used to expand existing programmes rather than being managed as a separate programme. The focus has been on integrating existing activities to provide security for the games, rather than on developing an effective games security plan and then integrating existing programmes when practical.

Wherever there is public involvement in large projects, it is generally not suffi cient to have good quality or fi t-for-purpose quality. The public demands very high quality stand-ards. The quality of the game events is likely to be judged by the absence of delays and clockwork precision with which the public expects events to proceed. In the case of trans-port, quality is judged by lack of traffi c jams and hold-ups. The quality of security will be judged by perceived public safety and lack of incidents such as terrorism.

In construction projects, quality can be clearly defi ned, for example, as fi t for purpose or conforming to strict environmental guidelines. In projects such as the games there are diffi culties in defi ning quality, particularly in the early stages of the development cycle.

Adoption of total quality management techniques in these programmes could improve the quality of the delivered Olympic Games. The essential ingredients of a total quality management system are: quality of the product as the ultimate goal; quality management process; quality assurance systems; and attitude.

Where clear specifi cations and well-defi ned standards are diffi cult to formulate, engag-ing experienced personnel and experts may be particularly desirable. The product (e.g. events or performances) should be thoroughly tested prior to the games, allowing ample time to make necessary modifi cations at least cost.

A good management process is vital to the delivery of a high-quality product. It is nec-essary to establish milestones and set procedures for the management process to achieve quality.

As mentioned above, cost and quality are closely related. Quality comes at a price. This applies particularly to a project like the Olympic Games when completion on time is critical, and the cost of failure is extremely high for any of the items included in the project.

Only through closely controlled quality management processes and early identifi cation of the possibility of failure can the success of the programme be ensured. Several safeguards have been put in place both by the International Olympic Committee and the New South Wales Government to ensure the delivery of the games is to an acceptable quality.

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ConclusionGood communications are vital to the success of the project and to effective control of all three dimensions. Trial games and test programmes will serve to control all three dimen-sions and should be treated seriously. The planned trials in the coming years will be an excellent opportunity to monitor, control or correct any defi ciencies in the project.

AfterwordThe preparations of SOCOG appear to have paid off handsomely. Not only were the games and associated events eminently successful, but Sydney now benefi ts from greater levels of international investment as a result of its higher and more prestigious profi le.

SOCOG raised A$2.3 billion to pay for the games whose total bill only came to A$1.9 billion. The infrastructure changes to airport terminals, transport networks and the sports facilities have all added to the effect on the economy: six to seven billion tourist dollars in 2000 (the year of the games) alone.

Discussion pointsDiscuss these with your study group before reading the suggested outline solutions:

1. Explain why project scope management was critical to the Sydney 2000 project. Try to illustrate your answer with other projects you may know about or have worked on yourself and draw parallels.

2. Discuss the concept of quality, with reference to what you consider the meaning of quality to be for the Sydney 2000 project.

3. Explain why time management was critical to the Sydney 2000 project.

Outline solutions1. As evidenced by the above narrative, the scope of the Sydney 2000 project was very

large and complex. As a public project, the management and control of all aspects is critical to the overall success of the project. Recent large-scale public projects have had a history of overrunning on time and cost (for example, the Channel Tunnel). Effective project scope management should safeguard or at least reduce these prob-lems. Importantly, project scope management ensures that only the work required to complete the project successfully is carried out, and that the overall project does not become overburdened with unnecessary activities and costs. Project scope verifi cation and acceptance will be essential to ensure that quality requirements are achieved. This kind of project will be open to constant and detailed public scrutiny; clarifying scope in the early stages of the project management process is vital for project success.

2. For the Sydney 2000 games, quality means satisfying the needs of the organising com-mittees to a predefi ned standard and set of specifi cations required for a large-scale sporting event. Quality will also mean reliability and, to a certain extent, uniformity. It is important to consider quality in the context of each project. This may involve:● Balancing high quality with desired quality. Desired quality is defi ned by the pur-

pose of the project. Different aspects of the games project will have different quality requirements;

● Fitness for purpose. This again will depend upon each individual element of the project, for example the security measures, transport arrangements for the athletes, or the location and adequacy of the sporting facilities. If any element of the project

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ENT is not considered to be fi t for purpose then it cannot be used and is therefore of poor

quality;● Achieving the customer requirements. The notion of fi tness for purpose must also con-

sider customer requirements. Therefore, any aspect of the project can only be of suf-fi cient quality if it meets customer requirements.

3. Time management is a critical aspect of the Sydney 2000 project, because as of September 2000 the eyes of the world will be focused upon the Sydney Olympic Games. If the games are not ready on time, the project will quite obviously be considered a failure. This will include both political embarrassment, and finan-cial implications for the organisers and commercial sponsors relying on finan-cial profits. The Sydney 2000 project will only be completed when all of the various systems and subsystems have been tested and retested prior to the games commencing.

Comparing PRINCE2 with PMBoKR. Max Wideman, © R. Max Widemanhttp://www.maxwideman.com. Published with permission. This material is offered to individual readers freely in connection with their project work. It may not be used by commercial or non-commercial organisations without permission

IntroductionFrom time to time we are asked to recommend project management systems and meth-odologies, or to compare them as part of some selection process. We have been taking an in-depth look at PRINCE2, a widely recognised de facto standard used extensively by the UK government and in the private sector. As a basis for comparison, and because we are located in North America, we will refer to the Project Management Institute’s ‘PMBoK’ which actually refers to their publication A Guide to the Project Management Body of Knowledge (2000 Edition).

‘PRINCE’ stands for Projects IN Controlled Environments and is described as a struc-tured method for effective project management for all types of project, not just for infor-mation systems, although the infl uence of that industry is very clear in the methodology. The 2002 version has been through a number of incarnations in the past and is now the result of the ‘experience of scores of projects, project managers and project teams.’ The 408-page document, like the Guide (216 pages) is copyright, but the content is clearly generic common sense. The PRINCE2 Introduction lists a signifi cant set of reasons why projects fail, and the methodology sets out to remove these causes.

It must be borne in mind that both sets of documentation must be tailored to suit the occasion. For example, PMBoK is not intended to tell people how to do any of the techniques or use any of the tools described. It only lays out the processes, how they link together and the tools and techniques that can be invoked. Somewhat similarly, the appli-cation of PRINCE2 must be scaled for the size and needs of the project. Indeed, scalability is a topic specifi cally included in the description of each process.

Project life cycle and major processesThe fi rst difference to notice is that PRINCE2 is clearly project life cycle based with six out of eight major processes running from ‘Starting up a project’ to ‘Closing a project’. The remaining two, ‘Planning’ and ‘Directing a project’ are continuous processes sup-porting the other six. Each of these have their respective sub-process totaling 45 in all.

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Then, feeding into the system, are six ‘Components’ some of which are documents and others that are themselves processes. Finally, PRINCE2 describes three techniques namely: ‘Product Based Planning’, ‘Quality Review’ and ‘Change Control’. The whole t; docu-ment is presented as an easy-to-follow narrative, bulleted checklists, process diagrams and timely ‘Hints and Tips’. By comparison, the Guide consists of twelve chapters describing function-based knowledge areas with illustrations of their respective project management processes and narrative descriptions in the form of inputs, tools-and-techniques, and outputs.

There are a number of interesting differences between the Guide and PRINCE2 phi-losophies. PRINCE2 speaks of ‘stages’ rather than ‘phases’ and states that while the use of stages is mandatory, their number is fl exible according to the management requirements of the project. PRINCE2 also differentiates between technical stages and management stages. Technical stages are typifi ed by a particular set of specialist skills, while management stages equate to commitment of resources and authority to spend. The two may or may not coin-cide. The Guide defi nes a project phase as: ‘A collection of logically related project activi-ties, usually culminating in the completion of a major deliverable.’ It does not distinguish between phases and stages and in the text uses either indiscriminately.

The PRINCE2 project life cycle does not start with original need, solution generating and feasibility studies – these are considered as inputs to the project life cycle, perhaps as separate projects in their own right. For example, PRINCE2 describes a product’s life span as having fi ve phases: Conception, Feasibility, Implementation (or realisation), Operation and Termination but, of these, only implementation is covered by PRINCE2. Indeed, the manual states ‘Most of what in PRINCE2 terms will be stages will be divisions of ‘‘imple-mentation’’ in the product life span.’ management, rather than a whole project manage-ment methodology.

Indeed, PRINCE2 assumes that the project is run within the context of a contract and does not include this activity within the method itself. However, it suggests that since contracting and procurement are specialist activities these can be managed sepa-rately using the methods. The Guide, on the other hand, recognises that the project needs assessment or feasibility study may be the fi rst phase of the project, although it also defers to other life cycles used in various industries. The presumption in the Guide is that Project Procurement Management, where required, is part of the overall project management process and is viewed from the perspective of the buyer in the buyer–seller relationship.

Management levels and responsibilitiesPRINCE2 recognises four parallel levels of management: ‘Corporate or Programme Management’, ‘Directing a Project’ (i.e. the Project Board, chaired by the ‘Executive’, more often called ‘Project Director’ in North America), ‘Managing a Project’ (i.e. the project manager’s level) and ‘Managing Product Delivery’ (i.e. team-level technology manage-ment). In this way, the corporate business or programme management interests are closely integrated with both project management at the project level as well as with the manage-ment of the project’s technology at the team level.

Another interesting feature is the responsibility of the project manager. The Guide defi nes project manager simply as ‘An individual responsible for managing a project.’ The Software Engineering Institute goes further and calls it ‘The role with total business responsibility for an entire project; the individual who directs, controls, administers, and regulates a project … [and] is the individual ultimately responsible to the end user.’

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In sharp contrast, under PRINCE2 the project manager is ‘The person given the authority and responsibility to manage the project on a day-to-day basis to deliver the required products within the constraints agreed with the Project Board.’ These constraints are referred to as ‘tolerances’ and prescribe the ranges of acceptability of each scope, qual-ity, time and cost within which the project manager must manage. Any trend beyond these limits becomes an ‘issue’ and must be brought to the attention of the project board.

‘The project board is chaired by a person referred to as ‘executive’ and it is this per-son who has the real responsibility for the project. This individual ensures that the project or programme maintains its business focus, that it has clear authority and that the work, including risks, is actively managed. The chairperson of the project board, represent[s] the customer and [is] owner of the business case.’

To us, this sounds very much like a project director, who provides the leadership on the project, while the project manager provides the managementship. By comparison, the Guide does not recognise either ‘executive’ or ‘project director’ but uses the term ‘sponsor’. The sponsor is one of the project’s stakeholders and is defi ned as ‘The individual or group within or external to the performing organisation that provides the fi nancial resources, in cash or in kind for the project.’ So, one can conclude that under the Guide, it is the project manager who is fi rmly in charge.

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Figure 1 Overview of Project Management Knowledge Areas and Project Management Process

PROJECTMANAGEMENT

4. Project Integration Management

4.1 Project Plan Development4.2 Project Plan Execution4.3 Integrated Change Control

5.1 Initiation5.2 Scope Planning5.3 Scope Definition5.4 Scope Verification5.5 Scope Change Control

6.1 Activity Definition6.2 Activity Sequencing6.3 Activity Duration Estimating6.4 Schedule Development6.5 Schedule Control

7.1 Resource Planning7.2 Cost Estimating7.3 Cost Budgeting7.4 Cost Control

8.1 Quality Planning8.2 Quality Assurance8.3 Quality Control

9.1 Organizational Planning9.2 Staff Acquisition9.3 Team Development

10.1 Communications Planning10.2 Information Distribution10.3 Performance Reporting10.4 Administrative Closure

11.1 Risk Management Planning11.2 Risk Identification11.3 Qualitative Risk Analysis11.4 Quantitative Risk Analysis11.5 Risk Response Planning11.6 Risk Monitoring and Control

12.1 Procurement Planning12.2 Solicitation Planning12.3 Solicitation12.4 Source Selection12.5 Contract Administration12.6 Contract Closeout

7. Project Cost Management

8. Project Quality Management

9. Project Human Resource Management

10. Project Communications Management

11. Project Risk Management

12. Project Procurement Management

5. Project Scope Management

6. Project Time Management


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Authority documentationPRINCE2 tends to be heavy on documentation. A project has a set of progressive govern-ing documents in its series of processes, a sequence that we had a little diffi culty in follow-ing. The very fi rst document is the ‘Project Mandate’. As PRINCE2 states, this document

Figure 2 Use of PRINCE2 components and techniques in the processes

Controls

Starting up a Project

Initiating a Project

Controlling a Stage

Dir

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Pr

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Pla

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Quality Review

Managing ProductDelivery

Change ControlPlansControls

PlansBusiness CaseMgmt of RiskControlsOrganisation

ControlsConfiguration MgmtBusiness Case

ControlsChange ControlConfiguration Mgmt

PlansQualityMgmt of RiskBusiness CaseControls

PlansMgmt of RiskOrganisationBusiness Case

Managing StageBoundaries

Closing a Project

Key Pink = Techniques Grey Clear

Product-based

Planning

= Process= Component

Change Control

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ENT may come from anywhere, but should at least come from some level of management that

can authorise the cost and resource usage commensurate with the size and type of project. It must contain suffi cient information to trigger the fi rst ‘Starting up a Project’ (SU) proc-ess, and in that process is converted into a ‘project brief ’. The Guide recognises neither business case nor project brief.

The SU process is intended to be of short duration and is designed to ensure that all the necessary players, and pieces, are in place prior to the real start of the project. It assumes that a provisional ‘Business Case’ exists, although if it does not, it is created during the SU process. The business case justifi es the undertaking of the project in terms of reasons, ben-efi ts, cost, time and risk and the source of this information is the project mandate or the project brief, the project plan and information from the customer. The business case is a dynamic document that is updated throughout the project to refl ect changing conditions, although it is ‘baselined’ during the subsequent ‘Initiating a project’ process.

The output of the SU process is an ‘Initiation Stage Plan’ that ensures the required peo-ple are identifi ed, and that the information they will need is contained in a project brief. The project brief is a relatively simple document providing background, project defi nition (i.e. what the project needs to achieve), the outline business case, the customer’s quality expectations, acceptance criteria and any known risks.

This documentation feeds into the ‘Initiating a project’ (IP) process, the output of which is a ‘Project Initiation Document’ (PID). Unlike the business case, which is updated, the PID is a substantial and stable document, except for the background attach-ments such as the business case. The PID is intended to defi ne all of the questions what, why, who, when, and the how of the project. It is the base document against which the project board will assess progress, the change management issues, and the ongoing viabil-ity of the project. Concurrently with the preparation of the PID, the fi rst project stage is planned leading to the authorisation by the project board of the project’s fi rst stage.

The Guide’s equivalent of the PID is the ‘Project Charter’ which is an output from the Initiation process under the knowledge area of Project Scope Management. The Guide defi nes project charter as ‘A document issued by senior management that formally author-ises the existence of a project. And it provides the project manager with the authority to apply organisational resources to project activities.’

Special project management rolesPRINCE2 does not defi ne management jobs, instead preferring to defi ne roles, that may be allocated, shared, divided or combined according to the project’s needs. In addition to the usual roles of project board, project manager, team manager and so on, and executive as described earlier, PRINCE2 introduces a number of other distinctive roles to facilitate its methodology. For example:

Project Support Offi ce (PSO) is conceived as a central pool of skilled resources, such as clerical, confi guration librarians and even PRINCE2 consultants serving a number of projects. The manual states that a PSO is not essential, but it can be useful to support managers with their administrative tasks and ensure proper use of PRINCE2 across all projects. To the above list, we would add other expertise such as planning and scheduling, estimating, forecasting and project accounting. In fact, a number of other special responsi-bilities are suggested in the role description.

Executive, as noted earlier, is the person who chairs the project board. Supported by the senior user and the senior supplier, executive is the single individual with ultimate

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responsibility for the project. He or she ensures that a project or programme meets its objectives and delivers the projected benefi ts.

Senior User, a member of the project board, is responsible for the specifi cation of the needs of all those who will use the product(s), for user liaison with the project team and for monitoring that the solution will meet those needs within the constraints of the Business Case in terms of quality, functionality and ease of use.

Senior Supplier, also a member of the project board, represents the interests of those designing, developing, facilitating, procuring, implementing and possibly operating and maintaining the project products. The senior supplier is accountable for the quality of products delivered by the supplier(s), and must have the authority to commit and acquire supplier resources required.

Note that both these roles may each be represented by more than one person, and that they liaise directly with the team members who are responsible for producing the project’s products. Therefore, great care must obviously be taken to ensure that the project manag-er’s authority on the project is not circumvented and that his or her ability to manage the project is not thereby undermined.

Project Assurance covers all interests of a project, including business, user and supplier. PRINCE2 requires that this service is independent of the project manager and therefore cannot be delegated there. Project assurance is a responsibility shared between the execu-tive, senior user and senior supplier.

Confi guration Librarian is a role responsible as a custodian and guardian of all mas-ter copies of the project’s products. It also maintains the project’s issue log. Although this refers primarily to management documents and product documentation, rather than phys-ical objects, nonetheless it is not a trivial task on most projects. It includes controlling the receipt, identifi cation, storage and retrieval of all such documents, providing information on the status of all projects, as well as numbering, recording, distributing and maintaining the project’s issues records. The role is part of project support.

PRINCE2 does not discuss the ever-popular-in-North-America subject of people management, as does the Guide in its chapter ‘Project Human Resources Management’. However, PRINCE2 does describe in detail the responsibilities of ten project management team roles that are included in its methodology.

Document description outlinesPRINCE2 includes descriptions of thirty-three standard management ‘products’ that are invoked through the PRINCE2 methodology. Many of these documents are standard fare, such as various plans and reports, for which it is most useful to have detailed listings of required contents. However, in addition to those mentioned earlier, certain unique docu-ments are worthy of special mention in the context of managing projects successfully. For example:

Acceptance Criteria, defi nes in measurable terms what must be done for the fi nal prod-uct to be acceptable to the customer and staff who will be affected. This is either provided by programme management, or is developed during the starting-up-a-project process. It seems to us that this is essential information often overlooked in many projects.

Confi guration Item Record: Confi guration management is defi ned as the discipline that gives management precise control over its assets (including the products of a project), cov-ering planning, identifi cation, control, [etc]. The confi guration item record provides the required information about the status of each and every item and makes reference to the

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log and change control.The Issue Log is the repository of a summary of all issues raised on the project that

need to be brought to the attention of the project and that require an answer. Issues may range from a question or statement of concern, to an off-specifi cation (e.g. a defi ciency) to a request for scope change. Such issues may be raised by anyone associated by the project at any time. In PRINCE2, the issue log is an essential part of controlling project stages by capturing all queries, problems and similar events in a consistent way before their proper disposition has been determined. Each item can then be followed up until the required action has been taken and the item cleared.

Similar to the issue log, the Risk Log provides a repository for the identifi cation of all project risks, their analysis, countermeasures and status. PRINCE2 recognises risk as a major component to be considered during the management of a project and is factored into all of the major processes. Project management must control and contain risks if it is to stand a chance of being successful.

The Lessons Learned Log is a repository of any lessons learned, both good and bad, that cover management experiences or use of specialist products and tools, and so on that can be usefully applied to other projects. Captured during the project, these items provide the basis for writing up a formal lessons learned report at the end of the project. We recognise this as an essential feature of the ‘Learning Organisation.’

With the exception of lessons learned, these documents are not discussed in the Guide.

Planning and schedulingProduct-based planning is a key feature of PRINCE2, providing a focus on the products to be delivered and their quality. It forms an integral part of the Planning (PL) process and leads into the use of other generic techniques, such as network planning and Gantt charts. It provides a product-based framework that can be applied to any project, at any level, to give a logical sequence to the project’s work. A ‘product’ may be a tangible one, such as a machine, a document or a piece of software, or it may be intangible, such as a culture change or a different organisational structure.

PRINCE2 describes three steps to the PL technique: (1) Producing a Product Breakdown Structure (PBS); (2) Writing Product Descriptions; and (3) Producing a Product Flow Diagram. Each step is described in detail and excellent examples are pro-vided as illustration. In step 2, writing a clear, complete and unambiguous description of products is a tremendous aid to their successful creation. The corollary is, of course, that if it is not possible to write the description, then more work, or another iteration, is nec-essary to ferret out the necessary information. In step 3, the products are re-ordered into their logical sequence to form a product fl ow diagram.

The original PBS can become very detailed because the links between the products in the product fl ow diagram represent the activities required to create them, and every prod-uct must be included to capture every activity. The converse is that no activity is necessary unless it contributes to the fi nal outcome. A correctly formed product fl ow diagram, there-fore, not only identifi es the activities involved but also leads to a network dependency-based schedule or Gantt chart. PRINCE2 provides a good explanation of the technique and specifi es the associated documentation to go with it.

In the Guide, planning generally is seen as part of key general management skills, is one of the fi ve process groups applied to each phase and is therefore recognised as an ongo-ing effort throughout the life of the project. Planning is discussed in the chapter ‘Project

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Integration Management’, and the essence of which is to create a consistent, coherent document that can be used to guide both project execution and a baseline against which changes will be controlled. However, planning also appears in each knowledge area and t; must be integrated across all of them. Because of this fragmentation, an attempt is made for ease of reference to map the Guide’s various content to the planning process.

ControlIn PRINCE2, control of the technical work is exercised through the authorisation of work packages. According to the manual, control is all about decision-making and is central to project management. Its purpose is to: Produce the required products, meeting the defi ned quality criteria; Carry out the work according to schedule, resource and cost plans; and Maintain viability against the business case. We have some concern over this last item because the business case is a ‘dynamic’ document, updated from time to time. There could therefore be a tendency to match the business case to the current reality rather than controlling the current reality to the business case justifi cation.

The work package control is used to allocate work to individuals or teams. It includes controls on quality, time and cost and identifi es reporting and hand-over requirements. The individuals or teams report back to the project manager via checkpoint reports or other identifi ed means such as triggers, and by updating the quality log.

In the context of control, PRINCE2 establishes a good distinction between ‘toler-ance’, ‘contingency’ and ‘change control’. Tolerance is the permissible deviation from plan allowed to the project manager without having to bring the deviation to the attention of the project board. Contingency, in PRINCE2 terms, is a plan including the time and money set aside to carry out the plan, which will only be invoked if a linked risk actually occurs. Change control is a procedure designed to ensure that the processing of all project issues is controlled, including submission, analysis and decision-making. The process is described in detail starting with project issue management.

In the Guide, like planning, Change Control is discussed as part of Project Integration Management, and, also like planning, is to be found referenced in many of the other Guide chapters.

SummaryPRINCE2 and the Guide take very different approaches to the presentation of their mate-rial. Indeed, they really serve different purposes and are therefore not directly comparable. We believe that the Guide takes that best approach for purposes of teaching the subject content of each knowledge area, but is not so affective when it comes to providing guid-ance for running a particular project. Of course, the corollary is also true. In a life-cycle-based presentation like PRINCE2, it is diffi cult to do justice to each knowledge area.

For example, as we discussed under planning and scheduling, PRINCE2’s approach is a single unifi ed methodology starting from developing the initial product breakdown struc-ture through to identifying the corresponding network schedule. In our view, this straight forward and well-explained proposition should clearly lay to rest the controversies that we have seen in North America. That is, over whether a work breakdown structure should be product or activity based, which comes fi rst, and how they are related.

While PRINCE2 is designed for a variety of customer/supplier situations, the manual has been written on the assumption that the project will be run for a customer with a sin-gle (prime) supplier involved throughout. This has a bearing on both the organisation and the details of control. The implication is that PRINCE2 is in the hands of the supplier

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of multiple prime contracts (i.e. trade contracts) directly under the control of an owner as is the case, for example with a developer using construction management techniques. In such cases, the issues of work coordination responsibility are much more complex.

In describing a project, the Guide explains that ‘Projects are often implemented as a means of achieving an organisation’s strategic plan’ and ‘Projects are undertaken at all levels of the organisation.’ The Guide is generally written from this perspective throughout, that is to say, from the project owner’s perspective rather than from that of a supplier or seller. Consequently, the Guide covers more ground than does PRINCE2.

Nevertheless, within its self-prescribed limitations, PRINCE2 provides a robust easy-to-follow methodology for running most projects, that is where the objectives are clear and the deliverables are either well described, or capable of being so.

It seems to us that both PRINCE2 and the Guide have chicken-and-egg problems in the area of documentation for project initiation. Our strong preference is for the generic project example to start with a ‘conception’ phase. This phase, short or long, is the oppor-tunity to assemble the owning organisation’s needs that could be potential projects, and analyse and select the best opportunity for serious study. This is the time to articulate that best opportunity in terms of big picture, vision and benefi t. It should result in a viable business case as the stage-gate measure.

Following approval of the business case, the project then moves into its second major phase. In this phase, the project’s concept is developed by studying and testing alternatives and conducting feasibility studies. At the same time, the intended products are defi ned as far as possible through the necessary customer/user input. With the products defi ned, an implementation plan can be formulated that covers the project’s scope and quality grade, and time and cost tolerances.

The whole can then be assembled into a formal project brief or project charter and pre-sented to the management for approval of a major commitment of cash and resources. Such a life-cycle design represents a simple straight forward progression with only two major project documents as stage-gate controls. Considering that it is in the conception and defi nition phases that the most critical project decisions are made, it is surprising that more focus is not given to this part of the project life cycle by both the Guide and PRINCE2. Indeed, as PRINCE2 observes, ‘A lot of time can be wasted in producing a very good plan to achieve the wrong objective’ and ‘Finding out that a product doesn’t meet requirements during its acceptance trials is expensively late.’

While on the subject of project life cycle, there is room for improvement in both docu-ments for dealing with the fi nal phase of a project in which the product(s) are transferred into the care, custody and control of the customer or user. The product resulting from the project may be excellent and fully up to specifi cation, but if the fi nal transfer is not han-dled with appropriate delicacy, the reaction to it may still be negative and the project seen as a failure. We use the term ‘delicacy’ advisedly, because this part of the project is often fraught with political overtones. After all, who wants to change the way they do things anyway?

Clearly, both the front and back ends of the project are fruitful territories for aca-demic research and improved best practices: the front end for better project identifi cation and selection, and the back end for better communication and training in the use of the project’s product. If these aspects were properly recognised and documented in standard methodologies, perhaps sponsors would be more willing to set aside the necessary funding to ensure higher chances of project success.

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Max Wideman is a retired Canadian professional engineer and project manager with experience in systems, social and environmental projects, as well as design and engineer-ing projects. He is a Fellow of Project Management Institute, of which he is the past president and chairman, and for whom he developed the 1987 version of the Project Management Body of Knowledge. He also enjoys Fellow status in the Institution of Civil Engineers (UK), the Engineering Institute of Canada, and the Canadian Society of Civil Engineering. He has lectured or presented papers in 11 countries and has contributed books, chapters, papers and articles on many project management topics. His latest book is A Management Framework for Project, Program and Portfolio Integration, Trafford, BC, 2004. Comprehensive coverage of project management theory and practice can be found on his website at http://www.maxwideman.com.


Revision Questions 5Section A type questions

Question 1The term feasibility is often used when assessing the viability of projects.

Requirements(a) Explain the term feasibility. (2 marks)(b) Discuss the aspects of feasibility that are typically considered in project selection.

(8 marks) (Total marks � 10)

Question 2SWOT analysis is commonly used in project selection, as it helps the organisation focus upon projects that will facilitate the organisation’s achievement of its strategic objectives.

Requirements(a) Explain the term SWOT analysis, and how a SWOT analysis is used in project selection.

(5 marks)(b) When selecting a project, should the lowest price proposals always be selected? Give

reasons for your answer. (5 marks) (Total marks � 10)

Question 3R Company, a manufacturer and retailer of fashion clothes, has invested in a new technol-ogy system to improve the logistics of the movement of clothes between its warehouses and chain of 250 retail outlets. Ensuring that the outlets have the right supply of clothes is a critical success factor for the company.

However, the warehousing stock control and logistics project set up to develop and deliver the new system has experienced numerous problems. The project ended up being well over budget and was also late in delivering the system. Now, only 3 months after the

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new system has been installed, it is apparent that the project has not delivered its objective. Instead, the company is facing a crisis with many store managers complaining that they are not receiving the correct stock. Even worse, some stores are out of stock of key ranges, whereas the warehouses are full of clothing.

A meeting between the project team and project sponsor has ended up with everyone blaming each other, saying it was not their responsibility. It is clear that they did not use a project management methodology and did not have adequate control systems in place so that the problems that have now transpired could have been identifi ed and rectifi ed earlier in the project life cycle.

RequirementsRecommend to R Company a project management methodology/approach, explaining how it could have helped to prevent the failures of the warehousing, stock control and logistics project. (10 marks)

Question 4R has taken on the responsibility for organising the annual conference for the local Society of Management Accountants. Remembering the project management techniques she came across when studying for her professional qualifi cation, R has decided that critical path analysis may be helpful in planning the conference.

As a start, R has drawn up a list of the activities she must complete in preparation for the conference, she has identifi ed the dependency between the different activities and the time she thinks each will take.

Activity Dependency Time (weeks)

Determine conference theme A – 3Research alternative venues B – 6Identify and book guest speakers C A 4Book venue D B 2Print conference papers E C 8Print and send out invitations F D 4Confi rm fi nal arrangements with venue and deliver documents G E, F 2

RequirementUsing the information from the scenario, construct a network diagram and explain how information from this could be useful to R in planning the conference. (10 marks)

Question 5T has just returned to his job in the fi nance department of Z Company, having spent the last 6 months as a member of a project team working on the development of an educa-tional visitors centre for the company.

Refl ecting on his experiences whilst working on the project, he feels that most of his time was spent in meetings that did not achieve anything, but rather wasted his time. He also feels that the fi nal stages of the project were not dealt with effectively, with the project members going back to their functional jobs without any discussion or feedback on the project performance and outcomes.

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He has now been asked to take on the role as project manager for a new project and is determined that he will improve the experience for his project team.

RequirementEvaluate the contribution of the various activities that should be carried out as part of project closure, the post completion review and audit of the project. (10 marks)

Question 6The information below relates to the proposed installation of some new software:

ActivityCommencement date

– week number Duration

Install new software 1 3Test installation 4 1Prepare master fi le data 3 2Install and test master fi le data 5 1Ensure all data entered into old software 5 1Train staff on new system 4 3Transfer account balances to new system 6 1Parallel run new and old systems 7 2Processing on new system only 9 As long as required!

RequirementPrepare a Gantt chart to monitor the installation of the new software. (10 marks)

Question 7Project planning is a critical stage of the project management process, and this question requires you to clearly explain why this is so, and to clearly state what planning involves. In an exam question, you could be asked to put together a project plan for a given scenario, and therefore it is important to have the basic knowledge of project planning stages.

Project planning is considered to be one of the most important stages of the project management process.

Requirements(a) Explain why project planning is vital to project management. (3 marks)(b) Describe the steps involved in a detailed planning process. (7 marks)


Question 8It is often claimed that all project management is risk management since risk is an inherent and inevitable characteristic of most projects. The aim of the project manager is to combat the various hazards to which a project may be exposed.

RequirementExplain the concept of risk and the ways in which risk can be managed in a project.

(10 marks)

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Question 9Once a project is under way, control of the project tasks and activities is critical. This ques-tion is designed to ensure that you understand the importance of control and how it is undertaken.

Requirements(a) Explain why it is important to control a project once it is under way. (3 marks)(b) Briefl y explain how control is carried out. (7 marks)


Section B type questionsQuestion 10

Trend plc is a large fashion retail chain. It currently has 48 stores throughout the country, mostly in prime high street locations. These are coordinated by the head offi ce through six regional general managers who take full responsibility for the performance of the stores in their region.

You are currently employed by Trend as project fi nance manager on a major capital investment – the full refurbishment of a newly acquired city centre store. This project, with a total budget in excess of US$8 million, has been in progress for 9 months and is nearing completion. All the major structural work has been completed to schedule, and the services (gas, electricity, water, etc.) installed on time. The building is now undergoing its ‘fi t-out’ stage, where the interior is installed.

TodayOn arriving at work this morning, you received a message from Jane Bell (the regional general manager responsible for the new store) informing you that the project manager of the refurbishment project has resigned. Jane asked you to deputise as project manager until a replacement could be recruited. This situation obviously provides you with a challenging opportunity, and you expect to gain valuable experience from it.

Talking to colleagues, you have managed to establish the circumstances leading to the unexpected departure of the project manager. Apparently, there was a very heated meet-ing between the project manager, Jane, and the subcontract supplier of the goods elevator which is being installed to carry stock from the basement stockroom to the retail fl oors. At the meeting, the site manager of the elevator supplier apparently mentioned that the installation was running late by 3 weeks. Jane pointed out that this situation would delay the opening of the store, with disastrous cash fl ow impact.

At some point during the meeting, Jane appears to have become angry with the subcon-tractor and the project manager. Jane feels that she should have been informed about the possible delay at the earliest opportunity, and that the project manager and subcontractor were trying to hide the delay from her. The project manager apparently claimed (rather forcefully) that it was his responsibility to manage the project, not Jane’s. The project man-ager also suggested that the delay was ‘a minor detail’, and that opening would not be delayed. Jane apparently disagreed. Shortly afterwards, the project manager resigned and left the site. The subcontractor has refused to do further work until Jane apologises.

Jane has given you an extract from the Gantt chart for the original project plan (Figure 5.2) and says that it ‘proves the point’.

Jane says she has been ‘left in the dark’ by the project manager and ‘doesn’t like surprises’. Apparently, Jane had always experienced problems in persuading the project

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manager to discuss progress, and has received only three written progress reports during the last 9 months. Other than occasional conversations when she visited the site, this has been her only contact with the project manager. Jane has called a ‘crisis meeting’ for tomorrow with the managing director and fi nance director of Trend, which she wants you to attend.

Produce notes for tomorrow’s steering committee meeting that include:

(a) a brief explanation of the nature and purpose of SWOT analysis in project management;

(4 marks)(b) a SWOT analysis for the project as at today; (8 marks)(c) a prioritised action list based on the SWOT analysis. (13 marks)


Question 11IDC Ltd is a software development company that specialises in designing and implement-ing internet websites and e-commerce systems for their clients. IDC Ltd is based in the United Kingdom with a branch offi ce in the United States; their clients are worldwide. A large proportion of IDC’s work can be done via the Internet, although they do have to visit their clients’ sites for the initial systems analysis and sometimes to participate in pres-entations, systems testing and implementation.

IDC employs 150 staff, split evenly between the United Kingdom and the United States. Some projects are shared jointly between the two sites, with staff from the United Kingdom and the United States working together. In the past, this has caused problems due to lack of adequate communication between the staff. Most of the staff are specialists and can only work on a small part of a project. The staff fall into the following categories.

● Systems analysts – the main contact with the client, senior systems analysts also act as project managers.

● Designers – IDC regularly uses specialist consultant graphic designers to design the graph-ics for the websites. The designers are commissioned to create an appropriate graphic design for the site that will attract and hold the attention of ‘surfers’ and regular clients.

● Programmers – create the code required to run the website.● Administrators, sales and marketing.

Figure 5.2 Gantt Chart

Install gas services

NowWeek36

Week37

Week38

Week39

δ

δ

Week40

Week41

Week42

Week43

>51

>53

Week44

Week45

Week46

Week47

Install electricity services

Install water and waste

Test all services

Commission all services

Install goods elevator (GE)

Connect and test GE

Commission and hand over GE

Install catering facilities

Install heating and air conditioning

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The staff work on projects in development teams, the membership of which can vary depending on the requirements of the projects.

IDC Ltd provides a full development and maintenance service for their clients, starting with an initial idea, ‘I think we could do with setting up a Website’ through to the hand-over to the client’s staff.

IDC has many projects in progress at any one time. Each project has a project manager but can utilise any of the specialist staff as required. The workload does not follow any particular cycle but does vary from time to time. At present there are a lot of projects in progress, some of which are being held up as the specialist required is not available when needed. You are working with IDC Ltd as a member of a systems development team.

IDC has recently started talking to ABC Inc. ABC is considering the possibility of setting up a website and moving into e-commerce. ABC has recently formed a steering committee to oversee the e-commerce project. The steering committee have asked IDC to justify setting up a feasibility study team to prepare a feasibility report on e-commerce in their company.

(a) Explain to ABC the need for, and purpose of, a feasibility study. (5 marks)(b) Explain the factors that ABC Inc. should consider in evaluating the feasibility of the

e-commerce project. (15 marks)(c) Outline the contents of a feasibility report. (5 marks)


Question 12IDC has a turnkey contract with AZ Ltd for the supply of hardware and software to run a completely new stock control system and a website allowing access to the stock database. The design stage has been completed and the project is progressing through the implemen-tation stage, but is falling behind schedule. An analyst of your team at IDC has prepared the following schedule of events for the 16-week implementation phase of the project.

AZ Ltd Implementation Schedules:

Task Planned start Planned duration

PlannedWrite programs Start of week 1 8Purchase and install hardware Start of week 1 5Create databases Start of week 6 4.5Convert existing fi les Start of week 9 2.5Test programs Start of week 6 3Test system Middle of week 11 2.5Select and train personnel Start of week 8 5Cutover Start of week 14 3ActualWrite programs Start of week 1 9Purchase and install hardware Start of week 1 6Create databases Start of week 7 4Convert existing fi les Middle of week 10 1.5 (continuing)Test programs Start of week 7 5 (continuing)Test system Not startedSelect and train personnel Start of week 8 4 (continuing)Cutover Not started

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Current date is start of week 12

(a) Explain the phases of project management. (8 marks)(b) Prepare a Gantt chart for the AZ Ltd project. (9 marks)(c) Explain the purpose of a Gantt chart and interpret the information shown on the chart

prepared for AZ Ltd. (8 marks) (Total marks � 25)

Question 13Trend plc is a large fashion retail chain. It currently has 48 stores throughout the country, mostly in prime high street locations. These are coordinated by head offi ce through six regional general managers who take full responsibility for the performance of the stores in their region.

You are currently employed by Trend as project fi nance manager on a major capital investment – the full refurbishment of a newly acquired city centre store. This project, with a total budget in excess of US$8 million, has been in progress for 9 months and is nearing completion. All the major structural work has been completed to schedule, and the services (gas, electricity, water, etc.) installed on time. The building is now undergoing its ‘fi t-out’ stage, where the interior is installed.

TodayOn arriving at work this morning, you received a message from Jane Bell (the regional general manager responsible for the new store) informing you that the project manager of the refurbishment project has resigned. Jane asked you to deputise as project manager until a replacement could be recruited. This situation obviously provides you with a challenging opportunity, and you expect to gain valuable experience from it.

Talking to colleagues, you have managed to establish the circumstances leading to the unexpected departure of the project manager. Apparently, there was a very heated meet-ing between the project manager, Jane, and the subcontract supplier of the goods elevator which is being installed to carry stock from the basement stockroom to the retail fl oors. At the meeting, the site manager of the elevator supplier apparently mentioned that the installation was running late by 3 weeks. Jane pointed out that this situation would delay the opening of the store, with disastrous cash fl ow impact.

At some point during the meeting, Jane appears to have become angry with the subcon-tractor and the project manager. Jane feels that she should have been informed about the possible delay at the earliest opportunity, and that the project manager and subcontractor were trying to hide the delay from her. The project manager apparently claimed (rather forcefully) that it was his responsibility to manage the project, not Jane’s. The project man-ager also suggested that the delay was ‘a minor detail’, and that opening would not be delayed. Jane apparently disagreed. Shortly afterwards the project manager resigned and left the site. The subcontractor has refused to do further work until Jane apologises.

Jane says she has been ‘left in the dark’ by the project manager and ‘doesn’t like sur-prises’. Apparently, Jane had always experienced problems in persuading the project man-ager to discuss progress, and has received only three written progress reports during the last 9 months. Other than occasional conversations when she visited the site, this has been her only contact with the project manager. Jane has called a ‘crisis meeting’ for tomorrow with the managing director and fi nance director of Trend, which she wants you to attend.

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You then call Anne Martensen, the head of quality assurance at Trend’s head offi ce. She tells you that there are no standard procedures for the control of capital projects, as all her department’s time is taken up with designing and implementing control procedures for the retail activities of the organisation. Anne is surprised to hear about the problem with your project, but is unable to offer any help as she and her staff have little experience of manag-ing major projects.

Anne says that she is sure that other project managers would appreciate a set of proce-dures to improve the project management process.

Requirements(a) Describe the main controls used in formal approaches to project management (e.g.

PRINCE2). (10 marks)(b) Explain how such controls could be used in this and future projects. (15 marks)


5Section A solutions

Solution 1Guidance and common problemsThe fi rst part of this question should be of no problem. The second part of the question requires you to think about a range of aspects that affect project feasibility. As accountants we may be primarily concerned with the fi nancial feasibility, but examination questions will require you to consider all aspects of feasibility, including social, ecological, technical and fi nancial considerations (i.e. do not just concentrate on the fi nancial aspects).

(a) Feasibility is a term used to describe how achievable various project options are. Feasibility is normally established by means of a feasibility study, which may be carried

out on a number of potential strategies. The aim of the study is to decide which pro-posal to choose.

(b) Fasibility can be examined from a number of perspectives.

Technical feasibilityThere are a number of key aspects regarding technology. The technical features of a strat-egy that need to be considered are:

● development – that is, will it require further testing prior to use or are we confi dent that the material/technology/processes have been thoroughly tested and are readily usable and available?

● applicability – that is, is the technology suitable to satisfy the objective of the project effectively?

Other technical considerations could be:

● the ease of use of the technology;● the degree of disruption during the construction/installation phase.

Social feasibilityIt is becoming increasingly necessary to assess social factors affecting feasibility. This may include awareness of the social issues within a group or offi ce (e.g. introducing a compu-terised system), or larger social awareness regarding the effect of projects or products on workers, employment (i.e. will the introduction of computerised systems lead to redun-dancy) and the general public (e.g. the effect of constructing a new road or nuclear power plant on a community).


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Ecological considerations may be driven by the understanding that customers would prefer to purchase alternative products/services as they are more ecologically sound and less harmful to the environment. Environmental considerations may be stimulated pri-marily by health and safety legislation. It is important for organisations to consider the raw material input, the production processes and the disposal of the product at the end of its life.

Financial feasibilityA technique often used in a feasibility study is cost-benefi t analysis. Cost-benefi t analysis helps to identify and evaluate the costs of the proposal over its anticipated life (such as purchase, building, maintenance, repair, etc.). The other side to cost-benefi t is the identifi -cation and evaluation of the benefi ts of the project over its life.

The types of costs and benefi ts involved in a project will depend upon the precise nature and scope of that project and can vary greatly.

For every item of the project proposal, it is necessary to identify:

● its value: in monetary terms or in terms of benefi ts● whether it is capital or revenue● when it occurs● whether it is an one-off cost or recurring.

Solution 2Guidance and common problemsSWOT analysis is a commonly used tool in strategic planning and project selection. The answer above is mainly concerned with your ability to describe the technique and its uses. In this examination, SWOT may also be examined in a very practical way, that is you may have to perform a SWOT analysis on the data provided in the scenario, and the SWOT results may form part of your evidence in recommending a particular project option. Therefore, it is important that you consider the application of SWOT as well as being able to describe the technique.

(a) A common analytical tool used in assessing project proposals and their feasibility is SWOT analysis (Strengths, Weaknesses, Opportunities and Threats). The strengths and weaknesses arise from the organisation’s internal environment, whereas the oppor-tunities and threats arise in the organisation’s external environment.

When evaluating a project proposal, it is important to establish whether the pro-posal helps to achieve the organisation’s long-term aims and objectives. Thus, for any project proposal, a SWOT analysis can establish whether a particular proposal has suffi cient strengths that are compatible with the achievement of the organisation’s objectives, or provides the organisation with suffi cient opportunities to do so in the future. A SWOT analysis will also highlight the weaknesses and threats of particular proposals.

For example, consider a project proposal to implement a new marketing database. A SWOT analysis for this proposal may indicate a strength of improving customer relationships and an opportunity to increase market share. Increasing market share could be one of the organisation’s long-term objectives, and, therefore, this would be an important factor in fi nal project selection.


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(b) The answer to this question is no. The lowest priced proposals should not necessarily be chosen. There are many other factors to consider when evaluating proposals, such as the reputation and experience of the project provider, the materials used, the times-cales being offered, the level of quality and the level of technology being used. Cost is obviously an important factor in deciding who to choose to provide a project, but often other factors, such as quality, expertise, after-sales support and warranty terms are of more importance as deciding factors.

Solution 3A project management methodology that could have been used by R Company is PRINCE2. This is an acronym for Projects IN Controlled Environments and is a struc-tured approach to project management, used by the UK government and private sector organisations. It includes bureaucratic controls on the planning and execution of projects, identifi es some of the potential problems that may arise and early resolution. Whilst it could be argued that aspects of PRINCE2 could be considered to be just good project management, the difference is in the level of structure and documentation required.

The key processes of PRINCE2 methodology offer a number of features that would have benefi ted R Company including:

● A defi ned management structure● A system of plans● A set of control procedure● A focus on product based planning.

The main purpose is to deliver a successful project, which can be defi ned as:

● Delivery of agreed outcomes● On time● Within budget● Conforming to the required quality standards.

PRINCE2 has a set of progressive documents for a project and control is achieved through the authorisation of work packages. These include controls on quality, time and costs and identify reports and handover requirements, all of which are problems that have led to the failure of the project in R Company.

The methodology includes a series of ‘management products’, for example project initia-tion documents, project budget, quality plan and various checkpoint and progress reports, which would have improved controls for R’s project.

The key processes and documentation of PRINCE2 would have enforced the project team in R Company to have a clear structure of authority and responsibility between members in the project team, so that each party has clear objectives. As part of this, the control responsibilities of the various members of the project team would have been deter-mined. This should mean that the different participants in the warehousing stock control and logistics project would have had a clearer understanding of the various tasks and the relationships between them and should have prevented the problems R Company is now facing.

The exception plan concept in PRINCE2 would mean that if R’s project was going to exceed its tolerance, for example variances in time, cost or quality, this would have been reported to the project board. The implications on the whole project deliverables should

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have been discussed and plans amended to refl ect any changes needed to ensure the project delivered its objectives.

Solution 4Network diagram for conference planning

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Critical path analysis is a technique that can be used to assist in the time planning for project management. It will help P to identify the sequential relationship between the vari-ous activities that need to be undertaken in planning the conference. In conducting the analysis, P will need to answer the following questions for each activity:

1. What must be done before this activity can start?2. What can be done once this activity fi nishes?3. What activities can be done at the same time as this activity?

The answers to these questions will help to determine the dependencies and the project duration between different activities. It will also identify the activities that are critical. In other words, the activities where any delay will lead to a delay in the project overall, and in this case the conference actually going ahead.

Undertaking the analysis should assist P to decide when she needs to start working on the arrangements for the conference, and to identify the start and fi nish times for each activity. This will involve calculating the earliest time event (EET), which is the earliest time at which any subsequent activity can start, and latest time event (LET), which is the latest time at which all previous activities must have been completed to prevent the whole project being delayed.

In the case of the conference planning, the critical path is between, A, C, E & G and the project duration will be 17 weeks.

Solution 5Project closure is the fi nal stage of the project life cycle and occurs once the project work has fi nished. The purpose is to ensure benefi ts are gained in the fi nal stages. It is important to maintain commitment of the team until all the work is completed since people tend to be more motivated to move on to new projects rather than tying up the loose ends. It is also important to evaluate the conduct of the project in order to learn from experiences which will help the company improve on its performance in future projects. The questions that could be asked include:

Was the project completed to quality, on time and within budget?Did the project deliver according to the objectives set?

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Are there lessons to be learnt?Are there any follow up action on this project needed?

Project closure activities would involve practical tasks such as organising and fi ling all project documentation and ensuring that members of the project team have jobs to return to. It should also involve formally agreeing with the ‘client’ that all the agreed deliverables have been achieved. The business case should be reviewed to check that intended ben-efi ts are likely to be realised. In other words, examining project performance by compar-ing achievement with the original project plan to show that the project has delivered the outputs.

In addition, there should be a review of the project organisation and methods to recom-mend future improvements. This can be achieved through the post completion review and audit.

The main purpose of the post completion review is to evaluate the overall project and to learn from the experiences gained before the project team is disbanded. This might involve debriefi ng meetings which enable all parties involved in the project to assess their own performance.

It provides a forum to discuss with individual team members their role in the project and how they could improve their own performance for the future.

An evaluation from the client’s perspective will establish if the project was successful in satisfying their requirements and has given them the opportunity to voice any concerns.

The review will provide an opportunity to discuss the successes and failures of the project process. The feedback should provide reinforcement of good skills and behaviours and the identifi cation of areas for improvement or change in practice for the smooth run-ning of future projects.

The post completion audit is the fi nal stage and involves conducting a formal audit of the entire project against a checklist. This will include an assessment of the extent to which:

● the required quality of the project has been achieved; the effi ciency of the solution com-pared with the agreed performance standards;

● the actual cost of the project compared with budgets and reasons for over/under expenditure;

● the time taken to develop the solution compared with target dates and reasons for any variances;

● the effectiveness of project management methodologies.

Together, the review and audit can provide a case history of the project, providing a repository for the knowledge captured. The project manager should issue a report summa-rising project performance and advising on how it could be improved in the future.

The reason that post project activities are not always undertaken is that it is often dif-fi cult to quantify in a tangible way the benefi ts derived, given the associated costs of review and audit.

Solution 6Guidance and common problemsCheck how much time is required on the Gantt chart fi rst; you can then allocate the neces-sary space across the page. Remember that some activities will overlap; however, from the information given, you will not be able to input the actual duration of the different activities.

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Solution 7Guidance and common problemsAs stated in the question, planning is a key aspect of the project management process and students need to analyse the scenario data provided in the exam to ascertain the planning procedures undertaken by the scenario organisation. Projects often go wrong at this early stage of the project life cycle, so if there are signs of projects going out of control, you may be able to explain these causes by analysing the planning stage. Part (b) of this question should give you a clear structure, which can be used to put together a sound project plan.

(a) Planning is a vital part of any project. It is important to lay out a ‘road map’ that clearly shows how the project activities and tasks will be accomplished, within budget and to schedule. Attempting to begin a project without a plan would be like trying to assemble a set of cabinets without fi rst reading the instructions, or trying to drive from Glasgow to Southampton without fi rst reading a map. Getting from A to B (the start of the project to fi nal successful completion) is most likely to be achieved if all of the stages and tasks between A and B are broken down and planned carefully before begin-ning the project. The risk of project failure is much greater without project planning.

(b) Detailed planning involves the following stages:● Obtaining project authorisation● Time plan● Resources plan including staffi ng● Contingency plan● Quality plan● Cost plan● Communication plan● Audit plan.From these can be developed:● Work packages● Estimates of time and cost● Graphic illustrations of the schedule: Gantt charts, etc.● Risk analysis and plans● Project schedule and the budget● Change management● Acceptance process● Post-project implementation audit.

Install new software

Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9

Test installation

Prepare master file data

Install and test master file data

Ensure all data entered into old software

Train staff on new system

Transfer account balances to new system

Parallel run new and old systems

Processing on new system only

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Then the plan is issued to all major stakeholders, excluding any sensitive information that would only be given to senior management. To gain full marks you would be expected to give some detail for each category.

Solution 8Risk can be defi ned as the probability of an adverse or undesirable event occurring. Undertaking any project carries an element of risk and project management will be concerned with understanding what is risky about a particular project or activity within the project. Essentially this will involve identifying the different types of risk and then how to manage the risk. The fi rst stage will require an assessment of the probability of risks occurring and their likely impact on the project. It will then require plans to be put in place to reduce or eliminate them. In other words, risk management which is what the project manager does to counteract or prepare for the risks.

The process of risk assessment involves obtaining a clear defi nition of the possible risks, for instance determining how important the risk is to the project, the likelihood of that risk occurring and what the severity of its occurrence would be, in other words its sensitiv-ity. This can be achieved by some assessment of the likelihood and consequences of risks and then plotting the outcomes on a matrix which maps the potential impact of risk (low, medium, high) and the threat of likelihood (low, medium, high).

A number of stages are involved in the process of managing risk:

● Identifi cation of risks, producing lists of risk items in a risk register.● Analysis of the risks in terms of the impact of each risk item on project performance,

schedule and quality.● Estimate of the probability of the risk occurring during the execution of the project

(project exposure).● Prioritise the risk according to exposure, effect and problems associated with the risks

(sensitivity).● Carry out risk management strategies, deciding how to address each risk item.● Review and monitor, tracking the success of resolving the risk and the risk management

approach.

These steps will enable the project manager to monitor risk factors and take appropriate action during the execution of the project.

In deciding what to do about the risk, in other words risk management, this should be determined in terms of the level of impact (e.g. either high or low) and the prob-ability of the risk (high or low). There are different strategies for dealing with risk, for example:

● Avoidance of risk – where the factors which give rise to the risk are removed totally from the work to be done.

● Reducing the risk – where the potential for the risk cannot be removed but analysis has enabled the identifi cation of ways to reduce the incidence or consequences.

● Transference of the risk to others, which is where the risk is passed on to someone else, for example through insurance.

● Absorption – this is when the potential risk is accepted in the hope or the expectation that the incidence and consequences can be coped with if necessary, perhaps having con-tingency plans should the risk occur.

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Risk management is a continuous process through the life of the project. Procedures are necessary to regularly review and reassess the risks documented in the risk register.

Solution 9Guidance and common problems(a) and (b) together

Once the project is under way, it is necessary to monitor progress continually against the plan to ensure that it is proceeding as expected. Control involves measuring actual results and progress versus the planned progress. In order to measure actual project progress, it is important to keep an up-to-date record of which activities have begun, which are com-pleted, and at what time they started or were completed; it is also important to record the actual costs of each activity.

If, during this monitoring process, it is found that the project is not progressing as planned (i.e. it is behind schedule or is over budget) then the project manager must insti-gate some form of corrective action. Changes to the project scope, schedule or budget must fi rst be agreed by the project team and the customer.

Decisions must then be made as to how to revise the schedule or budget. These change decisions may involve a trade-off of time, cost or scope. For example, reducing the time taken on an activity to bring the project back on schedule may involve increasing the costs by employing more staff to get the work done quicker, or it may involve reducing the scope of the project by not carrying out a particular part of the project.

Similarly, reducing project costs to get the project back on budget may require the reduction of quality in materials or functionality of the technology. It will depend very much upon the customer’s fi nal project needs as to which elements of the project will be forgone or reduced to achieve the project target. Once changes are made to the budget or schedule, they must be incorporated into a revised project plan that must then be distrib-uted to the team members and customer.

Section B solutions

Solution 10Trend plc(a)SWOT analysisSWOT analysis is one of the most commonly used business and project management tools. It is a brief summary of the major strengths, weaknesses, opportunities and threats relating to the entity (project or organisation).

Strengths are: things we do well, things we do that others do not, things to be proud of.Weaknesses are: things we do badly, things we do not do (that we should), things to cor-

rect or improve.Opportunities are: events or changes that we can exploit to our advantage.Threats are: events or changes that we should protect ourselves from or defend ourselves

against.

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Strengths and weaknesses relate to the project itself, opportunities and threats to the business environment in which the project is based.

PurposeA SWOT analysis is used, on a periodic basis, to provide a critical analysis of the project in relation to its environment. It can be used by the project team, in order to help them to improve their performance, or as a communication document to report progress to project sponsors.

Each of the SWOT sections should consider:

● what has happened in the past● what is the current situation● what might happen in the future.

The real value of SWOT analysis is not in the analysis itself, it is in how we use it as a basis to discuss and agree future action.

(b)Strengths● Major structural work completed to schedule.● Recognition of the scale of the problem.

Weaknesses● Resignation of project manager.● Relationships within project.● Misunderstandings and communication breakdown.● Poor reporting of progress.● Insuffi cient slack in project programme.● Absence of project control procedures.

Opportunities● Good relationship with subcontractor prior to this project.

Threats● Relationship with elevator subcontractor.● Potential impact on project completion.● Potential impact on business cash fl ow.

Looking at the whole SWOT analysis, it is clear that the current situation is critical. The on-time completion of the refi t is seriously threatened by continuing delays on elevator installation. A number of actions are necessary to regain control of the project.

(c)Immediate actionsThe fi rst priority for the project must be to get the elevator subcontractor back to work. This will require a meeting to air and resolve differences. It is essential that this meeting is friendly and conciliatory, rather than confrontational; it may be necessary for Jane to apologise to the subcontractor, even if she feels she was right. Successful completion of the project must be our fi rst priority. I shall be producing a report for Jane on how we can improve relationship management in the project.

Once work on the project has recommenced, the project programme must be examined for any possible slack. It appears that elevator installation is a critical activity, but there

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may be some opportunity to reschedule subsequent activities or allocate more resource to them in order to ‘claw back’ the lost weeks.

Once the project programme has been studied (and hopefully amended), Jane and Samantha must be fully briefed. This should only happen after the programme has been re-evaluated, as it is possible that a simple solution exists to rescue the project.

Short-term actionsIn the short term, the control and reporting procedures relating to the project must be reviewed and improved. Reporting of progress is an important part of managing the rela-tionship between the project team and the project sponsors.

There are a number of formal project management methodologies, designed to improve control. It is important that we adopt at least some aspects of these to improve project management in the future.

It is also important for the project that we identify or recruit a permanent project man-ager as soon as possible. All projects need certainty and consistency, and having a project manager in place for the remainder of the project will improve control and reduce risk. The responsibility for replacing the project manager lies with Jane and Samantha.

Long-term actionsWe can learn a lot by comparing our project management process against models of best practice. I will be briefi ng you later on the different types of benchmarking and the likely benefi ts for future projects.

Anne Martensen should be asked to prepare a set of procedures for project management in Trend. This will allow projects to learn from each other, and should improve both the quality and consistency of project management. Anne may require additional resource or external help to produce these.

Solution 11 (a) Feasibility study – need and purpose

A feasibility study is a study that is carried out to assess the types of systems that are required by an organisation to meet its objectives. A feasibility study examines the current operational systems and considers alternative ways of meeting the systems and organisa-tion’s objectives. A feasibility study is needed to establish the technical, operational, legal and economic feasibility of the proposed system. The feasibility study is documented in a feasibility report which will make recommendations on the way to proceed. (b) Factors that should be considered during the e-commerce feasibility study

(i) The feasibility study provides the basis for the feasibility report. It will therefore have to consider a range of topics in suffi cient depth to allow a report to be prepared. The feasibility study will be carried out by a team who have been appointed by the steering committee. The steering committee sets the terms of reference for the study team, who will then carry out the study and prepare a report based on the terms of reference.

(ii) Analyse existing system. The study will start by analysing the current systems. ABC Inc.’s current hardware and software provision will need to be carefully examined, in

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order to establish whether the current confi guration could support an e-commerce operation. The answer will determine the scale of change proposed for the new sys-tem. Examples of the information that will need to be established and taken into account in the design of the new system include:● quantity, specifi cation and age of the existing hardware;● type of processors used, the operating system used;● networking capabilities;● speed and capacity of the CPU and disks;● security software and access controls available;● communication technology available;● type, quantity and source of sales orders currently processed;● type, quantity and timing of payments from customers;● current structure of the stock and customer records;● any current use made of the internet, e-mail or EFT.

(iii) Establish objectives. The study team will need to interview ABC Inc.’s management to establish the objectives of the proposed e-commerce system and to discuss critical success factors for the project. The information requirements of the management will also need to be established.

(iv) Involve users. The study team will also need to discuss the system requirements with users to establish the requirements of the system.

(v) Prepare system specifi cation. The analysis of the current system, the requirements of users and the information requirements of the management will be combined to determine the new system requirements and a system specifi cation prepared.

(vi) Compare alternatives. An outline logical system can then be prepared and alternative outline physical specifi cations specifi ed. The feasibility and advantages of each of the alternative systems can then be analysed. They can be judged by their:● Technical feasibility – to determine which alternative is most likely to meet the

technical specifi cations of the system.● Operational feasibility – the study will need to take account of the human, organi-

sational and political aspects of ABC Inc.:– The levels and types of skills required to operate the new system will need to be

considered and compared with the levels and types of skills currently possessed by the staff.

– The levels and types of changes proposed in the current jobs and possible changes to organisational structures.

– The consequent effects on status and promotional expectations of staff.● Economic feasibility – the costs and benefi ts of each proposal need to be estab-

lished, the timescale of their infl ow or outfl ow established and discounted to present values. The costs need to be separated into one-off costs and continuing costs, while the benefi ts can be separated into those that are tangible and can be quantifi ed and those that are intangible and unquantifi able. The proposal with the greatest NPV is selected. The problem in organisations like ABC Inc. is that many of the benefi ts associated with e-commerce will be intangible and therefore very diffi cult if not impossible to calculate. This means that a full cost-benefi t analysis will be diffi cult to carry out. The feasibility report may therefore have to report an

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NPV for each proposal based on the quantifi able costs and benefi ts along with a list of un-quantifi ed benefi ts.

(c) The contents of a feasibility reportThe primary purpose of the feasibility report is to enable the steering committee to make

a decision on whether to approve a systems design project or to cancel the project. It does this by presenting the work and conclusions of the feasibility study team. The report will set out:

● the feasibility study terms of reference;● the extent of the survey carried out on the existing system and the range of interviews,

and so on performed to assess the system requirements;● the alternative outline systems considered, those rejected and the results of the evalua-

tion of the remaining alternatives;● a clear recommendation for the steering committee to consider. The recommendation

could be to cancel the project; if the recommendation is to go forward it will recom-mend a preferred option;

● a timescale, a budget and a schedule of other resources required to implement the system if it is approved.

Solution 12 (a) Project management can be divided into four phases: (i) Start-up or initiation stage. The organisational aspects of the project need to be

setup. The project director and project manager have to be agreed. The feasibility report can be used to prepare the project initiation document. This will set out:● what is to be carried out● why it is being carried out● who is going to do it● how it is to be carried out● when it is to be carried out.An overall plan for the whole project will also be prepared, along with a detailed plan for the next stage.

(ii) Development stage. This is where most of the supplier’s work is carried out. In an IT project, the requirements defi nition, design, integration and test stages are included here.

(iii) Execution stage. This starts when the system has been completed by the supplier and is delivered to the customer along with full documentation. Staff training needs to be carried out and acceptance tests performed. The system will then be commissioned and taken over by the customer.

(iv) Completion stage. This stage starts when live running begins. Some time after the system has been implemented a post-implementation review should be carried out to establish whether the project’s objectives have been met.

The AZ Ltd stock system has completed the fi rst and second stages of the project and is now in the third stage.

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Planned time

Cutover

Selectand trainpersonnel

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Create data-bases

Writeprograms

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Actual time

(c) The Gantt chart or bar chart’s purpose is to help with project planning by showing the duration and sequence of activities in a project. The chart is also able to show actual progress alongside planned progress but does not show dependencies.

The information shown on the attached Gantt chart for the stock control implementation shows the following:

● The initial estimate for the time to write programs was 1 week less than the time needed. This 1-week delay meant that the fi le conversion could not start until Week 10; it actu-ally started in the middle of Week 10, 1.5 weeks late, possibly due to the lack of avail-able staff.

● File conversion has not yet been completed, although it was meant to be fi nished in the middle of Week 11.

● The purchase and installation of equipment took 1 week longer than planned. This delay caused the creation of the database and test programs to be delayed by 1 week, starting in Week 7 instead of Week 6.

● The creation of the database went very well and the team completed the task in 4 weeks instead of 4.5 weeks.

● Testing programs started a week late due to the delay in purchasing equipment, but is still unfi nished after 5 weeks; the original plan was for 3 weeks. This suggests problems are arising during testing, which could be related to the delays in writing the programs.

● Testing the system was meant to have started in the middle of Week 11, but has not started yet as it is dependent on the fi les being converted and the programs tested, nei-ther of which is completed.

(b) Gantt chart

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● The system cutover is likely to be delayed as fi le conversion and program testing are not yet fi nished and are holding up system testing. System testing is planned to take 2.5 weeks, so even if it started today the cutover will be delayed by half a week.

Solution 13 (a) Types of control. If we take as our basis for discussion that a control is any mechanism

designed to ensure that a project achieves its objectives, then the PRINCE2 methodol-ogy (as do others) contains a wide number of control elements.● The organisation structure of the project team under PRINCE2 enforces a clear

structure of authority and responsibility on the participants. The structure of supervi-sion and reporting (see below) seeks to ensure that each party has clear objectives and that they are supported from both above and below in achieving those objectives.

● In PRINCE2, there are a series of ‘management products’ associated with the man-agement and control of the project. These include, for example, the project initia-tion document, the project budget, the project plan, the quality plan and various checkpoint and progress reports.

● The PRINCE2 methodology includes various different types of plans. These ensure that all the participants in the project have a clear understanding of the tasks to be completed and the relationships between them.

● PRINCE2 contains many quality controls such as clearly defi ned technical and management procedures. These ensure that work is completed not just on time but also at an appropriate level of quality.

(b) Control framework. We can take some of the most appropriate control elements from the PRINCE2 methodology and use them to improve the management of major projects within Trend. I would suggest that, as a minimum, the following aspects of project management should be covered by control procedures.● Each project should have a formal organisation structure. The control responsibili-

ties of the various parties are outlined below.● The Trend organisation (in the form of its directors) is responsible for project selec-

tion and the overall approval of the project plan and budget. This approval would be in overview only, as the detailed breakdown of both plan and budget are operational issues. The organisation should provide a clear set of objectives and constraints to the project.

● The project sponsor (or, in a complex project, the steering committee) is responsible for ensuring that project objectives are achieved. The sponsor also reports progress and issues on a periodic basis (perhaps quarterly) to the organisation. The project sponsor agrees the detailed plan and budget with the project manager, and provides advice and support downwards.

● The project manager is responsible for the day-to-day management of the project team and subcontractors. He/she will communicate objectives and monitor perform-ance against the plan and budget. Any variations to the project must be recorded and agreed with the sponsor, and any issues or slippages reported upwards. A series of review meetings (weekly) will take place between the project manager and spon-sor, and these will be supported by periodic progress reports (monthly), including a project overview using SWOT analysis and a report of progress against plan using a Gantt chart.

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● The members of the project team, and the representatives of subcontractors, will report to the project manager on a frequent basis. This will take the form of daily briefi ngs, supported by weekly or monthly written progress reports.

● Copies of all project documentation and reports will be kept in a well-referenced fi ling system. This will allow any of the project participants to check what has been agreed.

