CIMA’S Official Study System
Managerial Level

Integrated Management
David Harris

AMSTERDAM BOSTON HEIDELBERG PARIS SAN DIEGO SAN FRANCISCO

LONDON NEW YORK SINGAPORE SYDNEY

OXFORD TOKYO

CIMA Publishing An imprint of Elsevier Linacre House, Jordan Hill, Oxford OX2 8DP 30 Corporate Drive, Burlington, MA 01803 First published 2005 Copyright # 2005, Elsevier Ltd. All rights reserved
No part of this publication may be reproduced in any material form (including photocopying or storing in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication) without the written permission of the copyright holder except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London, England W1T 4LP. Applications for the copyright holder’s written permission to reproduce any part of this publication should be addressed to the publisher Permissions may be sought directly from Elsevier’s Science and Technology Rights Department in Oxford, UK: phone: (+44) (0) 1865 843830; fax: (+44) (0) 1865 853333; e-mail: permissions@elsevier.co.uk. You may also complete your request on-line via the Elsevier homepage (http://www.elsevier.com), by selecting ‘Customer Support’ and then ‘Obtaining Permissions’

British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 0 7506 6710 9 For information on all CIMA publications visit our website at www.cimapublishing.com

Important Note A new edition of the CIMA Official Terminology is due to be published in September 2005. As this is past the publication date of this Study System the page reference numbers for ‘Management Accounting Official Terminology’ contained in this Study System are for the 2000 edition. You should ensure that you are familiar with the 2005 CIMA Official Terminology (ISBN: 0 7506 6827 X) once published, available from www.cimapublishing.com

Typeset by Newgen Imaging Systems (P) Ltd, Chennai, India Printed in Great Britain

Contents

The CIMA Study System
Acknowledgements How to use your CIMA Study System Guide to the Icons used within this Text Study technique The Integrated Management Syllabus Transitional arrangements

xv xv xv xvi xvii xviii xxii

1 The Nature of Strategic Management
1.1 Learning Outcomes What is strategy about? 1.1.1 Some initial definitions 1.1.2 Common themes in strategy 1.1.3 Three elements to strategy 1.1.4 Levels of strategy A model of the rational strategy process 1.2.1 Mission and objectives 1.2.2 Corporate appraisal 1.2.3 Strategic option generation 1.2.4 Strategy evaluation and choice 1.2.5 Strategy implementation 1.2.6 Review and control Approaches to formulating business strategy 1.3.1 A formal top-down strategy process 1.3.2 Benefits of business strategy 1.3.3 Drawbacks of formal business strategy 1.3.4 Strategy and small businesses Alternatives to the rational approach to strategy 1.4.1 Criticisms of the rational model of strategy formulation 1.4.2 Emergent strategies 1.4.3 Logical incrementalism Resource-based versus positioning view of strategy 1.5.1 The source of competitive advantage 1.5.2 Economic profit 1.5.3 Competitive advantage and economic theory 1.5.4 The positioning approach

1.2

1.3

1.4

1.5

1 1 1 1 2 2 4 5 6 6 6 6 7 7 7 7 9 9 10 12 12 14 15 17 17 17 18 18

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1.6

1.7

1.8

1.9

1.10

1.11

1.12

1.13

1.5.5 Resource-based theory (RBT) 1.5.6 Some RBT writers 1.5.7 Comments on resource-based views of strategy Stakeholders 1.6.1 The identity of stakeholders 1.6.2 The influence of stakeholders 1.6.3 The Mendelow matrix 1.6.4 Assessing power of stakeholders 1.6.5 Assessing interest of stakeholders 1.6.6 Illustration of the stakeholder matrix 1.6.7 Strategies to deal with stakeholders 1.6.8 Conflict between stakeholders Mission 1.7.1 Terminology 1.7.2 Elements of a mission statement 1.7.3 Roles of mission statements Setting strategic objectives 1.8.1 The link between mission and objectives 1.8.2 The goal structure Critical success factors 1.9.1 Defining critical success factors 1.9.2 Methodology of CSF analysis Meeting the objectives of shareholders 1.10.1 Maximisation of shareholder wealth as an objective 1.10.2 Financial and non-financial objectives Competing objectives 1.11.1 Importance of the existence of competing objectives 1.11.2 Resolving competing objectives Corporate governance 1.12.1 What is corporate governance? 1.12.2 The history of corporate governance 1.12.3 The combined code principles of corporate governance 1.12.4 The benefits of corporate governance Summary
Readings Revision Questions Solutions to Revision Questions

19 19 21 23 23 23 24 24 25 25 25 27 27 27 27 28 29 29 30 31 31 31 32 32 33 33 33 34 35 35 35 38 39 39 43 59 63

2 Strategy, Structure and Culture
2.1 2.2 Learning Outcomes Strategy and structure Organisational structure 2.2.1 Internal structure 2.2.2 Organisational design and contingency theory 2.2.3 Contingency theory

71 71 71 72 73 73 74

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2.3

2.4

2.5

2.6

2.2.4 Structural characteristics 2.2.5 Strategic choice and the issue of consistency 2.2.6 Entrepreneurial organisation (Figure 2.1) 2.2.7 Functional organisation 2.2.8 Holding companies: ‘federated firms’ and franchises 2.2.9 Divisional organisation 2.2.10 Matrix organisation 2.2.11 Flexible firms, networks and complex organisation forms 2.2.12 Mintzberg’s (1983) structural configurations Organisational culture 2.3.1 The importance of culture in organisations 2.3.2 Determinants of culture 2.3.3 Writers on culture 2.3.4 Models for categorising culture 2.3.5 Culture and control Improving effectiveness 2.4.1 Balancing control with autonomy 2.4.2 Decentralisation 2.4.3 New venturing 2.4.4 Empowerment 2.4.5 Team working 2.4.6 Innovation 2.4.7 Organisational learning and knowledge management 2.4.8 Rosabeth Moss Kanter and entrepreneurship The network organisation 2.5.1 An overview of network organisations 2.5.2 Forms of network relationship 2.5.3 Implications of network organisations 2.5.4 Theoretical basis of network organisations 2.5.5 Transactions cost theory 2.5.6 Transactions cost theory and network organisations 2.5.7 Network organisations and resource-based theory Summary
Readings Revision Questions Solutions to Revision Questions

74 75 76 76 77 78 80 82 84 88 88 88 89 91 94 95 95 96 97 98 99 99 100 101 102 102 103 104 104 104 107 109 110 113 127 131

3 Contemporary Thinking on Strategy
Learning Outcomes 3.1 Trends in the general management and structure of organisations 3.1.1 Changes in the business environment 3.1.2 International structures 3.1.3 Mergers and de-mergers

137 137 137 137 139 139

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3.2

3.3

3.4 3.5

3.6

3.7

New patterns of employment 3.2.1 The flexible firm 3.2.2 Implications of flexibility for employment 3.2.3 Flexible time arrangements 3.2.4 Homeworking 3.2.5 Core and periphery workers 3.2.6 The knowledge worker 3.2.7 Implications for management accounting 3.2.8 A critical perspective on flexible organisations Competition – Porter’s five forces model 3.3.1 Basic argument of the model 3.3.2 Using the model 3.3.3 Threat of entry 3.3.4 Rivalry among existing competitors 3.3.5 Pressure from substitute products 3.3.6 Bargaining power of buyers 3.3.7 Bargaining power of suppliers 3.3.8 Exercise on confectionery industry 3.3.9 Solution An ecological perspective 3.4.1 Environmental responsibilities Social responsibility 3.5.1 Scope of social responsibility 3.5.2 Must social responsibility conflict with benefiting shareholders? Shareholder wealth and ethics 3.6.1 Nature of ethics 3.6.2 Example of an ethical issue 3.6.3 Friedman: profit is the sole objective 3.6.4 Sternberg: shareholder wealth is natural purpose 3.6.5 A stakeholder view of business ethics 3.6.6 An egoistical view 3.6.7 Implications of ethics for the chartered management accountant Summary
Readings Revision Questions Solutions to Revision Questions

140 140 140 141 141 141 141 142 143 144 144 144 145 146 146 147 147 147 148 148 148 149 149 150 151 151 152 152 152 153 154 154 155 157 169 173 179 179 179 179 180 180 182

4 Projects
Learning Outcomes 4.1 Definition 4.2 Characteristics of a project 4.3 The project life-cycle 4.3.1 The project life-cycle phases 4.3.2 An alternative project life-cycle – iteration

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4.4

4.5

4.6 4.7

4.8

4.3.3 Project approach 4.3.4 Other frameworks: 4, 5, 7 or 9? The project as a conversion process 4.4.1 Inputs 4.4.2 Constraints 4.4.3 Outputs 4.4.4 Mechanisms Examples of projects 4.5.1 One successful project: ongoing 4.5.2 One not so successful project Why some projects fail Strategy and scope 4.7.1 Strategy 4.7.2 Scope Summary
Readings Revision Questions Solutions to Revision Questions

182 183 184 184 185 185 185 185 185 188 190 191 191 191 191 193 211 213

5 People and Projects
5.1 5.2 5.3 Learning Outcomes Introduction The roles of the project manager The responsibilities of the project manager 5.3.1 Organisation 5.3.2 Planning 5.3.3 Controlling The skills of the project manager 5.4.1 Leadership skills 5.4.2 Communication skills 5.4.3 Negotiation skills 5.4.4 Delegation skills 5.4.5 Problem-solving skills 5.4.6 Change-management skills Project teams Problems of team-working 5.6.1 Unclear team goals and objectives 5.6.2 Lack of team structure 5.6.3 Lack of definition of roles 5.6.4 Poor leadership 5.6.5 Poor team communication 5.6.6 Lack of commitment Project management and team-building Project stakeholders 5.8.1 Managing stakeholder expectations

5.4

5.5 5.6

5.7 5.8

215 215 215 215 216 216 217 217 218 218 219 220 220 221 222 222 223 223 223 223 223 224 224 224 224 226

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5.9

Projects and organisation structure 5.9.1 Matrix organisations 5.10 Summary
Readings Revision Questions Solutions to Revision Questions

226 227 227 229 247 253 257 257 257 257 258 258 258 258 258 258 258 260 260 264 265 265 265 265 265 266 267 273 277 279 279 279 279 280 280 280 280 281 281 282 282

6 The Project Management Process
6.1 6.2 6.3 Learning Outcomes Introduction A definition of project management The project management process 6.3.1 Initiation 6.3.2 Planning 6.3.3 Executing leadership 6.3.4 Controlling 6.3.5 Completing Project planning 6.4.1 Initiation 6.4.2 Detailed project planning 6.4.3 The baseline plan Project objective constraints 6.5.1 Project scope/functionality 6.5.2 Project schedule/time 6.5.3 Project cost 6.5.4 Customer satisfaction/quality Summary
Readings Revision Questions Solutions to Revision Questions

6.4

6.5

6.6

7 Identifying and Selecting Projects
7.1 7.2 7.3 7.4 7.5 Learning Outcome Setting project objectives Identifying project proposals Formation of project proposals Setting project requirements The feasibility study 7.5.1 Assessing project feasibility 7.5.2 Technical feasibility 7.5.3 Social and ecological feasibility 7.5.4 Fit with business goals 7.5.5 Financial feasibility

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7.6

Types of cost 7.6.1 Capital costs 7.6.2 Revenue costs 7.6.3 Finance costs 7.7 Risk sensitivity 7.8 Financial evaluation techniques 7.9 Risk and uncertainty 7.9.1 Quantitative risk 7.9.2 Socially constructed risk 7.9.3 Qualitative risk 7.9.4 Managing risk 7.9.5 Uncertainty 7.10 SWOT analysis 7.10.1 An example of a SWOT analysis 7.10.2 A contingency plan 7.11 Summary
Readings Revision Questions Solutions to Revision Questions

283 283 283 283 283 284 284 285 285 285 285 286 286 287 288 288 289 299 305

8 Performing the Project
8.1 8.2 8.3 8.4 Learning Outcomes Introduction Planning the project Performing the project 8.3.1 An example – development of an information system Monitoring and controlling the project 8.4.1 Making effective control decisions 8.4.2 PRINCE 2 methodology 8.4.3 Other project management methodologies Project closure 8.5.1 Organising project documentation 8.5.2 Collection of receipts and making final payments Post-completion review and audit 8.6.1 Post-project review meetings 8.6.2 Post-completion audit 8.6.3 Justifying the cost of post-completion audit 8.6.4 Continuous improvement Summary
Readings Revision Questions Solutions to Revision Questions

8.5

8.6

8.7

313 313 313 313 314 314 315 315 317 317 318 318 319 319 319 319 320 320 321 323 339 343

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9 Project Management Tools
9.1 9.2 Learning Outcome Introduction The planning process 9.2.1 Benefits of planning methods 9.2.2 Communication of project planning Gantt charts Network analysis 9.4.1 Calculation of the EET 9.4.2 Calculation of the LET 9.4.3 Slack or float An alternative method for constructing network diagrams: activity on node Project evaluation and review technique (PERT) Project management (PM) software 9.7.1 PM software functions 9.7.2 Advantages of using PM software 9.7.3 PM software pitfalls Summary
Readings Revision Questions Solutions to Revision Questions

9.3 9.4

347 347 347 348 348 348 348 349 350 351 352 352 354 354 354 355 356 357 359 365 369 373 373 373 373 373 375 376 376 378 379 380 380 381 382 383 384 384 385 386 386 386

9.5 9.6 9.7

9.8

10 Management
10.1 Learning Outcomes Power, authority, responsibility and delegation 10.1.1 Power and authority 10.1.2 Authority as legitimate power 10.1.3 Organisational power 10.1.4 Responsibility 10.1.5 Delegation of authority The characteristics of leaders and managers Personality trait theories of leadership Management styles 10.4.1 Kurt Lewin 10.4.2 Rensis Likert 10.4.3 Tannenbaum and Schmidt 10.4.4 Robert Blake and Jane Mouton Contingency theories of leadership 10.5.1 John Adair action-centred leadership 10.5.2 Fiedler Situational leadership styles 10.6.1 Hersey and Blanchard 10.6.2 Richard Boyd (1987) – transformational leaders

10.2 10.3 10.4

10.5

10.6

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10.7

Classical and contemporary theories of management 10.7.1 Scientific management 10.7.2 The administrative school 10.7.3 Bureaucracy: a culture, process or a form of organisation? 10.7.4 The human relations school 10.7.5 Systems theory 10.7.6 Contingency theory 10.7.7 Peter Drucker: management by objectives (MBO) 10.7.8 Modern perspectives on organisations 10.8 Managing in different cultures 10.8.1 National cultures 10.8.2 Power distance 10.8.3 Uncertainty avoidance 10.8.4 Individualism and collectivism 10.8.5 Masculinity/femininity 10.8.6 Time orientation 10.8.7 Other cultural characteristics 10.8.8 Changing behaviour 10.9 Information gathering 10.9.1 Interviews 10.9.2 Questionnaires 10.9.3 Observation 10.9.4 Other information gathering methods 10.10 Summary
Readings Revision Questions Solutions to Revision Questions

387 387 388 390 391 392 393 395 396 397 397 397 398 398 398 398 398 398 399 399 400 400 401 401 403 411 415 421 421 421 421 421 422 422 423 424 424 425 426 428 428 429 429 429 429

11 Management of Groups
11.1 Learning Outcomes Behaviour in work groups 11.1.1 Informal groups 11.1.2 Formal groups 11.1.3 Formation and development 11.1.4 Integration and organisation 11.1.5 Group dynamics and performance 11.1.6 Formal groups: roles and teams 11.1.7 Team roles – Meredith Belbin (1981) 11.1.8 Vaill (1982): high-performance teams 11.1.9 Problems with groups Communication 11.2.1 Oral and written communication Project meetings 11.3.1 Project status review meetings 11.3.2 Project design review meetings 11.3.3 Project problem-solving meetings

11.2 11.3

2005.1

7.6.1 The need for negotiation 11.1 Safety.8.10 Summary Readings Revision Questions Solutions to Revision Questions 430 430 431 433 433 433 434 434 434 434 435 435 435 437 439 443 12 Control Systems in Organisations 12.3.6.6.4 12.7 12. redundancy and job insecurity 12.6 11.8.9.3. health and the environment 12.8.6.2 Safety committee and representatives 12.3 Learning Outcomes Objectives of internal control systems Internal control systems Levels of control 12.8.2 Progress reporting 11.8.1 Strategic level 12.1 12.3 The final report 11.6 12.2 Tactical control 12.5 12.5 Health and safety training 12.8.1 Project initiation document (PID) 11.5 11.4 11.3 Operational control Effective control systems An example of a control system in practice 12.4 Working with contractors 12.6.2 Tactical level Health and safety 12.7 11.8.1 Strategic control 12.9.1 Personal time management 12.3 Managing safety 12.2 Time management values 12.8 Effective meetings The roles of team members in meetings Problems with meetings Post-project evaluation meeting Project reporting 11.6.8 449 449 449 449 451 451 451 452 452 453 453 453 455 455 456 456 456 457 458 458 460 460 462 462 462 463 463 2005.7 Stress management Dismissal.9 Negotiation 11.6.6 Managing health 12.3 The aim of negotiation 11.1 .xii CONTENTS INTEGRATED MANAGEMENT P5 11.2 Negotiation approaches 11.5.9.1 Dismissal Time management 12.2 12.5.3.4 Time scheduling 12.3 Time management action 12.

3 Disciplinary situations 13.2.10 Summary Readings Revision Questions Solutions to Revision Questions 463 463 464 464 465 473 477 13 Conflict and Discipline 13.2.1.1.9 Mentoring 12.2.5 Managing conflict Discipline 13.1.1 Why mentoring? 12.4 Taking disciplinary action 13.1.2.2 13.5 Immediacy: Douglas McGregor’s ‘hot stove rule’ 13.6 Disciplinary procedures 13.9 Fairness and commitment in the work place 13.8 Grievance procedures 13.10 Diversity and equal opportunities Summary Readings Revision Questions Solutions to Revision Questions 13.1.3 Handling conflict 13.2.7 ACAS code of practice 13.1 Learning Outcomes Conflict in organisations 13.9.2 Forms/sources of conflict 13.1 The symptoms of conflict 13.2 Self-discipline 13.INTEGRATED MANAGEMENT xiii CONTENTS 12.1 .2.4 Resolutions of industrial relations conflict 13.3 485 485 485 486 486 490 491 494 497 497 497 498 498 500 500 501 502 503 506 509 511 519 523 Preparing for the Examination Revision technique Planning Getting down to work Tips for the final revision phase Format of the examination Structure of the paper Revision questions – mapping grid 529 529 529 530 530 531 531 531 2005.2.1 The meaning of discipline 13.2.2.9.2.2 Benefits of mentoring 12.

1 .xiv CONTENTS INTEGRATED MANAGEMENT P5 Section Section Section Section Section Section A type questions B type questions C type questions A solutions B solutions C solutions 533 535 537 548 549 555 583 Index May 2005 Examination 2005.

The CIMA Study System Acknowledgements Every effort has been made to contact the holders of copyright material. together with full solutions. containing detailed explanatory text supported where appropriate by worked examples and exercises. such as relevant journal articles or other readings. generous question practice. you may struggle to understand later chapters. The main body of the text is divided into a number of chapters. and provides:     a detailed explanation of all syllabus areas. Most chapters are illustrated by more practical elements. However. each of which is organised on the following pattern:    Detailed learning outcomes expected after your studies of the chapter are complete. so that you can appreciate where your studies are leading. This is the heart of each chapter. extensive ‘practical’ materials. Step-by-step topic coverage. ensuring that you understand the material being explained and can tackle the examples and exercises successfully. together with comments and questions designed to stimulate discussion. xv 2005. and also the facility to undertake extensive question practice. including readings from relevant journals. How to use your CIMA Study System This Integrated Management Study System has been devised as a resource for students attempting to pass their CIMA exams. complete with exam standard questions and solutions. the Study System is also ideal for fully taught courses. You should work carefully through this section. Remember that in many cases knowledge is cumulative: if you fail to digest earlier material thoroughly.1 . an exam preparation section. Readings and activities. but if any here have been inadvertently overlooked the publishers will be pleased to make the necessary arrangements at the first opportunity. This Study 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. You should assimilate these before beginning detailed work on the chapter.

these indicate the length and the quality of solution that would be expected of a well-prepared candidate. A table mapping revision questions to the syllabus learning outcomes allowing you to quickly identify questions by subject area.xvi THE CIMA STUDY SYSTEM INTEGRATED MANAGEMENT P5   Question practice. The final section of this CIMA Study System provides you with the guidance you need. Revision questions. Solutions to the revision questions. but at this stage do not be too concerned about attempting the questions in exam conditions. and so on. It is an illusion to think that this provides the same benefits as you would gain from a serious attempt of your own. Guidance on how to tackle the examination itself. Make a serious attempt at producing your own answers. Avoid the temptation merely to ‘audit’ the solutions provided. In particular. If you work conscientiously through this CIMA Study System according to the guidelines above you will be giving yourself an excellent chance of exam success. and then make your own attempt before referring back to the full solution. It includes the following features:       A brief guide to revision technique. it is more important to absorb the material thoroughly by completing a full solution than to observe the time limits that would apply in the actual exam. if you are struggling to get started on a question you should read the introductory guidance provided at the beginning of the solution. However. which questions are compulsory and which optional. You should know what to expect when you tackle the real exam. Good luck with your studies! Guide to the Icons used within this Text Key term or definition Equation to learn Exam tip or topic likely to appear in the exam Exercise Question Solution Comment or Note 2005. Having worked through the chapters you are ready to begin your final preparations for the examination. A note on the format of the examination. As before. The test of how well you have learned the material is your ability to tackle exam-standard questions. and in particular the number of questions to attempt. Solutions. especially as regards the time allocation.1 . These are of exam standard and should be tackled in exam conditions.

and which weeks you will devote to revision and final question practice.1 .INTEGRATED MANAGEMENT xvii THE CIMA STUDY SYSTEM Study technique Passing exams is partly a matter of intellectual ability. Note that the standard amount of notional learning hours attributed to one full-time academic year of approximately 30 weeks is 1200 hours. By way of example. The amount of notional study time for any subject is the minimum estimated time that students will need to achieve the specified learning outcomes set out earlier in this chapter. ISBN: 1874784434. formal planning is essential to get the best return from the time you spend studying. decide which chapters you are going to study in each week. the notional study time might be made up as follows: Hours Face-to-face study: up to Personal study: up to ‘Other’ study – e. 2005. Now split your total time requirement over the weeks between now and the examination. Estimate how much time in total you are going to need for each subject that you face. With your study material before you. for example face-to-face tuition. private study. etc. This book will provide you with proven study techniques. revision time.g. CIMA Publishing. directed home study. Later in the text we mention some techniques that you will find useful at the revision stage. The notional study time for Managerial level Integrated Management is 200 hours.: up to 60 100 40 200 Note that all study and learning-time recommendations should be used only as a guideline and are intended as minimum amounts. and the pace at which different students learn. It occupies 45 per cent of the main body of the text because it includes many tables and charts. ‘Summarising and Analysing Data’ has a weight of 25 per cent in the syllabus and this is the best guide as to how long you should spend on it. prior learning of the student. Remember to allow for holidays or other periods during which you will not be able to study (e. 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. Remember that you need to allow time for revision as well as for initial study of the material. This will give you an idea of how much time you need to devote to study each week. The amount of time recommended for face-toface tuition. revision. learning in the workplace. but however accomplished you are in that respect you can improve your chances significantly by the use of appropriate study and revision techniques. Chapter by chapter it covers the building blocks of successful learning and examination techniques. In this section we briefly outline some tips for effective study during the earlier stages of your approach to the exam. This time includes all appropriate learning activities. because of seasonal workloads). Planning To begin with. You may find it helpful to read Learning to Learn by Sam Malone. personal study and/or additional learning will vary according to the type of course undertaken. learning in the workplace.g. For example. etc.