● At the end of the project, an independent quality assurance inspector will carry out a full post-completion audit of the project. All participants will be briefed on the fi ndings of the audit and encouraged to discuss the issues that arise. Their sugges-tions for the improvement of future projects will be recorded and circulated widely throughout the organisation. This will allow the participants in other projects to learn and improve.


6

Management


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6LEARNING OUTCOMES

After completing this chapter, you should be able to:

� discuss the concepts of power, bureaucracy, authority, responsibility, leadership and delegation;

� demonstrate the importance of organisational culture;

� explain the process and importance of mentoring junior colleagues.

6.1 IntroductionThis chapter aims to explore the nature of management and the factors that infl uence the relationship between managers and subordinates. The fi rst section examines the historical foundations of management and some of the different theoretical perspectives, considering their relevance and application for organisations today. The concepts of power, authority, responsibility and delegation are then discussed.

Leadership can be a signifi cant determinant on organisational performance since the effectiveness of the leader can impact on the nature of the relationship with subordinates. The different approaches to leadership will be explored, along with some of the more con-temporary thinking on transformational leadership and entrepreneurship.

A major challenge for managers arises from an increasingly global business environment in which many organisations now operate. The management implications of globalisation will be considered with specifi c reference to managing across different national cultures.

6.2 Classical and contemporary theories of management

The study of management theory and development of ideas on effective management prac-tice helps in providing an understanding of the principles underlying the process of man-agement and which in turn infl uences management behaviour in organisations. The main

Management


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Figure 6.1 illustrates the 4 main approaches.

Classical

– Scientific Management– Functions of Management

– Bureaucracy

Human Relations

Systems

Contingency

Figure 6.1 Main schools of management thinking

6.2.1 The Classical SchoolThe classical approach to management emphasises the technical and economic aspects of organisations. It assumed that behaviour in organisations was rational and logical. There are different approaches within the Classical School which can be identifi ed as Scientifi c Management, Administrative School and Bureaucracy. The foundation on which the vari-ous theories developed was that management could be learnt and codifi ed. These ideas were developed in an era when mass production and economies of scale were viewed as central to business success. Although some of these theories were developed over a century ago they do continue to inform management practice today.

There are some common interests that all these different perspectives focus on:

● The purpose and structure of organisations and planning of work.● The technical requirements of each job.● The principles of management.

Scientific managementFrederick W. Taylor (1856–1917) is known as the father of the scientifi c management movement. Taylor spent some 30 years in the steel-and paper-making industries and iden-tifi ed that:

● workers varied their pace at work to suit the conditions;● managers made very little effort to specify what made up a reasonable day’s work;● no effort was made either to identify the best methods, or to train the workers in the

best methods.

These discoveries stimulated his interest in the art of work study. He stated that the principal object of management should be to secure the maximum prosperity for both employer and employee. He made many other important contributions to management


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thinking such as the ‘exception principle’ in management reporting. He laid down four principles:

1. The development of a true science of work. This was the assessment of what consti-tuted a fair day’s work, as well as a fair day’s pay.

2. The scientifi c selection and progressive development of workers, involving careful recruitment and training to ensure that the worker was capable of achieving output and quality targets.

3. The bringing together of the science of work and the scientifi cally selected and trained men. This was referred to as the mental revolution, as the workforce was encouraged to develop to their full potential.

4. The constant and intimate cooperation between management and workers. Work was allocated by consultation and cooperation between management and workers.

Taylor recognised that if specialised knowledge and skills were concentrated in the hands of well-trained and able employees, there would be an improvement in productivity. He therefore broke jobs down into separate functions and then gave each function to an individual. Sometimes, this meant that as many as eight functional foremen were giving instructions to other workers. Taylor believed that it was only through the effective use of control by specialists that best use would be made of the resources available to increase the size of the incentive surplus to be shared between effi cient staff.

Taylor’s method cut across traditional craft skills and organisational principles because it started from scratch, from real facts. The method was:

● observe and collect data● analyse data● classify results● develop hypotheses● test these by experiment● formulate laws● use and apply the laws.

At Bethlehem Steel Corporation, he noticed that the same size shovel was being used to shovel different kinds of material, and therefore different loads were being lifted by the workers. He calculated that 21.5 lbs (9.8 kg) was the optimum weight for effi ciency, and had shovels redesigned so that their size matched up to 21.5 lbs of the material being shov-elled. This improved productivity and earnings.

ExerciseWhich elements of Taylorism are evident today:

(a) at the manufacturing level?(b) at the strategic level?

SolutionScientifi c management has not gone away, quite the reverse.

(a) Statistical process control and computerisation requiring precise measurement and management by exception.


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application of scientifi c management principles of division of labour and specialisation of function.

The administrative schoolHenri Fayol (1841–1925) was the manager of a group of mining and engineering companies in France. His best-known book was General and Industrial Management. His approach was to view problems from the managerial aspects and to specifi cally analyse the work of management, stressing that most management features had universal application. He defi ned which operations give business control:

● Technical: production, maintenance, design.● Commercial: sales, purchasing, marketing.● Financial: capital investments.● Security: protection of goods and people.● Accounting: accounts, balance sheets, stocktaking.● Managerial: various functions.

Fayol concentrated on the managerial aspect of organisations and explored the role of managers. He identifi ed the common features as:

● Forecasting and planning.● Organising: allocation of resources, duties and authority.● Coordinating: working together to achieve company objectives.● Commanding: giving orders and instructions.● Controlling: comparing actual performance with expected or budgeted.

The effective manager is judged by the effi ciency with which he applies these elements, and it will be seen that Fayol identifi ed the need for managers to be trained for their new roles before promotion.

Confusingly, he supplemented these with thirteen general principles of management.

1. Division of labour. The use of specialisation to achieve more effi cient use of labour at all levels.2. Authority and responsibility. Fayol identifi ed the existence of a manager’s offi cial author-

ity derived from his offi cial position, and his personal authority derived from his experience, intelligence and charisma. Fayol stated that ‘authority should always be commensurate with responsibility’.

3. Discipline. Respect for agreements directed at achieving obedience, application, energy and respect. Discipline should be maintained by a fair disciplinary system, with penalties judiciously applied by worthy superiors.

4. Unity of command. A subordinate should receive orders from one superior only. This principle could give rise to problems concerning the role of ‘staff ’ and ‘line’ management, unless duties and responsibilities were clearly defi ned.

5. Unity of direction. There should be one head and one plan for each group of activities. Unity of direction relates to the organisation itself, whereas unity of command relates to the personnel in the organisation.

6. Personal interest. The interests of one employee or group of employees should not take priority over that of the general interest and aims of the organisation.

7. Remuneration. This should be fair, giving satisfaction to both employer and employees alike.


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8. Scalar chain. The scalar chain is the term used to describe the chain of superiors from the highest to the lowest rank.

9. Material and social order. This defi ned the existence of a place for everything and every-thing in a place.

10. Equity. A combination of kindness and justice in managers and employees.11. Stability of tenure. Stable employment to enable goals to be achieved.12. Esprit de corps. People must be encouraged to work as a team. ‘In union, there is

strength.’13. Initiative. This should be developed to the full within the bounds of authority and

discipline.14. Centralisation. Control should be retained centrally for maximum effi ciency.

Bureaucracy: a culture, process or a form of organisation?Bureaucracy is not ‘red tape’, but a technically superior way of operating through the power vested in the offi ce (French bureau, German Biiero) rather than the person.

German sociologist Max Weber (1864–1920) developed his model of the ‘ideal type’ bureaucracy, in which he explored the characteristics of a rational form of organisation. Today, the term bureaucracy tends to have many negative connotations, but Weber used it to describe what he believed to be potentially the most effi cient form of organisation – ‘technically superior’. However, the model he put forward was deliberately idealised to high-light the key features of this form of organisation. Weber’s model of bureaucracy was based on authority derived from the law and written rules, as opposed to other forms of organisa-tion based on tradition or personal (charismatic) authority. The ideal type bureaucracy has a number of distinctive characteristics, each of which contributed to the effi cient functioning of the organisation.

These eight characteristics were as follows:

1. Specialisation. Clear division of labour, so that each member has well-defi ned spheres of authority to carry out his or her duties.

2. Hierarchy. A hierarchy of authority, in which offi ces are linked through a clear chain of command.

3. Rules. Strict rules and procedures govern decision-making and conduct of offi cials.4. Impersonality. Objective and rational decisions rather than personal preferences.5. Appointed offi cials. Managers are selected by their qualifi cations, education or training.6. Career offi cials. Managers pursue their career within the bureaucracy and work within a

defi ned salary structure.7. Full-time offi cials. Professionalism requires commitment rather than dilettantes.8. Public/private division. Money is used in a limited liability framework to prevent family

money being used, as this creates conservatism because of personal risk.

These features were developed against a background of a society where money bought privilege, and positions of power were used to promote patronage. Even army generals like Sir Arthur Wellesley (later Duke of Wellington) bought their commissions!

Nowadays, most large organisations, whether grouped according to the major types below (functional, divisional or matrix), will be bureaucratic. Many others, though smaller, will also have to have a rational structure because they need to conform to regula-tory bodies of one sort or another and to legislation, especially in the employment fi eld. This is currently being debated in the United Kingdom as ‘red tape’ is snuffi ng out a nascent entrepreneurial spirit. For this reason, bureaucracy is not viewed as a specifi c form


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aspect is based on position power, and results in what Harrison termed the role culture, and which Handy drew as a temple.

Because of the formal nature of this type of organisation, the main disadvantages are:

● slow response to change, as many rules have to be changed;● lack of speedy communication owing to the segregated ‘offi ces’ and levels;● little need for involving staff in decision-making;● rules stifl e initiative and innovative ideas, preventing development;● no recognition of very important informal relationships.

Alvin Gouldner’s Patterns of Industrial Bureaucracy identifi ed three patterns of bureauc-racy based on the nature of the management style and the workforce attitudes.

1. Mock bureaucracy. Often occurs under centralised systems, where decisions are made by an external authority. At local level, these rules are often amended to suit the situation.

2. Representative bureaucracy. Through maximum participation and involvement in the setting of the rules, there tends to be a high level of acceptance.

3. Punishment-centred bureaucracy. Describes rules and procedures that are drawn up by one side, but imposed on the other side. It is often a source of friction because of the lack of agreement and commitment from both sides.

Whereas Weber had not considered the motivational needs of people at work, Gouldner clearly indicated the need for appreciating the feelings and opinions of the workforce, if cooperation was to be encouraged.

6.2.2 The human relations schoolElton Mayo (1880–1949), together with several colleagues, carried out the famous Hawthorne investigations for the Western Electric Company at its Hawthorne Works in Chicago during the 1920s and 1930s.

Mayo’s team was concerned with fatigue and its effects on output. When they increased the lighting in one of the work areas, output increased. This would have indicated that extra lights helped the workers see better and thus to suffer less from fatigue effects.

When the team of scientists took away the extra lights, however, output increased again!!

Clearly, it was not the lights which were the cause. Mayo had hit on the ‘experimenter effect’ – the infl uence of the scientists on the workforce. It was their presence, their interest in the workers and their environment, which had increased their motivation, and, conse-quently, their output.

Mayo developed this fi nding into a detailed series of studies when the effects in the fi rst area were not observed in another area. Here, it was group attitudes – a micro social system – which effectively rejected the scientists, so the experimenter effect was not contributing to extra motivation.

It may have been signifi cant and Fiona Wilson argues that it was – (in her book Organisational Behaviour and Gender) that the fi rst area was mainly female, the second male. In the event, Mayo and his colleagues had redressed the balance away from Taylor’s techniques and back towards people.

Frederick Herzberg carried forward Mayo’s emphasis on the identifi cation of the motivational needs of individuals. He believed that human behaviour even at work is


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directed towards achieving certain desirable goals or incentives, or towards avoiding the other undesirable negative consequences. His two-factor theory of motivation describes motivational factors and hygiene (or maintenance) factors.

Motivational factors● Challenging tasks● A feeling of achievement● Responsibility● Personal growth● Advancement● Recognition of ability.

Hygiene (or maintenance) factors● Rules● Environment● Work breaks● Supervision● Wages and fringe benefi ts.

Herzberg believed that only motivators can move employees to action: the hygiene factors cannot. They can only prevent dissatisfaction. Even money, he claimed, is not a motivator though we cannot do without it.

His major claim is that we like what we do at work and we dislike the circumstances of how we do it. He does admit that some jobs are ‘idiot-jobs’ and do not have motivational potential. Also, some people are driven more by hygiene factors than motivators – if they are in need of money, for example.

Experiments in job enlargement, job rotation and job enrichment, which provides for the psychological development of the worker, have been derived from Herzberg’s fi ndings.

Using Herzberg’s two-factor theory of motivation, give some specifi c examples of hygiene factors and motivating factors that are used in the organisation that you work for, or one that you are familiar with.

6.2.3 Systems theoryTrist and Bamforth developed a socio-technical systems theory (Figure 6.2).

While he was working at the Tavistock Institute, Trist’s most famous research was into the structure and operation of the longwall’ method of mining in County Durham in the 1940s as it highlighted the interaction between social needs and technological activities. The longwall method introduced new cutting equipment which widened the narrow coal ‘face’ into a ‘longwall’. But very soon the low morale, high absenteeism and deteriorating relationships were so serious that the Tavistock Institute was invited to investigate causes and possible solutions to the problems.

Trist and Bamforth diagnosed that although the new methods had been introduced ‘scientifi cally’:

● close-knit groups had been broken up;● communication was diffi cult because of the geographical spread of workers;● new payment schemes caused jealousy among the workforce;● too much specialisation and individuality was built into the jobs.


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The mine owners had not considered the effects on the workforce, showing an igno-rance of individual and group needs at work, especially in such a traditionally close-linked occupation as mining. The social and technological factors are interlinked and cannot be treated in isolation.

Figure 6.2 indicates the interaction that will inevitably occur when changes are made to either the social or technical aspects of work. Managers should note that this interaction, if ignored, would inevitably bring problems.

6.2.4 Contingency theoryManagers, researchers and consultants often found that the methods suggested by the clas-sical management schools did not always work. The idea of one approach being right – whether it be the school of scientifi c management, classical/universal human relations or systems – is rejected in favour of contingency. The contingency view suggests that the effectiveness of various managerial practices, styles and techniques will vary according to the particular circumstances of the situation. The problems arise when two such contin-gencies are in confl ict – the theory does not describe how such confl icts can be resolved.

ExerciseWhat do you consider to be the main contingencies?

SolutionThe main contingencies are related to the external and internal environments of the organ-isation – in other words, a mechanistic organisation is contingent upon a stable environ-ment and so on. Thus, any stimulus (government policy, technology, industrial relations, competitor’s quality) will have an effect on structure.

Mechanistic versus Organic OrganisationsBurns and Stalker (1961) distinguished between mechanistic and organic organisations. Burns is quoted as saying: ‘The beginning of administrative wisdom is the awareness that there is no one best way of designing a management system.’ Burns, a professor of sociol-ogy based in Scotland, combined with Stalker, a psychologist, in a study of the way in which high-technology industries were being introduced into Scotland. The diffi culties

Socialsystems

Technicalsystems

WORK

Figure 6.2 Trist and Bamforth: socio-technical systems theory. Reprinted by permission of Sage Publications Ltd. from ‘Human Relations’ by Trist, E.L. and Bamforth, K., © The Tavistock Institute, 1951


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experienced by low-technology companies in the conversion process to high technology highlighted many organisation structural problems.

Burns and Stalker’s studies led them to distinguish between two major types of organisa-tions – mechanistic and organic. However, they considered these two systems to be located at opposite ends of a continuum, with various combinations in between.

Features of a mechanistic organisation● High degree of task specialisation.● Responsibilities and authority clearly defi ned.● Coordination and communication – a responsibility of each management level.● Selectivity in the release of top level information to subordinates.● Great emphasis on the organisational hierarchy’s ability to develop loyalty and

obedience.● Employees are often locally recruited.

The mechanistic system was seen to be appropriate in fairly stable conditions where the management of change was not seen to be an important factor. The relationship with Weber’s bureaucracy is obvious.

Features of an organic organisation● Skills, experience and specialist knowledge recognised as valuable resources.● Integration of efforts via lateral, vertical and diagonal communication channels.● Leadership based on consultation and involvement in problem-solving.● Commitment to task achievement, survival and growth more important than loyalty and

obedience.● Employees are recruited from a variety of sources.

The organic system is seen to be more responsive to change, and is therefore recommended for organisations moving into periods of rapid changes in technology, market orientation, or tasks.

(The appropriateness of organisational structure to its environment is a cornerstone of contingency theory.)

Technology has been defi ned as ‘the way work is carried out’ and from 1953 to 1957 Joan Woodward’s Essex Studies examined features of the various organisations with special emphasis on such factors as:

● number of levels of authority;● the spans of control at different levels;● communication processes;● use of specialists;● use of management committees;● recruitment of graduates.

In her analysis of the 100 companies (which ranged in size from 100 to 1000 employ-ees), she identifi ed ten types of technology which were condensed into three main groups. These are:

● unit and small batch production – typical of ‘craft’ industries;● large batch and mass production – for example, cars;● process production – for example, cement, oil, and food processing.


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structure:

● In heavily mechanised process technologies taller hierarchies were found to exist, but with levels of committee rather than straight-line instruction. Since technical expertise is important, people were highly skilled, often graduates, with most of the organisation headcount being involved in administration. Control was far easier in these organisa-tions. They involved groups of more highly skilled workers and job satisfaction was highest.

● Large batch and mass production companies have shorter lines of command and thus fewer managers and clerks. There were a traditionally larger number of direct operatives. The large number of semi-skilled workers required for mass production means that the span of control of supervisors is very wide, and this may create an environment where human and industrial relations are strained. Job satisfaction was lowest.

● Unit and small batch production companies were found to have short hierarchies, with no manager very far from production work, and a limited number of administrative con-trols. They tended to involve much smaller groups of more highly skilled workers and job satisfaction was higher. Job satisfaction was middling.

Large batch and mass production systems, because of the high numbers of specialists involved, create more paperwork and demand clearer cut defi nitions of duties.

Woodward’s studies indicated how four major factors in any company (task; technology; people; and structure) were interrelated, and that management needed to be aware that when one of these factors changed, it was vital to recognise the effects this change would have on the other factors.

These studies contributed to the debate as to whether technology forced organisations to change their structure and culture.

6.2.5 Peter Drucker: management by objectives (MBO)Drucker popularised the process of defi ning organisational objectives (targets) and linking them to a timescale. He stated that objectives should be agreed for areas where performance and results have a direct infl uence on the achievement of the basic company aims:

● profi tability;● managerial performance;● worker performance;● public responsibility.

Management by objectives can be defi ned as a type of control strategy: controlling outputs. However, Drucker emphasised that if objectives are to be effective, they must be stated in behavioural or measurable terms, so that any deviation can be highlighted at an early enough stage to permit corrections to be made and that managers, when setting objectives, have a responsibility to:

● agree their own departmental targets with their superiors;● discuss and agree targets for their staff that are achievable;● ensure that all targets set are measurable and possible, and that resources are made avail-

able together with some setting of priorities;


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● apply the control system and discuss progress with staff at regular intervals. Where staff jointly set objectives with their manager they achieve valuable feedback on performance, a motivating factor acknowledged by Herzberg.

These were taken further in the United Kingdom by John Humble.

6.2.6 Contemporary perspectives on organisationsThe more recent literature on organisations and management is vast and diffi cult to cat-egorise in the simple ways used for early contributions to organisation theory.

Gareth Morgan has argued that we can view organisations in different ways as we try to understand them. We are rarely aware of the image of organisations we take for granted but, just like the photographs of the Parthenon from different perspectives, they funda-mentally infl uence what we see and the explanations we put forward to make sense of it. However, the Parthenon can be approached from different directions, though not all are equally easy. Different angles will give different perspectives, and by arriving very early in the morning you could get a photograph with unusual lighting and fewer people in it.

The same is true of the way we look at organisations and the process of management.From one perspective it is helpful to think of organisations as machines, in which the

various jobs and departments are carefully designed to work smoothly together to perform certain functions effectively. This is certainly the view implicit in early theories such as classical and scientifi c management.

ExerciseWhat are likely to be the limitations of viewing organisations as machines? Can you think of any other ways of looking at organisations that might be useful?

SolutionThe view of organisations as machines provides some useful insights, but also imposes lim-itations, which in some circumstances can be severe. For example, the use of basic costing techniques in large multi-product fi rms may result in misleading information for decision-making. In this type of situation, more sophisticated models which recognise the more complicated nature of the organisation, may be more appropriate.

The limitations of mechanistic perspectives on organisations are as follows:

(a) They can create organisational forms that have great diffi culty adapting to changed circumstances.

(b) They can result in mindless and unquestioning bureaucracy.(c) They can have unanticipated and undesirable consequences as the interests of those

working in the organisation take precedence over the goals the organisation was designed to achieve.

(d) They can have dehumanising effects upon employees, especially those at the lower levels of the organisational hierarchy (Morgan, 1986).

Morgan goes on to argue that there are other ways of viewing organisations that lead to different insights. It is not possible to go into all of those here, but two other perspectives he identifi es are the view of organisations as organisms and organisations as cultures. It is


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one perspective in their search for effectiveness.

6.3 Power, authority, responsibility and delegation

Individuals within the workplace have different relationships with each other. To be able to analyse the nature of management relationships it is necessary to understand the concepts of power, authority, responsibility and delegation.

6.3.1 Power and authorityAt the most general level, management and leadership are concerned with the process of infl uencing other people so as to bring about changes in their attitudes or behaviour.

The ability to exert infl uence depends on the type and amount of power and authority the manager possesses. A person’s position in an organisation gives

them authority over others and comprises a legitimate power, especially when follow-ers accept that the leader has the right to direct them.

6.3.2 Authority as legitimate powerAuthority is essentially the right to take actions and make decisions. Max Weber (1864–1920) who studied power and how it was applied in society proposed that authority legiti-mises the exercise of power within the structure and rules of the organisation. Hence, it allows individuals within an organisation to issue instructions for others to follow. Weber defi ned three bases for such authority as follows:

Charismatic authorityThis is derived from the personality of the leader. Weber used the term ‘charisma’ (literally ‘the gift of grace’) to describe that personal quality which sets the leader apart. This is most commonly seen in politics or religion, but people like Tom Peters (of the Excellence lit-erature), Richard Branson of Virgin Airways and Anita Roddick of Body shop all provide examples in the industry. Because the charismatic power in the organisation is so depend-ent on the leader, diffi culties arise when he or she has to be replaced. Unless someone else is available, who also possesses the necessary charisma, the organisation either decays or survives in one of the other two forms – traditional if the succession is made hereditary, or rational-legal if a set of rules is drawn up to decide the succession.

Traditional authorityThis is derived from custom and practice or status such as aristocratic or middle-class power. The personality of the leader is irrelevant: he or she inherits the status of leader because of the long-standing belief in the natural right to ‘rule’ which is sometimes handed down. Examples would be where the organisation is family owned and appointments, or on family rather than ability and procedures depend on what has always been done. Even a big multinational like Ford has had a succession of Henry Fords running it!


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Rational-legal authorityThis is based on the legal occupancy of senior positions and is based on the acceptance of formal rules and procedures and on impersonal principles. So, the legal rational authority will stem from the hierarchal position in the organisation and is typifi ed in bureaucratic types of structures.

It represents the ability to perform particular functions and their operations are based on following a set of written rules. Weber called this type of organisation ‘bureaucratic’ because the organisation is based on a system of offi ces or bureaux arranged in a hierar-chy. The various tasks which it is designed to carry out are distributed among the offi ce-holders, whose authority is not personal but is vested, impersonally, in the offi ce. This clear separation of personal from business relationships is emphasised in the rules con-cerning appointment and advancement, which are based on technical qualifi cations and not personal ones.

Authority is enshrined in the legal structure of companies who register under the vari-ous Acts of Parliament and with the appropriate Stock Exchanges, as this registration gives directors the authority to build a business in certain areas through their ‘articles of associa-tion’ which specify that area, and to issue a certain number of shares and so on. Banking arrangements under various Finance Acts describe the authority of various roles such as the signing of cheques up to certain limits.

A chain of authority links each level of the organization, and functional departments laterally have authority to act over different issues, though both are diffi cult to work through at the borders of these limits. This is essentially line management and direct authority.

The authority of staff managers, such as the management accountant, is more diffi cult to capture than that of line managers who have control authority.

The relationship between specialised staff managers and line managers can be such that staff have advisory, service, control or functional authority in respect of line activities:

● Advisory authority. Staff offer suggestions, give opinions and prepare plans or policies for their area of specialty for the consideration of line managers. Line managers are not, of course, obliged to follow staff advice.

● Service authority. This is the authority given to staff for the conduct of activity that has been separated from line work as service to the line. Line managers are obliged to accept this service, although they may, of course, complain about its quality. The purchasing function, for example, has service authority.

● Control authority. Staff with control authority have responsibility for controlling cer-tain aspects of line performance, as is the case with quality control and inspection staff. Control authority moderates line authority in important respects.

● Functional authority. This is said to be the authority to make decisions that fall out-side those made within the formal chain of command. It is usually confi ned to specifi c areas of activity, for example health and safety, on which the responsible manager has the authority to issue instructions and, say, prohibit the use of unsafe equipment and machinery. Functional authority carries with it the right to both insert and enforce standards of performance and behaviour.

6.3.3 Organisational powerThe management and leadership relationship with subordinates is about infl uencing the behaviour of others. To understand why subordinates comply and ‘obey’ leaders, it


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ENT is important to understand the nature of power and how an individual can gain power.

French and Raven (1959) identifi ed the following fi ve possible bases of a leader’s power:

1. Reward power, where the leader is able to directly infl uence the intrinsic and/or extrinsic rewards available to followers.

2. Coercive power, where the leader uses penalties or sometimes physical punishments to enforce compliance.

3. Referent power, when followers believe that the leader has desirable characteristics that should be copied, or has inspirational charisma.

4. Expert power, based on the followers’ belief that the leader has certain expertise and knowledge relevant to a particular problem or issue.

5. Legitimate power (i.e. authority), when followers accept that the leader has the right to infl uence them in certain areas or aspects of behaviour.

ExerciseCan you see Weber’s three types within the French and Raven scheme?

SolutionCoercive and Legitimate � historical/traditional.Reward and Referent � charismatic/personal.Expert � legal/rational.

Power bases within organisations vary, Perrow (1970) described the sales department as the ‘main gate between the organisation and the customer’ – the source of money. Consequently, the sales department enjoys a high level of power. Other fi rms have cultures based on research and development or engineering, in which these departments are powerful. The Rolls-Royce RB211 engine nearly bankrupted the company in 1971 as it was controlled by engineers (hence they possessed the power) rather than fi nance staff; General Motors produced some appalling cars (such as the sub-compact Vega) when it was controlled by the fi nance department which insisted on common parts.

Pfeffer and Salancik (1977) defi ned organisational power as the result of the interaction of fi ve factors:

1. Dependency creation;2. Financial resources;3. Centrality of activities;4. Non-substitution;5. Uncertainty reduction.

6.3.4 ResponsibilityResponsibility involves the obligation of an individual who occupies a particular position in the organisation to perform certain duties, tasks or make certain decisions. Though managers can delegate authority for tasks (in theory anyway) they cannot delegate responsibility: the ‘buck’ should stop with the responsible manager. However, in a large organisation it is very diffi cult to work out exactly which layer of management is actu-ally responsible. It is sometimes supposed that what is delegated is responsibility, but a


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manager in no way diminishes his own responsibility by delegating part of his task. What he, in fact, does is to create a new responsibility for the subordinate to himself without in any way dividing his own responsibility. Indeed, he even adds to his responsibility because, by delegating part of his task to a subordinate, he creates for himself the new responsibility of control. This is an important point because what the manager delegates is work and the necessary authority to do it.

6.3.5 DelegationWithout delegation formal organisations cannot exist. If there was no delegation the chief executive would be responsible for everything. Of necessity, the manager has to give some of the work (tasks and decisions) for which he is responsible to subordinates. In many organizations, there is a defi nitive list of authority delegation – mostly to do with approval for monies spent or committed. Other responsibilities are generally left to the discretion and judgment of the manager and his or her view of the capabilities and time available for his or her individual staff, bearing in mind training and development needs and the time the manager has for supervision and on-the-job training.

Of course, management could not completely delegate the tasks, and the associated authority for planning, coordinating, controlling, organising and monitoring; to do so would be to abrogate responsibility (though this is not too uncommon in practice). On the other hand, some laissez-faire leadership styles are effective, as are democratic styles in certain circumstances. Both of these involve delegation to a point of allowing decisions to be made at a very low level.

The barriers to delegation must be overcome because the process is not only inevitable, but when carried out properly can result in a number of signifi cant advantages:

● Effectiveness and effi ciency – Getting more work done is the raison d’etre of all teamwork, and delegation requires teamwork. It is effective because it develops the staff gradually and allows the manager to spend more time on strategic issues.

● Training – Training by doing is acknowledged to be a very effective method. By delegat-ing more and more and further and further down the line, and by insisting on full brief-ing and consultation between managers and subordinates, training becomes not a special process to be done at rare intervals, but a general day-to-day activity.

● Decision-making – Better decisions are made by people who are close to the customer or production process and also quicker decision-making, since subordinates do not always have to refer problems up the hierarchy for someone else to check them.

● Management succession – ‘The King is dead, long live the King’, is nothing more than a pious hope unless the new boy has a chance of acclimatisation: he not only needs to get to know the routine but also to accustom himself to the responsibilities of managing and the development of managerial skills among a wider group within the organisation.

● Development and self-evaluation – A subordinate can be tested under actual condi-tions, before being permanently promoted. By regularly ensuring a free fl ow of del-egation, there will be continuous assessment of staff, accepted as a matter of routine, and increased motivation as people are given clear authority for more demanding activities.

● Job satisfaction – The most valuable advantage of delegation is job satisfaction for subordinates. By ensuring that the mix of delegation is appropriate, some of the interesting jobs will be delegated and not only the tedium. By increasing employees’


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remains though about the appropriate degree of delegation in any particular circum-stance; this is a matter of the extent to which authority and accountability should be passed down to lower levels in the hierarchy. If there is extensive delegation the organisation will operate on a decentralised basis, whereas if most decisions are made by a few people at the top of the organisation it will be highly centralised. This is obviously a matter of degree: no organisation exhibits complete centralisation or decentralisation.

The process of delegation is usually one or a combination of the following steps:

● Abdication – To leave issues without any formal delegation, which is a very crude and usually ineffective method.

● Custom and practice – An age-old system whereby precedent rules. The most junior member of staff opens the mail, gets the coffee and so on, and seniority allows managers to slide out of various duties because ‘rank has its privileges’.

● Explanation – Involves the manager in ‘briefi ng’ subordinates along the lines of how the task should be done (not too little and not too much – a fi ne balance that requires judgement).

● Consultation – Prior consultation was once quite novel in manager/union relations and also between managers and subordinates, but nowadays prior consultation is considered to be important and very effective. People, if organised, are immensely powerful; by con-tributing or withholding their cooperation they make the task a success or failure. At least, some managers now have the humility to admit that sometimes good ideas come from below. Indeed, the point of view of the person nearest the scene of action is more likely to be relevant.

6.4 Management and the Role of ManagersThe various theories that have been discussed so far have identifi ed a range of views on what constitutes management and the different roles for managers. However, the overarch-ing objective of management is the process by which the efforts of people in the organ-isation are co-ordinated and directed toward the achievement of organisational goals. It involves the clarifi cation of objective, planning, organising, directing and controlling other people’s work (Mullins 2004). The function of a manager, as determined by Fayol includes:

● Planning. Selecting objectives and the programmes and procedures for achieving the objectives of the organisation.

● Organising. Providing the resources to carry out the activities of the organisations and grouping tasks which need to be performed to achieve organisational goals.

● Coordination. Unifying and harmonising the activities of individuals and groups to achieve organisational objectives. Management needs to reconcile any differences by making individuals aware of how their work is contributing to the goals of the overall organisation.

● Commanding. Giving instructions to subordinates to carry out tasks over which the manager has authority for decisions and responsibility for performance.

● Controlling. Measuring activities to ensure performance is in accordance with plans and any deviations are identifi ed and corrected.


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Other writers such as Drucker have tried to describe what managers do. He identifi es three broad tasks:

1. Satisfying the goals or mission of the organization.2. Enabling the worker to achieve and focus on productivity.3. Managing social responsibility.

Mintzberg has also contributed to the debate by identifying the roles which managers fulfi l in the conduct of their job. He classifi es the activities which constitute the essential function of a managers’ job into a set of ten managerial roles. These are divided into three groups:

1. Interpersonal roles. These arise from the manager’s relations with others and include a fi gurehead role representing the organisation; a leader role having the responsibility for motivating employees; a liaison role involving networking with others not only outside their own area of work but also outside the organisation.

2. Informational roles. The manager has an important role to play by collecting and dis-seminating information. This will include a monitoring role, where the manager scans for information to help them develop an understanding of the organisation and its internal and external environment; a disseminator role where information is shared with employees by holding meetings or passing on information; and a spokesperson role by communicating information to different parts of the organisation and outside the organisation.

3. Decisional role. This involves the manager in making strategic decisions about the future of the organisation. In an entrepreneurial role, the manager will seek to make changes and look for new ideas; as a disturbance handler, the manager will respond to pressures and crises, and unpredictable events. It will also include a resource allocator role, allo-cating resources to others, managing the budget and constructing timetables and sched-ules; as a negotiator the manager will participate in negotiating activities with other individuals to reach agreements, solve work disputes and resolve arguments.

6.4.1 Managers or LeadersThere are many different views on whether managers and leaders are one and the same. However, the stance taken in this text is that whilst the job of the manager will normally require some leadership competence, not all leaders are managers. Individuals are often given the title of ‘manager’ based on their position in the organisation hierarchy, which gives them power and authority (as outlined in the previous section). Leadership, on the other hand, can be viewed as providing direction, creating a vision, and then infl uenc-ing others to share that vision and work towards the achievement of organisational goals. Bennis and Nanus (1985) make a helpful distinction between leading and managing summed up in the following quote:

to manage means to bring about, to accomplish to have responsibility for, to conduct. Leading is infl uenc-ing, guiding in direction, course, action and opinion. The distinction is crucial. Managers are people who do things right and leaders are people who do the right thing. The difference may be summarised as activities of vision and judgement – effectiveness (leading) – versus activities mastering routines – effi ciency (managing).

Leaders arise naturally in groups, often in an ‘emergent’ fashion, particularly where tasks are of a technical nature and an expert arises to solve a problem and then disappears when the task is fi nished.


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ENT Managers, however, are often in the role of appointed or nominated leaders and seldom

if ever ‘elected’, though they might emerge and be promoted. Many managers lack the essential qualities of leadership as they are quite often concerned with achieving objectives in a bounded time frame and do not wish to become the focus of attention that true leadership really demands.

The process of leadership has probably been the subject of more research than any other topic connected with organisations and management. Unfortunately, although there is widespread acceptance that leadership is important, it has proved very diffi cult to identify the elements of effective leadership. In part, this is because there is no one universally accepted defi nition of the word. Indeed, it has been suggested that there are almost as many different defi nitions of leadership as there are persons who have researched the subject.

Despite these problems of defi nition, most people would still accept that effective leadership can make a signifi cant difference in organisations. It is also generally agreed that the process of leadership is inextricably intertwined with the concepts of power, infl uence and authority.

Leadership studies in psychology have attempted to observe the emergence of ‘natural’ leaders (social facilitators or technical experts, charismatic persons, etc.) from within groups of people without a formal organisation. This is perhaps why there is so much confusion in the management literature, as researchers are unsure whether they are meas-uring leadership as distinct from measuring the ‘directing’ part of the role of management.

6.5 Different Perspectives of LeadershipIn the search to explain why some leaders are more effective than others, the following per-spectives can be identifi ed

● Personality, trait or qualities theories.● Style theories.● Contingency or situational theories.

Each of these different perspectives is explored below.

6.5.1 Personality, trait or qualities theories of leadership

The basis of this perspective, which is the earliest attempt to explain why some people are more effective than others, is that leaders are born rather than made. This assumes that indi-viduals possess particular personal characteristics or traits that make them into effective leaders.

Although the common sense assumption underlying trait theory appears sound to most people, it has in fact proved impossible, despite many research studies, to identify any con-sistent pattern of traits which characterise effective leaders. Despite this lack of positive research evidence, many managers continue to attach importance to personal factors such as judgement, initiative and decisiveness, when making selection or promotion decisions to posts involving leadership.

Whatever the situation or group, some writers assert that to be successful the leader should have a number of key characteristics:

● The impulse to lead – this is a problem for many managers promoted on technical grounds. This can be countered to some extent by technical leadership – intelligence and knowledge of the task so that judgements are right most of the time.


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● Integrity – a wholeness in all of the above so that the group feels the leader rings true, and can be trusted.

● Self-awareness – the ability to evaluate the effect of the style being used on the group and the task.

● Human sympathy – authority is given by the group and is not a divine right. A leader who regards people as a nuisance or as his or her only interest is doomed to fail.

● Tough-mindedness – to be single-minded and do what is required in a situation in spite of side effects; to overcome opposition and also any personal disappointments.

Certain other writers selected other personal qualities which were thought to be desirable in leaders, who are ‘born and not made’ based on the analysis of successful ‘great men [sic]’. These great leaders were considered to have:

● above-average intelligence;● initiative – independence and inventiveness, the capacity to perceive a need for action;● motivation – the urge to do it;● self-assurance – self-confi dence;● the ‘helicopter factor’ – the ability to rise above the particulars of a situation and perceive

it in relation to the surrounding context.

Other ‘essential’ qualities that researchers apparently spotted included enthusiasm, socia-bility, integrity, courage, imagination, determination, energy, faith, even virility.

This approach poses questions that are not easy to answer: how does one identify and locate such qualities? Is the possession of such qualities necessary and a suffi cient condition for effective leadership? Can one train for ‘courage’ or ‘faith’?

The personality theories are not well developed, especially as they cannot account for con-text, or examples such as war leaders who seem to possess not intelligence but belligerence.

6.5.2 Management stylesIndependently of any leadership ability, managers have been studied and differing styles emerge. The style chosen by a manager will depend very much upon the assumptions that he or she makes about subordinates, what he thinks they want and what he considers their attitude towards their work to be. Most managers, of course, do not give much con-scious thought to these things, but tend to act upon a set of assumptions that are largely implicit. The implicit assumptions about the nature of human behaviour and the motiva-tion behind a good deal of the thinking in economics have been assessed as ‘Theory X’ by Douglas McGregor. Theory X, sometimes referred to as the carrot and stick approach, consists of the following assumptions:

● The average person has an inherent dislike of work and will avoid it if possible.● Because of this, most people must be coerced, controlled, directed and threatened with

punishment to get them to put in adequate effort towards the achievement of organisa-tional objectives.

● The average person prefers to be directed, wishes to avoid responsibility, has relatively little ambition and wants security above everything else.

In contrast, McGregor proposed a theory which would bring about ‘true innovation’ – an opposite view of Theory X, which he called, appropriately, Theory Y and which consists of the following sets of assumptions.


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● The expenditure of physical and mental effort in work is as natural as play or rest.● External control and the threat of punishment are not the only means for bringing about

effort towards organisational objectives. People will exercise self direction and self con-trol in the pursuit of objectives to which they committed.

● Commitment to objectives is a function of rewards and the satisfaction of ego. Personal achievement needs are perhaps the most signifi cant of these rewards, and can both direct result of effort directed towards organisational objectives.

● The average person learns, under proper conditions, not only to accept, but to seek responsibility.

● The capacity to exercise a relatively high degree of imagination, ingenuity and creativ-ity in the solution of organisational problems is widely, not narrowly distributed to the population.

A number of different authors have contributed to the management style perspective, the key ones are considered in the following sections.

Kurt LewinThe fi rst signifi cant studies into leadership style were carried out in the 1930s by psycholo-gist Kurt Lewin. His studies focused attention on the different effects created by three dif-ferent leadership styles independent of personality:

● Democratic. A participative style where all the decisions are made by the leader in con-sultation and participation with the group.

● Laissez-faire. A style where the leader does not really do anything but leaves the group alone and lets them get on with it.

● Authoritarian. A style where the leader just tells the group what to do.

Lewin and his researchers were using experimental groups in these studies and the crite-ria they used were measures of productivity and task satisfaction.

In terms of productivity and satisfaction, it was the democratic style that was the most productive and satisfying.

The laissez-faire style was next in productivity but not in satisfaction – group members were not at all satisfi ed with it.

The authoritarian style was the least productive and satisfying of all and carried with it lots of frustration and instances of aggression among group members.

Rensis LikertLikert examined different departments in an attempt to explain good or bad performance by identifying conditions for motivation.

Poor performing departments tended to be under the command of ‘job-centred’ manag-ers. These tended to concentrate on keeping their subordinates busily engaged in going through a specifi c work cycle in a prescribed way and at a satisfactory rate. This is clearly a Taylorist approach, breaking down the job into its component parts, selecting and training people to do those tasks and exerting constant pressure to achieve a required output. The manager concentrates on getting the job completed, doing the job well and obtaining this with the resources (including the operatives) at his disposal. No attempt was made to fi nd out if a better result could be obtained with better inputs into the job.

Best performance was under ‘employee-centred’ managers who tended to focus their attention on the human aspects of their subordinates’ problems, and on building effective


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work groups which were set demanding goals. This fi nding appears to comply with Elton Mayo’s fi ndings that one of the components of success was the creation of an elite team with good communications, irrespective of pay and conditions. Such management regards its job as dealing with human beings rather than work, with the function of enabling them to work effi ciently.

Likert concluded that the key to high performance is an employee-centred environment with general supervision, emphasis on targets, high performance goals rather than meth-ods, and scope for input from the employee and a capacity to participate in the decision-making processes.

Likert summarised his fi ndings as four systems of management.

1. System 1: exploitive authoritative. This relies on fear and threats. Communication is downward, and superiors and subordinates are psychologically far apart, with the deci-sion-making process concentrated at the top of the organisation. However undesirable this may ostensibly appear, there are certain organisations, such as the Church, Civil Service and armed forces, where there must be little room for questioning commands, for procedural, doctrinal or strategic reasons.

2. System 2: benevolent authoritative. This is a step beyond system 1. There is a limited element of reward, but communication is restricted. Policy is made at the top, but there is some restricted delegation within rigidly defi ned procedures. Management tends to hear only what it wishes to hear. You should be able to envisage the resultant style of leadership; an arrogant personality at the top, possibly fanatically committed to an ideal and determined to see it through to the ultimate conclusion desired, what-ever the consequences. Criticism or dissent, even other viewpoints, is not tolerated and frequently is ruthlessly suppressed. The result is a leadership hierarchy supported by yes-men.

3. System 3: consultative. Here rewards are used along with occasional punishment, and some involvement is sought. Communication is both up and down, but upward com-munication remains rather limited. Scope is given for some local input.

4. System 4: participative. Management gives economic rewards, rather than mere ‘pats on the head’, utilises full group-participation, and involves teams in goal setting, improv-ing work methods and communication fl ows up and down. There is a close psychologi-cal relationship between superiors and subordinates. Decision-making is permitted at all levels and is integrated into the formal structure with reference to the organisation chart. Each group overlaps and is linked to the rest of the organisation by link pins who are members of more than one group.

ExerciseWhile accepting that technically competent, tough job-centred management can achieve high productivity, especially if reinforced by rigid control methods, Likert suggested that such environments generate a latent rebellious attitude in subordinates, with high utilisation costs in waste and scrap, higher levels of conflict, stoppages and grievances and so on. Where do you think this type of management can be essential?


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SolutionArmed forces, dangerous occupations?

To be successful requires consideration of the people being led, their ability and traditions. Sensitivity to what people value and expect is essential. To deal with this problem, Likert identifi ed the following factors that can infl uence success.

● Loyalty to the organisation, be it local, group, division, company or corporation.● Goal congruence.● Individual motivation.● Confi dence and trust between different sub-units and between the hierarchy and lower

echelons.● Adequate communication.● Credibility of communication.

Tannenbaum and SchmidtTannenbaum and Schmidt came up with a continuum of leadership behaviours along which various styles were placed, ranging from ‘boss centred’ to ‘employee centred’. Boss-centred is associated with an authoritarian approach and employee-centred suggests a dem-ocratic or participative approach. The continuum is based on the degree of authority used by a manager and the degree of freedom for the subordinates. The outcomes of the con-tinuum of styles are often summarised as:

● Tells – the leader makes all the decisions and ‘tells’ the subordinates.● Sells – the leader makes the decision, but rather than just announcing or telling to the

subordinates, tries to persuade them to accept it.● Consults – the leader does not make the decision until he has presented the problem to

the subordinates and hears their views and suggestions, then adopts the solutions that have been suggested.

● Joins – this is where the leader defi nes the problem but delegates and hands over the decision-making power to the group. The leader will indicate the limits within which the decision must be made.

Blake and Mouton managerial gridBlake and Mouton (1994) argued that managerial competence could be taught and learned. Their managerial grid provides a framework for understanding and applying effective management, and sets guidelines for an approach to management. The grid derived from the precept that management is concerned with production and people. Developing this concept a little further, concern for production is not confi ned simply to the Taylor ideal of effective factory performance. Production may mean the number of good research ideas generated or accounts processed, the volume of sales, quality of serv-ice and possibly warranty claims, as well as top policy decision-making and the number of successful decisions. Likewise, concern for people embraces friendships and relation-ships, task commitment, self-respect, equity and integrity. The grid suggests that any combination of concern for production and concern for people may be present within an organisation.

A high concern for production will score 9 and a high concern for people will also score 9, the two coordinates on the grid indicating the proportion of each concern present (Figure 6.3). So 9,9 gives a team management style.


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The task-orientated style (production � 9, people � 1 or 9,1) is in the best, Taylor tradition. People are treated as a commodity, like machines. The manager will be responsible for planning, directing and controlling the work of those subordinate to him or her. However, while this style can achieve high production, there are notice-able defi ciencies. In certain environments, creative energy may be channelled into trying to beat the system. Subordinates can become indifferent and apathetic, or even rebellious.

The country club style (1,9) emphasises people. People are encouraged and supported, and any inadequacies are overlooked, on the basis that people are doing their best, and coercion may not improve things substantially. The ‘country club’, as Blake calls it, has certain drawbacks. This style is often present in ineffi cient, quasi-monopolist, time-serving organisations. Many disputes, such as within the railways, the health service, local govern-ment, the newspaper publishing industry and the coal industry, have arisen largely from this style of management taking the easy option.

The impoverished style (1,1) is almost impossible to imagine. Certainly, no commercial organisation could survive with such impoverished management, and it is doubtful if any non-profi t-making organisation could either. This style may exist on the micro-scale, how-ever, for example the supervisor who abdicates responsibility and leaves others to work as they see fi t. A failure, for whatever reason, is always blamed down the line. Contact is fre-quently minimised, and commitment to problems raised is almost nonexistent. Typically, the 1,1 supervisor or manager is a frustrated individual, passed over for promotion, shunted sideways, or has been in a routine job for years, possibly because of a lack of per-sonal maturity.

The middle road (5,5) is a happy medium. This viewpoint pushes for productivity and considers people, but does not go ‘over the top’ either way. It is a style of ‘give and take’, neither too lenient nor too coercive, arising probably from a feeling that any improvement is idealistic and unachievable.

The team style (9,9) may be idealistic; it advocates a high degree of concern for produc-tion which generates wealth and for people who in turn generate the production. This style endeavours to discover the best and most effective solutions, aiming at the highest attainable level of production to which all involved contribute and in which everyone fi nds his own sense of accomplishment.

Country clubmanagement

Teammanagement

Middle-of-the-road management

High

High

CONCERN FOR PRODUCTION

Impoverishedmanagement

Authority-compliancemanagement

CONCERNFOR

PEOPLE

Low

1

1 9

9

Low

Figure 6.3 The managerial grid


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ENT The 9,9 manager assumes that employees are committed to the organisations (e.g. businesses

where the employees are all shareholders). Confl ict will occur, but be successfully managed.

6.5.3 One best style?The diffi culty with style theories, even when they attempt to refl ect the multidimensional nature of leadership, is that they ignore the important infl uence of the context in which the leader is operating. To take one simple example, although the 9,9 style of leadership may be effective, there will sometimes be circumstances (e.g. in a crisis) when time con-straints do not make it possible to use this style. This helps to account for the fact that no one style of leadership has proved to be universally superior to others.

From the discussions on the leadership styles theories, it should be apparent that there is no one best style of leadership that is equally effective for all circumstances. The best leadership style is the one that fulfi ls the needs of the group the most, while at the same time satisfying the needs of the organisation. The manager has to provide the following factors:

● Direction. The elimination of uncertainty about what has to be done and the coordina-tion of all effort to pull in one direction.

● Drive or motivation. The commitment of the group to move forward, but this will include satisfying the intrinsic needs of group members.

● Reputation. Represent the purpose of the group to the outside world.

The variables that defi ne the successful style include:

● The personality of the leader is probably the most rigid of the variables that defi nes the most effective leadership style.

● The situation of the group can vary from calm to crisis, simple to complex, severe threat to security and thus will drastically affect the successful style. The task, technology, structure and environment in which the group is working will have similar marked effects.

● The situation within the group (which can vary from cooperative to militant) will also affect the successful style.

● The people within the group will vary in intelligence, education, interest and motives. They may be loyal and long-serving, aggrieved, casual or troublemakers. This is obvi-ously independent of the other variables.

What is your preferred style of leadership? Give you reasons why. Do you think this style would be effective in all situations? Why/why not?

6.6 Contingency and Situational theories of leadership

Following on from the discussion above concerning one best style, a more recent view of effective leadership has developed from the notion that the most effective leaders have the ability to adapt their style depending on the situation.


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6.6.1 John Adair action-centred leadershipAdair (1983), after his military training at Sandhurst, put forward a model of ‘action cen-tred leadership’, which is based on the premise that effective leadership requires a bringing together of task, team and individual needs (Figure 6.4):

● Task achievement is obviously important for effi ciency and effectiveness, but it also can be valuable for motivating people by creating a sense of achievement.

● Teams, almost by defi nition effective teams, generate synergy out of the different skills and knowledge of individuals.

● Where individuals feel they have opportunities to satisfy their needs and develop, they are more likely to contribute to creativity and effectiveness.

The key task for the action-centred leader is to understand these processes and bond them together because otherwise there will be a tendency for the organisation to remain static.

Concern for Task

Concern for Team Concern for Individuals

Figure 6.4 Action centred leadership

6.6.2 FiedlerThe development of the contingency approach marked the bringing together of the per-sonality and situational approaches. Fiedler’s contingency model is the best example of an attempt to integrate individual characteristics with the structural and task properties of the situation.

Fiedler’s hypothesis is that the situation is going to determine the most effective style of leadership. He defi nes the situation as a combination of three factors:

1. Leader/member relations. Based on the leader’s view of the favourableness or unfavoura-bleness of his work group.

2. Task structure. The extent to which the leader is able to defi ne and control the group’s activities.

3. Leader position power. The degree of formal authority/responsibility allocated to the position.

In terms of leadership style, Fiedler intimates that the leader can be high on only one aspect at a time – either people oriented or task oriented, but not both.


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ENT Fiedler was also talking in terms of effectiveness, that is group effectiveness, but he

ignored the question of leader effectiveness which is also an important moderating variable on performance.

The personality dimensions are taken in terms of the leader’s view of the characteristics of his or her group. He fails to treat the characteristics of the leader as they are viewed by the group.

Nor does Fiedler defi ne the situation adequately, either in terms of the situation itself or in terms of the subordinates’ defi nition of the situation. He also overlooks a lot of other moderating variables, including subordinates’ expectations of leader behaviour.

6.6.3 Hersey and BlanchardThe current trend in the study of leadership has been towards a situational approach, based on the notion that the most effective leadership style varies according to the level of matu-rity of the followers and the demands of the situation.

Hersey and Blanchard’s theory is based on a relationship between three factors:

1. task behaviour – this is the extent to which the leader provides direction for the follow-ers and how they should get the job done.

2. relationship behaviour – this is the extent to which the leader engages in two-way com-munication with followers and provides encouragement and support.

3. The level of task and relevant maturity that followers can provide to accomplish it.

Maturity is not defi ned as age or psychological stability. The maturity level of the fol-lowers is defi ned as:

● a desire for achievement (level of achievement motivation) based on the need to set hard but attainable goals;

● the willingness and ability to accept responsibility;● education and/or experience and skills relevant to the particular task.

The appropriate leadership style used by a manager varies according to the maturity level of the followers (represented by M1–M4). There are four distinct leadership styles that are appropriate given different levels of maturity. As the maturity level of followers increases, the manager should reduce task behaviour and increase relationship behaviour. The four styles are:

1. Delegating style – is appropriate where there is low relationship and low task behaviour but high maturity of the followers.

2. Supporting (participative) style – is appropriate where there is high relationship but low task behaviour and moderate maturity of followers.

3. Selling style – is appropriate where there is high task behaviour and moderate maturity of followers.

4. Telling (directing) style – is appropriate where there is low relationship but high task behaviour and low maturity of the followers.

6.7 Transformational leadersThe dynamic nature of the environment facing many organisations today means that there is a constant need to innovate and change. It is suggested that to cope with this type of environment, leaders need to have vision and be creative, innovative and capable of


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inspiring others. The approach to leadership is referred to as ‘transformational leadership’ whose distinguishing feature is the ability to bring about signifi cant change. Leaders do this by motivating followers, not just to follow them personally but also to believe in a vision of organisational or political transformation.

The new kind of transformational leader needs a different range of skills from those sug-gested by traditional management theories. These new skills according to Boyd encompass:

● anticipatory skills providing foresight in a constantly changing environment;● visioning skills whereby persuasion and example can be used to induce the group to act

in accordance with the leader’s purpose or the shared purpose of a larger group;● value-congruence skills which enable the leader to be in touch with individuals’ economic,

psychological, physical and other important needs, in order to be able to engage them on the basis of shared understanding;

● empowerment skills involving the willingness to share power and to do so effectively;● self-understanding so that the leader understands his or her own needs and goals as well

as those of the followers.

Boyd believes that there is a need to develop such skills in organisations and to create the conditions in which this type of leadership can emerge.

Identify some examples of transformational leaders? Explain why you would defi ne them as transformational leaders.

6.8 EntrepreneursIn today’s competitive environment, organisations must constantly innovate to estab-lish themselves, survive and grow. As such, there is growing interest in enterprising behaviour, and in the characteristics of entrepreneurs and their apparently special skills, knowledge and attitudes that enable them to identify new opportunities. Wickham (2004) suggests that entrepreneurs are simply managers who manage in an entrepreneur-ial way. They actively pursue opportunity and drive change to create new values, take a strategic view and learn as they go. This can be applied to different situations, not just new start-ups but small and large fi rms, private and public organisations, and not for profi t sectors.

Bolton and Thomson (2003) suggest that there are some key action factors that charac-terise entrepreneurs that enable them to make a signifi cant difference. These include that they:

● Are creative and innovative● Spot and exploit opportunities● Find the resource required to exploit opportunities● Are good networkers● Are determined in the face of adversity● Are able to handle risk● Have control of business● Put the customer fi rst● Create capital.


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ENT Casson (2003) goes on to propose the following qualities of entrepreneurial capacity:

● Foresight● Imagination● Communications● Self-knowledge● Autonomy● Search skills● Analytical ability● Networking skills● Manage risk● Delegation● Organisational skills● Industry knowledge/expertise.

6.9 Organisational culture

Organisational culture is an important concept since it has a widespread infl uence on the behaviours and actions of employees. It represents a powerful

force on an organisation’s strategies, structures and systems, the way it responds to change and ultimately, how well the organisation performs.

The task for owners and managers is to achieve the right blend of cultures for the organ-isation’s task and environment. However, managing culture is not a short-term or straight-forward task, since it goes beyond slogans and new mission statements: real change requires modifi cations to values, basic assumptions and behaviour that are not easy to achieve, but is increasingly important for many organisations. Handy expanded this as: deep-set beliefs about the way work should be organised, the way authority should be exercised, people rewarded, people controlled – these are all aspects of the culture of an organisation.

There are many different defi nitions proposed to explain culture. Schein (1992) refers to culture as ‘the deeper level of basis assumptions and beliefs that are shared by members of the organisation, that operate unconsciously and defi ne in a basic ‘taken for granted’ fashion an organisation’s view of itself and its environment’. Moorhead and Griffi n (1992) defi ne organisational culture as ‘a set of values, often taken for granted that people in an organisation understand. It refl ects the ways work is performed: and what is acceptable and not acceptable: and what actions are encouraged and discouraged’.

From the above defi nitions, culture can be said to refer to the underlying beliefs, values and does of practice that makes an organisation what it is. Handy (1993) simplifi es this by suggesting that culture is ‘the way things are done around here’.

Some aspects of an organisation’s culture will be visible and obvious, while many others will be both less tangible and more signifi cant. This can be depicted using the analogy of the organisation as an iceberg (French and Bell, 1990). The part of the iceberg which is visible above water can be characterised as the goals and strategy of the organisation, the structure, systems and procedures and the products and services. The greater part of the iceberg is submerged, and is concerned with the values, attitudes and beliefs, norms of


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McKinsey, a US management consultancy, also produced a framework for understand-ing organisations (the McKinsey 7-S framework) highlighting the ‘hard’ and ‘soft’ aspects of organisations which can infl uence the culture. The seven factors referred to are:

1. Systems. How the organisation gets things done. This includes formal and informal pro-cedures that ensure the organisation operates. For example, accounting systems, budg-etary systems information technology systems and so on.

2. Structure. The issues of structure, as discussed in the previous section, should not only be concerned with whether the organisation should be a functional/divisional or matrix form, but should also consider the coordination between different areas.

3. Strategy. The actions that are planned in response to environmental change in order that the organisation achieves its objectives.

4. Style. Relates to the management and leadership style which will be critical because this will convey what is important in the organisation.

5. Skills. The key capabilities of the organisation. A change in strategic focus may mean that new skills need to be acquired as other skills become redundant.

6. Shared values/super ordinate goals. Are the guiding concepts, values and aspirations of the organisation that go beyond the formal statement of corporate objectives.

The hard aspects of the 7-S framework refer to systems, structure and strategy, in other words, the overt or formal aspects of the organisational iceberg shown in Figure 6.5. The softer elements are style, staff and skills (i.e. the covert or hidden aspects of the organisa-tion iceberg).

A key factor in determining how effective the organisation is will be the appropriateness of its culture for its stakeholders, and particularly its customers. A strong culture will be

Formal aspects(apparent)

Behavioural aspects (hidden)

Goals, technology, finance,structure, skills

Attitudes

Communication patterns

Group processes

Personality

Conflict

Problem-solving style

Figure 6.5 The organisational iceberg. From Organisational Behavior, Canadian Edition 1st edition by Hellriegel/Slocum/Woodman Brun. © 1998. Reprinted with permission of Nelson,

a division of Thomson Learning: www.thomsonrights.com. Fax 800 730–2215

behaviour and leadership style, all of which combine to make up the organisation’s culture. The concept of the organisational iceberg is illustrated in Figure 6.5 below.


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the other hand, a strong culture that does not have these attributes is likely to be a major barrier to effectiveness.

The main effects and characteristics of a strong culture will be as follows:

● It will strengthen behavioural regularities and norms among members of the organisation.● It will minimise some of the perceptual differences among people within the organisation.● It will refl ect the philosophy and values of the organisation’s founder or dominant group.● The particular culture will have a signifi cant effect on the organisation’s strategy and

ability to respond to change.

6.9.1 Different levels of cultureCulture exists at a number of different levels from the core beliefs and values to the visible manifestation of artefacts. Edgar Schein (1992), in his analysis of different levels of organi-sational culture, depicts culture as having four major levels:

1. Artefacts2. Norms3. Values4. Basic Assumptions.

Artefacts are the more obvious and visible symbols of an organisation’s culture. These are things such as factory and/or offi ce equipment, head offi ce buildings, the way in which employees dress and the provision of information for customers.

Norms guide individuals on how they should behave in a particular situation and repre-sent unwritten rules of behaviour. They tell people what they are supposed to do, say and believe, and are passed on by word of mouth or behaviour. For example, how managers treat subordinates, the importance attached by them to status and levels of formality.

Values are often taken for granted and tell individuals what is regarded as important in the organisation and what sort of behaviour is desirable, the more strongly based the val-ues, the more they are likely to be affected, although this does not necessarily mean that the values are articulated in written form. Rather, the way in which they are reinforced is by the behaviours of management.

Hewlett Packard makes use of statements called the ‘HP Way’ to clarify corporate values to all employees, and in the area of ‘belief in our people’ the following appear:

● confi dence in, and respect for, our people as opposed to depending on extensive rules, procedures, and so on;

● depend on people to do their job right (individual freedom) without constant directives;● opportunity for meaningful participation (job dignity).

So explicit an approach to the use of culture is still the exception rather than the rule, but organisations promote and act on values whether or not they are formally documented.

Underpinning any set of values will be the basic assumptions about things which represent the deepest level of cultural awareness and guide individuals’ behaviour, determining how they should perceive, think and feel about things. For example, the relationship between the organisation and its environment, appropriate human relation-ships (e.g. individualistic and competitive or collective groups) and what motivates people. These will be very important, but largely subconscious.


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The structure and culture of an organisation will develop over time and will be deter-mined by a complex set of variables, including the:

● history and nature of the organisation’s business; the reason the organisation was formed;● age;● values of the fi rst owners; infl uence of the leader;● nature of the management and staff in the organisation; organisational goals and

objectives;● structure, whether it is centralised or decentralised; nature of the business environment;● size of the business;● life stage of the organisation, whether it is in its youth, maturity or decline.

So although organisations are operating in the same industry sector and have the same corporate status, it is their own unique culture that will differentiate them from each other, derived from the variables described above.

In trying to explain how the culture of an organisation can be described and understood, Johnson et al. (2005) developed the framework of the cultural web framework, which brings together the different aspects of organisational culture. The main elements are:

● Stories. what people talk about in the organisation to each other and outsiders in terms of important events and personalities and the mavericks who deviate from the norm, what matters in the organisation and what constitutes success or failure;

● Routines. what the normal ways of doing things are, how members behave towards each other, what the procedures are;

● Rituals. the special events the organisation emphasises in terms of what is particularly important; what the organisation highlights and rewards, for example sales achievement, quality, innovation. These signal what is important and valued;

● Symbols. what the symbols of the organisation are, for example logos, titles, company cars, travel arrangements (business class, fi rst class, etc);

● Power structures. who the most powerful individuals or groups are, who makes the deci-sions, who infl uences the decisions;

● Control systems. the measurement and reward systems which denote what is important to monitor and focus activity on;

● Organisational structure. which refl ect the power structure, who reports to whom, on an informal and formal basis.

6.9.2 Models for categorising cultureWhilst every organisation will have its own unique culture, there are a number of different ways of classifying organisation culture. The following section will consider some of the ways that culture can be classifi ed.

Harrison’s/Handy’s four types of cultureHandy (1993), developing on the ideas of Harrison, suggests that there are four different types of culture:

1. Power or club2. Role3. Task4. Person.


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● Power culture is based on one or a few powerful central individual, often dynamic entre-preneurs, who keep control of all activities and make all the decisions. The structure is perhaps best depicted as a web whereby power resides at the centre and all authority and power emanates from one individual. The organisation is not rigidly structured and has few rules and procedures. This type of culture can react well to change because it is adaptable, informal and decision-making is quick.

This is likely to be the dominant type of culture in small entrepreneurial organisations and family-managed businesses).

● Role culture tends to be impersonal and rely on formalised rules and procedures to guide decision-making in a standardised, bureaucratic way (e.g. civil service and traditional, mechanistic mass-production organisations). This type of culture can be depicted as a Greek temple, drawing strength from the pillars which represent func-tions such as marketing, fi nance and human resource management that are joined at the top, where the heads of the functions form management boards. Everything is based on a logical order and rationality. There is a clear hierarchical structure with each stage having clearly visible status symbols attached to it. Each job is clearly defi ned and the power of individuals is based on their position in the hierarchy. The form rule and procedures, which must be followed, should ensure an effi cient opera-tion. Decisions tend to be controlled at the centre, this means that whilst suitable for a stable and predictable environment, this type of culture is slow to respond and react to change.

● Task or achievement culture is typifi ed by teamwork, fl exibility and commitment to achieving objectives, rather than an emphasis on a formal hierarchy of authority (per-haps typical of some advertising agencies and software development organisations, and the desired culture in large organisations seeking total quality management). It can be depicted as a net with the culture drawing on resources from various parts of the organisational system and power resides at the intersections of the net. The power and infl uence tends to be based on specialist knowledge and expert power rather than on positions in the hierarchy. Creativity is encouraged and job satisfaction tends to be high because of the degree of individual participation and group identity. A task culture can quickly respond to change and is appropriate where fl exibility, adaptability and problem solving is needed.

● People or support culture can be divided into two types. The fi rst type is a constel-lation of stars, based on technical expertise of individual employees – such as that found in architects’ and solicitors’ practices, IT and management consultants. The organisation is what these few people possess as skills. Other types of organisation exist for the benefi t of the members rather than external stakeholders, and are based on friendship, belonging and consensus (e.g. some social clubs, informal aspects of many organisations).

Each of the different types of culture described has advantages and disadvantages and in reality, organisations often need a mix of cultures for their different activities and processes.

What are the problems an organisation will face if it has an inappropriate culture?


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Deal and Kennedy 1982/1988 Strong culture theoryAnother categorisation of culture is presented by Deal and Kennedy. They suggest that culture can be determined according to two factors:

1. the extent of risk connected with the activities of the organisation;2. the speed of feedback on the outcome of employees’ decisions.

Four generic profi les resulting are:

1. Tough-guy macho. High risk, quick feedback; this refl ects tough individualistic and high risk-taking organisations. This profi le is likely to be an entrepreneurial fi rm run by the owner. The organisation is made up of people working as individuals who take high risks and receive quick feedback on whether their actions were right. Financial stakes are high and the focus is on speed, resulting in a high pressure environment.

2. Work-hard-play-hard. Few risks taken; this culture is where the team is all important and quick feedback from the customer is the key to success.

3. Bet-your-company. High risk but slow feedback; This culture is characterised by slow feedback with decision cycles taking years, for example in pharmaceutical research. However, decisions are large scale and risks are high.

4. Process. No feedback, bureaucratic. This type of culture is where technical performance is of critical importance and there is a need for order and predictability.

6.9.3 Culture and organisational effectivenessThere are different views on the relationship between culture and organisational perform-ance. A number of researchers believe that culture plays a major role in determining an organisation’s ability to implement strategies and contributes to organisational effective-ness and excellence and ultimately, to overall competitive advantage. Some of the different researcher’s views are discussed below.

Ouchi – Theory A, Theory J and Theory ZWilliam Ouchi in 1980 popularised the idea of culture in his book Theory Z: How American Business can Meet the Japanese Challenge. He suggested that there are a number of characteristics that differentiate the typical American fi rm (Theory A) from the typical Japanese one (Theory J). Of course, Ouchi is generalising when he speaks of the typical American or Japanese organisation. Looked at more closely, organisations in any one coun-try will have important differences and unique features: these differences represent the cul-ture of the particular organisation. He went on to suggest that it was possible for American fi rms to modify their culture (Theory Z) to help them compete more effectively with the Japanese. Ouchi’s comparison of US and Japanese organisational cultures and the features of each type of culture are summarised as follows:

Theory A (US)Employment. Usually short term, with lay-offs quite common.Evaluation and promotion. Very fast. If individuals are not promoted, they seek employ-

ment elsewhere.Career path. Very specialised; people tend to stay in one function for the whole of their

career.Decision-making. Carried out by individual managers.


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Responsibility. Assigned on an individual basis.Concern for personnel. The organisation is only concerned with the workers’ work life.

Theory J (Japan)Employment. Usually for life, with lay-offs rare.Evaluation and promotion. Very slow.Career path. Very general. Staff are rotated around the organisation.Decision-making. Carried out by group or committee.Control. Very implicit and informal. People rely on trust.Responsibility. Shared collectively.Concern for personnel. The organisation is concerned with the workers’ whole life.

Theory ZEmployment. Fairly long term, to encourage a loyal, committed workforce.Evaluation and promotion. Slower, with an emphasis on development and training.Career path. More general, with elements of job rotation and broad training.Decision-making. Carried out by individual managers, but seeking consensus from the

group.Control. A balance between formal and informal.Responsibility. Assigned on an individual basis.Concern for personnel. The organisation’s concern is expanded to include aspects of the

workers’ home life.

Peters and Waterman (1982) The cultural excellence schoolThese former McKinsey consultants suggest that culture, as a form of control, is critical for corporate success. Their research into high-performing American corporations revealed that corporations with a clearly articulated tight culture were able to develop simple, decentralised, fl exible and innovative forms of organization, based on trust and participa-tion. These simplifi ed forms of organisation reduced the number of managerial levels and central staff through the avoidance of bureaucracy and, by avoiding complicated matrix structures, lived in line with man’s limitations.

The eight key characteristics of excellent organisations are as follows:

1. Bias for action. To facilitate decision-making and problem-solving, they avoid self-perpetuating bureaucratic committees. Instead, they promote a ‘ready-fi re-aim’ ethos through temporary ad hoc mechanisms.

2. Close to the customer. They listen and learn from customers so that they are market driven. Quality, reliability and service are valued as long-term growth is sought through customer loyalty.

3. Autonomy and entrepreneurship. They regularly reorganise to produce small basic units, like product divisions.

4. Productivity through people. They believe people respond to trust, that those at the fron-tier know best, and that innovation comes from ‘where the action is’.

5. Hands on value driven. They take ‘value-shaping’ seriously and inspire employees by ‘Management by walking about’ (MBWA) – regular visits to the workplace.

6. Stick to the knitting. They avoid diversifi cation and concentrate on the things they do well.


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7. Simple form, lean staff. Simple self-contained but competing structures, like product divisions, have few central ‘staffers’ and intermediate levels of management. Simple structures make reorganisation easier.

8. Simultaneous loose-tight properties. Since autonomy has been ‘pushed down the line’, while the corporate level retains control over a few core values, these organisations are both centralised and decentralised.

Two main points can be made about the cultural excellence school.

1. It reveals the limitations of the traditional ‘rationalist’ approach which only regards measurable and visible aspects of organisations worthy of consideration, the con-sequence of which has been a restrictive emphasis on rigorous organisational design, fi nancial planning and analysis and information technologies, and so on. Hence, insuffi cient attention has been given to the less quantifi able ingredients of organisa-tional life. Culture has either been neglected or relegated to the ‘art of management’.

2. The emphasis on simple forms of organisation using simultaneous loose – tight controls refocuses the traditional debate about whether or not organisations should operate tight centralised controls or looser decentralised ones which encourage self-regulation.

Whatever the merits of this approach, we need to recognise that it constitutes a resur-gence of universalism and is therefore somewhat at odds with contingency theory. Several factors suggest, however, that it is unlikely to replace contingency theory because:

● the sample of organisations studied (all high performers) and the character of their employees (self-motivated and highly trained) is not representative;

● it is quite likely that organisations facing complex environments and undertaking chang-ing tasks will benefi t more from such forms than those operating in stable environments;

● other research, while tending to confi rm the relationship between performance and some of the key characteristics, has nevertheless found variations in the degree of centralisation of organisations according to the market operated within.

While Peters and Waterman made an important contribution to the understanding of how large, successful organisations are managed, unfortunately, some of the organisations defi ned as excellent have subsequently experienced severe operating diffi culties. Thus, for example, only 2 years after publication of the book, the magazine Business Week re-examined the companies against the original criteria used by Peters and Waterman and found that fourteen of the forty-three no longer matched up to the yardstick of ‘excellence’. This merely illustrates the temporary nature of organisational success.

Peters (1987) Thriving on chaosSubtitled A Handbook for a Managerial Revolution, Peters produced an amazing 45 prescriptions (his term) under fi ve headings for ‘managing change innovation and survival’.

Most of these contain a lot of common sense and are self-evident and revisit previous attempts to defi ne ‘best practice’ or ‘excellence’:

● creating total customer responsiveness● using fast-paced innovation● achieving fl exibility by empowering people● learning to love change● building systems for a world turned upside down.


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scriptions with the unusual heading ‘building systems for a world turned upside down’.This involves control systems, and the need to measure what is most important stra-

tegic-ally. Too often, management accounting systems are set up to link into fi nancial reporting requirements, a theme pursued by Eli Goldratt in The Goal which he subtitled AManagement Accounting Textbook. Peters wants measures of product quality and customer satisfaction and wants these simple. Control should be bottom-up with ‘conservative’ (i.e. achievable) goals. Trust and integrity come high on this list as without control, trust is a de facto requirement without which systems cannot work.

6.9.4 Culture – The International DimensionAs many organisations operate at a global level and face international competition, an understanding of national culture has become increasingly important. Cultural practices vary between different countries and will impact on how organisations operate. This view is captured in one of the early defi nitions of culture which is ‘the confi guration of learned behaviour and result of behaviour whose component elements are shared and transmitted to the members of a particular society (Linton, 1945). Bloisi (2004) develops this stating that culture is a commonality of beliefs, experiences, values and expectations that put it apart from others – so, for example, it is what makes the United Kingdom different from, say France or China. The implications of this are that managers must be sensitive to the dimensions of national culture. The different dispositions of countries will impact on how they do business and manage employees.

Hofstede (1990) developed a model to explain national differences by identifying ‘key dimensions’ of common culture in the value systems of all countries. These include, power distance, uncertainty avoidance, individualism/collectivism and masculinity/femininity. (Hofstede’s work will be returned to later in the study system).

The features of a country’s culture have important implications for managing cross bor-der mergers, where problems can arise because of the different ways companies are run as a result of cultural differences. This point is very relevant to organisations who seek to grow through mergers and acquisitions with foreign companies. However, it is import-ant to remember that cultures in society are not permanent and as mentioned earlier, all cultures have sub-cultures and a range of complex and interrelated factors infl uence organisational culture. The national culture is just of one of these infl uences.

6.9.5 Culture and controlHow signifi cant is culture for control? Academics and managers have recently suggested that culture is signifi cant because:

● it may be appropriate for organisations which have to contend with turbulent environ-ments while employing staff who have a high regard for self-regulation;

● strong corporate cultures that are closely linked to corporate strategy may be critical for success.

Culture comprises values, which stress what is important for the corporation, and beliefs about how things should work. It is expressed through symbols, rituals, myths, stories and behaviour. It consists of taken-for-granted assumptions and norms about how people should behave, usually on the basis of learning from what has been successful in


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the past. It is this latter feature which makes corporate culture a double-edged ‘weapon’, because it is diffi cult to change. Yet many organisations are facing turbulent environments (techno-logical developments, heightened international competition, unpredictable mar-kets, recession, deregulation, etc.) and are attempting to change corporate strategy by, for example, moving into unfamiliar markets. This often proves diffi cult because the existing culture, which may have been a tower of strength in the past, is not suited to the new strategy. Hence, some corporations have developed an interest in cultural change, though experience suggests it is a diffi cult and lengthy process which should be undertaken as a last resort.

These aspects of organisational culture are ‘taken for granted’ by long-established members of the organisation as representing the normal ways of doing things and behaving. However, new members of the organisation have to learn these norms and be socialised to accept them. Life is generally much more straightforward and easier once the basic ground rules are known; while some of these may be set out in formal docu-mentation, most organisations have important cultural values that are not spelled out in this way. If an organisation has few shared values, and wide differences in ways of think-ing and behaving in different departments, it has a ‘weak’ culture. Some organisations, however, have very ‘strong’ cultures, which are an important and systematic infl uence on employees.

6.10 Managing in different culturesA challenge facing managers who are working in an increasingly global business environment is the impact of national cultures on the way people behave at work. This highlights the need for a cross cultural approach to understand the nature of the management/employee relationship. Hofstede’s research has attempted to establish the essence of work related difference across the work and relate these to preferred management styles.

6.10.1 National culturesHofstede suggests that the national culture of different countries can be classifi ed according to fi ve ‘Dimensions of Culture’:

1. Power distance2. Uncertainty avoidance3. Individualism/collectivism4. Masculinity/femininity5. Time orientation.

Power distancePower distance is the extent to which a society accepts that power in organisations is distributed unequally. High power distance means people accept inequality in power among institutions, organisations, and people. In countries with high power distance, managers tend to make autocratic decisions and subordinates do what they are told rather than being involved in decision-making. This kind of culture was found, by Hofstede, to be particularly strong in Malaysia, China, Philippines, and Russia. Low power distance means people expect equality in power, such as in Denmark, Austria and Israel.


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Uncertainty avoidance is the degree to which members of society feel uncomfortable with risk, uncertainty and ambiguity, and feel threatened by unusual situations. High uncer-tainty avoidance will mean risk taking is discouraged and organisations will tend to rely heavily on rules and regulations so that people know what they are doing. This type of atti-tude is found in Greece, Japan, and Russia. Low uncertainty avoidance means people have high tolerance for the unstructured and unpredictable (Singapore, Taiwan and Thailand).

Individualism and collectivismIndividualism is the extent to which people are supposed to take care of themselves and be emotionally independent from others and refl ects the values for a loosely knit social framework. This tends to be true for the United States, Canada, Britain and Australia. Collectivism is a preference for a tightly knit social framework in which individuals look after one another and organisations protect their members’ interests. This was found to be particularly the case in China, Mexico, Chile, and Peru.

Masculinity/femininityMasculinity relates to the degree to which masculine values predominate. For example, a focus on power, achievement, assertiveness, and material success as opposed to the stereo-typical feminine values of relationships, modesty, sensitivity and concern for others. Masculine values are strong in Japan, Austria, Italy and Germany. Feminine cultural values were found in Sweden, Norway, Finland and Denmark. Both men and women subscribe to the dominant value in masculine and feminine cultures.

Time orientationShort-term orientation means that people expect fairly rapid feedback from decisions, expect quick profi ts, frequent job evaluations and promotions, and so on.

6.10.2 Other cultural characteristicsOther issues that may require a manager to modify their approach would include the following:

● Language● Religion● Attitudes● Social organisation● Education● Ethnocentrism (a tendency to regard one’s own culture as superior to others).

6.10.3 Changing behaviourIn any situation, where you are required to manage in a cross-cultural or multi-cultural environment, there are a number of guidelines that you should follow:

● Always show respect and listen, do not be in a hurry.● Try to gain an appreciation for the differences between Hofsede’s ‘masculine’ and

‘ feminine’ cultures.


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● Do not feel your way is the best way.● Emphasise points of agreement.● Discern the perceived defi nitions of words.● Save face as well as giving face.● Do not embarrass anyone in front of others.● Know or take someone who knows the culture.● Understand that leadership may mean different things to different countries.● Do not lose your temper.● Avoid clique-building.● Always show respect.● Leave your own ‘domestic’ management style at home.● Eliminate stereotypes.● Learn to tolerate a high degree of unpredictability.

6.11 MentoringA mentor is essentially a guide, counsellor, tutor or trainer. The name comes from Greek literature, where Mentor was the human form of Athena who acted as a guide to Telemachus. Mentors are often in senior positions within the organisation, usually more experienced employees who can guide and support younger less experienced employees in any aspect of their development and socialise them into the culture of the organisation. The mentor is normally a role model, having already achieved a status (and possibly quali-fi cation) to which the subordinate aspires.

Whilst it is normal for the mentor to be from the same function (i.e. fi nance), it is unu-sual for the mentor to be a direct or indirect line manager of the subordinate. The fact that the mentor is not the direct line manager means that he/she can act as an independent arbiter; otherwise there is the danger for confl ict given the development versus line man-agement nature of mentoring.

Mentoring works alongside more formal control mechanisms, such as appraisal, and is intended to provide the employee with a forum to discuss development issues that are relaxed and supportive. Mentors often discuss such issues as training, the choice of qualifi -cation, interpersonal problems and career goals.

The role of a mentor is to encourage and assist junior members of staff to analyse their performance in order to identify their strengths and weaknesses. The mentor should give honest but supportive feedback and guidance on how weaknesses can be eliminated or neutralised.

The mentor could also act as a sounding board for ideas. The process should help junior staff to question and refl ect on their experiences.

A mentoring system has both career-enhancing and psychological functions. The career function is concerned primarily with enhancing career advancement through exposure, vis-ibility and sponsorship. The psychological function is more concerned with aspects of the relationship that primarily enhance competence and effectiveness in management roles. A mentoring system should help junior staff in expanding their network of contacts and gain greater exposure in the organisation.

For a mentoring system to be successful, relationships should not be based on authority but rather a genuine wish by the mentors to share knowledge, advice and experience and should be one of mutual trust.


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ENT The main benefi ts of mentoring include the following:

● Improved motivation among employees;● Lower levels of staff turnover;● Faster career progress.

In summary, the mentor stimulates, encourages, guides, supports and cautions, acting as a role models, and nurtures learning.

6.12 SummaryThis chapter has looked at the basic concepts of, and approaches to, management. The key points to remember are:

● the concepts of power, bureaucracy, authority, responsibility and delegation;● the different perspectives of leadership;● the importance of organisational culture, and the implications for management style;● the process of mentoring.

ReferencesAdair, J. (1983), Effective Leadership. Basingstoke: Macmillan.Blake, R. and Mouton, J. (1994), The Managerial Grid. Houston: Gulf.Bolton, B. and Thomson, J. (2003), The Entrepreneur is Focus: Achieve Potential. London:

Thomson.Burns, T. and Stalker, G.M. (1961), The Management of Innovation. London: Tavistock.Casson, M. (2003), The Entrepreneur – An Economic Theory (2nd edn). Cheltenham UK:

Edward Elgar Publishing Inc.French, J.R.P. and Raven, B. (1959), ‘The Bases of Social Power’. In D. Cartwright (ed.),

Studies of Social Power. Ann Arbor, MI: University of Michigan, Institute for Social Research.French, W.L. and Bell, C.H. Jr (1987), Organisational Development: Behavioural Science

Interventions for Organisational Improvement (3rd edn). Prentice Hall.Handy, C. (1993), Understanding Organisations. UK: Oxford University Press.Hofstede, G. (1980), ‘Motivation, Leadership, and Organisation: Do American Theories Apply

Abroad?’ Organisational Dynamics, Vol. 9, No. 1, Summer 1980 pp. 42–63. Morgan, G. (1986), Images of Organisation. London: Sage.

Mullins, L.J. (2004), Management and Organisational Behaviour. Harlow,: FT Prentice Hall.Ouchi, W. (1981), Theory Z: How American Businesses can Meet the Japanese Challenge.

Reading, MA: Addison-Wesley Pub Co.Perrow, C. (1970), ‘Departmental Power and Perspectives in Industrial Firms’. In J. Pfeffer

and G.R. Salancik (eds), The External Control of Organisations: A Resource Dependency Perspective. New York: Harper & Row.

Peters, T. (1987), Thriving on Chaos: A Handbook for a Managerial Revolution. London: Pan.Peters, T. and Waterman, R. (1982), In Search of Excellence. New York: Harper & Row.Pfeffer, J. and Salancik G.R. (eds) (1977), The External Control of Organisations: A Resource

Dependency Perspective. New York: Harper & Row.Schein, E.H. (1992), Organisational Culture and Leadership. Jossey Bass: San Francisco.Trist, E.L. and Bamforth, K. (1951), ‘Some Social and Psychological Consequences of the

Longwall Method of Goal-getting’. Human Relations, Vol. 4, No. 1.Wickham, P. A. (2004), Strategic Entrepreneurship (3rd edn). Harlow: Pearson Education.

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Question 1X Company is a manufacturer of non-alcoholic soft drinks and has a well-established posi-tion and brand recognition in country Z. The potential for future growth in country Z is however limited, with the market reaching saturation. One option for expansion is to move into new markets in other countries offering their existing product range.

The business development team are evaluating this option and are currently working on proposals to sell their range of drinks in country Y. One possible method of achieving market entry development that the team is investigating is through a joint venture with a company that is already established in country Y and is in the drinks distribution business.

The Board of X Company has given the business development team the task of under-taking a feasibility study to explore the viability of the proposed strategy. As part of the feasibility study there needs to be some assessment of industry competition and the attrac-tiveness of the market in country Y. The feasibility study also needs to assess the cultural compatibility of the ways of doing business in country Y compared to how X Company currently operates in country Z.

RequirementDiscuss how Hofestede’s research on national cultures could be used to assess the cultural compatibility of X Company’s market development strategy to form a joint venture with a company in country Y. (10 marks)

Question 2Briefl y describe the concepts of accountability, authority and responsibility. (10 marks)

Question 3G, the senior partner of L, a medium sized accountancy fi rm, has worked for L for over twenty years and has a sound knowledge and understanding of the different activities of the fi rm’s business. Over the years, G has become known for his fairness in how he man-ages staff. He is also well liked and respected for his enthusiastic approach. He always has time to encourage and mentor younger members of staff.

6Revision Questions

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ENT The fi rm has recently invested in new technology which will improve the effective-

ness of its offi ce systems, but will mean the roles and responsibilities of the support staff will change. G, has taken on the unenviable role of leading the project to introduce the technology and new working practices. He knows that the project will be met with resist-ance from some members of staff and he will need to draw on various sources of power to ensure the changes are successfully implemented.

RequirementDescribe the different sources of power that G has and which will help him in introducing the changes. (Total for Question Two � 10 marks)


Question 4Moon Co is a family shipbuilding company owned by a technical expert in shipping engi-neering, Andy Moon, which has been built up by him and his sons and daughters over the period following the Second World War. Moon himself, now in his 80s, is poor at delegating, and the board, which consists entirely of family members except for the fi nance director, is a place for heated argument and frequent clashes of personality. The situation is no better in the offi ces and on the shop fl oor of the shipyard. Everyone tries to guess what the owner, Mr Moon, wants, as there are few rules and regulations in this ‘power culture’. The owner and his family can change their minds at a moment’s notice, hire and fi re staff immediately, change people’s jobs by sideways moves, by promoting them or demoting them, punishing them by suspensions without pay and so on.

The human resources department tries to keep up with all the changes by fi lling in the relevant paperwork to inform payroll and the tax authorities of changes to wages, dismissals or new hires. The staff in HR have no time to plan ahead, nor are they required to. There is poor morale in the yard and employees have begun to join trade unions, though the owner and family are dead against any third-party intervention in what they regard as their own private affairs. They do not regard employees as assets but as liabilities who get in the way of how the family wants to do things. Unfortunately, none of the family members have any qualifi cations or experience in management, so new people who have ideas from elsewhere or qualifi cations are threatening, and so often do not last long before being sacked.

The fi nance director has had enough of the family arguing at each board meeting and has told the owner that this, combined with unfair treatment of the workforce, may lead him to resign. If he does there will be a lot of trade and fi nancial secrets going with him, so Moon is keen to make changes if only to keep the fi nance director happy – though he is also aware of quality problems in the yard causing delays and re-work costs due to poor morale; he thinks these can be solved by stricter discipline and punishment.

Things outside the yard are changing, however, and the government has introduced measures to avoid the kind of exploitation of employees that Moon has been using. These include protection from unfair dismissal for long-serving employees, safety, health and envi-ronment legislation and some aspects of equal opportunities such as equal pay for work of equal value. Also, new employment opportunities have led many staff to leave, often to lower level jobs which pay just as well as in Moon’s, and where the atmosphere is not so threatening, and where fringe benefi ts are often available, such as paid holidays and sick pay.


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Requirements(a) clearly distinguish between power and authority; (15 marks)(b) evaluate the type of power and control Moon had had, and suggest reasons why this is

being eroded. (10 marks)(Total marks � 25)

Question 5Until October 2002, Sheila was the Chief Executive Offi cer (CEO) of X Company, a man-ufacturer of washing machines and similar products. As Marketing Manager in the late 1990s, Sheila had been responsible for adding new products to the company range that boosted company profi ts, a success that had been largely responsible for Sheila’s promotion to CEO.

In 2000, however, the company suffered a number of setbacks, and Sheila, in order to boost sales by bringing products to the market sooner, ordered that all testing of new prod-ucts should stop.

The consequences were disastrous; X Company was overwhelmed with returned merchandise.

In an effort to keep the share price high, Sheila ordered the Finance Director, Bob, to omit the recording of returned products. Bob initially protested that this would be unethi-cal accounting, but eventually complied with Sheila’s order. Under further pressure, Bob was also persuaded by Sheila to show an increase in sales and respectable earnings per share fi gures. Bob managed to do this by adjusting the way the company reported sales, by understating expenses and by generating several hundred false invoices.

A year-end audit exposed the misconduct of the two executives. Sheila was sent to prison for 2 years. Bob was imprisoned for 1 year and was struck off from membership of his professional body.

Requirements(a) Describe the sources of power and authority that would enable someone in Sheila’s

position to persuade Bob to behave as he did in the above scenario. (15 marks)(b) Discuss the measures the Board of Directors of X Company might take to ensure that

the abuse of power and authority that occurred in X Company does not occur again.(10 marks)


Question 6Up until two years ago, E Company enjoyed a monopoly position in the energy indus-try. However, a change in government policy has meant that new competition has been encouraged to move into the industry with E Company losing its monopoly. The com-pany now fi nds itself facing severe diffi culties.

E Company has developed a strong culture over the years which can be typifi ed as a role culture. This is now acting as a barrier to the organisation’s ability to change, to become more fl exible and to be able to respond more quickly to changes in the environment and initiatives by its competitors.

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ENT E Company is falling behind its competitors when it comes to innovations in energy

services. Developments in new services require staff to work together across functional boundaries. However, this is unheard of in E Company where people fi ercely protect their functional specialism and will only work on the tasks specifi ed in their job descriptions.

Requirements(a) Discuss why the characteristics of a role culture may no longer be appropriate for E

Company. (5 marks)(b) Recommend, with reasons, the type of culture to which the company now needs to

move to. (5 marks)(Total for Question Two � 10 marks)


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6Solutions to Revision Questions

Section A solutions

Solution 1Just as an organisation develops its own corporate culture which will infl uence its strategy and its way of doing business, countries show international differences in how they view the world and develop their own cultures in terms of values and basic assumptions. This is an important concept since it will impact on the ways in which people behave at work and the way things are done in organisations. The effect of different environments is a key fac-tor in determining the cultural compatibility of organisations moving into new territories. A mutual understanding of the different cultures will infl uence the effectiveness of work-ing relationships and the management styles adopted.

Hofstede’s research was developed to explain national culture by mapping different cul-tural characteristics. The outcomes from the research suggest that countries can be clas-sifi ed according to the four dimensions in which national culture varies and that might infl uence business behaviour. The dimensions are power distance; uncertainty avoidance; individualism; and masculinity. A country can be classifi ed on these dimensions on a con-tinuum from high to low.

Power distance is the extent to which a society accepts that power in organisations is distrib-uted unequally. In countries with high power distance, managers tend to make autocratic deci-sions and subordinates do what they are told rather than being involved in decision making.

Uncertainty avoidance is the degree to which members of a society feel uncomfort-able with risk, uncertainty and ambiguity and feel threatened by unusual situations. High uncertainty avoidance will mean risk taking is discouraged and organisations will tend to rely heavily on rules and regulations so that people know what they are doing.

Individualism versus collectivism is the extent to which people are supposed to take care of themselves and be emotionally independent from others (individualism), to one where people prefer a tight-knit social framework based on involvement (collectivism).

Masculinity relates to the degree to which masculine values predominate. For example, focus on power, achievement, assertiveness, and material success as opposed to the stereo-typical feminine values of relationships, modesty, sensitivity and concern for others.

These factors need to be considered when developing strategies in a cross cultural context since Hofstede argues that countries differ signifi cantly in their ‘score’ on these dimensions. For instance, on the basis of Hofstede’s work it has been argued that the Japanese are more collective, cautious, and authoritarian than Anglo Saxon countries. The implication of this is that Japanese methods of management may not work well in these countries and vice versa.

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of the proposed strategy to enter country Y through joint venture. The comparison should not only take account of the two organisations but also the cultural differences between consumers in Company X’s existing markets and the consumers in Country Y. If the two countries have signifi cant cultural differences along all four dimensions, the joint venture might not be an attractive proposition.

Market development strategies often fail because whilst fi nancial assessments are sound, insuffi cient attention has been placed on cultural factors.

Solution 2Common errors● The question is straightforward in calling for a description of the concepts.

The concept of accountability relates to one person having to report to another for actions and results in the former’s area of activity.

Authority refers to the scope and amount of discretion given to a person to make deci-sions. Usually, this is by virtue of that person’s position or standing in an organisation. Authority may also be divided into expert and legal authority. As the names imply, expert authority derives from a person’s position as an expert on certain matters or doctrines, whereas legal authority is conferred by statute or common law. Thus, a parent will have legal authority over a child under 16 years of age, and an employer will have legal author-ity over employees as defi ned by the Health and Safety at Work laws. Authority may also be implied as opposed to being directly stated.

Responsibility relates to the liability a person has when called to account. A person’s responsibilities refer to the functions that that person is under a duty to perform on behalf of his/her organisation. Usually, if a person is responsible for a certain area of work, for example management accounts, then he/she is also accountable for its actions. The man-agement accountant would be responsible for management accounts staff and accountable to the fi nance director, or his/her immediate superior.

Solution 3A useful framework that can be used to discuss the different sources of power is that pro-posed by French and Raven and includes referent, reward, coercive, expert and legitimate power.

● Referent power is sometimes termed charismatic power and is derived from one’s admira-tion or respect for an individual that can inspire followers. This is gained by the personal qualities of the individual and when followers believe that the leader has desirable char-acteristics that should be copied, or has inspiration charisma. The scenario mentions that G is known for his fairness and is well liked and respected for his enthusiastic approach. It is therefore likely that he will have referent power which will help him in implement-ing the changes to working practices.

● Reward power is where the leader is able to directly infl uence the intrinsic or extrinsic rewards available to followers. For example, the ability to provide incentives for individ-uals to behave in a particular manner and has control over the organisation’s resources such as salary, bonuses or promotion. This type of power is usually used in a positive


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manner, although it can be used in a negative way through the threat of removal of rewards. As senior partner, G will have reward power that he could use to encourage people to adopt the new working practices. As well as fi nancial rewards, G could use intrinsic rewards such as verbal praise and recommendation for promotion.

● Coercive power, as the term implies, is the ability to punish or deprive people of things that they value and where the leader uses penalties or sometimes physical punishments to enforce compliance. It is based on fears and the use of the ‘stick’ or sanction, mak-ing life unpleasant for people. The receiver is unlikely to respond to this type of power. Whilst the immediate response might be compliance, it is unlikely to result in long term commitment. It is doubtful that G would want to resort to using this type of power, unless there is strong resistance to the changes, in which case he may have no choice.

● Expert power is based on the followers’ belief that the leader has certain expertise and knowledge relevant to a particular problem or issue. It will only work if others acknowl-edge that expertise. G will probably have this power given the time he has worked for the organisation and his sound knowledge and understanding of the fi rm’s different business activities. This experience will be of great help in the drive to introduce new technology and working practices into the organisation and should encourage respect from staff.

● Legitimate power, sometimes referred to as position power, is the power which is associ-ated with a particular job. It is when followers accept that the leader has the right to infl uence them in certain areas or aspects of behaviour. This is often based on the indi-vidual’s formal position in the organisation. Since G is a senior partner and leader of the project he will be deemed to have legitimate power in managing the changes and hence the right to issue instructions to staff.

The list proposed by French and Raven is not exhaustive and there are other sources of power, such as resource power, physical power and negative power. Informational power is derived from the ability to control access to information.

Section B solutions

Solution 4(a) Power and authority. A person’s position in an organisation gives them authority over

others and comprises a legitimate power, especially when followers accept that the leader has the right to direct them. Max Weber (1864–1920) defi ned three bases for such authority as follows:

1.Charismatic/personal authority based on personal standing, nepotism, favouritism such as Napoleon’s use of his family as heads of conquered states in the 1800s in Europe;

2.Traditional/historical authority such as aristocratic or middle-class power based on status;

3.Rational/legal authority increasingly in an era of burgeoning scientifi c management, merit or ability appeared as a variable.

Power French and Raven identifi ed fi ve possible bases of power:

1. Reward power, where the leader is able to directly infl uence the intrinsic and/or extrinsic rewards available to followers;

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to enforce compliance;3. Expert power, when followers’ belief that the leader has certain expertise that should

be copied, or has inspirational charisma;4. Expert power, based on the followers’ belief that the leader has certain expertise and

knowledge relevant to a particular problem or issue;5. Legitimate power (i.e. authority), when followers accept that the leader has the right

to infl uence them in certain areas or aspects of behaviour.

(b) Moon as both owner and manager had various types of authority and power. His char-ismatic/personal authority was based on nepotism and his employer status gave him rational/legal authority. These were supplemented by reward power over both the intrin-sic and extrinsic rewards available to employees, and coercive power in his use of penal-ties like sacking to enforce compliance ‘pour encourager les autres’.

The power base is changing because of PEST factors. Political infl uence comes from the government, which has introduced measures to avoid the kind of exploitation of employ-ees that Moon has been using. These include protection from unfair dismissal for long-serving employees safety, health and environment legislation and some aspects of equal opportunities such as equal pay for work of equal value. Economically, the yard is going to need better management to survive, socially people are no longer putting up with ‘tra-ditional’ authority, and resigning and going to other employers, but there seem to be no technological changes.

Solution 5 (a)Taking the sources of power fi rst, it is useful to make use of a typology such as that by French and Raven (1958), as this helps us to consider the different sources of power in a systematic manner. The authors identify fi ve major sources of power. These are coercive, reward, referent, expert and legitimate power.

Taking each of these sources in turn, coercive power is defi ned as that dependent on fear. In its extreme form, it is the fear that one is likely to feel if threatened by a gun or knife. In the case of organisations, power of this extreme kind is rarely used, but Sheila can be said to have access to coercive power because as the senior manager in the organisa-tion she is in a position to dismiss personnel from their job. Even when this power is not exercised, the potential for its use is still there and subordinates can feel threatened by this potential. A second source is that of reward power. In French and Raven’s typology, this derives from the capacity of the CEO to reward subordinates for their contribution to the performance of the organisation. These rewards may take many forms from simple praise in recognition for a job well done, through to more material rewards like promotion, sal-ary increases, more interesting work, additional holidays and so on.

Referent power arises out of the admiration which people have for certain individu-als. This admiration often includes a desire to be like that individual because he or she has qualities that mark them out from the mass of people. In the organisational context, some managers are able to persuade subordinates to make extraordinary efforts because subordinates wish to please the manager. In the particular case of Sheila, it is diffi cult to know from the scenario whether or not she possessed the charisma that would persuade


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subordinates to act to please her. What we do know is that she exhibited qualities in a crises situation that would be unlikely to enhance her referent power in the world of legitimate business.

Expert power is something that Sheila does possess. She demonstrated her marketing and management skills in her previous role as marketing manager. It may be however, that she does not possess the general management skills to perform effectively as CEO. We do not know how competent she was in the role. We do know that X Company suffered market setbacks, but these can affect any company irrespective of the skills of the CEO.

Legitimate power represents the power a person receives as a result of his or her position in the formal hierarchy of an organisation. It is the power accorded in the constitution of the organisation to anyone who fi lls a particular position. So, a policeman is accorded cer-tain powers to arrest people if they break the law, and managers generally may be granted powers to hire and fi re personnel, to give instructions, to reward personnel and so on. In the case of CEO, they are given wide-ranging powers such as that of strategy formulation and the power to implement it.

The concept of legitimate power in fact is very similar to the concept of authority to which we now turn. Power is not, however, the same as authority. Power may be exercised without legitimacy. For example, when any one individual forces another individual to do something which he or she would not otherwise do by a threat of physical violence, then this is not legitimate, unless we are in a war situation. By contrast, the exercise of authority implies the right to infl uence the actions of others through agreed legitimate means.

In the case under review, it is evident that Sheila, in pressurising Bob to change the fi g-ures, was exercising her power of position illegitimately.

(b)It is probably impossible to ensure that the abuse of power and authority will not occur again in X Company or any other company for that matter. Chief executive offi cers like Sheila have the responsibility of getting things done through others and with others, in order to meet corporate objectives. To accomplish this leadership role, they are accorded a degree of authority to enable them to run the business. In appointing the chief execu-tive offi cer, the board of directors selects individuals, who, in addition to possessing the required leadership skills and experience are also assumed to possess integrity.

Unfortunately, it is diffi cult for any selection body to know in advance that the person chosen as CEO will always use the power granted to them in a responsible manner.

The responsibilities of a board of directors therefore include those of controlling, moni-toring and supervising top management so that the business is run according to legal requirements and in the interests of shareholders and other stakeholders.

Following a succession of corporate scandals in the 1980s, a number of investigations and reports such as the Cadbury Committee Report (1992) recommended Codes of Best Practice to try to ensure better corporate governance. X Company could usefully adopt some of the recommendations of the Cadbury Report. These include the setting up of

Examiner’s Note:

Any alternative framework on power is acceptable.

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accountability through the monitoring of a company’s annual and interim results. A sec-ond recommendation of the Cadbury Committee, the appointment of more no executive directors would also be useful in strengthening this monitoring process.

Unfortunately, even these measures cannot guarantee responsible use of power and good ethical practices because Audit Committees and the like depend for their information on executives involved in running the company. The encouragement of whistle-blowing; a practice in which persons in a company expose the misdeeds of others to prevent the misuse of power and to preserve ethical standards is one possible measure. In some US companies, ‘ethics advisers’ have been appointed to assist staff on what action to take in case of observed unethical practices and abuses of power. To date, however, even these measures have limited effectiveness because of a lack of legal safeguards for whistle blowers. Employees who ‘blow the whistle’ on senior people in an organisation risk losing their job and this will remain a threat until such time as legal measures are put into place to protect them.

From the discussions on the several leadership theories, it should be apparent that there is no one best style of leadership that is equally effective for all circumstances. The best leader-ship style is the one that fulfi ls the needs of the group the most, while at the same time sat-isfying the needs of the organisation. The manager has to provide the following factors:

● Direction – The elimination of uncertainty about what has to be done and the coordina-tion of all effort to pull in one direction.

● Drive or motivation – The commitment of the group to move forward, but this will include satisfying the intrinsic needs of group members.

● Reputation – Represent the purpose of the group to the outside world.

The variables that defi ne the successful style include:

● The personality of the leader’s probably the most rigid of the variables that defi ne the most effective leadership style.

● The situation of the group can vary from calm to crisis, simple to complex, severe threat to security and thus will drastically affect the successful style. The task, technology, struc-ture and environment in which the group is working will have similar marked effects.

● The situation within the group (which can vary from cooperative to militant) will also affect the successful style.

● The people within the group will vary in intelligence, education, interest and motives. They may be loyal and long-serving, aggrieved, casual or troublemakers. This is obvi-ously independent of the other variables.

Solution 6(a)The concept of organisational culture is an important one for E Company because it can exert a strong infl uence on business performance. It can shape the behaviours and actions of individuals in the workplace and is often referred to as the ‘glue’ that holds the organisa-tion together.

There are different types of culture which are determined by an organisation’s struc-tures, processes and management methods. Currently, E Company is typifi ed as having a role culture which can be very effi cient and successful in a stable environment when work is predictable and the organisation can control its own environment, often by maintaining


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a monopoly position. However, this type of culture now appears to be having an adverse effect on E Company’s performance as the company now faces very different operating conditions since losing its monopoly position. The reasons for this can be explained by examining the characteristics of a role culture.

Role culture works by rationality and logic, and is usually associated with a formal struc-ture with well established rules and procedures. Job descriptions are clearly defi ned, tightly describing the tasks of an individual’s job. This leads to a strict division of labour with peo-ple often reluctant to take on wider responsibilities. Rather, they are obsessed by fulfi lling narrow job duties, with a preoccupation on day to day administration rather than longer term issues. These characteristics would make it diffi cult for the organisation to be fl exible and adapt to the more competitive operating environment, acting as a barrier to the devel-opments needed in E Company.

Within a role culture the organisation is dependent upon various functions, each of which has their own areas of strength and infl uence, with an emphasis on internal proc-esses. This type of culture is also impersonal, relying on formalised rules and procedures for work routines and communication and to guide decision making in a standardised and bureaucratic way. Relations between staff are dominated by hierarchy and authority with formal and rigid control systems. Individuals are selected for particular roles on the basis of their ability to complete a particular task to the required level: over achievement is not actively pursued. However, these characteristics of a role culture can mean that it is more resistant or very slow to adapt to change and getting people to work together across boundaries is diffi cult.

Innovation can be stifl ed, since the culture is one which insists people go through layers in the hierarchy to gain approval. Decisions are made at senior level with little involvement from other members of the organisation. In fact new ideas from below may be regarded with suspicion from above. Individuals are required to perform their job and not to overstep the boundaries of authority. This is occurring in the case of E Company, and would seem to be partly responsible for the lack of fl exibility, responsiveness and problem solving capability.

(b)It is apparent that the culture of E Company needs to change and it is recommended that a task culture would be more appropriate given the changes in business conditions.

This type of culture is typifi ed by teamwork, fl exibility and commitment to achiev-ing objectives rather than emphasising a formal hierarchy of authority. The task culture is often refl ected in a matrix structure or project teams, where the focus is on completing a job or project.

Staff become loyal towards the work rather than towards formal rules. The principal concern is to get the job done, breaking down rigid hierarchies and functions. Therefore, the individuals who are important are those with the skills and ability to accomplish a particular task. Skill and expertise are more important than length of service and posi-tion in the organisation, as is currently the case in E Company. People are not hindered in terms of their contribution by tight job descriptions associated with the role culture. Hence, a task culture tends to encourage greater fl exibility, with people working together across functional boundaries to achieve organisational objectives.

Team work is fundamental to a task culture, rather than the achievement of individuals. The result is that infl uence is spread throughout the organisation. By nature a task culture fosters creativity and is adaptable, responsive and able to change very quickly.


7

Management of Relationships in the Working Environment


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7 LEARNING OUTCOMES After completing this chapter, you should be able to:

� discuss the roles of negotiation and communication in the management process, both within an organisation and with external bodies;

� identify tools for managing and controlling individuals, teams and networks and for managing group confl ict

� discuss the effectiveness of relationships between the fi nance function and other parts of the organisation and external stakeholders.

7.1 Introduction Success within organisations is to a large extent dependent on the way in which people as both individuals and in groups are managed. People rarely work in isolation at work, since most activities need some coordination through groups of people. Whilst there are some positive outcomes of group work, for example it can lead to increased productivity, morale and encourage greater innovation and creativity in the workplace, working with others is not always easy, and poor group work can have a negative impact on organisational performance.

This chapter will provide an understanding of the theory and practice of group working, starting with an explanation of the meaning of groups and the different types of groups that exist in organisations. This will be followed by an investigation into the factors that can lead to effective group working. Some of the problems that can occur in groups will be identifi ed. The fi nal part of the chapter will discuss some of the important skills managers need in managing relationships including effective communication and negotiation.

7.2 The meaning of groups and teams The reasons that groups are formed in organisations are as a consequence of the formal organisational structure and arrangements of work tasks, hence reasons relating to the

Management of Relationships in the Working Environment


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T fulfi lment of organisational functions and division of tasks. However, they are also formed with a view to making boring work and routine work more palatable and interesting in order to enhance job satisfaction. Working in groups should also increase people’s skills, job satisfaction and motivation. Group work can fulfi l social needs, and can be formed to pro-vide an outlet for companionship, support, role identity, affi liation and recognition, giving a sense of belonging to individuals. These reasons can all be identifi ed in the Human Relations approach to management, discussed in the previous chapter. What is clear is that groups are a key force on the behaviour of individuals at work.

There are many different defi nitions available to explain what constitutes a group. Schein (1988) suggests that a group is any number of people who:

● interact with one another; ● are psychologically aware of one another; and ● perceive themselves to be a group.

Whereas teams are a kind of group, all groups are not teams. Teams can be defi ned ( Katzenbach and Smith, 1994 ) as ‘ a small number of people with complementary skills who are committed to a common purpose, performance and goals and approach for which they hold themselves mutually accountable ’ . The economic concept of team production(Alchian and Demsetz, 1972) would stress the interdependency of skills rather than the human resource element of commitment, but it is important that the team contains the right mixture of individuals and skills.

Surely all team members must have different goals from their roles or a team would be a group of clones? Can you think of teams in this situation? A football team – goalies save goals not score them, and soon.

The main potential benefi ts of groups for individuals and organisations include the following:

● Teamwork and improved problem-solving. ● Greater creativity and quality. ● Support and facilitation for individual training and development. ● Improved information fl ows and more effective communication through participation. ● Satisfaction of social needs and a means of sharing and helping in a common activity. ● Providing a forum for constructive confl ict resolution.

7.3 Types of groups There are many different classifi cations of the types of groups that exist in organisations. One distinction that can be made is between formal and informal groups.

7.3.1 Formal groups Formal groups are created by management to fulfi l the specifi c goals and tasks related to the needs of the organisation. The membership of this group is more likely to be formal, perhaps nominated or at least constrained by that organisation (e.g. into shop-fl oor opera-tives or into departments or divisions).

7.3.2 Informal groups Informal groups develop from individual relationships based on common interests and to satisfy the needs of staff beyond that of doing the job. They are not explicitly set up by


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Tmanagement and do not fi gure in the organisation’s hierarchy. Individuals join groups in order to satisfy some important needs, such as for safety, friendship and a sense of belong-ing. These types of group membership are likely to be voluntary and informal. The infl u-ence of informal groups over individual members ’ behaviour can be more powerful than that of formal groups, and can have a positive or negative effect on organisational performance. The potential problems of informal groups arise from them serving a counter-organisational function. For example, by resisting change or when their norms are inconsistent with those of the management, confl ict can occur (the nature of confl ict will be examined in Chapter 9).

7.3.3 Reference groups A reference group is a group the individual does not currently belong to but wants to join (e.g. senior manager group, if he or she is a junior member, or a shop stewards group, if he or she is only a trade union member).

7.3.4 Self directed and autonomous groups Self-directed work teams have evolved from the autonomous working groups and group tech-nology developed by Volvo. These were based on a socio-technical systems theory that the interaction of task with an individual is often best served by a group process. The Volvo experiment however was based on diffi culties in recruitment to a boring job rather than a change in technology of work per se. It was later abandoned as not being effective. Under cellular manufacturing methods, typically teams are where the cell makes a larger part of the end-product than previously, and these are empowered with tasks, almost like a div-ision of a fi rm, and obtain materials and create output by following their own internal processes. Such teams must have a balance of technical skills, and usually a team leader is elected or more often appointed after a selection centre using psychometric instruments.

Identify the different types of groups that you belong to.

7.4 Effective group performance There are many interrelated variables that infl uence and constrain the behaviour of groups and contribute to the effectiveness of the group. The criteria of group effectiveness can be viewed in terms of the extent to which the tasks and organisational goals are achieved and the satisfaction of team members.

One approach to identifying the various dimensions of group effectiveness was developed by Handy (1993) . He argues that it will depend on:

● the ‘ givens ’ which include the group, the task, and the environment; ● the ‘ intervening factors ’ such as motivation of the group, leadership style and processes

and procedure; ● the ‘ outcomes ’ which includes factors such as the productivity of the group and the satis-

faction of group members.


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T 7.4.1 Formation and development

The level of group performance is affected by the manner in which groups come together. According to Tuckman’s (1965) analysis, groups typically pass through four stages of development:

1. Forming. This stage involves the initial formation of the group. The emphasis is on making a personal impression, getting to know the others, and possibly dropping out of the group. Members are attempting to create their identity within the group. Individual’s test what is acceptable behaviour and codes of conduct begin to emerge.

2. Storming. The stage can be characterised as a period of internal confl ict and high emo-tion. As people begin to know each other, they start to present their view to the group and disagreements and arguments begin to occur. Bargaining over goals, resulting in confl ict and hostility which can disturb the impressions gained at the forming stage. Again, dropping out is likely and this could ultimately lead to the collapse of the group.

3. Norming. It is at this stage that as confl ict is resolved, new guidelines and standards of behaviour will be established. Group cohesion develops and norms of what is accept-able behaviour are set and roles allocated (norms are standards of behaviour to which members will conform and are unique to each group).

4. Performing. When the group has successfully progressed through the earlier stages, it will have created the cohesiveness to operate effectively as a team. The group should now begin to work smoothly, although their goals or standards may well not accord exactly with the organisation’s goals.

7.4.2 Group cohesiveness There are a number of factors which affect the integration of organisational and individual objectives in groups, and hence the cohesiveness of the group. They include:

Membership factors ● Homogeneity. Similarity of members is preferred for simple tasks; it leads to easier working

but less creative problem-solving. A variety of skills and knowledge is more effective for com-plex tasks. Homogeneity of status, both internally and externally, leads to a more cohesive group.

● Alternatives. If the individual has alternatives, that is he or she can leave the group eas-ily, his or her dependence on the group is reduced. Similarly, if turnover of membership is high, the group will tend to lack cohesion. Management may, of course, deliberately keep changing the membership of awkward groups.

● Size of group. The importance of this factor depends on the nature of the particular task. Groups solve problems more quickly and effectively than individuals, but one should also consider cost-effectiveness. As the size of the group goes up, the average productivity of the members goes down; there is less opportunity to participate; individuals ’ contributions are less discernible; cliques or factions may form; less work is done; and ‘ social loafi ng ’ or ‘ social noise ’ may increase.

● Membership in other groups. This may detract from cohesion and effectiveness.


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T Environmental factors ● Task: the nature of the task and its organisation must be compatible. ● Isolation of the group: external threat and incentives. ● The climate of management and leadership: a Theory X type of organisation tends to

lead to anti-management groups forming, even if only informally. Leadership style should be appropriate to the task, as we have seen before.

Dynamic factors ● Groups are continually changing, not just in membership but also in understanding

each other and of the task. ● Success and failure, there is a tendency to persist in failure.

7.4.3 Team roles A role is a social predisposition to certain ways of behaviour related to the perception of an individual to his or her status (position, occupation). Hence, the status of being a mother carries with it the role of ‘ mother ’ and attendant behaviours. Marital status produces the roles of husband and wife, and so on. These roles are learned implicitly from the expecta-tions of others.

Group roles are those functions which a group needs for it to survive (someone to organise social events, a joker, a serious adviser, and so on). These are very often implicit and develop spontaneously, but these roles need not emerge among groups of same-status individuals (called ‘ peers ’ in sociology), such as a group of police constables, a safety com-mittee, consultative committee or quality circle, though social roles might arise as one per-son volunteers to make the tea, another to collect monies for the lottery.

A popular categorisation of team roles has been developed by Belbin (1981) . From his own personality research, using Cattell’s 16PF scale, Belbin found that ‘ the Apollo team ’ – the brightest individuals at the management college – was the worst performing in business games. From there he realised that the personalities of the individuals mitigated against them acting together and he developed eight, then nine, key roles (these do not all have to be played by different individuals), each associated with different sets of personality traits that are important in an effective management team:

● Coordinator – who clarifi es the group’s objectives and helps to identify the issues to be addressed; individuals who prefer this role tend to be stable, dominant extroverts.

● Shaper – needs results for reassurance and has a compulsive drive to get things done; the key traits here are those of an anxious, dominant extrovert.

● Plant – this is the person who is very good at coming up with original ideas and suggestions; typically they are dominant introverts with a very high IQ.

● Monitor evaluator – is good at dispassionate analysis of suggestions and options; a stable, introverted type of individual with a high IQ.

● Implementer – who turns decisions into manageable tasks; stable, controlled individual. ● Resource investigator – this is the person who goes outside the group to obtain useful

information and resources; a dominant, stable extrovert usually performs this role well.


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If there is not the right balance of team roles, work will not be performed effectively. This balance is particularly important for groups operating in ill-defi ned, rapidly changing envir-onments. More stable groups may be able to operate without a fully balanced set of roles.

7.5 Group dynamics and team performance In a group, there is a high level of mutual interaction and awareness which are responsible for powerful forces, which cause the individual to behave, sometimes, rather differently from the way they would behave on their own. It is important to the organisation that these forces work for the organisation and not against it. Several classic experiments illustrate these forces.

Performance of simple, well-learned routines improves in the presence of an audience , or in co-action or in competition with others.

Performance of complex or new tasks, on the other hand, is poorer in the presence of an audience. Zajonc has suggested that this can be explained in terms of the relationship between arousal and performance, such that audiences can induce over-arousal and hence anxiety in complex tasks.

Steiner has identifi ed four basic models of group functioning:

1. An additive model in which every individual contributes but no one is dependent on anyone else. The total output in theory depends on the average skill or ability, but in practice it is found to fall short. This loss of effi ciency increases with the size of the group and may be either motivational or intersectional.

2. A coordination or conjunctive model in which there is a high, and often sequential, dependence between members, as in assembly lines or highly differentiated forms of offi ce work. Overall performance of the team is here dependent on the weakest member. The smaller and more homogeneous the team, the more effi cient the team performance. Though interaction losses will still occur, they will be less than in the additive case, because there is less opportunity for interaction in a linear model.

3. A collaboration or disjunctive model applies to things like problem-solving, where the group performance should be close to that of the most competent member, that is bet-ter than that of the average member. Group size should therefore be as small as possible, consistent with having all the necessary range of skills available, in order to reduce inter-action losses. Groups should be heterogeneous to provide these skills and to reduce any tendency towards unproductive group norms. A well-established or homogeneous group may tend to work towards agreement rather than towards an optimum solution.

4. A complementary model applies where the task can be divided into separate parts and different skills are needed for each.

Variations and combinations of the above may be appropriate to meet different circum-stances, for example small conjunctive teams working in parallel to feed a key worker or

● Team worker – who keeps the team together by supporting other members and helping to promote unity; a stable extrovert who is low in dominance.

● Completer-fi nisher – is impatient and very concerned with meeting deadlines; typic-ally an anxious introvert.

● Expert/specialist – technical person, if needed, who provides knowledge and skills to solve technically based problems.


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Tfunction such as inspection or packing. Also, different structures may be appropriate at different stages, so a large committee of many diverse skills may be appropriate to solving a problem (disjunctive), but a small homogeneous subgroup more appropriate for actioning the solution.

This theory considers the size of a group in relation to the number of tasks it needs to carry out, rather than the absolute size of the group. Some degree of ‘ under-manning ’ is found to be desirable and benefi cial, both for the individuals and for the organisation.

7.5.1 High-performance teams According to Vaill (1989) , high-performance teams exhibit the following characteristics:

● They perform excellently against a known external standard, and what they did before. ● They perform beyond what is assumed to be their potential best. ● They are judged by informed observers to be substantially better than comparable

groups. ● They achieve results with fewer resources than are assumed necessary. ● They are seen to be exemplars, achieving the ideals of the culture.

High-performance teams at Digital Equipment in Scotland Digital Equipment Corporation (DEC) started to develop high-performance work systems around empowered teams at its manufacturing plant in Ayr, on the west coast of Scotland, in the early 1980s. These teams were responsible for the manufacture of the company’s range of small business computers, and had the following features:

● Autonomous teams of six to twelve employees were self-managing and self-organising, functioning without fi rst-line supervision.

● Each team had full ‘ front to back ’ responsibility for a whole section of the manufactur-ing process, such as assembling a complete printed circuit board.

● Teams negotiated their production targets with their product manager, based on avail-able staff, materials and equipment.

● Team members were expected to share their skills with each other to become multi-skilled, and had no job titles.

● Team members were paid according to their skill level and not according to the particu-lar job on which they were working at any one time.

● Team members were involved in the performance appraisal of colleagues and in the selection procedure for new recruits.

● The physical layout of the factory fl oor was open to facilitate communications; technical support staff had their ‘ offi ces ’ and desks on the shop-fl oor too.

This approach to work design improved productivity, reduced the time required to intro-duce new products, and led to more effective problem-solving and decision-making. Shop-fl oor personnel developed a range of analytic, problem-solving, interpersonal, pro-cess design and group management skills through this approach, leading in many instances to signifi cant career opportunities and development (based on David Buchanan and James McCalman, 1989).

7.6 Problems with groups Unfortunately groups can also have negative as well as positive effects. Subsequent research has identifi ed a number of these negative effects, some of which are discussed below.


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T Conformity Individuals can be persuaded by group pressures to agree with decisions which are demon-strably and obviously wrong, and which the person must know to be wrong. Overall, some 74 per cent of his subjects conformed to an incorrect decision at least once, and the aver-age level of conformity was 32 per cent.

The combination of wrongness and unanimity takes members by surprise, shakes confi -dence and disorients judgement. If the group is not unanimous, then the spell is broken and normal judgement largely restored. In the Asch experiment, this was demonstrated if one con-federate was briefed to break ranks, when average conformity dropped from 32 to 6 per cent.

Milgram (1965) observed a similar effect in his famous ‘ electrocution ’ experiments determining obedience to authority; if a co-acting confederate rebelled, the proportion of subjects obeying the experimenter, Milgram, fell from 65 per cent under the standard con-ditions to only 10 per cent.

The Abilene paradox This is a famous case, exemplifying the stultifi cation of individuals through implicit and unconscious group processes. The story was written up as a case by a sociologist whose family all ended up in Abilene, Texas, driving 100 miles through desert heat, though none of them actually wanted to go. They all thought each other wanted to go, and no one wanted to disturb the ‘ consensus ’ .

Groupthink This is a word coined by Irving Janis (1972, Victims of Groupthink ) to describe a common situation which he observed to have occurred within tightly-knit political groups. After the initial ‘ Bay of Pigs ’ disaster, when the United States encouraged an abortive ‘ invasion ’ of Cuba via the Bay of Pigs, John F Kennedy saw clearly how to try to avoid ‘ groupthink ’ and planned his leadership accordingly by insisting on:

● critical evaluation of alternatives; ● independent sub-groups to work on solutions; ● external testing of proposed solutions; ● the leader to avoid domination of the group (which can be unconscious); ● the avoidance of stereotypes of the opposition.

Groupthink could be described simply as the homogeneity of objectives and thinking carried to the ultimate, and often disastrous, extreme. The attitude is well summarised in the more recent example of the space-shuttle disaster. To quote The Guardian : ‘ NASA argued that the ‘‘ gung-ho, can-do ” ethic which guided the space agency made it diffi cult to raise concern about the safety of the O-ring seals. ’

‘ Risky shift ’ or group polarisation This is the tendency for groups to take decisions which are riskier than any that the individual members would take on their own. It now appears that there is also a tendency, under certain circumstances, for groups to take excessively cautious decisions. In summary, we can see:

● pressures on individuals to conform to group norms; ● a tendency in certain situations to make more risky decisions than individuals because

no one can be held responsible (risky shift);


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T● poor communication and lack of trust can lead groups to take decisions that none of the

individual members actually prefers (the Abilene paradox); ● a tendency to become inward looking, particularly at times of crisis, ignoring external

events and confl icting views (groupthink); ● a focus on political manipulation and confl ict rather than organisational objectives.

Clearly, managers must attempt to minimise these potential problems while harnessing the benefi ts of groups and teams. This is not easy but recent approaches, such as TQM and the concept of a learning organisation, mean that effective groups are even more critical for organisational effectiveness. Managers need to pay attention to the formation of, and support for, formal groups and also realise that they cannot ignore or suppress informal groups. In relation to informal groups, it is important:

● to let employees know that managers understand and accept them while discouraging dysfunctional behaviour in such groups;

● to try to anticipate how decisions will infl uence informal groups; and ● to keep formal decisions from unnecessarily threatening informal groups.

Can you identify a situation when you were involved in a group that was ineffective. What created the problems? How could they have been resolved to

improve the effectiveness of the group.

7.7 Communication An important aspect in the relationship between managers and subordinates is com-munication. Most organisations will depend to some extent on the speed and accuracy of communication to maintain their competitive edge, and the management function involves both direct and indirect communication. Good communication skills are often included as an essential management competence, since people with good communi-cation skills have been found to make better decisions and tend to be promoted more frequently.

Communication can take many forms, for instance face-to-face discussions, e-mail, reports, teleconferencing, telephone or internal memoranda.

7.7.1 Oral and written communication Effective and regular personal communications are vital to ensure coordination and to identify problems quickly.

Oral communication can take many forms, such as:

● face-to-face meetings; ● telephone conversations; ● videoconferencing.

Oral communication provides immediate feedback and is important in engendering team spirit and relationships. It is particularly important for the managers to be proactive in oral communication, not only with team members but also with the other stakeholders.


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T It is important during oral communication for the manager to check that understanding has occurred to encourage feedback.

Written communication is normally achieved by internal memos and e-mails to team members, external letters and regular reports.

7.7.2 The communication process The process of communication involves the transmission of some idea, concept or thought from one person (the sender) to another (the receiver). Figure 7.1 illustrates the different stages in the process of communication.

Whilst this diagram above may suggest that the process of communication is straightfor-ward, this is often not the case because before the medium of transmission can be accessed the message has to be translated – or encoded – into an acceptable form (for example ‘ words ’ ). Similarly, before the receiver can access the message it has to be decoded. A further complication arises because it is improbable that the process of encoding, transmission and decoding are instantaneous and therefore there is the possibility of ‘ interference ’ – often referred to as ‘ noise ’ – which can distort the message.

The fi rst stage in the communication process is initiated by the sender, who can be an individual, group or organisation that attempts to communicate with a particular receiver. The sender must encode the mental thoughts so that they can be understood by the receiver. This might include using words, numbers, gestures or non-verbal cues such as images or body language. The output of the encoding is the message. An important point to consider is that the message needs to match the medium used to transmit it. There are a variety of media that can be used to communicate messages (e.g. conversations, e-mail, meeting, memos etc) – the different types of media will be considered in more detail later in this chapter. Decoding the message is the receiver’s version of encoding and consists of translating a verbal or visual aspect of a message into a form that can be inter-preted. Problems can occur here, in that the receiver’s interpretation of the message may differ from that originally intended by the receiver, and they will act according to their interpretation.

Just because communication has been sent it does not necessarily mean that it is effec-tive, barriers can arise at each stage of the communication process:

The sender may distort the communication by:

● not being clear as to what has to be communicated; ● omitting information; ● choosing words in coding the message that do not accurately refl ect the idea/concept,

and/or choosing words that intended recipients cannot understand;

CodedMessage

Medium Channel

DecodedMessage

SENDER RECEIVER

NOISE

Figure 7.1 Stages in the communication process


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T● choosing words that provoke – wholly or partly – an emotional response in the

recipient[s]; ● using technical jargon; ● choosing an inappropriate medium, for example text messaging instructions that are

complex;● sending too much information for a person to digest – creating overload; ● sending mixed messages simultaneously, for example there is incongruence between the

verbal message and non-verbal signals, both of which are available to the receiver.

The receiver may contribute to communication diffi culties by:

● not being in an appropriate state to receive the message (e.g. because of concentrating on some other task);

● not wishing to receive a message from that sender – or being selective in what they choose to hear;

● fi ltering out elements of the message he or she does not wish to deal with; ● having a mindset that does not admit the substance of the message – and therefore pre-

vents the receiver from appreciating the sender’s standpoint.

‘ Noise ’ refers to any distractions or interference in the environment in which the com-munication is taking place and affects all linkages in the communication process. Examples of noise are poor telephone connections, physical distance between the receiver and sender, illegible handwriting, distractions in the environment during the communication process. Noise may interfere with communication by:

● physically impairing the receiver’s ability to receive the message – or the sender’s capacity to receive feedback;

● physical failure of the medium of transmission (e.g. disruption of a telephone network or system downtime);

● limiting the encoding/decoding capabilities of the sender and receiver; ● obscuring the message within a mass of other communications (e.g. having to deal with a

very large number of voice mail and e-mail messages following the return from holiday).

One of the main barriers to communication in organisations is information overload – people feel overwhelmed by the high volume of information which has been transmitted, this is partly as a result of the increased use of electronic communications. Other reasons that can create barriers to good communication are concerned with differences in the back-grounds of the people involved, arising not only from social and educational backgrounds but also age, personality and status. Also, diffi culties can arise in the work situation, for example where there is confl ict between individuals or departments.

The above points illustrate some of the many diffi culties that can hinder accurate com-munication. It implies that both sender and recipient should take steps to overcome these barriers.

There are a number of ways to overcome the barriers outlined in the section above. The sender should:

● have a defi nite, clear objective: others will have a far greater chance of understanding the communication if the sender has articulated – at least internally – what he or she wants to achieve by the communication;

● plan the communication: it is better if, at the outset, the sender has thought about what is to be communicated; to whom it is to be communicated and how it is to be communicated;


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T● ensure that all elements of the communication (words, tone, non-verbal signals, medium,

environment etc.) fi t with each other and with the subject matter of the communication; ● think about the receiver[s] and the situation in which they will be in when the message

is received; ● anticipate reactions to the message and cater for these – if appropriate – within the mes-

sage or choice of medium; ● practise; ● seek and work with feedback from recipients.

The receiver should:

● consider the contribution he or she is making to the communication by being aware of the feelings of the sender and/or the medium, and of the prejudice which, inevitably, he or she brings to the receipt of the message;

● listen attentively, or – more broadly – receive the message actively rather than passively; some researchers contend that listening is a key communication skill; however people are generally not very good at listening. Listening involves more than just hearing the mes-sage, it requires the receiver to actively decode and interpret verbal messages.

● check out anything that is not clearly understood; ● give feedback to the sender so that the sender can ascertain that what has been commu-

nicated is what was meant to be communicated.

Non verbal communication is also important in helping to make communication more effective. It is therefore important to ensure that non-verbal signals are consistent with the verbal messages to avoid miscommunication. Non verbal communication could include body movements (such as moving backwards and forwards) and gestures such as pointing; facial expressions and eye contact. Positive non verbal actions that can help to communi-cate include:

● maintaining eye contact; ● smiling and showing animation; ● occasionally nodding the head in agreement; ● speaking at a moderate rate, in an assuring tone.

However, it should be remembered that what is acceptable as positive non-verbal com-munication will vary around the world and across cultures.

7.8 Effective meetings Meetings can be an effective communication method for the manager. In order to ensure that the meeting is effective and useful, it is important to adopt the following steps:

● Determine the purpose of the meeting. If the objectives of the meeting are not clearly defi ned, it is unlikely that they will be achieved.

● Establish who needs to attend. If the wrong team members are invited, time will be wasted and again the objective of the meeting cannot be achieved.

● Determine the agenda in advance and distribute it to those attending. Meetings will be inef-fective if there is no clear focus for discussion. It is also essential for attendees to view the agenda before the meeting in order to prepare material and to generate answers or fur-ther questions.


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T● Make suitable arrangements for location and time in advance. The timing and location of

meetings is important if it is to encourage attendance. If meetings are held at inappro-priate times or locations then attendance is likely to be poor and the meeting ineffective.

● Facilitate discussion. The manager should not dominate proceedings, but rather should allow participants to lead discussions and present solutions or arguments, that is the gate-keeping role. The manager also needs to manage confl ict during meetings to ensure that personal issues do not get in the way of the overall discussion. A strong leader should not only foster an open and honest debate but must also control and manage strong team personalities and disruptive elements.

● Manage the plan of action. As the meeting progresses, the manager should note what actions are to be taken, by whom and by when. If actions are proposed, the manager should ensure that it is clear whose responsibility it is to ensure that the action is taken.

● Summarise. Throughout the discussions, the manager must summarise and clar-ify key points made. At the end of the meeting, a summary of the results should be made in order to make sure that the participants are clear as to the action points and commitments.

● Publish results/minutes. The results/minutes of the meeting and the subsequent team activities should be documented and distributed to the team as soon as possible. (E-mail is a particularly good medium, especially if the outcomes are also stored on a shared drive on the system.) If this is not done, the focus of the meeting outcomes may be lost and team members may forget or wrongly prioritise the meeting’s action points.

7.8.1 The roles of team members in meetings Team members fulfi l different roles in meetings. For example the manager should act as a facilitator in the meeting process. He or she should take responsibility for setting the agenda for discussion and ensuring that the meeting achieves its objective, and that all team members have had an opportunity to participate, that is the gate-keeping role again.

It is important that one person at the meeting acts as a chairperson , whose main respon-sibilities are to ensure that the agenda for the meeting is followed, that all members have the ability to participate equally and that all views are listened to. This role may or may not be carried out by the manager.

The meeting will also require a secretary or administrator, whose responsibility it is to take the minutes of the meeting and to provide a hard/electronic copy of these minutes to the team members after the meeting. The manager should ensure that prior to the meet-ing, the secretary has been clearly briefed and has a clear understanding of the purpose and likely content and format of the meeting.

The team members attending will play various roles, depending on the purpose of the meeting. For example, some members of the team will be protagonists , that is positive sup-porters of the issue under discussion. Obviously, positive support is critical for successful team-working, but the manager must carefully assess the reasons for the positive support. The particular manager may have a vested interest in a particular outcome, which may not be to the overall benefi t of the project.