(3) Limit distractions. but remember that you will need to refer back to them at a later date. you will learn to assess the pace you need to work at. (5) Work carefully through a chapter. or the written word. set your phones to message mode. make sure you highlight any issues you would like to follow up with your lecturer. and put up your ‘do not disturb’ sign. The Integrated Management Syllabus Syllabus outline The syllabus comprises: Topic and Study Weighting A The Basis of Strategic Management 30% B Project Management 40% C The Management of Relationships 30% A B C 2005. making notes as you go. so turn off the TV. If you are on a taught course. Preparing an answer plan is a good habit to get into. Your timetable may need to be adapted to allocate enough time for the whole syllabus. Make sure that you have all the materials you need before you begin so as to minimise interruptions. and plan as far as possible to use the same period of time each day. With experience. which will supplement your knowledge and demonstrate a wider perspective. or even a suitcase. make sure you have an overall picture of all the areas that need to be covered by the end of that session. Your notes may be in the form of lists. so that you do not waste time searching for items around the house. while you are both studying and revising. (2) Store all your materials in one place. When you have covered a suitable amount of material. so they must be intelligible. (6) Make notes as you study. Tips for effective studying (1) Aim to find a quiet and undisturbed location for your study. As your course progresses you will become more familiar with how long it takes to cover topics in sufficient depth. However. or any areas that you failed to cover or covered only skimpily. which will not be disturbed until the next time. It helps to impose a structure on your solutions. before diving in and becoming engrossed in the finer points. allow yourself a short break and move away from your books. To make the most effective use of your study periods you should be able to apply total concentration. If you have to pack everything away after each study period. and also in the examination room.1 . bullet points. After an hour. and avoids rambling. (4) Your timetable will tell you which topic to study. diagrams. When you have finished your attempt.xviii THE CIMA STUDY SYSTEM INTEGRATED MANAGEMENT P5 It is essential to know your syllabus. Getting into a routine helps to avoid wasting time. and discover the techniques that work best for you. keep them in a box. There are now numerous paper storage systems available to ensure that all your notes. vary the pattern by attempting a practice question. You should also allow enough time to read relevant articles from newspapers and journals. summaries. calculations and articles can be effectively filed and easily retrieved later. ‘mind maps’. (7) Organise your paperwork. make notes of any mistakes you made.

explain the purpose and principles of good corporate governance. and the ways to manage this conflict. each worth between 2 and 4 marks. 2005. Section B – 30 marks Three compulsory medium answer questions. Section C – 50 marks Two questions. analyse data in support of strategic decision-making. Short scenarios may be given. or between the objectives of an organisation and its stakeholders.1 . Short scenarios may be given. from a choice of three.  Strategic decision-making processes. to which some or all questions relate. evaluate competitive situations and apply this knowledge to the organisation. contribute to decision-making in these areas by advising management. Miniscenarios may be given.INTEGRATED MANAGEMENT xix THE CIMA STUDY SYSTEM Learning aims Students should be able to:    identify and apply management techniques necessary for decision-making that cuts across functional areas. each worth 25 marks. with the following sections.  The relationship between strategy and organisational structure. Section A – 20 marks A variety of compulsory objective test questions. Syllabus content  The process of strategy formulation. to which questions relate. discuss concepts in contemporary thinking on strategic management.  The reasons for conflict between the objectives of an organisation. to which a group of questions relate. each worth 10 marks. Learning Outcomes and Syllabus Content A – The basis of strategic management – 30% Learning outcomes On completion of their studies students should be able to: (i) (ii) (iii) (iv) (v) (vi) explain the process of strategy formulation. evaluate different organisational structures. apply tools for strategic analysis appropriately. Assessment strategy There will be a written examination paper of three hours.

g. emergent. Williamson) and its implications for organisational structure. project management. Resource-based views of the firm and implications for strategy development. 2005. formation of strategic business units.g. Contemporary issues in business management (e. boards. The determinants. (xi) identify structural and leadership issues that will be faced in managing a project team. evolutionary or system-based views based on Porter. (ix) identify stakeholder groups and recommend basic strategies for the management of their perceptions and expectations. B – Project management – 40% Learning outcomes On completion of their studies students should be able to: (i) identify a project and its attributes. alliances. Introduction to corporate governance. virtual organisations. Ecological perspective on the firm.1 .xx THE CIMA STUDY SYSTEM INTEGRATED MANAGEMENT P5         Approaches to strategy (e. Translating strategy into business (e.g. adaptive. demergers. Transaction cost view of the firm (e.  Stakeholders (both process and outcome) and their needs. and the contrast with repetitive operations and line management. (v) demonstrate the role of key stakeholders in the project. corporate social responsibility and business ethics). importance and role of organisational cultures and ways to improve the effectiveness of an organisation. managers and clients. (xiii) evaluate through selected review and audit. (xiv) evaluate the process of continuous improvement to projects. in the context of a simple project. recognising the effects of uncertainty and recommending strategies for dealing with this uncertainty. (x) produce a basic project plan. including the evaluation of proposals. the learning outcomes from a project. (vi) distinguish the key tools and techniques that would need to be applied in the project process. rational. including stakeholders and the role of government. encouragement of entrepreneurship inside organisations).  4-D and 7-S models to provide an overview of the project process. Bartlett and Ghoshal). Syllabus content  The definition of a project. (xii) recommend appropriate project control systems. (iv) identify the characteristics of each phase in the project process.g. (ii) apply suitable structures and frameworks to projects to identify common management issues. Coase. (viii) identify the strategy and scope for a project. (vii) identify methodologies and systems used by professional project managers. and the nine key process areas (PMI) to show what happens during each part of the process.  Roles of project sponsors. Mintzberg. champions. (iii) produce a basic outline of the process of project management.

C – Management of relationships – 30% Learning outcomes On completion of their studies students should be able to: (i) explain the concepts of power. (vi) construct a set of tools for managing individuals. cost and quality through performance and conformance management systems. The use of post-completion audit and review activities and the justification of their costs. The role of determining trade-offs between key project objectives of time. (v) demonstrate personal time management skills. establishment of gates and milestones). stakeholder marketing. bureaucracy. Syllabus content  The concepts of power. Project completion documentation. bureaucracy. network diagrams (Critical Path Analysis). (ix) discuss the importance of national cultures to management style. (x) explain the importance of business ethics and corporate governance to the organisation and its stakeholders. (iv) explain how groups form within organisations and how this affects performance. Evaluation of plans for projects. cost and quality. completion reports and system close-down. (viii) explain the process of mentoring junior colleagues. including recognising the life-cycle of teams.g. and the interface with the risk management process. Gantt charts.1 . (vii) recommend ways to deal effectively with discipline problems. team/group behaviour and selection. The key processes of PRINCE2 and their implications for project staff. responsibility. and their impact on project achievement. resource histograms. (ii) analyse the relationship between managers and their subordinates. and for managing group conflict. authority. cost and quality.INTEGRATED MANAGEMENT  xxi THE CIMA STUDY SYSTEM            Key tools for project managers (e. Scenario planning and buffering to make provision for uncertainty in projects. authority. Work Breakdown Structure.  The characteristics of leaders. 2005. both within an organisation and with external bodies. leadership and delegation. The production of basic plans for time. (iii) discuss the roles of negotiation and communication in the management process. Organisational structures. responsibility and delegation and their application to relationship within an organisation and outside it. including the role of the project and matrix organisations. teams and networks. leadership. Control of time. Managing scope at the outset of a project and providing systems for configuration management/change control. Teamwork. (xi) identify methods of conducting research and gathering data as part of the managerial process. managers and entrepreneurs.

The sources of conflict in organisations and the ways in which conflict can be managed to ensure that working relationships are productive and effective. including business ethics and the role. Negotiation skills. Transitional arrangements Students who have passed the Systems and Project Management paper under the Beyond 2000 syllabus will be given a credit for the Integrated Management paper under the new 2005 syllabus. childcare. network). including the form and process of formal disciplinary action and dismissal (e. 2005.g. Fiedler). Tuckman. Theories of group development. interviews. Blake and Mouton). as well as the utility and conduct of meetings) and ways of managing communication problems. Belbin). Contingency approaches to management style (e.g.g. reporting structures). Theories of control within firms and types of organisational structure (e. Adair. Introduction to corporate governance.e. divisional.xxii THE CIMA STUDY SYSTEM INTEGRATED MANAGEMENT P5                 Management-style theories (e. behaviour and roles (e.g. Creativity and idea generation.g. matrix. Disciplinary procedures and their operation.1 . Likert.e. Communication skills (i. fair treatment. types of communication tools and their use.g. please contact CIMA directly or visit their website at www. The advantages and disadvantages of different styles of management. For further details of transitional arrangements. performance appraisal.cimaglobal. relating to health. employment contracts. The use of systems of control within the organisation (e. Tannenbaurn and Schmidt. questionnaires). Managing in different countries and cultures.com. obligations and expectations of a manager. contracts of employment and working time). including the principles of employment law (i. discrimination. arbitration and conciliation). Information gathering techniques (e. Personal time management. The nature and effect of legal issues affecting work and employment.g. safety. industrial tribunals.

p. 50. discuss concepts in contemporary thinking on strategic management.1 . stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be.1. to meet the needs of markets and to fulfil stakeholder expectations. ‘Strategy is the direction and scope of an organisation over the long term: which achieves advantage for the organisation through its configuration of resources within a changing environment. 4. cited in Lynch (2000. p. 4). 50.1 Some initial definitions Consider the following definitions of strategy: 1. 3.1 What is strategy about? 1. 5.’ Johnson and Scholes (1997.’ CIMA: Management Accounting: Official Terminology.’ Andrews. p. Strategic plan: ‘A statement of long-term goals along with a definition of the strategies and policies which will ensure achievement of these goals.The Nature of Strategic Management 1 L EARNING O UTCOMES By the end of this chapter you should be able to: " " " " explain the process of strategy formulation. p. purposes and goals and essential policies or plans for achieving those goals. 1 2005.’ Hofer and Schendel (1978. explain the purpose and principles of good corporate governance. Strategy: ‘A course of action. 1. apply tools for strategic analysis appropriately. 2. to achieve a specific objective. ‘The basic characteristics of the match an organisation achieves with its environment is called its strategy. including the specification of resources required. 10). ‘Corporate strategy is the pattern of major objectives. p. 8).’ CIMA: Management Accounting: Official Terminology.

‘Corporate strategy is concerned with an organisation’s basic direction for the future: its purpose. its stakeholders. reliability and value. 4 and 6). 4 and 6). what it decides to produce or sell.2 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL P5 6. It will involve considerations such as:     how it attracts customers. furniture and financial services. 5). how it will win-out against rivals.1). its ambitions. 3. food.1 The elements of strategy .’ Lynch (2000. 4 and 6).1. 1. 1. You should turn to this now.3 Three elements to strategy It is possible to perceive of a firm’s strategy as consisting of several different elements (Figure 1. A case study of strategy The Readings section of this chapter contains an article about the strategy of Abbey National. its resources and how it interacts with the world in which it operates. cosmetics. For example. which markets and countries it operates in. Competitive strategy This deals with how the firm competes for business and where its earnings come from.1. p. It involves using the firm’s resources effectively and building on its strengths to meet environmental challenges (definitions 1. Everything Figure 1. It sells clothes.1 2005. It is concerned with meeting the challenges from the firm’s business environment such as competitors and the changing needs of customers (definitions 3. such as customers and shareholders (definition 4). Marks & Spencer plc (M&S) traditionally competes on quality.2 Common themes in strategy Strategy involves the following issues:     It is about the purpose and long-term objectives of the business (definitions 2. It is ultimately about delivering value to the people who depend on the firm.

obtaining funds in an amount and at a cost and for a duration that meet the needs of the business. Investment and resource strategy This area of strategy concerns how management uses funds retained from profits or otherwise borrowed from investors. working capital management and inventory. They recognised that although M&S was unlikely to deliver the sudden spectacular leaps in profits associated with some other businesses. These issues will be dealt with thoroughly at the Strategic Level. ensuring that the capital structure and range of foreign currency liabilities are appropriate for the needs of the business. at dividend time investors were content to allow profits to be reinvested in the business to finance further growth. the financing of human resource recruitment and development. While M&S was pursuing successful competitive strategies its earnings were supportive of its financial strategy. protecting the value of the shareholders’ investment through avoiding excessive risk. It must also bear in mind the banks and suppliers who are also sources of capital. This again provided funds. M&S was seen as a ‘safe bet’ by investors and professional fund managers. It has attempted expansion into the United States and continental Europe. It hopes its brand reputation and wide distribution will give it high volumes and also enable it to charge better prices than other volume outlets or to gain access to higher margin markets such as furniture and financial services. Moreover. At M&S the funds were used in a variety of ways. For present purposes we can note that financial strategy deals with considerations such as:     providing an adequate return to shareholders. Profits increased year-on-year and investors were prepared to pay a premium price for M&S shares. It seeks to beat rivals by achieving higher margins through using its supply-chain strategy to flexibly deliver the right products at competitive prices. acquisitions of other businesses. Existing stores were always maintained to a high standard by a rolling programme of refitting. It operates predominantly in the United Kingdom by selling from shops in the high street and out-of-town malls but is also operating mail order and experimenting with internet shopping. This meant that the firm could raise additional capital relatively cheaply by issuing new shares and investors were happy to subscribe to them. investments in research and development of new products or processes of production. Clearly management has a major responsibility to meet the wishes of the shareholders of the business.1 . Financial strategy This deals with the firm’s relations with its investors and other providers of credit. buildings and other fixed capital equipment. neither was it likely to disappoint the investors either. in your Financial Strategy studies. These provide the resources the firm needs to carry out its competitive strategy. New stores in popular 2005. Investment and resource strategy covers a wide area and includes:       purchase of land. investment in advertising and brand creation and support.INTEGRATED MANAGEMENT 3 THE NATURE OF STRATEGIC MANAGEMENT carries its own brand name that it hopes signifies these brand values to the customer.

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locations, particularly in out-of-town malls, were opened regularly. Funds were also spent on acquisitions such as the Littlewoods chain. These increased the coverage and floor space of M&S in a way that enabled it to consolidate its position as a major retail force. In its stores staff were well paid and given excellent training, good welfare services and smart uniforms. Elsewhere M&S spent investment funds on developing its own clothes designs and recipes as well as on putting in the information technology infrastructure to support its inventory management systems and its expansion into financial services. A successful business will enjoy a virtuous circle where these three elements work in harmony together. However, if the competitive strategy fails to deliver the customers and earnings necessary the firm faces a vicious spiral of falling share price, inadequate funds and underinvestment.

1.1.4 Levels of strategy
Strategy exists at several levels in the organisation. A simplified model of the business organisation is given in Figure 1.2. Corporate strategy The corporate centre is at the apex of the organisation. It is the head office of the firm and will contain the corporate board. A textbook written 20 years ago would have assumed that all competitive strategy was formulated at corporate level and then implemented in a ‘top-down’ manner by instructions to the business divisions. During the 1980s, high-profile corporate planners like IBM, General Motors and Ford ran into difficulties against newer and smaller ‘upstart’ competitors who seemed to be more flexible and entrepreneurial. One consequence was the devolution of responsibility for competitive strategy to business units. Corporate strategy today typically restricts itself to determining the overall purpose and scope of the organisation. Common issues at this level include: 
 

decisions on acquisitions, mergers and sell-offs or closure of business units; conduct of relations with key external stakeholders such as investors, the government and regulatory bodies; decisions to enter new markets or embrace new technologies (sometimes termed diversification strategies);

Figure 1.2 Organisation chart showing corporate, strategic business unit and functional strategies
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development of corporate policies on issues such as public image, employment practices or information systems.

Business strategy A strategic business unit (SBU) is defined by CIMA as:
A section, within a larger organisation, responsible for planning, developing, producing and marketing its own products or services. CIMA: Management Accounting: Official Terminology, p. 39.

Management of the SBU will be responsible for winning customers and beating rivals in its particular market. Consequently it is at this level that competitive strategy is usually formulated. The considerations at this level will include: 
 

marketing issues such as product development, pricing, promotion and distribution; decisions on production technology; staffing decisions.

A business strategy should be formulated within the broad framework of objectives laid down by the corporate centre to ensure that each SBU plays its part. The extent to which the management of the SBU is free to make competitive strategy decisions varies from corporation to corporation and reflects the degree of centralisation in the management culture of the firm. Functional strategies The functional (or sometimes called operational ) level of the organisation refers to main business functions such as sales, production, purchasing, human resources and finance. Functional strategies are the long-term management policies of these functional areas. They are intended to ensure that the functional area plays its part in helping the SBU achieve the goals of its business strategy.

1.2 A model of the rational strategy process
Make sure you understand, and can reproduce, this diagram. Figure 1.3 shows a model of the steps which management may take to develop a strategy for their business.

Figure 1.3 A model of a rational strategy process
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1.2.1 Mission and objectives
These set the purposes of the organisation to be satisfied by the strategy. A mission is a broad statement of the purposes of the business. It will be open-ended and reflect the core values of the business. A mission will often define the industry that the firm competes in and make comments about its general way of doing business. For example: 
  

British Airways seeks to be ‘the world’s favourite airline’. Nokia speaks of ‘connecting people’. DHL ‘delivers your promises’. easyEverything group wants to ‘paint the world orange’.

Objectives differ from mission because they generally specify quantitative measures of the performance to be achieved and the time frame in which it is to be achieved. For a mobile phone operator these might include goals such as profit and growth but also non-financial targets such as customer service or geographical coverage.

1.2.2 Corporate appraisal
During this stage, management 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 resources position of the business. This will have been gathered in a separate 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 environmental analysis and will include information on:  competitors;  tastes of customers;  state of the economy. This stage is also termed a SWOT analysis, standing for strengths, weaknesses, opportunities and threats.

1.2.3 Strategic option generation
Management seeks to identify 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.

1.2.4 Strategy evaluation and choice
At this point, managements have a number of ideas to improve the competitive position of the business. The evaluation stage considers each strategic option in detail for its feasibility and fit with the mission and circumstances of the business.
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By the end of this process management will have decided on a shortlist of options that will be carried forward to the strategy implementation stage.

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

Tactical programmes and decisions are medium-term policies designed to implement some of the key elements of the strategy such as developing new products, recruitment or downsising 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.

1.2.6 Review and control
This is a continuous process of reviewing both the implementation and the overall continuing suitability of the strategy. It will consider two aspects: 


Does performance of the strategy still put the business on course for reaching its strategic objectives? 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?

1.3 Approaches to formulating business strategy
1.3.1 A formal top-down strategy process
Large organisations will formalise the development of business strategies. The following are typical features of the process: 1. A designated team responsible for strategy development. There are several groups of actors in this process: (a) A permanent strategic planning unit reporting to top management and consisting of expert staff collecting business intelligence, advising divisions on formulating strategy and monitoring results. (b) Groups of managers, often the management teams of the SBUs, meeting periodically to monitor the success of the present strategies and to develop new ones. These are sometimes referred to as country weekends because they often take place away from the office to avoid the day-to-day interruptions.
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(c) Business consultants acting as advisers and facilitators to the process by suggesting models and techniques to assist managers in understanding their business environments and the strategic possibilities open to them. You will be reading about many of these models and techniques later. Formal collection of information for strategy purposes. The management team will call upon data from within and outside the firm to understand the challenges they face and the resources at their disposal. This information can include: (a) Environmental scanning reports compiled by the business intelligence functions within the firm, including such matters as competitor behaviour, market trends and potential changes to laws. (b) Specially commissioned reports on particular markets, products or competitors. (c) Management accounting information on operating costs and performance together with financial forecasts. (d) Research reports from external consultancies on market opportunities and threats. Collective decision-taking by the senior management team. This involves the senior management team working together to develop and agree business strategies. Techniques such as brainstorming ideas on flip charts and using visual graphical models to summarise complex ideas will assist this process. Also, arriving at a decision will involve considerable conflict as particular managers are reluctant to see their favoured proposal rejected and a different strategy adopted. A process of communicating and implementing the business strategy. This can be accomplished using a combination of the following methods: (a) Writing a formal document summarising the main elements of the plan. This will be distributed on a confidential basis to other managers and key investors, but also perhaps to other key stakeholders such as labour representatives, regulatory bodies, major customers and key suppliers. (b) Briefing meetings and presentations to the stakeholders mentioned above. Frequently reporters from the business press will be invited to ensure that the information reaches a broader public. Naturally the fine detail will remain confidential. (c) The development of detailed policies, programmes and budgets based on achieving the goals laid out in the business strategy. (d) The development of performance targets for managers and staff. These ensure that everyone plays their part in the strategy (and perhaps receive financial rewards for doing so). 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.

The simple budgetary control systems and monthly variance reports common in management accounting control systems were originally developed to enable managers to control mass production operations. Today the sophisticated competitive strategies of many firms have necessitated the development of more complex performance measurement systems to supplement traditional budgetary control information. These are variously termed enterprise resource management systems and balanced scorecards. There has also been an increased emphasis on competitor and other environmental information to assist managers in steering their businesses. Testing your appreciation of management’s need for non-financial measures and environmental information will be a recurring feature of questions in this examination.
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1.3.2 Benefits of business strategy
Business strategy formulation obviously uses a lot of organisational resource. What are the benefits? 1. Avoids short-termist behaviour. It ensures that management considers the long-term development of the business rather than focusing solely on short-term results and operational results. This provides the shareholder value referred to in Section 1.3.1 above. 2. Helps identify strategic issues. By encouraging management to consider the business environment in their plans and decisions it will help them keep ahead of change and to be more proactive. 3. Goal congruence. There are many aspects to this: (a) It will help coordinate the different business units, divisions and departments and ensure that they work together to realise the full potential of the corporation. (b) Asset investment decisions will be taken with the long-term needs of the business in mind. This could include design or acquisition of buildings and capital equipment, information systems or acquisitions of other businesses. (c) Tactical programmes will be congruent with the strategy. This might affect the types of staff recruited and developed, the location of production and distribution facilities or the sorts of products and brands created. 4. Improves stakeholder perceptions of the business. If the firm demonstrates that it has a clear idea of where it is going, it enables others to make plans based on its future. This may lead to (a) Higher share price because investors are confident of higher future returns. (b) Attraction and retention of staff and higher morale because employees can see that their career aspirations may be met within the firm. (c) Improved relations with suppliers who feel they can rely on orders in the future. 5. Provides a basis for strategic control. By having a process of formulation and implementation this ensures that: (a) There is someone looking after the development of strategy. (b) There are clear programmes and policies being developed to implement it. (c) There are targets and reports enabling review of the success of the strategy. 6. Develops future management potential and ensures continuity. This relates to the fact that formal strategy formulation is a collective process. This means that: (a) Different functional managers (e.g. finance or marketing) gain an appreciation of the other disciplines of business and so develop into general managers. (b) Providers of information to the strategy process become more deeply involved in the business and develop as a pool of expertise from which the next generation of managers may be recruited. (c) Avoids succession problems when members of senior management retire or move on. The strategy of the firm is understood by all and will outlast the loss of key members of the management team.

1.3.3 Drawbacks of formal business 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
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strategy. If the environment changes unexpectedly, the firm’s performance may deteriorate as it continues to follow a business strategy which has now become inappropriate to its business environment, for example by continuing to make a product no one wants. 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 firms whose names are associated with radical and visionary entrepreneurs. These business leaders tend to follow the emergent strategy approach discussed in Section 1.4.2. It suffers from difficulties of implementation. The formal process is management-led and seeks to pursue the goals of the business. Successful implementation requires the participation, or at least acquiescence, of middle and junior management together with operative staff. There is a danger that the formal process will not build the support of these people and hence will be misunderstood or resisted. The result will be that the goals of the strategy are not realised. 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 manager in a strategically managed firm will be rewarded for carrying out their allotted part in the strategy and for not breaking the rules. The effect will be to encourage conformity among managers. This will lose the firm potentially successful ventures and perhaps also the services of gifted entrepreneurial managers who may leave in frustration. It is impossible in uncertain business environments. Formal business strategy requires that the strategists are able to make reliable assumptions about the future and particularly about the opportunities and threats facing them. Critics argue that the business environment is now more uncertain than ever before. Because in their view the future cannot be forecast some writers argue that management efforts should be diverted from trying to plan strategies and instead should focus on improving the ability of their businesses to respond and adapt to change. It is too expensive and complicated for small businesses. The manager of a small business is unlikely to be skilled in the techniques needed for developing the kinds of business strategy described above. Moreover the opportunity cost in terms of the time away from direct management of the operational parts of the business are likely to be too great.

1.3.4 Strategy and small businesses
According to Birley (1982), the formal process described above may be unsuitable for small businesses for four reasons: 1. Differences in goals. In a small firm the goals of the business are often inseparable from the goals of the owner-manager and immediate family group. Small businesses often do not exhibit the economic rationality and single-minded pursuit of dividends and growth often associated with businesses governed by external shareholders. Birley suggests that small-business goals may pass through a life-cycle from the foundation of the business: (a) Initial desire for independence and a chance to run their own business coupled with a desire for a satisfactory income and lifestyle.
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(b) Mid-life desire to achieve a balance between satisfactory financial returns and a good home life. This means that growth may not be a primary consideration. (c) When approaching retirement, the founder will have a number of possible objectives:  to ensure that the business passes to children or loyal employees, regardless of their skills or aptitudes;  to find a buyer for the business, often with safeguards for staff. 2. Limited scope of product/market choices. Small-business managers typically consider a much narrower range of strategic options than do their large-business counterparts: (a) Because their business is already narrowly based on the specific trade skills and knowledge of the proprietor. Any new product or market venture will seem very radical. (b) The day-to-day survival of the business will depend on success in this narrow market and management will not want to move too far away from it. (c) Management’s knowledge, skills and horizons will tend to be limited to their current industry. They will not notice wider opportunities. 3. Limited resources. Smaller firms lack the resources to invest in new strategic ventures and rapid growth. Therefore they do not exhibit the sudden strategic leaps envisaged by the rational model: (a) Less capital due to absence of external shareholders. (b) Less managerial resource because proprietor is unwilling to delegate or share control. (c) Smaller current income stream means that any unsuccessful strategic investment may destroy the firm. 4. Organisational structure. Strategic implementation demands the setting up of an appropriate structure and selection of an appropriate team to carry it out. Small firms may not be able to do this due to: (a) Desire by the proprietor to maintain absolute control. (b) Impatience with targets, budgets and other systems that smack of ‘bureaucracy’. (c) Difficulties for other managers to work with founder who may exhibit set ways of thinking and doing business. Birley’s observations certainly ring true of many small, family-controlled businesses. However, there are many examples of (initially) small entrepreneurs who have managed to exhibit very different paths of strategic development. For example: 
     

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

These businesses follow strategies that have been termed variously freewheeling opportunism, proactive management or radical entrepreneurship. One distinguished writer has coined the term ‘The New Alchemists’ to describe them (Handy and Handy, 1999). Increasingly their approaches to strategy have been emulated by the ‘dotcom’ firms of the new e-business world.
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They have particular features in common with one another: 1. They grew in an industry that was already dominated by one or more large corporations. Their success was almost always through exploiting the complacency or errors of the larger corporations. 2. The founder of the business had a particular vision of how they wanted the business to develop, which they stuck to. 3. The products or services they offer tend to be in markets that exhibit spontaneous purchasing behaviour where service and reassurance are important or which have been subject to recent radical changes (or discontinuities) due to emergence of new technologies, tastes or legislative frameworks. 4. They did not rely on conventional financing sources to develop their businesses initially (and several subsequently had unsatisfactory relationships with equity markets). 5. They do not appear to use rational strategy formulation techniques, but rather rely on vision, the skills of the proprietor and a low aversion to risk. 6. The day-to-day involvement of the founder in the detailed running of the business has been critical. This has led to increased criticism of the top-down, rational model and greater interest in bottom-up creative approaches.

1.4 Alternatives to the rational approach to strategy
1.4.1 Criticisms of the rational model of strategy formulation
This is likely to be examined quite frequently. Many strategy writers would dispute the model advanced so far by questioning some of the implicit assumptions. They would argue that organisational rationality is merely a textbook assumption from economics, with little basis in the real world. 1. Organisations are incapable of having objectives. This argument is derived from the insight of organisational sociology that organisations are really just collections of people. According to Cyert and March (1963), an organisation does not have goals of its own but rather it is the people within it that have the goals. Notions of profit (or shareholder wealth) maximisation are merely artificially simplified assumptions left over from economics. This leaves us with a picture of the goals pursued by a strategy being in fact the outcome of a bargaining process between various factions around the boardroom table. The consequences of this view are: (a) Objectives may be in conflict with one another. (b) Objectives will change from time to time according to which management faction finds itself in the ascendancy. (c) Objectives are unlikely to be directly related to the economic benefit of the shareholder. (d) Management will inevitably find itself adjudicating between the claims of the various stakeholder groups such as investors, employees, customers and government.
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One consequence of this is their adoption of satisficing behaviour where they try to follow strategies aimed at pleasing ‘most of the people most of the time’. (If you consider the way you have to juggle between the elements of your daily life, job, study, home life, leisure, etc., you get the idea of what satisficing means.) A more sophisticated argument is that management will formulate strategy in the light of its beliefs about the status of the firm and the nature of the environment around it. These beliefs are inevitably partially irrational and so any strategy based on them is likewise not completely rational. This is sometimes called an interpretative view of strategy because any attempt to explain a given firm’s strategy must consider the beliefs (or paradigms) in the minds of its management. Senior management should not be the only people involved in setting strategy. Writers argue that by making a separation between strategy formulation and strategy implementation the rational approach is bound to lead to difficulties. In the first place, senior management are too detached and will lack the detailed understanding of the problems of a given business division and the requirements of the particular customers and technologies there. The result will be a strategy that is unlikely to address the division’s needs. Second, and more fundamentally, they will not consider the social processes, values and cultures of the staff in the division or, if considered, these ‘soft’ factors will be misinterpreted. The resulting strategy will have unanticipated harmful effects on the motivation and commitment of those required to implement it. This view favours wider participation in strategy formulation through encouraging emergent strategies to percolate up from below. We shall return to this view in more detail later. In reality, strategy formulation is not a simple step-by step process aimed at finding the best way to meet the firm’s objectives. The model described in Figure 1.3 presents the process as moving in one direction. In reality, strategy formulation is a much more jumbled-up process and can include considerable backtracking and revisiting of earlier stages in the model. Indeed some writers question whether objectives are ever set in advance and suggest that management may revise or set strategic objectives in the light of the corporate appraisal or to match the strategies developed during the strategic option generation stage. Furthermore the strategy formulation process is very political. The main influence on the information considered and the options generated and accepted will be the power of particular personalities and factions in the management team. The strategies that firms eventually follow are not the same as the ones they set out in their plans. At the time of strategy formulation, management suffer from bounded rationality. This means that they cannot have perfect knowledge of the future and so any strategies developed will fail to take into account all eventualities. Consequently, the actual strategy will need to be adapted to suit the circumstances as they unfold. 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. Strategy should not be a rational process. This view is held by writers who are keen to re-establish the role of the individual manager and leadership in determining a firm’s success. The doctrine of action rationality proposed by Brunsson (1985) is a good example of this. Brunsson argues that excessive rationality in decision-making will rob a
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manager of the motivation and commitment necessary to implement the strategy successfully. Instead they will be haunted by doubts that they may have chosen the wrong alternative, aware of some of the inconsistency between objectives and conscious of all the things that might go wrong and the fact that the members of management that disagreed with the strategy are secretly hoping it will go wrong. It is better that managers should select a course of action from a small number of alternatives, focus on just the positive consequences and then formulate objectives based on the likely outcomes of the strategy once it has become established. This is very similar to the ‘ready-fire-aim’ philosophy associated with some successful firms.

1.4.2 Emergent strategies
The research of Mintzberg (1987) suggests that few of the strategies followed by firms in the real world are as consciously planned as the rational model suggests. The real strategies of real firms are a long way from ‘mental maps’ designed by a rational process. Instead, they are a combination of the planned strategy and another unanticipated emergent strategy (Figure 1.4). Mintzberg describes emergent strategies as ‘patterns or consistencies realised despite, or in the absence of, intentions’. By this he means us to understand that they just ‘happen along the way’ with differing degrees of management involvement. The failure of intended strategies to be fully realised as deliberate strategies does not surprise Mintzberg. He regards it as unlikely that a firm’s environment can be as totally predictable or totally benign as it would need to be for all intended strategies to work out. The emergent strategy is often a response to unexpected contingencies and the resulting realised strategy may, in the circumstances, be superior to the intended strategy. Mintzberg considers management’s role in this process and suggests that some strategies may be deliberately emergent. By this he means that managers may create the conditions for new ideas to flourish and strategies to emerge. This has the effect of focusing attention on 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.’

Figure 1.4
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Mintzberg’s types of strategy

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Detect discontinuity. This is the ability to detect the subtle environmental changes that may affect the business and be able to assess their potential impact on its future performance. Mintzberg states: ‘The trick is to manage within a given strategic orientation most of the time yet be able to pick out the occasional discontinuity that really matters.’ Know the business. Mintzberg believes that the ‘craftsman-manager’ will exhibit a hands-on feel for the business that goes beyond the cold and fragmented analysis available from reports and statistical analysis. He believes that formal strategy systems distance managers from their business and hence ensure that they lack the knowledge they need to run it. Manage patterns. Management should encourage strategic initiatives to grow throughout the business and watch to see how they develop and intervene once this is clear. Mintzberg says: ‘In more complex organisations this may mean building flexible structures, hiring creative people, defining broad umbrella strategies, and watching for the patterns that emerge.’ Reconcile change and continuity. Managers must realise that radical changes and new patterns of strategy will create resistance and instability in the firm. They must keep radical departures in check while preparing the ground for their introduction.

1.4.3 Logical incrementalism
Logical incrementalism is the term developed by Lindblom (1959, 1979) to describe how government administrators ‘muddle through’ from year to year rather than carry out bold strategic initiatives. Administrators will avoid radical strategies that take the organisation off in a new direction. Instead they will accept that they cannot foresee the future and survive by muddling through, taking small steps based on what has been done and has worked in the past. Lindblom is not recommending logical incrementalism. Rather he is recording the reality of its existence. As he says, if the environment changes radically (a discontinuity) then logical incrementalism will not respond sufficiently and hence the strategy will drift away from what is required by the environment.

Figure 1.5

Logical incrementalism
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As we can see. They will be attuned to the problems and issues confronting the organisation. Overcome personal and political pressures resisting change. they do not see this as unacceptably conservative. Evaluation of approaches to strategy Much academic research devotes itself to understanding how a business came to pursue a given strategy in the same way as a historian might seek to account for the origins and conduct of a war. Unlike Lindblom. Although fascinating. The use of formal strategic frameworks is valuable in developing and communicating the changed strategy. For this. 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. it is better that we take a rational approach as a basic framework. customers and others. Rather than present the strategy full-blown. we should still recognise what 2005. Logical incrementalism has been criticised as potentially being too slow to enable the organisation to cope with rapid changes in its environment. Build organisational awareness and support for the strategies. This will build further commitment among those charged with making the project a success and erode the consensus in favour of the old way of doing business. being prepared to adapt if the environment changes or if support is not forthcoming. The incrementalism comes from the need to subordinate rapid change to the process of gaining consensus and avoiding resistance (similar to Mintzberg’s ‘Reconcile change and continuity’). 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. Deal with the varying lead times and sequencing of events in the decisions. This said. 2. Often they will wait until circumstances have made other managers responsive to ideas for a change to the organisation. 4. but see it as realistic. This is the logical element in Quinn’s methodology because it ensures that the process leads somewhere. they will start to develop a general strategic vision for the organisation. a manager must map where he or she wants the organisation to go and then proceed towards it in small steps. the manager will build political support for the ideas by revealing them to key committees or on management retreats.16 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL P5 Quinn (1978) takes a more positive view of logical incrementalism than Lindblom. For Quinn.1 . The syllabus focuses on how strategy may be developed and how as a chartered management accountant you may assist in this process. Quinn suggests four key roles for the manager in this process: 1. Once they sense that a need for change has arisen and that events are pushing the firm in a particular direction. 3. this reflective approach is not the perspective of the syllabus you are following. and risk opposition. They may use formal strategy models and techniques to understand these. This consensus will build and press the strategic change forward incrementally. Commitment will be gained to an initial trial of the strategy. Improve the quality of information used in key decisions.

Positioning view. 1. however. 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. It is sometimes called an outside-in view because it is concerned with adapting the organisation to fit its environment. This could support the view that a more formal approach to strategy brings benefits even in the age of e-commerce and e-business. As a footnote to the earlier discussion of ‘dotcom’ firms it is worth recalling that during the latter part of 2000 several of the most ambitious examples of such businesses ran into serious financial difficulty and the share prices of the general sector declined sharply. seeing it as something enabling the firm to generate a superior return on shareholders’ investment through time. most writers took a positioning view. This is an inside-out view of strategy because the firm must go in search of environments that enable it to harness its internal competences. Competitive advantage stems from the firm’s position in relation to its competitors. 1. It seems to have grown out of marketing theory. Economic profit is essentially the excess of the firm’s earnings over the opportunity costs of the capital it employs. a resource-based perspective has become popular.1 . most real-world strategies ‘walk on two feet’. This perspective comes from Economics.5 Resource-based versus positioning view of strategy This is likely to be examined quite frequently.2m. that in the real world strategies can be influenced by irrational factors and that implementation is a crucial step in successful strategies.5. Its profits last year were £62.5. customers or stakeholders. consider this simple investment situation: Marsh Hall plc has net assets of £520m.4m.INTEGRATED MANAGEMENT 17 THE NATURE OF STRATEGIC MANAGEMENT Mintzberg and others have alerted us to. Competitive advantage stems from some unique asset or competence possessed by the firm. more recently. balanced between the rational approach and the emergent approach. This has broadly been the approach so far of this Study System. In other words. for an economic profit to be recorded the returns to the shareholder must exceed the rate of return the shareholder could have obtained by investing the same funds in the next best alternative. For example. They may be characterised as follows: 1. Its direct rival Jevons plc has net assets of £780m and earnings of £70. Until the 1990s.1 The source of competitive advantage Theorists of business strategy disagree on the origins of competitive advantage. As Mintzberg has commented.2 Economic profit Both sets of strategy writers take an economic view of competitive advantage. Resource-based view. 1. 2. 2005.

e. low costs.3 Competitive advantage and economic theory The concept of economic profit is the same as the ‘supernormal profit’ (or ‘economic rent’) enjoyed by the monopolies you studied in Economics for Business at Foundation Level. In a simple way this illustrates the link between economic profit and shareholder value.5.6m better off by investing in Marsh Hall than if they had invested in the next-best alternative. 1. The market value of Jevons would fall and the market value of Marsh Hall will rise.1 . firms in competitive markets can enjoy supernormal profits until competitive entry erodes profits by increasing buyer choice and pushing prices down.5.18 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL P5 Advise the investors in Marsh Hall plc and Jevons plc on the economic performance of the firms. differentiation or focus and can be pursued by developing a unique configuration of its value chain or value system. Investors should switch their investments from Jevons plc to Marsh Hall plc to gain a better return. calculated as (12 À 9%) Â £520m. 1. The effect of this would be to reduce the share price of Jevons and raise the share price of Marsh Hall.2/£780). Investors in Marsh Hall are therefore enjoying a positive economic profit of £15. According to economic theory. Jevons plc. Investors in Jevons are suffering a negative economic profit of £23. In the short run. 3 per cent of £780m) because they chose not to invest in Marsh Hall plc. These strategies are the generic strategies of overall cost leadership. The debate over positioning versus resource-based approaches to strategy also has its origins in economic theory. 2005. Jevons plc is making a return on net assets of 9 per cent (£70. We will encounter here and in Paper P4 the positioning approach several time in the present text: 1. We need to calculate the economic profit earned by the two firms:     Marsh Hall plc is making a return on net assets of 12 per cent (£62. In other words.6m.4 The positioning approach The positioning approach to strategy takes the view that supernormal profits result from the following factors:    high market share relative to rivals. However the only firms that can enjoy supernormal profits in the long run are those that have erected barriers to entry.4m (i. supernormal profit arises whenever market power belongs to firms rather than consumers. they are £15.4/£520). differentiated product. Porter’s Five Forces theory argues that the long-term return on investment (ROI) of an industry is determined by five forces and so an appropriate strategy for a given firm is to increase its profitability by adopting a strategy that positions it against these forces in the long run better than its rivals. The two sides disagree on the sources and durability of the competitive advantages that lead to supernormal profits.

custom and permission to operate. 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.. Hamel and Prahalad.5. (1992) suggest four principles of capabilities-based competition: 1. It is better to retain these architectures as a unique competitive resource and to leverage them to take the firm into industries where they are valued.6 Some RBT writers Stalk et al.g. Barney. etc. However. 1.5. 2. one that can have its size and shape changed at will to fit the environment. to remain the same long enough for the firm to mount an effective response. 3. Stakeholder theory suggests that the long-term competitive success of a firm will depend on its developing a sustainable relationship with the key stakeholders on whom it depends for resources. Kay. structure.INTEGRATED MANAGEMENT 19 THE NATURE OF STRATEGIC MANAGEMENT 2.5 Resource-based theory (RBT) Resource-based theorists make the following criticisms of the positioning view: 1. global competition and rapidly changing technologies make this impossible. 3. Some RBT writers (e.1 . Creating these capabilities requires group-wide investments that transcend traditional functional or business unit boundaries. faster product life-cycles.. They argue that such organisational changes are likely to destroy the complex organisational architectures on which the firm’s present and future success depends. According to RBT writers (e. i. the impact of IT. Environments are too dynamic to enable positioning to be effective.e.g. RBT writers (e. It is easier to change the environment than it is to change the firm. suppliers. 1991). 1997) are suspicious of the positioning school’s implied belief in a ‘rubber organisation’. buyers. 2005. rivals. 1. The building blocks of corporate strategy are business processes not products and markets. Stalk et al. superior profitability instead depends on the firm’s possession of unique resources or abilities that cannot easily be duplicated by rivals. 1992) argue that superior competitive performance depends on developing business processes and structures that enable it to spot changing needs of customers immediately and to develop commercially viable responses quickly. Positioning advantages are short run.g. 1994. Competitive success depends on the ability to transform these processes into strategic capabilities able to provide superior value to the customer. Positioning depends on the customer group. culture. skills and products in response to them. 2. superior long-run profitability cannot be explained or assured by possession of a world-beating product. Therefore. 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 organization’s size. The competitive advantages are not sustainable. a dominant market position or low-cost position.

Here Barney is accepting the view of resources taken in the SWOT model.g. Barney (1991) argues that superior profitability depends on the firm’s possession of unique resources. Substitutability: it must not be possible for a rival to find a substitute for this resource (e.g. Consistency: all its innovations satisfy the customer. their detailed analysis of other clubs’ games. Imperfectly imitable: competitors must not be able to obtain them. Speed: more able to incorporate new ideas and technologies into its products. 4. (c) by implementing organisational routines. or because they are hard to understand and duplicate if you are an outside competitor (e. ability to point to a long history in the business or perhaps past purchase of a unique piece of land).1 . These can be divided into: (a) internal architecture: relations with employees. These deliver distinctive capabilities that are greater than the sum of the parts in three ways: (a) through the creation of unique organisational knowledge. not in the way that Microsoft used CD technology to substitute for the sales network. Competitive architecture: These are the relationships that make up the organisation. Agility: able to adapt on many fronts simultaneously. Generally this will result from them having come into the firm’s possession by a unique historical event (e. (b) external architecture: relations with suppliers and customers. Rare: competitors must not have them too. printing and logisitics of Encyclopedia Britannica when it launched Encarta).g. otherwise they cannot be a source of relative advantage. Therefore the champion of capabilities-based strategy is the chief executive officer (CEO). 2. Acuity: ability to see its environment clearly and forecast changing needs. However. 3. a cooperative spirit that enables players to pass the 2005. (b) through establishing a cooperative ethic among the participants. 2. 4. Kay (1997) writes of ‘distinctive capabilities’ arising from four sources: 1. Kay uses the examples of successful football clubs like Liverpool and Manchester United. the point he is making is that it is not enough just to have valuable resources. He suggests that their football league performance is due to the networks they have built with youth clubs and their expenditure on recruiting players. Innovativeness: able to generate and combine business ideas in novel ways. He identifies four criteria for such resources: 1. 5. 3. Superior competitive performance will result from the firm using these competences to outperform rivals on five dimensions: 1. payments systems. (c) network architecture: relations between a group of collaborating firms. which arises from collaboration and interaction.20 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL P5 4. Valuable: they must be able to exploit opportunities or neutralise threats in the firm’s environment. a particular organisational culture or relationship with stakeholder groups).

7 Comments on resource-based views of strategy Resource-based theory raises a number of issues: 1. services or solutions.1 . etc. 2. medicines. Among customers it is a reason to buy the product and to remain loyal. The notion of core competences spreads beyond the ability of the firm to compete just in particular markets 2005. 1. They propose three tests to identify a core competence: 1. Kay argues that reputation must be built and maintained over time and requires detailed attention to all aspects of the firm’s products. personal stereos. suppliers and potential employees it is a reason to become involved and give exceptional levels of support to the firm. and describe two concepts of the corporation (Table 1. Conflict with conventional product/market-based views of strategy. procedures and processes. This is sometimes called the extendability condition.1 suggests that Prahalad and Hamel’s formulation carries profound implications for the management accounting function. Kay observes that these generally occur in markets with strong government involvement (e. 4. He uses the examples of car hire and accountancy services to demonstrate that reputation drives up margins. Prahalad and Hamel (1990) describe ‘core competence’ as ‘the collective learning in the organisation. (1992) the view that excessive focus on functional or SBU divisions can cause harm. Close inspection of Table 1.) and profits may be limited by government action too. motorcycles. These skills enabled the firms to deliver premium profits across and through diverse environments. The authors cite as examples Honda’s skill with small reliable high-output petrol engines (cars. 2. The firm may have a unique source of materials or possess exclusive legal rights to a market or invention. This issue will be returned to in detail in the next chapter. Management accounting is traditionally built on a responsibility centre model. CD players. Post-It-Notes. They share with Stalk et al. These stave off competitors and enable the firm to enjoy the high margins of early life-cycle markets. defence equipment. Innovation frequently demands collaboration among staff and with suppliers and customers. televisions.5. abrasive papers). Innovative ability: This is the ability to develop new products. They argue that core competences can be destroyed by failure to invest in them. Ownership of strategic assets: This is close to the barriers to entry discussed in traditional economic theories of monopoly. Consequently it builds on the architectures of the firm. lawnmowers).g. laptops) and 3M’s skills in coatings (cassette and video tape. Must be difficult for competitors to imitate. Must provide access to a wide variety of markets. while for investors. photographic film. 3.INTEGRATED MANAGEMENT 21 THE NATURE OF STRATEGIC MANAGEMENT ball rather than waste chances with lone shots at goal and deeply embedded routines of play. 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. 3.1). Sony’s skills in miniaturisation (radios. Reputation: This is the high esteem that the public have for the firm. Must provide a significant contribution to the perceived customer benefits of the final product. especially how to coordinate diverse production skills and integrate multiple streams of technologies’.

extending into any products or markets where it will work. reputation and ownership of proprietary technology. 3. 2.22 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL P5 Table 1. This may increase perceived risk and hence destroy shareholder value by reducing the share price. Yet many of the models we have used. The RBT view seems to argue that strategy should not be a process of deciding a product/market mission and competing in markets by establishing what the customer wants and exploiting the weaknesses of rivals. the SBU ‘owns’ all resources other than cash Discrete businesses are the unit of analysis. and focus on building up relationships with internal and external stakeholders to develop its internal 2005. (b) There is a much higher emphasis on finding an environment to match the firm rather than vice versa (management seems to be saying ‘all we have is a hammer so our markets are anything that involves hitting things’). Challenges the rational model of strategy. it is no guarantee of competitive advantage against more focused players in each market (e. tend to discuss particular products and markets and develop strategic prescriptions for them. (b) Even where a firm is involved in a range of industries and has a unique core competence across them all. IBM had a unique global architecture. Indeed. (c) Investors cannot be clear what industry they are investing in.1 Two concepts of the corporation (adapted from Prahalad and Hamel.g. This leads to two possibilities: (a) By using techniques that focus on products and markets individually we may develop strategies which deplete the firm’s wider core competences (e. outsource the remainder. by deciding to withdraw from a market or to cut costs by outsourcing a crucial source of organisational learning). 1990) SBU Core competence Inter-firm competition to build competences Portfolio of competences. in the 1980s.g. 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).1 . consulting. capital is allocated business by business Optimising corporate returns through capital allocation trade-offs among businesses Value added by top management and industries. PCs and mainframe systems). The basis of RBT is the suggestion that the firm should retain any unique strategic assets it has. Instead it suggests that strategy involves deciding what makes the firm unique and building strategy on that. core products and businesses SBU is potential reservoir of core competences Businesses and competences are the unit of analysis: top management allocates capital and talent Enunciating strategic architecture and building competences to secure the future Basis for competition Corporate structure Status of the business unit Resource allocation Competitiveness of today’s products Portfolio of businesses related in product – market terms Autonomy is sacrosanct. This did not stop it being beaten into second or third place by focused rivals in each of its sub-industries of software development. The impacts of this are: (a) RBT strategy starts with the corporate appraisal not with the mission of the business. RBT can lead to different conclusions. such as the Porter models and the product life-cycle. the mission must adapt to fit the most recent extension of core competence.

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

teamworking; collaboration with suppliers and customers; flexible working practices; creation of participative culture.

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

1.6 Stakeholders
This is likely to be examined quite frequently.

1.6.1 The identity of stakeholders
Stakeholders are defined by CIMA as ‘Groups or individuals having a legitimate interest in the activities of an organisation . . . .’ (Management Accounting: Official Terminology, p. 18). They include: 
     

shareholders and other investors; management; staff and organised labour; customers; suppliers; local community; national governments.

The first three items are sometimes called internal stakeholders, while the remainder are external stakeholders.

1.6.2 The influence of stakeholders
Present strategic thinking encourages managers to consider stakeholders when setting the mission and objectives of the firm. This is for two broad groups of reasons: 1. Issues of stakeholder power. This view observes that, like it or not, management must recognise that stakeholders can affect the success of a strategy, depending on whether they support or oppose it. For example, customers refusing to buy products, shareholders selling their shares or staff striking would disrupt any strategy. The view concludes that management should consider stakeholders before setting strategic objectives. 2. Issues of organisational legitimacy. This more radical view suggests that firms are required to be good citizens because they are only permitted to exist by society on sufferance of not abusing their power. Consequently, although working primarily for the
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shareholders, management must ensure that its decisions do not ignore the interests of other stakeholders.