Conversely, some team members may be antagonists , that is possibly be disruptive to the team meeting procedures through disagreement and have a negative attitude to other team members. The manager must be aware of these individual issues and be able to manage them.


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T All meeting members must be listened to with respect, but it is the responsibility of the manager to make the whole team aware of the overall project objective, and the role that each team member plays in its achievement. If the meeting is designed to solve problems, individual team members will be called upon to offer their own expertise and advice on the situation. (Objectivity, professionalism and integrity are key requirements in all team members.) Other team members will take a more passive role, but will be important in providing an objective perspective on the solutions generated. It is important that a variety of skills are represented at a meeting so that those present can provide varying expert opin-ions upon the same problem.

7.8.2 Problems with meetings Some of the problems with meetings, and methods to overcome those problems, are explained below.

Problems with meetings Actions to avoid problem

Poor preparation: inappropriate chairperson Selection should be based on someone with the requisite range of communication skills

Poor preparation: the objectives of the meeting are undefi ned and so unclear

Ensure that an agenda is produced and circulated prior to the meeting. During the meeting, the chairperson should state the objective(s) and must return the focus of the meeting to the points on the agenda

Lack of enthusiasm or interest in the meeting For future meetings, ensure that only those with an interest in the meeting, or whose view is required, are actually invited to the meeting. For the current meeting, suggest a short break or stress the need to reach a conclusion

Attendees talk too much without regard to the chairperson’s requests or structure of the meeting

The chairperson must impose some order on the meeting. Possible solutions include asking the } participants to speak in accordance with meeting protocols such as a time constraint if necessary, or (worst case) asking them to leave the meeting altogether

Attendees cannot reach an agreement concerning issues on the agenda

The chairperson will need to exercise negotiation skills to try to bring the meeting to some agreement. If this is not possible, then attendees may have to agree to differ. However, some action points may be required to ensure that more information is obtained so agreement can be achieved at the next meeting

There is hostility between some of the attendees The chairperson will again need to exercise negotiation skills. Careful use of a seating plan may help to reduce the possibility of confl ict. As a last resort, one or both of the parties involved may be asked to leave the meeting

Action points from previous meetings have not been carried out

Assuming that minutes were issued correctly, in the current meeting, the chairperson should obtain reasons for actions not being completed. For future action points, ensure that each has a person identifi ed as responsible for completing it. Check the minutes of the meeting to ensure that all action points are included

Minutes are either too long (information overload) or too brief (do not include appropriate points)

Ensure that the minutes are either minutes of resolution (which contain agreed outcomes) or, if minutes of narration, that they are suffi ciently edited to provide the fl avour of the discussions, but not every pause and cough


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T Judgement A real-life anecdote concerns the clever management of those attending a meeting on a multinational project. There was a rather long-winded contribution from some-one who had travelled some distance to attend the meeting. The chairperson was an Englishman, as this was the language in which the project meeting was conducted. He was not the most senior person there. His boss, an Italian CEO, did not speak fl uent English. Getting a little impatient with the rambling contribution, the chairperson made to stop the contributor and get the meeting moved on. His boss quietly tapped him on the arm. She whispered: ‘ He has come a long way. His fi rm is vital to this project. Just don’t have it all minuted ’ . The contributor completed his views about fi ve minutes later. He was able to report to his own CEO about his excellent reception. Honour was satisfi ed: excellent relations were created with the fi rm, and the outcome was a successful project.

7.9 Negotiation Negotiation is another important skill for managers in their relationship with not only subordinates but with other stakeholders such as suppliers and customers. Whilst there are a variety of negotiation scenarios, most negotiations are defi ned by three characteristics:

1. There is a confl ict of interest between two or more parties. What one wants is not neces-sarily what the others want.

2. Either there is no established set of rules for resolving the confl ict, or the parties prefer to work outside of an established set of rules to develop their own solution.

3. The parties prefer to search for an agreement rather than to fi ght openly, to have one side capitulate, to break off contact permanently, or to take their dispute to a higher authority.

7.9.1 The aim of negotiation There are two types of negotiation process that differ fundamentally in their approach and in their relative prospects for the stability of the agreement that is reached.

The fi rst is called the win/win approach. In these negotiations, the prospects for both sides ’ gains are encouraging. Both sides attempt to reconcile their positions so that the end result is an agreement under which both will benefi t – therefore the resultant agreement tends to be stable.

The second is called the win/lose approach. In these negotiations, each of the parties seeks maximum gains and therefore usually seeks to impose maximum losses on the other side.

It is clear that a win/win solution is more likely to lead to a stable solution and a suc-cessful business relationship. In real life negotiations, both of these processes tend to be at work together. Therefore, rather than two negotiators adopting one or other of the approaches, negotiations tend to involve a tension between the two.

7.9.2 Phases involved in negotiation Negotiations consist of four phases – preparation, opening, bargaining and closing. In large-scale negotiations these phases are normally tackled sequentially. However, in small-scale


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T negotiations it is quite common for these phases to merge – possibly into a single unstruc-tured process.

● Preparation involves information gathering – knowing the background to the problem, and the likely constraints acting on each participant.

● The opening phase of a negotiation involves both sides presenting their starting pos-itions to one another. It usually represents the single most important opportunity to infl uence the other side.

● In the bargaining phase, your aim is to narrow the gap between the two initial positions and to persuade the other side that your case is so strong that they must accept less than they had planned. In order to do this, you should use clearly thought out, planned and logical debate.

● The closing of a negotiation represents the opportunity to capitalise on all of the work done in the earlier phases. The research that you have done in the preparation phase, combined with all of the information that you’ve gained since should guide you in the closing phase. It is in the closing stage that agreement is reached.

7.9.3 Negotiation approaches Adopting the following approaches can facilitate the negotiation process:

● Focus initially on each side’s primary objective – minor negotiating points can become a distraction in the early stages.

● Be prepared to settle for what is fair – if an agreement is not seen to be fair it is unlikely to be stable. Maintain fl exibility in your own position, this makes it easier for the other side to be fl exible as well.

● Listen to what the other side wants and make efforts to compromise on the main issues, so that both sides can begin to attain their goals.

● Seek to trade-off wins and losses, so each side gets something in return for everything they give up.

7.10 Management of the finance function As the economy continues to evolve so does the role of the fi nance function within an organisation. The pressure remains strong to deliver the fi nance function at less cost. Directors of fi nance in particular need to be able to demonstrate that their service is effi cient and provides good value for money.

The emphasis, therefore, is on companies to transform their fi nance functions to meet the demands for both greater cost-effectiveness and to provide a constructive contribution to the strategic decision-making process. In the same way, it could also be argued that any company which doesn’t transform its fi nance function in this way risks putting itself at a competitive disadvantage.

7.10.1 Business Process Outsourcing (BPO)Outsourcing is the act of giving a third-party the responsibility of running what would otherwise be an internal system or service.


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TBusiness Process Outsourcing (BPO) is contracting with a third party (external supplier)

to provide part or all of a business process or function. Many of these BPO efforts involve offshoring.

Offshoring is a type of outsourcing and simply means having the outsourced business function done in another country.

7.10.2 Outsourcing non-core activitiesIn theory, any of the operations that a business performs which are not either in direct or strategic support of its specifi c business activity, or which do not constitute an inextricable part of the business could justifi ably be outsourced. Such operations are often termed ‘non-core’ activities.

7.10.3 Benefits of outsourcingCost reductionOutsourcing can deliver signifi cant economies of scale by using standardised procedures and leading edge technology. Suppliers can perform fi nance and administration functions far more cheaply and effi ciently than companies working on their own. This could include reduction in working capital, improvements in tax effi ciency and avoidance of capital expenditure. The services are also provided at an agreed cost which should also lead to a more accurate prediction of costs, and therefore more accurate budgetary control.

Access to capabilities and expertise of the providerA specialist provider can bring best practice expertise and new investment in resources. Outsourcing fi nancial operations can encourage business to be more innovative and focused on value creation.

Release of capacity for finance function to provide business partneringAllows the retained fi nance function to concentrate on their role as business partners, working more closely with the business to improve decision making (see Section 7.10) which is a key source of competitive advantage.

7.10.4 Drawbacks of outsourcingLoss of controlControl is passed to a third party. External providers are now relied upon to input the right level of resource and skill required to meet the organisational needs. Businesses which outsource need to develop expertise in managing outsourced services.

Risk to innovationOver-reliance on external providers can lead to an erosion of internal knowledge and skills. Outsourcing can transfer the benefi ts of organisational learning to the service provider. An in-house accounts department can be a training ground for future business managers. An outsourced function is less likely to be a source of talent in the future.


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T Risk to competitive advantageConfi dentiality and risk to intellectual property are often cited as key reasons why companies choose not to outsource to an external provider. Companies that outsource must provide suffi cient security measures to limit the risk of intellectual property theft or breaches of confi dence. This is particularly relevant when more strategic management accounting processes are outsourced.

Managing outsourced solutionsThere is the risk of unsatisfactory quality and service or even failure of supplier. Monitoring mechanisms might be costly in themselves. The organisation could also run the risk that costs could be high for additional services requested after the service level has been agreed. It will be important to focus on contract compliance and adher-ence to predetermined standards to reduce the risk of increasing costs of outsource provision.

7.10.5 Shared service centres (SSC)Refers to the provision of a service by one part of an organisation or group where that service had previously been found in more than one part of the organisation or group. An example would be a large multinational organisation with fi nancial processing centres in all or several of the countries in which it operates, chooses to consolidate these activities at one site or shared service centre (SSC).

It is sometimes referred to as ‘internal outsourcing’. It allows an organisation to inves-tigate the potential benefi ts of consolidation of activities, whilst maintaining full internal control and thus minimising the control risks often associated with the assignment of control to an external party at the centre of the outsourcing option.

The key driver and benefi t of shared services is driven by increased productivity for all of the various parts of the organisation. Taking individual businesses where there is no critical mass and moving them into a more industrialized model enables better economies.

By consolidating all fi nancial transaction processing to one ‘shared service centre’ a company could expect to enjoy substantial benefi ts by reducing overhead costs and thus reducing unit transaction cost.

7.10.6 Benefits of shared services● Headcount reductions - Given the example of large multinational (Section 7.10.5 above)

it is conceivable that by consolidating each countries processing into one shared service centre using a common fi nancial processing system the more routine functions would benefi t from economies of scale, so that the same volume of processing and overall activity might be performed by fewer employees.

● Reduction in premises and associated costs – which might include security, insurance, etc.● Potential favourable labour rates in the chosen geographical location.● Quality of service provision – this is because the establishment of a shared service

involves not only a change of organisational geographical location but often changes in the philosophy of internal service provision.

● Consistent management of business data – the processes can be standardised to organi-sational ‘best in breed’.


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T7.10.7 Embedding finance personnel in business and

strategic decision processesOne of the most overlooked areas of strategy development is the fi nance and accounting function, often regarded as a ‘back-offi ce’ aspect of the business, the fi nance function plays a critical role in providing information for decision-making. Outsourcing certain activities frees up time for the fi nance function to concentrate on value-adding activities.

In the new business environment where competition is global and fi erce, companies need better information than ever before in order to remain competitive. Organisations and their chief executive offi cers now expect fi nance directors and fi nancial controllers to become more involved in matters of production, distribution and sales to play a fuller role at a strategic management level, in particular helping to decide which markets to serve with which products. Because decisions are only as good as the information on which they are based, establishing a reliable pipeline of data from the external business environment must be a priority for all businesses, regardless of size and industry.

Companies are never too big or too small to begin strategising the fi nance function, particularly important when the business is considering major changes in the organisation (a life cycle event) intended to make the company stronger. A few examples of life cycle events that are dependent on a strong fi nance function include going public, acquiring a business loan and seeking growth through acquisition. These activities rely on thorough knowledge of the core of the business and relate to the longer-term strategic success of the company. Accordingly a company should consider whether the responsibility for these aspects of fi nancial service operations remain in-house.

Decision-making is becoming the basis of competitive advantage and value creation. If markets give all organisations access to similar resources globally and competition causes many routine business processes to converge on world-class standards, the quality of information could become a key differentiator. Enhancing the value of accounting in fi nancial manage-ment processes requires a shift in focus away from transaction processing and reporting to a role which is fully integrated into the strategic and daily business activities of the organisation.

7.10.8 Contribution of finance to other functions● Finance people need to be trained not just to furnish and assemble information but to

draw insights and to communicate these effectively to support decision-making.● Finance people will be expected to use their understanding of the numbers and metrics

to evaluate opportunities and support decision making about investment opportunities and resource allocation.

● The role may need to emerge as a challenging sparring partner, able to challenge in a positive way and will require a broader business understanding and a range of soft communicating and infl uencing skills.

7.11 The finance function and external stakeholders

The fi nance function is under pressure to enhance its value contribution to the business, deliver information and maintain effective controls in line with ever changing governance


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T needs. The value of accounting is achieved if it meets one of its primary purposes of accountability, transparency and usefulness particularly to external stakeholders.

7.11.1 External reportingBanks, shareholders, the government are examples of external stakeholders who do not participate in the day to day management but will still have an interest in the company’s performance.

Investors and financiersIn spite of their absence on a day to day basis, investors and fi nanciers (those lending money to the company) often rely exclusively on the legally mandated reporting require-ments of the organisation to gain an understanding of company performance. They rely on the accuracy and predictability of the data coming from the companies in which they invest. They hold the company to performance predictions or forecasts and typically punish those companies that do not meet their expectations by selling their shares. This shows the importance of good data for external reporting and the important role the fi nance function can play in maintaining credibility with the external community.

Small and emerging businessesFinancing the company’s operations may be the single most important aspect of the fi nance function for the small and emerging business owner. Approaching banks is often a popular solution; the fi nance function will provide data on the health of the company and/or forecast its performance. Assembling sketchy documentation may mean that the business does not receive the fi nance it requires to start or stay in business.

Taxing and statutory authoritiesThe fi nance function must be prepared to gather the necessary information and docu-mentation to support remittances to taxing and statutory authorities. Finance need to be familiar with legal and statutory requirements prevailing in their respective locations and promote compliance throughout the organisation and then reporting to and fi ling returns with relevant authorities on a timely basis.

External AuditorsThe fi nance function can support organisations in delivering results and meeting exter-nally imposed rules. Both are important in order to stay in business. External audit’s work relates to the fi nancial statements, they are concerned with the fi nancial records that under-pin these. The external auditors will review the system of internal control in order to deter-mine the extent of the substantive work required on the year-end accounts. The auditors will identify the areas of weakness and recommendations for improvement. It is important that the management of the fi nance function know that they are properly managing the risk of any internal control failures. (The growing recognition by management of the benefi ts of good internal control, and the complexities of an adequate system of internal control have led to the development of internal auditing being recognised as an important form of control.) The fi nance function should implement any recommendations from the audit to enhance the effi ciency and effectiveness of the information sent to management. It is impor-tant therefore that the fi nance function as decision makers fully understand the benefi ts of a good audit and should be extracting the maximum benefi t from the company’s audit service.


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T7.12 Summary This chapter has looked at the management of groups. The key points to remember are:

● the role of groups and teams in organizations, and the factors that can contribute towards effective group working;

● the various techniques that can be used to improve team performance. ● the negative effects of group work; ● the skills managers need in managing relationships, including effective communication

and negotiation.

References Alchian , A. and Demsete , M. ( 1972 ), ‘Production, Information Costs, and Economic

Organization’ . American Economic Review , Vol. 62 , p. 777 . Belbin , R. M. ( 1981 ), Management Teams: Why They Succeed and Fail . London :

Butterworth Heinemann . Handy , C. ( 1993 ), Understanding Organisations ( 4th edn ) . Penguin . Janis , I. L. ( 1972 ), Victims of Groupthink . Boston, MA : Houghton Miffl in . Katzenbach , J. R. and Smith , D. K. ( 1994 ), The Wisdom of Teams . Harper . Milgram , S. ( 1965 ), ‘Some Conditions of Obedience and Disobedience to Authority’ .

Human Relations . Schein , E. H. ( 1988 ), Organisational Psychology ( 3rd edn ) . Prentice Hall . Tuckman , B. W. ( 1965 ), ‘Developmental Sequence in Small Groups’ . Psychological Bulletin ,

Vol. 63 , pp. 384 – 399 . Vaill , P. ( 1989 ), Managing as a Performing Art . San Francisco : Jossey-Bass .


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Question 1 Research into group behaviour suggests that the effectiveness of any work group/team depends on it having the right balance of group roles.

Requirement Explain why an understanding of group roles is important when forming an effective work group. Use any accepted classifi cation of group roles to illustrate your answer. (10 marks)

Question 2 Explain the advantages and disadvantages of cohesive work groups. (10 marks)

Question 3 D Company is a manufacturer of electrical components, supplying to the car industry. As a result of the downturn in the demand for its products and in response to diffi cult operating conditions in its existing market, the company is currently going through a major restructur-ing. It is anticipated that the restructuring plan will involve the consolidation of some business activities which will result in a number of staff having to move to different areas of the com-pany. This could mean re-location to different sites, and other staff being made redundant.

Whilst employee relations have in the past been good the management of the company is aware that employees and their trade unions which represent their interests will be resistant to the changes that need to be made. The fi rst stages of change will require skilful negotiation between the management and unions on a range of issues relating to the movement of staff jobs, the proposed job losses, specifi cally the criteria for redundancy and the redundancy package.

The company recognises the potential impact of the changes on staff morale and intends to implement a programme of research amongst staff to gain feedback on the way the change process is managed.

Revision Questions 7

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Requirements(a) Discuss the role of negotiation in the management of change in D Company, making

reference to the different stages involved in the negotiation process. (10 marks)


Question 4 The T Aerospace Company is in the early stages of planning the development of its latest commercial jet, the 007. The aircraft industry is a fi ercely competitive one, dominated by a few large global players who operate at the forefront of technology. In this industry, com-petitors quickly copy any advance in technology or new management technique that might provide them with a competitive edge. Some of the T Aerospace Company’s competitors have adopted team working as a means of speeding up their development and production processes.

The T Aerospace Company is thus considering the adoption of team working in its operations, but some of the traditionalists in the company are doubtful. They are con-cerned that the benefi ts of work specialisation will be lost. Some of the managers have had negative experiences with team working and so have strong reservations about the pro-posed changes.

Requirements (a) Describe briefl y the essential features of a team. (5 marks) (b) Identify the benefi ts that the T Aerospace Company can expect to gain from the adop-

tion of team working. (8 marks) (c) Describe the diffi culties that the company is likely to encounter in the management of

its teams and recommend how it might overcome these. (12 marks) (Total marks � 25)

Question 5 E Ltd, a long-established, medium-sized manufacturing company, designs and manufac-tures electrical generating units for customers all over the world. These electrical generat-ing units are designed to provide effective stand-by electricity wherever continuous power is critical, such as for hospitals, offi ces, hotels, airports and banks. E Ltd uses the latest computer technology to design and manufacture the generating units (including CAD and CAM systems) to meet the demands of a variety of customers. E Ltd operates in a highly competitive market, both at home and overseas.

Its factory operates to the highest quality standards, including ISO9001. However, as a result of increasing product complexity, and customer demands for unique product speci-fi cations, the Board of Directors recognised that their existing production planning sys-tem was unable to cope with these increased demands. In addition, the organisation had encountered problems of obsolete stock, materials booked to wrong jobs, and problems in measuring the cost of work completed. The Board of Directors considered that the opti-mum solution would be to introduce an integrated production planning and management reporting system.

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The Managing Director of E Ltd set up a steering committee to ascertain the require-ments of the new system. The steering committee consisted of the Managing Director, the Finance Director and the Manufacturing Director. The steering committee, having con-sidered the current problems, decided that the initial systems requirements would need to include a stock control facility, production planning, product costing and a fi nancial reporting system.

The steering committee very quickly recognised that E Ltd did not have the internal expertise to design and develop such an information system. A brief document was subse-quently produced by the steering committee, outlining the system’s requirements as high-lighted above. Six national systems design and development organisations were invited to submit tenders for either bespoke or off-the-shelf systems. No defi nite systems specifi c-ations were presented in the Invitation to Tender, as the MD pointed out: ‘ We are not the experts – we’ll let them tell us what we need, after all they should know. ’

Four suppliers responded to the Invitation to Tender document. Having reviewed the proposals, the steering committee decided to award the contract to Z Ltd, a systems soft-ware design company which had been in business for two years. Z Ltd had built its reputa-tion on designing to-order systems (i.e. bespoke software designed and built from a number of standard business modules, which can be re-designed and integrated to order). However, Z Ltd did not have prior experience in developing large integrated production systems; but it was the least expensive provider.

The fi rst task was to set up a project team. This consisted of a senior consultant from Z Ltd who was assigned the role of Project Manager, six systems analysts from Z Ltd (each of whom would lead a module design team), along with the IT Manager, the Internal Audit Manager, the Management Accountant and the Production Manager of E Ltd. The Project Manager was also currently working on the completion of another Z Ltd project for another organisation, which he assured to E Ltd that it would be fi nished by week 8 of the Z Ltd Integrated Production System (ZIPS) project. The Project Manager had stated to the steering committee: ‘ the analysts don’t need me to tell them what to do .’

The project commenced on schedule, and the systems analysis and design phase pro-gressed as expected. However, there was some concern from the project team members from within E Ltd that there was very little coordination between the end-users of the existing system and the module design teams. It was also noted that the Project Manager was rarely available in the fi rst 10–12 weeks, as he was busy dealing with problems on other Z Ltd jobs. In fact, he did not take over full-time responsibility for the ZIPS project until week 16, at which point the fi rst offi cial project team meeting took place.

At this meeting, the IT manager of E Ltd voiced his considerable concern that the mod-ule teams had not yet met to coordinate and discuss the design considerations prior to integration of the individual systems modules. However, the Project Manager was uncon-cerned: What’s the problem? The project’s on time and you’ve got 12 weeks built into the schedule for integration. Plenty of time. ’

Requirements (a) Evaluate the problems that occurred in the ZIPS project team relationships, and

explain how these team relationship problems could have been reduced. (13 marks) (b) Discuss the potential communication and team meeting problems that may occur in

complex projects. Explain how communications should have been undertaken and team meetings conducted for the ZIPS project. (12 marks)


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Question 6 The Direct Sales and Customer Contact Centre (the Centre) of A Insurance Company deals with vehicle, home and contents insurance products. B, who has been the manager of the Centre for the last three years, has a participative leadership style, involving staff in key decisions about the Centre. Initially she was very successful in achieving high staff morale as evidenced in the results of annual staff surveys for the fi rst two years of her appoint-ment. The Centre scored consistently higher on dimensions such as job satisfaction, com-munication and co-operation when compared with other parts of the company.

However, twelve months ago B was responsible for introducing a sales target system which involved allocating staff to teams as part of a restructuring programme. Each team is set targets and the results are published on a monthly basis in a league table. The team that is top of the league receives a cash bonus.

B is concerned that the restructuring has had an adverse effect on the performance of the Centre. She is particularly concerned that the results of the most recent staff survey show that communication and co-operation between teams have fallen dramatically. She has also observed animosity between the team leaders. Absenteeism has increased signifi -cantly, particularly in team Y. As part of her review of the issues facing the Centre, she has noted the following:

● Team X is always at the top of the league and, as a result, receives the cash bonus. The team leader of X is highly motivated and team spirit is high. Team members are constantly coming up with ideas on how to increase sales. The team seems to be a very cohesive group and team members regularly organise social events for themselves.

● Team Y never succeeds in meeting its targets. The team leader does not seem bothered by this, and appears more interested in working out how much longer he needs to work before he can retire. Team members have complained to B about the team leader, and two members have resigned. There is a personality clash between the team leader and another member of the team who is viewed by the rest of the team as the ‘ unoffi cial ’ leader.

● Team Z, whilst achieving its targets, is always behind Team X. The team members are an extremely tight knit group, but have become very insular and are no longer responsive to the work needs of other members of staff in the Centre. They appear to have their own agenda.

The restructure of the Centre into teams and the sales target system was dictated by Head Offi ce. Nevertheless, B is determined to take action to resolve the problems she currently faces.

Requirements (a) Discuss the benefi ts and problems of introducing sales teams and the sales target sys-

tem in ‘ the Centre ’ of A Insurance Company. (13 marks) (b) Explain the strategies that could be used by B to minimise the problems caused by

introducing sales teams and the sales target system in order to improve performance in ‘ the Centre ’ . (12 marks)

(Total for Question Six � 25 marks) (Total for Section B � 50 marks)

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Solutions toRevision Questions

Section A solutions

Solution 1 Belbin claims that there are nine useful types of contribution or group roles, and that the preferences and natural inclinations of people for a particular group role can be pre-dicted through personality assessments and group/team role questionnaires. In an ideal group/team all the necessary roles are represented with each role complementing those of others to provide an effective group/team. It is important to note that it is not necessary for a group to consist of nine people. If there are fewer than nine members in the group it is possible for particular individuals to perform more than one role.

The group/team roles described by Belbin are:

● Coordinator who clarifi es the group’s objectives and helps to identify the issues to be addressed; individuals who prefer this role tend to be stable, dominant extroverts.

● Shaper who needs results for reassurance and has a compulsive drive to get things done; the key traits here are those of an anxious, dominant extrovert.

● Plant is the person who is very good at coming up with original ideas and suggestions; typically they are dominant introverts with a very high IQ.

● Monitor/evaluator is good at dispassionate analysis of suggestions and options, a stable, introverted type of individual with a high IQ.

● Implementer who turns decisions into manageable tasks, is a stable controlled individual. ● Resource investigator is the person who goes outside the group to obtain useful informa-

tion and resources; a dominant, stable extrovert usually performs this role well. ● Team worker who keeps the team together by supporting other members and helping to

promote unity, a stable extrovert who is low in dominance. ● Completer-fi nisher is impatient and very concerned with meeting deadlines, typically an

anxious introvert. ● Expert is a technical specialist person, if needed, to solve technically based problems.

In Belbin’s view, it is not enough for groups or teams who are working towards a common goal to have a varied collection of individual skills. The various behaviours (and routines) of members identifi ed above as role types must mesh together in order to achieve their group’s goals and objectives.

In the formation of groups, it is therefore necessary (according to Belbin and others) to build work groups made up of members selected on the basis of their predisposition and capacity to play the roles of coordinator, shaper, plant and so on described above.

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Solution 2 A group is any number of people who interact with one another, are psychologically aware of each other and perceive themselves to be a group. In a cohesive group, members are more likely to talk in terms of ‘ we ’ rather than ‘ I ’ . It is also a group in which everyone is friendly or where loyalty to fellow members is high. A cohesive group is also one in which all the mem-bers work together for a common goal and where everyone is ready to take responsibility for group chores. Such a group is also one in which its members will defend against external criti-cism or attack. The norms formed by a cohesive group are likely to be particularly strong and exert considerable infl uence on the behaviour of its members. Studies by M. Deutsch in the 1940s found cohesive groups to have the following advantages over less cohesive ones:

● more productive in quantity; ● produce higher quality; ● have a stronger push to complete the task; ● have a greater division of labour and better coordination; ● experience fewer diffi culties in communication.

On the other hand, the result of the Bank Wiring Room experiments in the Hawthorne studies showed that cohesive work groups can have disadvantages for any organisation. The norms of a cohesive work group may develop in a way which undermines the goals of the company. In the Bank Wiring Room, persons who turned out too much work were considered ‘ rate busters ’ and were subjected to considerable pressure to reduce their output, while ‘ chisellers ’ were also pressurised to fall into line.

The effectiveness of a well-integrated work group, in other words, can be used against the company in which it exists as well as for it. This is most clearly seen when a group of employees takes industrial action to pressurise management in a dispute over an issue such as working conditions or a pay claim.

Solution 3 (a) Negotiation involves argument and persuasion in order to strengthen one’s own case by undermining the opposition. It occurs when there is no established set of rules for resolv-ing the confl ict and parties are committed to search for an agreement rather than fi ghting openly. Negotiation is often necessary within organisations to resolve confl icts of interest between two or more parties which have arisen because the parties have different objec-tives. It has, over time, become a useful and c ivilised way of settling disputes. In earlier times, industrial disputes often resulted in industrial sabotage by workers and sometimes physical violence between workers and their employees.

In the case of D Company, it is likely that confl icts will arise as a result of the restructuring of proposals which will involve the need for the relocation of staff and possible redundancies. These confl icts may be resolved through negotiation between management and the unions who are representing employees. The process of negotia-tion between employers and trade unions is often referred to as ‘collective bargaining’ and involves at least two parties with a defi ned interest. Without any negotiation, the result could be that the union calls for industrial or strike action which could have a detrimental impact on the company’s future survival.

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Approaches to the negotiation process can be through focussing initially on each side’s primary objectives, rather than becoming distracted by minor negotiating points at an early stage. It is necessary to maintain some fl exibility within the negotiation process and for both parties to be prepared to settle for what is ‘fair’. It is important to listen to what the other side wants and to make an effort to compromise so that both sides can attain their goals. However, this is often where negotiation can fail because of the tensions between the different objectives that can never coincide. This could occur for D Company since the union’s main objective will be to keep jobs, whilst the organi-sation may see no alternative to their long terms survival without the job cuts. It is likely that in the fi rst stages of negotiation, the union will reject the proposals as unac-ceptable and will prepare its negotiation strategy. Whilst the union will not want to agree to job losses, it might r ecognise that they are inevitable, and concentrate instead on persuading the management to provide generous severance pay above the legal minimum and compensation for staff who are being asked to relocate. D Company management will have anticipated such a reaction and should have their negotiation strategy worked out.

The ideal will be to achieve a win-win outcome where both sides achieve enough of their objectives to be satisfi ed with the end result, trading-off wins and losses so that each side gets something in return for everything it concedes on. Win-lose or lose-lose outcomes are in no one’s best long-term interest.

It is suggested that effective negotiation between D company and the trade union should go through the following four stages:

1. Preparation, which involves both parties gathering information and insight to the prob-lems, in order to understand the constraints acting on the negotiating parties. Who is involved in the negotiation, what the concerns of each party are and what the goal of the negotiation is will need to be determined. Another key feature at this stage is to determine the time for negotiation.

2. The opening phase of negotiation involves both sides presenting their starting positions to one another. It is at this stage that the greatest opportunity is present to infl uence the other side.

3. The bargaining phase is where both parties will aim to narrow the gap between the two initial positions to persuade the other party that their case is so strong that the other must accept less than it had planned. This might, in the case of D company, be on the total number of job losses, or the fi nancial arrangements for redundancy. The union will want the best for its members, whereas the management may be constrained by the fi nancial position of the company.

4. The closing phase of negotiation represents the opportunity to capitalise on the work that has been done at the earlier phases. It is at this stage that agreement is reached. The outcomes from the agreement should be publicised and implemented.

Important tactics for negotiation are to use questions effectively so as to control the situ-ation; the use of persuasion; and not to weaken your case inadvertently.

During the negotiation process, particularly in the case of negotiations surrounding the restructuring in D Company, which are likely to be formal in nature, it is important to test from time to time that both sides understand clearly what is being proposed and at what stage the negotiations are at.

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Section B solutions

Solution 4 (a) A team is something more than a group of people. A team does consist of a small group of people, but the individuals who compose it possess complementary skills and they work together to achieve a shared purpose. Furthermore, members of the team hold themselves mutually accountable for achievement of team objectives.

Expressed rather differently, a team has been defi ned as one that generates positive syn-ergy through coordinated action. The individual efforts of team members produce a level of performance that is greater than the sum of individual inputs.

So, in the light of these defi nitions, it follows that though teams are groups, they consist of something more than a collection of people. Whereas people who happen to be grouped together for administrative purposes may not produce any additional output, advocates of team working argue that the combined efforts of the individuals making up the team will produce more than they would as a mere group.

(b) The benefi ts that the T Aerospace Company can expect from team working are as follows:

● Contributes to the enhancement of overall performance because of the positive synergy that derives from the sharing of complementary skills.

● Provides a basis for creativity and innovation through the sharing of ideas via brain-storming and similar techniques.

● Helps the process of decision-making because ideas can be shared and collectively evaluated.

● Facilitates the empowerment of employees because in the case of self-managing teams, the responsibility and requisite authority for carrying out certain tasks are delegated to the team.

● Assists in the motivation and commitment of members to team goals because working with others helps satisfy individual needs.

● Provides a means of control and discipline because individuals generally feel obliged to comply with expectations of the team.

● A particular benefi t for the company is the kind of benefi ts that derive from the use of cross-functional teams. The sharing of knowledge and skills from different functional specialities has proved invaluable in the process of new product development.

(c) The T Aerospace Company may face a number of diffi culties in the management of its teams. There is some evidence, from research by Scott and Walker (1995), that team working can produce a levelling effect. So, while successful teams may be highly pro-ductive, others suffer from the fact that some individual team members fail to pull their weight. This is possible because individual output is sometimes diffi cult to identify when output is a resultant of team effort.

Second, as in any group of people, confl icts do arise between team members because of personality clashes or a whole range of petty differences. Such confl icts can undermine any potential synergy from team working and absorb a great deal of management time in deal-ing with the problems produced.

Third, the introduction of teams may pose a problem for some of the T Aerospace Company’s traditional managers. The management of teams, especially self-managing

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teams, requires a new style of management. Traditional managers who have been used to a monopoly of authority often fi nd it diffi cult to share it inside a team. The role of coach and adviser that is a requirement for team management is something that managers have to learn and this can take time.

Fourth, there is some doubt about the claim that teams result in more effective deci-sion-making, or that they are more able to foster creativity and innovation than are indi-vid-uals. Critics have pointed out that decision-making by teams can be time consuming and that, in some cases, individuals may well arrive at the same decision but much quicker – a feature that in a fast moving market can be vital in the gaining or losing of a contract. As to innovation, there is also much evidence that individuals working alone can be just as creative and innovative without the benefi ts of team membership. Indeed, some psycholo-gists claim that the problem with teams and groups more generally is the danger of what is called ‘ group think ’ , which is the tendency for team members to conform to a common set of beliefs about how things should be done. It is sometimes the case then that teams are not the best way of getting a job done and that employees working as individuals may be more effective.

Finally, as the Hawthorne studies on group behaviour demonstrated, there is no guar-antee that a team, which is a special kind of group, will necessarily pursue management objectives. The interests of employees are sometimes at odds with management, especially where matters of payment and conditions of work are concerned. In such cases, the ener-gies of the team may be directed to the pursuit of team members ’ interests rather than the organisation’s interests.

The problems of team working noted above can be overcome by taking appropriate management action. The levelling effect of team working can be counteracted by the use of a system that rewards individual group members for their efforts as well as their contri-bution to the overall team performance.

Confl icts between team members require some mix of counselling, discipline and in extreme cases the movement of individuals from one team to another. Managers who fi nd diffi culty in their new roles as facilitators of teams require training to assist them in the shift from being organisers and supervisors to roles as advisers and facilitators.

The dangers of teams developing interests that are in confl ict with the objectives of the organisation need to be recognised and steps should be taken to maintain close commu-nication with team members and their needs and aspirations. This means that manage-ment needs to take an interest in the welfare of team members so that the objectives of the organisation are aligned as far as possible with the team members ’ own goals. Again, this can be achieved through the reward system.

Solution 5 (a) The fi rst problem of project management in the ZIPS project is the assignment of the project manager from Z Ltd. There was an evident lack of direction and leadership from the project manager from the outset, with the project manager being little in evidence within the critical early stages. Lack of leadership was also a problem, in that the project manager was unable to motivate or coordinate the teams ’ responsibilities (mainly due to the extended absence from the project). In fact, the project manager from Z Ltd was dis-missive of the concerns of E Ltd’s managers, despite being absent for long periods of time from the project, and therefore unlikely to have a real understanding of the situation.

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A further important aspect of the project manager’s role is the ability to engender own-ership of the project in the other team members. This involves managing people effectively by the process of leadership, strong interpersonal skills, communication and delegation. Again, the interpersonal skills of the project manager would appear to be weak. It is sug-gested that it would have been more appropriate to have a manager from E Ltd as the project manager from the outset, as this would have ensured the continual presence of a project manager, which, in turn, is likely to have improved motivation, communication, and a sense of ownership of the project from within E Ltd.

A further responsibility of a project manager is to weigh up options and make decisions quickly and effectively, using the skills and knowledge from other team members to aid his/her decision-making process. This will involve maintaining the progress of work on the project, even in change circumstances, as the ability to manage change and confl ict is a critical aspect of most projects. Again, this was a major failure in the relationships of the ZIPS project team, as the original manager was not available initially to maintain adequate progress control and to manage the confl ict which was evidently building up between the Z analysts and the internal staff of E Ltd. As suggested earlier, an internally based project manager would have encouraged quicker decisions in the interest of E Ltd. Alternatively, E Ltd should have insisted upon a dedicated project manager from Z Ltd, not one who was clearly tied up with other projects.

Ineffective action by the project manager was challenged by the staff of E Ltd, but he did not respond to team members ’ concerns. The project manager did not utilise the most use-ful team members – the internal staff of E Ltd, who were in the best position to offer advice and expertise to the ZIPS project. A project manager must also have the ability to build up the project team and clarify the team members ’ roles and gain team respect. Without the support of the project team, the project manager’s role is signifi cantly more diffi cult. Working within that team environment will also require the project manager to delegate effectively and ensure that team tasks are organised, coordinated and communicated.

In the ZIPS project, the original project manager delegated too much responsibility to the module leaders, which led to the subsequent problems of poor module integration. It is suggested that the staff of E Ltd should have played a more active role within the module teams and should have been involved more at the analysis and design phase, rather thanjust Z Ltd programmers and analysts. It is vital to have a well-balanced, multi-discipline, and multi-organisational project team.

(b) Communication and team meeting problems in large complex projects: There are a number of communication problems which may occur as a result of carry-

ing out large, complex projects. Distance between team members may be prohibitive to open communication, particularly if the project is being coordinated and delivered at different locations. The complexity of resources required for the project is also a problem, particularly when attempting to coordinate a variety of skills and expertise.

Large complex projects will often involve multiple team input and often these different teams will have different objectives. Again, coordination of teams and ensuring that every-one participates in team meetings can be very diffi cult.

The organisational structure may also cause project problems. For example, some project team members may be dedicated staff committed to work only on the project, whereas some staff may participate in the project only occasionally.

Communication and team meetings on the ZIPS project: It was important, from an early stage in the project’s life, that all of the key stakeholders

were identifi ed. This was in order to ensure that appropriate information was communicated

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to all of these parties on a regular basis. The parties involved include, such as, the steering committee, users in each department, key suppliers, and staff association representatives. Once identifi ed, it is important to fi nd the most effective means of communication between each stakeholder and the project.

The ZIPS project required team meetings on a structured and regular basis in order to ensure continuous progress towards the project milestones. Interface between the teams needed to be clearly identifi ed at an early stage in the project’s life. Each team should have had a leader whose responsibility it was to communicate regularly across the project with other module leaders, other related departments and the project manager. Communication to the users via regular briefi ng sessions by the project manager would have helped to ensure that users were kept informed. Team meetings should really have taken place once per week. The outcomes of these meetings should have been reported to other team mem-bers and the steering committee. Regular milestone meetings should have taken place within all module teams and across module teams. It would also appear that more listen-ing was required within team meetings, as it is evident that team members ’ concerns were ignored by the original project manager.

Use of e-mail and bulletin boards would have assisted in the communication between the module development teams at different locations or the project manager when off-site. It may also have been useful to provide regular (one per month) project briefs to other members of E Ltd to keep them up to date on progress and to retain interest and momen-tum in the project.

Solution 6 (a) Whilst there are a number of benefi ts associated with introducing team work in the Direct Sales and Customer Contact Centre (the Centre), there are also problems that can occur, as illustrated in the scenario.

The benefi ts of teams are perhaps best illustrated mainly with reference to Team X. There is loyalty between team members which means that individuals will work together well to achieve their common goal. This should lead to higher productivity and high qual-ity of outputs with individual members having a strong desire to complete the team task. Other benefi ts are that communication and cooperation between team members will be positive and supportive.

Team working can help the motivation and commitment of individual members and also satisfi es the social needs at work building friendship groups. A further benefi t is that team working can lead to greater creativity and innovation through the sharing of know-ledge, skills and ideas which in itself is motivational. This is evident in Team X where ideas on how to increase sales are shared. It can also be viewed as a way of self control and discip-line since individuals may feel obliged to comply with expectations of team norms.

However, there are problems that can occur, particularly if individuals do not agree on group norms as appears to be the case for Team Y. This can be referred to as intra group confl ict and has led to discord between members in Team Y in terms of their relationships with each other.

Another problem is that whilst team work can encourage increased productivity, it can have the reverse effect where some team members do not fully contribute, particularly when it is diffi cult to identify individual contribution. This is a concept known as ‘ social loafi ng ’ .

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Confl icts can also arise because of personality clashes between members that mean B has to intervene to deal with the problems, as in the case of Team Y. Problems may arise as a result of role confl ict where two people are vying for the same role. This is evident in Team Y where the designated team leader appears to be disinterested in the achievement of sales targets and the team members. As a result another team member has taken on the unof-fi cial role of team leader.

Whilst it has already been noted that a cohesive team can bring benefi ts to the organ-isation, there are some possible downsides, as illustrated by the behaviours of Team Z. Cohesive groups may develop a hostile attitude to other groups leading to a lack of effect-ive communication and co-operation between groups. There appears perhaps to be too much harmony between the group’s members and they have become focused on the interests of the group rather than the Centre. This has led to confl ict with other groups, known as inter-group confl ict, and is where members close ranks and the other teams were perceived as enemies, as is likely to be the case with Team X who is always the winner.

Inter-group problems arise out of the direct competition between groups. As a result of introducing the league table system, A Insurance Company has encour-

aged competition and a win lose situation between teams. The losing teams who do not get a bonus end up arguing rather than focusing on performance. This appears to be hap-pening in Team Y. Overall the problems have resulted in hostility and jealousy between groups and poor communications, all of which are having a detrimental impact on the overall performance of the Centre.

(b) B is aware of the problems and confl icts between the teams and the threats this is having on the overall performance of the Centre. In managing confl icts she has a number of strat-egies that she could introduce.

It may be that some individuals need counselling or discipline, for example the leader of Team Y is not performing in his role and this needs to be resolved quickly since it is hav-ing a negative impact on the other members of the team. Training interventions could help staff to develop important interpersonal and team leadership skills.

Other methods of dealing with the problems could include inter-group training, for example, bringing people together from the different teams to discuss best practices. It could be that training is needed for the team leader.

B could explore how she could increase the interactions between different teams, for example she could perhaps identify departmental projects that would bring different team members to work together but which would have benefi ts for all the teams and build trust and cooperation. She could also identify some tasks which require joint problem solving by the teams, to try to introduce a more cooperative attitude.

As a result of the introduction of sales targets, too much emphasis is on results at the expense of team processes and dynamics. While the team-based bonus has been initiated from the head offi ce of A Insurance Company, perhaps B could review the way that this has been implemented within the Centre, and perhaps set super-ordinate goals, which all teams work towards, requiring cooperation between teams and which attracts a fi nancial (or other reward) for the whole department. To be effective the super-ordinate goals need to be sig-nifi cant and require energy and input of all of the teams.

Another alternative would be to introduce some element of rotation of team members so that individuals move between teams. It is acknowledged that whilst this can sometimes create diffi culties in terms of team development and there will be the need to go through

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the process of forming, storming and norming, the benefi ts in this scenario might out-weigh the drawbacks.

If there are serious personality clashes between team members B may need to consider the movement of individuals, although this should be a last resort when other interven-tions to resolve problems have not succeeded.

B could consider introducing social events for the whole of the Centre aimed at encour-aging individuals from different teams to mix together outside of the workplace.

To conclude, whilst competition between teams can be productive, in the case of the Centre, it has led to problems and confl ict which need to be controlled to help improve morale and performance.


8

Control Systems in Organisations


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8LEARNING OUTCOMES


� analyse the relationship between managers and their subordinates including legal aspects affecting work and employment;

� identify tools for managing and controlling individuals, teams and networks and for managing group confl ict;

� anaylse issues of business ethics and corporate governance.

8.1 IntroductionAn underlying feature of the relationship between managers and their subordinates is management control. This chapter will introduce control from a theoretical perspective, and provide a framework to examine some of the different ways in which control operates within organisations.

The second part of the chapter will discuss issues associated with health and safety at work, including stress management, personal time management skills and the methods of conducting research and gathering data.

8.2 The meaning of controlControl is an extremely wide concept and is diffi cult to defi ne. The following is just one defi nition of control:

Control Systems in Organisations

‘Control is a primary management task and is the process of ensuring the operations proceed according to plan. Control is necessary because unpredict-

able disturbances occur and cause actual results to deviate from the expected or planned results’. (Lucey)

Most defi nitions of management include control or controlling as a function of manage-ment, it is essentially a means of ensuring that the objectives of the organisations are met.


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are additional and undertaken to enhance the likelihood of achieving the objective of the process. As an example, an organisation can recruit people they need without a selection interview, but it is much more likely to get the people with the skill and experience to do the job properly if it uses interviews as a control. Achieving control can include complex systems and procedures in large organisations. In small organisations there may be very few formal control systems in place, hence control is not a ‘one size fi ts all’ concept.

8.3 A review of management theorists and control

The classical approach to management (discussed in Chapter 6) views control as an essential feature of the formal organisation and hierarchical structure of authority. This approach is based on routine procedures, rules and regulations to achieve consistent and predictable behaviour.

A key feature of the scientifi c management school is the use of job, process analysis and time study to establish the optimum production methods and rates. The worker is not left any discretion to make mistakes. The principles of scientifi c management make the work-place much simpler for managers to control. It is easier to measure inputs and outputs and compare the performance of workers. A control system to result from this management theory was standard costing, inputs could be planned, costs could be established and vari-ations highlighted. By adding budgeting to include overheads, a powerful control mech-anism is available.

ExerciseDiscuss the problems of this kind of approach to management control.

SolutionThere are several key problems:

● Motivation problems. Lack of morale; little worker commitment; no interchangeable skills (people were only trained to do one small part of the job); high staff turnover,

● Quality problems. No overall responsibility; no intrinsic satisfaction from work.● Little understanding of people. People at work are not necessarily rational, for example

they do not always work harder to earn more money and they are sometimes less inclined to work well if closely supervised; budgets sometimes cause problems, for example people might be inclined to purchase poor quality raw materials to stay within budget, thus causing production problems.

The human relations approach emphasises the social organisation and the importance of informal relationships. Elton Mayo’s studies on how to improve productivity revealed that work groups impose their own controls on members, such as the rate of work, the vision of work, the members’ interaction with managers. This control was imposed through a series of ‘punishments’, for example ostracizing members who were persuaded to comply with the objectives of management rather than the norms set by the group. Control is, therefore, a feature of interpersonal infl uences rather than close and constant supervision, recognising that people do not behave as automatons. This has an impact on control systems, so for


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Sexample effective budgetary control systems need to recognise the need to involve oper-ational staff in setting budgets so that the staff feel ownership of the budget, and to help avoid de-motivating staff with unachievable budget targets.

The contingency approach views organisational control as a variable and the nature of effective control will depend on the particular situation. Hence, when considering control in organisations, a control system needs to be unique to that organisation and tailored to meet the needs of a particular organisation, or part of the organisation.

8.4 Basic control modelsIt is important for management accountants to understand the elements of a basic control model, since it forms the basis of many of the control mechanism used in their day-to-day work. It consists of analysing a simple input-process-output control loop as shown in Figure 8.1. This model shows the use of feedback and feed forward controls. Choice of the specifi c controls to use depends on the reason a system is likely to be out of control, that is the risks to the achievement of the objectives of the system being controlled.

Input

Output

Measure

Feedforward

Feedback

PROCESS

Regulator

Comparestandard

Predictionsystem

Figure 8.1 A basic cybernetic control model

Some defi nitions:

Feedback control is ‘the measurement of differences between planned outputs and actual outputs achieved, and the modifi cation of subsequent action and/or plans to achieve required results’. (CIMA Offi cial Terminology, 2005)

Feed forward control is ‘the forecasting of differences between actual and planned outcomes, and the implementation of action, before the event, to avoid such differ-ences’. (CIMA Offi cial Terminology, 2005)

A closed loop systems is ‘a control system which includes a provision for corrective action, taken on either a feed forward or feedback basis’. (CIMA Offi cial Terminology, 2005).

An open loop system is ‘a control system which includes no provision for corrective action to be applied to the sequence of activities’ (CIMA Offi cial Terminology, 2005).


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both observed and expected results and the need for adjustments to the plan. For example, increase labour costs due to skill shortages would mean that the budget was exceeded, but the budget would need to be adjusted to refl ect the new situation.

Negative feedback indicates that a system is deviating from its planned course ina way that is detrimental to the organisation and action is required to move back towards the planned course.

Positive feedback indicates that a system is deviating from the plan in a way thathas a positive impact on the organisation and action may not be required or, if it is, it might be action to increase/encourage this move away from the plan. For example, higher than predicted sales.

8.5 Types of organisational controlThere has been increasing interest among both theorists and managers in the signifi cance of culture for organisational control and the role of managers in shaping it. Ouchi’s (1981) work, developed by Child (1988), distinguished different types of control strategies in organisations. These are:

8.5.1 Personal centralised controlThis approach is likely to be found in small owner-managed organisations where there is centralised decision-making by the owner. Reward and punishment will reinforce con-formity to personal authority. Control is carried out by the owner through personal super-vision. The authority is based on rights of ownership, charisma or technical expertise. However, as the organisation grows in size and complexity, owners may fi nd increasing external demands on their time and will need to employ others to undertake supervision of day-to-day tasks. In this phase of growth, control moves away from personal centralised control to more bureaucratic control or output control.

8.5.2 Bureaucratic controlControls will be based on formalised rules, procedures, standardisation and hierarchy. This is achieved through specifi cations of how employees should behave and carry out their work using formal job descriptions and specifi cation of standard methods for performance of tasks. Reward and punishment systems can be used to reinforce this control strategy. Managers will typically use budgets and standard cost accounting systems.

8.5.3 Output controlThis approach is a form of control that is based on the measurement of outputs and the results achieved. It is most appropriate where there is a need for quantifi able and simple measures of organisational performance since it requires a specifi cation of output stand-ards and targets to be achieved. This approach facilitates delegation without the need for bureaucratic controls, because once output standards have been agreed, employees can work semi-autonomously to carry out tasks.


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S8.5.4 Clan or Cultural controlThis form of control requires the development of employees’ strong identifi cation with management goals, for example through professional identifi cation and acceptance of the values and beliefs of the organisation. If employees have the necessary skills, experience and ability, they can be given freedom in deciding how to undertake their tasks. This leads to semi-autonomous working with few formal controls. This approach depends on the com-mon agreement of objectives and shared cultural values. It will require careful selection, socialisation and development of employees.

‘The whole system of controls, fi nancial and otherwise, established by the management in order to carry on the business of the enterprise in an orderly

and effi cient manner, ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the records. The indi-vidual components of the control system are known as controls or internal controls.’

Some of the controls, such as those over contracts and dismissal may be formal (or legal) in nature, whereas others may be informal (or managerial).

8.7 Internal control systemsIn CIMA’s framework of control, the control system is seen as consisting of:

● the control environment, which includes management philosophy and operating style and management policies;

● control procedures, that is the individual control mechanisms such as segregation of duties, authorisation, reconciliations, and so on.

The ICAEW has identifi ed features for a successful control environment:

● Commitment to truth and fair dealing.● Commitment to quality and competence.● Leadership in control by example.● Communication of ethical values.● An appropriate organisation structure.

Identify the nature of control in your organisation. Discuss whether control encourages or inhibits organisational performance?

8.6 Objectives of internal control systemsInternal control systems exist to enhance the achievement of organisational objectives. They promote the orderly and effi cient conduct of business, help keep the business on course, and help it change safely.

Internal control has been defi ned in terms of the Auditing Practices Committee guide-line on internal control issued in 1980. This defi nition was:


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● Independence, integrity and openness at board level.● Appropriate delegation of authority with accountability.● A professional approach to fi nancial reporting.

CIMA’s model and the ICAEW’s features of the control environment are broadly similar to the Committee of Sponsoring Organisations (COSO) model (see below) of internal control which has been made prominent by the current emphasis on the need for good corporate governance in organisations. Corporate governance is the system by which organisations are directed and controlled. The interest in corporate governance was awakened largely by scandals and failures in listed companies such as Polly Peck, Mirror Group Newspapers (Robert Maxwell) and BCCI. The studies of various committees in the 1990s have resulted in the ‘Combined Code’ on corporate governance which requires Stock Exchange listed companies to comply with the Code and, in particular, for directors to report on their review of internal controls in the annual report. (The importance of cor-porate governance is also recognised in the public sector, and central government organisa-tions are also being required to provide corporate governance statements annually.)

There had been similar scandals in the United States, and the Treadway Commission which investigated them had set up a subcommittee which published guidance on internal control. This subcommittee, the COSO of the Treadway Commission, included in its guidance a model for control in organisations, now known as the COSO model. This model forms the basis for the structure recommended for directors to use when reviewing control in their organisations.

Briefl y, the COSO model recommends that effective control systems should contain the following elements:

1. The control environment, which includes the company’s strategy for dealing with risk, its culture, codes of conduct, human resource policies and performance reward systems, all of which should support the business objectives.

2. An assessment of risk to the achievement of the company’s objectives, including its compliance with legislation, and an analysis of the objectives of control.

3. Control activities, for example segregation of duties, authorisation, reconciliations.4. Communication and information to ensure that all levels of management in the

organisation, but particularly the board, receive timely, relevant and reliable reports on progress against objectives.

5. Monitoring and corrective action processes embedded in the organisational systems to ensure the effective application of policies and other control mechanisms.

The only fundamental difference between the CIMA framework and the COSO model is the emphasis placed by the COSO model on risk assessment and risk management. Risk assessment and risk management are now seen as fundamental to an effective control sys-tem. An understanding of the risks specifi c to an organisation means that the control sys-tem can be tailored exactly to the needs of that organisation. This increases its effectiveness by ensuring that signifi cant risks are addressed and reduced costs by ensuring that only the minimum control necessary is in place.

8.8 Levels of controlOrganisations can be divided into three ‘hierarchical’ levels: strategic (senior management),tactical (middle management) and operational. These organisational decision-making levels can also be used to distinguish the organisational control levels.


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S8.8.1 Strategic controlThis is the level of control operating at board level. It will largely consist of the setting of the control environment. It will include:

● Strategic planning, determining the course the organisation will take.● Board procedures governing, for example decisions to be reserved for the full board,

appointment of directors, segregation of duties between the chief executive and the chair of the board, and so on.

● Setting and review of organisational structure.● Codes of conduct.● Policies on (this is not an exhaustive list):

– the conduct of business, for example general principles on the sourcing of raw mater-ials, sources of fi nance for capital investment;

– fi nancial and other performance measures, for example % profi t, ROCE, top-level budgets, customer satisfaction ratings, growth in market share;

– recruitment, selection, appraisal, discipline and reward of employees;– training and development;– environmental and ethical issues;– risk assessment, risk management and internal control systems, including the internal

audit function.● Monitoring achievement of, and compliance with, plans and policies set. This will include

setting management information requirements.

8.8.2 Tactical controlThis is control at the middle management level of the organisation. As an example, stra-tegic control is the responsibility of the production director, tactical control is the respon-sibility of the production manager, the purchasing manager, and so on who report to the production director. At this level, controls should be in place to implement the decisions and policies of the board.

Controls at tactical level using the production manager as an example include:

● Tactical planning, determining the production requirements and production schedule.● The production budget.● Procedures governing:

– recruitment, selection, appraisal, discipline and reward of production department employees;

– training and development of production department employees;– environmental and ethical issues relating to, for example, disposal of waste from the

production process;– risk assessment and risk management in the production department, for example the

impact of production delays and stock-outs if the JIT system fails and decision on whether to accept the risk or, perhaps, to carry buffer stocks.

● Monitoring achievement of, and compliance with, plans and policies set that relate to the production department. This will include setting management information requirements. For example, the production manager will be monitoring the achieve-ment of the scheduled production in a given period and asking for discrepancies to be explained.


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This occurs at the lower levels of the organisation. Operational controls are designed to con-trol structured and repetitive activities according to preset rules. These control systems are often fi nancial or quantitative in nature. A typical example of an organisational operational control system is a computerised stock control system, where stock levels per component, reorder levels and reorder quantities are calculated and operated automatically according to predetermined, precise rules. Operational control systems should require minimal manage-ment intervention and often operate as a closed loop automatic feedback control system.

Examples of organisational operational control systems

Accounting Credit controlStandard costing

Production Stock controlProduction scheduling

Sales and marketing Invoicing proceduresOrder processing proceduresDelivery schedules

8.9 Effective control systemsTo be effective, a control system needs to be:

● Acceptable to the people using it, that is tailored to the culture of the area being controlled.● Appropriate for the people using it, for example credit control might be an appropriate

control for use by accountants but not by salesmen.● Accessible, in that it should be as simple as possible and only as technical as necessary.● Action oriented, in that corrective action should be taken, for example discrepancies

investigated.● Adaptable, so that it can be fl exed to suit changed circumstances.● Affordable, that is cost-effective – the benefi t should outweigh the cost. Cost-effective

control systems are those based on an assessment of risk.

8.10 Practical difficulties with control systemsThere are a number of practical diffi culties associated with control systems.

Many control systems and activities are based on forecasting the future, for example budgets, strategic plans and standard costs. The information needed for accurate forecast-ing is often not available, or too expensive or time consuming to collect.

The cybernetic model of control, described earlier in the chapter, is very commonly found. Whist it sounds relatively simple to implement, there are problems associated with it. It is not always easy to defi ne the standard to be achieved. It is not always easy to persuade people of the need for action nor to implement the changes necessary in the time available. It is not always simple to discover the cause of the need for corrective action.

Control systems often bridge two, three or even more areas of activity and it is diffi cult to provide everyone with the information they need; to coordinate actions and to ensure the controls are appropriate to all users.


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SThe accurate, timely internal information that many controls rely on is diffi cult enough

to obtain. The external information requirements are even harder to get, for instance when benchmarking activities against best practice, your competitors will not be keen to tell you how they achieve lower material costs.

It is not always simple to distinguish between controllable and uncontrollable aspects of the operations being controlled.

8.11 An example of a control system in practice: HR and staff performance appraisal

In today’s organisations, one of the most important systems to control is the human resource system and we shall use this as our example of a control system in practice. The quality of an organisation’s employees is fundamental to its success. It is essential for the organisation to get its people system right. How does a large organisation set about doing this?

8.11.1 Strategic levelThe board sets out its policy on human resources. It will, of course, be guided by the organisation’s human resource experts and should include:

● The employment status of the people: whether it is willing to use (and what the per-centage mix will be) permanent, contract or agency staff; use of self employed; whether fl exible working arrangements will be encouraged, for example annualised hours, job sharing, family-friendly policies; whether some activities will be outsourced, for example catering.

● A policy on training and developments including, for example: what training it is willing to provide or pay for; what level of experience or qualifi cation it will buy in rather than train; whether it will have an internal management development programme; whether Investors in People accreditation is appropriate.

● The organisational structure that defi nes the division of work, reporting lines and spans of control.

● The recruitment and selection processes, including the extent to which it will be delegated.● The use and content of contracts of employment.● The reward structure.● The performance appraisal system.● A code of conduct and the disciplinary process.

This policy is then used to determine the procedures that will be put in place.

8.11.2 Tactical level – performance appraisal and the employment contract

The HR or personnel department is responsible for the implementation of the board pol-icy. It will devise the detailed procedures to control the implementation of, for example, the performance appraisal system. The performance staff appraisal system is a typical con-trol system. It is designed to infl uence the behaviour of employees in order to improve effi -ciency and to help the achievement of organisational objectives.


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NS A typical appraisal system will consist of:

● criteria for assessment;● agreement of objectives;● preparation of an appraisal report;● an appraisal interview;● a formal review, usually by the reporting offi cer’s line manager;● an action plan to be implemented.

An effective performance appraisal process will identify key deliverables; compare per-formance against requirements (the standard); identify training and development needs; identify areas for improvement; provide feedback on the organisation’s recruitment and selection procedures. It will be relevant to the needs of the organisation and the individual; fair, objective and consistent; taken seriously by the parties involved; a cooperative process; not overly time consuming or costly to administer.

One aspect of this typical performance appraisal system that can reduce its effective-ness is the appraisal interview. Poor performance appraisal interviews can be confronta-tional, judgemental, just a chat, a paper exercise, a substitute for the management process that should be undertaken during the year and/or out of date and irrelevant because it is annual, that is things have changed in the year.

There are other methods of appraisal that avoid some of the disadvantages of the above process:

(a) Self-assessment, which offers the advantage of increasing the employee’s responsibility as well as saving the manager’s time. However, people are often not the best judge of their own performance and this reduces the effectiveness of the control it offers.

(b) A combination of self-assessment and assessment by the manager, which offers the advantages of self-assessment but takes more time and means there is a negotiation to reconcile the two opinions.

(c) 360-degree appraisal, where the reporting process is informed by subordinates of the person reported on, their peers, their customers (internal and external as appropriate) as well as their line manager. This provides a fuller view of performance but is time-consuming and, again, leaves different views to be reconciled.

As another example of control in practice, the HR or personnel department will also be responsible for the implementation of a system of contracts of employment.

A contract of employment places responsibilities on the employee and these form the basis of a control mechanism. The employee owes a duty of ‘faithful service’ to his or her employer (or someone his/her employer contracts him to), and this covers such matters as his or her competence, reasonable care and skill, obedience to instruction, accounting for money and property and the duty of personal service, that is the employee cannot delegate or subcontract the duties to a third party without express permission.

The board will have decided whether the contract will be written or oral. A contract can be oral and as informal as a chat. However, it can be written and very formal, for example drawn up by a solicitor. Although a written contract is not essential under UK law, the employer must provide a statement of prescribed particulars of employment. It contains the type of informa-tion that you would expect to fi nd in a contract of employment. The statement shows:

● the name of employee and employer and the job title;● date of commencement and links to any other period of employment with another employer;


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S● pay, holiday entitlement and pay, hours of work;● sick leave and pay, pension and pension schemes;● notice period on both sides.

The employee must also be informed of disciplinary procedures.An effective employment contract sets out what is expected of the employee and for the

basis of the relationship between the parties. However, it can appear dictatorial, it can be too prescriptive and it can place undue emphasis on the negative aspects of employment.

8.12 Health and safetyThe HASAWA (Health and Safety at Work Act 1975) requires every organisation employ-ing fi ve or more persons to prepare, and from time to time to revise, a written statement of their policy for health and safety of the organisation and arrangements in force to imple-ment this. This policy must be brought to the notice of employees. The ACAS induction checklist had a whole section on matters relating to safety and fi rst aid. A safety policy should relate to the fi ve key areas of employer responsibility as specifi ed in the Act.

These are as follows:

● Provision and maintenance of safe and risk-free plant and systems of work. This covers existing and new plant, monitoring for toxicity levels, provision of protective clothing (which must be provided free if required by law to be worn), training in plant usage, emergency plans, and so on.

● Ensuring the safety, and so on, in use, handling, storage and transport of articles and substances.This includes an adequate audit, particularly of dangerous substances, and correct labelling.

● Provision of information, training, instruction and supervision. This area is particularly important. Everyone needs to be aware of the possible hazards in a situation, not merely those people who deal with the equipment on a regular basis. Too many accidents are caused by ‘strangers’, that is those who do not regularly work there but who may have a legitimate reason to be present on a particular occasion.

● Maintenance of a safe workplace and the provision of means of entry and exit. Any special safety requirements must be complied with, fi re exits need to be accessible and clearly marked. This is, in any case, one of the requirements of a fi re certifi cate.

● Provision of a safe working environment and adequate facilities. There are regulations on heating, lighting, ventilation, noise and fi rst aid requirements, and adequate toilet and washing facilities are needed.

The policy should have specifi ed a senior member of the organisation responsible for carrying out the policy. There may be one or more specifi ed safety offi cers in add-ition to this. Furthermore, employees have a duty under the Act to take reasonable care of themselves or others who may be affected by their acts and omissions, to keep their own working areas tidy and safe, to avoid creating hazards, to draw to the management’s attention potential problems, and to cooperate with their employer so far as is necessary to ensure that any duties legally imposed on the employer (or any other person) can be performed.

Does this mean that a manager can sit back and leave people to take care of themselves? The answer is a clear no. Safety responsibility includes enforcing safety regulations. And while health authorities and other government departments cannot themselves be prosecuted,


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if they ‘endanger themselves or others’.Management’s role is to make clear to employees just what is required of them, and it

must take steps to enforce that requirement. Safety rules must be clear, and any breach of these rules must lead to disciplinary action. While employees may contribute to their own accidents, employers must be seen to be trying to prevent this.

8.12.1 Safety committee and representativesMore than 80 per cent of UK organisations have these at present. In addition to the legal requirement for a written safety policy, employers must be willing to cooperate with safety representatives. It is the duty of trade unions to appoint safety representatives, who should normally have at least 2 years’ experience in a similar industry or workplace. The employer should consult with these representatives about making and monitoring arrangements to ensure health and safety at work and check the effectiveness of such measures. (If no union is recognised, safety representatives may be elected by employees.)

Representatives are entitled to such time off with normal or average pay as is neces-sary to perform these functions and to undergo the necessary training, normally provided by the union. If this is not complied with the safety representatives may complain to an industrial tribunal. Safety representatives may inspect the workplace every 3 months, or more frequently if changes take place in working conditions or if there has been a notifi -able accident.

8.12.2 Managing safetyTwo incidents reported involved shop assistants in supermarket stores, not a particularly hazardous situation, both stocking shelves while wearing shoes with high heels.

In the fi rst case, the supervisor orally warned the assistant to bring in some more sens-ible fl at shoes suitable for the job, certainly by the next day. Meanwhile, the assistant went on stocking shelves that day and had an accident.

In the second case, the supervisor orally warned the assistant not to wear such shoes as they were totally unsuitable for the job, and instructed her to take them off there and then and wear suitable shoes the next day. She carried on working in bare feet the rest of that day, and had an accident!

In the fi rst case, the employer and the employee were each found 50 per cent liable. In the second, the employee was found 100 per cent liable since ‘the supervisor (manage-ment) had taken all reasonable steps to ensure the health and safety of its employee’.