1.6.3 The Mendelow matrix
Make sure that you can draw and apply this model. Mendelow (1991) proposed a diagram to help analyse stakeholders (Figure 1.6). Scholes (1998) suggests that this technique can be used in two situations: 1. To keep a track of changes in the potential influence of different stakeholder groups. By plotting the matrix periodically, management can be alerted to when a strategy may need to change 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).

1.6.4 Assessing power of stakeholders
Factors that may be associated with a particular group having high power are: 1. Status of the stakeholders, for example:  their place in the organisational hierarchy;  their relative pay;  their reputation in the firm;  their social standing (e.g. ministers of religion may carry considerable power due to their social status). 2. Claim on resources, for example:  size of their budget;  number and level of staff employed;  volume of business transacted with them (e.g. suppliers and customers);  percentage of workers they speak for (e.g. a trade union).

Figure 1.6
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Mendelow’s power–interest matrix

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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).

1.6.5 Assessing interest of stakeholders
This will be more complex because it involves two factors: 1. Where their interests rest. We assume that powerful stakeholders will pursue their selfinterest. It is important to consider what they wish to achieve. It is possible to make some generalisations, for example:  managers – want to further the interests of their departments and functions as well as their own pay and careers;  employees – require higher pay, job security, good working conditions and some consultation;  customers – want fair prices, reliable supply and reassurance about their purchases;  suppliers – want fair prices, reliable orders, prompt payment and advance notification of changes;  local government – wants jobs, contribution to local community life, consultation on expansions, etc. In practice, we would need to interview the powerful stakeholders to find out precisely what they wanted. 2. How interested they are. Not all stakeholders have the time or inclination to follow management’s decisions closely. Again, some generalisations are possible about what will lead to interest, for example:  high personal financial or career investment in what the business does;  absence of alternative (e.g. alternative job, customer, supplier or employer);  potential to be called to account for failing to monitor (e.g. local councils or government bodies such as regulators);  high social impact of firm (e.g. well known, visible product, association with particular issues).

1.6.6 Illustration of the stakeholder matrix
An illustration of Mendelow’s matrix appears in Figure 1.7. It takes up the idea of a factory closure mentioned earlier (Section 1.6.3) and suggests where management could classify the stakeholder factions and how it might deal with them.

1.6.7 Strategies to deal with stakeholders
The purpose is to consider what the matrix will need to look like for the strategy to be a success and then to develop strategies to align the actual matrix with the ideal matrix. In the example in Figure 1.7, the key concerns where alignment is poor are: 
  

the the the the

negative attitudes of skilled labour, key managers and national suppliers; ambivalent attitude of shareholders and customers; potentially negative interventions of national media and central government; possible search for power from local council and media.
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Figure 1.7

Illustration of Mendelow’s matrix applied to Dyson

Scholes (1998) 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 gone through, this may stop them joining forces with more powerful dissenters in C and D. Factory management should brief all groups here on the reasonableness of the case for closure and of the provisions being made for the redundant staff. Advance notice will give each more time for adjustment. Box C – intervention. The key here is to keep the occupants satisfied to avoid them gaining interest and shifting into D. Usually, this is done by reassuring them of the likely outcomes of the strategy well in advance. Factory managers should assure the government and suppliers that the closure will result in a more competitive firm that is able to compete worldwide. A similar message may reassure investors if it is backed up with a reassuring short-term dividend forecast. Box D – participation. These stakeholders can be major drivers of the change and major opponents of the strategy. Initially, there should be education/communication to assure them that the change is necessary, followed by discussion of how to implement it. The factory managers should involve the unions in determining the redundancy package or redundancy policy. Key managers should be involved in deciding the basis on which early retirements should be handled and how redeployment or outplacement should be managed. Key shareholders will be consulted throughout to reassure them that costs will not be excessive.

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1.6.8 Conflict between stakeholders
The objectives of the stakeholder groups will inevitably be different and may be in direct conflict. For example, the staff’s desire for better pay and work conditions may conflict with the shareholders’ desire for higher profits and the customers’ desire for lower prices. The job of management is to develop and implement strategy with these differences in mind. This can be further complicated in organisations where the employees are also shareholders! Additionally, there will be differences between the goals of members of the same internal stakeholder group. Two examples are particularly important: 1. Differences between shareholders. This commonly manifests itself as a polarisation between those who broadly require their income as short-term dividends and those who are happy for profits to be retained to promote capital growth. 2. Differences between managers. The goals of managers and the departments they lead may conflict. Consequently, many strategic objectives are the outcome of a political bargaining process at boardroom level.

1.7 Mission
1.7.1 Terminology
Johnson and Scholes provide the following useful guide to the terminology we shall be using in this section:

Term

Definition

Personal example

Mission

Vision or strategic intent Goal Strategies

Overriding purpose in line with the values and expectations of stakeholders Desired future state: the aspiration of the organisation General statement of aim or purpose Long-term direction

Be healthy and fit

To run the London marathon Lose weight and strengthen muscle Associate with a collaborative network (e.g. join a running club), exercise regularly, compete in marathons, stick to appropriate diet Lose 10 pounds by 1 September and run the marathon in 18 months time

Objective

Quantification (if possible) or more precise statement of the goal

Adapted from Johnson and Scholes (1997 p. 13).

1.7.2 Elements of a mission statement
Although there is no standard format for mission statements, most seem to contain the following four key elements. (The following mission statements were taken from the British Airways website in late 1999. It refers to the mission it established in 1997. It will be used here to illustrate the elements in mission statements.)
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British Airways mission statement The new mission To be the undisputed leader in world travel The new values Safe and Secure Honest and Responsible Innovative and Team-spirited Global and Caring A Good Neighbour The new goals Customers’ Choice – Airline of first choice in key markets Strong Profitability – Meeting investors’ expectations and securing the future Truly Global – Global network, global outlook: recognised everywhere for superior value in world travel Inspired People – Building on success and delighting customers 1. A statement of the purpose of the business. According to conventional economic theories of the firm, this will be to make profit (or shareholder value). For British Airways it is the second of its three goals. The appearance of customers, community and environment in mission statements raises the question of whether satisfying the shareholder is (or indeed should be) still the principal goal of strategic management. 2. A statement of its scope or industrial domain. This is conventionally described as its products and markets. British Airways alludes to creating a global travel network of which airlines seem to be only a part. 3. A statement of its competitive strategy or positioning. British Airways emphasises the way it is viewed by its customers, in particular its superior value and truly global nature. 4. A statement of its principles, ways of doing business and social responsibilities. British Airways communicates this under its values.

1.7.3 Roles of mission statements
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. Mission statements help at four places in the rational model of strategy: 1. Mission and objectives. The mission sets the long-term framework and trajectory for the business. It is the job of the strategy to progress the firm towards this mission over the coming few years covered by the strategy. For example, whatever British Airways decides to do, it must be concerned with delivering customer and financial value in the global travel business. Discussing opportunities for opening a chain of burger bars in London would not be appropriate because it is not British Airways’ business.
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2. Corporate appraisal. Assessing the firm’s opportunities and threats, its strengths and its weaknesses must be related to its ability to compete in its chosen business domain. Factors are relevant only insofar as they affect its ability to follow its mission. 3. Strategic evaluation. When deciding between alternative strategic options, management can use the mission as a touchstone or benchmark against which to judge their suitability. The crucial question will be, ‘does the strategy help us along the road to being the kind of business we want to be?’ 4. Review and control. The key targets of the divisions and functions should be related to the mission, otherwise the mission will not be accomplished. For British Airways, this implies objectives for customer service and supplier relations in addition to budgetary control.

1.8 Setting strategic objectives
1.8.1 The link between mission and objectives
A mission is an open-ended statement of the firm’s purposes and strategies. Strategic objectives translate the mission into strategic milestones for the business strategy to reach. A strategic objective will possess four characteristics which set it apart from a mission statement: 
  

a precise formulation of the attribute sought; an index or measure for progress towards the attribute; a target to be achieved; a time-frame in which it is to be achieved. Another way of putting this is to say that objectives must be SMART, that is, 

   

Specific – unambiguous in what is to be achieved; Measurable – specified as a quantity; Attainable – within reach; Relevant – appropriate to the group or individual to whom it is applied; Time-bound – with a completion date. Table 1.2 lists some strategic objectives.

Table 1.2 Mission Growth

Examples of strategic objectives Attributes Sales volume Share of market Asset base of firm Customer satisfaction Defects Consistency Peer group respect Speed to market Successful new products Non-discrimination Environmental pollution Safety Measure
0 000s of units % of total volume Net assets

Quality

Repeat purchases No. per 0 000 Adoption of standard procedures Industry awards received Development time % of sales from new products Workforce composition Cubic metres of waste Notified incidents

Innovation

Social responsibility

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1.8.2 The goal structure
The goal structure is the hierarchy of objectives in the organisation. It can be visualised as the diagram in Figure 1.8. Objectives perform five functions: 1. Planning. Objectives provide the framework for planning. They are the targets which the plan is supposed to reach. 2. Responsibility. Objectives are given to the managers of divisions, departments and operations. This communicates to them: (a) the activities, projects or areas they are responsible for; (b) the sorts of output required; (c) the level of outputs required. 3. Integration. Objectives are how senior management coordinate the firm. Provided that the objectives handed down are internally consistent, this should ensure goal congruence between managers of the various divisions of the business. 4. Motivation. Management will be motivated to reach their objectives in order to impress their superiors and perhaps receive bonuses. This means that the objectives set must cover all areas of the mission. For example, if the objectives emphasise purely financial outcomes, then managers will not pay much heed to issues such as social responsibility or innovation. 5. Evaluation. Senior management control the business by evaluating the performance of the managers responsible for each of its divisions. For example, by setting the manager a target ROI and monitoring it, senior management ensure that the business division makes a suitable return on its assets. You may be familiar with these five functions (often recalled using the acronym PRIME) from your studies in budgetary control. Budget targets are a good example of operational level objectives. In this chapter, however, we are working at a higher level by considering the strategic objectives of the firm.

Figure 1.8
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A goal structure

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1.9 Critical success factors
1.9.1 Defining critical success factors
This approach first emerged as an approach for linking information systems strategy to broader commercial goals by first identifying the crucial elements of the firm’s business strategy. More recently it has been appropriated by strategists in general as an alternative to the goal structure approach described above. According to its originators, critical success factors (CSFs) are: ‘The limited number of areas in which results, if they are satisfactory, will enable successful competitive performance’ (Rockart and Hoffman, 1992). More recently, Johnson and Scholes (1997) have defined CSFs as:
. . . those components of strategy where the organisation must excel to outperform competition. These are underpinned by competences which ensure this success. A critical success factor analysis can be used as a basis for preparing resource plans.

The attraction of the approach lies in the fact that it provides a methodology for identifying strategic goals (or CSFs) by basing them on the strengths, or core competences, of the firm. These are implemented though the development of key performance indicators (KPIs) or milestones in the processes delivering the CSFs (Figure 1.9).

1.9.2 Methodology of CSF analysis
According to Johnson and Scholes, this is a six-step process. We have illustrated them here using the example of a chain of fashion clothing stores. 1. Identify the critical success factors for the specific strategy. They recommend keeping the list of CSFs to six or less. The store chain might decide that these are:  right store locations;  good brand image;  correct and fashionable lines of stock;  friendly fashionable store atmosphere. 2. Identify the underpinning competences essential to gaining competitive advantage in each of the CSFs. This will involve a thorough investigation of the activities, skills and

Figure 1.9 Critical success factors and key performance indicators

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3.

4.

5.

6.

processes that deliver superior performance of each. Taking just one of the store’s CSFs, the issue of correct stock, as an example:  recruit and retain buyers with acute fashion sense;  just-in-time purchasing arrangements with clothing manufacturers;  proprietary designs of fabrics and clothes;  close monitoring of shop sales by item to detect trends in which items are successful and which are not;  swift replenishment delivery service to minimise amount of stock in the system. Ensure that the list of competences is sufficient to give competitive advantage. The store needs to consider whether improvement to the systems and processes underlying its CSFs will be sufficient to secure its place in the high street or whether more needs to be done. For example, have they considered whether they need to develop a direct ordering facility to raise profile and gain loyalty? Identify performance standards that need to be achieved to outperform rivals. These are sometimes termed key performance indicators and will form the basis of a performance measurement and control system to implement and review the strategy. KPIs that the clothing store chain might consider to match its key processes (listed above) include:  staff turnover among buyers and designers;  lead times on orders from suppliers;  percentage of successful stock lines designed in-house;  installation of a real-time store sales information system by the end of the year;  establishment of one-day order turnaround for store replenishment. Ensure that competitors will not be able to imitate or better the firm’s performance of each activity, otherwise it will not be the basis of a secure competitive strategy. Our store would compare its competences against Gap, Miss Selfridge, Next, River Island, etc. It would need to consider whether its present advantages are sustainable. Monitor competitors and predict the likely impact of their moves in terms of their impact on these CSFs. This process is carried out principally by discussions between management, although there is a clear additional role for the special expertise of the chartered management accountant in mapping the key process, developing KPIs and monitoring them.

1.10 Meeting the objectives of shareholders
1.10.1 Maximisation of shareholder wealth as an objective
Traditional economic theory specifies that the objective of the firm is to maximise profit. However, this assumption does not accurately reflect the goals of the shareholder for a number of reasons: 1. It is a single-period measure (typically annual). The shareholder wants financial returns across many years. 2. It ignores risk. Shareholders will require higher returns if risks are higher but will be satisfied with lower returns if risks are low. 3. It confuses profit with cash flows to the investor. The investor wants cash flows not a figure for profit on the income statement.
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As you will learn in Financial Strategy, a more appropriate version of rational shareholder objectives is either (a) maximisation of the present value of the free cash flows of the business, or (b) maximisation of the share price.

1.10.2 Financial and non-financial objectives
Traditionally, the shareholders’ objectives have been translated into financial objectives such as profit or profitability (e.g. return on capital employed or earnings per share). These accounting measures have several drawbacks when used as strategic targets:    

They are not useful for start-up businesses. During their first few years many firms do not make a profit or return a positive cash flow due to the high costs of set-up and getting established in the market. Profitability measures are better suited to mature businesses. They are inherently short-termist. Because profit is an annual measure it encourages management to focus on short-term returns at the expense of the long-term development of the business. Hence, managers may decide to cut product development, promotion or staff development to improve profit performance at the expense of the long term. They provide no control over strategic behaviour. The profit figure is a financial summary of the effects of a year’s economic activity. The competitive strategy of the firm will seek to do business in particular ways in order to make this profit. This strategy should also feature in the goal structure. They can be manipulated by creative accounting. Consequently, the strategic targets of firms usually contain a mixture of financial and non-financial measures of performance. These ensure that:  managers follow courses of action consistent with the competitive strategy;  shareholders and others can form an opinion of the success of the firm’s strategy even when financial results are low;  the strategic objectives can be more easily translated into tactical and operational objectives for divisions and processes without an immediately discernible impact on profits (e.g. human resources, marketing, etc.)

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

1.11 Competing objectives
1.11.1 Importance of the existence of competing objectives
It has been shown that profit-seeking, not-for-profit and public sector organisations may have competing objectives arising from: 
 

conflicts between profit and social responsibilities; differences in the goals of particular managers; conflicts between the goals of influential stakeholder groups.
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This has important implications in the following areas: 1. Development of consistent strategies. If the organisation does not have clear objectives, or if its objectives are in conflict with one another, then it will not be able to follow consistent courses of action. For example, a firm that seeks to satisfy objectives for shortterm dividends while also pursuing long-term growth will eventually be forced to sacrifice one or other due to lack of funds. 2. Deciding between strategic options. Options are evaluated against the objectives of the business before management agree to devote resources. However, if one option provides a good financial return while another provides jobs in an area of high unemployment, a firm with both financial and social responsibility objectives will not be able to choose. 3. Development of appropriate performance measures. The more objectives an organisation has, the more control measures it will need to monitor performance towards them. If the objectives are competing there is a danger of conflicting signals or, worse, excessive focus on one at the expense of the rest. For example, a school will have many objectives such as producing good citizens, ensuring emotional development, catering for special needs, etc. 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.

1.11.2 Resolving competing objectives
There are various techniques available: 1. Prioritisation. Management can specify that any strategy considered must as a minimum satisfy one or more specific objectives before they are prepared to consider it. For example, management may set a minimum profitability threshold for any strategy (say 15 per cent 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 its satisfies the objective (a high score showing high attainment). A ranking is calculated for each option by multiplying its weighting by its score, and the strategic option with the highest overall ranking is accepted. 3. Creation of composite measures. These are used for strategy implementation and control rather than for strategy formulation and choice. Approaches include the use of balanced scorecard measures and techniques of data envelopment analysis (DEA). DEA is used to assess performance of a group of branches or divisions (e.g. a group of schools, hospitals or universities), where each has the same set of multiple objectives to achieve. Data is fed into a sophisticated computer program which identifies for each objective the best performer among the group. It calculates the comparative performance of the remaining branches against this ‘best in class’ branch. It can also give an overall performance metric for each branch, based on a composite index of its performance against a notional ‘best in class at everything’ branch. The above techniques are rational, mathematical ones. In their study A Behavioral Theory of the Firm (1963), management researchers Cyert and March identify some less obviously
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In the United Kingdom. Press coverage of BCCI.12. that all SEC-regulated companies should have an audit committee with a majority of non-executive directors. stakeholders happy. The Treadway Commission issued a report on fraudulent financial reporting in 1987. 1. Where particular stakeholders’ objectives cannot be addressed. pay remains static while dividends are paid. According to the Cadbury report: Corporate governance is the system by which companies are directed and controlled.2 The history of corporate governance Treadway and COSO Some of the earliest considerations of corporate governance come from the United States.INTEGRATED MANAGEMENT 35 THE NATURE OF STRATEGIC MANAGEMENT rational techniques by which competing objectives are resolved:     Satisficing. Exercise of power. Stakeholders are kept happy by taking turns to get their objectives realised. Polly Peck and the pension funds of the Maxwell Communications Group caused much public questioning about how effective the boards 2005. Sequential attention. COSO. 1. 1. The Treadway Report prompted the Securities and Exchange Commission (SEC) to incorporate in its listing requirements. developed a framework for internal control. It usually emerges as a result of negotiation between the competing stakeholders. this is often resolved by one or more powerful figures using their power to force through their preferred option. Here the strategy selected is the one that keeps all. Where management are deadlocked due to competing objectives. Practice and Future. Side payments.1 What is corporate governance? This is likely to be examined quite frequently. Corporate Governance: History. and gave guidance for reporting publicly on internal control. published by CIMA Publishing and reproduced with permission. which confirmed the role and status of audit committees. Further work by a subgroup of the Treadway Commission. or at least the most powerful.12. in between. providing detailed criteria for management to assess internal control systems. the corporate governance debate was stimulated by a series of corporate scandals and unexpected corporate collapses in the late 1980s and early 1990s.1 . Therefore staff may get a large pay rise every 3 years but. from 1988. or a local community may have a new leisure centre built by a company whose new superstore will inevitably increase noise and traffic congestion in the area. they are compensated in another way. For example.12 Corporate governance This section is based on extracts from the CIMA working party report. a shareholder may be compensated for a low profit by a higher dividend.

The 2005. to consider the responsibilities of executive and non-executive directors. At the heart of the Cadbury Committee’s recommendations was the Code of Best Practice. The Cadbury Report advised that companies would not be able to comply with their recommendations until further necessary guidance was developed. with which all listed companies were to comply. boards and auditors.1 . The board would find it easier to secure assent for its strategies. and about the difficulties that non-executive directors and auditors faced in ‘standing up’ to dominant chairmen or chief executives. guidance for companies on the form in which directors should report. The committee’s remit was to report on the financial aspects of corporate governance (particularly in relation to financial reporting and accountability). The argument for adhering to the Code was that it would strengthen both confidence and accountability. accountability (the requirement for directors to provide quality information. The committee placed great importance on internal control – both because it is essential to efficient management. this would facilitate the efficient 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. and guidance for auditors on relevant audit procedures and the form in which auditors should report. It felt that this was the responsibility of the accountancy profession. in December 1994. the principal responsibilities of auditors.’ It intended this requirement to ensure that companies have an appropriate control system in place. if its activities were more open and there was a clearer understanding of its responsibilities. balanced and complete financial reporting). it called upon them to take the lead in developing:    a set of criteria for assessing effectiveness. integrity (honest. and apply it effectively.36 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL P5 of these companies had been in monitoring the actions of their executive management. Rutteman The Rutteman working group published its guidance. the case for audit committees. and because failures in internal control were one of the reasons the committee was established. Internal Control and FinancialReporting: Guidance for Directors of Listed Companies Registered in the UK. Cadbury The Cadbury Committee was set up in May 1991 by the Financial Reporting Council (FRC). the extent and value of the audit. Specifically. and the links between shareholders. the Stock Exchange and the accountancy profession in response to their concern about ‘the perceived low level of confidence both in financial reporting and in the ability of auditors to provide the safeguards which the users of company reports sought and expected’. And if the general level of confidence in financial reporting were improved. and for shareholders to exercise their powers as owners responsibly). together with preparers of accounts. The Code was based on three principles:    openness (subject to commercial confidentiality).

or the statement on directors’ responsibilities. on the initiative of the chairman of the FRC. and to prepare a code of practice based on its findings.INTEGRATED MANAGEMENT 37 THE NATURE OF STRATEGIC MANAGEMENT guidance was addressed principally to listed companies. the committee expected that non-listed and smaller companies would find their conclusions of merit. This guidance has now been superseded by the Turnbull Report. It was to be applicable immediately – to accounting periods beginning on or after 1 January 1995. The committee’s approach was to strengthen accountability. and (d) confirmation that the directors (or a board committee) have reviewed the effectiveness of the system of internal financial control. and encourage improved performance through transparency. but also considered the relatively neglected issue of how to appropriately reward performance. and the proper reporting to shareholders. and those traded on the USM. but independent of. who would have no personal interest in the remuneration decisions they were taking. on the initiative of. in the directors’ report. Although their research focused on UK listed companies. Internal Control – Integrated Framework. it felt that determining directors’ pay needed to be delegated by the board to a suitably knowledgeable and independent group. (c) description of the key procedures that the directors have established and which are designed to provide effective internal financial control. Its terms of reference were to ascertain what was good practice in determining directors’ pay. Specifically. 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. the appropriate allocation of responsibilities for determining remuneration. Greenbury The Greenbury Committee was set up in January 1995. This group would report to shareholders. and considered that implementation of its recommendations would improve corporate remuneration practices. Hampel The Hampel Committee was established in November 1995. the CBI and the Consultative Committee of Accountancy 2005. The committee published its report in July 1995. although it might also be included in the operating and financial review. The committee was not just responding to public and shareholder concern about pay increases and accountability. providing full disclosure of individuals’ remuneration and the underlying policy. non-executive directors. the Confederation of British Industry (CBI).1 . 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 financial control. (b) explanation that such a system can provide only reasonable and not absolute assurance against material misstatement or loss. The Hampel Committee’s sponsors included the Stock Exchange. but was felt to be relevant to all business organisations. and advised that readers would expect it to be included within the corporate governance statement. and followed the recommendations of both the Cadbury and Greenbury Reports for a successor committee. Rutteman did not prescribe the form of the internal controls statement.

1 . and to identify broad principles (some familiar from Cadbury and Greenbury) which it hoped would command general agreement. and address the roles of shareholders and auditors in corporate governance. Directors’ remuneration: Without paying more than is necessary. Policy on executive remuneration should be clear. and to justify any significant variances. 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. Details of remuneration policy and the remuneration of each director should be stated in the annual report. and no director should be involved in determining his/her own remuneration. keep under review the role of directors (executive and non-executive). Some element should be performance-related in such a way as to encourage the achievement of corporate objectives and to reward individual performance.   Directors: Listed companies should be led by an effective board. recognising the need for board cohesion and the common legal responsibilities of all directors. It started from the beginning to consider what is meant by corporate governance. To enable it to discharge its duties the board should be supplied in a timely manner with good quality information.12. The committee felt that it was important to look at corporate governance from a fresh perspective.3 The combined code principles of corporate governance The Combined Code was published in June 1998 and comprised Principles of Good Governance and a Code of Best Practice. 1. 2005. proposing amendments where necessary. It consulted widely. not as a ‘response to things which were perceived to have gone wrong’. their report was not as short as these comments suggest. The procedure for appointing new directors should be formal and transparent and directors should stand for re-election at least every 3 years. The committee felt that it was ‘too soon to reach a considered assessment of the longterm impact of the Cadbury Code’ and ‘even more difficult to reach a definitive conclusion on Greenbury’. There should be a clear division of responsibilities of the two key tasks of running the board and running the business so that no individual has unfettered powers. the level of remuneration should be that which is necessary to recruit and retain directors of the right calibre. which set out Code Provisions for each of these principles. with a balance of executive and non-executive directors such that no individuals or small groups can dominate decision-making.38 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL P5 Bodies (CCAB). The principles are divided into the broad areas listed below. However. sending out a questionnaire to interested parties (including public companies. Greenbury and its own work and to pass this to the Stock Exchange so that it could sit alongside the Listing Rules. institutional investors and representative bodies such as CIMA). The committee decided to produce a Combined Code embracing Cadbury. The committee indicated that companies would be required to make a statement to show how they apply the principles and comply with the Combined Code. review the Greenbury recommendations.

2005. It creates confidence among other stakeholders. The key points to remember are:   at least one definition of strategy. Stimulates performance. helps the board to identify opportunities more readily. However.4 The benefits of corporate governance Good corporate governance:       Reduces risk. Enhances the marketability of goods and services. and the investor organisation’s responsibilities to evaluate the company’s corporate governance arrangements. and communicate with private investors through the medium of the annual general meeting. the stages in the rational strategy model. Improves access to capital markets. The Combined Code also included Code Principles and Provisions for institutional shareholders. It is also responsible for maintaining a sound system of internal controls to safeguard the company’s assets and the shareholders’ investments in the company. The wider pool of knowledge and experience available to the board. encouraging their participation. Demonstrates transparency and social accountability. It helps to ensure that the personal objectives of the board and the company’s strategic objectives are brought into line with those of stakeholders. communication between investor and company. and it can provide a framework for reviewing and assessing projects. It can help to reduce the risk of fraud. they were felt to be important by the Hampel Committee. customers. and public confidence in. It should establish through an audit committee formal and transparent arrangements for considering how to apply the principles of financial reporting and internal control and for maintaining an effective relationship with external auditors. these recommendations were not included in the Listing Rules for companies.1 . corporate governance can be seen as protecting shareholders’ rights. In particular.INTEGRATED MANAGEMENT  39 THE NATURE OF STRATEGIC MANAGEMENT  Relations with shareholders: Companies should be prepared to enter into a dialogue with institutional investors.13 Summary This chapter covered an introduction to strategy. It institutes clear accountability and effective links between performance and rewards. the organisation. This in turn can foster political support for. through the inclusion of external members. Because they were targeted not at the company itself but at organisations representing institutional shareholders. Improves leadership. covering matters such as voting. 1. suppliers and partners in joint ventures. Accountability and audit: The board is responsible for presenting a balanced and understandable assessment of the company’s financial position and prospects. which can encourage the organisation to improve its performance. It can provide a mechanism to review risk. including employees. including investors.12. It reduces the level of risk as perceived by outsiders. and thus make it easier for companies to raise finance. and because all board members are encouraged to examine board decisions critically. 1. It allows increased expertise to be brought to bear on strategic decision-making. through the influence of non-executive directors (NEDs).

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Harvard Business Review March/April. 20. Stalk. J. (1994). pp. London: Little. Evans.D. J. 2005. ‘Systems Delivery: Evolving New Strategies’. Summer. 7–21.1 .INTEGRATED MANAGEMENT 41 THE NATURE OF STRATEGIC MANAGEMENT Quinn.B. ‘Competing on Capabilities’. P. No. J. G. Fall.F. Rockart. Sloan Management Review. (1992). ‘Strategic Change: Logical Incrementalism’. Sternberg. Sloan Management Review. and Shulman. Brown. (1978).. L. E. pp. Just Business: Business Ethics in Action. (1992). 7–19. and Hoffman.

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Management Accounting. Alan Marsden explains these issues in the following article. Initially. to one of exploiting and building the organisation’s competencies and resources. This approach to strategy generally involves a deliberate step-by-step approach. there has been a move towards recognising the contribution of a more flexible contingent approach within which strategies can sometimes emerge from chance events and from complex cognitive. An associated change of emphasis has been a switch in the focus of attention from a concern with finding the most advantageous position for the organisation in relation to its environment. The external environment is then analysed to determine potential opportunities and threats. January 1998 Many readers of this magazine will associate strategic management with strategic planning. an internal audit is conducted to determine the organisation’s strengths and weaknesses.1 . cultural and political processes within organisations. strategic alternatives are evaluated to determine which strategy will best ‘position’ the organisation so as to capitalise on opportunities and strengths while minimising threats and weaknesses and then a plan is prepared to assist in the implementation of the chosen strategy. which is taken from the Management Accounting Official Terminology (CIMA 1996). The approach may be illustrated by a diagram such as Figure 1.Readings 1 Approaches to strategic management have changed and evolved considerably over the last 20 years or so. More recently.1 Development of the planning/positioning approach as the dominant framework This approach to strategy has provided the dominant framework for textbooks on strategy from the time the subject emerged as a distinct specialism in the 1950s with the work of Igor Ansoff. 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. Kenneth Andrews and others2 through to the early 1990s. Among these. the most important contributor has been Michael Porter.3 with his development of the concept of the five 43 2005. Strategic management – which way to competitive advantage? Alan Marsden. most writers on strategy emphasised the importance of adopting a deliberate and systemic approach to the process of planning. It commences with a set of tentative objectives which the CEO or senior management team considers necessary for the organisation to achieve its goals.

It is perhaps not surprising. was not to last. the value chain as an instrument for assessing internal organisational strengths and weaknesses. The common assumption underlying the approach is that the environment largely determines the organisation’s freedom to manoeuvre. One of the main purposes of corporate planning was. the major focus has tended to be on the environment. and the generic strategies as a tool to assist in strategy evaluation. that of the planning and management of growth.4 Ansoff. The typical format used by these departments was a five-year corporate-planning document that set goals and objectives. however. The demise of the planning approach The enthusiasm for corporate planning. Therefore.44 THE NATURE OF STRATEGIC MANAGEMENT READINGS P5 Figure 1 Long-term plan forces model used for industry analysis. 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. Though writers such as Philip Selznick. 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. established priorities for different products and business areas and allocated resources. This was particularly true in the period of stability and economic growth that characterised the 1960s and early 1970s. A study in 19635 found that the majority of the largest US companies had set up corporate planning departments. forecast the main trends such as those for market demand. and is. Porter and others discussed the importance of internal analysis and developed both the competencegrid and the value chain as aids to this. The approach outlined was taken on board and used by planning departments in some of the world’s largest corporations.1 . One reason for its demise appears to have been the increasing rate of change and the associated 2005. then. that during this period we find the development and use of portfolio planning matrices as frameworks for selecting strategies and allocating resources in the diversified corporations. the company’s market share and its revenue and net income. During the 1960s and 1970s diversification was very much in fashion as a means to corporate growth.

Organisations were faced not only with fluctuations in the economy but also with technological change. The emphasis on quantifiable data led to the neglect of important qualitative changes in the environment because they were difficult to measure. The product of all these changes for the organisation was a dynamic and unstable environment in which any long-term plans became quickly outdated. Research by R. and the drive for administrative efficiency in the planning process and the unqualified acceptance and misapplication of various analytical techniques. Academics charted these developments and conducted empirical research into how strategy was actually formulated in companies.INTEGRATED MANAGEMENT 45 THE NATURE OF STRATEGIC MANAGEMENT macroeconomic instability with which companies had to cope from the mid-1970s onwards.T. whereas strategy as a pattern refers to the observed decisions and actions after they have been taken. The main findings of this research can perhaps most easily be summarised by the use of a diagram provided by Henry Mintzberg. One effect of this was that product life cycles became shorter and firms more frequently needed to update their production processes. There is some evidence that the reason for planning failure was partly influenced by the way in which the planning process was conducted in some organisations. it could also be regarded as a pattern of consistent behaviour over time. In many companies. This additional competition resulted in an ever more active search by competitors to secure competitive advantage. the excessive emphasis on quantifiable data.1 . found that in a number of organisations the planning process developed into an annual ritual for which managers had little enthusiasm because it took up so much time and effort and often seemed to lead nowhere. The recognition that strategies can emerge All these developments affected the practice of strategic planning and led to a reappraisal of the approach by both managers and academics. The use of professional planners with their use of technical jargon tended to alienate some practising managers. The drive for efficiency tended to result in the growth of bureaucratic procedures and to be detrimental to creative thinking while the over-reliance on analytical tools like portfolio matrices often seemed to serve as a substitute for critical thought in the analytical process.6 for instance. A secondary reason for the fall in popularity of strategic planning was the failure of diversification to increase profitability. Mintzberg suggests that strategy as a plan 2005. The difference between these is that a plan refers to intended future action. 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. Particularly damaging was the first oil price shock of 1974. corporate planning departments were dismantled and responsibility for strategy formulation passed to managers who had responsibility for its implementation. This produced fuel shortages and inflation which few if any could have anticipated and this rendered the predictions of corporate planners virtually useless. A more flexible less formal approach was adopted and the time horizon for long-term plans reduced. They found that several factors contributed to this lack of commitment including the professionalisation of planning. Lenz and M. Another factor adding to this competitive situation was the growth of Japan and other SE Asian countries as manufacturers and exporters of an increasing range of goods. Lyles.7 He observed that while strategy is often thought of as a plan or a guide to a course of action into the future. Developments in transport and communications resulted in the development of global competition for many products and this intensified competition.

intentions that are fully realised can be called deliberate strategies. when Honda executives arrived in Los Angeles in 1959. the sales of the 250cc and 350cc bikes were disappointing. Pascale recounts how. not through planning. however. 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. This occurs for a number of reasons.46 THE NATURE OF STRATEGIC MANAGEMENT READINGS P5 Figure 2 Forms of strategy (Mintzberg. however. The strategy that emerged did so. The strategic planning approach recognises both these possible outcomes but it does not account for a third possibility. such as an unexpected change in the environment like a sudden fall in demand. For their part the Honda team were reluctant to sell the small bikes because they feared it would alienate serious bikers who 2005. a switch in the strategy of a competitor. The most frequently quoted example of this type of strategy development comes from a description provided by Richard Pascale8 of Honda Motor Company’s entry into the US motorcycle industry. According to Pascale. 1994)7 can be called intended strategy. The intended strategy looked to be failing. The ostensible reason for Honda’s success is that the company redefined the US motorcycle industry via a brilliantly conceived intended strategy. pressure from a stakeholder group or the fact that the original strategy may have been misconceived.1 . That is to say that few plans are realised in all their intended detail. The available research shows that few planned strategies work out exactly as expected. Honda’s intended strategy was nearly a disaster. In the course of their work. which Mintzberg calls emergent strategy and which applies to a situation where a realised pattern evolves that was never intended. they did so with the intention of setting up a subsidiary to sell 250cc and 350cc machines to existing motorcycle enthusiasts. while the pattern of actions which evolve from past decisions might be called realised strategies. but through unplanned action taken in response to unforeseen circumstances. As things turned out. One day the Honda team received a call from a Sears’ buyer who proposed selling the 50cc machines through the department chain outlets. while those that are not realised at all can be called unrealised strategies. As depicted in Figure 2. One of the reasons was to do with mechanical failure of some of their machines. the Honda executives were using 50cc machines to run errands around Los Angeles and their presence attracted a lot of attention.

assumptions and way of doing things that had served the company well in the past were not easily abandoned. Johnson explains the reluctance of Coopers’ management to change their strategy as arising from the mind-set produced by the prevailing paradigm. In the case of Coopers the situation was eventually resolved in an incremental fashion by many small adjustments over a period of time.INTEGRATED MANAGEMENT 47 THE NATURE OF STRATEGIC MANAGEMENT might associate the Honda Company with ‘wimp’ machines.1 . Senior managers committed to a way of doing things. Evidence that the changing market required a change in strategy was dismissed as inconclusive or as temporary phenomena that would revert to its former pattern in the near future. The set of beliefs.9 In his examination of how strategy developed in Coopers. Johnson describes how. which bring a company to the brink of ruin. This set of assumptions and beliefs may be regarded as a sort of paradigm. the retail clothing company. the buyers shared the common assumption developed over years of experience in the industry that a ‘commodity’ merchandise policy (a ‘pile it high. In addition. Sales took off and a new strategy was born. resisted change. supported by top management. Johnson concluded that the strategy that emerged could be best explained in terms of the cognitive. 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. What’s more. 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. 2005. Eventually. sell it cheap’ policy) was the one most likely to deliver competitive advantage. the leisure centre and the park. which influences the perceptions of managers. the response of senior management was not to adopt a new strategy to cope with a rapidly changing market but to pursue the low-price strategy even more vigorously by tightening controls and cutting controllable costs. their failure to sell the expected quota of larger machines pushed them into selling the small 50cc machines and to sell them not through specialist motor cycle distributors but through general retailers. the buyers. 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. and therefore the decisions they make and the actions they take. because the prevailing paradigm was associated most strongly with senior executives in the company. however. despite clear signals of fashion changes in the market and continuous pressure from middle management. Abandonment of the way of doing things. This tacit knowledge consisted of agreed notions about trading procedures. which they had continually defended. Even when sales fell. 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. would result in a major loss of face. are frequently replaced by those with new ideas. any challenge to it constituted a political threat. political and cultural fabric of the organisation. It also illustrates the fact that strategy need not originate in the minds of the CEO or the senior management teams but can arise from the observations and experience of the salesperson. By 1964 nearly one out of every two motor cycles sold in the USA was a Honda. The critical point demonstrated by this example is that not all strategies are planned. In other organisations it is not uncommon for a failing company to be forced to adopt a new strategy almost overnight. and also that successful strategy can emerge without prior planning and often in response to unforeseen circumstances. and methods of organisation and control that it was believed contributed to the effectiveness and efficiency of the organisation.

knowing of them. Having selected the most favourable industry. Second. the problems are not such as to invalidate the approach but do require the effort and attention by managers concerned to avoid the pitfalls. and that additional resources have to be devoted to these by the organisation. This does not mean that attempts to plan should not be undertaken. these findings do not mean that the strategic planning approach should be abandoned. competitive rivalry among firms currently in the industry. Here again. on average.48 THE NATURE OF STRATEGIC MANAGEMENT READINGS P5 What now for strategic planning? The accumulated evidence suggests that the strategic planning approach to the development of strategy has a number of limitations.1 . It also means that organisations have to be flexible and to accept change as something that has to be managed rather than resisted. the focus in the traditional planning approach tends to have been on the environment because research shows that it is more difficult to generate profits in some industries than others. As previously indicated. In Porter’s words. Porter’s five forces model. Given these differences in industry profitability it follows that any entrepreneur seeking to invest in a profitable venture should seek to enter an industry in which the five forces are favourable and the chances of profit-making therefore greater than one in which competitive pressures are intense. Third.10 Because the strength of the five forces varies from industry to industry. buyers. In some industries. such as soft drinks and pharmaceuticals where the five forces are favourable. 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. many competitors can earn attractive returns. it is becoming more difficult to plan because of the accelerating rate of change. suggests that an industry’s profitability potential is a function of the interactions among the five forces (suppliers. research by Mintzberg. 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. in particular. to take account of these when formulating plans. What these studies do is to inform us of the complex processes at work in the strategy-making process and. trial and error and cognitive and political processes. Positioning and its problems It is not only how managers can best formulate strategy that has concerned academics but also where managers should concentrate their attention. 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. ‘the collective strength of these five competitive forces determines the ability of firms in an industry to earn. But again. strategies can emerge that derive not only from the systematic and rational analysis used by strategic planners but also from chance observations. industries vary in their potential for profitability. as the study by Lenz and Lyles has demonstrated. rates of return on investment in excess of the cost of capital’. Johnson and others has found that in practice. Pascale. But in industries like rubber. product substitutes and potential entrants to the industry). First. and can change as industry evolves. the second question the entrepreneur needs to address is how to best position the firm within the industry so as to earn a rate of 2005. steel and video games the pressure from one or other of the five forces is so intense that few firms can sustain a high level of profit.

The fact that innovation can revolutionise industry structure is now widely recognised. For instance. Research by Richard Rumelt. which pioneered telephone sales in insurance. Manufacturers with the knowledge. The competitive forces operating in a particular industry determine the kind of strategy that will be effective for firms operating in the industry. banking and other financial services can be sold and this is changing the structure of the industry.INTEGRATED MANAGEMENT 49 THE NATURE OF STRATEGIC MANAGEMENT return above the industry average. advertising and superior after-sales service. This approach. but this still suggests a quite limited influence by the industry structure.1 . The example of the development of the computer industry is one of the more dramatic recent examples. Fifteen years ago the industry was dominated by the likes of IBM.11 for example. however. the industry and the wider environment and so achieve a strategic fit with the environment. Sun Microsystems and Silicon Valley have gained market share from the established producers like IBM. which concerns itself with how companies might best position themselves in the market. In some cases the competitive forces will be such that differentiation is the source of competitive advantage. As a result. A firm that can position itself well can become very profitable even when the industry structure is unfavourable. now companies like Compaq. If this is the case the company will seek to differentiate itself by improving quality. Dell. by innovation. producers of standardised silicon chips find themselves driven by competitive forces to adopt a low-cost strategy because price competition is fierce in an industry where the technology allows cheap mass-production. The second criticism of the five forces model and the positioning approach of which it is a part is that it overemphasises the importance of industry structure as a determinant of company performance. first. The implication of this finding is that individual company differences explain much of the rest of the variance. though still very popular among both theorists and practitioners. insurance and other financial services. a market for a small number of customised chips for specialised equipment. Other studies suggest that the variance in performance arising from industry structure is really nearer to 20 per cent. expertise and appropriate flexibility to produce these can gain a competitive advantage by targeting this niche in the market and supplying at lower cost than the mass producers of standardised chips. These studies have been taken as evidence by a growing number of academics to mean that the individual resources and capabilities of a company are far more important determinants of its profitability than the industry in which it is located. Digital Equipment and Wang Labs. that it overemphasises the importance of industry structure and the wider environment while deemphasising the significance of individual company differences in the possession of resources. In the UK. second. Other recent examples are in banking. that it relies on a static picture of competition and thus understates the role of innovation and. suggests that industry structure only explains about 10 per cent of the variance in profit rates across companies. capabilities and competence. 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. 2005. There is. but the revolution that Apple computers started when it introduced the first personal computer has transformed the structure of the computer industry. has sparked off a revolution in the way in which insurance. companies like Direct Line Insurance. The main shortcomings of the approach are. has come in for criticism in recent years. a five forces analysis conducted in 1980 would look completely different from one done today. Where a few companies existed ten years ago.

Canon’s core competence in optics. capabilities and competences. The resources of the firm in the competence-based approach are typically classified into two types: tangible and intangible resources. Currently a number of writers are trying to derive a vocabulary for discussing what they have called a ‘competence-based approach to strategic management’. it is argued. competences and capabilities. there is as yet limited agreement on the terminology to be employed. The approach assumes that an organisation is a collection of resources. organisational culture and a firm’s reputation for its products. They include assets like plant and equipment.1 . distinctive competences. Tangible resources are inputs into a firm that can be seen. it is possible to describe the main characteristics of what we shall call here the competencebased approach.50 THE NATURE OF STRATEGIC MANAGEMENT READINGS P5 The competence-based alternative These problems with the positioning approach have been one reason for the search for an alternative. has allowed Sony to make everything from the Walkman to video cameras to notebook computers. cameras and image scanners. Similarly. a trained and skilled workforce and a firm’s organisational structure. intangible assets. imaging and microprocessor controls has enabled it to enter markets as diverse as copiers. access to raw materials and finance. The choice of the firm’s strategy is not dictated by the constraints of the environment but is influenced more by calculations of how the organisation can best exploit its core competence relative to the opportunities in the external environment. In contrast to the traditional planning model which takes the environment as the critical factor determining an organisation’s strategy. Because the new approach is still in the process of development. Similar terms – core competences. capabilities. Marks & Spencer’s competitive advantage has been based on its consistent ability to deliver high-quality clothing and food products at reasonable prices. 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. resources. skills and capabilities in the process of their development. Intangible resources range from intellectual property rights like patents. It is also assumed that firms can acquire different resources. the competence-based approach assumes that the key factors for success lie within the firm itself in terms of its resources. capabilities and competences of the organisation as the source of competitive advantage rather than the environment as in the traditional approach. skills – are used interchangeably by different authors. Thus Prahalad and Hamel12 cite the core competence of miniaturisation as the basis for the success of the Sony Corporation. however. laser printers. the skills and capabilities required for miniaturisation and considered to be the basis of core competence for Sony take many years to hone to perfection and give Sony an advantage because they are not readily available to competitors. strengths. Despite the confusing use of terminology. trade marks and copyrights to the knowhow of personnel. This competence. But because it takes time to acquire and develop such resources and capabilities it follows that firms that already possess a relevant set of these can gain competitive advantage over rivals. touched and/or quantified. capabilities and competences that are relatively unique and that these provide a basis for its strategy and its ability to compete. For example.13 Whether or not this attempt will provide a vocabulary on which all can agree remains to be seen. These examples have led Hamel and Prahalad and other researchers to focus on the resources. The dividing line between the tangible and intangible is often unclear and how they are classified varies a little 2005. informal networks. A diagram such as that in Figure 3 can be used to illustrate the competence-based approach.

This is a term coined by Hamel and Prahalad16 to mean the leveraging of a firm’s internal resources. Aaker found that a reputation for quality was rated as the most important basis for competitive advantage by the managers questioned. It is this skill and knowledge acquired over time and embedded in the firm’s culture that influences how it operates and determines its success. A survey of managers by Aaker15 in 1989 appears to confirm this. being less visible. proponents of the competence-based approach are agreed on the relative importance of the two types of resource. This being the case.1 . Examples cited by various authors of strategic intent include the intention by Intel to become the number-one supplier to the computer industry. 1991)14 from one writer to another. it is argued.INTEGRATED MANAGEMENT 51 THE NATURE OF STRATEGIC MANAGEMENT Figure 3 The competence-based approach (adapted from R. Grant. difficult to imitate. Whether or not resources and capabilities have the potential to become core competences depends on how difficult they are for competitors to acquire and how valuable they are to the firm as a basis for competitive advantage. the most important resource for any organisation is the skill and knowledge possessed by the organisation’s employees. however. Although it is clear that both types of resource are required for any business to operate. The reason for this. Despite the problems with classification. then they can be considered core competences and serve as the basis of an organisation’s sustained competitive advantage. non-substitutable and they allow a firm to exploit opportunities or neutralise threats. is that.M. As such they are therefore more likely to be a source of competitive advantage. the belief and intention of Microsoft that it can provide the Yellow Pages for an electronic marketplace of on-line information systems and the intention of Komatsu to encircle 2005. are not a basis for competitive advantage. they are more difficult to understand and imitate than tangible resources. capabilities and core competences to accomplish what initially appear to be impossible goals in the face of the competitive forces confronting it. 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. competence-based theorists argue that intangible resources are the most likely source of competitive advantage. When they are rare. As part of this new approach to strategy development a number of writers have incorporated the notion of strategic intent. Resources alone.

exclusivity and surprise. or will become. 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. however. theorists have also concerned themselves with how competences might be best acquired. licensing. Second. the core competences of the organisation. it is not a new approach because its key features are the same as those contained in a general framework for strategic management first formulated over 30 years ago. First. which is still critical to the survival of organisations. Third. 64). we have the claim that changes in the business environment have rendered the positioning approach irrelevant and that the only sound basis for sustainable competitive advantage is the development and exploitation of those resources and capabilities which are. the case for its superiority is 2005. Thus. would suggest that a more cautious view of the so-called new paradigm should be adopted. a variety of perspectives exist. then. As in the rest of this developing field. the claim is made that core competences are more critical than the external environment as a basis for strategy determination. Some of the claims for the competence-based approach are quite sweeping in nature. The claim for the competence-based model as a superior form of explanation is based on examples of a number of firms that appear to be successful because they are particularly good in one or more functions and/or because they have acquired some unique resource which combined with others gives them a competitive edge. mergers and acquisitions. Writers who favour internal means of acquiring competences do so because they claim that such means give the advantages of secrecy.20 p. some writers such as Senge17 and Argyris18 stress the acquisition of competences through internal mechanisms of individual and collective learning. 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. old alliances can be discarded and new ones formed. capabilities and competences become necessary for competitive advantage it is quicker to buy them than to spend years of trial and error in their development. Those who concentrate on external means of acquiring competences defend their approach on the grounds of flexibility and speed. Summing up so far. because the environment is in too much of a state of change to base any strategy on it. the combination of core competence and capabilities may define the universal model for corporate strategy in the 1990s and beyond’ (Stalk et al.1 . 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 the competition. Indeed. its main competitor. Problems with the competence-based approach A review of the literature. This approach assumes that the characteristics and direction of the competence building activity of a company are mainly contingent on its strategic objectives. As markets change.. while others like Hamel and Prahalad19 put greater emphasis on strategic tools like alliances. it is argued. it is partial and one-sided and thus in danger of neglecting the environment.52 THE NATURE OF STRATEGIC MANAGEMENT READINGS P5 Caterpillar. For example: ‘Like the ‘‘grand unified theory’’ that modern physicists are searching for to explain physical behaviour at both the subatomic level and that of the entire cosmos. All this adds up we are told to the emergence of a new paradigm in corporate strategy. The reasons for caution include the following. As new resources.