8.12.3 Working with contractorsAnother time when the organisation will need to be particularly careful is when outside contractors are employed. Employers/purchasers and the contractors have a dual respon-sibility for safety. Such situations are potentially hazardous because the contractors, as ‘strangers’, are not aware of all the potential hazards in an unfamiliar situation and may themselves be introducing risks which are unfamiliar to you and therefore hard for you to anticipate. There is a need for the contractor and manager to communicate fully and actively to attempt to foresee and guard against hazards, which could arise from the inter-action of their two systems.


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SEven at the basic level of maintenance carried out by contractors there are major dan-

gers. Lift maintenance is one such example, where a lack of liaison between the contractor and the relevant manager in the organisation has caused accidents. During lift mainten-ance, doors have been left open during testing and no attempt made to prevent people entering, presumably because neither the contractor nor the manager concerned saw this as his/her responsibility.

8.12.4 Health and safety trainingHealth and safety training is the only form of training required by statute.

While there will be certain industry or job-specifi c needs, thinking in terms of the fol-lowing broad categories is generally useful.

New staff under inductionAll new staff must receive training which ensures their safety both in normal working circumstances and in cases of emergency. This means that they must be trained to carry out their work responsibly and to use the buildings and the site with care. They must be informed in no uncertain terms of all safety rules and the disciplinary consequences of breaches of those rules. They must know when, where and how to get medical treatment. They must know the correct procedures in the event of fi re or any emergency evacuation. They must know about the provisions for employee hygiene and health. Correct attitudes to health and safety must be initiated and developed from their fi rst day, if not earlier.

Monitoring safetyThere is a legal requirement to notify the authorities of any accident at work resulting in death or a major injury or more than 3 days off work and to keep detailed records of the event. Dangerous occurrences such as those involving the collapse of hoists, explosions of boilers, fi res or explosions closing the plant for more than 24 hours, the release of danger-ous substances and so on, are notifi able whenever they occur. If you need to know in detail what is notifi able consult the local health and safety inspectorate.

In making sure that rules are obeyed, organisations are going some way towards moni-toring the implementation of safety policy. There are two further useful techniques for monitoring safety in the absence of actual accidents. The fi rst is safety sampling.

This involves trained observers following a prescribed route and identifying safety defects. A target level is set and steps taken to reach this. Thereafter, periodic samples check that no new hazards have arisen. This method has the advantage of identifying haz-ards before accidents occur.

Another technique is the critical incident approach. This involves questioning employ-ees to fi nd cases where things almost went wrong. Again, this allows steps to be taken to prevent accidents before they occur. You may be familiar with the regulation requiring all ‘air near misses’ to be notifi ed. These are cases when aircraft come closer than a specifi ed distance although without colliding.

A further technique involves studying accidents themselves. In serious cases, this investi-gation is unlikely to be your responsibility (though you can usefully get information from witnesses while what actually happened is still fresh in their minds). Less serious cases may produce useful information both as to hazards and as to further training needs.


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A common fi nding is that back injury is responsible for far more time off work than p1

anything else. This is a particularly serious problem as backs, once weakened, give repeated trouble. If you have found that this was the case in your organisation, then you might like to consider, for example, whether people were lifting loads correctly, or whether alternative means for lifting might be devised.

One observation, which does not really follow on but is important, concerns appor-tioning of blame after accidents. It is very easy to fi nd someone to blame and to think the problem is solved. While this may settle the matter of legal liability the more import-ant question to ask is ‘How did the organisation allow that person to act in such a way?’ All too often the cause will lie in faulty training, faulty practices, or faulty enforcement of rules. Finding someone to blame will not reduce the likelihood of it happening again; fi nding the root causes, while less comfortable, may well do.

Does your organisation have a policy on health and safety at work? How is it communicated to employees?

8.13 The nature of business ethics

Ethics is primarily concerned with the distinction between what is considered ‘right’ and what is consider ‘wrong’ behaviour and with the way in which indi-

viduals arrive at such judgments in terms of moral duty and obligations that govern conduct.

Ethical issues in business include:

● honesty in advertising of jobs or products;● fairness in setting pay and working conditions;● non-exploitation of countries or peoples;● effects on customer of consuming product;● dealing with oppressive governments;● management of closures and redundancies.

Ethical issues can also be considered at four levels in the organisation:

Macro level This relates to business in the overall international and national context and the role of the organisation in society.

Corporate level Ethical issues affecting the organisation over which it has some direct control, for example preservation of the environment, contributions to political parties and so on.

Group level Ethical issues affecting particular professional groups or particular groups within an organisation.

Individual level The conduct, activities and standards of behaviour of individuals within an organisation.


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SBusiness ethics is about the standards of conduct that an organisation sets itself in its deal-ings with different stakeholders both within the organisation and outside with its environ-ment is part of the culture of the organisation in that it sets the norms of behaviour by which people will abide. The question for organisations is the extent to which they want to consider ethical issues that could arise in the conduct of its business beyond the legal minimum.

However, the application of ethics to the business setting is not simple or straightfor-ward. One of the diffi culties in dealing with ethics in a practical sense is in determining what constitutes ‘right behaviour’. There is little agreement on this because what is ethical, to a great extent, will depend upon the context in which the issues arise.

8.13.1 Factors affecting ethical obligationsA number of factors will affect the ethical obligations of an organisation, for example: the law; extent of government regulation; industry and company ethical codes and social pressure.

Carroll (1990) identifi es eleven different ethical criteria which managers could use as a basis of judgment in relation to ethical business issues:

1. The categorical imperative – whereby principles of action will be adopted only if they can be adopted, without inconsistency, by everyone else.

2. The conventionalist ethic – whereby acting in your own self interest is permitted pro-vided that the laws imposed by society are not thereby infringed.

3. The golden rule – do unto others as you would have them do unto you. 4. The hedonistic rule – if it feels OK, then it probably is OK. 5. The disclosure rule – whereby the correctness of a particular action is judged by refer-

ence to how you would feel should it appear on the front page of a newspaper. 6. The intuition rule – do whatever your emotions, as opposed to rational decision-making,

tells you to do. 7. The means to an end ethic – whereby it is permissible to act if the end result is

defensible. 8. The might equals right rule – where acting in accordance with the strength of your

power base is permissible even though this runs contrary to social conventions. 9. The organisational ethics in accordance with which loyalty to the organisation takes

transcends all other considerations.10. The professional ethics under which adherence to the code of your profession tran-

scends other considerations.11. The utilitarian principle under which the guiding principle is attaining ‘the greatest

good of the greatest number’.

Increasingly, organisations are judged by those with whom they come into contact on the basis of their capacity to act in an ethical manner. Having an ethical framework in place can make it easier for businesses to choose the ‘right’ behaviour. However, the pres-sures of organisational life, such as competitor activities or the constant need to improve productivity, can mean that managers make decisions that can confl ict with their own per-sonal values. This can bring about an ethical dilemma, which is a situation faced by an individual that involves complex and confl icting principles of ethical behaviour. For exam-ple, while selling a product, an individual may face the dilemma of whether or not to tell


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mission. Other examples of ethical issues that managers may face include:

● situations of unfair competition● whether or not to do business with or in certain countries● dealing with bribes and attempts at extortion● dealing with the rights of employees● implementing policies that imply social cost, for example the pollution of rivers. This

may reduce the costs to a company of getting rid of waste, but it will involve the social costs in clearing the rivers;

● the relations an organisation should have with political parties.

Blanchard and Peale suggest that individuals facing ethical dilemmas should ask themselves:

● Is it legal? Will you be breaking laws by engaging in the activity?● Is it balanced? This means ‘is it fair to all parties involved’?● Is it right? How does this decision make you feel and would you like others to know

about it?

The fact that there are so many possible approaches to the determination of what, in a given set of circumstances, would constitute ‘right’ behaviour shows how diffi cult is the translation of anything which could be regarded as an ethical principle into the world of business. Organisations may be judged by those with whom they come into contact, for example customers, regulators, suppliers or others, who expect them to exhibit ‘right’ behav-iours, even though each group may have a different slant on what constitutes correctness.

8.13.2 Developing an ethical organisationHaving an ethical framework in place makes it easier for an organisation to choose the ‘right’ behaviour. There are two basic approaches to developing an ethical organisation:

1. compliance based2. integrity based.

Compliance-based approachA compliance approach seeks not so much to promote ethical behaviour, but to eradicate that which is unethical. It is designed fundamentally to eliminate competitive disadvantage and to ensure that the organisation acts with regard for and compliance with the relevant laws. Any violations are prevented, or if detected, punished.

Compliance approaches have the benefi t of being readily manageable. They can also be actively promoted by forces external to the organisation, by punishing non-compliant behaviour. This happened in the United Kingdom in respect of the requirement that fi nan-cial services must rectify the problems caused by the miss-selling of pensions and endow-ment policies.

Integrity-based approachIntegrity strategies aim to integrate ethics into the day-to-day activities and the organi-sation’s culture and systems, guiding ethical values and patterns of behaviour. It empha-sizes managerial responsibility for ethical behaviour. This can involve the introduction of


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Sprogrammes to achieve things such as ethical orientation, consultation on the articulation of ethical values and standards, integrated systems and feedback channels for employees. Such programmes are important, but are likely to fail unless the organisation’s leadership is prepared to ‘walk the talk’. For example, remuneration systems must be designed to give credit to, or at least not to discourage, ethical behaviour. Similarly, the organisation should strive to establish a climate of trust whereby mistakes can be openly discussed and worries regarding the ethical credentials of a product or service can be shared internally.

Ethics management involves creating an environment that will support ethically sound behaviour and in still a sense of shared accountability amongst members. The importance of communication channels which allow employees to voice their concerns cannot be overstated. Initially, consultation with those who are required to exhibit ethical behaviour seems to be cru-cial to the success of the programme. An absence of feedback channels may set up a dilemma for the concerned employee who, on the one hand, has doubts about the ethics of some aspect of work but on the other hand, has to act ethically. Faced with this situation, the employee will either be forced to compromise his ethical principles or blow the whistle on his employer.

Whistle-blowing is of major concern to those interested in the introduction of ethical programmes to organisations. It is the disclosure by a member of staff of illegal, immoral or illegitimate practices on the part of organisations. The organisation’s attitude to actual or potential whistle-blowers depends on the level of mutual trust which exists between employer and employee. This is an indicator of the viability of such programmes. However, in the past, it has frequently involved fi nancial loss for the whistle-blower, since they often ended up losing their jobs.

In the United Kingdom, whistle-blowing has now moved into the legal arena through the introduction of the Public Interest Disclosure Act 1998. This imposes on organisations operating in the United Kingdom an obligation to establish an internal system whereby employees can draw attention to behaviour which is or may be considered unethical.

Many organisations and professional bodies such as CIMA have published codes of behaviour to provide guidance on how individuals should behave when faced with an ethi-cal dilemma. Corporate ethical codes will involve identifying the required conduct in spe-cifi c circumstances, training employees in ethic decision-making, and establishing channels of communication for reviewing ethical dilemmas. However, since they tend not to be rules that can be enforced by penalties for non-compliance, the key issue is the extent to which they are supported by the people to whom they apply.

Ethics programmes can help to promote a strong public image, particularly if people see organisations as valuing people more than profi t in a positive light. They can also help to ensure that policies are legal rather than incurring costs of litigation. For example, well-designed human resource policies, ensuring ethical treatment in matters of recruitments and selections, performance and management and disciplining, will have positive outcomes.

Consideration of ethics, it could be argued, has substantially improved society in terms of how organisations ‘look after’ their staff, with a higher value placed on fairness and equal rights. There is legislation to support equal opportunities making certain types of discrimina-tion in the workplace illegal, such as discrimination on the basis of sex, race and disability.

8.13.3 Example of an ethical issueImagine that a chain of shops decides to close down a branch situated in the centre of town in favour of an out-of-town location where profi ts will be higher. Elderly and poorer shop-pers who lack private transport are now without a shop. Some will suffer reduced quality


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ping done for them, so imposing a strain on social services or family members. Perhaps another local shop decides to exploit its monopoly position by raising prices, thereby forc-ing poorer families to forgo some of the things they need.

It seems that pursuing the interests of the shareholder has harmed others. Can this be morally right?

Does your organisation have an ethical code of conduct. What does this include?

8.14 Professional ethicsCIMA has an adopted code of ethics that makes it clear that a professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer. Professional accountants must act in the public interest and in order to do so, should observe and comply with the ethical requirements of this code.

The code is in three parts

1. Part A establishes the fundamental principles of professional ethics for professional accountants and provides a conceptual framework which provides guidance on funda-mental ethical principles.

2. Part B applies to professional accountants in public practice.3. Part C applies to professional accountants in business.

8.14.1 Fundamental principlesA professional accountant is required to comply with the following fundamental principles:

(a) Integrity. A professional accountant should be straightforward and honest in all profes-sional and business relationships.

(b) Objectivity. A professional accountant should not allow bias, confl ict of interest or undue infl uence of others to override professional or business judgements.

(c) Professional competence and due care. A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a cli-ent or employer receives competent professional service based on current developments in practice, legislation and techniques. A professional accountant should act diligently and in accordance with applicable technical and professional standards when provid-ing professional services.

(d) Confi dentiality. A professional accountant should respect the confi dentiality of infor-mation acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specifi c authority unless there is a legal or professional right or duty to disclose.

(e) Professional behaviour. A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession.


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S8.14.2 Conceptual frameworkThe conceptual framework requires a professional accountant to identify, evaluate and address threats to compliance with the fundamental principles, rather than merely comply with a set of specifi c rules. Compliance with the fundamental principles may potentially be threatened by a broad range of circumstances. Many threats fall into the following categories:

(a) Self-interest threats, which may occur as a result of the fi nancial or other interests of a professional accountant or of an immediate or close family member.

(b) Self-review threats, which may occur when a previous judgement needs to be re-evaluatedby the professional accountant responsible for that judgement.

(c) Advocacy threats, which may occur when a professional accountant promotes a posi-tion or opinion to the point that subsequent objectivity may be compromised.

(d) Familiarity threats, which may occur when, because of a close relationship, a profes-sional accountant becomes too sympathetic to the interests of others.

(e) Intimidation threats, which may occur when a professional accountant may be deterred from acting objectively by threats, actual or perceived.

Safeguards to these threats include:

● Educational, training and experience requirements for entry into the profession● Continuing professional development requirements● Corporate governance regulations● Professional standards● Professional or regulatory monitoring and disciplinary procedures● External review by a legally empowered third party of the information produced by a

professional accountant● Effective, well-publicised complaints systems operated by the employing organisation,

the profession or a regulator, which enables colleagues, employers and members of the public to draw attention to unprofessional or unethical behaviour

● An explicitly stated duty to report breaches of ethical requirements.

8.15 Corporate governanceThis section is based on extracts from the CIMA working party report, Corporate Governance: History, Practice and Future, published by CIMA Publishing and reproduced with permission.

8.15.1 What is corporate governanceAccording to the Cadbury report, corporate governance is the system by which compa-nies are directed and controlled. A number of high profi le scandals over the last few dec-ades have highlighted the need for guidance to confront the problems that can arise in organisations’ systems of governance. Whilst usually associated with large quoted com-panies, governance is an issue for all organisations – profi t making and not-for-profi t.


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governanceTreadway and the COSOSome of the earliest considerations of corporate governance come from the United States. The Treadway Commission issued a report on fraudulent fi nancial reporting in 1987, which confi rmed the role and status of audit committees. The Treadway Report prompted the Securities and Exchange Commission (SEC) to incorporate in its listing require-ments, from 1988, that all SEC-regulated companies should have an audit committee with a majority of non-executive directors. Further work by a subgroup of the Treadway Commission, COSO, developed a framework for internal control, providing detailed cri-teria for management to assess internal control systems, and gave guidance for reporting publicly on internal control.

In the United Kingdom, the corporate governance debate was stimulated by a series of corporate scandals and unexpected corporate collapses in the late 1980s and early 1990s.

Press coverage of BCCI, Polly Peck and the pension funds of the Maxwell Communications Group caused much public questioning about how effective the boards of these companies had been in monitoring the actions of their executive management, and about the diffi culties that non-executive directors and auditors faced in ‘standing up’ to dominant chairmen or chief executives.

CadburyThe Cadbury Committee was set up in May 1991 by the Financial Reporting Council (FRC), the Stock Exchange and the accountancy profession in response to their concern about ‘the perceived low level of confi dence, both in fi nancial reporting and in the ability of auditors to provide the safeguards which the users of company reports sought and expected’. The commit-tee’s remit was to report on the fi nancial aspects of corporate governance (particularly in rela-tion to fi nancial reporting and accountability), to consider the responsibilities of executive and non-executive directors, the case for audit committees, the principal responsibilities of auditors, the extent and value of the audit, and the links between shareholders, boards and auditors.

At the heart of the Cadbury Committee’s recommendations was the Code of Best Practice, with which all listed companies were to comply. The Code was based on three principles:

1. openness (subject to commercial confi dentiality)2. integrity (honest, balanced and complete fi nancial reporting)3. accountability (the requirement for directors to provide quality information, and for

shareholders to exercise their powers as owners responsibly).

The argument for adhering to the Code was that it would strengthen both confi dence and accountability. The board would fi nd it easier to secure assent for its strategies if its activities were more open and there was a clearer understanding of its responsibilities. And if the general level of confi dence in fi nancial reporting were improved, this would facilitate the effi cient working of capital markets.

One of the recommendations of the Cadbury Code was that ‘directors should explain their responsibility for preparing the accounts next to a statement by the auditors about their reporting responsibilities.’ It intended this requirement to ensure that companies have an appropriate control system in place, and apply it effectively. The committee placed great importance on internal control – both because it is essential to effi cient management, and because failures in internal control were one of the reasons the committee was established.


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SThe Cadbury Report advised that companies would not be able to comply with their

recommendations until further necessary guidance was developed. It felt that this was the responsibility of the accountancy profession, together with preparers of accounts. Specifi cally, it called upon them to take the lead in developing:

● a set of criteria for assessing effectiveness● guidance for companies on the form in which directors should report● guidance for auditors on relevant audit procedures and the form in which auditors

should report.

RuttemanThe Rutteman working group published its guidance, Internal Control and Financial Reporting: Guidance for Directors of Listed Companies Registered in the UK, in December 1994. The guidance was addressed principally to listed companies, and those traded on the USM, but was felt to be relevant to all business organisations. It was to be applicable immediately – to accounting periods beginning on or after 1 January 1995.

Rutteman did not prescribe the form of the internal controls statement, and advised that readers would expect it to be included within the corporate governance statement, although it might also be included in the operating and fi nancial review, in the directors’ report, or the statement on directors’ responsibilities.

The report advised that the statement should contain as a minimum:

(a) acknowledgement by the directors that they are responsible for the company’s system of internal fi nancial control;

(b) explanation that such a system can provide only reasonable and not absolute assurance against material misstatement or loss;

(c) description of the key procedures that the directors have established and which are designed to provide effective internal fi nancial control; and

(d) confi rmation that the directors (or a board committee) have reviewed the effectiveness of the system of internal fi nancial control.

It did not develop from scratch the list of criteria for assessing the effectiveness of internal controls but based them on those set out in the US’ COSO report, Internal Control – Integrated Framework.

This guidance has now been superseded by the Turnbull Report.

GreenburyThe Greenbury Committee was set up in January 1995, on the initiative of, but independ-ent of, the Confederation of British Industry (CBI). Its terms of reference were to ascertain what was good practice in determining directors’ pay, and to prepare a code of practice based on its fi ndings. The committee was not just responding to public and shareholder concern about pay increases and accountability, but also considered the relatively neglected issue of how to appropriately reward performance.

The committee’s approach was to strengthen accountability, and encourage improved performance through transparency, the appropriate allocation of responsibilities for deter-mining remuneration, and the proper reporting to shareholders.

Specifi cally, it felt that determining directors’ pay needed to be delegated by the board to a suitably knowledgeable and independent group, non-executive directors, who would have no personal interest in the remuneration decisions they were taking.


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NS This group would report to shareholders, providing full disclosure of individuals’ remu-

neration and the underlying policy.The committee published its report in July 1995, and considered that implementation

of its recommendations would improve corporate remuneration practices.Although their research focused on UK-listed companies, the committee expected that

non-listed and smaller companies would fi nd their conclusions of merit.

HampelThe Hampel Committee was established in November 1995, on the initiative of the chair-man of the FRC, and followed the recommendations of both the Cadbury and Greenbury Reports for a successor committee. The Hampel Committee’s sponsors included the Stock Exchange, the CBI and the Consultative Committee of Accountancy Bodies (CCAB). It consulted widely, sending out a questionnaire to interested parties (including public com-panies, institutional investors and representative bodies such as CIMA), from which it received over 140 responses. Hampel’s remit was to:

● review the Cadbury Code and its implementation to ensure that its original purpose was being achieved, proposing amendments where necessary;

● keep under review the role of directors (executive and non-executive), recognising the need for board cohesion and the common legal responsibilities of all directors;

● review the Greenbury recommendations; and● address the roles of shareholders and auditors in corporate governance.

The committee felt that it was ‘too soon to reach a considered assessment of the long-term impact of the Cadbury Code’ and ‘even more diffi cult to reach a defi nitive conclu-sion on Greenbury’. However, their report was not as short as these comments suggest. The committee felt that it was important to look at corporate governance from a fresh per-spective, not as a ‘response to things which were perceived to have gone wrong’. It started from the beginning to consider what is meant by corporate governance, and to identify broad principles (some familiar from Cadbury and Greenbury), which it hoped, would command general agreement.

The committee decided to produce a Combined Code embracing Cadbury, Greenbury and its own work and to pass this to the Stock Exchange so that it could sit alongside the Listing Rules. The committee indicated that companies would be required to make a state-ment to show how they apply the principles and comply with the Combined Code, and to justify any signifi cant variances.

8.15.3 The combined code principles of corporate governance

The Combined Code was fi rst published in June 1998 and comprised Principles of Good Governance and a Code of Best Practice, which set out Code Provisions for each of these principles. The code was revised in 2003, and now refl ects the work done by Turnbull, Smith and Higgs. Only the ‘purpose and principles’ of Corporate governance are examin-able in the Integrated management paper, and the principles of the code are divided into the broad areas listed below.

● Directors. Listed companies should be led by an effective board, with a balance of execu-tive and non-executive directors such that no individuals or small groups can dominate


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Sdecision-making. There should be a clear division of responsibilities of the two key tasks of running the board (Chairman) and running the business (Chief Executive) so that no individual has unfettered powers. Appointments to the Board should be made in a formal, rigorous and transparent manner. To enable it to discharge its duties, the board should be supplied in a timely manner with good quality information. Directors should receive an induction, on joining the company, and should regularly update and refresh their skills. The Board should evaluate its own performance, and that of its committees, on an annual basis. The directors should offer themselves for re-election at regular intervals, and should plan for the Board to be ‘progressively refreshed’ by bringing in new members.

● Directors’ remuneration. Without paying more than is necessary, the level of remunera-tion should be that which is necessary to recruit and retain directors of the right calibre. A signifi cant proportion of executive directors’ pay should be performance-related in such a way as to encourage the achievement of corporate objectives and to reward indi-vidual performance. Policy on executive remuneration should be clear, and no director should be involved in determining his/her own remuneration.

● Accountability and audit. The board is responsible for presenting a balanced and under-standable assessment of the company’s fi nancial position and prospects. It is also responsi-ble for maintaining a sound system of internal controls to safeguard the company’s assets and the shareholders’ investments in the company. It should establish formal and transpar-ent arrangements for considering how to apply the principles of fi nancial reporting and internal control and for maintaining an effective relationship with external auditors.

● Relations with shareholders. There should be a dialogue with shareholders based on the mutual understanding of objectives. The Board as a whole is responsible for ensuring that this dialogue takes place. The Board should use the annual general meeting (AGM) of the company as a vehicle for communication with investors, and a tool to encourage them to participate.

The Combined Code requires listed companies to include in their accounts a narrative statement of how they applied the principles set out in the Combined Code and a state-ment as to whether or not they complied throughout the accounting period with the pro-visions set out in the Combined Code. Listed companies which do not comply must give reasons for non-compliance.

The Combined Code includes Code Principles and Provisions for institutional sharehold-ers, covering matters such as voting, communication between investor and company, and the investor organisation’s responsibilities to evaluate the company’s corporate governance arrangements. In a section titled ‘Related Guidance and Good Practice Suggestions’, the code also provides guidance relating to internal control (the ‘Turnbull guidance’) and audit committees (the ‘Smith guidance’).

8.15.4 The benefits of corporate governanceGood corporate governance:

● Reduces risk. It helps to ensure that the personal objectives of the board and the compa-ny’s strategic objectives are brought into line with those of stakeholders. It can help to reduce the risk of fraud. It can provide a mechanism to review risk, and it can provide a framework for reviewing and assessing projects.

● Stimulates performance. It institutes clear accountability and effective links between per-formance and rewards which can encourage the organisation to improve its performance.


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● Improves access to capital markets. It reduces the level of risk as perceived by outsiders, including investors. In particular, corporate governance can be seen as protecting share-holders’ rights, and thus makes it easier for companies to raise fi nance.

● Enhances the marketability of goods and services. It creates confi dence among other stake-holders, including employees, customers, suppliers and partners in joint ventures.

● Improves leadership. It allows increased expertise to be brought to bear on strategic deci-sion-making, through the infl uence of non-executive directors (NEDs), and because all board members are encouraged to examine board decisions critically. The wider pool of knowledge and experience available to the board, through the inclusion of external members, helps the board to identify opportunities more readily.

● Demonstrates transparency and social accountability. This in turn can foster political sup-port for, and public confi dence in, the organisation.

8.16 SummaryThis chapter has looked at control in the organisation. The key points to remember are:

● the formal and informal controls that exist within organisations;● the actions that organisations can take to protect their employees and treat them fairly,

including health and safety at work● issues of business ethics and corporate governance.

ReferencesCIMA (2005), Management Accounting offi cial Terminology. London: CIMA. Lucey, T. (2003), Management Accounting (5th edn). Continuum.

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8Revision Questions


Question 1Your organisation is a large manufacturing company. Give examples of controls you would expect to be in place in the purchasing system:

(a) at the strategic (senior management) level (5 marks)(b) at the tactical (middle management) level (5 marks)


Question 2M is Chairman and Managing Director of Y Company which he started 15 years ago, spe-cialising in the manufacture of hospital uniforms. The company has been very successful and through a series of acquisitions has diversifi ed into the manufacture of a range of cor-porate and other uniforms, employing 3,500 people. M is a major force in the company. His management style is very autocratic and he is unwilling to involve others in decisions about the future strategic direction of the company. Recently, M announced to the Board that he is intending that Y Company becomes listed on the Stock Exchange

D, the Finance Director of the company has become increasingly concerned about the decisions being made by M and the fact that he has put pressure on her to participate in some questionable accounting practices. She has had to cover up M’s substantial remu-neration package, which M has awarded to himself. D is also aware that M has accepted bribes from foreign suppliers and of insider dealing relating to a number of the acquisi-tions. There is a lack of appropriate control systems and accountability in the Company.

D has discussed her concerns with other members of the Board, all of whom work for Y Company, including the Marketing Director, Production Director and HR Director. However, they seem willing to overlook the wrongdoings of M and never challenge the decisions made by him. The opportunity to do so is limited since the Board meets on an irregular and infrequent basis.

At the last Board meeting M set out his plans to close the existing factories and move opera-tions to L country where he has been in secret negotiations with representatives of the govern-ment. The main objective is to benefi t from low cost labour, since the county has very little in the way of employment legislation to protect workers and has a poor human rights record.

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RequirementExplain the corporate governance and ethical issues facing Y Company. (10 marks)

Question 3Whilst Z Company has a policy and a code of conduct on health and safety, the results from a recent survey suggests that many senior managers are not aware of their responsi-bilities for health and safety in the workplace.

The Board have nominated H, the fi nance director, to deliver a seminar to help senior management appreciate the importance of health and safety at work. He is currently con-sidering what he should include in the seminar.

RequirementExplain the key areas that H should cover in the Health and Safety seminar. (10 marks)


Question 4S Company develops accountancy software for small-to medium-sized businesses. S Company was established 15 years ago by a graduate in accounting. Despite an increas-ingly competitive environment, it has grown and diversifi ed to become a global provider of specialised accountancy software.

In order to cope with the increasing size and diversity of the business, additional levels of management and control systems have been introduced, including additional policies, rules and procedures. Unfortunately, the increase in bureaucracy is having the effect of slowing down decision-making processes and limiting ideas for new software development.

The Chief Executive Offi cer is aware of the confl ict between the structural changes and the need for continuous creativity and innovation that are critical to new software devel-opment and the future success of the business, but is not sure how to overcome the problem.

Requirements(a) Explain: (i) why formal control systems are increasingly necessary as an organisation grows

and diversifi es; and (ii) why the use of bureaucratic forms of control in S Company might limit creativity

and innovation. (15 marks)(b) Discuss how S Company could balance control with autonomy to assist continuous

creativity and innovation. (10 marks)(Total marks � 25)

Question 5B Local Council is responsible for providing public services, serving the local community. A new Chief Executive has recently been appointed with the explicit brief to improve the performance of the Council which is currently in the spotlight for being ineffi cient and not focused enough on the needs of the local residents.

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Over the last three months the Chief Executive has undertaken a review and is not impressed with what he has found. He has identifi ed a number of weaknesses and problem areas which need to be remedied. The culture of the Local Council needs to change radic-ally to become a more performance oriented one.

The initial fi ndings from the review suggest that the B Local Council is typifi ed by a very bureaucratic culture, where power is determined by position and status. The managers in the Council defend their territory and are unwilling to share information and cooperate with other departments. Staff are only allowed to undertake the specifi c activities included in their job description. Many say they have had no training and that opportunities for career progression are limited. They receive no feedback on their performance but work under close supervision in, what appears to be, a ‘them and us’ culture between manage-ment and staff.

The review also identifi es that morale is low. Staff feel that they are not encouraged to participate in decision making, and any ideas they have are stifl ed as a result of the chain of command. A signifi cant number of staff have told the new Chief Executive that if they could get another job they would leave the Council. Discussions with the HR manager reveal that both absenteeism and turnover is high, despite competitive salaries and other excellent working conditions and benefi ts such as free car parking, a subsidised canteen and sports facilities.

The Chief Executive has identifi ed a number of signifi cant changes that need to be made to improve performance of B Local Council. He is surprised that there is currently no staff performance appraisal in place and is keen that an effective system should be designed and implemented.

Requirements (a) Analyse the problems in B Local Council, and discuss what the Chief Executive could

do to improve performance. Your should include reference to appropriate theories to support your analysis. (13 marks)

(b) Explain the key issues that should be considered in the design and implementation of an effective staff performance appraisal system for B Local Council. (12 marks)


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Section A solutions

Solution 1Guidance and common problemsFor many CIMA students, their own practical experience of control systems in large organisations makes it relatively easy for them to identify controls at the operational levels. They do not always fi nd it easy to identify controls at higher levels in the organisation.

(a) Strategic controls over the purchasing system in a large organisation include:● Director with designated responsibility for the function.● Policy agreed by the Board on major issues such as:

– strategic expectations of purchasing in the future, for example to source for sales growing at the rate of 10 per cent p.a.

– expectations of overall cost structure – nature of relationship with suppliers (e.g. partnering arrangements) – acceptable sources (e.g. Europe, Third World) – single or multiple sourcing – commitment to environment and any other ethical issues – code of conduct on use of bribery/acceptance of kickbacks – resourcing of the function.

● Organisation’s overall HR policy, particularly in respect of the honesty and integrity expectations of its employees. (This is because the purchasing system is particularly vulnerable to the risk of fraud.)

● Risk management system.(b) Tactical controls include:

● Manager with designated responsibility for delivering the purchasing system object-ives (right goods/services, right quality, right price, right time, and so on).

● Budgetary control.● HR policy on staffi ng the section including qualifi cations, experience, reward struc-

tures, performance appraisal.● Management Information System capturing and reporting on the monitoring infor-

mation required to assess the performance of the section and allowing informed organisational decision-making.

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● Procedures setting out policy on achievement of value for money, for example expenditure levels for competitive tendering, use of select lists of tenderers.

● Risk management process that identifi es and records risks in the system and sets out formally the actions to be taken to manage them.

Solution 2Corporate governance concerns the ownership and control of profi t making organisations and the relationship between owners and manages. A number of reports have been pro-duced to address the risk and problems resulting from poor corporate governance. In the UK the most signifi cant reports include the Cadbury, Hempel and Greenbury reports. The recommendations are merged into a Combined Code which comprises the purpose and principles of good corporate governance for listed companies

There are a number of corporate governance issues facing Y Company.

● It is problematic for one person to hold both the role of Chairman and Managing Director since this can result in too much concentration of power being in the hands of one person, and the greater dangers of the misuse or abuse of power. As illustrated in the scenario, it is diffi cult for other directors to challenge M’s decisions. M, through his dominance and associated behaviours, combining chairperson and chief executive roles contravenes much of the recent thinking on corporate governance. This advocates that the separation of the two roles is essential for good control.

● It is evident from the scenario that Board meetings are ineffective, they are held on an irregular and infrequent basis with M wielding his power over other directors. It would seem that he has forced through decisions that are in his own personal interest, and could be detrimental to the company. One of the core principles of the Combined Code is that listed companies should be led by effective Boards, which meet regularly and membership should be a balance of executive and non executive directors so that no individuals or small groups can dominate decision-making. It would be appropriate for non-executive directors to be appointed to the Board of Y Company to provide inde-pendent judgements on decisions.

● It seems that there is a lack of adequate control, accountability and audit in the com-pany. The Board is responsible for presenting a balanced and understandable assessment of the company’s fi nancial position. It is responsible for maintaining a sound system for internal controls to safeguard the company’s assets and shareholders investment. Y Company should establish through an audit committee formal and transparent arrange-ments for considering how to apply the principles of fi nancial reporting and internal control. Non-executive directors should satisfy themselves on the integrity of fi nancial information and that controls are robust.

● M has determined his own remuneration package, which he is keen to keep covered up. Good corporate governance practice states that no director should be involved in determining his/her own remuneration. Non-executive directors should be responsible for determining a policy on the remuneration of executive directors and specifi c remu-neration packages for each director, a proportion of which should be linked to corporate and individual performance. It is good practice to include a report on the remuneration policy for directors to the annual accounts.

The above points would help support the Finance Director who has been placed in an awkward situation regarding the illegal accounting practices and M’s remuneration.


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SEthical issues arise when one person values confl ict with those of others. M appears to

be making decisions that are not within acceptable standards of honesty and integrity. In his position he should be setting the moral tone for Y Company, but in this case it seems that M is abusing his power. This is illustrated by M’s lack of ethical behaviour regarding the acceptance of bribes, insider dealing, and the secret negotiations to move manufactur-ing to a country where there workers could be exploited. Other members of the Board may have different ethical values regarding the potential exploitation of labour and the loss of jobs but seem to be unwilling or unable to challenge M.

The Finance Director could be encouraged to ‘whistle blow’, a practice in which she could exposed the misdeeds of M, preventing further wrongdoings and to preserve ethical standards. That said, because of the lack of legal protection, the Finance Director could risk losing her job. It is apparent from the scenario that she doesn’t have the support of other colleagues on the Board.

Solution 3H should start the seminar by explaining why the senior management of Z Company have an important role in infl uencing health and safety in the work place. He could support this by discussing the legal duties of Z Company and the need to ensure that employees comply with health and safety laws. For example, if Z Company is a UK-based company H could cover the key elements of the Health and Safety at Work Act 1974, which place duties on employers to protect the health and safety of their employees. It requires, manag-ers to provide employees with the necessary information, instruction and training so that work activities are carried out safely. In addition, H could make reference to the European Directives which place specifi c duties on employers to ensure that employees are capable and trained. He should make the point that as senior managers they are responsible for ensuring that any health and safety problems are solved and that rules are observed and safety regulations are enforced.

H should go on to explain the employer’s responsibilities, for example, making sure that all work practices are safe and that the work environment is safe and healthy, providing safe plant and machinery, safe premises, and safe systems of work. This will involve the selec-tion of competent staff and proper supervision. H should make specifi c reference to the content of T Company’s policy and written code of conduct and company rules regarding training and supervision on safety procedures, including information on basic health and safety requirements.

Discussion could also include reference to the fact that senior managers should make sure the company’s health and safety policy has been communicated to all staff and that they should make sure employees have received training on safe working practices. As an employer Z Company has a statutory duty to provide training not just for managers but for all employees to ensure compliance with legal requirements. H should mention the need for new staff to be properly briefed on health and safety on hazards, procedures and the use of any protective equipment, if appropriate. He should also highlight the fact that all staff must undergo periodic fi re evacuation training. Health and safety training is the only form of training required by statute

H could then explain the importance of health and safety from a business perspective. For example, he could point out that accidents and illness cost the organisation money and can impact on the company’s image in the market place if they do not demonstrate their commitment to health and safety.

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H should include in the seminar the aspect of health and safety relating to risk assess-ment of all work hazards and the risk to anyone else affected by the company’s work activi-ties. He should make the point that this should be carried out continuously (not just a one off exercise). He should remind managers about the company’s accident report system, which includes monitoring trends to reveal areas where accidents are reoccurring and how the company follow up any accident to prevent reoccurrence.

H should discuss with senior managers the employer’s duty to provide safe working conditions extended to employees working on the premises belonging to a third party. H should also highlight that certain groups of employees may require more care and supervi-sion than others, for example disabled workers.

Whilst focusing on the employer duties in the seminar, H should mention that employ-ees also have duties for health and safety, for example they need to take reasonable care of themselves and others, use equipment properly and inform the employer of any situation which may be of danger.

H could fi nish his seminar by reminding staff who the health and safety advisers are in the company. If the company has a recognised trade union, H should communicate who have been appointed as safety representatives.

Section B solutions

Solution 4(a) (i) For any organisation like S Company, the growth and diversifi cation of the busi-ness poses an increasing problem of control. As the number of levels in the organisation is increased and the number of different kinds of tasks to be carried out multiplies, the div-ision of labour becomes more complex. In this changing situation, it becomes increasingly diffi cult to ensure that members of an organisation are doing what they are supposed to be doing.

Without some attempt to control what people do in organisations, there is a danger of centrifugal tendencies developing – that is people begin, intentionally or unintentionally to do ‘their own thing’ by working towards their own personal goals and perceived self-interests.

To counteract the tendencies created by the processes of differentiation, and to ensure goal congruence, there is a need to create a ‘common focus’ in an organisation, which will control and integrate members’ diverse activities. This is why organisations introduce a variety of formal controls.

In small, simple organisations it is possible for the owner manager or senior manage-ment to supervise subordinates’ activities personally and systematically. Often, in such organisations, it is possible to achieve control in an informal way by setting employees tasks and then checking that they have been carried out. Any deviations from the accepted standard of performance can be communicated directly by the owner manager to particu-lar employees and the necessary corrective action taken. In larger organisations, however, with a complex division of labour, and a taller hierarchy of responsibility, it is not phys-ically possible to control people in such a simple manner. In such situations, formal pol-icies, rules and procedures have to be put into place together with a system of rewards and punishments to ensure that the policies, rules and procedures are observed.

In such hierarchical organisations, policies and objectives are typically set, or at least confi rmed, by occupants of higher-level positions and are then communicated to lower-level staff, who are then charged with the responsibility to carry out the necessary actions.

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It is up to the higher-level managers to determine whether or not the objectives have been met and, if not, to take the appropriate steps. This is the process of control.

It is important to note, however, that there are a number of different ways of exercising control in organisations and that the effectiveness of a particular type of control system depends on a number of factors including the organisation’s strategy, culture, structure, environment and the type of goods or services produced.

In the case of S Company, it chose to use bureaucratic (administrative) forms of control, but as the CEO realised, such a form of control is not conducive to creativity and innovation. (ii) Creativity, which can be defi ned as ‘the generation of new ideas, and innovation, which is the transformation of creative ideas into tangible products or processes’ varies considerably between one organisation and another. Some organisations, like 3 M, Hewlett Packard and Microsoft have a reputation for creativity and innovation while other organ-isations hardly ever seem to generate new products or new ways of doing things.

The generation of new ideas and their translation into commercial use is a particularly important issue for an organisation like S Company because its future depends on a con-tinuous supply of innovative software products. There are many factors infl uencing the rate of innovation in organisations, but research suggests that one reason has to do with how an organisation is structured and controlled.

Studies by Rosabeth Moss Kanter (1983) and others have found that excessive bureau-cracy with its allegiance to central control and to rules and procedures discourages creativity and innovation. The focus on rules and procedures and the accompanying sanctions designed to ensure compliance means that employees ‘play safe’ by sticking to the rules rather than risk trying out new ideas. As R. K. Merton pointed out, rules become ‘ends in themselves’.

The division of labour that often accompanies the growth of an organisation also affects creativity and innovation because it restricts the sharing of ideas between individuals and between different units, departments or divisions. The case of S Company illustrates well the problems facing all large organisations at some time in their development – that of balancing the need to ensure adequate direction and control of staff and yet allowing suffi cient free-dom and discretion of middle managers and other employees to contribute their particular knowledge and expertise to the organisation. Too little direction and control can result in wasted effort and ineffi ciencies as the departments and divisions into which an organisation is subdivided pursue their own particular goals. Too much central control and lower level staff become frustrated by rules and procedures forced upon them from on high by those who are too far from the action to make informed decisions.

(b) The most important means to help balance control with autonomy and so encourage creativity and innovation is through the related processes of decentralisation, delegation and empowerment.

Decentralisation involves specifi c delegation of authority for decision-making within cer-tain limits to sub-units of S Company such as strategic business units, divisions or depart-ments. Delegation refers to the conferring of specifi ed authority to individuals by a higher authority and empowerment is similar to delegation, in that it allows greater freedom, autonomy and self control to teams and/or individuals, but responsibility is also devolved. All these related processes have in common the idea that organisational sub-units and/or par-ticular individual post holders have discretion to make decisions and to act within the lim-its agreed by those higher in the organisation’s chain of command. The autonomy granted to units and individuals through these processes contributes to creativity and innovation because it allows people with specialised knowledge and skill the freedom to pursue their own ideas for improved products and processes.

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The problem for the organisation is, as already noted, that of ensuring that employees keep within the bounds of their authority and use their time and other company resources in ways that contribute to the organisation’s overall objectives. This brings us back to the means by which organisational members can best be controlled.

Three main forms of internal organisational control have been identifi ed: bureaucratic control, output control and cultural control. S Company appears to have adopted bureau-cratic forms of control, but as we have seen, these are not conducive to an organisation that depends on a continuous fl ow of innovative new software for its g; survival.

The use of output forms of control may provide an answer to S Company’s problem if the output in terms of creativity and innovation could be measured. Output control strat-egy is aimed at facilitating the delegation of operational decision-making without the need for bureaucratic controls or close supervision. The problem for S Company, however, is likely to be that of setting measures for creativity and innovation.

Perhaps, therefore a form of cultural control will be of more use. The basis of cultural control is the willing compliance of employees with management requirements. This, in turn, requires an acceptance of the values and beliefs or the organisation and its objectives. The implementation of cultural control would require a careful selection, socialisation and training of staff to ensure commitment to the objective of continuous innovation. Once commitment to objectives has been achieved via these methods, semi-autonomous methods of working could be introduced with the use of self-managing teams with responsibility for completing particular software development projects. The use of fi nancial incentives can also be used to support systems of cultural control.

Other means to assist innovation include, ‘internal new venturing’ which is a form of entre-preneurship. The idea is to design organisations to encourage creativity and give new-venture managers the opportunity and resources to develop new products or markets. To provide a new-venture unit that gives managers the autonomy to experiment and take risks, the company sets up a new-venture division separate from other divisions and makes it a centre for new product or project development. Away from the day-to-day scrutiny of top management, divisional staff pursue the creation of new products as though they were external entrepreneurs. The division is operated by controls that reinforce the entrepreneurial spirit. Bureaucratic and output controls are seen as inappropriate because they can inhibit risk taking. Instead, the company develops a culture for entrepreneurship in the new venture division to provide a climate for innovation. Care must be taken, however, to institute some bureaucratic controls that put some limits on freedom of action. Otherwise, costly mistakes may be made, and resources wasted.

Solution 5(a)B Local Council is facing a wide range of problems which the new Chief Executive will have to overcome if he is to be successful in improving the performance of the organ-isation. The problems are derived from a number of interrelated factors, including the bureaucratic culture of the organisation and the attitude and leadership style of managers who defend their territory.

Herzberg’s two factor theory is a useful framework to analyse some of the other prob-lems and to identifying ways to improve staff motivation in order that the Local Council can move towards a performance culture.

The two factor theory suggests that the work situation can be divided into two types. One set of factors, if absent, can lead to dissatisfaction and are usually related to job

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context. These factors tend to be extrinsic to the job itself and are referred to as hygiene or maintenance factors and whilst are unlikely to motivate staff, if they are not right can cause dissatisfaction and de-motivation. The other set of factors are those which if present can motivate individuals to superior effort and performance. They tend to be related to the job itself, in other word are intrinsic factors and are referred to as motiva-tors or growth factors.

Hygiene factors include the factors surrounding the job such as pay, working environ-ment, company policy and interpersonal relationships. Whilst B Local Council offers com-petitive salaries and excellent working conditions, there are some hygiene factors that could trigger dissatisfaction and consequently impact on performance. For example, the Chief Executive needs to look at the necessity for close supervision of work and how to address the poor relationships suggested by the ‘them and us’ culture. It is likely that managers will need to adapt their leadership style to a more democratic approach.

If the Chief Executive wants to build a performance culture it is not enough to focus only on the hygiene factors. He will need motivated staff, hence should give some atten-tion to potential motivating factors such as those relating to recognition, challenging work, responsibility and advancement. This is not an easy task since it will require some funda-mental changes to the organisation, such as restructuring to reduce the chain of command. It needs to move from its present bureaucratic culture to a performance oriented one.

The Chief Executive needs to ensure that every member of staff understands the over-riding objectives of the local council, i.e. providing services to local residents as effi ciently and effectively as possible. This should provide a common focus for the combined efforts of both management and staff.

The Chief Executive could consider job design, to improve the performance of staff, so for example job enlargement and job enrichment could be used. He could explore the design of job roles to widen the scope of jobs, providing more interesting and challenging work for staff. The benefi t to employees would be the development of new skills and being given responsibility through empowerment. This would require a more participative lead-ership style, with junior staff given greater responsibility for their own area of work and encouraged to participate in decision making.

He could also look at how improved prospects for career development could be achieved. This might mean providing opportunities for lateral moves to enable staff to gain new experiences and competencies. Training programmes for staff could help in customer service to help change attitudes and behaviours as well as improving skills.

To help strengthen the forces for change there may need to be some incentive for indi-viduals to change their behaviour and improve performance. The Chief Executive could explore the introduction of recognition schemes since recognition is a motivator. This could be achieved, at one level, by encouraging managers to thank members of staff for their contribution, acknowledging extra effort and performance. A more formal recog-nition scheme could be introduced such as employee of the month. Another possibility would be the implementation of a fi nancial reward system that recognises the contribution of employees who meet or exceed their performance targets. The proposed staff perform-ance appraisal system could also be used to provide feedback and recognition on achieve-ments. Research would have to be undertaken to ensure that the reward and recognition schemes are valued by staff before being introduced.

It is important for the Chief Executive to appreciate that such signifi cant changes can-not be achieved overnight, quick wins would help signal his commitment to the changes needed to help B Local Council become more performance oriented.

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(a)Performance appraisal systems can be used for a wide range of reasons, but essentially they assess employees’ performance, potential and development needs. The issues that need to be considered by the Local Council in designing and implementing an effective system include the following points:

Firstly, it is important that the appraisal system is designed to be relevant to both the needs of the Local Council and the individual. Since appraisal systems can fulfi l a number of roles the primary purpose of the appraisal system must be determined and commu-nicated. In view of the objectives of the Chief Executive, the staff appraisal system for B Local Council should be focused on performance, though in the longer term the system could be developed to link performance to rewards.

The design of the appraisal must be viewed as fair and objective and the purpose of the appraisal must be clearly expressed and understood by both appraisers and the appraisees. Effectiveness will be greater if all involved are clear about what the system is for and how it fi ts with other organisational activities, otherwise it can be perceived as a bureaucratic form fi lling activity. To help achieve this it would be worth including staff from different backgrounds in the Local Council to contribute to the design of the system. The greater the extent to which appraisees participate in the development of the system the more there is the chance of gaining their commitment.

Appraisals are normally designed to measure an individual’s contribution to the organ-isation in an objective way as possible. There should be a consistent approach for appraisal across the different areas of the Local Council with a reasonable standardisation of criteria. The criteria used in the system to measure performance levels must be relevant, fair and objective, rather than subjective, to minimise the potential negative impact of managers who may be biased or allow personality differences to get in the way of assessing actual performance. Ideally, any performance measures should link to the key strategic objectives and priorities of B Local Council.

The Chief Executive must ensure that senior managers in B Local Council are fully com-mitted to the introduction of the appraisal system. Otherwise there is the danger that staff will view it with some cynicism and as something that the Chief Executive has thrust upon them.

If the system is to be effective then both those undertaking appraisals and those being appraised will need to be properly trained to help with interviewing and assessment tech-niques and to avoid badly delivered feedback.

Appraisal should be viewed as part of a continuous process of performance manage-ment, and not as an annual event where the targets set can become irrelevant and out of date. Time is needed to prepare, so both parties can make a constructive contribution. In addition, suffi cient time should be given to the undertake appraisals so that they are not regarded as something that ‘must be got over with as quickly as possible’. The sys-tem must have a clear purpose and outcomes, so it is not just experienced as a friendly chat, but helps to focus on areas which will help them to improve their performance.

To be effective the performance appraisal system for B Local Council should be viewed as a problem solving participative and developmental activity rather than just a manage-ment tool of control. It is important that there are jointly agreed outcomes from the proc-ess and there is good follow up. Within the design of the system action plans should be included. Actions need to be agreed by both the appraiser and appraise and monitored to make sure any they do take place. For example, if training needs are identifi ed and the

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member of staff does not actually receive the training, this failure to follow up may lead to cynicism on the part of staff.

Finally, it is important to ensure that the staff performance appraisal system in B Local Council is not perceived as a bureaucratic form-fi lling exercise, but a system designed to help improve organisational and individual performance. However, it should not be overly time consuming or costly to administer.


9

Conflict and Discipline


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9LEARNING OUTCOMES

After completing this chapter, you should be able to:

� analyse the relationship between managers and their subordinates including legal aspects affecting work and employment;

� identify tools for managing and controlling individuals, teams and networks and for managing group confl ict;

� identify the nature and causes of confl ict;

� discuss alternative approaches to the management of confl ict;

� compare and contrast ways to deal effectively with discipline problems;

9.1 IntroductionConfl ict can be viewed as an inevitable feature of organisational life, and can result in both positive and negative outcomes. This chapter will consider the nature of confl ict and the reasons as to why confl icts occur. It will go on to explore the different ways that confl ict can be managed within organisations. The fi nal part of the chapter will look at some of the issues concerning the nature of the employment relationship including discipline, griev-ance, dismissal and fairness in the workplace.

9.2 The nature of conflict in organizations

Conflict and Discipline

Simplistically, confl ict is a disagreement, and is when one party is perceived as preventing or interfering with the goals or actions of another. Confl ict can

occur in a variety of forms and at different levels, for example organisational, group or individual level, arising because of differences between the objectives of different groups within organisations.

Whilst confl ict can have negative consequences leading to dysfunctional behaviours, it can also have positive outcomes. The terms destructive and constructive confl ict are used to differentiate between negative or positive outcomes.


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E Daft (1989) noted that several negative consequences for organisations that may arise from confl ict are as follows:

● Diversion of energy. Time and effort wasted in addressing a confl ict rather than achieving organisation goals.

● Altered judgement. Judgement and perceptions become less accurate when confl ict becomes more intense.

● Loser effects. The losers may deny or distort the reality of losing, withdraw, or seek scapegoats.

● Poor coordination. Under intense confl ict, coordination does not happen. Collaboration across groups decreases – less contact, not sympathetic to other points of view – achieving departmental goals and defeating the enemy take priority. There is no room for compromise.

However, the positive outcomes of confl ict can stimulate creative problem solving and generation of ideas, brings emotions out into the open, release hostile feelings and avoids complacency by challenging accepted/old fashioned ideas.

9.2.1 The symptoms of conflictSometimes confl ict is overt, as when it emerges in the form of a strike, or individuals refusing to communicate with each other at all. However, the management of confl ict is likely to be easier and more effective if the symptoms of confl ict can be recognised and dealt with at an earlier stage. Such symptoms would probably include some of the following:

● Problems, even trivial ones, being passed up the hierarchy because no one wants to take responsibility for them.

● Hostility and jealousy between groups.● Poor communications up and down the hierarchy, and between departments.● Widespread frustration and dissatisfaction because it is diffi cult to get even simple things

done effi ciently.● Problems constantly being polarised around people, usually in different groups, and per-

sonalities rather than issues.

Example

A conflict at Apple Computer between the Apple II and Macintosh groupsOrganisational factors that led to the confl ict were physical separation of the two groups and different goals. The trigger for confl ict was an annual meeting in which senior exec-utives devoted most of the programme to Macintosh products and ignored Apple IPs innovations, which were the backbone of the company at that time. The consequence for Apple was poor morale and decreased performance in the Apple II division. Management responded by paying more attention to Apple II and by changing conditions so that the Apple II group would not be physically removed from the rest of the organisation.

9.2.2 Horizontal conflictHorizontal confl ict occurs between groups or departments at the same level in the hier-archy, such as between line and staff. For example, production may have a dispute with quality control because new quality procedures reduce production effi ciency. The sales department may disagree with fi nance about credit policies that makes it diffi cult to win


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Enew customers. R&D and sales may fi ght over the design for a new product. Horizontal coordination of some sort is needed to reduce confl ict and achieve collaboration.

The potential for horizontal confl ict exists in any situation in which separate depart-ments are created, members have an opportunity to compare themselves with other groups, and the goals and values of respective groups appear mutually exclusive. There are a number of factors that may play a part in creating confl ict:

Environment. Departments are established to interact with major domains in the exter-nal environment. As the uncertainty and complexity of the environment increase, greater differences in skills, attitudes, power, and operative goals develop among departments. Each department is tailored to ‘fi t’ its environmental domain and, thus, is differentiated from other organisational groups. Moreover, increased competition, both domestically and internationally, have led to demands for lower prices, improved quality, and better ser-vice. These demands exert more intense goal pressures within an organisation and, hence, greater confl ict among departments.

Size. As organisations increase in size, subdivision into a larger number of departments takes place. Members of departments begin to think of themselves as separate, and they erect walls between themselves and other departments. Employees feel isolated from other people in the organisation. The lengthening hierarchy also heightens power and resource differences among departments.

Technology. Determines task allocation among departments as well as interdependence among departments. Groups that have interdependent tasks interact more often and must share resources. Interdependence creates frequent situations that lead to confl ict.

Goals. The overall goals of an organisation are broken down into operative goals that guide each department. Operative goals pursued by marketing, accounting, legal and personnel departments often seem mutually exclusive. The accomplishment of operative goals by one department may block goal accomplishment by other departments and hence cause confl ict. Goals of innovation also often lead to confl ict because change requires coordi-nation across departments. Innovation goals cause more confl ict than do goals of internal effi ciency.

Structure. Organisation structure refl ects the division of labour as well as the systems to facilitate coordination and control. It defi nes departmental groupings and, hence, employee loyalty to the defi ned groups. The choice of a divisional structure, for example, means that divisions may be placed in competition for resources from headquarters, and headquarters may devise pay incentives based on competition among divisions.

Operative goal incompatibility. Goal incompatibility is probably the greatest cause of inter-group confl ict in organisations. The operative goals of each department refl ect the specifi c objectives members are trying to achieve. The achievement of one department’s goal often interferes with another department’s goals. University police, for example, have a goal of pro-viding a safe and secure campus. They can achieve their goal by locking all buildings on evenings and weekends and not distributing keys. Without easy access to buildings, however, progress toward the science department’s research goals will proceed slowly. On the other hand, if scientists come and go at all hours and security is ignored, police goals for security will not be met. Goal incompatibility throws the departments into confl ict with each other.

A typical example of goal confl ict may arise between marketing and manufacturing departments. Marketing strives to increase the breadth of the product line to meet customer tastes for variety. A broad product line means short production runs, so manufacturing has to


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E bear higher costs. Other areas of goal confl ict are quality, cost control, and new products. Goal incompatibility exists among departments in most organisations.

Differentiation. The differences in cognitive and emotional orientations among managers in different functional departments. Functional specialisation requires people with specifi c education, skills, attitudes, and time horizons. For example, people may join a sales depart-ment because they have ability and aptitude consistent with sales work. After becoming members of the sales department, they are infl uenced by departmental norms and values. The underlying values and traits of personnel differ across departments, and these differ-ences lead to horizontal confl icts.

Consider an encounter between a sales manager and an R&D scientist about a new product.The sales manager may be outgoing and concerned with maintaining a warm, friendly

relationship with the scientist. He may be put off because the scientist seems withdrawn and disinclined to talk about anything other than the problems in which she is inter-ested. He may also be annoyed that the scientist seems to have such freedom in choosing what she will work on. Furthermore, the scientist is probably often late for appointments, which, from the salesman’s point of view, is no way to run a business. Our scientist, for her part, may feel uncomfortable because the salesman seems to be pressing for immediate answers to technical questions that will take a long time to investigate. All the discomforts are concrete manifestations of the relatively wide differences between these two people in respect to their working and thinking.

Task interdependence. This refers to the dependence of one unit on another for materials, resources, or information. Pooled interdependence means little interaction; sequential interde-pendence means that the output of one department goes to the next department; and recip-rocal interdependence means that departments mutually exchange materials and information.

Generally, as interdependence increases, the potential for confl ict increases. In the case of pooled interdependence, units have little need to interact. Confl ict is at a minimum. Sequential and reciprocal interdependence require employees to spend time coordinating and sharing information. Employees must communicate frequently, and differences in goals or attitudes will surface. Confl ict is especially likely to occur when agreement is not reached about the coordination of services to each other. Greater interdependence means departments often exert pressure for a fast response because departmental work has to wait on other departments.

Uncertainty. When activities are predictable, departments know where they stand. They can rely on rules or previous decisions to resolve disputes that arise. When factors in the environment are rapidly changing, or when problems arise that are poorly understood, departments may have to renegotiate their respective tasks. Managers have to sort out how new problems should be handled. The boundaries of a department’s territory or jurisdic-tion become indistinct. Members may reach out to take on more responsibility, only to fi nd that other groups feel invaded. In a study of hospital purchasing decisions, managers reported signifi cantly higher levels of confl ict when purchases were non-routine than when they were routine. Generally, as uncertainty about departmental relationships increases, confl ict can be expected to increase.

Reward system. The reward system governs the degree to which subgroups cooperate or confl ict with one another. An experiment with student groups illustrated how incen-tives infl uence confl ict. In one half of the groups, called cooperative groups, each stu-dent’s grade was the grade given for the group’s project. All students in those groups,


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Eregardless of individual contribution, received the same grade. In the remaining groups, called competitive groups, students were rewarded on the basis of their personal contribution to the group project. Each student was graded individually and could receive a high or low grade regardless of the overall group score.

The outcome of these incentives on confl ict was signifi cant. When the incentive system rewarded members for accomplishing the group goal (cooperative groups), coordination among members was better, communication among members was better, productivity was greater, and the quality of the group product was better. When individuals were graded according to their personal contributions to the group (competitive groups), they commu-nicated less with each other and were more frequently in confl ict. Members tried to pro-tect themselves and to succeed at the expense of others in the group. Quality of the group project and productivity were lower.

Incentives and rewards have a similar impact on confl ict between organisational depart-ments. When departmental managers are rewarded for achieving overall organisation goals rather than departmental goals, cooperation among departments is greater. Bechtel, for example, provides a bonus system to division managers based upon the achievement of Bechtel’s profi t goals. Regardless of how well a manager’s division does, the manager is not rewarded unless the corporation performs well. This incentive system motivates div-ision managers to cooperate with each other. If departments are rewarded only for departmental performance, managers are motivated to excel at the expense of the rest of the organisation.

9.2.3 Vertical conflictVertical confl ict occurs among groups at different levels in the vertical hierarchy and can take various forms. Student groups may fi nd themselves in confl ict with lecturers or administration about the teaching versus research goals of a university. Individual employ-ees may have confl icts with their bosses. Managers of international divisions often experi-ence confl ict with senior executives located at domestic headquarters.

It is usually about power and powerlessness, as the vertical levels have progressively more power to allocate scarce resources.

Status and power differences among groups are often greater for vertical confl ict than for horizontal confl ict. Part of the reason vertical confl ict occurs is to equalise power dif-ferences; for example, unions try to give workers more power over wages or working con-ditions. Moreover, the ground rules for confl ict between workers and management are formalised by laws and regulations. Formal negotiation procedures are available in which appointed representatives work to resolve differences. The confl ict between union and management is thus different from confl ict that occurs horizontally across departments.

A typical instance of vertical confl ict is between headquarters’ executives and regional plants or franchisees. For example, one study found confl ict between a local television sta-tion and its New York headquarters. In another example, several franchisees at Nutri/System, a diet plan company, took headquarters to court because of confl icts. Vertical confl ict can occur among any levels of the hierarchy, such as between crew leaders and supervisors.

9.2.4 Handling conflictA useful framework for classifying different ways of handling confl ict has been produced by Thomas (1976). It is based on two confl ict-management dimensions. These consist of


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E (a) the degree of assertiveness in pursuit of one’s interests and (b) the level of cooperation in attempting to satisfy others’ interests. The strength of each of these in a particular situ-ation can be regarded as lying along two continuums, respectively, as illustrated in Figure 9.1, and so producing fi ve confl ict-handling strategies.

High

HighFocus on other’s interests

Focus on one’sown interest

LowLow

Avoiding Accommodating

Compromising

Competing Collaborating

Figure 9.1 Conflict-management strategies

Source: Adapted from K. Thomas, ‘Conflict and Conflict Management’, in M.D. Dunnette (ed.), Handbook of Industrial and Organisational Psychology. © 1976 John Wiley & Sons, Inc., New York

Reprinted by permission of M.D. Dunnette

The fi ve confl ict-handling strategies are:

1. Avoidance – one or more parties in confl ict may seek to avoid, to suppress or to ignore the confl ict. This is not recommended as it does not resolve the confl ict which may break out again when the parties meet in the future.

2. Accommodation – this involves one party putting the other’s interests fi rst and suppress-ing their own interest in order to preserve some form of stability and to suppress the confl ict. Again, if the causes of confl ict are endemic or lasting, the accommodation strategy may not resolve the differences. Also, the accommodating party may well lose out as a result.

3. Compromise – often seen as the optimum solution. Each party gives something up and a deal somewhere between the two is accepted after negotiation and debate. However, in compromise, both parties lose something and there may be a better alternative.

4. Competition – this is a state where both or all parties do not cooperate, but instead seek to maximise their own interests and goals. It creates winners and losers. The resultant confl ict can prove damaging to the organisation as well as to at least one of the parties. So, it is not recommended.

5. Collaboration – from the perspective of all parties, this is likely to be the optimum solu-tion. Differences are confronted and jointly resolved, novel solutions are sought and a win-win outcome is achieved.


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9.2.5 Managing intergroup conflictIntergroup confl ict within organisations can be defi ned as the behaviour that occurs between organisational groups when participants identify with one group and perceive that other groups may block their groups’ goal achievement. It requires three ingredients. First, group identifi cation: employees have to perceive themselves as part of an identifi able group or department. Second, there has to be an observable group difference of some form. Groups may be located on different fl oors of the building, members may have gone to different schools, or members may work in different departments. The ability to identify oneself as a part of one group and to observe differences in comparison with other groups is neces-sary for confl ict. The third ingredient is frustration. Frustration means that if one group achieves its goal the other will not; it will be blocked. Frustration need not be severe and only needs to be anticipated to set off intergroup confl ict. Intergroup confl ict will appear when one group tries to advance its position in relation to other groups:

● Confrontation occurs when parties in confl ict directly engage one another and try to work out their differences. Negotiation is the bargaining process that often occurs dur-ing confrontation and that enables the parties to systematically reach a solution. These techniques bring appointed representatives from the departments together to work out a serious dispute. Confrontation and negotiation involve some risk. There is no guarantee that discus-sions will focus on a confl ict or that emotions will not get out of hand. However, if mem-bers are able to resolve the confl ict on the basis of face-to-face discussions, they will fi nd new respect for each other and future collaboration becomes easier. The beginnings of rel-atively permanent attitude change are possible through direct negotiation. Confrontation is successful when managers engage in a ‘win-win’ strategy. Win-win means that both departments adopt a positive attitude and strive to resolve the confl ict in a way that will benefi t each other. If the negotiations deteriorate into a strictly win-lose strategy (each group wants to defeat the other), the confrontation will be ineffective. Top man-agement can urge group members to work toward mutually acceptable outcomes. With a win-win strategy – which includes defi ning the problem as mutual, communicat-ing openly, and avoiding threats – understanding can be changed while the dispute is resolved.

● Third-party consultants: when confl ict is intense and enduring, and department members are suspicious and uncooperative, a third-party consultant can be brought in from out-side the organisation to meet with representatives from both departments. These con-sultants should be experts on human behaviour, and their advice and actions must be valued by both groups. Third-party consultants can make great progress toward building cooperative attitudes and reducing confl ict. Typical activities of third-party consultants are as follows:– Re-establish broken communication lines between groups.– Act as interpreter so that messages between groups are correctly understood and are

not distorted by preconceived biases.

For each of the confl ict handling strategies, identify a situation when it would be most appropriate to use a particular approach.


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E – Challenge and bring into the open the stereotyping done by one group or the other. Exposing stereotypes often leads to their dissolution.

– Bring into awareness the positive acts and intentions of the other group. This forces a cognitive re-assessment of one group’s stance toward the other group.

The specifi c source of confl ict must be defi ned, focused and resolved.

● Member rotation. It means that individuals from one department can be asked to work in another department on a temporary or permanent basis. The advantage is that individuals become submerged in the values, attitudes, problems and goals of the other department. In addition, individuals can explain the problems and goals of their original departments to their new colleagues. This enables a frank, accurate exchange of views and information.

Rotation works slowly to reduce confl ict but is very effective for changing the under-lying attitudes and perceptions that promote confl ict.