Waterman recalled that the first writer to discuss the idea of organisational distinctive competences was Phillip Selznick in 1957 when that writer noted that: ‘The terms. To be applicable to a single firm. Over thirteen years ago Waterman21 noted that the focus on distinctive competence is not new.’ One of the important premises of the model is that strategies should be unique and built on distinctive (now called core) competences.’ Waterman also goes on to confirm that the standard textbook on business policy (another name for strategic management) over 30 years ago was by Learmond et al. as Ansoff called it. It is also clear that in all fundamental respects the approach adopted was similar to that being promoted by modern 2005. even when the leading exponents conduct an analysis of the same case. Turning first to the claim that the competence-based approach represents a new paradigm. Ansoff recommends taking the fully integrated manufacturing firm as the most comprehensive framework of capabilities and using this as a point of reference.22 and that the focus of strategy-making at that time was clearly on analysing and building distinctive competences.INTEGRATED MANAGEMENT 53 THE NATURE OF STRATEGIC MANAGEMENT based on a few examples of successful companies that have been chosen because they appear to confirm the theory. The list of the major skills and competences identified in the competence profile. organisational character and distinctive competence all refer to the same basic process – the transformation of an engineered. which are common to most industries. The result of this process of analysis and rating will be to provide a competence profile for the firm which can be used in conjunction with the analysis of the external environment as an aid to strategy formulation and planning. can then be rated with respect to those found in other firms which have the same capabilities. Finally. Under a heading ‘Distinctive competence the forgotten trail’. marketing and so on are listed together with the equipment. In their work. Frameworks for analysis of firms in trade. The individual skills and resources can then be organised according to major functional areas. as many of his modern counterparts do. institution. technical arrangement of building blocks into a purposive social organisation. Ansoff22 supplied perhaps the most detailed account. But whatever the merits of his approach it is evident that he and his contemporaries were very much aware of the need to assess a firm’s capabilities and resources as a basis for planning and strategy formulation. This rating will produce a ranking for each skill or capability according to whether it is judged to be outstanding. Ansoff describes how to develop what he calls a grid of competences. Companies that are successful for other reasons have been neglected. He recommends that for such a grid to be widely applicable it must be constructed in terms of competence areas. average or weak. finance and services can then be obtained through modification of the general model.1 . personnel skills. operations. Since that time. Functions such as R&D. which differentiate between success and failure in different types of business. 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). both Andrews and Ansoff stressed the importance of internal analysis as part of the strategic planning process. organisational capabilities and management capabilities for each function. they disagree about the basis of competitive advantage. these areas must list specific skills and resources. Adopting what students today will recognise as the strengths and weakness approach to the internal analysis of the business. Ansoff seems to use the word competence and capability interchangeably. Waterman argues.

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. There are. the definition of capability by Stalk et al. Stalk et al. By contrast. In many respects the methodology reminds one of the Peters and Waterman23 study of excellent companies. Also. While fully accepting that organisations continually need to adapt to change by developing their core competences. The same weaknesses appear to be evident in the approach adopted by the new resource-based theorists. capabilities and core competences which contribute to success. there are some problems with the competence-based approach. In short. it is simply an elaboration of one part of the overall strategic management framework formulated over 30 years ago. attribute organisational success to a capability that is defined as a set of business processes strategically understood. 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. of course. Their example of Sony’s technical competence at miniaturisation suggests that much of competence has to do with the technical knowledge and skill which a firm accumulates over time. The factors which appear to have contributed to their success are listed and put forward as the key characteristics which contribute to the success of these and other organisations and consultants go on to prescribe these as the basis for future success. According to Prahalad and Hamel Honda’s competitive advantage derives from core competences which they define as the combination of individual technologies and production skills that underline a company’s myriad product lines. 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. there is nothing radically new in the competence-based approach. In fact. The disagreement between Stalk et al. the claim 2005. A fourth problem with the case made by the resource-based school is that they are unable to agree on what it is that contributes to the competitive advantage of the organisation even when they are conducting an analysis of the very same case. some differences. research and development and so on.54 THE NATURE OF STRATEGIC MANAGEMENT READINGS P5 day competence-based theorists. Existing successful companies are selected and examined. In brief then. Modern theorists have refined the terminology. Researchers spot some excellent companies – often Japanese high-tech consumerelectronics companies whose products are characterised by relatively short product life cycles – and abstract what appear to be those resources.1 . Several of these excellent companies have since failed and critics such as Guest24 have pointed out that a major problem with the methodology adopted by Peters and Waterman was that no comparisons were made with companies not considered to be excellent. As a result it is difficult to know whether the characteristics contributing to excellence were evident to a greater extent in excellent companies than in other organisations. after-sales service. The second problem with the competence-based approach is that in seeking to distance itself from the positioning approach it is in danger of overemphasising internal analysis to the extent of neglecting the problems which the accelerating rate of change in the environment poses for organisations. There is as yet a lack of agreement on terminology that results in a lack of clarity. 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. and Prahalad and Hamel25 in respect of Honda’s success illustrates this point very well. includes so much as to invite confusion.

References 1. IL: Irwin. Peterson. H.A. Selznick. and Guth.: Leadership in Administration: A Sociological Interpretation. E. The planning process has been questioned partly because of its limited success in application but also because it fails to take account of cognitive. Evanston. 1957. New York. 1980 and Competitive Advantage: Creating and Sustaining Superior Performance. 1965. M. McGraw Hill. The environment in which organisations operate is changing faster than ever and it is therefore necessary for it to be continuously monitored and the position of the organisation within it regularly assessed. 5.: Business Policy: Text and Cases. political and cultural processes which often influence both how the strategy is formulated as well as its content..: ‘Paralysis by analysis: is your planning system becoming too rational?’.: Corporate Strategy.. F. 2. Some of them. 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.1 .: Competitive Strategy: Techniques for Analysing Industries and Competitors. P. Porter. 1965.INTEGRATED MANAGEMENT 55 THE NATURE OF STRATEGIC MANAGEMENT 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. 1985.E.I.R. 1971.R. 1979. C. IL: Irwin. Holmwood. Ithaca. 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. Holmwood. pp. p. 64–72. Lenz. IL: Row. 2005. R. is currently being addressed and the less extreme advocates of the competence-based model readily agree that the approach can complement rather than conflict with the positioning approach. Conclusions This review of developments in strategic management suggests the following state of play. 6. 38.: Formulation and Advocacy of Business Policy (rev ed). These problems are not insurmountable. Learned. Andrews. Long Range Planning. Andrews. 3. W. Management Accounting Official Terminology. NY: Cornel University Press. New York: Free Press. August 1985. New York: Free Press.P. K. such as the problem with terminology. CIMA Publishing 1996. capabilities and competences as critical sources of competitive advantage and concepts for use in their analysis are currently being developed. The findings do not appear to challenge the need to conduct analysis or to plan. and Lyles.T. M. K. Christensen. Gilmore. it is questionable whether or not it makes sense even to try to establish whether position in the industry/market place or the organisation’s competences are the key to critical advantage when the performance of any company is so evidently dependent on both. Recent studies have re-established the importance of resources.F.R. 4.: The Concept of Corporate Strategy.D. In fact. Ansoff.

California Management Review. 3 (Spring 1984).K.: ‘The core competence of the corporation’. California Management Review.P. 2. Reprinted by permission of Pearson Education.E. H. No. P.: ‘The resource-based theory of competitive advantage: implications for strategy formulation’.T. Harvard Business Review. Strategic Management Journal. and Waterman.M. Hamel. T. 31. Grant. and Pralahad. Harvard Business Review. C. 23. 1982. 1992. Copyright (c) 1991. January/ February 1988. 2005. Aaker. L. Heene. Stalk. 1989. C. 18. Pralahad.K. Pascale. G. by the Regents of the University of California Managment Review Vol 33. 9. C. 1989.E. New York: McGraw Hill. C. 33 (Spring).A. New York: Free Press.: In Search of Excellence. Porter. 11. and Scholman. 1989. 67.: ‘How much does industry matter?’.J. 12 (1991). 26.I. Harvard Business Review. G. pp. 22. 63–76. Sloan Management Review. pp.: ‘Re-thinking incrementalism’.: ‘Collaborate with your competitors and win’. M.: ‘Managing assets and skills: the key to sustainable competitive advantage’. 8. No. 57–69. 14.. H. 1994. and Thomas. 20. 16. H. Johnson. Strategic Management Journal. Contrast the ‘positioning approach’ to strategy formulation with the ‘competence-based’ approach.: ‘Competing on capabilities: the new rules of corporate strategy’. Ansoff. Sanchez. 133–9. 25. 91–106. pp. P. Guest. 75–91.: ‘The core competence of the corporation’.: ‘Right enough to be dangerously wrong: an analysis of the In Search of Excellence phenomena’ in G. Peters. 17. G. Harvard Business Review. 1994. R. A. No. Argyris. and Pralahad. Salaman et al (eds): Human Resource Strategies. 72.: The Rise and Fall of Strategic Planning. pp. Evans. 77–85. 1991. March/April 1992. G. C. pp.: ‘Good communication that blocks learning’. Oxford: Elsevier.1 . New York: Harper & Row. G. 114–135.. pp.: ‘Towards the theory and practice of competence-based competition’ in Sanchez. by permission of The Regents. Pearson Education. R. 167–185. Pralahad. California Management Review. 12. pp. Hamel. Thomas. May/June 1990.: Corporate Strategy. Senge. pp. Harvard Business Review. May/June 1990. Discussion questions   Explain how strategies can emerge. 1980. Rumelt. (eds): Dynamics of Competence Based Competition: Theory and Practice in the New Strategic Management.K.K. Heene. R. 24. D.: ‘The leader’s new work: building learning organisations’. California Management Review. G. 47–72.: ‘Perspective on strategy: the real story behind Honda’s success’. 3. D. Spring 1984. 7–23. No. 15. R.. 10. R.: Competitive Strategy: Techniques for Analysing Industries and Competitors. 13. Harvard Business Review. 1996. P.: ‘Strategy follows structure: developing distinctive skills’. Fall 1990. H. 3. and Hamel. pp. 19. 4. Mintzberg. R. 1. London: Sage.56 THE NATURE OF STRATEGIC MANAGEMENT READINGS P5 7. and Thomas. No. 21. No. A. pp.: ‘Strategic intent’. and Hamel. 67. 1965.

# Abbey National Plc. All rights reserved. Personal financial services The core ongoing PFS businesses remain sound and have had a good year in terms of new business. Our focus will make us unique and will enhance business performance and execution. we would like to express our regret for the results and dividend cut that we have announced. 2005. Read the review and answer the question which follows. which is expected to deliver enhanced performance as well as streamline operations. Review of 2002 Abbey National’s results for 2002 reflect a resilient UK personal financial services (PFS) business. which was overshadowed by large write-offs and charges relating to Wholesale Banking. Life Assurance and goodwill. These charges reflect the harsh impact on Abbey National of extremely difficult markets. The loss before tax for the Abbey National Group of £984 million is extremely unsatisfactory. designed around the customer. On behalf of the whole Board. and issuing a quarter of a million new credit cards in 2002. opening almost half a million bank accounts. offering security to our 16 million customers. We are reducing the risks in our life assurance business and programmes are in place to protect against downward movements in equity markets. We are acting quickly and decisively to address challenges.6% share of mortgage net lending in the second half of the year and £1. the Company will be focused solely on providing a full range of personal financial services in the UK through direct and intermediary channels. as we move forward with our new strategy. Credit quality in these businesses remains good.INTEGRATED MANAGEMENT 57 THE NATURE OF STRATEGIC MANAGEMENT The following Annual Review by Abbey National Group for 2002 contains a useful example of a deliberate change in corporate strategy. We are focusing all our energies where we have demonstrated strengths and where we have the greatest opportunity to succeed and distinguish ourselves. The organisation has a strong financial base. The new strategy directs all our resources towards personal financial services – by delivering greater value to our customers. They also reflect recent actions by management to recognise the challenges we are facing. and to reduce risk in the business to protect against future volatility. we will earn more value for shareholders. We are acting quickly and decisively to address these challenges and details are outlined below. A new strategy for growth Reproduced with permission. We have a new structure for the Company in place.8 billion of deposit inflows.1 . This is a radical shift in strategy. focusing on our strong personal financial services businesses. Delivering a single-minded strategy Following an intensive strategic review. Highlights include a 10.

the first such opportunity being at the time of the pre-close statement in June. We have absolute conviction that this is the right strategy for Abbey National. Discussion question  Describe the new corporate strategy of Abbey National Group. trusted and powerful brand. a top five position in many relevant market segments. who do not feel that they have been well served by the UK banking industry. It will. The 25 pence level represents an appropriate starting point based on the trading potential of the ongoing PFS businesses. we will aim to deliver more value to customers – to earn their trust and commitment. We know that our shareholders will want to see tangible progress along the way. our customers and our employees. however.35 pence. It is important to stress that while we will exit these operations. we start this year with a strong base of around 16 million customers. Through the highest level of service and advice. between the interim and final dividend of approximately one third/two thirds. a distinctive. 2005. and the remaining part of the First National business have been deemed non-core due to the lack of synergy with ongoing PFS business. single and unifying goal under a suitable organisational structure. we will favour shareholder distribution unless there is a compelling strategic and economic case for reinvestment. various operations including those in France and Italy. Outlook Despite the difficulties in 2002. We have aligned all our talent. many remain profitable and are open for business as usual.1 . and we will be reporting regularly. In addition. to give a full year dividend for 2002 of 25 pence per share (2001: 50 pence). We are now strongly focused on delivering.58 THE NATURE OF STRATEGIC MANAGEMENT READINGS P5 Portfolio Business Unit As a result of the new strategic direction. Our goal is to deliver a compelling proposition to UK customers. and to align its risk appetite with that of our shareholders and customers. These businesses will be managed for value as part of our newly established Portfolio Business Unit (PBU). Our employees are key to our success and we would like to thank them for their continued hard work and commitment. It is Abbey National’s intention that from 2003 the Group will return to its historical split for dividend payments. The events of 2002 have acted to focus minds. and strong product distribution through a variety of channels. for our shareholders. If surplus capital arises from our actions. Capital and dividends The Board is proposing a final dividend of 7. At all times we intend to be disciplined in managing the business for shareholder value. and this is already driving an increased sense of determination and delivery within the business. This reflects the desire to focus only where we have business advantage. investment and energies on a clear. hard process that we envisage will span the next three years. We have made significant progress in terms of managing and reducing the risks in these portfolios. be a long. asset-based portfolios representing a majority of the Wholesale Bank’s risk have also been assigned to the new PBU.

most of the time’ is known as (A) (B) (C) (D) goal congruence stakeholders satisficing sub-optimisation Question 1. for what does the acronym SBU stand ? 59 2005.4 In Mendelow’s stakeholder analysis matrix.Revision Questions 1 Section A type questions Question 1. SWOT analysis is normally carried out as part of (A) (B) (C) (D) mission and objective setting corporate appraisal strategy option generation strategy evaluation and choice Question 1.2 In the rational strategic planning model.5 In strategic management.1 The approach to strategy formulation that bases strategy on the assessment of core competences is known as the (A) (B) (C) (D) resource-based approach position-based approach rational approach emergent approach Question 1. what are the two axes of the matrix? Question 1.3 A strategy that aims at pleasing ‘most of the people.1 .

Some companies wishing to communicate selectively with a subgroup of shareholders are often prevented from doing so.60 THE NATURE OF STRATEGIC MANAGEMENT REVISION QUESTIONS P5 Section B type questions Question 2 Newco plc is a recently privatised company that supplies energy to the general public. they set up a company to manufacture these items. within Newco plc. people who have been brought into Newco plc within the last two or three years. The demand for their products outstripped their ability to supply. This group is small in numbers but seems to be very influential. Requirement Explain why a company may wish to disclose forward-looking information to its stakeholders and in particular to its shareholders. The financial information provided tends to be of a historical nature. 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. as all shareholders should receive the same financial information. and they expanded rapidly. Requirement Discuss the extent to which the chief executive’s aim is compatible with the interests of the shareholders. (10 marks) Section C type questions Question 4 Tub plc was founded in the early 1980s by two brothers.1 . Most of this expansion was financed from retained profits but. 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. 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. It has been argued that shareholders in particular should be entitled to receive forward-looking information. The holders of this view are. that the cheapest possible cost will only be achieved by the introduction of a number of changes to improve operating efficiency. 2005. they qualified for a state grant towards the cost of their new premises. (10 marks) Question 3 Companies have an obligation to provide information to their stakeholders. Spotting a gap in the middle-price range of the market for bathroom and kitchen fittings. like the chief executive himself. as they happened to be located in an area of economic decline.

Each company had its own independent board of directors on which the brothers sat with one vote each. L has personally carried out the full range of planning and operational management activities required to develop the business ever since it began. L is actively considering raising the new capital by a public issue of shares. He believes this will leave him free to pursue BZ Ltd’s strategic development. The environment in which the company operates is currently very difficult. L’s strategic objective has been to exploit market opportunities. BZ Ltd needs to raise more capital than he personally is able to introduce. Requirements (a) Identify the key issues involved in formulating the corporate strategy of a company such as Tub plc. some to major retail DIY multiples and one of the companies coordinated the group’s export operations. It has become apparent to L that. L now considers that in order to continue growing.1 . The company has achieved success by providing a very differentiated service. further capital needs to be injected. automating processes wherever possible. L obtained a bank loan. arguing that it promoted enterprise and that it was easier for small companies to grow than for larger ones to do so. Economic recession in the early 1990s and a housing market which continues to remain stagnant are causes for concern.INTEGRATED MANAGEMENT 61 THE NATURE OF STRATEGIC MANAGEMENT By 1995 Tub plc had organised itself around eight operating companies covering the different products and sales activities of the group. (8 marks) (b) How would you go about setting the business strategy of the various operating companies within the Tub group? (10 marks) (c) In what ways might the strategies of the organisational functions within each of the operating companies contribute to the overall strategy? (7 marks) (Total marks = 25) Question 5 BZ Ltd is a service company that was founded by L. Tub plc has invested heavily in new technology. It has developed good relationships with its suppliers and developed just-in-time purchasing and production systems. In addition to his own capital. its proprietor. At the present time the company has no new products coming onstream and its research and development function is tiny and confines itself to modifying existing products for what is a difficult overseas market. and these were the only two sources of finance used to start the business. Additionally. 2005. investing his redundancy payment to establish the business. and he has achieved a high level of return on his investment. It has progressive human resource management policies in place. It is also able to deliver its products within 48 hours of orders being placed. The brothers could be out-voted and in fact had been at various times in the past. However. it is clear to L that he needs to appoint other senior managers to maintain the operational side of the business. The senior management believed in decentralisation. Some of these sold directly to housing developers. in order to continue growing.

(12 marks) (Total marks = 25) 2005. (13 marks) (b) Describe and comment on the appropriate strategic planning processes that BZ Ltd should adopt in order to satisfy its organisational objectives following the public issue of shares.1 .62 THE NATURE OF STRATEGIC MANAGEMENT REVISION QUESTIONS P5 Requirements (a) Explain in what ways the strategic objectives of BZ Ltd may change if it obtains new capital from the public issue of shares.

Solutions to Revision Questions Section A solutions Solution 1.1 .3 (C) Solution 1.4 Stakeholder power Stakeholder interest Solution 1.1 (A) 1 Solution 1.5 Strategic Business Unit Section B solutions Solution 2 Common errors  Not comparing and stating the extent of differences.2 (B) Solution 1. It is generally assumed that the fundamental objective of a profit-seeking company is to maximise the shareholders’ wealth. The chief executive of Newco plc did not include the 63 2005.

On the other hand. the shareholders. As the providers of the long-term finance to the company.  Shareholders.64 THE NATURE OF STRATEGIC MANAGEMENT SOLUTIONS TO REVISION QUESTIONS P5 shareholders’ interests in the statement of objectives. who own the company. but may cause customers to seek better service from competitors. the maximisation of shareholders’ wealth. would appreciate information about the future plans of the company to enable them to be aware of its strategic aims and objectives. Stating the objectives of the firm as supplying ‘the best possible service to the greatest number of customers at the cheapest possible cost’. is an intermediate objective which focuses on marketing. Both shareholders and customers will obtain benefit from the firm if excellent service is provided at a relatively low price and if the service is available to the greatest number of consumers. Expenses incurred to provide the ‘best possible service’. management may not focus sufficient attention on the maximisation of shareholders’ wealth. the management 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. Solution 3 The management of a company is usually keen to show stakeholders that the company is being successful and. by emphasising an intermediate marketing objective. This. many shareholders will also be customers and there will be a conflict of interest between these two groups. The published financial 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. It is possible that shareholders would be prepared to reduce the rate of 2005. the interests of customers are stressed. employees and customers will be interested in receiving forward-looking information about the company. In particular. to publicise the fact that it is being managed efficiently and effectively. One of the fundamental beliefs of marketing is that of mutually beneficial exchanges between the supplier and the customer and this is likely to be achieved if the service can be provided at ‘the cheapest possible price’. they would be concerned with the investment plans that the management are considering. will result in lower levels of profit for shareholders. potential and existing shareholders. 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. the expected changes in the share price and dividends would be of interest to the existing and potential shareholders. creditors and lenders. excessive concern with cost-cutting will increase profits available for shareholders. Although information is shown in respect of the company’s past achievements. especially regarding the future prospects of the company. it is likely to create dissatisfaction among shareholders. the shareholders would be interested in being provided with information relating to the mission and objectives of the company. It is therefore possible that the chief executive’s statement focuses attention on the best method of achieving the ultimate objective of the organisation.1 . but expressed a view which suggests a strong marketing orientation. fundamentally. This could be against the long-run interests of the shareholders as profitability is likely to decrease if sales decline. then. In addition. In particular. In particular. In a public utility company like Newco plc. However. While this situation may please the customers.

would be very interested in receiving the company’s future strategy.1 . Tub plc’s corporate strategy is to grow its businesses in particular markets in the kitchen and bathroom furnishings sector. it is not possible to direct the reports only to these interested parties because competitors.INTEGRATED MANAGEMENT 65 THE NATURE OF STRATEGIC MANAGEMENT    return expected. Although this is difficult to assess. in particular. Section C solutions Solution 4 Common errors  confusion over the word ‘setting’  lack of definitions for levels of strategy. This group of stakeholders would be interested in the forward-looking information as they are concerned with the long-term survival of the company. building a stronger group by gradually and organically 2005. as it would enable the competitors to develop tactics and strategies which would counteract the company’s plans. as this additional information would reduce the risks faced by investors in the company. Hofer and Schendel distinguish between corporate strategy (what business to be in). In general terms. Customers. especially if it presents a favourable picture. they would be able to judge the company’s prospects of repayment more effectively. Employees.  liability to link these levels. Creditors and lenders. If they are convinced that the company was being managed effectively. business strategy (which market segments to serve and how). and functional strategy (detail by department). However. the provision of future-oriented strategic information would aid them and may act as a motivating factor which would benefit the company.  lack of application to the case. forwardlooking management information. This would benefit the company if it leads to a reduction in the cost of borrowing. 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 firm. the management would be motivated to disclose strategic. it is possible that they would prefer to place orders with the company and this would represent a competitive advantage as a result of publishing the forward-looking information. 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. 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. This would clearly represent a major threat to the successful implementation of the strategic information plan. The corporate strategy of a company like Tub plc will convert its ‘mission’ – what it is all about as a business – into practical policies on markets to be served and how to generate and manage growth. By having access to information which focuses on future rather than past performance.

while overseas activities are coordinated in one group entity. McDonald’s has increased its range of non-beef products in the United Kingdom following a health scare surrounding British beef. and by matching resources to opportunities in each company. encouraging local empowerment of managers. 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. To support and focus the ongoing process. and refined the standardisation of its product range and presentation style. I would aim to formalise a strategic review exercise on a biennial basis. I would not embark upon detailed large-scale planning. and niche focus) which a company might adopt in response to its 2005. and then choose a set of strategic moves that would be clear-cut and measurable in implementation. I would analyse the strategic position of each company (using techniques such as SWOT analysis. and financing this growth internally. extended its activities into financial services. Marks & Spencer (a large UK retailer) has extended its presence in out-of-town shopping centres. For example. customers and suppliers in each market served. Each business strategy would be designed (‘crafted’) to build incrementally upon the emergent strategic themes in that business. capable of using its scale advantages wherever useful – for example. Group corporate strategy will decide such questions as where to focus group resources (core businesses). differentiated brand marketing.66 THE NATURE OF STRATEGIC MANAGEMENT SOLUTIONS TO REVISION QUESTIONS P5 building up stronger individual companies through related diversification. HR standards. 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. value chain analysis. Management structure – Tub plc provides a minimalist superstructure with a coordination role. and assess current trends so that opportunities can be maximised and threats minimised. Porter has identified three generic business strategies (cost leadership. but rather seek to keep the entrepreneurial local opportunism that has characterised much of Tub plc’s past success. I would then make sure that the feedback loop worked. the directors need to consider Tub plc’s overall strengths and weaknesses in relation to competitors. by reference to their individual competencies and local competitive conditions. Business strategy refers to how a business unit approaches its markets. I would determine the business strategy of Tub plc’s companies by reference to the group strategy and the capacity of the companies to benefit from collaboration. and has built good relations with distributors. and Porter’s five forces analysis) to explore the alternatives. Thus. In formulating the corporate strategy of Tub plc. As another example. the emphasis each business puts on overseas activity appears to be determined locally. marketing. 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. Culture and people strategies – Tub plc has adopted good HR policies. At group level. buying power. This is also a key issue in managing corporate strategy. technology. Other group-level strategic choices cover such areas as:    Degree of investment in automation – Tub plc has favoured automation as a source of competitive advantage. The business also uses a TQM approach.1 .

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. and convert theory into practice at the sharp end. Solution 5    Note the phrase ‘L’s strategic objective has been to exploit market opportunities’. but on what tools we have to work with. Sometimes. creating a strategic opportunity for the company to compete on price and a strategic pressure to increase its share of that market and skew its investment in that direction. marketing. Also the prevailing rules of corporate governance will frown on an organisation so clearly controlled by one man and will demand that he shares power with a board of executive and non-executive directors. BZ Ltd will need to respond to a wider group of stakeholders. 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). etc. These will require reliable financial returns and more formalised strategies. there is both a top-down and a bottom-up communications exchange. and that everyone is aware of the plan and personally engaged in its fulfilment. Functional strategies provide readily measurable implementation. Similarly. – the objectives are not really objectives in the sense of targets – they are more like aims. Functional strategies are important as this is the level at which strategy is implemented in detail. Functional strategies within operating companies do accumulate upwards (like building blocks) into business unit development and hence into overall group strategy. For example. In developing functional strategies. 2005. opportunities and threats.1 . for example. a finance department strategy may be to buy a new computerised information system that will help control the business better. production. The accumulated effect of the strategic steps taken in each function of a business (finance. enabling value to be added in various ways across the company. notably its investors. Keeping the share price high will require that the firm has longer-term strategies in place and shows an ability to achieve them.INTEGRATED MANAGEMENT 67 THE NATURE OF STRATEGIC MANAGEMENT analysis of its strengths. Try to visualise the firm. weaknesses.) determines the strategic development of that business. one development in a corner of a large group can spread out and influence its whole direction. This suggests a style akin to ‘freewheeling opportunism’. This is also the resourcebased approach to strategy formation – which tends to focus not so much on where we should be heading in relation to our markets. This encapsulates the issues clearly: – presently the objectives are set by one man. 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. Would thinking of the Virgin Group with L in the role of Richard Branson help? By going to the market. that the detail will work. This helps to ensure that the right strategic decisions are taken. are digestible elements of the overall plan.

Until now. This may require the strategic objectives of the company to be modified. This demonstrates that there is rarely just one right answer.1 . 4. The prime responsibility of L will change from the planning and operational management of the company to the strategic planning and management of the firm. Indeed the process of strategy formulation will now mean the objectives will be set collectively. Objectives become used for divisional control. Furthermore. Rather it is more of a mission. This will make it necessary for strategic 2005. equity investors expect higher returns to reward them for taking greater risks. This will involve significant changes in the strategic objectives of the firm. It has been successful through the differentiated service that L has provided to his customers. The solution suggested here takes the last-mentioned approach. BZ will need to develop formal objectives with measures and dates and these will need to be formally communicated to management and to investors. The appointment of senior managers to assist in the firm’s expansion will change this. This is the problem of short-termism.68 THE NATURE OF STRATEGIC MANAGEMENT SOLUTIONS TO REVISION QUESTIONS P5 However. which is often encountered in this type of situation. This is not really a formal objective because it is not capable of measurement. Each will expect to have their career goals and aspirations met within the firm. the objective is not formal but rather exists in L’s head. (a) BZ Ltd is a firm characterised by freewheeling opportunitism (Peters). 3. In future. The larger firm and the requirements of the stock market mean that there will now be a number of managers. This will lead to the problem of conflicting objectives. 2. There are various ways to tackle part (b) of the question: – describe the use of emergent strategies and describe the role of L as a shaper of these. Greater formalisation of objectives. in setting up more formal strategic processes BZ plc will need to ensure that it does not lose its dynamism or lose or demotivate L himself. – recommend the rational model of business strategy (but mention that it may lack flexibility). In many instances. L has set the firm’s objectives on his own. It is possible that there will be a conflict between the long-term success of the company and the short-term needs of the new shareholders. This will mean that BZ Ltd will need to adopt a strategic objective to satisfy these new shareholders. It is clear that this is the source of the firm’s competitive advantage and the success of the company has created an opportunity to expand. L will not exercise the total control and responsibility that he had at the start of the operation. L will need to be aware of these matters in developing any strategic plans and also in the management of the organisation. Raising capital by means of a public issue of shares will mean that there are additional stakeholders in the company. and it is important that he delegates responsibility to the senior managers who are appointed. The shareholders will expect a reasonable return on their investment and so the dividend policy and investment decisions will have to take account of the requirements of the new shareholders. Until now the objective of BZ Ltd has ‘been to exploit market opportunities’. Objectives of shareholders become important. Broader management participation in setting objectives. 1. – describe some of the issues that must be overcome to make the transition to a more formal approach to strategy.

The increased funds will enable the company to pursue more business opportunities. there will be other parties that will be concerned with determining the goals and objectives. allocating the resources that are available and assessing the success of the decisions that are implemented.INTEGRATED MANAGEMENT 69 THE NATURE OF STRATEGIC MANAGEMENT business units (SBUs) to be created and within them the functional areas of the firm to be delineated. if funds are raised through public issue and the senior managers appointed. It will be necessary to consider the roles of the different managers in the development of the firm’s strategy. It is possible that these changes will be unacceptable to L and he may prefer to forgo the opportunity to expand as it will mean that a considerable amount of control will be lost in raising funds from the public issue and by appointing senior managers to manage the expanding firm. The shareholders will have expectations of the firm and management will need to develop a strategy that meets the expected levels of growth and profitability.1 . Business strategy and implementation. the proprietor has been involved in both operational and strategic decision-making in the company. From their business experience it is likely that they will be able to provide a more effective assessment of the strategic position of the firm in relation to the current competition and technology. these new stakeholders will make it necessary for the strategic planning process to be modified. especially in terms of the new ventures. 4. It will be essential that reports are produced which analyse the performance of the company. managers’ career development expectations will need to be considered. It is likely that the entire process will become more formalised and structured as the participation of senior managers will be necessary. It will also be necessary for arrangements to be made to ensure the publication of the accounting reports that are required by the regulatory bodies. it is important that the firm retains some flexibility. In general terms. In this more formally structured organisation it is essential that responsibilities are established and recognised by all the management and staff and that adequate control is maintained. It is very important that L is able to focus on the strategic issues and leave operational decisions to the senior managers. Although this change in attitude may be difficult. In particular. (b) Since the founding of BZ Ltd. It will be essential that L assume a stewardship role on behalf of the other stakeholders. In addition. so that new ventures can be undertaken. Monitoring and evaluation. 2. it is important that the founder delegates the responsibilities effectively if the company is to benefit from the changed situation. 1. However. Objectives are a method of communicating the priorities of the business and. Assessment of the internal and external environments. However. 3. The functional specialists will provide information to assess both the external and internal environment of the firm. 2005. Establishing goals and objectives. L is likely to find that he can no longer make all the decisions within the firm. through performance measurement. can form the basis of control.

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put forward by Alfred Chandler (1962).1 . Structure and Culture 2 L EARNING O UTCOMES After completing this chapter you should be able to: " " evaluate different organisational structures. 2. The focus of the study was on the historical development of the corporations and strategy was defined simply in terms of changes in product and market areas. The key stages of development identified by Chandler are summarised below: Key strategic issue Accumulating and controlling raw materials and resources Rationalising the use of resources to improve efficiency Diversification into new products and/or markets Rationalising the use of diversified resources Structure Entrepreneurial Functional (Holding company) Divisional Chandler observed that the transition from one form of structure to another usually did not take place as soon as the key strategic issue changed. discuss concepts in contemporary thinking on strategic management. The first. was based on a study of the development of large corporations in the United States. He suggested that although the founders or entrepreneurs were typically very astute at strategy development and 71 2005.1 Strategy and structure This is likely to be examined quite frequently.Strategy. from which he concluded that ‘structure follows strategy’. There are two main views on the relationship between strategy and structure.

is based on the idea that managers already working within a particular organisation structure will take the structure for granted and only consider strategies that will ‘fit’ with the existing structure. between its strategy structure and controls. and even the various environments (or domains) themselves. The options range from market and output controls to bureaucratic controls and control through organisational culture. or congruence. integrated dealerships or resellers who are to allowed to sell other products (such as are found in the motor trade). Finally. On the other hand. they call for different structural responses and control systems. that ‘strategy often follows structure’. Organisations seem to be in conflict. 2. For example. respectively). It must decide how best to assess the performance and control the actions of subunits. In this way it is possible to have a market penetration at lowest cost. and internally to reduce overheads by outsourcing activities considered ‘non-core’ into the market. its boundary with its environment. STRUCTURE AND CULTURE STUDY MATERIAL P5 implementation. purchasing groups in retailing. a company must achieve a fit. and employers’ and trade associations (negotiating and lobbying. divisional or matrix’ which are discussed below. We can see from our 2005. Recent research has questioned the view that ‘structure always follows strategy’. McDonald’s).72 STRATEGY. the financial structure of an organisation. which sometimes involved the departure of the founder of the business.2 Organisational structure Typically. and joint ventures (which involve a separate company usually with shareholdings being set up). a strategy of differentiating a company’s product by unique technical characteristics generates a need for integrating the company’s activities around its technological core and establishing control systems that reward technical creativity. partnerships and alliances. The reason for managerial reluctance to change structure is associated with the time-consuming effort involved in such a process and the fact that some managers will have vested interests in maintaining the structure as it is. An organisation also needs to decide what kind of reward and incentive systems to set up for employees. This second view. they tended to know very little about organisation structure. an organisation must also establish appropriate organisational control systems. nowadays plays an increasing role in determining the overall forms of an organisation. not part of the syllabus for Integrated Management. However. There is a never-ending demand for everincreasing economies of scale. Other external groupings include ‘bidding consortia’ in construction. including the structures described under the terms ‘functional. the term ‘organisational structure’ has been used to describe the internal operational structure. while simultaneously customer sophistication leads to the need for reactive and yet also proactive policies.1 . Since different strategies and environments place different demands on an organisation. The question is: How can these different forces be contained? We must start with the definition of an organisation and then make some attempt to widen this to include quasi-organisations (‘almost-organisations’) which are appearing today such as franchised firms (like Bodyshop. With this background we can analyse the way internal structures have been developed to manage the external complexity and turbulence in the environment. and argued instead that ‘strategy often follows structure’. Besides choosing a structure. a strategy of cost leadership demands that an organisation be kept simple (so as to reduce costs) and that operations and controls stress productive efficiency. As a result the move to a more appropriate structure was often a slow and painful process.

reward systems. STRUCTURE AND CULTURE later discussion of chain of command. In simple terms.2 Organisational design and contingency theory The basic problem of organisational design is to formulate and establish a structure to facilitate the achievement of organisational goals. This requires two basic issues to be dealt with:   How to divide the work to be performed into a number of distinct tasks. Organisation structure is concerned with the way in which work is divided up and allocated. an organisation’s structure can be defined as ‘the established pattern of relationships among the individuals. This can be described as an organisation’s basic structure. The basic types of structure represent some of the responses to these pressures as an organisation develops. 2. Examples include written rules and regulations.1 . Classical management theory was preoccupied with trying to find the best form of organisation structure.1 Internal structure All organisations have some form of structure. For example. 2005. Another part of the idea of structure is the process that goes on underneath the signified relationships: these are described more fully in a later chapter. Some of the different forms of organisation are considered below. Similarly. Attempts by managers to resolve this problem have produced various forms of organisation. job descriptions. Here. the basic vertical structure of an organisation is a relatively static framework within which processes such as communication. groups and departments within it’ or more pragmatically as ‘the arrangements for the allocation and control of resources’. scalar principle. leadership and decision-making take place. and in some organisations it will be illustrated in the form of a chart (simple organisation charts will be used to describe the main types of structure later in this chapter). How to group the tasks together to achieve the overall goals in an efficient manner. a matrix structure can be superimposed on a functional or divisional one. we need to emphasise that the operating mechanisms are used to reinforce the basic structure and to clarify what is expected of employees. managers have to pay particular attention to the process of delegation and the resultant degree of decentralisation of decision-making in the organisation. a divisional structure could be primarily based on product divisions but have one international division.INTEGRATED MANAGEMENT 73 STRATEGY.2. and so on. the forms of organisation are not mutually exclusive and it is common to find hybrid forms in which two or more types are combined. and line–staff relationships that a key problem for managers arises from the need to have people who specialise in different tasks and then coordinate their activities into a unified whole. Clearly then there are two structures – a vertical structure of authority and responsibility where clear limits of financial authority exist. Although the horizontal structures can be changed from time to time. and how coordination to achieve objectives is achieved. which should facilitate the implementation of strategy and the achievement of objectives. In seeking the right balance for a particular set of circumstances. Finding the right type of structure for an organisation involves trying to balance pressures for uniformity and standardisation with those pulling towards diversity and uniqueness. and a horizontal structure of groupings of activities designed to use the resources towards goal-attainment. Of course.2. 2.

2. At the time many of the principles were first put forward. particularly Burns and Stalker’s studies. These principles tended to emphasise tightly organised. STRUCTURE AND CULTURE STUDY MATERIAL P5 Early contributions to organisation theory. However.2.4 Structural characteristics Academic researchers have attempted to classify the dimensions of organisation structure. bureaucratic structures. large organisations were typically entering the strategic phase identified by Chandler as rationalising the use of resources to improve efficiency. the history of the organisation and whether the owners are directly involved in managing it will exert some influence on organisational design. competencies and level of motivation. Environment – the concept of organisations as open systems has been explained in an earlier chapter and this highlights the importance for organisational design of factors in the organisational environment. This type of approach is useful when making comparisons between different organisations as it permits profiles of each organisation to be drawn up using the various structural characteristics. the development of more complex strategies and environments has rendered this approach less useful.74 STRATEGY. Since this usually required a functional structure the classical approach proved quite useful. Standardisation – the extent to which specific procedures exist to deal with the tasks to be carried out within the organisation. Technology – the techniques. such as the classical management approach. will have some impact on the design of an appropriate organisation structure. 2. The key factors to take into account are as follows:      Size – as illustrated above in the discussion of administrative intensity. In order to understand the requirements of effective organisational design it is useful to consider first of all the main dimensions of organisation structure. 2. Past experience and pattern of ownership – organisational design rarely starts with a blank sheet of paper. People – the type of people employed and their skills.3 Contingency theory The research into administrative intensity and size illustrates how structural relationships are contingent or dependent on a number of factors.1 . attempted to put forward general principles of management to guide the design of appropriate organisation structures. Centralisation – the extent to which authority to make decisions is in the hands of a few senior managers. This has contributed to the emergence of contingency theories which stress the importance of finding the best structure for particular circumstances. 2005. One way of doing this is to distinguish between the following structural characteristics:      Specialisation – this reflects the extent of division of labour within the structure. Configuration – the shape of the organisation as illustrated in a detailed organisation chart. equipment and specialised knowledge used to transform organisational inputs into outputs that can be returned to customers or clients with added value. Formalisation – describes the extent to which procedures and rules are written down.

for example.     The larger the organisation the lower the administrative intensity. Certain groups will be better placed than others.g. etc). The rate at which size is changing is an important factor. they should attempt to ensure that the structures and systems adopted are consistent with the organisation’s culture and the philosophy of its management.INTEGRATED MANAGEMENT 75 STRATEGY. STRUCTURE AND CULTURE Administrative intensity One of the most intensively researched aspects of organisation structure is the relationship between size and the number of employees in administrative or support roles. helps to explain why organisational politics often plays a significant part in decisions about reorganisation. one study of a number of hospitals found that administrative intensity actually decreased with increasing size. technology. In particular. Interest in this relationship was initially stimulated by Parkinson’s Law (Northcote Parkinson. he found that the more successful airlines employed different forms of organisation to each other despite facing the same contingencies: what distinguished them from the less successful ones was that they demonstrated a high degree of internal consistency in the approach to management and organisation they had adopted.’ The consequence of this for organisations is alleged to be that as they grow the proportion of administrative and staff personnel grows more than proportionally. unambiguous measures of effectiveness against which the appropriateness of different structures can be objectively judged. John Child (1984) presents evidence from a study he conducted of four North American airlines and one European airline which lends some tentative support to the importance of consistency between various structural arrangements. large size requiring formalisation and competitive markets requiring flexibility. This. 1955) which in its simplest form states that ‘work expands to fill the time available for its completion. to influence or resist structural changes. One of the potential problems for managers attempting to adopt a contingency theory approach to organisational design is what to do when faced with contingent factors that pull in opposite directions. 2005. Factors other than size also influence administrative intensity (e.2. 2. an element of choice is open to strategic decision-makers both in terms of the environments they choose to operate in and the forms of structure they believe to be best. Administrative intensity is a function of both the size and the complexity of an organisation. it will constrain choices about the most appropriate structure but will not determine them. To avoid this danger managers must take into account the overall configuration of the organisation. This particular personnel ratio is referred to as administrative intensity.1 . along with the difficulties of obtaining simple. The commonsense appeal of Parkinson’s Law has proved very difficult to verify by research. The danger is that each is taken into account in a way that leads to inconsistencies in organisational design. In fact. because of their power in the organisation. The following tentative conclusions can be drawn about the impact of size on administrative intensity. the organisation’s environment.5 Strategic choice and the issue of consistency Strategic choice is the context within which an organisation exists. In particular.

1 Entrepreneurial structure 2. or Steve Jobs at Apple.1) A small organisation has the entrepreneur at its head. The entrepreneur will coordinate everything and delegate where s/he feels it is necessary. Support staff will be very few in number – perhaps a part-time secretary or the owner’s spouse or family or friends helping out with admin.7 Functional organisation The most common form of structure adopted when an organisation has outgrown the entrepreneurial one is a functional structure (Figure 2.2). though this is increasingly possible. This divides the organisation up into its main activities or functions (production. When this point is reached it is necessary to start to delegate formal authority to other people and to make them accountable for carrying out specific activities. The key reasons for this are probably fear and lack of trust as. The manager fears losing control and may not trust the subordinate’s ability to carry out the activities. probably a technical manager rather than a financial manager. the manager is still accountable for the consequences of these decisions. Decisions will be centralised and the culture a mixture of task and power. Can you think of an example of a technical and a non-technical entrepreneur? Microsoft’s Bill Gates is most people’s choice for the former. there is often considerable reluctance by managers to delegate and also for subordinates to accept it. STRUCTURE AND CULTURE STUDY MATERIAL P5 Figure 2. sales. A manager is placed in charge of each function under the overall control of 2005.2.2. as such expertise is at the heart of the business. accounting and so on) in which all similar specialist activities are grouped together into interdependent departments.6 Entrepreneurial organisation (Figure 2. The transition from an entrepreneurial to a functional structure occurs essentially because there are limits to the extent to which one person can personally supervise or carry out all of the organisation’s tasks.76 STRATEGY. Although this process is essential for efficient and effective management in all but the smallest of organisations. although the manager can increase decentralisation by delegating the authority to make decisions to subordinates.1 . Craig Pollock’s management of Formula One former world champion driver Jacques Villeneuve and the new Formula One BAR team would be an example of the latter – Pollock used to be a schoolteacher. The subordinate on the other hand may be suspicious about the motives behind delegation and unclear about who is ultimately responsible for specific tasks. 2. The core of the entrepreneurial organisation tends to be technical. this may not be on strictly rational grounds. External technical advice may be sought from manufacturers of equipment or consultants.

and when the technology is routine.INTEGRATED MANAGEMENT 77 STRATEGY. interdepartmental conflicts. Opportunities exist for extensive division of labour. When the organisation reaches a certain size. These problems are likely to occur with professionalism and a role culture where job demarcations are felt to be important. It is suited to conditions which stress functional specialism. requiring little interdependence between departments. coordination overload the vertical hierarchy. a functional structure promotes a narrow focus on specialist interests. Quality is enhanced by other specialists from the same functional area. A more flexible and responsive form is needed than the rigidly functional. they are likely to be exacerbated especially if it has developed a wide range of products or services.1 . little creativity and innovation. They may be solved by adopting a holding company or a divisional structure in which profit centres based on particular products or geographical areas are created. 2. A career structure enables people to advance within their functional specialism. It does not duplicate specialist resources throughout the organisation and promotes economies of scale. STRUCTURE AND CULTURE Figure 2.2. Burns and Stalker (1961) devised the term ‘mechanistic’ for firms where the interconnections are strong as they are unsuited to changeable environments and non-routine technologies. difficulties in identifying profitable and unprofitable products. It fosters communication between specialists and enhances the development of skill and knowledge.8 Holding companies: ‘federated firms’ and franchises Full divisionalisation can solve some of the problems of a functional form but requires the development of new accounting information systems to implement the new systems of management control involved in operating such a structure. The following problems might arise:        increased need for interdepartmental coordination and scheduling. It is easier to manage specialists if they are grouped together. where the environment is stable. responsibility for overall outcomes is unclear. inefficient coordination of functional departments. especially when the manager has the same experience. communication. This form of organisation has a number of potential advantages:         Specialised resources are used efficiently.2 Functional structure the owner or a senior manager. While these systems are being 2005. However.

as it contains within it functional specialists but groups its activities around products or regions. the headquarters unit will act almost as an investment company for a largely independent group of operating companies.4) can help to overcome the limitations of the holding company and/or a functional structure. Hanson and other conglomerates which actually add value (most such firms do not) arguably exist only by financial measures being tightly controlled from the centre. in the United Kingdom in the 1970s developed. this form may be used to describe some of the more adventurous partnerships and alliances in the supply chain or market referred to in the introduction. but there were no shareholders. In a holding company structure. STRUCTURE AND CULTURE STUDY MATERIAL P5 Figure 2.3). and jeopardise movement to a fully developed divisional structure. Identify some holding company structures.3 Simplified structure of Mobil Oil Corporation Inc. McDonald’s and Body Shop are franchises. rationalisation and selling-off of businesses.78 STRATEGY. This was the basis of the financial success of Sir Arnold Weinstock’s GEC empire where the centre had control over the separate businesses which were set up as ‘management companies’. 2005. an intermediate form of holding company structure may evolve (Figure 2. In this way extreme cost-sensitivity was instilled in each operating company. Any businesses that are acquired will probably continue to trade under their original name. Where there was any deficit. the individual units being unlikely to add up to more than the sum of the parts and absence of a coherent corporate strategy.2. to produce a crisis of control. in which separate business units exist in a loose ‘federation’.1 . These each had a bank account into which monthly sales revenues were scheduled and from which budgetary amounts were withdrawn for wages and other costs. The limitations of the holding company approach include the lack of centralised skills to support the business. Lonrho and BTR are conglomerates where the holding company structure may be ideal for their strategies of acquisition.9 Divisional organisation A divisional structure (see Figure 2. Alternatively. 2. there was an immediate cash problem which was either solved internally or which had to be referred by the local MD to Sir Arnold personally. however. The lack of financial controls and coordinating mechanisms in this arrangement are likely.

longer planning horizons. Cadillac and Chevrolet. Too much control stifles innovation but too little is a recipe for wild excesses of spending on pet projects such as happened in Rolls-Royce where the RB211 engine project overruns nearly bankrupted the company. with no real autonomy. bringing together a central function to garner expertise from the different firms such as Pontiac. teamwork and goal consensus. for example. Two ways of grouping activities are supposed to ensure a closeness to the customer which is not really possible in a functional structure.) or projects (the new compact car. such as IBM. STRUCTURE AND CULTURE Figure 2. the centre became so powerful that these divisions effectively reverted to becoming departments. the Vega.4 Divisional structures – product based In particular. Alfred Sloan is widely accepted as developing a true divisional structure for the disparate firms owned by General Motors Corporation in the 1930s. This enables regional differences to appear in marketing research and be directly translated into branch-level contact and projects based on local stakeholders. This tension between the centre and divisions or departments is a crucial problem of control for all organisations. Eventually however.1 . General Motors (GM). was a centrally run project at GM).5). realising more creativity in marketing and sales through focus. they may group activities according to sales area and be literally ‘closer to the customer’ (Figure 2. Divisional managers have considerable authority – in effect a small business (sometimes temporary) is created within a large one. with its emphasis on profit centres. each addressing different markets. has plants combining a variety of specialist resources for specific products (Chevrolet. Pontiac. etc. These groupings are based on product or location. Product organisation People and resources are grouped according to an organisation’s products. and the development of future senior executives with general management experience as divisional leaders. This format is used most successfully where there is a variety of products. divisionalisation. according to John De Lorean. and a liaison with a smaller set of customers.INTEGRATED MANAGEMENT 79 STRATEGY. This enables technical excellence and concentration on fewer product lines. Cadillac. Regional organisation Where organisations have few products. In this way IBM gets to know the details of the businesses in an area and its sales team focus on local chamber of commerce 2005. should promote clear accountability.

for example. it is well suited to changeable environments.  Coordination across divisions is difficult. react to customer requirements.5 Divisional structures – geographically based meetings and social contacts at the golf club or race track. employees identify with the product or project rather than their own function.  Specialists may become isolated from both their colleagues and fail to further their specialist skills.  Competing demands on people may create stress. a divisional structure will be the most appropriate form of organisation. Cellular manufacturing can even be considered a kind of internal divisionalisation with an emphasis on internal customers.80 STRATEGY.10 Matrix organisation Allegedly this was introduced as the main structure by NASA when President John F Kennedy demanded ‘a man on the moon within ten years’.  Since each division can. just-in-time links between different ‘products’ and the dynamism created through teamwork. As such. The achievement of this goal was apparently due to the new structure NASA adopted to link the functional 2005. STRUCTURE AND CULTURE STUDY MATERIAL P5 Figure 2.  Since departmental units are often small. For many large entities. meeting senior people from potential clients informally as well as formally who are decision-makers for IBM’s big customers.1 .2. Disadvantages of divisionalisation  There may be a costly duplication of resources across departments. Advantages of divisionalisation  It provides excellent coordination across functional departments. as well as self-contained. a move to divisions is particularly useful for large organisations. but in certain circumstances it may eventually have to be adapted to include formal mechanisms to promote closer interdivisional collaboration: the result will be a matrix structure in which vertical and horizontal formal relationships are recognised. 2.