● Superordinate goals. Another strategy is for top management to establish superordinate goals that require cooperation between departments. Confl icting departments then share the same goal and must depend upon one another to achieve it. To be effective, a superordinate goal must be signifi cant and must consume a substantial amount of each group’s time and energy. The reward system also can be redesigned to encourage the pur-suit of the superordinate goal rather than departmental subgoals. One powerful goal is company survival. If an organisation is about to fail and jobs will be lost, groups forget their differences and try to save the organisation. The goal of survival has improved rela-tionships between groups in meat packing plants and auto supply fi rms that have been about to go out of business.

● Intergroup training. A strong intervention to reduce confl ict is intergroup training. This technique has been developed by psychologists such as Robert Blake, Jane Mouton and Richard Walton. When other techniques fail to reduce confl ict to an appropriate level, or when other techniques do not fi t the organisation in question, special training of group members may be required. This training requires that department members attend an outside workshop away from day-to-day work problems. The training workshop may last several days, and various activities take place. This technique is expensive, but it has the potential for developing a company-wide cooperative attitude. The steps typically associated with an intergroup training session are as follows:

– The confl icting groups are both brought into a training setting with the stated goal of exploring mutual perceptions and relationships.

– The confl icting groups are then separated and each group is invited to discuss and make a list of its perceptions of itself and the other group.

– In the presence of both groups, group representatives publicly share the perceptions of self and other that the groups have generated, while the groups are obligated to remain silent. The objective is simply to report to the other group as accurately as possible the images that each group has developed in private.

– Before any exchange takes place, the groups return to private sessions to digest and analyse what they have heard; there is great likelihood that the representatives’ reports have revealed to each group discrepancies between its self-image and the image the other group holds of it.

– In public session, again working through representatives, each group shares with the other what discrepancies it has uncovered and the possible reasons for them, focusing on actual, observable behaviour.


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E – Following this mutual exposure, a more open exploration is permitted between the

two groups on the now-shared goal of identifying further reasons for perceptual distortions.

– A joint exploration is then conducted of how to manage future relations in such a way as to encourage cooperation between groups.

After this training experience, department employees understand each other much bet-ter. The improved attitudes lead to better working relationships for a long time.

Faced with this type of situation, the purpose of any managerial strategy will be (a) to turn the confl ict into fruitful competition and (b) if this is not possible, to con-trol the confl ict. As we have already seen, it may be very diffi cult to achieve the fi rst of these aims in some situations, because the conditions are not conducive to resolution in this way.

Other methods of dealing with organisational confl ict are as follows:

● Alter the context by, for example, introducing new disputes procedures, reducing the dependence of one group on another, altering the way in which work is divided up, and so on.

● Alter the issue in dispute. This might be achieved by methods such as breaking issues into their smallest components and dealing with them separately, separating task- and person-related issues, or limiting the strength and scope of precedents.

● Alter the relationship directly by using methods such as physically separating the indi-viduals or units, and using ‘integrators’ to help coordinate efforts towards a common goal.

● Alter the individuals involved. In its most obvious sense, this could mean transferring some of the individuals to other parts of the organisation or even dismissing them. A more ambitious approach is to attempt actually to change the attitudes and behaviour of the confl icting parties. This is typically an integral part of the approach known as ‘organisational development’ (OD).

Handy (1985) suggests that argument will result in the fruitful resolution of differences only if the following conditions are satisfi ed.

● Effective group dynamics enable the arguments to be constructive – this will typically involve shared leadership, confi dence, trust, and challenging tasks for those involved.

● Everyone is arguing about the same thing, and suffi cient information is available to resolve the issue.

● Emotions and feelings can be expressed.

He goes on to suggest that these conditions can only be met in full in low-technology, diversifi ed, task organisations under conditions of rapid growth and plentiful resources.

9.2.6 Industrial relations and conflictThe most visible form of vertical confl ict occurs between management and workers and is often formalised by union-management relations.

Vertical confl ict can exist with or without a union, but confl ict is more visible when workers join a union. The union formalises vertical differences and provides a mechanism


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E for resolving those differences. Workers form into unions for a variety of reasons, which refl ect the sources of vertical confl ict:

● Psychological distance. Workers often do not feel involved in the organisation. They per-ceive that their needs are not being met. A union is a way of giving Voice’ to those needs. It provides workers with a clear group identity. Once the union is formed, members identify with the union, not the company, and try to achieve gains through the union. This often throws the union and management into a win-lose confl ict.

● Power and status. Workers are at the bottom of the hierarchy and often feel powerless and alienated. They have little say in decisions about issues that directly affect their lives, such as wages and benefi ts. Standing together in a union gives them strength that equal-ises their power with management’s. This power is restricted to areas directly affecting workers, but it is still more power than workers have alone.

● Ideology. One basic difference between management and workers pertains to values and ideology. This difference represents basic beliefs about the purpose and goals of organisa-tions and unions. Union members strongly believe in length of service (seniority), the right to engage in a strike, and security. Managers believe more strongly in the free enter-prise system, the right to work during a strike, management rights, and the use of quotas to measure performance. These basic value differences represent a major confl ict that has to be overcome for union and management to cooperate successfully.

● Scarce resources. Another important issue between unions and management is fi nancial resources. Salary, fringe benefi ts, and working conditions are dominant bargaining issues. Workers look to the union to obtain fi nancial benefi ts. Unions may strike if neces-sary to get the pay and benefi ts they want. Management, by contrast, feels pressure to reduce costs by holding the line on wages in order to maintain low prices.

9.2.7 Resolutions of industrial relations conflictSome new approaches have helped shift management and union leaders away from win-lose negotiating positions toward a win-win attitude to benefi t both company and employees.

Ford Motor Company in the United States and many UK fi rms have set up innovative worker participation programmes. These innovative approaches do not eliminate collect-ive bargaining, but they broaden the bargaining philosophy. As the traditional barriers between union and management are broken down through collaboration and teamwork, companies get increased productivity and workers receive a better quality of life. The win-win approach is being applied to union–management relationships more than managers would have believed possible just a few years ago.

Daft reports that a Blake and Mouton study involved managers who were placed in groups of nine to twelve persons. Each group produced a solution to a problem. To simulate the negotiation strategies of unions and management, each group was then asked to elect a representative who would negotiate with a representative from a competing group. The two representatives were asked to select one solution as the winner. An interesting thing happened: representatives stayed loyal to their own groups’ solutions. In thirty-three incidents of having group representatives meet, thirty-one representatives remained loyal to their own groups’ solutions, regardless of solution quality. The representatives never did agree on a winning solution.


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EDo you think this will still happen today?The above fi ndings are striking because they emphasise just how diffi cult it can be for elected representatives to reach a solution when confl ict is severe. The fi rst priority for rep-resentatives is loyalty to their group; this can create strategies of avoidance or individualis-tic approaches.

Union-avoidance strategies. Many UK and US fi rms have adopted union-avoidance strategies to reduce the inherent group-based loyalty and the systematic positioning for power that goes on all year in the run-up to annual negotiations. Others have used ‘double-breasting’, an American term to illustrate the establishment of new plants in areas of high unemployment (in the North-East and South Wales in the United Kingdom) or traditionally low union activity (in the Southern US states). Many other fi rms have not fully derecognised their unions but have removed from them the annual pay round, while retaining the right to consultation and representation of their members. Some researchers have found that managers believe this to be the best of both worlds: representation is effi cient especially where bargaining is ‘integrative’ – that is about the jobs people do – and not ‘distributive’ – that is about distributing rewards. To assist in the process emphasising problem-solving, fi rms have decentralised collective bargainingdown to factory or branch level to enable real discussions about real issues to be the agenda.

Individualistic approaches. Kochan, Katz and McKersie reported a signifi cant shift in mana-gerial attitudes in the United States away from ‘third-party’ (i.e. union) intervention. As well as avoidance strategies, this comprised an individualistic approach such as introducing appraisals and performance-related pay for all staff including manual workers; single-status policies to remove differences at least in pensions and benefi ts; better training and educa-tion opportunities; share purchase schemes; and profi t-related pay. A cumulative heading for such innovation is human resource management – the harnessing of commitment to business needs, reducing the distinctions of the past which resulted in group-loyalty to the workgroup over the employer.

Collective bargaining. Collective bargaining is the negotiation of two types of agreement between management and workers collectively. The bargaining process is usually accom-plished through representatives such as a union, and it follows a prescribed format: the procedural agreement. Collective bargaining involves at least two parties that have a defi ned interest. The collective bargaining activity usually begins with the presentation by one party of demands or proposals that are evaluated by the other parties. This is followed by counterproposals and concessions. An agreement is ultimately reached that defi nes each party’s rewards and responsibilities for the next 2 or 3 years – the substantive agreement – but in the United Kingdom this is not binding legally on the parties as it is in some other countries. Agreements have often been more distributive than integrative – more about pay and hours and less about productivity, though with some notable exceptions such as Esso and Mobil’s ground-breaking productivity agreements in their UK refi neries in the 1960s and 1970s.

Today’s economic, political, technological and social environment has led, in some fi rms which have retained unions, to a more cooperative approach. These changes have grown from the unions’ need to prevent loss of employment and the companies’ need


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E to curb labour and production costs. Some of the new approaches to resolving union–management confl ict are as follows:

Partnership agreements. Encouraged by the present UK government, the idea is to iden-tify and work towards common interests (the plurality of working life) but using the representational role of the unions as an effi cient and hopefully effective method of com-munication. Large employers such as Royal Mail could not have derecognised trade unions without severe disruption and this type of approach redefi nes the relationship.

Gain sharing. Union members receive bonuses and profi t sharing rather than guaran-teed, fl at-rate increases. Gain sharing is designed to provide a connection between organ-isation performance and worker compensation. At Volkswagen in the United States, for example, workers are paid an annual bonus that refl ects a combination of individual per-formance and company performance.

Labour–management teams. These are designed to increase worker participation and pro-vide a ‘cooperative model’ for union–management problems. The main function of teams is to tap workers’ knowledge of their jobs to improve productivity. These teams exist at three levels:

1. On the shop fl oor, teams of perhaps ten workers identify problems and implement solutions, similar to a quality circle approach.

2. Middle managers and local union leaders serve as an advisory team to coordinate pro-grammes and implement team suggestions.

3. At the top, senior corporate executives and top union leaders set long-term policy and plan alternatives to layoffs. This coordinated approach engages union members’ partici-pation in the company and increases their identifi cation with the company.

This has usually been tried in the United States. What factors are specifi c to the United States which would militate against it working in other countries?

Employment security. The new trend is away from job security and toward employment security, which means that unions allow workers to be reassigned to different posi-tions. Employment security also means there can be no jobs unless the fi rm is success-ful. Managers and workers create a ‘common fate’ culture that means they succeed or fail together. This superordinate goal increases employee concern about company productiv-ity and profi ts. Moreover, employees are given meaningful information on the company’s performance.

9.3 Discipline9.3.1 The meaning of disciplineThe word discipline is used and understood in several different ways. It brings to mind the use of authority or force. To many, it primarily carries the disagreeable meaning of punish-ment. However, there is another way of thinking about discipline, based on the meaning of the original Latin distipulus – a learner or pupil. Discipline means learning, as in the discipline of management, along a set of rules.

Maintaining discipline (learning) among employees is an integral part of the functions of management. Discipline is present when the members of the enterprise follow goals or objectives sensibly without overt confl ict and conduct themselves according to the stand-ards of acceptable behaviour.


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EDiscipline therefore can be considered as positive (or good) when employees willingly

follow or go beyond (in Theory Y terms) the rules of the enterprise. Discipline is negative (or bad) when employees follow the rules over-strictly, or disobey regulations and violate standards of acceptable behaviour.

9.3.2 Self-disciplineSelf-discipline is based upon socialisation, producing norms which follow reasonable standards of acceptable behaviour. Positive self-discipline is based upon the premise that most employees want to do the right thing. Most people accept the idea that following instructions and fair rules of conduct is part of the work ethic.

Once employees know what is expected of them and feel that the rules are reasonable, self-disciplined behaviour becomes a part of collective attitudes and group norms (i.e. the way in which employees behave as a work group), enabling ‘responsible autonomy’. When new rules are introduced, the manager must try to convince employees of their purpose and reasonableness. If the work group as a whole accepts change, a strong sense of group cohesiveness on the employees’ part will usually exert group pressure on possible dissenters, thus reducing the need for corrective action.

9.3.3 Disciplinary situationsThere are several situations where work norms might not be adhered to and which would cause problems if there were no remedial action:

● leaving work early, lateness, absenteeism;● defective and/or inadequate work performance;● breaking safety or other rules, regulations and procedures;● refusing to carry out a legitimate work assignment;● poor attitudes which infl uence the work of others or which refl ect on the public image

of the fi rm, such as improper personal appearance.

(Compare these with the ‘fair’ reasons for dismissal discussed in Chapter 8.)In addition to these job situations, some types of employee behaviour off the job may

form part of a disciplinary code. These may be an excessive drinking problem, the use of drugs or some form of narcotics, or involvement in some form of law-breaking activity. In such circumstances, whenever an employee’s off-the-job conduct has an impact upon per-formance on the job, the manager should be prepared to deal with such a problem within the disciplinary process rather than, for example, leaving it for a court to decide on guilt.

This may seem unfair at fi rst, but criminal courts have to use the test of ‘beyond reason-able doubt’ whereas the basic trust of the employer in the employee may have been already lost by the bringing of action by the police.

9.3.4 Taking disciplinary actionDisciplinary action requires the manager to utilise some of the authority inherent in the position, even though ‘passing the buck’ to someone in higher management is tempting. It is vital that managers know the rules and regulations and the custom and practice so as to be able to take appropriate action when it is required. If they do not, some diligent employees


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E may be encouraged to follow the example of poor performers, and lack of discipline will become more pervasive.

Disciplinary action must have as its goal the improvement of the future behaviour of the employee and other members of the organisation. The purpose is the avoidance of similar occurrences in the future.

Taking disciplinary action will involve a number of steps.Progressive discipline provides for an increase in the severity of the penalty with each

offence. The following is a list of suggested steps of progressive disciplinary action and many companies have found these steps to be workable.

The informal talkIf the infraction is of a relatively minor nature, and if the employee is one whose record has no previous marks of disciplinary action, an informal, friendly talk will clear up the situation in many cases.

The oral warningThis type of interview emphasises that ultimately the matter could lead to serious disci-plinary action. The violation should be discussed as a straightforward statement of fact. Although the supervisor should stress the preventive purpose of discipline by manner and words, the employee should be put on notice that such conduct will not be tolerated again. In some enterprises, a temporary record is made in the employee’s fi les that this oral warn-ing has been given. Of course, the purpose of the oral warning is to help the employee to correct the improper behaviour and to prevent the need for further disciplinary action. It should leave the employee with the feeling that there must be improvement in the future.

The written or official warningA written warning is of a formal nature, in so far, as it becomes a permanent part of the employee’s record. Written warnings, not surprisingly, are particularly necessary in union-ised situations, so that the document can serve as evidence in case of grievance procedures.

The employee should receive a duplicate copy of the written warning, which should contain a statement of the violation and the potential consequences of future violations. Another copy of this warning is sent to the HR department, so that it can be inserted in the employee’s permanent record.

Note that, in many cases, employees will want to be represented or at least accompanied by a colleague where formal warnings are issued and the procedure should accept a meas-ure of appeal to the next higher level manager. Advice or involvement of HR staff may be needed at the outset as few managers have extensive experience of the higher stages of disciplinary hearings and appeals, and a mistake early on in procedure can jeopardise the employer’s case if dismissal is warranted.

Disciplinary layoffs, or suspensionThis course of action would depend on the procedure of the particular organisation and is uncommon in staff areas, such as accountancy, though if fraud or theft were suspected then suspension with pay while an investigation was carried out would be the normal procedure.


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EDemotion or transferWhere performance problems exist or personality clashes are the basis for disciplinary action it may be possible to demote or transfer the employee. This is allowable provided the procedure is specifi c or if the employee agrees as the contract of employment has been changed unilaterally.

In any disciplinary situation, the time element is signifi cant. For example, there is the question of how long the breaking of a rule should be held on an employee’s record. Generally, it is desirable to disregard minor offences which have been committed more than 1 or 2 years previously. Therefore, an employee with a poor record on account of tardiness would be given a type of ‘clean bill of health’ for maintaining a good record for 1 year, in some enterprises 6 months or even less.

9.3.5 Immediacy: Douglas McGregor’s ‘hot stove rule’This rule draws a comparison between touching a hot stove and experiencing discipline. When one touches a hot stove, the reaction is immediate, consistent, impersonal and with warning. The burn is immediate, with no questions of cause and effect. There is a warning, because everyone knows what happens if one touches a stove when the stove is red hot. The result is consistent; every time a person touches a hot stove, he is burned. The result is impersonal; whoever touches a hot stove is burned. One is burned because of what he or she does, because the stove is touched, not because of who the person is. The comparison between the ‘hot stove rule’ and disciplinary action is that discipline should be directed against the act and not against the person.

Immediacy means that after noticing the offence, the supervisor proceeds to take discip-linary action as speedily as possible, normally the preliminary informal investigation.

For example, emotional incidents such as arguments in public or insubordination often require immediate response.

9.3.6 Disciplinary proceduresAdvance warningEmployees must be informed clearly that certain acts will lead to disciplinary action. Without a procedure, unfair dismissal claims are likely to succeed. Also, it is easier to maintain standards if employees accept them as fair, and this means that everyone should know in advance what is expected of them and what the rules and regulations are.

Induction is the time when the formal rules may be set out. Then the individual man-ager can set standards which are the custom and practice of the department – for example, answering the telephone after three or four rings.

Large companies fi nd it useful to have a disciplinary section in an employee handbook, which every new employee receives.

Custom and practice may become as important as written rules and so the procedures should be reviewed and anomalies brought to the attention of HR or senior managers. In many cases, no one has been disciplined, and employees do not expect these rules to be enforced in the future.

The fact that a certain rule has not been enforced in the past does not mean that it can never be enforced. Rather, it means that instead of taking disciplinary action suddenly, employees should be informed and warned that the rule will be strictly enforced in the future.


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E ConsistencyA further requirement of good disciplinary technique is consistency in application and enforcement. This means that appropriate disciplinary action is taken every time because inconsistency in application lowers morale and diminishes respect for the system. Inconsistency also leads to employee insecurity and anxiety, and creates doubts in their minds as to what can and cannot be done.

However, consistency does not mean imposing the same standard penalty every time for a particular offence. Each case should be considered on its own merit, and each employee should be judged according to personal background, work history, length of service, and so on.

ExerciseThree employees come back late from a pub lunch. One just started work a few days ago, the second has been warned about this once before, the third employee has been late on numerous previous occasions. Can you suggest appropriate measures?

SolutionA friendly, informal talk with the employee who just started work a few days ago. The second employee receives an oral warning, and the third employee might receive a written warning.

ImpersonalityIt is only natural to feel some resentment towards someone who has taken disciplinary action against you. Yet, making disciplinary action as impersonal as possible can help remove the personality element. Penalties should be connected with the act and not based upon the personality involved.

Once disciplinary action has been taken, ‘bygones must be bygones’.

DocumentationProcedures often require that records are kept of what happened. Documentation of the facts, including the reasoning involved in the decision, is because the burden of proof is usually on the manager, and it is not wise to try to depend on memory. This is particularly true in unionised fi rms where disciplinary actions meted out against employees often result in a challenge via the grievance procedure.

The right to appealProcedure and natural justice require that the employee should have the opportunity to state his/her case, and have a right of appeal. Following the chain of command, the immediate supervisor’s boss would be the one to whom an appeal should fi rst be directed.

As a result of an appeal, the disciplinary penalty may be reduced or set aside. Under these circumstances, a supervisor may become discouraged, feeling that the boss has not backed him or her up.


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E9.3.7 ACAS code of practiceIn the United Kingdom, there exists a set of advisory booklets about various employment practices published by the Advisory Conciliation and Arbitration Service (ACAS). These are often used as yardsticks against which internal disciplinary procedures are judged to be fair or reasonable. The disciplinary code of practice states that disciplinary procedures should:

● be in writing;● specify to whom they apply;● provide for matters to be dealt with quickly;● indicate the disciplinary actions which may be taken;● specify the levels of management which have the authority to take the various forms of

disciplinary action;● provide for individuals to be informed of the complaints against them and to be given

an opportunity to reply;● give individuals the right to be accompanied by a trade union representative or by a fel-

low employee;● ensure that, except for gross misconduct, no employees are dismissed for a fi rst breach of

discipline;● ensure that disciplinary action is not taken until the case has been carefully investigated;● ensure that individuals are given an explanation for any penalty imposed;● provide a right of appeal and specify the procedure to be followed.

Other recommended procedures:

● provide for individuals to be informed of the nature of their alleged misconduct;● allow individuals to state their case, and to be accompanied by a fellow employee (or

union representative);● ensure that every case is properly investigated before any disciplinary action is taken;● ensure that employees are informed of the reasons for any penalty they receive;● state that no employee will be dismissed for a fi rst offence, except in cases of gross

misconduct;● provide for a right of appeal against any disciplinary action, and specify the appeals

procedure.

9.4 Grievance proceduresGrievance procedures are not at all the same as disciplinary procedures, although the two terms are often confused. A grievance occurs when an individual thinks that he is being wrongly treated by his colleagues or supervisor, for example he is being picked on, unfairly appraised in his annual report, unfairly blocked for promotion, discriminated against on grounds of race or sex, and so on.

Example: FiatFiat tells its employees that they are not guaranteed life-long employment and the written contract is signed once a year. Moreover, the company asked employees to show gradual improvement in performance and more contributions to Fiat. In return, the employees will receive opportunities for learning and skill development. For example, Fiat achieved mutual understanding with newly employed staff through introducing training programmes and a


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E two-way communication system. As a result, employees obtained opportunities to develop their professional and interpersonal capabilities. Furthermore, Fiat provided tailored con-sulting for staff to design their short- or long-term career objectives. Through these ways, a healthy psychological contract between Fiat and its staff is established and more commit-ment is gained, although realistically it doesn’t seem to allay the security fears caused by 1-year contracts.

When an individual has a grievance, he or she should be able to pursue the grievance and ask to have the problem resolved. Some grievances should be capable of solution informally by the individual’s manager. However, if an informal solution is not possible, there should be a formal grievance procedure. Formal grievance procedures, like disciplinary procedures, should be set out in writing and made available to all staff. These procedures should:

● State what grades of employee are entitled to pursue a particular type of grievance.● State the rights of the employee for each type of grievance. For example, an employee

who is not invited to attend a promotion/selection panel might claim that he or she has been unfairly passed over. The grievance procedure must state what the individual would be entitled to claim. In our example, the employee who is overlooked for promotion might be entitled to a review of his or her annual appraisal report, or to attend a special appeals promotion/selection board if he or she has been in his or her current grade for at least a certain number of years.

● State what the procedures for pursuing a grievance should be.

A typical grievance procedure might be as follows:

● The individual should discuss the grievance fi rst with a staff/union representative (or a colleague). If his or her case seems a good one, he or she should take the grievance to his or her immediate boss.

● If the immediate boss cannot resolve the matter, it should be referred to his or her own superior (and if necessary in some cases, to an even higher authority).

● Cases referred to a higher manager should also be reported to the personnel department, line management might decide at some stage to ask for the assistance/advice of a person-nel manager in resolving the problem.

● Distinguish between individual grievances and collective grievances. Collective griev-ances might occur when a work group as a whole considers that it is being badly treated.

● Allow for the involvement of an individual’s or group’s trade union or staff association representative. Indeed, many individuals and groups might prefer to initiate some griev-ance procedures through their union or association rather than through offi cial grievance procedures. Involvement of a union representative from the beginning should mean that the management and union will have a common view of what procedures should be taken to resolve the matter.

● State time limits for initiating certain grievance procedures. For example, a person who is passed over for promotion should be required to make his or her appeal within a cer-tain time period.

9.5 Tribunal applicationsA company may fi nd that the individual employee is not happy with the outcome of the grievance procedure and that the individual wants to make a claim to an employment


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Etribunal. Industrial tribunals are independent judicial bodies, less formal than a court, established to hear and determine claims to do with employment matters. Their aim is to resolve disputes between employers and employees over employment rights. Examples include:

● unfair dismissal● breach of conduct● discrimination● equal pay.

9.5.1 Resolving disputes without a tribunal hearingIt is usually preferable for both the employee and the employer to avoid the expense and stress of an employment tribunal hearing. Therefore, before a dispute reaches this point an attempt should be made to resolve the issue using an alternative resolution process.

ArbitrationArbitration can be used to decide cases of alleged unfair dismissal or claims under fl exible working legislation. An independent arbitrator hears the case and delivers a legally binding decision in favour of one party. Arbitration is a voluntary process available where both par-ties agree to sign up to the scheme. Benefi ts include:

● a speedy private informal hearing● no cross-examination● limited grounds for review of the arbitrators decision.

ConciliationConciliation can be used to settle a dispute before it gets to a tribunal hearing. Benefi ts include:

● confi dentiality● avoiding the time, effort, cost of preparation and stress of attending a tribunal hearing● lessening damage to the employment relationship● reaching an agreement that satisfi es both parties rather than having a tribunal impose a

decision that favours only one party.

9.6 Dismissal, redundancy and job insecurityUnder UK law, dismissal is described as termination of employment with or without notice by the employer, or in the case of constructive dismissal, resignation by the employee because the conduct of the employer was suffi cient to be deemed to have terminated the contract by the employer’s actions.

Dismissal without notice is usually wrongful dismissal, that is breach of the contract of employment; it may or may not also be unfair dismissal.

For a dismissal to be fair, the employer must show that the reason for dismissal is of a type acceptable under statute. In the United Kingdom, the employer still has to surmount a second hurdle: did the employer act reasonably in the circumstances in treating that rea-son as a suffi cient reason for dismissal.

If an individual’s employment contract is terminated, it must be done in a way which follows the correct procedures and is fair in the circumstances; otherwise the employee


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E may be able to claim compensation for unfair dismissal. The reasons for dismissal that are acceptable under statute include conduct, capability, breach of statutory duty, redundancy, or ‘some other substantial reason’.

1. Conduct. A well-documented and fair disciplinary procedure is the best way of hand-ling conduct problems. Again, though, large fi rms especially, need to demonstrate suf-fi ciency and why they did not transfer the employee or counsel them.

2. Capability. Normally, an employer would have to demonstrate what standards there were, how the employee failed to meet them, detail the informal/formal warnings and any remedial action it tried to take, for example extra training and job transfer. It is dif-fi cult to show that loss of effi ciency has had an effect on the business.

3. Breach of statutory duty. Continuing the employment might place the employer in breach of a statutory duty, for example under health and safety legislation. In such cases, there may be a valid ground for dismissal.

4. Some other substantial reason. Possibilities include dishonesty, refusal to transfer overseas and loss of trust.

5. Redundancy. A dismissal on the grounds of redundancy may be justifi ed on any of the following grounds:● cessation of business;● cessation of business in the place where the employee was employed;● cessation of the type of work for which he or she was employed.

Not all instances of terminating an employment contract involve dismissal. Retirement of employees increasingly takes place before the offi cial retirement age of 60 or 65. The advantages of retirement are that both parties agree to it and typically the employer has plenty of notice of the event so that succession planning can take place.

The employer should also follow procedures such as the following:

● Consult recognised trade unions.● Notify Department for Education and Employment.● Select and dismiss fairly.● Give appropriate notice.● Make redundancy payments (if employees qualify).● Allow time off for employees under notice to look for other jobs.

Recent trends towards de-layering and downsizing have signifi cantly increased the fre-quency of redundancy in many industries and organisations. So, in the United Kingdom banks, which have traditionally been viewed as providing a secure job and a clear career structure, have over the last few years shed many tens of thousands of jobs as a result of new technology processes and competitive pressures. This move has been associated with very high levels of profi tability in the banks during the mid-1990s.

9.7 Fairness and commitment in the work placeDue to globalisation of business processes, intensifi ed competition and new information and communication technologies, a period of constant changes is occurring in organ-isations. Short-term contracts are becoming common, and a job for life no longer exists.


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ENowadays, employees are considered as human capital and essential for organisations to drive competitive advantages (Buhler, 1999).

The changing nature of organisations has caused a signifi cant shift to a consideration of new psychological contracts which are considered in detail below. Central to the shift is

● the ending of any expectation of life-time employment,● from purely working hard for loyalty to appropriate reward to employee contribution,● from being given a single chance for promotion to receiving the opportunity for a future

career, possibly elsewhere (Torrington et al., 2002).

Hiltrop (1996) and Stalker (2000) suggest that organisations should use a quite sim-ple formula of caring, comprehensive communications, listening and knowing. Then, by introducing a fair reward system with the additional provision of opportunities for learn-ing, training and development they may be able to balance the expectations of the indi-vidual and of the organisation.

CommitmentEmployee commitment is often nowadays seen as the key factor in achieving competitive performance. Commitment is strongly related to work performance in terms of absentee-ism, lateness, and turnover, all of which cost organisations money and time, and make them less productive.

A committed workforce is valuable to an organisation because it is more likely to under-stand better as to what the organisation is trying to do and be more prepared to contribute to its effi cient operation. Commitment also contributes to a healthy organisational climate, high morale, and motivation. Finally, there is also some evidence that commitment can help to protect people from the negative effects of stress. Perhaps, this is because it gives their work more meaning.

Martin and Nicholls (1987) echo Alan Fox’s (1974) idea of going ‘beyond contract’ and state that commitment is:

A willingness on the part of individuals to contribute much more to the organisation than their formal contractual obligation.

Job commitment is a variable refl ecting the degree of connection an individual perceives to have with the organisation he or she works for.

One extreme is the Marxist concept of ‘alienation’ – here there is no perceived connec-tion with the job and the organisation. The other extreme is ‘identifi cation’ – here the individuals’ perception of connection is very strong. Most people fall somewhere between these extremes. However, a recent survey carried out for the Department of Employment shows that only a minority of a sample amount of almost 3,500 workers felt strongly com-mitted to their employers.

The psychological contractThe term ‘psychological contract’ can be thought of as a way of operationalising commitment.

Psychological contracts were initially considered in the 1960s (Levinson, 1962), but the concept has recently gained interest through the work of Rousseau (1990, 1995).

Identify the factors that would encourage commitment in your organisation, or one with which you are familiar.


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E A psychological contract is an unwritten contract that is established when a person takes a job with an organisation – there is mutual understanding regarding expectations and obli-gations (Jewell, 1998). The individual may expect to derive certain benefi ts from member-ship of the organisation and is prepared to expend a certain amount of effort in return. They are also likely to have subjective expectations that they will be treated with courtesy and fairness, and if this happens they will most likely feel a corresponding obligation to be fair and loyal to the organisation in return.

Rosseau and Greller (1994) defi ne the psychological contract as the actions employees believe are expected of them and what response they expect in return of the employer. These expectations are rarely, if ever, explicitly stated, and people are rarely consciously aware of these things until their expectations are not met.

In general, both sides expect loyalty, honesty and fair treatment from one another.Three types of psychological contract can be identifi ed:

1. Coercive contract. Here the individual considers that they are being forced to contribute their efforts and energies involuntarily and that the rewards are inadequate.

2. Calculative contract. The individual, who expects to do the job in exchange for a read-ily identifi able set of rewards, accepts this type of contract voluntarily. This is the most common form of contract in industrial and commercial organisations.

3. Cooperative contract. Here the individual becomes personally identifi ed with the organ-isation and its goals, so that they actively seek to contribute further to the achievement of those goals. Motivation comes from success at work and a sense of achievement and self fulfi lment. The individual will probably want to share in the planning and deci-sions that affect their job, so cooperative contracts are likely to occur when employees participate in decision-making.

Motivation occurs when the psychological contract is viewed the same way by the organisation and the individual, and when both are able to fulfi l their side of the bargain. In coercive contracts, motivation and commitment would be low, non-existent, or even negative; in calculative ones, motivation and commitment can only be increased if rewards to the individual are improved, whereas for cooperative contracts motivation and commit-ment, would be allied to achievement.

According to Stewart and McGoldrick, organisations need to look more carefully at the congruence between their own values and those of individual employees if they are to retain a loyal and committed workforce. Contracts can be managed by both employers and employees.

Research in this area suggests that increasing numbers of people believe their employers are violating these understandings (Robinson and Rousseau, 1994), and violations of the psychological contract result in lower organisational commitment.

Therefore, an obvious way that an organisation can encourage and maintain commit-ment is to make sure that expectations with which people begin work are realistic, and then live up to these expectations. In short, an organisation must condition an individu-al’s expectations, and never promise anything that they will not deliver. HR practices are crucial.

Guzso and Noonan (1994) state that ‘HR practices can be seen as communica-tions that infl uence the psychological contract and employee commitment . . . much of the infor-mation employees rely on to assess the extent to which their psychological contracts are fulfi lled comes from the perceived fairness of the HR practices of their employer’.


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EFairnessFairness can be thought of in two major ways

1. The moral case.2. The business case.

Adam’s equity theoryThis provides a framework by focussing on employees’ feelings of how fairly they are treated, when compared with how others are treated. There are two main aspects:

1. Individuals assess their social relationships as in process theories of motivation – that is they set against what they receive by what they have to contribute.

2. Individuals always compare their situation with that of others.

Imagine your lecturer gives everyone a £10 note for good work. You are all feeling warm and happy. He or she then gives one person an additional £1 – now everyone else, despite being £11 richer, feels unhappy and cheated!

Salomon’s equity diagramSalomon (1999) shows the diffi culty of achieving equity in a diagram (Figure 9.2), which illustrates the factors along which an equitable relationship can be judged. These may dif-fer in importance as between different societies, cultures and workgroups.

It is obvious that fairness is a contingency issue; it depends on whose interests one takes as to whether something is fair.

Is performance-related pay (PRP) fairer than seniority-based pay for example?Similarly, it is diffi cult to assess how fair various employment practices are – from

recruitment to training and development, and so on. Perhaps, the main element in achiev-ing fairness should be the equality of opportunity and so the encouragement of a policy of diversity. Legislation is in effect an ‘imposed strategy’ according to Mintzberg and Walters,

Between organisation’sability to pay and its need

to recruit labour

Equity ofpayment

dif

fere

nti

als

comparabilit

y

status

contribution to the organisation

supply and

demand

a liv

ing

wag

e

rate for the job

output reward

responsibility

Between employees’wages and the profitability

of their organisation

Between employeescarrying out different work

within differentorganisations

Between employeescarrying out the same or

similar work withindifferent organisations

Between employeescarrying out different work

within the sameorganisation

Between employees atdifferent levels within the

same organisation

Between employeescarrying out the same work

within the same organ-isation but performing

at different rates

Between employeescarrying out the

same work

Between employees’needs and their income

Figure 9.2 Equity of payment (Salomon, 1999)


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E and organisations tend to ‘satisfi ce’ (i.e. do the minimum necessary) to introduce specifi c forms of legislation rather than viewing it as a change process.

Salamon’s diagram is not comprehensive as it is exclusive of other issues such as diversity and equal opportunities.

9.7.1 Diversity and equal opportunitiesOnly a few discriminatory practices are in fact covered by legislation, and there exists adverse discrimination on the basis of ‘acceptable’ dimensions such as health, previous per-formance, age, height, weight (e.g. airline stewards/esses) – as well as implicit ones such as speech, attractiveness (e.g. for sales jobs, acting, hosting) and also region/county (accents? attitudes?), class (manners, speech?) and occupation of parents.

Thus, diversity is a better, more positive and complete way to avoid adverse practices.

Equal opportunities Diversity

Removing discrimination Maximising potentialIssue for disadvantaged groups Relevant to all employeesA personnel and development role A managerial roleRelies on proactive action Does not rely on proactive action

An equal opportunities approach relies on an inadequate conceptualisation of the prob-lem and resistance is generated. There is often little ‘change management’ concerning the structures, values and the nature of the organisation. This may in part be due to the legis-lative background.

The role of the StateFrequently, the role of the State in employment matters has been seen as a ‘referee’ or as attempting a balancing act to rectify the excesses of one party (employers or employees) vis a vis the other. This is necessary as the history of employment back through the ages emphasises the needs of the ‘master’ as opposed to those of the ‘servant’. UK common law requires the employee to have duties of

● Obedience or cooperation.● Performance or careful execution.● Trustworthiness or loyal service.

Whereas the main duty of employers, apart from payment of wages, is only one of ‘care’.In the European Union, the move to establish a coded system of legal rights began early in

the 1970s, and a wave of acts of parliament in the United Kingdom enacted EU standards of employment – and the process is still continuing. Other countries have had similar experience, although in many cases the lack of regulation allows the power of employment by employ-ers in a slack labour market to exploit the labour of often young children, though the United Nations is attempting on a global basis to prevent fi rms from gaining profi ts in this manner. However, for developing countries this is almost impossible if they are to prosper generally.

In the United Kingdom, specifi c anti-discriminatory employment Acts include the following.

● The Disability Discrimination Act 1995.● Equal Pay Act 1970 (as changed by the Equal Pay (Amendment) Regulations 1993).


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E● Race Relations Act 1976, as amended 1996, 2000.● Sex Discrimination Act 1975, as amended 1986.● Trade Union Regulation and Employment Rights Act 1993 (TURERA).● Employment Equality Regulations 2003.

More recent legislation adds a number of new rights such as:

● A Statutory procedure for trade union recognition.● Requests for fl exible working patterns to be treated seriously.● Working time regulations limiting hours to 48 per week.● Statutory Minimum Wages.● Paternity leave and Statutory Paternity Pay.● Equality of treatment for part-time workers.● Age discrimination.● Employment equality (religion or belief ).● Employment equality (sexual orientation).

Regulatory bodies include the following:

● Equal Opportunities Commission.● Commission for Racial Equality.● Employers’ Forum on Disability.

TURERA allows employees the right to complain about discriminatory collective agree-ments in the fi rm and to challenge trade union rules nationally or locally.

Discrimination can be direct (‘treated less favourably’ and ‘suffered a detriment’) or indir-ect (where the proportion of women/married people who can comply with a requirement is ‘considerably smaller’ and ‘it cannot be justifi ed’ and ‘they suffer a detriment’).

Equal pay (EPA), and any other term and condition, applies to employees only, not con-tractors in ‘an establishment’, not necessarily a site. Work has to be ‘the same or broadly similar’ or ‘rated as equivalent’ under a job evaluation scheme.

The Race Relations Act 1976 covers race, nationality or ethnic origin, but not religion. As a result, in Dawkins v. Dept of Environment, the Court of Appeal held that Rastafarians can be discriminated against. The Act generally follows the SDA as to terms.

These Acts have generally failed to redress the balance of UK workforces and positive discrimination (affi rmative action in the United States) has had to be invoked.

In the United Kingdom and in many other countries, the law can be made directly through government or via individual court cases. Statute law and case law are two aspects of the same system, but the latter can and does include ‘common law’ or the interpret-ation of norms and values built up by society, piecemeal over time. This makes dealing with legal issues at work highly complex, and the internal procedures mentioned earlier act as substitutes for ‘going to law’ with all its uncertainty and expense.

Nevertheless, the government has a role to ensure fair treatment at work to protect the rights both of capital and labour, though under common law the former, through prop-erty ownership, has traditionally had more latent power. Trade unions and other pressure groups in society (such as Friends of the Earth or Greenpeace) have attempted to erode this power base with varying degrees of success.


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E The UK government has had to enact a series of Acts related to employment since accession to the European Union. These began in the 1970s with, for example, the Race Relations Act, Employment Protection Act and Equal Pay Act.

Another government role has been that of a referee. Where case law has been seen to be against the public interest, statute laws have been passed subsequent to major cases in order to prevent a repetition of what had been seen as over-zealous application of legal principles. For instance, the Trade Union Act created immunities for the trade union movement after the Taff Vale railway company had received a favourable judgement fol-lowing a strike.

The Fairness at Work Bill has been converted into the Employment Relations Act which received Royal Assent in 1999.

9.7.2 Working time directivesA working time directives lays down minimum safety and health requirements for the organisation of working time with the aim of improving employment conditions. Provisions can include but are not limited to;

● A limit of hours in the working week● A right to a number of hours rest per day● A right to the number of days off per week● A right to rest breaks after a specifi c number of hours worked● A right to a minimum amount of annual leave.

There are a number of benefi ts in introducing a working time directive:

● Increased productivity, if workers are tired of their productivity falls● Increased motivation, better work/life balance, some workers feel exploited if they are

forced to work long hours● Good for the safety of workers, especially in industries like driving● Gives protection to workers who have no trade union.

9.7.3 Child careEmployers have many choices when it comes to helping their employees balance work and child care responsibilities. The bottom line is when there are problems with child care a business is affected, lack of adequate child care support for working parents impacts on productivity and employee morale. The economic realities for employers are that child care benefi ts;

● Attract and retain good employees● Result in reduced employee absenteeism and turnover, and an increase in productivity● Enhance an employee’s perception of their employer often leading to improved job

performance● Enhance an employer’s public image in the community● Can offer tax advantages for the employer and the employee


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E9.8 SummaryThis chapter has looked at confl ict and discipline in the organisation. The key points to remember are:

● the symptoms and causes of confl ict, and the tools available for managing the different type of confl ict;

● the ways to deal effectively with discipline and grievance;● the issues associated with dismissal;● the ways to achieve fairness and commitment in the workplace.

ReferencesBuhler, P.M. (1999), ‘Stress: A Concern for Everyone’. Supervision, Vol. 60, No. 12. Daft, R.L. (1989), Organisation Theory and Design. St. Paul, MN: West Publishing. Fox, A. (1974), Beyond Contract: Work, Power and Trust Relations. London: Faber and

Faber. Guzzo, R.A. and Noonan, K.A. (1994), ‘Human Resource Practices as Communications

and the Psychological Contract’. Human Resource Management, Vol. 33, pp. 447–462. Handy, C. (1985), Understanding Organisations. London: Penguin. Hiltrop, J.M. (1996), ‘Managing the Changing Psychological Contract’. Employee Relations,

Vol. 18, No. 1, pp. 36–49. Levinson, H. (1962), ‘A Psychologist Looks at Executive Development’. Harvard Business

Review, Vol. 40, No. 5, pp. 69–75. Robinson, S.L. and Rousseau, D.M. (1994), ‘Violating the Psychological Contract: Not

the Exception but the Norm’. Journal of Organisational Behavior, Vol. 15, pp. 245–259. Rousseau, D.M. (1990), ‘New hire perceptions of their own and their employer’s

obligations: a study of psychological contracts’. Journal of Organisational Behaviour,Vol. 11, pp. 389–400.

Rousseau, M. (1995), Psychological Contracts in Organisations. London: Sage. Rousseau, D.M. and Greller, M.M. (1994), ‘Human Resource Practices: Administrative

Contract makers’. Human Resource Management, Vol. 22, pp. 385–401. Stalker, K. (2000), ‘The Individual, the Organisation and the Psychological Contract’.

British Journal of Administrative Management, Vol. 2, p. 28. Thomas, K. (1976), Confl ict and Confl ict Management, in Duneette, M.D. (ed.), Handbook

of industrial and Organisational Psychology. New York: John Wiley and Sons Inc. Torrington, D., Hall, L. and Taylor, S. (eds) (2002), Human Resource Management.

London: Pearson Education.


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Revision Questions 9Section A type questions

Question 1Because of its failure to serve a suffi cient number of clients and/or to provide a service of the required quality, a state-owned business (SOB) has had its funding cut for 3 consecu-tive years. This is putting pressure on people throughout the organisation. Departments and individuals have been set more demanding targets and large-scale redundancies have recently been announced. This has resulted in considerable confl ict. The service profes-sionals are convinced that the marketing and sales department are responsible for the woes of the organisation. Perhaps unsurprisingly, this is not a view shared by marketing and sales. They believe that the poor quality of service offered is the real reason for the decline in demand for services and for the resulting cuts in government funding. The effect of these differences between departments is one of declining cooperation between the direct service providers and the personnel in marketing and sales.

Of more immediate concern to senior management, however, is the threat of indus-trial action by the trade unions determined to protect their members’ jobs. Even individ-uals like the management accountant are fi nding themselves in confl ict with departmental managers with whom they have previously enjoyed good relations. Requests for informa-tion on the costs of providing services are being met with hostility and the accountant’s job becomes more diffi cult by the day.

RequirementDiscuss the potential consequences arising from the confl icts between the various depart-ments and groups within SOB. (10 marks)

Question 2Keith Bissett Ltd’s factory was located in a major town and was a minor but signifi cant supplier of aircraft engine chassis, in the form of titanium steel rings, to engine manufac-turers. It grew larger as its customers grew with the rise of the aerospace market, until in 1994 its high profi tability attracted the attention of the much larger Ingersoll Engineering Group (IEG) and was acquired by them as a wholly owned subsidiary.

Most of the factory employees were local people and had been with Keith Bissett Ltd since their schooldays, growing up with the company and sharing a vision of how things

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should be. Nevertheless, there was a culture of ‘skilled manual craft work’ at shop-fl oor level where all the employees were members of a trade union. As all the lower level man-agers were ‘time-served’ (or ‘professional’) engineers, this helped to cement the ‘craft’ cul-ture yet further, though the goals of the managers could be different from those of the shop-fl oor workers.

Communication was limited, and occurred either through strict lines of manage-ment responsibility, as on the organisation chart, or through the informal ‘grapevine’. Occasionally, a crisis would prompt an ad hoc meeting, but meetings were infrequent and there was no standing ‘production meeting’ at the start of the week to discuss priorities – there had never been felt to be a need, as everybody knew what was wanted.

RequirementSuggest ways of decreasing the confl ict in Bissett’s. (10 marks)

Question 3S has recently been appointed as the fi nance department manager in Z Company. During the fi rst month in her new role she has observed that one member of staff, C, is underperforming. C is frequently arriving late to work with no explanation, and he is taking extended lunch breaks without permission. He is also making errors and refuses to do certain tasks which are part of his role. One of his colleagues has spoken to S confi -dentially, saying that C’s poor performance is having an adverse impact on the rest of the team.

It is apparent that the problems have being going on for some time but the previous manager had preferred to ignore them. S has decided that she must take action on what appears to be a disciplinary case, but is unclear on how to deal with the situation.

RequirementExplain to S the stages involved in taking disciplinary action against C. (10 marks)

Question 4D Company, a national airline carrier, has made a net loss for the last 5 years. While its major competitors have pursued programmes of modernisation, D Company has been left behind and is reported to have administrative costs and average salary costs that are, respectively, 35 and 25 per cent higher than those of its competitors. The use of outdated and fuel-ineffi cient aircraft, as well as a reluctance to make use of modern Internet systems for online reservation, have been among the factors that have contributed to D Company’s decline.

The board of D Company has produced a restructuring plan that includes 5,000 job cuts out of a workforce of 50,000; new, more demanding employment conditions; the sale of non-core assets; the establishment of twelve profi t centres; a reduction in routes fl own; replacement of its ageing fl eet with fewer but more fuel-effi cient aircraft and a complete overhaul of its reservation system.

Fierce confrontation is expected with the fourteen airline unions, but the board of D Company is committed to the implementation of the restructuring plan.

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RequirementIdentify the key problems associated with making large-scale redundancies. With reference to the situation in D Company, discuss the ways in which redundancies can be managed to minimise these problems. (10 marks)


Question 5Farnsworth’s is a company of 200 staff in the engineering consultancy business, and doing very well. Because of this, the managers (all of whom are middle-aged men, normally engineers) do not think the fi rm needs an HR function with line responsibilities – they only want someone to advise managers on the rare occasions when they feel they need it. The managers are generally technical experts who have no managerial skills, though they feel they know all about human nature. Farnsworth’s is a technically driven company and the managers value the expertise of their staff, most of whom are cleverer than the rather older managers – many have PhDs.

If there are any grievances, and staff threaten to leave, the grievance is simply solved by giving the complaining member of staff a pay rise. This often means other staff begin to have feelings of inequality and often ask for a rise also. Therefore, over time, wages paid are high, caused not by market demand or internal increases in productivity but by ‘wage drift’.

Fringe benefi ts are, they admit, out of control – but the managers’ benefi t too, with company cars, free fl ights, long holidays, luxurious offi ce furniture, generous pensions, and, more new ones added every year.

There are no HR systems – no salary budget for each department, only a general one, no job descriptions, no job evaluation – so there is no internal control over managers who are giving staff out-of-budget increases and, as benefi ts are not costed in payroll but as overheads, these seem ‘free’ to managers and staff alike.

Furthermore, Farnsworth’s recruits staff only from among the friends and relatives of its existing staff members. If a vacancy occurs, the manager will inform his staff, who will ask around. Eventually, two or three people might be identifi ed and interviewed by the manager, who will then appoint someone. Appointments are made simply by the manager sending details of the new employee to the payroll.

If someone is not performing, this is commonplace because of the recruitment pro-cess and the fact that the interview does not include testing the interviewee’s ability. But there is a problem in deciding what to do, as there are no procedures. The manager will usually try to get the person who introduced the staff member to explain the situation, hoping that things improve. If they don’t they might try to get the introducer to fi nd the new employee another job in X or locally. If it comes to a dismissal situation the man-ager would normally just send a letter home to tell the employee that she/he is dismissed, enclosing the pay cheque up to the next end-of-month pay date. Managers are not used to handling grievances, and if staff have problems they are told to sort them out themselves or sometimes a senior employee is asked to intervene.

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Requirements (a) Defi ne the terms ‘discipline’ and ‘grievance’. (10 marks)(b) Suggest how Farnsworth’s could improve its handling of these matters. (15 marks)


Question 6The T Textile Company is in a troubled state. The trade union representing the weavers has just negotiated a pay increase for its members, and this has led to a claim by the mechanics, who maintain the machinery, for a similar percentage pay increase so that the traditional differential with the weavers is maintained. The T Textile Company is seek-ing to resist the mechanics’ claim on the grounds that the weavers’ extra payment can be justifi ed by increases in productivity, while the maintenance work carried out by the mechanics has not changed. The response of the mechanics has been to threaten industrial action.

The problems for the T Textile Company have been made worse by a dispute between the Weaving Department and the Cloth Inspection Department. All mem-bers of the Weaving Department, including the weaving shed managers and its super-visors, receive a bonus based on the productivity of the whole department. Employees in the Cloth Inspection Department are paid a fi xed salary based on proven competence and experience.

The confl ict between the departments developed following the appointment of a new manager in the Cloth Inspection Department. The Works Manager has warned the new manager that the quality of output has to improve if the company is to remain competi-tive. This has resulted in a general tightening up of the standards enforced in the inspec-tion process so that weaving machines are standing idle more frequently than in the past while faults detected during cloth inspection are investigated.

The sight of idle machines has resulted in intense frustration among management and employees in the Weaving Department as every idle machine means a reduction in their bonus payments. The weavers’ frustration is now being taken out on the Cloth Inspection Department by adopting a policy of not cooperating.

Requirements (a) Explain the causes of the horizontal and vertical confl icts within the T Textile

Company. (10 marks)(b) Discuss how each type of confl ict within the T Textile Company might be resolved.

Explain what factors might infl uence the likelihood of a successful outcome for each type of confl ict. (15 marks)


Question 7V is the Chief Executive of M Company, a manufacturer of prepared frozen foods. The company is facing diffi cult business conditions with strong competition from supermarket own brand products and consumer demand for variety and new products as their tastes change.

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However, V is aware of the problems the Company has encountered when undertak-ing new product development (NPD) in the past. Whilst collaboration is essential, instead there have been disagreements and arguments between the various departments.

The marketers complain that the Research and Development (R&D) department is very slow in responding to their proposals for new recipes and the whole process of R&D takes too long. The production department has protested that R&D does not consider the implications for the production process when coming up with new recipes and product packaging. The sales team is frustrated by the length of time the whole NPD process takes. The lack of new products puts it at a disadvantage when negotiating with retailers to sell M Company’s products.

The fi nance department is concerned that the investment in NPD does not provide adequate returns, and both the marketing and R&D departments are always over budget. However, other departments see Finance as controlling and sanctioning spend rather than supporting new product development.

V knows that to remain competitive, changes need to be made to the NPD process in the company. He has decided to establish a cross functional team to work on a new range of ready prepared frozen foods to appeal to the luxury end of the market.

Requirements (a) Analyse the nature and sources of confl ict between the different departments in M

Company. (10 marks)(b) Describe the factors that V should consider in building a successful cross functional

project team. (15 marks) (Total � 25 marks)


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Section A solutions

Solution 1The consequences of confl ict can be positive as well as negative and this is likely to be the case for the parties involved within the SOB organisation and for the organisation as a whole.

The present lack of cooperation between the service professionals and the sales and market-ing department is likely to have damaging effects for the organisation, the departments, and the individuals employed within them unless steps are taken to improve matters. The present situation of each department’s members blaming the other can only make things worse. Unless changes are made, there will be a downward spiral of events in which the services provided to clients will deteriorate further. Relationships between personnel from the two departments will be even less pleasant, government funding will be cut again and even more jobs threatened. All of these events will create stress for the individuals involved, result in absence from work for some employees and perhaps lead others to seek employment elsewhere.

The threat of industrial action from the trade unions can only serve to heighten the tension and resulting stress on individual employees and the organisation more generally. Any action brought by the trade union to put pressure on senior management and/or the government will inevitably have a knock-on effect on the service to clients that again will make clients even less ready to make use of the service in future. All of this is likely to threaten the viability of the organisation.

Members of accounting and fi nance are liable to become caught up in these confl icts, whether they wish it or not and the problems they encounter will impose stress on the individuals concerned, with a resultant deterioration in their effi ciency and effectiveness. The lack of adequate information in turn will make adequate management control of operations even more diffi cult.

The outcome of the above-noted confl icts could lead to the demise of the organisation altogether unless the downward spiral is arrested.

Fortunately, the government or senior management can be expected to act before the service collapses altogether. Although there is a tendency to think of confl ict in destructive terms, confl ict has positive consequences. It alerts and pressurises those involved to seek to change matters. This is likely to occur in this case. Senior management, trade union representatives and government offi cials will be shaken by the impending crisis in the ser-vice and action will be taken. Provided the appropriate action is taken, this can result in

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a more effi cient and effective organisation that serves more clients with a good-quality ser-vice than it ever did before. It is in this sense that ultimately, the confl ict can have positive consequences.

Solution 2Bissett’s has little Vertical confl ict’ because of the culture of ‘skilled manual craft work’ at shop fl oor level and all the lower level managers were ‘time-served’ (or ‘professional’) engin-eers, though the goals of the managers could be different from those of the shop-fl oor workers. More importantly, ‘horizontal confl ict’ occurs in Bissett’s between departments at the same level in the hierarchy. Horizontal coordination of some sort is needed to reduce confl ict and achieve collaboration. Top management must resolve these confl icts. Success in one goal may mean less success in another goal, but so far none of the directors had much in common and board meetings often took place without one or other of the direct-ors, and were held infrequently.

To resolve these differences, managers typically use four techniques: bargaining, satisfi c-ing, sequential attention, and priority setting:

1. Bargaining engages managers with different goals in a give-and-take discussion to fi nd a workable basis for achieving their joint interests.

2. Satisfi cing means that organisations accept a ‘satisfactory’ rather than a maximum level of performance.

3. Sequential attention means that organisations attend to important goals for a period of time and then turn to other goals. This enables an organisation to achieve satisfactory levels of performance on one goal before going to another goal.

4. Priority setting means that top management defi nes a preference ordering among goals. Giving priority to one goal, such as profi t making, does not mean that other goals will be ignored; other goals continue to exist but will receive less emphasis.

Solution 3Best practice in the case of disciplinary procedures is to be seen as consistent and fair, supported by clear rules which outline the standards of conduct expected at work. The main purpose of taking disciplinary action is to achieve a change in behaviour of employees so that future action is unnecessary. However, it is often viewed as carrying out the threat of punishment rather that as remedial and corrective. In the United Kingdom, the Advisory Conciliation and Arbitration Service (ACAS) publishes booklets on internal disciplinary procedures. S could refer to the information from ACAS to help her understand the pro-cess of discipline.

S must fi rst check that C has been informed that certain actions will lead to disciplinary action, what constitutes misconduct and gross misconduct, and what the consequences are. In large organizations, this is often covered in the employee handbook.

The starting point of the disciplinary process in this case would be for S, as line man-ager, to give C an informal verbal warning. This would usually involve having an infor-mal discussion with C, to explore the issues, and determine why he is behaving in an unacceptable manner at work. It may be that, once aware of the causes of behaviour by C, the problems can be resolved. However, at this stage S must carry out a full investigation and be clear on what ‘rules’ or ‘regulations’ have been broken, how frequently and the

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implications on other members of staff. C must be made aware of what is happening. After the meeting, a way forward should be agreed on, with progress being reviewed.

If, following the informal discussion, there is no improvement in C’s behaviour then it may be necessary for S to implement a formal disciplinary proceeding. The Human Resources department should be involved and kept informed of what is happening. Since this is S’s fi rst disciplinary case, she may want to gain the involvement of HR staff who will have greater experience of the disciplinary hearings to ensure mistakes are not made.

The fi rst step in the formal process is a formal verbal warning. This would emphasise the seriousness of the situation and that C is on notice and that his conduct will not be tolerated. At this stage, C should be asked if he wants to be represented or accompanied by a colleague. The purpose of this meeting should be to help C correct his behaviour and to prevent the need for further action. A written record should be kept, detailing why the action has been invoked and what level of improvement is required.

The next step, if there is no improvement by C, is a written warning, which is more formal in nature and becomes a permanent part of the employee’s record. The nature of offences will be stated and it should specify the future disciplinary action that will be taken if there is no improvement in C’s behaviour. A copy of the written warning will be placed on the fi le of C’s staff record. The written documentation is necessary in case of grievance procedures. As with the oral warning, C has full right of appeal.

If performance problems continue to exist, it may be possible to demote C or to transfer him to another part of the organisation. The ultimate stage of disciplinary action is dis-missal which could lead to C exiting the organisation.

Solution 4The key problems in any redundancy situation include that of deciding which personnel shall be made redundant, carrying out the redundancy process in a way that is fair and within the law, deciding what the redundancy package will consist of, and how to main-tain the morale and motivation of the remaining workforce.

Selection for redundancy must be fair, carried out according to an agreed procedure laid down beforehand and consistently applied. This procedure does not have to be the last in fi rst out’ principle, although this is a popular method because of its ease of application.

In the United Kingdom, the ACAS Code of Practice provides a useful checklist that helps ensure that companies operate within the law and that individuals are treated fairly in the redundancy process. Other countries have similar codes of practice and these should be followed where available.

The ACAS code suggests that management should stop recruitment, reduce overtime, consider retraining or transfer of people to other jobs, retire those over normal retirement age and introduce short-time working. Where the redundancy is inevitable, as in the case of D Company, employers should give as much warning as possible, use voluntary redun-dancy and early retirement, and offer help in fi nding other work. Employers must also ensure that individuals are informed before any news leaks out, and should try to run down establishments slowly.

The redundancy package offered needs to be considered for a number of reasons. First, a basic legal minimum sum based on the number of years of employment can result in a substantial sum, and this has to be budgeted for. Second, D Company might consider paying over the legal minimum as a way of indicating to the remaining employees and the world more generally that it is a ‘good’ employer.

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The needs of the remaining staff should also be considered. Their morale and confi -dence in the organisation will need to be boosted. In the case of a partial redundancy, those remaining at work may well have to change their work patterns by operating new machinery, coping with bigger jobs or changing their job location. This will need to be discussed with the trade union(s), the employees concerned and their supervisors.

The term ‘outplacement’ has come to be used to describe the efforts of management to place redundant employees in other economically active positions. Some consultants have become expert in revising curriculum vitae (CVs) of staff and ‘selling’ them to a network of contacts.

Section B solutions

Solution 5 (a) Discipline and grievance. The word discipline is used and understood in several dif-ferent ways. It brings to mind the use of authority or force. To many, it primarily car-ries the disagreeable meaning of punishment. However, there is another way of thinking about discipline, based on the meaning of the original Latin discipulus – a learner or pupil. Discipline means learning, as in the discipline of management, along a set of rules.

Maintaining discipline (learning) among employees is an integral part of the functions of management. Discipline is present when the members of the enterprise follow goals or objectives sensibly without overt confl ict and conduct themselves according to the stand-ards of acceptable behaviour.

A grievance occurs when an individual thinks that he (or she) is being wrongly treated by his colleagues or supervisor, for example he is being picked on, unfairly appraised in his annual report, unfairly blocked for promotion, discriminated against on grounds of race or sex, and so on.

(b) Farnsworth’s is operating outside of Weber’s defi nition of bureaucracy in that it is not impersonal. To make it more formal means having rules, then enforcing them. Rules must be set up by management in committee, perhaps involving a consultant as change agent. Then employees must be informed clearly that certain acts will lead to disciplinary action. Without a procedure, it is not easy to maintain standards, as employees do not accept them as fair. Everyone should know in advance what is expected of them and what the rules and regulations are. Most companies fi nd it useful to have a disciplinary section in an employee handbook, which every new employee receives. Induction is the time when the formal rules may be set out and the handbooks distributed.

However, it is also important for the individual managers to set standards which are the custom and practice of the department – for example, answering the telephone after three or four rings.

Finally, the CEO must ensure that breakages of the rules are enforced by managers.

Solution 6 (a) The confl ict in the T Textile Company encompasses both vertical and horizontal confl ict.

Horizontal confl ict happens between groups of staff or between departments at the same level in the hierarchy. The confl ict between the Weaving Department and the Cloth Inspection Department could be classifi ed as horizontal confl ict. The cause of the confl ict

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is due to the fact that the tightening of standards in the inspection process has had the knock-on effect of machines standing idle. This has affected the productivity of weavers and reduced their bonus payments. At a more fundamental level, there is a confl ict in the goals of the Departments, the weavers are focused on producing cloth to maximise output and hence receive bonuses. On the other hand, the key objective of the Cloth Inspection Department is the quality standard of the material. The two groups are rewarded in differ-ent ways.

Vertical confl ict occurs between individuals or groups who are at different levels in the hierarchy, and often arises because of status and power differences amongst groups. In the case of the T Textile Company, confl ict has arisen between mechanics and management over status and pay. Mechanics want the same percentage pay increase as weavers but man-agement argues that weavers can justify the increase by increasing productivity, whereas the work carried out by mechanics has not changed. This has led to industrial unrest.

(b) The best approach to managing horizontal confl ict in the T Textile Company would be collaboration where differences are confronted and jointly resolved. The desired out-come is win/win for both groups. This could be achieved by holding meetings between the two Departments, including the managers, weavers and inspection staff. Solutions to how quality standards could be maintained while minimising the down time of machines could be discussed. Communications between the different Departments, sharing an understand-ing of each other’s goals and objectives should assist the process. Perhaps, the organisation could look at some of the techniques associated with total quality management in resolv-ing the problems.

The vertical confl ict in the T Textile Company is an example of industrial relations con-fl ict over pay claims. This type of confl ict may be resolved through negotiation between management and representatives of the mechanics through collective bargaining. The rep-resentatives of the mechanics could present a proposal for consideration by management, followed by counter-proposals and concessions. The outcome will depend on the relative power held by the mechanics (for example, withdraw labour, gain support from other workers and willingness to take industrial action) and the power of management (ability to replace mechanics, ability to switch production to other factories). A win/win situation is desirable but often industrial relations confl ict is resolved through compromise.

A useful framework for classifying different ways of handling confl ict has been produced by Thomas (1976). It is based on two confl ict-management dimensions. These consist of (a) the degree of assertiveness in pursuit of one’s interests and (b) the level of cooperation in attempting to satisfy others’ interests. The strength of each of these in a particular situ-ation can be regarded as lying along two continuums respectively, as illustrated in fi gure below and so producing fi ve confl ict-handling strategies.

It is diffi cult to determine the degree of assertiveness and the level of cooperation that exist in the case of T Textile Company, so we cannot come to a conclusion here and now but the framework does provide a useful means of considering alternatives if we can gather the necessary information.

The fi ve confl ict-handling strategies are:

1. Avoidance – one or more parties in confl ict may seek to avoid, to suppress or to ignore the confl ict. This is not recommended as it does not resolve the confl ict and may break out again when the parties meet in the future.

2. Accommodation – this involves one party putting the other’s interests fi rst and suppress-ing their own interest in order to preserve some form of stability and to suppress the

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High

HighFocus on other’s interests

Focus on one’sown interest

LowLow

Avoiding Accommodating

Compromising

Competing Collaborating

confl ict. Again, if the causes of confl ict are endemic or lasting, the accommodation strategy may not resolve the differences. Also, the accommodating party may well lose out as a result.

3. Compromise – often seen as the optimum solution. Each party gives something up, and a deal somewhere between the two is accepted after negotiation and debate. However, in compromise, both parties lose something and there may be a better alternative. This approach could be used to resolve the confl ict between mechanics and management.

4. Competition – this is a state where both or all parties do not cooperate, instead they seek to maximise their own interests and goals. It creates winners and losers. The resultant confl ict can prove damaging to the organisation as well as to at least one of the parties. So it is not recommended.

5. Collaboration – from the perspective of all parties, this is likely to be the optimum solu-tion. Differences are confronted and jointly resolved, novel solutions are sought, and a win/win outcome is achieved. This is the proposed strategy to deal with the confl ict between weavers and the cloth inspection staff.

For grievances, the informal solutions are also creating havoc, and there should be a formal set of HR policies and a separate formal grievance procedure set out in writing and made available to all staff. This would mean cases being taken higher in the hierarchy and so becoming more impersonal and free from the infl uence of the line manager who often seems to have recruited the employee without a proper procedure.

Solution 7 (a) Organisational confl ict can occur on a number of different levels and can have a det-rimental impact on the business. The problems for M Company are that management time and effort is being wasted on addressing confl icts rather than concentrating on NPD. Collaboration between the different departments is not occurring.

The confl ict in M Company is best characterised as horizontal confl ict. This is where confl ict occurs between groups or departments at the same level in the hierarchy. A number of factors play a part in creating confl ict.

Goal incompatibility is often the main cause where the goals of one area block the achievement by other areas. In M Company, the functional structure of the organisa-tion could encourage employee loyalty to particular departments with employees wanting

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to concentrate on their own goals. The goals of different departments are often seen as mutually exclusive. This can result in confl ict and lack of cooperation between different departments.

Goals of innovation often can cause more confl ict than other goals since the NPD pro-cess requires departments to cooperate. However, where task interdependence between dif-ferent departments increases, then the potential for confl ict will also increase. This is because the greater interdependence means that departments may exert pressure for fast response, because the work in one department has to wait on other departments. Employees will need to spend time on sharing information and communication and as a result difference in goals and attitudes can emerge leading to confl ict. There appears to be a lack of understanding and appreciation of the pressures and needs of other departments during the NPD process.

For example, whilst the R&D department wants to come up with the best possible range of menus from a technical perspective, in doing so they may not take account of the cost aspect, nor of the implications for the mass production of the product, which will be an issue for the Production Department.

The focus of the sales staff is on achieving their sales targets, and they want the new product ready now. They are disinterested in the various activities involved in the NPD process, they just want results. The fi nance department is viewed very much as a control-ler and an obstacle to the NPD process. The marketers and R&D staff may see fi nance as only taking a short term view rather than investing for the future of the Company.

Another source that can lead to horizontal confl ict is the differences in the cognitive and emotional orientations of managers in different functional departments. This is often appar-ent between the different values of those working in marketing and R&D scientists; this stems from the different skills, attitudes and time horizons of the people working in these areas.

(b) There are a number of factors that V must take into account when building the cross functional team which will involve bringing together people from the different functional departments. This approach will have the benefi t of bringing together individuals from different specialisms who can contribute to the process of NPD. First, V should consider the personalities and characteristics of the individual members in the group and their per-sonal goals.

In designing the team, the suitability of members can be determined through assess-ing how members are likely to fi t with the rest of the team and whether or not the team has a balanced portfolio of characteristics relative to the task, in this case the NPD pro-cess. Belbin’s research suggests that an effective group should have a balance of team roles. He provided managers with a tool to help guide the nature or mixture of people who will be required to undertake the NPD project. The classifi cation of roles identifi ed by Belbin included: the coordinator; the shaper; the monitor-evaluator; the resource investigator; the implementer; the team worker; the fi nisher; and the specialist.

Team members need to understand the roles, responsibilities and activities that the other team members are contributing. Therefore, it important to have clear communication pro-cedures, regular team meetings and status reviews. Understanding each others roles, rather than which functional department individual comes from will have a positive impact on the interactions between team members.

It is necessary for the members to communicate and interact regularly and it is import-ant that there is a common task or goal that all team members are working towards. V should set out the objectives for NPD and set targets so that all members of the team are clear on what they need to work towards, and provide feedback on progress. Participation in team meetings should be encouraged from all members. It is important that all members of

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the team are motivated and committed to achieving the project objectives, and feel account-able for their individual activities.

V should also think about the environment such as the physical surroundings at work and where team members are situated. If they are in close proximity then this is prob-ably more conducive to encouraging team work and effective communication than where members are geographically separated from each other.

V also needs to consider the form of leadership style adopted since this can infl uence the relationship between members of the team, and can have a major impact on team effect-iveness. The team will be affected by the way in which the manager gives guidance and encouragement to the team, provides opportunities for participation and deals with any confl icts. Usually, a participative or democratic style of leadership is most appropriate to encouraging high team performance.

In addition, when fi rst establishing the cross functional team, team development and maturity can also affect the effectiveness of the team. Tuckman identifi es four successive stages of group development:

1. Forming, where the group comes together and starts to establish the purpose of the group, structure and leadership;

2. storming, where members get to know each other better. At this stage, disagreements can occur over roles and behavioural expectations. This can lead to confl ict and hostility;

3. norming, where the group will establish agreed guidelines and standards and develop their own norms of acceptable behaviour and performance;

4. performing, which occurs when the group has progressed through the earlier stages of development and created the structure to work effectively as a team.

Investment in the early stages should pay off for M Company in developing an effective team committed to achieving the objectives of NPD.

Preparing for the Examination


467

Preparing for the Examination

This chapter is intended for use when you are ready to start revising for your examination. It contains:

● A summary of useful revision techniques.● Details of the format of the examination.● A bank of examination-standard revision questions and suggested solutions. These solu-

tions are of a length and level of detail that a competent student might be expected to produce in an examination.

● A complete exam paper. This should be attempted when you consider yourself to be ready for the examination, and you should emulate examination conditions when you sit for it.

Revision techniquePlanningThe fi rst thing to say about revision is that it is an addition to your initial studies, not a substitute for them. In other words, do not coast along early in your course in the hope of catching up during the revision phase. On the contrary, you should be studying and revising concurrently from the outset. At the end of each week, and at the end of each month, get into the habit of summarising the material you have covered to refresh your memory of it.

As with your initial studies, planning is important to maximise the value of your revi-sion work. You need to balance the demands for study, professional work, family life and other commitments. To make this work, you will need to think carefully about how to make the best use of your time.

Begin as before by comparing the estimated hours you will need to devote to revision with the hours available to you in the weeks leading up to the examination. Prepare a written sched-ule setting out the areas you intend to cover during particular weeks, and break that down fur-ther into topics for each day’s revision. To help focus on the key areas, try to establish:

● which areas you are weakest on, so that you can concentrate on the topics where effort is particularly needed;

● which areas are especially signifi cant for the examination – the topics that are tested frequently.


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ION Do not forget the need for relaxation and for family commitments. Sustained intel-

lectual effort is only possible for limited periods, and must be broken up at intervals by lighter activities. And do not continue your revision timetable right up to the moment when you enter the exam hall: you should aim to stop work a day or even 2 days before the exam. Beyond this point, the most you should attempt is an occasional brief look at your notes to refresh your memory.

Getting down to workBy the time you begin your revision, you should already have settled into a fi xed work pattern: a regular time of day for doing the work, a particular location where you sit, particular equipment that you assemble before you begin and so on. If this is not already a matter of routine for you, think carefully about it now in the last vital weeks before the exam.

You should have notes summarising the main points of each topic you have covered. Begin each session by reading through the relevant notes and trying to commit the important points to memory.

Usually, this will be just your starting point. Unless the area is one where you already feel very confi dent, you will need to track back from your notes to the relevant chapter(s) in the Learning System. This will refresh your memory on points not covered by your notes and fi ll in the detail that inevitably gets lost in the process of summarisation.

When you think you have understood and memorised the main principles and tech-niques, attempt an exam-standard question. At this stage of your studies you should normally be expecting to complete such questions in something close to the actual time allocation allowed in the exam. After completing your effort, check the solution provided and add to your notes any extra points it reveals.

Tips for the final revision phaseAs the exam approaches, consider the following list of techniques and make use of those that work for you:

● Summarise your notes into a more concise form, perhaps on index cards that you can carry with you for revision on the way to work.

● Go through your notes with a highlighter pen, marking key concepts and defi nitions.● Summarise the main points in a key area by producing a wordlist, mind map or other

mnemonic device.● On areas that you fi nd diffi cult, rework questions that you have already attempted, and

compare your answers in detail with those provided in the Learning System.● Rework questions you attempted earlier in your studies with a view to producing more

‘polished’ answers (better layout and presentation earn marks in the exam) and to com-pleting them within the time limits.

● Stay alert for practical examples, incidents, situations and events that illustrate the mate-rial you are studying. If you can refer in the exam to real-life topical illustrations, you will impress the examiner and earn extra marks.

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Format of the examinationStructure of the paperThere will be a written paper of three hours. This paper will comprise two sections:

1. Section A: Five compulsory medium answer questions, each worth 10 marks. Short scenarios may be given, to which some or all questions relate. (50 marks)

2. Section B: One or two compulsory questions. Short scenarios may be given, to which questions relate. (50 marks)


Question 1V plc operates in the leisure and entertainment industry. It has a range of different ventures worldwide including fi tness centres, casinos, cinemas and sports bars, each of which operate as separate businesses.

RequirementDistinguish between the different levels at which strategy will exist in V plc.

(10 marks)

Question 2T is the CEO of S Company, a manufacturer of hair and body care products. Over the years the company has been market leader in its fi eld, achieved through being at the fore-front of product innovation. S Company has invested heavily in research and development, which has enabled it to be the fi rst in the market to introduce new variants of the product range. However, this has meant that the cost of operations has spiralled leading to an increase in the price of the company’s products.

Up until last year, the company had been very successful in increasing its market share. However, the most recent key performance indicators show that sales are down. It would seem that supermarket ‘own brand products’ are stealing market share and T is worried about the future ability of the company meet its objectives for continued growth. T has decided to undertake a strategic review, the fi rst stage of which will involve conducting a corporate appraisal.

RequirementExplain what would be involved in undertaking a corporate appraisal, demonstrating how the information could be used to help T in his review.

(10 marks)

Question 3N Airline operates in the short haul fl ight industry. Unlike many of its competitors who are constantly seeking to reduce costs, often at the expense of customer service, the

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foundation of N’s business strategy is based on providing a superior quality of service. Its mission is to be market leader, providing unrivalled customer service, in fl ight comfort and reliability in the short haul airline industry. It views its customers as central to strategic developments, and values its staff in building success.

Requirement(a) Distinguish between the concepts of mission and objectives. (4 marks)(b) Illustrate how the mission for N Airline could be translated into strategic objectives.

(6 marks)

Question 4S has recently been appointed as the fi nance department manager in Z Company. During in the fi rst month in her new role she has observed that one member of staff, C, is underperforming. C is frequently arriving late to work with no explanation, and he is taking extended lunch-breaks, without permission. He is also making errors and refuses to do certain tasks which are part of his role. One of his colleagues has spoken to S confi den-tially saying that the performance of C’s work is having an adverse impact on the rest of the team.

It is apparent that the problems have being going on for some time but the previous manager had preferred to ignore them. S has decided that she must take action on what appears to be a disciplinary case, but is unclear on how to deal with the situation.

RequirementExplain to S the stages involved in taking disciplinary action. (10 marks)

Question 5Seebohm plc manufactures a large range of confectionery which is sold nationally through a wide range of outlets. As an independent management consultant, you have been invited by the managing director to examine the corporate culture. You discover the following:

(a) One of the factories has severe problems with one of its machines, which is currently producing chocolate whose odour and taste ‘made my stomach turn’ (according to the complaining letter of Mrs E. Bagwind). There have been many similar letters, none of which has been answered by Seebohm. The production manager has arranged for repairs to be carried out in 5 years’ time (evidently, the fi rm which is to undertake the repairs is very busy until then). All production at this plant has been suspended until the work has been undertaken.

(b) The fi rm adopts a centralised system of control, imposing rigid targets on its fi rst-line managers without any consultation whatsoever.

(c) According to comparative statistics from similar fi rms in the chocolate industry, the productivity of production workers is woefully inadequate. You suspect that the motive behind this is to work overtime and thus to supplement earnings.

(d) Seebohm distributors have not been contacted about the defective chocolate.

RequirementAssess the cultural defi ciencies of the fi rm. (10 marks)

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Question 6Project management often involves managing areas of uncertainty that are likely to require constant monitoring throughout the life of the project.

Requirements (a) Explain those aspects of project management which might involve some degree of

uncertainty. Explain why these aspects are likely to be uncertain. (5 marks) (b) Explain why it is important for project managers to monitor projects in progress, and

what can be done if the project is found to be deviating from plan. (5 marks)(Total marks � 10)

Question 7RequirementExplain the importance of project progress reports as part of the overall project communi-cation process. (10 marks)

Question 8RequirementBriefl y explain why, and how, an iterative approach to project management might be used instead of a structured project life cycle. (10 marks)

Question 9RequirementBriefl y explain the stages an organisation might move through as it progresses towards excellence in project management. (10 marks)

Question 10RequirementDistinguish between the ‘strategy’ and ‘scope’ of a project, illustrating your answer with appropriate examples. (10 marks)

Question 11RequirementDescribe FIVE issues that may cause problems in the management of a project team, and briefl y suggest how a project manager might avoid such problems. (10 marks)

Question 12RequirementBriefl y describe the stages in a typical negotiation, illustrating your answer with relevant examples. (10 marks)

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Question 13An increasing number of companies have expressed their willingness to consider their wider social responsibilities. This often involves them in voluntarily undertaking extra responsibilities and costs; for example:

● in order to reduce pollution, they may decide to treat waste products to a higher stand-ard than required by legislation;

● they may decline to trade with countries whose governments they fi nd objectionable;● they may pay wages above national minimum levels.

Requirements (a) Discuss: (i) whether the pursuit of a policy of social responsibility necessarily involves a

confl ict with the objective of shareholder wealth-maximisation; (ii) the extent to which the existence of a confl ict between a company’s objectives is

acceptable. (9 marks) (b) Discuss the extent to which it is feasible for a company to ‘operationalise’ its social

responsibility aspirations, that is, whether it is possible to bring these considerations into strategic decision-making in a programmed or systematic way. (9 marks)

(c) Discuss whether it is feasible for companies to include the requirements of their stakeholders when they seek to recognise their wider social responsibilities.

(7 marks)(Total marks � 25)

Question 14A company engaged in the supply of water for public and industrial consumption operates in a service industry. It is subject to external infl uences when establishing its objectives and formulating strategy. The nature of this industry is that new technology is constantly being developed in treating and supplying water of suffi ciently high quality for customer use. The organisational culture of such a company needs to refl ect the nature of the industry in the provision of a reliable service to the public.

RequirementAs a member of the company’s strategic planning team, advise the board of directors on the extent to which external infl uences may affect the formulation of organisational objec-tives and strategies. Your advice should recognise the public service nature of the industry and the way this affects the company’s organisational culture.

Note: No specifi c knowledge of the water supply industry is required to answer this question.(25 marks)

Question 15Companies have an obligation to provide information to their stakeholders. The fi nancial information provided tends to be of a historical nature. It has been argued that share-holders in particular should be entitled to receive forward-looking information. Some

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companies wishing to communicate selectively with a subgroup of shareholders are often prevented from doing so, as all shareholders should receive the same fi nancial information.

Requirements (a) Explain why a company may wish to disclose forward-looking information to its stake-

holders and in particular, to its shareholders. (12 marks) (b) Discuss the competitive issues a company must consider before disclosing forward-

looking information to its shareholders. (13 marks)(Total marks � 25)

Question 16In the second half of this century, the classical approach to management has, in some industries and many organisations, been replaced by the human relations approach. Other parts of society, and other organisations, have not adopted the human relations approach, or have even reverted to the earlier concepts.

Requirements (a) Compare and contrast classical and human relations approaches to management.

(15 marks) (b) Give reasons why some organisations may use one or the other approach in present-

day conditions. (10 marks)(Total marks � 25)

Question 17The discovery of heavily overstated profi ts in some of the largest US corporations in 2002 undermined investor confi dence in company accounts and called into question the integrity of senior managers, their professional staff and the presumed independence of external auditors.

Requirements (a) Describe the key infl uences on the ethical conduct of senior management of business

corporations, their professional staff and those involved with auditing their accounts.(13 marks)

(b) Explain what both businesses and professional bodies can do to infl uence the ethical behaviour of their organisational members. (12 marks)


Question 18Scientists from various countries in the world have researched into and achieved success in mapping the genetic code of human beings. It is considered that this research may identify how serious, life-threatening diseases develop. It is believed that this will lead to improved treatments and in time, removal of these diseases altogether. Eventually, this may result in the Directors of world-class pharmaceutical suppliers facing a confl ict of interests. These confl icts may arise because of the need to satisfy the demands of their shareholders in terms of maximised long-term wealth and also because of the need to discharge social responsi-bilities by developing treatments which eventually may render its products redundant.

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RequirementDiscuss the ethical implications of this research for major world-class pharmaceutical companies. In your discussion, comment on how the Directors might reconcile confl icts between satisfying the demands of shareholders and discharging their social responsibilities.

(25 marks)

Question 19The D Soft Drinks Company has become so convinced of the benefi ts of empowerment that it has decided to introduce empowerment throughout the company. As Director of the fi nance department, Mary has been instructed to empower her staff to bring the department in line with company policy. Mary is not enthusiastic. She has managed her department very successfully for 15 years and cannot imagine how empowerment would improve things. She has already delegated some of her responsibilities to trusted mem-bers of her staff and regards any further delegation as likely to have a negative impact on the smooth running of the department rather than to improve its effi ciency and effectiveness.

Requirements (a) Explain to Mary how empowerment can help improve the effi ciency and the effective-

ness of the organisation. (8 marks) (b) Advise Mary on the steps she needs to take to ensure that empowerment is successfully

introduced within the fi nance department of the D Soft Drinks Company. (10 marks) (c) Discuss the main diffi culties that Mary might anticipate when introducing empowerment.


Question 20Sam is the Chief Executive Offi cer (CEO) of T Inc, a tobacco company. He has tradi-tional views about the purpose of business in general and his own organisation in particu-lar. Though he is frequently pressured by a variety of groups and organisations that think he should run his organisation differently, he sticks fi rmly to the view that the overriding purpose of business is to make money for the shareholders. His son, Frank, who is being coached to take over the CEO role, takes a very different perspective. In his view, T Inc has a responsibility to a wide range of stakeholders.

Requirements (a) Explain how (i) Sam would justify his view that the overriding purpose of the business is to make

money for the shareholders; (ii) Frank would justify his view that T Inc has a responsibility to wards a wide range

of stakeholders. (15 marks) (b) Recommend the stages Frank should go through in determining the priority of the

goals of T Inc when he becomes CEO. (10 marks)(Total marks � 25)

The following scenario relates to Questions 21 and 22.

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BackgroundYou are a trainee management accountant working for a fi rm of fi nancial and management consultants (ZX Consultants) who have been contracted to assist in the management and control of a large sporting event, due to take place in the region in 2 years’ time.

The World Youth Indoor Games, November 2004The World Youth Indoor Games is a sporting competition which, every 2 years, brings together over 5000 young sportsperson from around the world to compete, at the highest level, in a range of indoor sporting events. The organisation of the Games is a large scale and complex project, involving a diverse range of activities. The strict time constraints set for the project increase the diffi culties of managing the other key constraints, namely cost and quality. The next Games are to be held in Farchester, a state capital in the United States, in 2 years’ time, and will last for 2 weeks.

Project sponsorThe Farchester city government will guarantee to cover the cost of the Games. A signifi cant part of the project will be the provision of new buildings and facilities. A number of the required buildings already exist, and most of the remaining requirements will be constructed as part of a re-development programme being undertaken by Farchester’s city government.

Major new works associated with the project include the construction of a 30,000-seat indoor athletics stadium and a world press and media centre.

A further consideration is the upgrade of the current transport network, with major development work required on the local rail system between the main stadium and the city centre, and an airport bus link.

Farchester Games Co-ordination Committee (FGCC)The overall management of the project, including the construction of the new facilities and the refurbishment of existing facilities, is being coordinated by the Farchester Games Coordination Committee (FGCC). The Committee is made up of local councillors, local businessperson, city government offi cials, sportsperson and senior managers from ZX Consultants. In addition to the provision of sporting facilities, transport and accommoda-tion, the scope of the project includes provision of:

● communication facilities● marketing● fund raising● recruitment of and training for staff● organisation of events and ceremonies.

These individual project activities are being managed by specialist teams, who are responsible for the delivery of the individual aspects of the project and reporting back to the Committee on a regular basis. Each specialist team is led by a project team manager.

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Definition and objectives of the projectThere are many stakeholders involved in this project: the paying spectators, the local citizens of Farchester, the state citizens, the sponsors and television companies, the athletes and the local business community. Success will be measured in terms of trouble-free performance of the events, level of customer enthusiasm and satisfaction, and sustained economic activity generated in the region. Completion of the project on time is critical; the Games must begin on 2 November 2004. The current date is November 2002 and the FGCC held its fi rst offi cial project meeting on the fi rst day of this month.

Telecommunications and Information TechnologyThe last three World Youth Indoor Games have attracted a worldwide television audience, and the telecommunications network has to be adequate to cope with the additional television and telephone communications required to facilitate coverage throughout the world. A tele-communications infrastructure, including broadband web transmission and satellite commu-nications, needs to be established to service both national and international demand.

Software requirementsThe main software development aspect of the project is the development of the Games’ communications software in the form of an information database, designed to provide all Games information to the general public. This will require development of a dedicated web-site to give public access to event information. The database will contain information about:

● all competitors● which events they are competing in● at what time● where each event is taking place● the capacity of the building for each event● the availability of tickets.

The database will be designed to allow the general public to monitor the events they are interested in and to allow the Games coordinators to monitor progress of the Games, both before and during events. In addition, the public will be able to order tickets from the website for any event, and purchase Games merchandise. The website will also contain links to local hotels and restaurant facilities. The whole package of communications soft-ware and the telecommunications and IT hardware has been called the ‘Communications Infrastructure’.

Project activitiesThe project can be broken down into the following areas of work:

Each of the above activities is carried out by individual specialist project teams, and is led by a project team manager. It is critical that these events are coordinated and planned effec-tively, as timing is critical to the success of this project. There is little formal coordination

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between the individual project teams, but the FGCC intends to distribute regular project information to all project team managers.

Critical project dimensionsTime dimensionThe Games must begin on the stipulated date (2 November 2004) even if quality or costs are adversely affected. The FGCC is investigating alternative methods of control which will help to control the timing of the project. Its plans include holding project team meet-ings (once every two weeks), setting target dates well in advance of the main event (to be set by individual project team managers), contingency planning and the design of ‘test events’ in order to trial key or complex events prior to the real thing. In addition, critical path methods and programme evaluation and review (PERT) will be employed to control time-related uncertainties.

Cost dimensionThe Games budget, excluding construction costs, is $25 million, which will be provided by a combination of city government fi nance, sponsorship and television rights. The budg-eting and fi nancial planning process for the Games will include:

● consultations with national and international experts in sporting events management;● consultation with committees who have previously hosted the Games;

Activity Activity descriptor Preceding activity

Duration (after completion

of preceding activities)

A Obtain fi nancing and sponsorship – 22 weeks negotiation

B Sporting facilities (refurbishment and new construction) – 52 weeks

C Analysis and design of communications software A 14 weeks

D Construct media facilities B, C 16 weeksE Programme communications system C 26 weeksF Install communications software and D, E 6 weeks

telecommunications hardwareG Transport network upgrade and – 40 weeks

construct athletes’ accommodationH Security arrangements and checks G, F 12 weeks

(both physical and technological)I Public relations/advertising/marketing F 10 weeksJ Human resources and volunteers 12 weeks

(including pre-Games training for volunteers)

K Test games, trial events and media H, J 6 weeks systems, and contingency

L Events (including the opening and K 2 weeks closing ceremonies)

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● analysis and review of the budgets and fi nancial planning from previous Games;● independent review and consultation with independent fi nancial experts (including ZX

Consultants).

All the specialist team project managers are responsible for their own budget, and will be required to report the fi nancial position of their particular activity to the FGCC on a quarterly basis. Advice on budgetary control will be available from the consultants at ZX, but project team managers will not be given any specifi c fi nancial training.

Quality dimensionThe FGCC considers quality to fall into two main categories:

1. fi t for purpose;2. conforming to customer requirements.

In projects such as the Games, there are clear diffi culties in defi ning quality, particularly in the early stages of development. For example, quality of performances and ceremonies might be measured by how spectacular they are, how well they are displayed and how they appeal to a mass, multi-cultural audience.

Adoption of total quality management techniques could improve the quality of the project and help to ensure the success of the Games. In addition, continuous audit of all project activities has been suggested by ZX Consultants as a way to maximise the achievement of cost, quality and time criteria.

Project statusThe FGCC held its fi rst meeting on 1 November 2002, at which the above issues were discussed. The second project review meeting is due to take place at the beginning of December 2002. You have been asked to attend as part of the ZX consultancy team.

The FGCC is aware of the need to manage effectively the three major project dimensions of cost, quality and time. One of the key tasks to undertake immediately is the determination of the critical path.

Question 21RequirementsFor the meeting in December 2002, you have been asked by the FGCC to prepare a report which includes:

(a) an explanation of the importance of undertaking critical path analysis for a project such as the Farchester Games. (5 marks)

(b) a critical path analysis for the Games (using either the Activity on Node approach or the Activity on Arrow approach), clearly identifying:

(i) the critical path activities and the critical duration of the project; (ii) the Earliest Event Time for each activity (EET); (iii) the Latest Event Time for each activity (LET).

(Note: You are NOT required to prepare a Gantt chart as part of the report.)

(15 marks)

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(c) a calculation of the slack time on activity H and an explanation of how this information may assist decision-making during this project. (5 marks)


Question 22 (a) The specialist project teams, which will be undertaking the various activities of the

project, will soon be required to hold their fi rst project team meetings.

RequirementsExplain

(i) what actions are needed prior to a fi rst team meeting to ensure that the meeting is effective;

(ii) how the fi rst team meeting should be conducted for it to be effective. (10 marks)

(b) What issues need to be addressed in a feasibility study for developing a website dedi-cated to the Games? You should consider the economic, technical, organisational and operational aspects of feasibility. (15 marks)


Question 23The E Company consists of automobile engine, marine engine and aerospace engine busi-nesses. It has built its global reputation for engine design and quality on its engineering capability. Though the marine engine business has not been performing well for some time, the E Company has dominated the supply of engines for the luxury end of the auto-mobile market for years. Unfortunately for the E Company, however, the market in luxury automobiles is changing. Exchange rate movements and increased production costs have made the E Company less competitive and its rivals are rapidly catching up in terms of engine quality and design. As a result, the latest annual report shows turnover down, mar-gins reduced and the company barely breaking even.

You have just attended a strategy meeting at the E Company in which:

● Manager A argued that the automobile engine business strategy was wrong;● Manager B claimed that the major problem had been the failure to properly implement

functional strategies;● Manager C said that more attention should be paid to the threats and opportunities of

the external environment so that the E Company could position itself more realistically;● Manager D claimed that the company should really be seeking to develop further its

core engineering competence if it was going to regain its competitiveness in the market place.

After the meeting, a junior manager who had been in attendance asks you to explain what his senior colleagues had been talking about.

RequirementsFor the benefi t of the junior manager, explain

(a) the differences between corporate level strategy, business level strategy and functional level strategy in the E Company; (12 marks)

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(b) the theoretical perspective on strategy formation adopted by manager C and manager D.(13 marks)


Question 24NYO.com was established in February 2000. Since then, the company, which provides online fi nancial advice, has experienced rapid growth and the management has not really had the time to get all management systems and procedures into place.

The company has asked you to look at the way in which the company deals with its disciplinary problems and procedures. The chief executive offi cer has asked you to do two things.

Requirements(a) Recommend guidelines for drawing up a disciplinary procedure. (13 marks)(b) Explain why NYO.com should have a formal disciplinary procedure. (12 marks)


Question 25(a) Defi ne the nature of a ‘virtual organisation’, and account for the emergence of this

organisational form. (12 marks)T is a newly established mobile telephone company in N, an industrialising country.

It has just formed a joint venture, J, with a large established European mobile telephone company, K. The purpose of the joint venture is to design, manufacture, market and dis-tribute mobile phones in country N.

Requirement (b) Describe the nature of a joint venture. Explain the potential advantages to Company

T and Company K of setting up the joint venture J. (13 marks)(Total marks � 25)

Question 26Able Components (Able) is a small manufacturer of precision automotive components. It was established in 1923 by two brothers, and has managed to survive by continuous improvement in product quality and customer service. It is now one of the very few family-owned businesses still supplying the automotive industry. One of Able’s major customers, Baker Motor Manufacturing Inc. (BMM), is currently prototyping a new car model, the ‘Baker Blaster’, which uses some of Able’s components in its braking system. These brake components are unable to provide the required level of performance, and BMM has asked Able to redesign the components.

The Baker Blaster is due to enter manufacture in 30 weeks, and the production depart-ment of Able require the redesign to be completed 6 weeks prior to this in order for the components to be manufactured and tested. You have been asked to assist with the project planning for the redesign. The design department has given you the following information relating to the redesign of the brake components.

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Activity Duration (weeks) Depends on

A 8 –B 6 –C 2 A, BD 7 CE 5 CF 6 DG 4 E, F

Requirements(a) Draw a Gantt chart for the redesign project, based on the information provided.

(10 marks)(b) Calculate the project elapsed time, according to the information provided.

(2 marks)(c) Identify the issues that should be investigated in order to determine if the project can

meet its time constraint. (13 marks)(Total marks � 25)

Question 27Many organisations develop elaborate control systems to ensure that major projects achieve their objectives.

Requirements(a) Explain the types of constraint that might prevent a complex project achieving its

objectives, illustrating your explanation with relevant examples. (10 marks)(b) Describe a control system suitable for the management of a complex project.


Section A solutions

Solution 1Strategy will exist at different levels within V Company, and can be classifi ed in terms of corporate, business and functional. The different levels of strategy in V Company can be viewed as a hierarchy whereby activities at the lowest level are guided by and constrained by decisions at the higher levels. In other words the different levels of strategic decisions are interdependent so that one level should be consistent with the strategies at the next level. Whilst the corporate strategic decisions tend to be the concern of senior management, other levels of management in V Company will be responsible for ensuring the successful implementation of strategy.

In order to distinguish between the different levels it is helpful to explore the purpose of each level.

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Corporate level strategy in V plc will primarily address the question of what type of business the organisation should be in, and is concerned with its overall purpose and scope. This will involve decisions about the longer term direction of V Company, its activ-ities, matching these to its environment, its resources and values and the expectations of different stakeholders. It is also concerned with how much investment V Company should provide to each of its business units.

Corporate strategy will be encapsulated in V Company’s mission and will address deci-sions on, for example, future acquisitions, mergers, divestments, de mergers or closure of its businesses. Also, at corporate level strategic decisions will be made on whether V Company should invest in new businesses, enter new markets or diversify – at the moment the various business are all related to the leisure industry. This level of strategy provides a framework of goals and objectives that inform the lower levels of strategy for V Company.

Business level strategy should be formulated within the broad framework of the objec-tives determined by the corporate strategy of V Company. This usually occurs within a strategic business unit (SBU) which is a section within a larger organisation responsible for planning and developing its own products and services. Each SBU will determine its own strategy for its particular market. In V Company the fi tness centres, casinos, cinemas and sports bars are all SBUs. Each SBU will make strategic decisions about choices of products/services, how to meet the needs of customers, and how to gain competitive advantage over its competitors. For instance, this will involve decisions on which products/services should be developed and how each SBU should segment its markets/s.

Functional strategies, whilst of strategic importance, will be made at operational level in V Company. They are concerned with ensuring that the various functions of the organisation such as production, marketing, fi nance, human resources etc contribute to the achievement of corporate goals and objectives. It is the level at which strategy is imple-mented in detail. To accomplish this resources need be available.

The activities of functional departments of V Company need to refl ect the overall stra-tegic direction otherwise it can counter the direction of the overall organisation, hence there needs to be both top down and bottom up communications and co-ordination of activities.

Solution 2The outcomes from a corporate appraisal will help T assess the current position of the hair and body care company and its ability to achieve its objectives in the future. This involves assessing the key infl uences from the external business environment and the internal stra-tegic capability of S Company that will impact on strategy development. It can be used as the basis against which to judge strategic choices.

The internal review of current performance, commonly referred to as a position audit, is undertaken to assess the strategic capability of the company. This would involve audit-ing the company’s resources, products, markets, brands, operations such as research and development, production and distribution and internal structures. A framework that could be used in this process is the value chain. Undertaking value chain analysis can help to identify strengths or core competences, such as the ability to constantly innovate and sources of weaknesses, for instance which of S Company’s operations are particularly costly. The outcomes from the analysis will help T understand where value is being added or destroyed and to identify the company’s strengths and weaknesses.

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Strengths are areas of the company that should be exploited by suitable strategies. In the case of the hair and body care company, strength might be the research and develop-ment capability to constantly innovate. Any areas of the company that create weaknesses will need strategies to improve them, for example this might be the cost and effi ciency of operations.

Information to feed into the corporate appraisal will also be needed on the external business environment, in terms of the key trends and how these are likely to change in the future. This is often conducted using the PESTEL framework which helps to iden-tify infl uences that might impact on the strategic development of the company under the headings: political, economic, social, technological, environmental and legal. In addition, competitor analysis will also need to be conducted to assess the nature of the competition. T could use Porter’s fi ve forces model to assess the competitive forces that are infl uencing the nature of competition in the hair and body care industry.

The external appraisal helps to identify opportunities that can be exploited by the com-pany’s strengths and also to anticipate possible environmental threats against which it must develop strategies to protect itself. For example, key threats facing the company are likely to be the growth and strength of competition, particularly supermarket ‘own brand’ products. Opportunities could be linked to changes in consumer lifestyles, which might allow T to exploit the company’s research and development competence in developing new product ranges.

The outcomes from the corporate appraisal will provide T with an assessment of the strengths and weaknesses, opportunities and threats in relation to the internal and external factors and are often summarised in a SWOT.

Solution 3

(a) A mission is a broad statement of the overall purpose of the business and should refl ect the core values of the business. It will set out the overriding purpose of the business in line with the values and expectations of stakeholders. It will also be concerned with the scope and boundaries of the organisation, in N’ cases short haul fl ights. Sometimes it is simply referred to as “What business are we in?

Objectives differ in that they state more precisely what is to be achieved and where pos-sible provide quantitative measures of performance. These could be expressed in fi nan-cial terms, but also market based objectives. The characteristics objectives should possess include:

● A precise formulation of the attribute sought● A measure for progress towards the attribute● A target to be achieved● A time frame in which it is to be achieved.

The acronym often used when setting objectives is SMART: that is objectives should be specifi c, measurable, attainable, relevant and time bound.

(b) N Company could set objectives relating to its growth aspiration in terms of the numbers of passengers using the airline, or in terms of market share, for example gaining 20% of short haul fl ights by the end of 200X. Growth could also be measured in terms of the number of destinations or landing slots.

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The objectives relating to superior quality of service could be set based on customer satisfaction. This information could be collected through market research, against a set of customer satisfaction criteria and might include factors such as ease of booking, in fl ight comfort, helpful staff. Another measure of quality could be the percentage increase in repeat customer bookings; percentage of fl ights departing and arriving on time. A further objective could be in terms of percentage reduction in the number of complaints received.

Solution 4Best practice in the case of disciplinary procedures is to be seen as consistent and fair, sup-ported by clear rules which outline the standards of conduct expected at work. The main purpose of taking disciplinary action is to achieve a change in behaviour of employees so that future action is unnecessary. However, it is often viewed as carrying out the threat of punishment rather that as remedial and corrective. In the UK the Advisory Conciliation and Arbitration Service (ACAS) publishes booklets on internal disciplinary procedures. S could refer to the information from ACAS to help her understand the process of discipline.

S must fi rst check that H has been informed that certain actions will lead to disciplinary action, what constitutes misconduct and gross misconduct, and what the consequences are. In large organisations this is often covered in the employee handbook.

The starting point of the disciplinary process in this case would be for S, as line manager, to give H an informal verbal warning. This would usually involve having an informal discussion with H, to explore the issues, and determine why he is behaving in an unacceptable manner at work. It may be that once aware of the causes of behav-iour by H the problems can be resolved. However, at this stage S must carry out a full investigation and be clear on what ‘rules’ or ‘regulations’ have been broken, how frequently and the implications on other members of staff. H must be made aware of what is happening. After the meeting a way forward should be agreed on, with progress is reviewed.

If, following the informal discussion, there is no improvement in H’s behaviour then it may be necessary for S to implement a formal disciplinary proceeding. The Human Resources department should be involved and kept informed of what is happening. Since this is S’s fi rst disciplinary case she may want to gain the involvement of HR staff who will have greater experience of the disciplinary hearings to ensure mistakes are not made.

The fi rst step in the formal process is a formal verbal warning. This would emphasise the seriousness of the situation and that H is on notice and that his conduct will not be tolerated. At this stage H should be asked if wants to be represented or accompanied by a colleague. The purpose of this meeting should be to help H correct his behaviour and to prevent the need for further action. A written record should be kept, detailing why the action has been invoked and what level of improvement is required.

The next step if there is no improvement by H is written warning, which is more formal in nature and becomes a permanent part of the employee’s record. The nature of offences will be stated and it should specify the future disciplinary action that will be taken if there is no improvement in H’s behaviour. A copy of the written warning will be placed on the fi le of H’s staff record. The written documentation is necessary in case of grievance procedures. As with the oral warning H has full right of appeal.

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If performance problems continue to exist it may be possible to demote H or to trans-fer him to another part of the organisation. The ultimate stage of disciplinary is dismissal which could lead to H exiting the organisation.

(Candidates may refer to the practices governing disciplinary proceedings that are specifi c to their country)

Solution 5Common errors● lack of theoretical basis for cultural defi ciencies;● ‘assess’ often replaced by ‘describe’.

We shall judge Seebohm by considering Peters and Waterman’s aspects of excellence culture:

(a) Keenness for action. It would appear that the management are willing to wait for 5 years before the machine is repaired; a remarkable lack of any ‘keenness for action’ whatsoever. For instance:– alternative companies could be investigated; or– it may be possible to hire new plant.

The reluctance to act decisively is also illustrated by the management’s complete lack of response to the complaints letters. Management may be taking one view that the ‘whingeing’ consumers are only a small fraction of the total market. But according to research, for every one unsatisfi ed customer who complains, there are nine who do not.

(b) Customer orientation. Seebohm’s immediate customers are the distributors, who have not yet been contacted. It would be better for the distributors to hear about the prod-uct problem from Seebohm rather than from angry customers. Ideally, the company should meet all its distributors, explain the problem, and detail an action plan for its rectifi cation. Otherwise, confi dence could be lost and the buyers could switch to alter-native brands.

Seebohm should also communicate with its consumers. (Perrier achieved this end by advertising on national television when a similar product quality problem was discovered.)

In any case, Mrs Bagwind’s letter (and all the others) should be answered as soon as possible, preferably including compensation for her suffering (e.g. vouchers for alter-native brands).

(c) Target setting. Peters and Waterman stress that teams and individuals should be involved in setting their own targets. (Otherwise they may be uninspired to achieve them.) Seebohm allows no participation in this respect – a continuance of this approach will ensure that the lacklustre complacency of employees will continue.

In practice, the degree of participation will vary according to who is being assessed. For instance, a mass-production worker would (typically) discuss a target production rate with his or her immediate superior. In most cases, the target would not be altered, but at least the worker has had the chance to express his/her feelings about his/her performance yardstick.

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Solution 6Guidance and common problemsAs suggested in the introduction to this question, uncertainty is likely to be a factor in the management of most projects. In this examination, you may need to think about those factors that are likely to be uncertain and therefore, those factors that need to be moni-tored closely by the project manager. Again, it is likely that you will need to apply this knowledge of uncertainty to the given scenario:

(a) Many aspects of a project are likely to involve some degree of uncertainty, as all projects are future based and it is not always possible to predict the future with a high degree of certainty. Factors likely to be uncertain are the schedule of events and the budget. Unexpected price rises in materials or technology can increase the price and therefore affect the budget. Likewise, natural events such as adverse weather conditions can affect timescales. Also, if the project is an undertaking of an event or scheme never carried out before, then uncertainty is likely to increase. For example, the London Eye was the fi rst wheel of its size and technological design in the world. Therefore, there was a large degree of uncertainty in terms of schedule, particularly in the design phase of the capsules, as capsules of this size and nature had never been constructed for this purpose before.

(b) Once the project is under way, it is important to continually monitor progress to ensure that the project is proceeding as planned. This will involve the project man-ager measuring actual results and comparing these to the project’s planned progress. If this comparison of actual versus planned progress indicates that the project is behind schedule, exceeding the budget or not meeting the required technical specifi cations, then corrective action must be instigated to return the project back to plan.

However, corrective action cannot be taken by the project manager alone. The project manager must gain advice from both the project team and the customer before corrective action is taken, as corrective action is likely to affect the project team members, and may involve a change in project scope, cost or schedule, which the customer must agree.

Solution 7Project progress reports are a key information dispersal tool. Progress reports keep internal project team members up to date, and are a key document for the customer.

The project progress reports provide key information about:

● the project objective● current project status● problems to date● activities undertaken to resolve problems to date● future anticipated progress.

A typical project progress report may include the following details:

● Project achievements since last report (this may include the achievement of certain project milestones on key dates).

● Current project status – performance to date as compared against budgeted performance.

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● How successfully previous project issues/problems have been addressed. Status to date on previous project problems.

● Planned future corrective action.● Potential risks or problems since last performance report.● Targets and milestones for next project progress report.

Solution 8Project life cycles may vary from a couple of weeks to several years, dependent on the com-plexity, size and content of the project. It is also important to recognise that not all projects will follow the exact phases of the project life cycle. Phases may be simultaneous or less structured and formal.

For smaller projects and for those whose requirements are uncertain, the life cycle above may be too slow and involve customers too little during development. In these cases, the project life cycle may be repeated several times before a solution is agreed, rather than linearly.

Approximate requirements, the best ideas from competitors and the best parts of pre-vious projects may be built with customers into a model or prototype. Key features of the proposed system are implemented in a simulated operational environment that can be used as a ‘predictive model’. By trial use of the model, requirements are revised and the cycle is repeated until agreement is reached.

This would reduce risk because team members can gain experience as this process evaluates complex processes, tests and validates design techniques and tools, designs test facilities, assesses aspects of system integration and can be used to persuade suppliers and users to accept the proposed solution.

The feedback from this iterative process can identify risky parts of project design or problems of integration and operation (Field and Keller). In some cases, the model then becomes the fi nal solution with no further implementation.

Solution 9Many organisations view project management as a strategic competence, from which they can gain a competitive advantage. This is particularly true of organisations in project-based industries, such as engineering and consultancy. Such organisations have begun to see that using project management without continuous improvement to the methodology allows for the repetition of mistakes and poor practices. Excellence in project management requires the development of a methodology, a culture that believes in the methodology, and continues improvements to the methodology.

One such approach is the Project Management Maturity Model (PMMM), proposed by Kerzner, which provides guidance on how to become excellent in project management. The PMMM consists of fi ve levels, and each level represents a different degree of maturity in project management.

Level 1 – Common Knowledge. In this level, the organisation recognises the importance of project management and the need for a good understanding of the basic knowledge of project management, along with the accompanying language/terminology. The emphasis here is on training and education.

Level 2 – Common Processes. In this level, the organisation recognises that common proc-esses need to be defi ned and developed such that successes on one project can be repeated on other projects. Also included in this level is the recognition that project management

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principles can be applied to and support other methodologies employed by the company, such as total quality management and time-to-market.

Level 3 – Singular Methodology. In this level, the organisation recognises the synergistic effect of combining all corporate methodologies into a singular methodology, the centre of which is project management. The synergistic effects also make process control easier with a single methodology than with multiple methodologies. However, in some fi rms, the information systems personnel may still have a separate methodology.

Level 4 – Benchmarking. This level contains the recognition that process improvement is necessary to maintain a competitive advantage. Benchmarking must be performed on a continuous basis. The company must decide whom to benchmark and what to benchmark.

Level 5 – Continuous Improvement. In this level, the organisation evaluates the information obtained through benchmarking, and must then decide whether or not this information will enhance the singular methodology.

Solution 10StrategyThe strategy of a project, as of an organisation, can be defi ned as ‘a course of action, including the specifi cation of resources required, to achieve a specifi c objective.’ A project should have a comprehensive high level defi nition of what it is to achieve, how that will happen, and the resources to be used.

For example, in the redesign of a car, the strategy might be ‘to redesign the XYZ at a cost not exceeding $1 m, in order to improve customer safety to a level comparable to the best in the industry’.

ScopeThe scope of a project is the extent of work needed to produce the project’s deliverables. It is generally expressed as a list of tasks, often a summary of the work breakdown structure.

For example, in the redesign of a car, the scope of the project might be:

● agree specifi cation and model of best practice● redesign braking system● redesign passenger compartment● redesign airbags● redesign safety restraints● prototype and test changes, and correct any problems.

Solution 111. Unclear team goals and objectives. The project manager needs to review the project

objectives on a regular basis, with the team and with individual team members, to ensure that the objective remains an important target and that the team remains focused. Being vague about the goals of the project or not reinforcing the importance of the achievement of the goal on a regular basis is likely to lead to a lack of team focus and a failure to meet the project objective.

2. Lack of defi nition of roles. Team members may not clearly understand their roles in the project or may feel that their lines of responsibility and duty overlap with those of another team member. The project manager must meet with each team member

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early on in the life of the project to describe and discuss individual roles, duties and responsibilities, and to explain how they interact with other team members. When the project plan is formulated by the team, each team member must be given a plan of work, normally a work breakdown structure (WBS), which identifi es individual tasks and when they need to be carried out. This plan must be given to each team member by the project manager so that all the team members can understand clearly what they have to do, and what the other team members are also doing.

3. Poor leadership. The project manager must create an environment in which the team members can feel free to contribute and provide feedback. It is important for the project manager to set guidelines for team operations, but he or she must be able to bal-ance the requirements of many individuals within this framework of project rules. The project manager must be fl exible enough to listen and take advice from his or her team, but must also be strong enough to enforce his or her own suggestions and decisions, when necessary. Fairness and objectivity when dealing with team members is critical.

4. Poor team communication. It is important that the project manager holds regular team meetings and status reviews to communicate progress and to provide a forum for team discussion and airing of views. Participation in team meetings should be encouraged, and certain team members should be required to report on the status of their activities. Project documents, such as plans and budgets, must be kept up to date and circulated to the team regularly. The project manager should encourage open and frank discus-sion among the team members, both formally and informally. Physical location of team members can often be an important factor in helping or hindering communication.

5. Lack of commitment. Team members may not be committed to the overall project objec-tive, perhaps as a result of poor communication. The project manager must speak to each team member in order to communicate his or her importance to the achievement of the project. The project manager needs to determine the motivating factors important to each individual and should ensure that the project environment is a motivating one. The project manager must continually encourage individuals and support progress. Effective team members need to be committed and want to feel accountable for their individual activities.

Commitment may also be lacking where an individual is being split between work on the project and a full-time job. The project manager should recognise and deal with the situation by clarifying priorities and, if necessary, bidding for the individual to join the team on a full-time basis.

Solution 12Negotiations consist of four phases – preparation, opening, bargaining and closing. In large scale negotiations, these phases are normally tackled sequentially. However, in smaller scale negotiations, it is quite common for these phases to merge – possibly into a single unstructured process.

● Preparation involves information gathering – knowing the background to the problem, and the likely constraints acting on each participant. This might involve researching organisations, or discussing the context of the negotiation with colleagues.

● The opening phase of a negotiation involves both sides presenting their starting posi-tions to one another. It usually represents the single most important opportunity to infl uence the other side. An example might be that in negotiating a sales price, the sales person quotes the normal retail price and the customer asks for a 20 per cent discount.

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● In the bargaining phase your aim is to narrow the gap between the two initial positions and to persuade the other side that your case is so strong that they must accept less than they had planned. In order to do this you should use clearly thought out, planned and logical debate. For example, the sales person might gradually reduce the price asked, and the customer gradually increase their offer, each explaining reasons why they cannot be more generous.

● The closing of a negotiation represents the opportunity to capitalise on all of the work done in the earlier phases. The research that you have done in the preparation phase, combined with all of the information that you have gained since, should guide you in the closing phase. It is in the closing stage that agreement is reached. In the case of our example, the parties agree the price to be paid.

Section B solutions

Solution 13

(a) (i) The adoption of socially responsible policies is likely to result in increased costs. This will reduce the profi tability of the company, particularly in the short run, and will confl ict with the objective of maximising the wealth of the shareholders. It is possible, however, that the adoption of the policies might increase the profi t over a longer period of time and even result in the survival of the company. If a fi rm is seen as a ‘good neighbour’, it is likely that this image will be benefi cial in terms of attracting customers. This means that expenditure on the social programmes can be regarded as a good investment of resources.

(ii) It is possible that organisations which concentrate on the maximisation of profi t in the short run will probably resist the adoption of social policies that involve incurring additional costs. However, by concentrating only on short-term goals, the total profi tability of the organisation may be reduced over the life of the com-pany or project. Adopting a long-term view can often be the best approach. This means that the adoption of social policies that increase costs may eventually lead to the maximisation of shareholders’ wealth. This is the ultimate goal of many organisations.

(b) The company will need to appoint either an offi cial or a committee to plan and imple-ment policies which will improve the social responsibility of the organisation. It is also possible that the appointment of an outside consultant to monitor the position will be useful for implementing the social policies. Internal managers, who are under pressure to boost the results of the company, might neglect ‘social responsibilities’. In this situa-tion, there may be a temptation to reject policies that increase costs.

It may be diffi cult for the managers to identify the areas in which social respon-sibility issues arise. Training programmes and collaboration with other organisations may assist in the identifi cation of the problems that need to be addressed. It is possible that the starting point should be a review of the present social policies and practices of the fi rm. In addition, it will be necessary to ensure that the social responsibility of the fi rm is monitored to ensure that this type of issue is considered before decisions are made. It is also important that socially responsible policy decisions should be widely publicised within the fi rm. This will ensure that managers incorporate environmental factors into all decisions.

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(c) Although the shareholders will expect good fi nancial returns from the company, they are also members of the general public who will be affected by the social policies of the company. In this context, they may be prepared to sacrifi ce short-term benefi ts for the long-run advantages. As discussed in part (a), sound social policies may even result in improved fi nancial performance in the long run. The adoption of responsible social policies may, therefore, be the best policy for the company in the long run.

Employees are more likely to benefi t from most of the socially responsible policies of the company. They are therefore likely to be in favour of the policies. However, if the policies threaten their jobs, this will not be the case.

The effect on the fi rm’s other stakeholders, which include lenders, suppliers and the gov-ernment, will depend on the particular situation. Their reaction to particular social respon-sibility issues will be determined by the way that the policy affects their interests. Lenders will be principally concerned with the settlement of the amounts owed to them and this involves the levels of liquidity and profi tability. Suppliers will want to be sure that, in the short run, the amounts owed to them will be paid, but will be eager to retain links with a fi rm that is expanding. The government will be particularly interested in the levels of pol-lution in the country.

Solution 14When determining the objectives and designing the strategy for a company, it is impor-tant to consider the external infl uences. For a company that supplies water for public and industrial consumption, signifi cant factors will be as follows:

● Shareholders will expect a return on their investment and so their expectations will be important in the formulation of both objectives and strategy. As a supplier of water, it is possible that the company will have some element of monopoly power. This means that it may be possible to adjust the pricing policy to meet the expectations of the existing and potential shareholders. However, the level of return expected from their investment will affect the decisions that are taken by the management.

● Customers will expect to receive a high-quality product and service from the water company. It may be necessary to take their expectations into account, especially when determining the level of capital expenditure that should be undertaken. If water users’ requirements are not being met, it may be necessary to invest signifi cant amounts of capital to improve the service. It is possible that some degree of compromise will be necessary if an acceptable strategy is to be devised, as these customers, who may also be shareholders, will have confl icting views regarding the performance of the company.

● Competition may not be a major infl uence in this situation. However, the establishment of a regulatory body would have a major impact on the decisions that can be made by the management of the water company. Pricing and service criteria may be set for the company by the regulator.

● It will be essential that the opinion of the regulator is considered carefully to ensure that the company is not forced to rectify an unsatisfactory performance that might prove to be costly to deal with, after receiving unfavourable reports from the regulator.

● The economic, political and social environments will be a major infl uence in the formu-lation of the company’s objectives and strategy. Pollution, pricing policy and quality will be very important to all the parties involved in the supply and use of the water from the

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company. Any issues that arise are likely to be discussed within the community, so the company must be aware of the concerns of the public when formulating objectives and strategy.

● The management of the water company must be sensitive to the wishes and expectations of all these stakeholders. As a supplier of water, the company will be responsible for the health and safety of the community and this places a signifi cant level of responsibility on it. A breakdown in the water supply would be a major disruption to the lives of the users and the consequences for the industrial users would also be great. It is, therefore, important that the supply of water is not disrupted and the managers should take steps to ensure that the company can cope with most of the diffi culties that are likely to arise.

● It is imperative that the water is safe for consumption and so managers must be confi dent that the quality of the water supplied is acceptable. This may require the installation of extensive testing and quality-control procedures. This will increase the costs of the com-pany and consequently, reduce the profi t available to shareholders. It is essential, however, that the health aspects of the product are always paramount in establishing objectives and devising the strategy to be adopted. At all times, it is necessary to bear in mind the con-fl icts between the various stakeholders and to resolve them in a satisfactory manner.

● Within the water company, it is important that the effect of the organisational culture is taken into account. The core beliefs of the members of the company will infl uence the behaviour and attitudes of the employees. This will be particularly important when the company’s strategy is being developed and decisions are taken regarding both the short- and long-term future of the company. The staff will be aware of the high-profi le nature of the company’s activities and that supply problems in the water industry have many repercus-sions. This is because the supply of water is a sensitive and emotional issue. It is, therefore, important that the supply of clean water is placed high in the objectives of the company.

Solution 15(a) The management of a company is usually keen to show stakeholders that the com-pany is being successful and, fundamentally, to publicise the fact that it is being managed effi ciently and effectively. The published fi nancial reports of the company are used by the directors and management of the company to disclose information to the stakeholders about the performance of the company. In particular, potential and existing shareholders, who own the company, would appreciate information about the future plans of the com-pany to enable them to be aware of its strategic aims and objectives.

Although information is shown in respect of the company’s past achievements, the man-agement may wish to disclose strategically sensitive management accounting information if they believe that this will maximise the long-term wealth of the owners to whom the management are ultimately responsible.

It is likely that the stakeholders will be interested in receiving information which will enable them to form better opinions of the future performance of the company, especially regarding the future prospects of the company. In particular, the shareholders, creditors and lenders, employees and customers will be interested in receiving forward-looking information about the company:

● Shareholders. As the providers of the long-term fi nance to the company, the shareholders would be interested in being provided with information relating to the mission and objectives of the company. In particular, the expected changes in the share price

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and dividends would be of interest to the existing and potential shareholders. In addition, they would be concerned with the investment plans that the management are considering. It is possible that shareholders would be prepared to reduce the rate of return expected, as this additional information would reduce the risks faced by investors in the company.

● Creditors and lenders. This group would appreciate being provided with forward-looking information as they are interested in assessing the ability of the company to repay the amounts owed to them. By having access to information which focuses on future rather than past performance, they would be able to judge the company’s prospects of repay-ment more effectively. This would benefi t the company if it leads to a reduction in the cost of borrowing.

● Employees. Providing forward-looking information to the employees would enable them to assess their long-term employment prospects, which will be linked to the survival of the fi rm. Although this is diffi cult to assess, the provision of future-oriented strategic informa-tion would aid them and may act as a motivating factor which would benefi t the company.

● Customers. This group of stakeholders would be interested in the forward-looking infor-mation as they are concerned with the long-term survival of the company. If they are convinced that the company was being managed effectively, it is possible that they would prefer to place orders with the company and this would represent a competitive advan-tage as a result of publishing the forward-looking information.

In general terms, the management would be motivated to disclose strategic, forward-looking management information, especially if it presents a favourable picture. However, it is not possible to direct the reports only to these interested parties because competitors, in particular, would be very interested in receiving the company’s future strategy. This would clearly represent a major threat to the successful implementation of the strategic information plan, as it would enable the competitors to develop tactics and strategies which would coun-teract the company’s plans. This means that the management accountant faces a dilemma in deciding the extent and nature of the strategic information to be disclosed by the company.

(b) The management must strike a balance between the benefi ts to be received by publish-ing forward-looking management information and the costs of the information being used to counteract the plans of the company. This is an area in which it is extremely diffi cult to assess the likely consequences of their decision. As previously discussed, it may be possible to reduce the cost of capital and borrowing, creating a climate within the company which motivates the workforce and attracts additional orders from customers, but it will place this information in the public domain which means that it could then be used by competi-tors to frustrate the company’s strategy.

In order to cope with this situation, the management must carefully select the informa-tion to be published. The regulatory framework, which consists of the legislation, account-ing standards and accounting practice, will prescribe the minimum disclosures in the published reports, but additional information can be provided in the chairman’s report or in the reviews which are often included in the published statutory reports. It is also pos-sible for the company to make known selected elements of its plans and strategy to the fi nancial press which would be prepared to publish the information, if it was considered to be in the interests of the general public.

It is, therefore, for the management accountant to consider the type of information that would be benefi cial to the company, if made available to the public. At the same time, the possible use that could be made of the details by competitors would have to be assessed,

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and then the report prepared. It is likely that broad details of the strategy could be out-lined in the reports, but the details of the plan and the tactics would not be disclosed. This would mean that the management accountant is reaching a considered compromise in terms of the costs and benefi ts of the disclosure of strategic management information.

Solution 16Common errorsMany of the answers require simple factual statements-candidates, however, often provide long lists comprising often unrelated items.

(a) Classical management generally refers to a set of theories which have tried to set out a clear, prescriptive agenda for how all organisations should manage their affairs. From Parker Follet, Fayol, Taylor, Urwick and perhaps even Peter Drucker, they have appealed to the scientifi c or rational approach. In contrast, the human relations approach (HRA) has been relatively recent, arguably starting with Mayo and being developed by Hertzberg, McGregor and McClelland. It tried to suggest that the role of human, social and psycho-logical factors was as important, if not more important, in an organisations’ performance as scientifi c or technical excellence of the equipment or the systems.

Classical management concentrated on the task, the technology and the outputs of work. HRA, however, built on the inputs – the complex role of people and their motiva-tions. Mayo’s experiments demonstrated clear differences in output due to group effects despite the production system. The Tavistock Institute investigated the role of work meth-ods and group relations, establishing work as a ‘socio-technical system’. American writers such as Maslow, Herzberg and McGregor followed this up in various ways. The clear mes-sage to managers from HRA is ‘whatever the system’s elegance, people will not follow it unless motivated’.

Whereas the classical approach was decidedly European, by contrast, the HRA was almost entirely American and perhaps refl ected their liberal/democratic value system where the individual was the centre of their thinking. Classical scholars in the European tradi-tion were empiricists looking for scientifi c evaluations, with the exception of Taylor, a most important American theorist, who nevertheless adopted essentially European attitudes.

The HRA would concentrate on effectiveness and peripheral factors for achieving this, but classical approaches apply effi ciency measures and deal with the certainties of the task boundary. Surely, this is the approach of Japanese managers who enable inventiveness and employee involvement, yet also simultaneously, engineer effi ciency and effectiveness by their approach to ‘holistic’ management of quality.

(b) Organisations, or their managers, in practice, do not have views about what theory they are employing. Things tend to happen in a rather chaotic way (muddling through), though some visionary managers do think very deeply about the craft of management. Large organisations have always had to address the issues of control – via various processes and structures. These tend to operate in essentially stable, growing markets – hence their size – and have a classical approach. Small fi rms could well also have such an approach, based on people’s own feelings about jobs and implicit feelings about the ‘need to have an accountant’. Small hitech companies may, however, have started out in an HRA direction as they needed expert skills.

Nowadays, the competition in world markets is questioning the classical approach and even Taylor’s emphasis on effi ciency. Effectiveness is the preferred term, it seems, but scale effects are becoming ever more important in cutting the relative costs of operations in

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order to satisfy investors. The HRA to enlightened change programmes is becoming more popular, yet at the same time, downsizing is leading to mass redundancies. Perhaps we are reverting to the simple economic theory of the fi rm.

Solution 17(a) We can classify the infl uences on ethical behaviour into those affecting the individual, those operating within the organisation and those infl uences in the organisation’s environ-ment that condition the ethical behaviour of those responsible for its management.

Individual ethical behaviour is infl uenced by family, religious values, personal standards, and personal needs of various kinds. Research suggests that the early socialisation process is particularly important, as early training and development have a strong infl uence on character development. Managers and staff who lack a strong and consistent set of per-sonal values will fi nd that their decisions vary from situation to situation as they strive to maximise their self-interests. In the case of corporations like Enron in 2002, it is evident that the self-interest of some senior management and some professional staff overrode their commitment to acceptable standards of honesty and integrity. By contrast, people who operate within a strong ethical framework of personal rules or strategies will be more con-sistent and confi dent, since choices are made against a stable set of ethical standards.

The organisation in which an individual is employed is also an important infl uence on ethical behaviour. Senior managers in their role as organisation leaders set the moral tone of the organisation through their example and through the system of rewards and punish-ments available to them. Similarly, the expectations and reinforcement provided by peers and group norms are likely to have a similar impact. Formal policy statements and written rules are also important in establishing an ethical climate for the organisation as a whole. They support and reinforce the organisational culture which can have a strong infl uence on members’ ethical behaviour.

Organisations operate in an environment composed of a wide variety of stakeholders including customers, suppliers, buyers, competitors, government, trades unions, political parties, pressure groups and local communities and are constrained by laws and regula-tions, and by social norms and values. These norms and values vary from society to society depending on historical and cultural heritage, but, as countries become more integrated through the globalisation process, the business ethics acceptable in each country become more open to scrutiny and a convergence towards a common set of business ethics appears to be taking place.

The expectations of stakeholders play a key role in an organisation’s ethical behaviour because if expectations are violated, then this will have repercussions that can affect the organisation’s ability to operate. In the case of the US companies that violated the report-ing standards expected of them, the companies were punished by legal penalties and by shareholders who sold their holdings.

(b) Formal codes of ethics are offi cial written guidelines on how to behave in situations susceptible to the creation of ethical dilemmas. They have long been used in medicine, the law and other professions to regulate the ethical behaviour of their members and are now increasingly used in well-run organisations of all kinds.

These ethical codes try to ensure that individual behaviour is consistent with the values and shared norms of the profession or organisation. Codes of ethical conduct lay down guidelines on how to avoid illegal or unethical acts in the profession or job and on how employees should conduct themselves in relationships with clients and customers.

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Areas frequently addressed include advice on bribes and kickbacks, political contribu-tions, the honesty of records, customer-supplier relationships, and the confi dentiality of corporate information.

Useful though these codes are, they cannot cover all situations, and they cannot guar-antee ethical conduct. The value of any formal code of ethics still rests on the underlying values of people recruited to the organisation, its managers and other employees. It is evi-dent therefore that attention to recruitment and selection is important and that the criteria of selection should pay as much attention to the honesty and integrity of candidates as to their skills and abilities to perform the tasks and duties of the post they are recruited to.

Senior managers have the power to shape an organisation’s policies and set its moral tone. They can and should serve as models of appropriate ethical behaviour for the entire organisation. Not only must their day-to-day behaviour be the example of high ethical conduct, but top managers must also communicate similar expectations throughout the organisation and reinforce positive results. The same responsibility extends to all managers in a position to infl uence the ethical behaviour of the people who work for and with them. Every manager becomes an ethical role model, and care must be taken to do so in a posi-tive and informed manner.

A number of organisations now include some ethics training in their induction pro-grammes. This is especially the case for UK pension providers and those involved in the selling of fi nancial services more generally. A scandal of mis-selling and subsequent severe fi nes for the companies concerned has made them especially careful of the behaviour of the agents they now employ to sell their products.

Ethics training, in the form of structured programmes, to help participants understand the ethical aspects of decision-making, can help people incorporate high ethical standards into their behaviours. Most ethics training is designed to help people deal with ethical issues while under pressure and to avoid the rationalisations for the unethical behaviour that peo-ple are prone to indulge in to convince themselves that their unethical actions are justifi ed.

One particular technique used in ethics training is worthy of special mention. This is the so-called ‘mirror test’ in which trainees are confronted with the consequences of their behaviour, if it should become widely known to the public.

The term ‘whistle blowers’ refers to people who expose the misdeeds of others in organi-sations in order to preserve ethical standards and protect against harmful or illegal acts. While such behaviour does help to preserve ethical standards, it entails considerable risks for people who ‘blow the whistle’. In many cases, exposure of misdeeds has damag-ing fi nancial consequences for the organisations involved and damage to the reputation and careers of the people involved in the unethical behaviour. In such cases, the ‘whistle blowers’risk losing their present job and put their future career in jeopardy. It follows that if ‘whistle blowers’ are to be encouraged to speak out, then appropriate legal protection must be available to prevent them suffering penalties for what is, in many ways, a public service.

Solution 18An assumption can be made that the world class pharmaceutical suppliers have maximi-sation of shareholder wealth as their main objective. The question of what is meant by ‘social responsibility’ arises. This may be defi ned as ‘taking more than just the immediate interests of the shareholders into account when making a business decision’. A confl ict may exist in deciding that the satisfaction of the demands of shareholders compromises the company in achieving outcomes which are in the best interests of society. It is also

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possible that the two may not confl ict although, at fi rst sight in the scenario, it appears that the source of shareholder wealth through the production of pharmaceutical products may reduce or even disappear as disease becomes eradicated through the advancement of scientifi c research.

Ethics is concerned with the morality associated with decisions and actions. One area of ethical consideration is the exploitation of countries or people. Another is concerned with product development and their effects on the user. The ethical question is whether max-imisation of shareholder wealth should take precedence over everything else for a business in all circumstances. There is no absolutely right answer to the question.

Followers of Friedman would argue that the market economy is superior to other systems and the needs of society are accommodated by organisations recognising the market response to the environment. The profi t motive provides an incentive to supply the best results which benefi ts society in the main. This occurs through allocation effi ciency. Friedman’s followers would therefore argue that the pharmaceutical supplier is maximis-ing value to society by allocating resources in the most effective way to achieve the highest level of returns for the shareholders.

Sternberg believes that the sole purpose of business is to pursue shareholder wealth. Her view is that businesses cannot become involved in issues of social responsibility because this would change their purpose and objectives. Thus, followers of Sternberg would argue that the pharmaceutical companies are carrying out their legitimate responsibility to max-imise shareholder wealth.

The egotistical view explains that the rational pursuit of self-interest is natural and that the directors should pursue the increase in shareholder wealth irrespective of the consequences.

The stakeholder view would consider that the business should aim to be a good corporate citizen. This approach argues that businessmen are members of society and it is society that allows them to pursue their business interests under a form of unwritten social contract. Legislation may formalise elements of this social contract. This imposes a duty on the directors of the pharmaceutical companies to behave reasonably towards society and to accept social responsibility. This implies that they should promote the manufacture and sale of medicines which lead to elimination of diseases, even though this will ultimately affect their source of income.

The pharmaceutical companies should also consider the effect on other stakeholders, besides shareholders and customers or users. The employees will look for adequate remu-neration and stability. Managers will seek to maximise their own earnings and some will aim to develop their power and status. Suppliers will be affected by developments in disease eradication and preventative practices and medicines. The issue goes considerably beyond the pharmaceutical companies themselves. It impacts on the wider considerations of govern-ment and the people they serve. This therefore introduces a political dimension to the issue.

The whole issue of how far medical and drug research should be the responsibil-ity of pharmaceutical companies is raised. Certainly drug companies have argued that private investment is necessary to carry out research. The testing of drugs then goes through a rigorous governmental process in the major industrialised nations before they become available to market. Therefore, it is clear that governments do bring infl uence to bear on the process and development of drugs before they are sold. This requires a kind of partnership to develop between the governments and the drug companies. Governments are able to obtain tax payments from all profi table companies which enable more investment in public amenities and infrastructure. This has a benefi cial

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effect on the well-being of the population at large. If the source of fi nance was only the public sector, then this may create more central control, but it may well stifl e develop-ment. In any case, could governments around the world afford to make the necessary investment?

The directors may consider whether self-interest may be served by satisfying the natural demands made by society to develop improved medicines for disease eradication and pre-vention. They may refl ect that their own shareholders are also susceptible to diseases. The drug development aspect of the pharmaceutical suppliers however is only one element of the issue posed in the scenario. Traditionally, the pharmaceutical manufacturers have con-centrated their research on ways of treating conditions which already exist. The research into genetic code breaking will enable the determination of what causes diseases to break out in the fi rst place.

This shows a way forward for the directors of the pharmaceutical organisations in that their efforts may need to be channelled more into the research on how to use the new information to best prevent disease. This may result in the development of products which contribute to the improvement in quality of life, by preventing the spread of disease.

The directors will recognise that they have a contract with society to satisfy its demands in respect of public health which may in turn improve their reputation and enhance their sales of other developed products. This may develop further into pricing reviews which assist people with fewer resources to take advantage of new products. This, in turn, will translate into enhanced shareholder value through higher sales volumes.

There is a question of sustainability and the directors of pharmaceutical companies cannot resist the relentless march of scientifi c breakthrough and progress. The natural developments in breaking the genetic code and its consequences for fi ghting disease is an unstoppable force which the directors will need to embrace. By doing so, they will need to review their business strategy and redirect their research. There is also the issue of times-cale. It is likely that scientifi c breakthroughs will not happen in such a way as to immedi-ately reduce the demand for existing products. It will take time.

It also raises a whole group of other ethical issues about the use of genetic information, which is beyond the scope of this question.

Solution 19(a) Empowerment occurs when authority to make decisions and to resolve organisational problems is delegated to subordinates. It is believed that giving power to those doing the work of the organisation should improve fl exibility, speed up decision-making and aid the motivation of staff.

Hopefully, Mary will fi nd the following reasons for adopting empowerment convincing:First, it enables the knowledge possessed by employees at various levels in the organisa-

tion to be fully utilised because those doing the jobs are usually those knowing most about them. Expressed differently, empowerment brings to the attention of senior management, useful information, knowledge and skills that might otherwise have not been available.

Second, the feeling of involvement that empowerment gives employees makes them much more ready to come forward with existing and new ideas because they come to see themselves as part of the ‘team’.

Third, if employees feel that they have participated in some decision-making aspect of the business, then they are more likely to feel ‘ownership’ and hence motivated to give their energies to that particular project.

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Fourth, empowerment lifts the burden of supervision and control from management. Instead of spending time and effort ensuring that employees are doing what they are sup-posed to do, the manager can get on with other tasks.

(b) In order to empower her staff in the fi nance department, Mary will need to do a number of things.

Mary should, fi rst, attend a training course or workshop on empowerment to discover fi rst hand, the benefi ts of this method of managing people. She will also fi nd it useful to spend some time in departments that have already adopted empowerment because the problems of changing to the new way of operating will still be fresh in the minds of staff. If Mary can see empowerment working in practice, she is more likely to be convinced than if she has to rely only on the claims of others.

The next step for Mary will be to change her own behaviour as a manager. This will involve giving up the traditional form of management that implies the control and direc-tion of people and the maintenance of discipline. Instead, she will have to learn to trust all her subordinates (except the very inexperienced) and start to delegate the authority to carry out tasks to individuals or to teams of people. Instead of seeking to direct and con-trol, Mary will need to adopt a problem-solving approach in which she seeks to determine from employees what problems they have, if any, and to offer assistance where required. Thus, Mary will take on the role of mentor, facilitator/coach.

Such a process cannot be carried out overnight. Staff themselves will require a pro-gramme of reorientation and training to appreciate what is being asked of them. There may also be extra training required for some individuals who have not yet had the oppor-tunity to develop the skill and confi dence necessary to accept responsibilities without the guiding framework of the original management structure.

There will also need to be a review of reward systems so that the desired behaviour of both managers and other employees is consistent with that of empowered people. Anything that rewards the previous command and control kind of behaviour needs to be abandoned.

It may also be necessary and cost effective to remove some layers of management as empowerment reduces the necessity for a tall hierarchy, because people at all levels are sharing responsibility for decision-making.

Communication is very important in an empowered organisation. Channels of com-munication need to be opened up to encourage openness and information, previously restricted to a select few, made available to a much wider section of the workforce.

(c) The main problems that Mary is likely to encounter in seeking to empower her staff include the following:

First, she may have diffi culties with her immediate managerial subordinates because as already noted, empowerment involves changes in the role and behaviour of both managers and the people they manage.

For some managers, this is very diffi cult because it challenges their whole concept of ‘what it is to be a manager’. Some managers fear that to empower means to lose status and control and even to risk chaos. So in order to introduce empowerment, it is necessary to change the mental set of managers and this, in many cases, will require a programme of training and development. Mary may thus have to spend a considerable amount of time convincing her managers of the need to change their own behaviour.

The process of empowerment also assumes that workers are happy to take on extra responsibilities and to take some risks by using their own discretion rather than rely-ing on direction from their line manager. Research and general observation shows that some workers are reluctant to take on additional decision-making tasks, preferring

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instead to accept minimum responsibility. As in the case of managers, programmes of training and development, an appropriate reward system and a period of actually work-ing in an empowered work environment are necessary to persuade workers to change.

Solution 20(a) (i) Sam would probably justify his view of the organisation’s purpose, that is, making

money for shareholders using some, or all, of the arguments put forward by those committed to the view that organisations exist for the benefi t of shareholders. These include the arguments:

● That because T Inc belongs to shareholders, they have every right to expect that the company will be run in their interests. In particular, Sam could point out that the interests of investors includes a return on their investment in the form of regular dividends and possibly a capital gain from an increase in the share price.

● That other stakeholders like T Inc’s middle management, other employees, its cus-tomers and suppliers do have a legitimate interest in the business, but that they receive their rewards in the form of salaries, wages, good quality tobacco products and payments, respectively.

● That the profi ts that T Inc makes are taxed and that these are in turn used for the benefi t of the society as a whole. He could also argue that the company provides employment for people who might otherwise not have jobs.

● That it is not the principal responsibility of organisations like T Inc to look after the environment or provide community services: these are really the responsibilities of the state and local government agencies.

(ii) By contrast, Frank would probably justify his view of organisational purpose by advo-cating some version of the stakeholder value perspective, which argues that:

● Since the success of T Inc depends on inputs from a variety of stakeholders such as labour, management, suppliers and consumers, the purpose of the organisation can-not be confi ned to serving just the interests of shareholders.

● Organisations like T Inc should instead be regarded as joint ventures between a number of stakeholders who supply fi nance, knowledge and skills of various kinds, raw materials and parts and so on.

● While the interests of shareholders are legitimate, so are those of employees, suppli-ers, customers and the wider community including those responsible for providing local infrastructure and the educational facilities to supply competent employees. The social responsibility of organisations extends, therefore, to the stakeholders out-side the organisation such as the local community.

(b) Frank has adopted the stakeholder perspective on organisations, which sees the pur-pose of the business as trying to satisfy the goals of a wide range of stakeholders.

It follows from this that organisational goals are partly a refl ection of the collection of standards imposed on an organisation by its stakeholders, but these different stakeholders have very different degrees of power.

Different stakeholders have different goals. For instance, in the case of the tobacco company, T Inc:

● customers are interested in quality, price, taste and increasingly, product safety;● shareholders in dividends and capital growth;● suppliers in future orders and timely payment;

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● government in payment of tax on cigarettes and tobacco and employment issues;● local government in local tax payments, pollution and local employment;● lenders in liquidity, assets providing security and potential to repay on due date; and● employees in wages, working conditions, interesting work and career development

prospects.

Of course, the organisation does not have to pay equal attention to each of these demands: this depends on how reliant the organisation is on each stakeholder.

Another important consideration is how congruent with each other the expectations of the stakeholders are. If there is widespread agreement among all groups about what the organisation exists to do and how it should do it, then there will be few confl icting goals. However, in organisations in which there is widespread disagreement over purposes and methods, management is faced with a much more diffi cult task of reconciling the goals of interest groups. This would probably be the case for a tobacco company.

In such cases, the determination of organisational goals involves the following stages:

(a) Identifi cation of the stakeholders for the particular organisation and assessment of the relative power (organisational dependency) of each.

(b) Determination of what expectations each stakeholder group has for the organisation, that is, the goals they seek to impose.

(c) Examination of the expectations for potential confl icts and, along with the informa-tion on relative power, determination of an order of priority of these for the organisa-tion as a whole.

(d) Finally, assessment of organisational priorities in terms of the organisation’s ability to satisfy at least the minimum expectations of the key stakeholders.

The goal priorities will also need to take account of what is possible in terms of goal attainment for the organisation and this will depend on the outcome of a wider strategic analysis as well as the stakeholder analysis detailed above.

Solution 21(a)

IntroductionThe following report will introduce the importance of undertaking a critical path analysis for this project, and will illustrate this by presenting one. This will indicate the critical activities that the FGCC must monitor and control. In addition, the report will demon-strate the total duration of the project and any areas of slack time (fl exibility) which the project managers need to be aware of.

Importance of critical path analysisCritical path analysis (CPA) is a useful method of highlighting a chain of sequential events in a project, which determines the minimum time required for the project. This would form part of the project planning and scheduling stage of the project life cycle. In the Games project, the effective management of the time dimension is critical, as the project must begin on the specifi ed date of 2 November 2004. Therefore, CPA will be used to set target dates which will ensure that the project is on time.

This project is also likely to be complex in terms of the scope of activities which need to be undertaken and coordinated (e.g., from the development of a telecommunications and information system to the coordination of media and public relations events). All of these

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activities will need to be coordinated effectively by using CPA to analyse the most appropri-ate and logical sequencing and timing of their undertaking. Monitoring of project progress using CPA will enable the impact of delays to be identifi ed quickly as priority planning is enabled by analysing the fl oat on each activity. Those activities with a zero fl oat are consid-ered to be ‘critical’ and therefore will be the focus of the project managers’ attention.

It is also likely that the individual project managers of each work breakdown structure, that make up the whole project, would also undertake CPA for their own area of control. For example, the project manager responsible for Activity B in the work breakdown struc-ture would be required to breakdown the construction and refurbishment phase of the project further, into key tasks and activities and produce a critical path in order to control this key phase (52 weeks).

(b)

The critical pathSee Appendix 1A or 1B for CPA diagram with EET’s and LET’sThe critical path activities are B, D, F, I, J, K and LThe critical path duration is 104 weeks

(c) The slack time on activity H is 10 weeks.From Activity-on-Arrow diagrams, this is calculated as 96–12–74.From Activity-on-Node diagrams, this is calculated as 84–74.This information may assist decision-making since if completion time for this activity

slips by up to 10 weeks, additional costs to recover the delay, such as overtime or premium delivery, would not be authorised.

Also, if resources need to be borrowed to assist an activity with zero slack time, the resources from activity H can be spared up to 10 weeks without damaging the overall project completion time.

00

0

B

522

52

52

D

164

68

68

F

65

74

74

H

H

12

12

774

84

684

841

22

28

C

A22

E I 10 12J

26

143

36

42

796

96

K

6

EventEETActivity

Critical path

Duration LET

8102

102

L

29

104

104

G40

Key:

APPENDIX 1A Critical Path Analysis of the Farchester Games Project (using an activity on arrow approach)

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3EN

TERPRISE MA

NA

GEM

ENT

Construct sports facilities

B

250

52 wks

Fri 01/11/02 Thu 30/10/03

Construct media facilities

D

8625

16 wks

Fri 31/10/03 Thu 19/02/04

Install communicationssystem

F

4786

6 wks

Fri 20/02/04 Thu 01/04/04

PR

1

4847

10 wks

Fri 02/04/04 Thu 10/06/04

HRM

J

6948

47868625250

Obtain finance

A

826

22 wks

Fri 01/11/02 Thu 03/04/03

Design communicationssystems

C

2482

14 wks

Fri 04/04/03 Thu 10/07/03

Programmecommunications system

E

8624

26 wks

Fri 11/07/03 Thu 08/01/04

220

ISPM, Nov 2002

1 520 days

Fri 01/11/02 Thu 28/10/04

4010

26636322

69484847

12 wks

Fri 11/06/04 Thu 02/09/04

Construct transport andaccomodation

G

44

Note: EET (Earliest start time) and LET (Latest start time) here refer to the activities. On Activity on Arrow diagrams, EET and LET refer to milestones between activites.Therefore EET and LET values will differ in the two methods.

84

40 wks

Fri 01/11/02 Thu 07/08/03

Security check

H

6948

12 wks

Fri 02/04/04 Thu 24/06/04

Test and contingency

K

20169

6 wks

Fri 03/09/04 Thu 14/10/04

Events

L

401201

401201201696847040

2 wks

Fri 15/10/04 Thu 28/10/04

ActivityPrecedence

Duration

EETKey: Earliest finishtime

LET Latest finishtime

APPENDIX 1B Critical Path Analysis of the Farchester Games Project (using an activity on node approach)

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ConclusionCritical Path Analysis will be an important control tool for this project as it focuses upon critical events and the management of the timing of key activities. The Farchester Games must begin on 2 November 2004; therefore, the importance of managing the time element of this project cannot be over-emphasised. The critical path for this project of activities B, D, F, T, J, K and L now provides the steering committee with a focus for the management of the resources within those activities. It will also demonstrate to the project managers of those activities the importance of effective project management for their own areas.

Solution 22(a)

For effective project team meetings (i) Activities to be carried out before the meeting: ● Determine the purpose of the meeting, such as what are the objectives and the

desired fi nal outcomes required. For these fi rst team meetings, the objectives are likely to be to establish the objective of the team, allocate roles and responsibilities for work breakdown activities, to set initial deadlines and targets, to discuss reporting procedures and levels of authority and to provide guidelines for team communicationand operations.

● Formulate the agenda, based upon the objectives and fi nal outcomes required from the meeting and distribute the agenda well in advance.

● Determine who needs to attend. ● Prepare the necessary paperwork, such as handouts, presentation slides or briefi ng

notes for the project team. ● Ensure that all facilities to hold the meeting are available, such as appropriate loca-

tion (accessible room), facilities and equipment.(ii) Conduct of the meetings: ● Begin the meeting on time in order to encourage team members to arrive on time at

future project meetings. ● Take minutes, and have them circulated to all members of the team, other project

managers on other project teams and the FGCC organising committee. ● The project manager should act as a facilitator, encouraging open participation and

discussion of agenda items. Ideally, the project manager should encourage all team members to make a contribution to the meeting procedures. It is particularly impor-tant at this fi rst meeting, as contacts between group members need to be established and all views and opinions about the project team activities need to be aired so that problems or diffi culties can be discussed as a team.

● In addition, the project manager must effectively control the meeting, ensuring that all agenda items are adequately discussed and that the meeting is not diverted on to issues which are not on the agenda. The project manager must also control the time spent on each item. Again, effective control in the fi rst meeting by the project man-ager is vital, as this will set the standard for future team meetings.

● All points raised by team members must be clarifi ed and recorded, and at the end of the meeting, all action points must be summarised and conclusions and action points must be agreed to by the participants.

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(b)

Economic feasibilityThis part of the study would investigate whether there are suffi cient fi nances available within the project to cover the fi nancial outgoings of an Internet site development. An assessment of the costs of site development, design, maintenance in terms of hardware, software and manpower would be required. The fi nancial budget for this project is strict and it will be important to spend money on those areas which are absolutely essential and not a luxury. Without having a specifi c budget breakdown, it is diffi cult to assess the fi nancial viability, but it could be suggested that an Internet site would be a viable asset to the organisation, marketing and selling the Games to the whole world. It would also be necessary to assess whether the marginal increase in revenue is forecast to be greater than the marginal increase in cost.

TechnicalThis part of the study will assess whether the technology exists or can be obtained for the Games project. Internet sites and the integration of organisational databases in order to sell and market products and services is clearly an existing capability within other organisations. Many organisations, from supermarkets to insurance companies, now use their Internet sites to sell and promote their goods. Internet technology does exist already and so such a site is technically feasible. However, the FGCC must consider specifi c issues such as fi nding an appropriate provider, ensuring security capabilities and assessment of maximising access.

OrganisationalThis part of the study will assess whether the Internet site will fi t into the organisational context of the Games. It would appear that the culture of the Games (high quality, cus-tomer satisfaction, high achievement) is in line with a Games Internet site.

OperationalThis part of the study will evaluate whether the organisation has the existing personnel and procedures to undertake an Internet site development. As this project is a one-off situation and the organisational structure is a temporary one, then personnel and procedures can be brought in and designed to suit the individual activities required by the project. Therefore, the Internet site development should be operationally feasible as long as the FGCC can fi nd suitable experts who are capable of undertaking such a project.

One issue that may affect the operational feasibility is the critical nature of the timing of the project. The project may well be able to buy in personnel, but will there be suffi cient time to train them and to test the procedures and systems?

Solution 23(a)The corporate level strategy of an organisation like E Company is concerned with issues such as:

● the overall scope and direction of the organisation;● how is it to be run in structural and fi nancial terms;● how resources are to be allocated among its portfolio of automobile, marine and aero-

space engine businesses.

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It is also concerned with what products and markets it should be in and this will involve decisions about companies which it might acquire on the one hand or companies which it might divest itself of on the other.

Given the information available, it looks as if E Company has pursued a strategy of related diversifi cation in that it has built on its engineering capability to move into the production of engines for the automobile, marine and aerospace markets.

The business level strategy of an organisation is primarily concerned with how to com-pete in a particular market and is the responsibility of a particular strategic business unit or division. In the case of E Company, the senior management of each of the three businesses will largely determine business strategy in automobile, marine and aerospace respectively. In their deliberations, the business unit managers will be guided by the overall strategy decided at the corporate level.

According to Michael Porter, there are three generic strategies available to organisations at the business level: cost leadership, differentiation and focus. The adoption of one or other of these strategies by a business unit is made on the basis of:

1. an analysis of the threats and opportunities posed by forces operating in the specifi c industry of which the business is a part;

2. the general environment in which the business operates;3. an assessment of the unit’s strengths and weaknesses relative to competitors.

The general idea is that the strategy to be adopted by the organisation is one which best positions the company relative to its rivals and other threats from suppliers, buyers, new entrants, substitutes and the macro-environment, and to take opportunities offered by the market and general environment. In the case of E Company, it appears that the business strategy across all divisions has been one of differentiation based on engine design and quality.

The functional level strategies of an organisation refer to the way in which the different functions of the organisations – purchasing, manufacturing, marketing, fi nance and so on, contribute to the other levels of strategy. The concerns here are to do with how effi ciently and effectively resources are deployed.

Without effective implementation at the functional level, strategic plans at higher lev-els would come to nothing. It is at the functional/operational levels that strategies are implemented in detail. The pursuit of a cost leadership strategy at the business level, for instance, entails the suppression or reduction of costs in as many functional areas as possi-ble. This may be achieved by a variety of means such as the use of advanced technology in manufacturing and administration, exploitation of economies of scale, the increased moti-vation of employees, additional training and so on. Functional strategies are digestible ele-ments of the overall plan. They help to convert theory into practice at the sharp end.

(b) The perspectives of managers C and D to strategy development in the scenario refl ect two of the major schools of thought on how managers should go about the analysis, for-mation and implementation of strategy.

One school of thought, known by various names, such as the industrial organisation approach, the outside-in approach or the positioning approach, concentrates on the threats and opportunities presented by forces in the industry and wider environment. According to this view, the critical task for strategists in E Company is to continually scan the environment to ensure that it is best positioned to ward off threats from the chang-ing strategies of rivals, suppliers, buyers, new entrants and producers of substitutes, and

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to take advantage of any opportunities that present themselves. A similar stance is taken in respect of the social, economic, political and technological changes that occur in the macro-environment. Threats posed by changes in the economy in the form of interest rates or exchange rates, for example, have to be factored into E Company’s calculation of how best to price its engines while taking account of how competitors and other players will react to such behaviour.

The advantage of this approach is that managers are in constant touch with changes in the market place and have the knowledge available to enable appropriate action to be taken as challenges arise from other industry players or from wider environmental changes.

The alternative view is again referred to by a variety of names such as the resource-based approach, the core competence approach or the inside-out approach. Whatever name is applied, this approach to strategic management is characterised by the claim that the criti-cal factor for any company seeking competitive advantage is its unique resources and/or its core competences and capabilities. Proponents of this view maintain that competitive advantage derives from tangible and intangible resources, such as the engineering skills and the quality brand image of E Company’s products. On this view, strategic advantage can be gained, or regained in this case, by concentrating on its hard-to-imitate resources and competences. Hence the view of manager D in the scenario that E Company should focus on developing further its engineering skills as a means of beating the competition and pre-sumably ensuring that the quality of its products exceeds that of others.

The advantage of such a view is that it focuses attention on the value chain activities within the business and suggests that, by improving the organisation’s resource base, its core skills or competences and the way it coordinates its activities, it can both reduce its costs and improve the quality of its products.

Solution 24(a) In drawing up guidelines for disciplinary procedures, reference should be made to codes of practice such as that published by ACAS in the United Kingdom. (In other coun-tries, some quasi-governmental organisation and/or employer/industry association will provide guidelines.) Any system must be fair and applied consistently because procedures are often subject to legal control.

Guidelines for disciplinary procedures in NYO.comThe procedure should:

(i) be a formal, written procedure; (ii) indicate to whom it applies and the appropriate employees should be provided with

a copy;(iii) specify what disciplinary actions may be taken and which level of management has

the authority to take such action. In particular, the procedure should specify the vari-ous steps involved in the process, for example:

● informal discussion ● oral warning ● written warning ● demotion/suspension ● dismissal.

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(iv) ensure that the employee is notifi ed of the complaint against him/her, given the opportunity to state his/her case and be represented either by the union representative or a fellow employee;

(v) ensure that no disciplinary action is taken without a full investigation and that no employee is dismissed for a single incident of misconduct, unless it is gross misconduct;

(vi) provide the employee with the right of appeal against any disciplinary action.

While it is not possible to set out a procedure, which is applicable to all organisations, most disciplinary procedures are based on the provision of a range of sanctions, increasing in severity, to be applied by progressively more senior levels of management.

(b) NYO.com requires a disciplinary procedure to comply with employment law (Employment Protection Consolidation Act 1978 in the United Kingdom and/or the equivalent in other countries). The procedures of the company are designed to ensure that standards are maintained and to minimise expensive litigation, which could arise because of claims of unfair dismissal.

The disciplinary procedure of NYO.com will be designed to create a system of objec-tive assessment for any situation that might be considered as misconduct or inadequate performance. It is available for all employees to read so that they are clear on standards and norms of behaviour and performance expected. The process aims to try to achieve a change in behaviour of any employee concerned through informal warning so that further actions are unnecessary.

Finally, a disciplinary procedure protects the employee from arbitrary management action. In setting out a written procedure, there is a greater chance that the employee, being disciplined, will receive a fair hearing than if such a procedure did not exist. In the event that the employee feels unfairly treated, he/she has the right, in many countries, to have his/her case heard before some kind of Industrial Tribunal. If the employer is shown to have been negligent in the use of or has misused the disciplinary code of conduct, then sanctions against the employer are available under the law.

Solution 25(a) A ‘virtual organisation’ may be defi ned as any productive system enabling individuals separated by distance and/or time to work together towards a common goal.

In recent years, a number of related developments have occurred that have given rise to the idea of the ‘virtual organisation’. These include developments in outsourcing, alliances and communications technology.

For many years, organisations have outsourced some of their activities as a way of getting things done by others who have the time, resources and specialist expertise that the organisa-tion itself may not possess. Such an arrangement often allows an organisation to reduce its costs and to offer a range of products and services that, on its own, would not be possible. The contribution of outsourcing to the notion of the virtual organisation is that production does not need to be concentrated in one place, but can be conducted anywhere in the world.

Organisations can subcontract many of the activities necessary to the production of the fi nal product or service and concentrate on a small number of core activities. Nike, the sport shoe specialist, for example, concentrates on the design and marketing of its shoes, but their production is subcontracted worldwide to wherever the cost of production is lowest.

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Alliances of various kinds, whether in the form of strategic alliances, joint ventures or consortia, have also added to the cooperative forms of organisation that result in a shar-ing of resources to the mutual benefi t of the cooperating parties. In such alliances, the value chain activities necessary for the production of a product or a service may be shared between partners. For example, aircraft fi rms in Europe have for many years collaborated on research and development of new types of aircraft and divided the production, with a fi rm in one country supplying engines and its partner fi rm in another supplying the fuse-lage and wings.

When fi rms cooperate with a number of different other organisations in this manner, it is common to refer to them as ‘network organisations’ because the links between them form a pattern of links that can be represented as a network of contacts and relationships. The organisation in this sense is virtual because it has no single physical location.

But perhaps the greatest infl uence on the development of the virtual organisation has been communications technology. The computer networks that comprise the Internet now allow individuals and organisations to communicate and transact business across the world in a way that was impossible until relatively recently. Increasingly, people do not have to be in a common location to do their business.

The use of hot-desking and tele-working, which are an increasingly familiar part of working life in many organisations, also represent aspects of the virtual organisation.

People interact increasingly by electronic means rather than face-to-face in the same physical location. For many, the mobile phone and the laptop constitute the offi ce and the offi ce itself might be mobile in the train, the aircraft or the car.

(b) Joint ventures are alliances in which partners create a third entity that represents the combined interests of the companies involved. Also, companies may enter into joint ven-tures by taking direct equity stakes in one another. Either way, joint ventures often entail complex coordination between partners to achieve a number of different objectives that they hope will be to their mutual benefi t. The potential advantages of forming the joint venture company will be different for each of the two partner companies, T and K.

For Company T, the possible advantages include access to technology and other knowl-edge and experience that the young mobile telephone company does not possess. Perhaps of greatest importance to Company T is the possibility of learning new skills that it can transfer to its own existing business. As Company K is an established European company, it will bring all its accumulated experience of the telecommunication industry to the part-nership. Company T might also benefi t from the brand image of Company K, given that it is an established player in the European market.

For Company K, the potential advantages will largely involve gaining access to the market in country N. In addition, Company K may gain knowledge from Company T about local market conditions and consumer needs. There may also be additional advantages to Company K of setting up a joint venture in an industrialising country like N. Such ventures are often positively regarded by the host country government. It may provide Company K with special assistance in aspects such as the gaining of planning permission and/or easing the restrictions on access to the market, that foreign companies often face when attempting to set up production via means other than a joint venture.

For both companies, there is also the possibility of advantages such as that of shared fi xed costs and the sharing of risks associated with new products and processes.

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(b) The project elapsed time, according to the information provided, is 27 weeks.(c) In order for the time constraint to be met, that is delivery to the production depart-

ment of Able in 24 weeks, there are a number of options worth exploring: ● Are all the estimated durations for the activities realistic? Are they based on good

quality data, or are they just guesswork? ● Is there any ‘contingency’ built into the estimates, in order to protect the design

department? ● Are the dependencies rigid, or is there any fl exibility for activities to take place in

parallel, or to overlap? ● Can any of the activities be re-engineered, in order to shorten their duration? ● Can any of the activities, or parts of them, be rescheduled into the 4 weeks of ‘slack’

in the project? ● Can the duration of any activities be shortened by hiring additional resource, or

subcontracting?

Solution 27(a) Projects are initiated when a need or an objective is identifi ed. Objectives are those things that the organisation wants to achieve. Typically, top-level objectives are profi t-ori-ented, or in non-profi t-making organisations, objectives will be to improve the standard of living or education, and so on of members. It is usually a function of the board of directors to determine the high-level organisational objectives. These objectives are then converted from ‘whats’ into ‘hows’ by undertaking projects.

The successful accomplishment of the project objective is usually constrained by four factors: scope/functionality, schedule/time, cost and customer satisfaction/quality.

Solution 26(a)

Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

A

B

C

D

E

F

G

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Project scope/functionalityThe scope of the project is all of the work that must be carried out to satisfy the project’s objective. The customer will expect the work to be carried out to completion and that there is nothing expected which is missing. For example, when building a house the project scope will include clearing the land, building the house and landscaping, all within the agreed quality standards expected by the customer. Leaving windows or walls unfi nished, a hole in the roof, or a garden full of rubble will be unlikely to satisfy the customer! In com-puter systems, the scope is often defi ned by all the functions that the system is expected to fulfi l.

Project schedule/timeThe schedule is the timetable for activities involved in achieving the project objective. The project will have a fi nite date for completion, either set by the customer or negotiated and agreed upon with the customer. For example, planning a wedding will require organisation of all activities to occur at a specifi c time and on a specifi c wedding date.

Project costThe cost is the amount the customer agrees to pay for the fi nal project or product. The project cost is based on the budget, which includes a cost estimate of the resources that will be used in the project. This will include salaries of the people working on the project, project materials, equipment purchase or hire, subcontractors’ or consultants’ costs and facilities costs.

Customer satisfaction/qualityThe objective of any project is to complete the scope within budget and by the agreed date, to the customers’ satisfaction and quality requirements. It is important to ensure that prior to the project planning, the project team has a clear understanding of the customer specifi cations and requirements, that the customer is kept informed of project progress throughout the project life and that the plan includes progressive testing to ensure that quality requirements are fully met. Quality in computer systems can be measured in the number and type of errors (‘bugs’) it still contains, response times, fi tness for purpose (i.e. matches the business process it is intended to support) and so on.

(b) As the project evolves, it is important to monitor it continually in order to ensure that it is progressing as expected, towards the fi nal objective. This requires a continual measure-ment of actual activities, including monitoring activities started and completed, how long it has taken so far (and how long it is estimated to take up to completion), and how much money has been spent on that activity. This measurement of actual resources committed at any time or to date must be compared against the plan of activities to assess progress and monitor any deviations. If, after comparison of actual versus plan, a deviation is discovered (such as overspending or taking longer than anticipated), the project manager must take corrective action to get the project back on target.

Corrective action requires consideration of alternatives before implementation. For instance, adding extra resources in order to get a project back on time will incur extra costs and may therefore overrun the project budget. The project manager needs to con-sider very carefully the implications of any corrective action upon the project scope, budget and schedule. The most important aspect of project control is ensuring that moni-toring progress is carried out on a regular basis and that corrective action is considered

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and implemented immediately. Effective project control will involve a system to regularly gather project data on actual project progress and performance and carrying out corrective action, where necessary, as soon as possible. A regular project reporting period should be set up (e.g., daily, weekly or monthly), depending on the complexity or duration of the project. More complex projects are likely to require more frequent progress assessment.

It is vitally important that the data collected about the actual progress of the project are reported on a regular, timely basis. Making decisions about changing the project plan or adding more resources can only be effective if the project manager is using the most up-to-date, accurate project information. The project manager should not gather actual data at the beginning of the month and then wait until the end of the month before using it to update the schedule or budget. It is also important for the project manager to agree to any changes in the plan only after consultation with the customer, as changes are likely to affect cost, schedule or scope of the original baseline plan.

When the updated schedule and budget have been calculated, a comparison must be made against baseline budget and schedule in order to determine if any variances have occurred. If it is considered that the project is satisfactorily on target, then no corrective action is required. If corrective action is required, the next decision is to determine how to revise the schedule or budget. These decisions may be very diffi cult, as they will often require a trade-off of cost, time and scope. For example, getting the project back on time may require extra resources and therefore, additional costs or a compromise on the original scope. Reducing excess expenditure may mean using less or lower-quality resources, which again may affect the overall scope and performance of the fi nal project.

Once a decision is taken, the changes must be incorporated into the schedule and budget. This project control process will be carried out continually throughout the dura-tion of the project. If it is considered that the project is likely to have a high control risk, the monitoring progress should be carried out more frequently.

513

At the time of publication there are no exam Q & As available for the 2010 syllabus. However, the latest specimen exam papers are available on the CIMA website. Actual exam Q & As will be available free of charge to CIMA students on the CIMA website from summer 2010 onwards.

Exam Q & As


Index


517

4-D model, 1565 project management process areas, 156–77-S model, 1579 project management knowledge areas, 157–8

Abdication, 306Abilene paradox, 352ACAS see Advisory Conciliation and

Arbitration Service (ACAS)Accounting, environmental responsibilities,

124Accuracy:

software, 235Achievement cultures, 322Action centred leadership, 315Action rationality, 18Activities:

graphics, 223nodes, 231

Acts, anti-discrimination, 448–9Actual cost (AC), 240Adair, John, 315Adam’s equity theory, 447Additive model, 350Administrative school, 294–5Advanced warnings, 438Advisory Conciliation and Arbitration Service

(ACAS), 441induction checklist, 393

Advocacy threats, 403Affordability, software, 235Agnew, J., 91, 92Air Traffi c Services (NATS), 177–8Airlines, 116Alternative approaches, strategic management,

3, 28–31

Amazon.com, 115–16American organisational culture, 323Analysis methodology, 30Ansoff, H.I., 42Anti-discrimination Acts, 448–9Apple Computer example, 426Appraisal:

corporate, 8performance, 391–3soft controls, 390

Arbitration, 441, 443Armstrong, A.G., 124Assessment:

confl ict, 432–3project feasibility, 214

Asset specifi city, 118–20Assumptions, projects, 224Attack competition, 88Auditors, internal, 405Audits:

soft controls, 393Authority:

delegation, 305–6documentation, 257–8management, 302–6management styles, 309, 329

Avoidance, risk management, 219

Balanced scorecards, 19Bamforth, K., 297Bargaining power:

buyers, 75suppliers, 75see also Collective bargaining

Barney, J., 25Bartlett, C.A., 116

Index

ENTERPRISE MANAGEMENT E2518

IND

EX Baseline plans, 223Behaviour:

change, 328–9Belbin, Meredith, 349–50Benchmarking, 244, 490Benevolent authoritative style, 311Bensoussan, B.E., 87Bias for action characteristic, 324Birley, S., 21, 22Blake, Robert, 312–14Blanchard, H.H., 316Boeing, 192–5Bounded rationality, 118Boyd, Richard, 317BPO see Business Process Outsourcing (BPO)Brand competitors, 84Brand name capital specifi city, 119Brandenburger, 77Breach of statutory duty, 444British Airways mission statement, 7Brunsson, N., 18Budgeting:

projects, 234software, 234

Buffering, 233Bureaucracy management, 295Burns, T., 298–9Business ethics, stakeholder view of, 126–7

ethical obligation, factors affecting, 397–8Business intelligence units, 98Business Process Outsourcing (BPO), 360–1Business strategy, 5–6

benefi ts, 19–20drawbacks, 20–1formulation, 19–20top–down process, 18

Buyers bargaining power, 75

CAD see Computer assisted design (CAD)Cadbury Code/Committee/Report, 404–5,

406Calculative contracts, 446Capital markets access, 408Capital requirements, 74Categorisation of information sources, 99Categorising culture models, 321–3Change:

behaviour, 328–9controls, 261management skills, 165–6projects, 153, 174

Channel Tunnel example, 253Charismatic authority, 302Chartered management accountants, 127–8Chemical industry, 124Child care benefi ts, 450CIM see Computer integrated manufacturing

(CIM)Close to the customer characteristic, 324Closure, projects, 242–3Clustering, 94–5Codes of practice, 461Coercive contracts, 446Collective bargaining, 435Collectivism, 328Combined Code (corporate governance), 407–8Commitment, 444–50

teams, 167, 491Committee of Sponsoring Organisations

(COSO), 388, 404Committees, safety, 349Communication, 163, 353–6

oral, 353–4project management, 152project managers, 162–3project planning, 222teams, 167written, 354

‘Communications Infrastructure’, 478Competence-based approach, 47–53Competing objectives, 36–8

composite measures, 37weighting, 37

Competition:defi nition, 430fi ve forces model, 11product differentiation, 74profi tability, 73rivalry, 75–6substitute products, 74–5see also Confl ict

Competitive advantage, 14–15, 23economic theory, 23strategic management, 41

The Competitive Advantage of Nations, 93Competitive environment, 69

competitor analysis see Competitor analysiseconomic environment, 90–2environmental analysis see Environmental

analysisenvironmental impact assessment, 69–70environmental uncertainty, 81–3


IND

EXinformation sources, 97–9national competitive advantages see National

competitive advantagespolitical risk, 96–7

Competitive strategy, 6Competitor accounting, 89

barriers to entry, evaluation of, 89–90competitor’ costs, 90

Competitor analysis:concepts, 84defi nition, 83gathering competitor intelligence, 86–7levels, 84–6response profi les, 88–9

Complementary model, 350Complex organisation forms, 114–17Complexity, 82Composite measures, 37Computer assisted design (CAD), 121Computer integrated manufacturing (CIM),

121Concilliation, 443Condit, Philip, 191, 192–3Confectionery industry:

example, 76Confl ict, 425

collective bargaining, 435differentiation, 428forms, 426gain sharing, 436goals, 432handling, 463–4horizontal, 426–9individualistic approaches, 435industrial relations, 434management, 431, 436organisations, 425–36partnership agreements, 436procedural agreements, 435resolution systems, 434–6reward systems, 428–9sources, 434stakeholders, 35symptoms, 426third party consultants, 431trade unions, 436, 441uncertainty, 428vertical, 429

Conformity, groups, 352Confrontation, 431Conjunctive model, 350

Consistency issue:discipline, 440

Consortia, 115Constraints, project management, 158Consultation:

contemporary management theories, 291contingency:

plan, 221project management, 222theories, 291–302

delegation, 305–6management style, 309–11

Continuous improvement, 244–5Contract staffi ng, 116Contractors, 394–5Control-oriented projects, 181Controls:

culture, 326–7decisions, 238–9example, 391–3gate, 232–3ICAEW, 387–8internal systems, 387–8levels, 388–90managers, 161organisations, 383planning models, 254PRINCE2 methodology, 237–8projects, 211rational strategy process, 6strategic, 19, 389systems, 383tactical, 389

Conversion process, 158–9Cooperative contracts, 446Core competence, 12Corporate appraisal, 13–14Corporate culture, 326Corporate governance, 404–8

Combined Code, 407–8benefi ts, 408corporate strategy, 4–5corporation concepts, 26defi nition, 404history, 404–7see also Organisations

Corporate strategy, 4–5COSO see Committee of Sponsoring

Organisations (COSO)Cost structure:

competitor analysis, 85, 88


IND

EX Costs:projects, 216scale advantages, 62storage, 76switching, 74, 75see also Transactions costs

Country analysis and political risk, 96–7Country club style, 313CPA see Critical path analysis (CPA)Critical path analysis (CPA), 503–4

of Farchester Games Project, 504, 505Critical project dimensions, 479

cost dimension, 479–80quality dimension, 480time dimension, 479

Culture:bureaucracy, 295–6characteristics, 328control, 326–7corporate, 326excellence school, 324–5Harrison, 321–2importance, 319management, 295–6organisational, 318–27strong culture theory, 320types, 321–2as-a-variable, 321see also Organisational culture

Custom and practice, 306Customer satisfaction, 227, 513–14Customers users, 169–70Cyert, R.M., 16

Dangerous substances, 393Deal, T.E., 323Decision-making:

collective, 19project control, 237–42

Dedicated asset specifi city, 119DEEPLIST, 72Delegation:

abdication, 306authority, 305–6consultation, 306custom and practice, 306effi ciency, 305management, 302–6skills, 165training, 305

Democratic style, 305Demotion, 439

Description outlines, 259–60Design review meetings, 169Development:

groups, 348information systems, 236–7projects, 154see also Training

Dicken, P., 91, 92Differentiation, 74, 428Digital Equipment Corporation, 351Direction, 15Discipline, 436–41

advanced warning, 439consistency, 440defi nition, 436–7demotion, 439disciplinary situations, 437informal talks, 438layoffs, 438management styles, 309procedures, 439–40right to appeal, 440situations, 437suspension, 438taking action, 437–8

Discrimination, 448, 449Disjunctive model, 350Dismissal, 387Distribution channels, 74Diversifi cation strategies, 15

see also Corporate governance; Corporate strategy

Diversity, equal opportunities, 448–50Documentation:

authority, 257–8description outlines, 259–60projects, 242

Documents, project initiation, 221–2Drucker, Peter, 300–1Dynamic factors, groups, 349Dynamism, 82

Eager, David, 247Earliest event time, 228Earned value management, 239–40Ecological factors, 72Ecological feasibility, 241–15Ecological perspective, 124Economic environmental responsibilities, 124Economic factors, 71Economic profi t, 23Economic theory, 23


IND

EXEconomies of scale, 74Eden Project, 175–7Education, 34–5Effectiveness:

control systems, 390meetings, 356–7

Effi ciency, delegation, 305Effort coordination, 165Electronic Markets Hypothesis, 121Emergent strategies, 28–9Employment:

anti-discrimination Acts, 448–9equal pay, 449job security, 436State involvement, 448termination, 443working time directives, 450

Enterprise resource management systems, 19Entrepreneurship, 324Entry and mobility barriers, 85Environment:

auditing, 124confl ict, 427groups, 349responsibilities, 124

Environmental analysis, 70environmental models evaluation, 80–1external environmental analysis, 78–80industry life cycle analysis, 78information sources for, 97–9macro-environmental analysis, 71–2

scenario-based analysis, 72micro- /industry environment analysis, 73–7survival and success factors, 81

Environmental impact assessment, 69–70Environmental information, accessing, 98Environmental models evaluation, 80–1Environmental scanning, 97–8Equal opportunities, 448–50Equal pay, 449Equity of payment diagram, 447–8Estimates:

competitors’ costs, 90resource, 153software, 235time, 235

Ethical issue, example of, 125Ethical organisation, developing, 398

compliance-based approach, 398integrity-based approach, 398–9

Ethics:chartered management accountants, 127–8

example, 125nature of, 396shareholders, 125–6stakeholders, 126–7

Eurotunnel plc, 118–19Evaluation:

approaches, 31control environment, 387–8environmental models, 80–1goal structure, 9–10rational strategy process, 6–16strategic management, 31see also Project evaluation and review

techniques (PERT)The examination, 469

format, 471planning, 469–70revision question, 471revision technique, 469–70

Excellence, 324Exit barriers, 76Exploitive authoritative style, 311External Auditors, 364External environmental analysis, 78–80

Facilitators, projects, 357Failures, projects, 173–4Fairness, workplace, 444–50Familiarity threats, 403Farchester Games Co-ordination Committee

(FGCC), 477FDI see Foreign direct investment (FDI)Feasibility studies, 186Feature analysis method, 214Feminine/masculine cultures, 328FGCC see Farchester Games Co-ordination

Committee (FGCC)Fiat example, 441–2Fiedler, F.E., 315–16Finance:

appraisal/evaluation, 217evaluation, 217feasibility studies, 215–16objectives, 35–6project costs, 226project evaluation, 144

Finance function:Business Process Outsourcing (BPO), 360–1contributions, 363embedding fi nance personnel in business and:

strategic decision processes, 363external stakeholders, 363


IND

EX reporting, 364outsourcing:

benefi ts, 361drawbacks, 361–2non-core activities, 361

shared service centres (SSC), 362Finance people, 363Fit for purpose, 251Five forces model, 11, 46, 73–7Fleisher, C.S.F., 87Float, 231Foreign direct investment (FDI), 91Form competitors, 84Formal groups, 346, 353Formation, groups, 348Formulating business strategy, 28–31Fractal approach, 187–8France, 294Franchising, 115Friedman, M., 125Functional decomposition, 155Functional strategies, 4, 5

Gain sharing, 436Gaining acceptance, 225Gantt charts, 227–8Gap analysis, 155Gathering information, 360Generic competitors, 85Ghoshal, S., 116Gilligan, C., 84, 98Give and take concept, 313Global economic environment, 90–2Global Shift, 91Globalisation, 91

and internationalisation, 112–14Goals:

confl ict, 427congruence, 19defi nition, 7projects, 166, 215setting, 6structure, 9–10teams, 166

Governance see Corporate governanceGovernment:

policy, 74relations with, 123

Grant, 86Graphics:

activities, 223software, 234

Greenbury Committee, 406Grievance procedures, 441–2Groups:

defi nition, 346development, 348dynamic factors, 349environmental factors, 349formal, 346, 353formation, 349identifi cation, 431integration, 348–9management, 345membership, 348organisation, 348performance, 347–50problems, 351–3roles, 349–50Steiner models, 350–1see also Teams

Groupthink, 352Growth rate, low, 75

Hagel, J., 124Hampel Committee, 406–7A Handbook for a Managerial Revolution, 325Hands on value driven characteristic, 324Handy, C., 433Harrison, Roger, 321–2HASAWA (Health and Safety at Work Act

1975), 393–4Hatch, M.J, 83Health and safety, 393–6

employees duty, 393management, 393–4training, 395–6

Helicopter factor, 309Hersey, P., 316Herzberg, Frederick, 296, 297, 301Hierarchies:

destroying old, 192–5disputes, 426–7project stakeholders, 169–70

Hierarchy solutions, 117High asset specifi city, 119High exit costs, 88High fi xed-cost structure, 88High strategic stakes, 76High unit costs, 88Histograms, software, 234Hodgetts, R.M., 96Hollins, Tim, 131Homogeneity, 348


IND

EXHorizontal confl ict, 426–9Hot stove rule, 439Human asset specifi city, 119Human relations school, 296–7Hygiene factors, 297

ICAEW controls, 387IDEAL/INTRo methodology, 241Identifi cation:

of need, 153–4project proposals, 212–13stakeholders, 31, 170

Immediacy, 439Implementation:

projects, 154rational strategy process, 6strategy, 16

Impoverished style, 313Indicators, environmental, 124Individualised corporation, 116Individualism, 328Induction, 395, 439Industrial relations, 433–6

see also Confl ictIndustry:

chemical, 124competitors, 84life cycle analysis, 78

Industry/micro-environment analysis, 73–7Informal groups, 346–7Informal talks, 438Information sources, for environmental

analysis, 97–9Information systems development, 236–7Information technology (IT):

project failures, 173–4transactions cost theory, 120, 121see also Software

Infrastructure, projects, 248–9Innovation, 47, 465Inputs, projects, 158Integration:

groups, 348Interest assessment, stakeholders, 33–4Intergroup training, 432Internal control, 387–8Internal Control and Financial Reporting

(Rutteman), 405–6Internal outsourcing, 362Internationalisation, 91

and globalisation, 112–14Intervention, 34, 35

Intimidation threats, 403Investment:

strategies, 22Investors and fi nanciers, 364IT see Information technology (IT)

Jain, S.C., 98Japan, organisational culture, 324Jobs:

insecurity, 443–4satisfaction, 305–6

Johnson, G., 70, 72, 115Joint ventures, 115Judgement, 359

Kay, J., 24, 25, 26Kennedy, A.A., 323Key performance indicators (KPIs), 57Knox, P., 91, 92KPIs see Key performance indicators (KPIs)

Labour, forced, 294Laid-back competitor, 88Laissez-faire style, 310Latest event time, 228, 229–30Layoffs, discipline, 438Leadership, 162

characteristics, 308Fiedler, 315–16personality traits, 308–9project management, 211project managers, 162–6situational styles, 314–16teams, 167transformational leaders, 316–17see also Management

Lean staff characteristic, 325Legal factors, 72Lewin, Kurt, 310LGAs see Local government authorities

(LGAs)Life cycles:

projects, 153–8technical projects, 181–90

Likert, Rensis, 310–11Lindblom, C.E., 29–30Line management, 97Local and nation economic environment, 91Local government authorities (LGAs), 116Logical incrementalism, 29–31LoNGPEST, 72Loose-tight properties, 325


IND

EX Lubove, Seth, 192Lynch, R., 86, 88, 89

Macro-environmental analysis, 71–2Maintenance factors, 297Man-month myth, 236Management by objectives (MBO), 300–1Management:

administrative school, 294–5authority, 294bureaucracy, 295–6classical theories, 291–302confl ict, 426, 429–30, 431–3contemporary theories, 291–302cultures, 295–6delegation, 302–6groups, 345health and safety, 393human relations school, 296–7levels, 255–7organisational power, 303–4power, 302–6projects:

plans, 211software, 234–6tools, 227

responsibilities, 255–7, 294roles, projects, 258–9safety, 393–4scientifi c, 292–3stakeholder expectations, 170–1strategies, 430styles, 309–14see also Finance function; Leadership; Project

managementManagerial grids, 312–14Managers:

direction factors, 294leadership characteristics, 308–9project responsibilities, 160reputation, 314see also Project managers

Market solutions, 117Martin, L., 178Masculine/feminine cultures, 328Mayo, Elton, 296MBO see Management by objectives (MBO)McGregor, Douglas, 309Mechanistic organisation, 298–9Meetings:

effective, 356–7

judgement, 359post project, 243problem avoidance, 351–3problem-solving, 358–9projects, 506

Member rotation, 432Membership, groups, 348Mendelow matrix, 32, 171Mentoring, 329–30

see also TrainingMethodologies:

critical path method, 250projects, 155

Micro- /industry environment analysis, 73–7

Microsoft, 231, 417Milestone, 232–3Mintzberg, H., 18, 28, 29Mission, 7

British Airways, 7defi nitions, 7objective setting, 7–8statements, 8terminology, 7

MNEs see Multinational enterprises (MNEs)Mobility and entry barriers, 85Models:

categorising culture, 321–3fi ve forces, 11, 73planning control, 157Project Management Maturity Model,

244–5Monitoring:

projects, 237–42safety, 395

Morgan, Gareth, 301Motivation:

factors, 297goal structure, 9–10managers, 297

Mouton, Jane, 312–14Multinational enterprises (MNEs), 91Multiple project handling, software, 234

Nalebuff, 77National Air Traffi c Services (NATS), 157,

177–8National competitive advantages, 93, 94–5

change events, role of, 94comment on Porter’s Diamond, 95–6demand conditions, 93–4


IND

EXfactor conditions, 94fi rm structure, strategy and rivalry, 94government, role of, 94losing, 95Porter’s diamond, 93Porter’s strategic prescriptions, 95related and supporting industries, 94

National cultures, 327–8NATS see National Air Traffi c Services (NATS)Negotiation, 359–60

skills, 163–4Network analysis, 228–30Network organisations, 115–17

transactions cost theory, 117–22Network structures:

capabilities, 49–53The New Alchemists, 22Nirmalya, K., 121Nodes, activities, 231–2Non-core activities, outsourcing, 361NYO.com, 509–10

Objectives, 7, 8competing, 36–7constraints, 158fi nancial, 35meeting, 35mission statements, 7–10profi t, 125project management, 152projects, 152–9setting, 32shareholders, 35–8strategic management, 3teams, 166

Objectivism, 127Offi cial warnings, 438Offshoring, 361Operational control systems, 390Operational strategies see Functional

strategiesOpportunistic behaviour, 118Opportunities see SWOT analysisOral:

communication, 353–4warnings, 438

Organic organisation, 298–9Organisational culture, 318–27

America, 323culture and control, 326–7culture and organisational effectiveness, 323

Ouchi – Theory A, Theory J and Theory Z, 323–4

Peters (1987) Thriving on chaos, 325–6Peters and Waterman (1982) The cultural

excellence school, 324–5different levels of culture, 320–1international dimension, 326Japan, 324models for categorising culture:

Deal and Kennedy 1982/1988 Strong culture theory, 323

Harrison’s/Handy’s four types of culture, 321–2

Organisational iceberg, 319Organisational structure:

projects, 152strategic choice, 62

Organisations:confl ict, 425contemporary perspectives, 301control systems, 390–3groups, 345–6integration, 299power, 303–4project documentation, 242project managers, 160

Ouchi, W., 121, 323Outputs, projects, 159Outsourcing:

benefi ts, 361drawbacks, 361–2non-core activities, 361

Participation, 35decision-making, 305

Participative style, 310Partnership agreements, 436Payments, projects, 242–3People:

cultures, 321Performance, 300–1

appraisal, 391–3indicators, 57, 196measurement systems, 19measures, 37methodology, 236–7teams, 351

Performing the project, 236–7‘Permeable organisation boundary’, 117Personality traits, 308–9

helicopter factor, 309


IND

EX leadership, 308–9PERT see Project evaluation and review

techniques (PERT)Peters, T., 324–6Phases, 155Physical asset specifi city, 119PID see Project initiation documents (PID)Planned value (PV), 240Planning:

baseline plans, 223control models, 245the examination, 469example, 224PMBoK® methodology, 152, 254–61PRINCE2 methodology, 240–1project management, 224–5project managers, 161projects, 161software, 231strategic management, 4

PMMM see Project Management Maturity Model (PMMM)

Polarisation, 352–3Political factors, 71Political risk, 96–7Porter, M.E.:

fi ve forces model, 11, 73–7Porter’s diamond, 93

comment, 95–6Porter’s strategic prescriptions, 95Positioning approach, 23–4Positioning view, 23–8Post project meetings, 243Post-completion audits, 243–5Post-completion review, 243–5Post-rationalisation, 18Power:

assessment, 33cultures, 322distance, 327management, 303–4stakeholders, 32, 33, 170

Prahalad, C.K., 26, 27, 51, 52PRINCE2 methodology, 240–1

control, 240planning, 241

Prioritisation of objectives, 37Problem avoidance, meetings, 358Problem-solving meetings, 169Problem-solving skills, 165Procedures:

confl ict agreements, 425, 435discipline, 436–40

Processes:bureaucracy, 295–6controls, 8conversion, 158–9project management, 156–7, 211projects, 211rational strategy process, 6–16top-down process, 18–21

Production:environmental responsibilities, 124methods, 299–300networks, 91

Productivity through people characteristic, 325Products:

differentiation, 74undifferentiated, 75

Professional ethics, 402–4conceptual framework, 403–4fundamental principles, 403

Profi t:sole objective, 125

Profi tability, threat of entry, 73–4Progress reporting, 238Project budget, 223Project evaluation and review techniques

(PERT), 233Project initiation, 211–22Project initiation documents (PID), 221–2Project life cycles, 153–8, 184, 250–1Project management:

activities graph, 223approach, 155approval, 169as conversion process, 158–9assessment, 214–15assumptions, 224audits, 243–5benchmarking, 244budgets, 223characteristics, 152–3checklists, 213closure, 242–3communication, 163, 222, 224completion, 154complexities, 173constraints, 158contentious issues, 222context, 251contingency, 221


IND

EXcontinuous improvement, 244–5control, 211, 237–42costs, 216–17, 223, 226, 234critical dimensions, 250customer satisfaction, 226defi nition, 152, 156, 211development, 154documentation, 242ecological feasibility, 214–15examples, 157, 174–9facilitators, 357failures, 159, 173–4feasibility studies, 214–17feature analysis method, 214fi nancial evaluation, 217fi nancial feasibility, 215–16fi t for purpose, 251, 252fractal approach, 187–8frameworks, 156–8functionality, 226goals, 166, 211identifying proposals, 211–13implementation, 154, 182–3infrastructure, 248–9initiation, 211–22inputs, 158leadership, 211life cycles, 153–8, 254matrix organisations, 171–3mechanisms, 159meetings, 356–9methodologies, 211, 241–2models, 184–7modern environment, 155monitoring, 237–42multiple, software, 234objectives, 211organisation structure, 171–3outline management plan, 224–5outputs, 159payments, 242–3performing, 236–7planning, 161, 211, 222–7, 250post-completion audits, 243post-completion review, 243–5practices, 188–90problem resolution, 165, 169processes, 156–7, 254–5project management process, 211–45project manager, 159–62project offi ce, 173

project scope, 159proposal formation, 213proposal identifi cation, 211–13, 274quality, 158, 226reporting, 238requirement setting, 213resources, 223revenue costs, 216reviews, 243risk management, 186–7, 218, 219risk-oriented models, 186–7roles, 258–9safety, 214schedules, 223, 225scope, 158, 159, 224, 226selection, 213setting objectives, 211setting requirements, 213skills, 191–2social feasibility, 214–15software, 234–6strategy, 159structures, 171–3systems, 234teams, 166–9technical feasibility, 214time dimensions, 479tools, 235–6uncertainty, 488work packages, 223

example, 224–5Project Management Maturity Model

(PMMM), 244–5Project managers:

change-management skills, 165–6communication skills, 163control, 161delegation skills, 165leadership skills, 162–3negotiation skills, 163–4organisation, 160planning responsibilities, 161problem-solving skills, 165project, 159–60responsibilities, 160roles, 160skills needed, 162–6

Project offi ce, 173Project owner, 169Project planning, 222–7Project schedule, 223, 225, 226


IND

EX Project sponsor, 169Project stakeholders, 169–71

hierarchy, 170Project teams:

lack of commitment, 168lack of defi nition of roles, 167lack of team structure, 167poor leadership, 167poor team communication, 167problems of team-working, 166project management and team-building,

168project team meetings, 168unclear team goals and objectives, 166

Proposals:checklist, 213projects, 211–13

Psychological contracts, 445–6Psychological distance, 434

Qualitative risk, 218–19Quality:

environmental responsibilities, 124models, 185–6project management, 224–5projects, 153, 189, 225teams, 166

Quantitative risk, 218Quinn, J.B., 30

Racism, 441, 449Rand, A., 127Rate of performance (RP), 240Rational strategy process, 6–16

control, 8corporate appraisal, 13–14criticism, 16–18evaluation, 9external analysis, 10–11implementation, 6internal analysis, 12–13mission, objectives and goals, 7–8review, 8, 16strategic options and choice, 14–16strategy implementation, 16

Rational-legal authority, 303Rawls, J., 126RBT see Resource-based theory (RBT)Redundancy, 443–4Reference groups, 347Regulatory bodies, relations with, 123

Reporting:progress, 235projects, 235software, 235

Reports, fi nal, 235Reputation, managers, 348Requirement setting, projects, 213Resource-based theory (RBT), 24

principles, 24–7Resource-based view:

comments, 23–8strategic management, 23–8

Resources:estimation, 223investigators, 349project management, 188–90, 211projects, 160software, 478strategy, 3–4

Responsibility, management, 302–6Revenue costs, 216Reverse engineering, 155Reviews, 16

projects, 168rational strategy process, 6see also Project evaluation and review

techniques (PERT)Revision technique, 469–70Reward systems, 428–9Right to appeal, 440Risk management (RM), 158, 219

avoidance, 219projects, 186–7reduction, 219role culture, 322

Risk-oriented models, 186–7Risky shift, 352–3Rivalry, 75RM see Risk management (RM)Role cultures, 322, 341Role defi nition teams, 167Rugman, A.M., 96Rutteman working group, 405–6

Safe working environment, 393Safety:

committees, 394monitoring, 395projects, 214see also Health and safety

Sage, Adam, 298


IND

EXSalomon’s equity:

diagram, 447–8Satisfi cing:

behaviour, 17defi nition, 460

SBU see Strategic business unit (SBU)Scalar chains, 295Scale, cost advantages, 74Scenario-based analysis, 72Schedules:

PRINCE2 methodology, 258–9projects, 165, 223, 225, 513

Schein, Edgar, 318, 320Schmidt, 312Scholes, K., 70, 72, 115Scientifi c management, 292–3Scope:

project management, 216projects, 157

Scorecards see Balanced scorecardsSecurities and Exchange Commission (SEC),

404Security, employment, 436Selection, projects, 213Selective competitor, 88Self-discipline, 437Self-evaluation, delegation, 305Self-interest threats, 403Self-review threats, 403Setting requirements, projects, 213Sexism, 399, 449Shapers, 371Shared service centres (SSC), 362Shareholder wealth and ethics:

business ethics, 126–7egotishcal view, 127for chartered management accountant,

127–8Friedman: profi t is the sole objective, 125Sternberg: shareholder wealth is natural

purpose, 125–6Shareholders:

ethics, 125–7objectives, 36social responsibility, 122–3wealth, 36, 125

Simple structures, 325Simultaneous loose-tight properties, 325Site specifi city, 119Situational leadership, 314–16SixSigma methodology, 242

Skills:project management, 191–2project managers, 162–6software, 162

Slack, 231Small and emerging businesses, 364Small businesses, 21–3SMART objectives, 8–9Social accountability, 131, 132, 408Social contract theory, 126Social feasibility, projects, 214–15Social responsibility, 122, 131

chartered management accountant, ethics for, 127–8

ecological perspective, 124environmental responsibilities, 124shareholder wealth and ethics, 125–7shareholders, 122–3

Socially conscious investors, 123Socially constructed risk, 218Sociocultural factors, 71Socio-technical systems theory, 297–8Soft controls, 232Software:

estimates, 233pitfalls, 235–6project management, 234–6skills, 236work breakdown, 236

Spender, J.C., 86SSC see Shared service centres (SSC)Stacey, R.D., 82Staff, induction, 395Stakeholders:

confl icts, 35, 171ethics, 126–7identifi cation, 170infl uence, 32interest assessment, 33–4managing expectations, 170–1multiple, 169–70perceptions, 20power, 32, 33projects, 169–71strategies to deal with, 34–5

Stalk, G., 24, 26Stalker, G.M., 298–9State, employment matters, 448–50Statements see Mission, statementsSteiner group models, 350Sternberg, E., 125, 126, 401


IND

EX Stick to the knitting characteristic, 324Stochastic competitor, 88Storage costs, 76Strategic alliances, 115Strategic business unit (SBU), 5, 18, 26, 417Strategic choice, 14Strategic control, 389, 413Strategic decision processes:

embedding fi nance personnel in business and, 363

Strategic management, 3–38alternative approaches, 28–31business strategy formulation, 5–6common themes, 4competence-based approach, 47–53competitive advantage, 41competitive strategy, 5control, 19corporate strategy, 4–5defi nitions, 3–4elements, 4–6emergent strategies, 28–9entrepreneurial spirit, 20–1evaluation approaches, 31functional strategy, 6goal structure, 9–10levels, 4–6Mintzberg, 18, 28–9objective setting, 9, 36–8planning/positioning approach, 41positioning view, 23–8rational model criticism, 16–18rational strategy process, 6–16resource strategy, 3–4resource-based view, 23–8small businesses, 21–3strategy types, 14–16see also Strategy development, contemporary

perspectives inStrategic management process, 3

corporate appraisal, 13–14external analysis:

fi ve forces model, 11PEST framework, 10

internal analysis/position audit, 12–13top-down strategy process, 18–21

Strategic objectives, 7–8Strategic option generation, 17Strategic plan defi nition, 4Strategic planning, 98Strategy:

and small business, 21–3concept, 3–4confl ict handling, 429–30ecological perspective, 124evaluation, 8, 31formulation, approaches to, 28–31implementation, 16levels in, 4–6organisational culture, 318–27projects, 166resource-based versus positioning view, 23–8social responsibility, 122themes in, 4

Strategy development, contemporary perspectives in, 111

complex organisation forms, 114–17internationalisation and globalisation,

112–14network organisations, 115–17

transactions cost theory, 117–22social responsibility see Social

responsibilityStrengths see SWOT analysisStrong culture theory, 323Structure:

projects, 157, 171teams, 167

Substitute products, 74–5Suppliers, bargaining power, 75Support cultures, 322Supranational organizations, creation of, 92Survival and success factors:

environmental analysis, 81Suspension, discipline, 438Sustainable communities, 133Sustainable energy, 133Sustainable enterprises, 123, 144Swifter information communications, 82Switching costs, 74, 75SWOT analysis, 13–14, 219–21Sydney 2000 Olympic Games, 247Synergy, 43, 113, 197Systems:

control example, 391–3design, 236–7information systems, 236–7projects, 236–7theory, 297–8

Tactical control, 389, 413Tannenbaum, A.S., 312


IND

EXTask cultures, 322, 341Task interdependence, 428Task-oriented style, 313, 315Taylor, F.W., 292, 293Team building, 168Team working, 166, 371, 377Teams:

characteristics, 315commitment, 168communication, 167defi nition, 315leadership, 167member roles, 357–8performance, 351project management, 168quality, 158roles, 357–8structure, 167style, 310unclear goals/objectives, 166see also Groups

Technical feasibility, projects, 214, 273Technical projects, 181, 182, 183Technological factors, 72Technology:

confl ict, 425see also Information technology (IT)

Telecommunications and information technology, 478

Temporal specifi city, 119Temps see Contract staffi ngTermination, employment, 443–4Theory A, 323–4Theory J, 323, 324Theory Z, 323, 324Third party consultants, confl ict, 431–2Threats, 14, 73–4

see also SWOT analysisTiger competitor, 88Time:

dimensions, 250–1, 479management, 158, 254orientation, 328

Timesheets, 235Top-down strategy process, 18–21Trade Union Regulation and Employment

Rights Act 1993 (TURERA), 449Trade unions, 372, 373, 394, 449, 450, 453,

456, 459Traditional authority, 302Training:

delegation, 305health and safety, 395–6intergroup training, 432–3

Transaction costs, 114theory, 117–22

Transfer, discipline, 439Transference, risk management, 219Transformational leaders, 316–17Transparency, 408Treadway Commission, 404Tribunal applications, 442–3Trist, E.L., 297, 298Trust, 326Tudor, J., 99Turbulence vs. uncertainty, 70–1TURERA see Trade Union Regulation and

Employment Rights Act 1993 (TURERA)

UK:hospitals, 116local government authorities (LGAs), 116railways, 116

Uncertainty:avoidance, 328competitive environment, 81–3confl ict, 425vs. turbulence, 70–1

Undifferentiated products, 75Union-avoidance strategies, 435

Vaill, P., 351Vertical confl ict, 429‘Virtual organisations’, 114Vodaphone, 114

Ward, K., 89Waterman, R., 50, 51, 324, 325, 487WBS see Work breakdown structure (WBS)Weaknesses see SWOT analysisWealth:

purpose, 125–6shareholders, 125–7

Weber, Max, 295, 302, 303Websites, 133Weighting competing objectives, 37Whittington, R., 70, 72, 115Wideman, R. Max, 254, 263Williamson, O.E., 117, 118, 119, 122Wilson, R.M.S., 84, 98Woodward, Joan, 299, 300


IND

EX Work breakdown structure (WBS), 167, 174, 189, 223, 227

Work groups, 348Work packages, 190, 223, 261Working environments, 393Working time directives, 450

Workplace fairness, 444–50The World Youth Indoor Games, November

2004, 477Written communication, 354Written warnings, 438Wrongful dismissal, 443