This mixture became known as a matrix. and employees within a department will report to both a functional and a product manager. If implemented successfully this form of structure can:     improve decision-making by bringing a wide range of expertise to problems that cut across departmental or divisional boundaries. Big factories have zones where maintenance staff are assigned so that they know the equipment and can repair broken machinery quickly – but they report to the maintenance manager as functional head. law or management. Universities have courses within which functional staff teach various elements – statistics. assist in the development of managers by exposing them to company-wide problems and decisions. for example – and who report to their functional heads. However. The matrix structure is sometimes appropriate for large multi-product companies which have significant interrelationships between their various operating units. A matrix structure seeks to add flexibility and lateral coordination to the traditional vertical hierarchy. each of which has equal authority. as he or she maintains functional/divisional responsibilities as well as membership of the project team. both vertical and horizontal relationships are emphasised. Hence.6 Matrix structure 2005.6) suits rapidly changing environments because the equal balance of power between functional and product management aids communication and Figure 2. replace formal control by direct contact.1 . Such set-ups are not often referred to as matrix organisations because they are at a lower level than the NASA example.INTEGRATED MANAGEMENT 81 STRATEGY. There is a dual chain of command which violates classical principles. many organisations run with a matrix structure implicitly and always have done so. improve lateral communication and cooperation between specialists. 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. STRUCTURE AND CULTURE specialists in the background departments intimately with the problem-solvers on the construction and research and development team for the Apollo mission. A matrix structure (Figure 2.

such as in the ‘small batch/unit’ production grouping used by Joan Woodward. People can be flexibly relocated across products or projects. 307) state: ‘Our favourite candidate for the wrong kind of complex response. Clashes of priority between product and function.          A lack of clear responsibility. Employees have the opportunity to develop either functional or general management skills. Difficult for one specialist to appraise performance of another discipline in multi-skilled teams. Consequently. p. networks and complex organisation forms This is likely to be examined quite frequently.11 Flexible firms. while in trying to avoid them by internalisation. of course. is the matrix organisation structure. They are regarded as an alternative way of coordinating resources. STRUCTURE AND CULTURE STUDY MATERIAL P5 coordination. Career development can often be stymied.1 . it automatically dilutes priorities. Managers will need to be able to resolve interpersonal frictions and may need training in human relations skills. it is useful for medium-sized organisations with a medium number of products or for task-centred organisations where project work is a feature of life. Peters and Waterman (1982. Functions lose control of the psychological contract. Thus. and question whether it should be adopted at all. Of course there are disadvantages with such a complex structure. The complexity of the matrix structure makes it difficult to implement successfully. Indeed some commentators are very critical of this form of organisation.82 STRATEGY. hierarchical forms of organisation result (see later 2005. People aren’t sure to whom they should report for what the organisation gets paralysed because the structure not only does not make priorities clear.’ How convinced are you by the criticisms of matrix structures put forward by Peters and Waterman? Do you think there are some types of situations when this form of organisation would work well? If the matrix structure is to avoid these problems. it says to people down the line ‘everything is important: pay equal attention to everything. It is an organic structure which facilitates adaptation to unfamiliar and unexpected problems. The idea seems to have grown out of Oliver Williamson’s idea of ‘transaction costs’ – that market relations incur such costs. aiding the speedy implementation of new ones. 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. Complex forms of organisation are usually thought of as occupying the ground between pure forms of market transactions and hierarchical organisations. 2. the key roles are those of the leaders of the units with cross-departmental or divisional responsibilities: they have to develop effective teams. In effect. but at the same time minimise the problems facing team members who also have other responsibilities in their department or division.2. Managers spend a great deal of time in meetings to prioritise tasks.

Mergers. Unfortunately. STRUCTURE AND CULTURE Figure 2. to all forms of partnerships and alliances in which coordination of resources was based on cooperation between the parties concerned. downsising. 1984) NB: The shaded segments are not under contracts of employment with the flexible firm. organisations are forming complicated vertical and horizontal relationships through demergers. demergers. delayering and margin retreat from product scope and geographical spread. 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. the lack of competition within hierarchical organisations itself results itself in a lack of control on costs. or more recently where construction consortia bid for motorway contracts. in this chapter). These pressures are essentially economic and in response to Japanese and Pacific Rim penetration of Western markets. automotive manufacturers have acquired or merged to give scale economies.INTEGRATED MANAGEMENT 83 STRATEGY.1 .7 The flexible firm (Source: After Atkinson. but commodity industries have in particular been slow to respond. Such organisations would range from cooperatives between organisations and their suppliers. At the same time globalisation means that scale economies are necessary to maintain price differentials and so mergers of parts of businesses where there is strategic fit is becoming commonplace. The complex forms attempt to overcome the inadequacies of both market and hierarchical forms through collaboration between existing organisations. The cutting of costs internally has resulted in a wave of outsourcing of non-core activities and research and development alliances. Examples are the Shell/Exxon 50–50 joint venture in the 2005. Chemicals firms have gone through a series of recent acquisitions and spin-offs. joint ventures and partnerships were typical of oil firms in their exploration and production activities and are now increasingly in their downstream operations. Mass production and engineering industries have been swift to act. The drivers for cooperation are of two sorts – cost reduction and market penetration. Increasingly. as mentioned above.

2. the acquisition of the ICI ‘cracker’ unit at Wilton works by BP Chemicals. sometimes in alliances or partnerships with other contracts. for example. 2. a conflict of interest would arise and textile majors would be reluctant to use the contractors who were not 100 per cent specific to them. We do not know the full extent of such complex structures but there is evidence that the gains stated at the outset have not been harvested. while partnerships may not. where ‘sunk costs’ on both sides are considerable and the social norms mitigate against overt exploitation by either party.12 Mintzberg’s (1983) structural configurations This is likely to be examined quite frequently. Various partnerships also exist in the automotive industry – Renault engines in Volvo cars. This saving on learning curve and experience curve effects becomes a competitive advantage for all the firms. imitating the coordination methods employed within the firms. Renault taking 37 per cent of Nissan Motor. Mergers are a form of complex organisation where. for example. the spin-off of Zeneca pharmaceuticals from ICI. as would sharing of facilities and the purchase of equipment. Ford acquiring Aston Martin and Jaguar and so on. Organisational effectiveness is almost 2005.1 .84 STRATEGY. obligatory contracting. and may or may not share assets. This is reflected in variations in the degree and type of decentralisation. indeed that most outsourcing has increased costs and decreased reliability of supply. The difference between each one is that it achieves coordination and congruence between environment. In Italy experiments have been made to introduce networks in technologically similar industries in areas called ‘business districts’. in the textile industry. provided that they do not compete on goals centred on internal process or system resources. For example. Consortia are short-term legal entities with sunk costs from each of the partners and which terminate at the end of the project. automotive parts are shared across divisions or companies and recently include Daimler-Benz (Mercedes) and Chrysler. Mintzberg puts forward a different way of looking at what he calls ‘structural configurations’. There exists then a technology transfer opportunity for the major textile firms as contractors learn the businesses of other firms. This may be due to the reluctance in the West to embrace relational contracting. Were this the case. contractors are based in the same region as the knitwear firms and often do work for several different firms. The five configurations described by Mintzberg are as follows:  Simple structure – this is essentially the same as the entrepreneurial structure (Figure 2. Termination clauses would vary with the nature of the cooperation. Networks have been described as a link between supplier and purchaser in the supply chain but a more accurate and useful division is between different suppliers. Joint ventures should mean that each sponsoring organisation has a degree of equity participation. STRUCTURE AND CULTURE STUDY MATERIAL P5 North Sea called ShellExpro. He contends that each of these configurations is suitable for an organisation at different stages of its development. or as it is known in Japan. Alliance is a term used for a weaker non-legal entity kind of operation where firms simply contract to work together on a gain-share/pain-share basis. resources and values in distinct ways. sometimes as sole contract-holder. All important decisions are made by the owner and there will probably be little formal planning or structure.8) already described.

highly qualified professionals (doctors.1 . National Health Service Trusts). Strategic decisions will still be centralised. the budgeting process in this form of organisation has consisted of some of the key specialists proposing activities and related costs for the coming year. management accountants.10) is much more decentralised than a machine bureaucracy. 2005. there will be a powerful group of analysts and specialists whose job is to search for cost savings and efficiency improvements (e. specialist personnel staff. jobs are closely defined and work highly standardised. however. Traditionally. Machine bureaucracy – in this form. This type of structural configuration has been common among large mass-production businesses. etc.). This process has.INTEGRATED MANAGEMENT 85 STRATEGY. Typically. been fundamentally changed by the introduction of internal markets and/or new forms of legal organisation (e. professors. but is being threatened in the United Kingdom by pressures towards greater commercialism and client focus. these are then coordinated by the accounting department into an overall budget. assisted by a group of support administrators. The management accounting role and traditional management accounting techniques that have developed mainly in this form of organization are now being challenged by new philosophies such as total quality management. The main method of coordination is by standardising the skills and qualifications required for appointment to specialist positions. A functional structure (Figure 2.g. STRUCTURE AND CULTURE Figure 2.g. Professional bureaucracy – this form of configuration has developed in organisations such as hospitals and universities. Specialist management accounting is unlikely to play a part within this form of highly centralised organisation.8 The simple structure Figure 2. A professional bureaucracy (Figure 2. Power is in the hands of specialist.9) is likely to be adopted with limited decentralisation to functional managers. etc.9 The machine bureaucracy   entirely dependent on the strategic vision of the owner.). work study specialists. which are requiring organisations that have traditionally relied upon professional bureaucracy to look for an alternative structural configuration.

Adhocracy – this is an informal and innovative form of organisation (Figure 2. and the role of the senior managers at the strategic apex at head office is to monitor performance and maintain a strategic overview of the business as a whole. and these are likely to be coordinated through some kind of matrix structure.12 The adhocracy   Divisional form – as indicated earlier when describing types of organisation structure. Businesses such as advertising agencies and management consultancies typically have this form of organisation and management.1 .11). this is a method of organisation whereby autonomous units are created around products or markets (Figure 2.11 The divisionalised form Figure 2. STRUCTURE AND CULTURE STUDY MATERIAL P5 Figure 2. Adhocracy brings with it problems as well as benefits: the 2005. A great deal of decision-making is decentralised to these units. Authority is based on expertise and the emphasis is on effective task performance.12) based on teams of specialists and extensive decentralisation.86 STRATEGY. For the management accountant this raises new problems. Groups of experts make up the basic operating units. as strategic changes can originate from any area within it. such as measuring divisional profitability and dealing with issues such as internal transfer pricing.10 The professional bureaucracy Figure 2. Adhocracy is particularly suited to complex and rapidly changing environments.

The specialist staff are placed into two categories by Mintzberg:   The technostructure is concerned with coordinating work by standardising work processes.1 . etc. What are the implications of these developments for the five basic parts of the organisation identified by Mintzberg? 2005.e.INTEGRATED MANAGEMENT 87 STRATEGY. legal advice and press relations. better quality and ways of contracting out of non-core activities.13 Five basic parts of the organisation main problem may be the coordination of diverse interests in a situation likely to be conducive to organisational politics. this is the role of the strategic apex which may in some circumstances also be responsible for linking the organisation to the needs of those who own or control it. Support staff exist to provide assistance to the organisation outside its operating work flow. Examples would be catering services. strategic apex. The operating core consists of those people who perform the work of rendering the services or producing products. As an organisation continues to grow and develop it is likely to include within its structure specialist staff outside the central line positions (i. STRUCTURE AND CULTURE Figure 2. outputs and skills. personnel managers. this is part of a wider and more general challenge facing managers as they seek new paradigms to guide organisations towards the twenty-first century. adhocracy poses a major challenge. but larger size will require more complex arrangements. In a small organisation this operating core may represent nearly all of the organisation. The middle line represents the hierarchy of authority from senior managers to first-line supervisors linking the strategic apex to the operating core. and will be made up of people such as management accountants. both in terms of styles of operation and the applicability of traditional techniques. For the management accountant. Many organisations are now actively seeking flatter hierarchies. middle line and operating core). There will be a requirement to formulate and implement strategy so that the organisation serves its mission in an effective way. Mintzberg also suggests that it is useful to view organisations as being made up of five parts (Figure 2.13). work study engineers.

2 Determinants of culture McKinsey.88 STRATEGY. The 7-S name is clearly intended to stick in the memory rather than arising strictly from the data.14). and particularly its customers. its ways of doing business and the way it responds to change. # 1998. The particular culture will have a significant ability to respond to change. a strong culture that does not have these attributes is likely to be a major barrier to effectiveness.com. produced a framework for understanding organisations (the McKinsey 7-S framework) similar to one used by Koontz since 1955. From Organisational Behavior.1 . The main effects and characteristics of a strong culture will be as follows:     It will strengthen behavioural regularities organisation. Reprinted with permission of Nelson. a division of Thomson Learning: www. It will reflect the philosophy and values of group. Koontz considers the framework lacking in both depth and precision.1 The importance of culture in organisations An organisation’s culture will influence its strategy. It will minimise some of the perceptual organisation. 2. On the other hand. Fax 800 730-2215 2005.3.3 Organisational culture 2.thomsonrights. while many others will be both less tangible and more significant (Figure 2. A strong culture will be beneficial if it focuses on these elements and highlights the need to change proactively. and norms among members of the differences among people within the the organisation’s founder or dominant effect on the organisation’s strategy and Some aspects of an organisation’s culture will be visible and obvious. Figure 2. a large US management consultancy. Canadian Edition 1st edition by Hellriegel/Slocum/ Woodman Brun.14 The organisational iceberg.3. A key factor in determining how effective the organisation is will be the appropriateness of its culture for its stakeholders. STRUCTURE AND CULTURE STUDY MATERIAL P5 2. However.

This of course is the ‘soft’ side of enterprise and includes an early reference to the idea of shared values. Geert Hofstede studied the answers to survey questions by over 10 000 IBM employees in different countries. press stories and published books reinforced the national culture.3 Writers on culture Edgar Schein (1984). staff. similar to that used by anthropologists. a real understanding of culture requires a deeper probing to reveal what the ‘values’ and ‘basic assumptions’ of organisational members are. They can be brought back to awareness only through a kind of focused inquiry. head office buildings.1 . STRUCTURE AND CULTURE The seven factors referred to are:        systems. More recently. On the contrary. and there is a danger that some managers will see culture as a simple manipulative device for achieving more control over employees. 1997) stresses the point that although managers can influence the evolution of culture they cannot control it. described the more obvious symbols of an organisation’s culture (its ‘artefacts and creations’ ). He suggested that there are a number of characteristics that differentiate the typical American firm (Theory A) from the typical 2005. shared values. strategy. These are things such as factory and/or office equipment. I am arguing that as certain motivational and cognitive processes are repeated and continue to work. structure. showing consistent international differences in how they view the world. where it has long been used to describe the way of life of a particular group of people. which we now call ‘culture’. However. I am not arguing that this is a result of repression. which Schein explains as follows: In stating that basic assumptions are unconscious. they become unconscious. This concept of culture is one that has been borrowed from the discipline of anthropology. William Ouchi in 1980 popularised the idea of culture in his book Theory Z: How American Business can Meet the Japanese Challenge. in his analysis of different levels of organisational culture. style. Organisational culture can be described as what the organisation ‘is’. 2. These international cultures emerge above IBM’s own regional culture (its corporate and organisational cultures) as a consistent set of different ways in which managers acted (see Chapter 10 section 8). skills.3. a ground-up set of factors which employees can readily identify. which is the management’s view of what is needed to perform well in present competitive markets and something that an organisation ‘has’. customs. The interweaving of laws. What is needed are the efforts of both an insider who makes the unconscious assumptions and an outsider who helps to uncover the assumptions by asking the right kinds of questions. He also argues that our understanding of organisational culture is quite superficial. Writers often distinguish this from ‘corporate culture’. the way in which employees dress and the provision of information for customers. Other uses of the word involved ‘high-culture’ or ‘the arts’ and the first use of it to organisations was reportedly by American Marxists who reflected that the interests of the ruling elites were transferred downwards in society. Gareth Morgan (1986.INTEGRATED MANAGEMENT 89 STRATEGY.

Control: Very explicit. Of course. Evaluation and promotion: Slower. people tend to stay in one function for the whole of their career. He went on to suggest that it was possible for American firms to modify their culture (Theory Z) to help them compete more effectively with the Japanese. Responsibility: Assigned on an individual basis. STRUCTURE AND CULTURE STUDY MATERIAL P5 Japanese one (Theory J). they seek employment elsewhere. committed workforce. with elements of job rotation and broad training. Control: Very implicit and informal. Concern for personnel: The organisation is concerned with the workers’ whole life. People are aware of their control responsibilities. but seeking consensus from the group. Theory J (Japan): Employment: Usually for life. Decision making: Carried out by individual managers. Ouchi is generalising when he speaks of the typical American or Japanese organisation. Evaluation and promotion: Very fast. with lay-offs rare. Control: A balance between formal and informal.1 . If individuals are not promoted. Career path: Very general. Concern for personnel: The organisation’s concern is expanded to include aspects of the workers’ home life. 2005. with lay-offs quite common. Career path: Very specialised. Career path: More general. Theory Z Employment: Fairly long term. 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. People rely on trust. Staff are rotated around the organisation Decision making: Carried out by group or committee. Evaluation and promotion: Very slow.90 STRATEGY. Responsibility: Shared collectively. Decision making: Carried out by individual managers. to encourage a loyal. organisations in any one country will have important differences and unique features: these differences represent the culture of the particular organisation. Responsibility: Assigned on an individual basis. Concern for personnel: The organisation is only concerned with the workers’ work life. Looked at more closely. with an emphasis on development and training.

people rewarded. appropriate human relationships (e. Underpinning any set of values will be basic assumptions about things such as the relationship between the organisation and its environment. but interest in organisational culture can probably be traced back to Roger Harrison’s questionnaire for charting of four types of culture in 1972 in which he determined ‘corporate culture’ as ‘organisational ideologies’. Opportunity for meaningful participation ( job dignity). the way authority should be exercised. Depend on people to do their job right (individual freedom) without constant directives. STRUCTURE AND CULTURE 2. and sometimes these are formally set out.4 Models for categorising culture Corporate culture: culture-as-a-variable The task for owners and managers is to achieve the right blend of cultures for the organisation’s task and environment. These will be very important. etc. However.1 . Deal and Kennedy 1982/1988 Strong culture theory In their book Corporate Cultures. and respect for. Handy expanded this as: deep-set beliefs about the way work should be organised. In this way strong cultures link to work on job satisfaction and may overcome job-design 2005. basic assumptions and behaviour that are not easy to achieve. These companies have cultures that artfully blend elements of all four types and blend them in ways that allow these companies to perform well when the environment around them changes as it inevitably does.3. Hewlett Packard makes use of statements called the ‘HP Way’ to clarify corporate values to all employees. whereas organisational culture cannot. but largely unconscious. our people as opposed to depending on extensive rules. managing culture is not a short-term or straightforward task. Deal and Kennedy state: Companies with very strong cultures – the companies that intrigue us most of all – fit [into cultural types] hardly at all. arguably. but organisations promote and act on values whether or not they are formally documented. it is useful for purposes of analysis to attempt to identify the main types of organisation culture. and the idea is to use this commitment in the absence of bureaucratic methods. since it goes beyond slogans and new mission statements: real change requires modifications to values. it only emerges by dint of the shared experience of employees. People can usually articulate the organisation’s key values. to provide performance enhancement via improved self-motivation. in effect a kind of psychological ‘cloning’. Corporate culture can be changed. Strong refers to the degree to which members subscribe to the norms and values. procedures. The term ‘culture’ can thus be applied to the study of organisations in several different ways. So explicit an approach to the use of culture is still the exception rather than the rule. and in the area of ‘belief in our people’ the following appear:    Confidence in. but which may be increasingly important for many organisations. For example. individualistic and competitive or collective groups) and what motivates people.g.INTEGRATED MANAGEMENT 91 STRATEGY. people controlled – these are all aspects of the culture of an organisation. These norms and values are importantly defined as those espoused by management. While culturally each organisation is unique. This approach uses culture as something that the organisation ‘has’ as opposed to what it ‘is’.

family-managed businesses). The assertion. which are typified by teamwork. Finally. The organisation is what these few people possess as skills. a strong culture might begin to reflect the members’ values rather than the organisation’s. and make little use of written rules (this is likely to be the dominant type of culture in small. The four types were:     tough-guy macho – high risk. STRUCTURE AND CULTURE STUDY MATERIAL P5 failure associated with the types of technology identified by Joan Woodward. In this way. however. IT and management consultants. bureaucratic. Additionally of course it may produce strong resistance to change. of two types. The first type is a constellation of stars. informal aspects of many organisations).92 STRATEGY. and are based on friendship. quick feedback. Harrison used a questionnaire method to produce four distinct types:     Power cultures. however. which has a good deal of support from the relevant research literature. and by implication more successful. such as the Dutch Admiral Paradigm where two recruits mutually praised each other in meetings and eventually became the two youngest Admirals in the Dutch Navy. People or support cultures. thus Harrison provided a definition as ‘organisational ideologies’. Role cultures. and the desired culture in large organisations seeking total quality management). Other types of organisation exist for the benefit of the members rather than external stakeholders. bet-your-company – high risk but slow feedback. later being a victim of ‘groupthink’. rather than emphasis on a formal hierarchy of authority (perhaps typical of some advertising agencies and software development organisations. is much more debatable. that companies with strong cultures are more interesting. The authors also suggested a typology which was not based on any scientific methodology though the types were categorised to an extent by two variables – risk-taking and feedback of results – and has passed almost unnoticed into the dustbin of history. process – no feedback. a strong ‘masculine’ culture may not travel well. based on one or a few powerful central individuals who motivate by a combination of patronage and fear. 2005. Roger Harrison’s four types This is likely to be examined quite frequently. belonging and consensus (e. Organisations with strong cultures are supposed to perform better than those with weak ones but the link has not been proven: successful companies obtain the right blend of appropriate cultures. not being referred to by any of the major texts on organisational behaviour. some social clubs.g. especially to areas of the world characterised by Hofstede’s ‘feminine’ dimension. bureaucratic way (e.1 .g. which are impersonal and rely on formalised rules and procedures to guide decision-making in a standardised. based on technical expertise of individual employees – architects’ and solicitors’ practices. Organisational culture is sometimes explained as ‘the way we do things round here’. Cabals are especially strong cliques of self-supporting individuals who may derail the process by charisma or Machiavellian methods. civil service and traditional. Culture. is represented by the shared values that hold together the other organisational systems. Task or achievement cultures. work-hard–play-hard – few risks taken. flexibility and commitment to achieving objectives. mechanistic mass-production organisations).

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. that those at the frontier know best. Simple structures make reorganisation easier. decentralised. Instead. Quality. is critical for corporate success. 2005. Simple form. these organisations are both centralised and decentralised. STRUCTURE AND CULTURE Peters and Waterman (1982) The cultural excellence school These former McKinsey consultants suggest that culture. 6. Close to the customer.1 . They avoid diversification and concentrate on the things they do well. Simultaneous loose–tight properties. Bias for action.   It reveals the limitations of the traditional ‘rationalist’ approach which only regards measurable and visible aspects of organisations worthy of consideration. however. They believe people respond to trust. 2. reliability and service are valued as long-term growth is sought through customer loyalty. Culture has either been neglected or relegated to the ‘art of management’. Their research into high-performing American corporations revealed that corporations with a clearly articulated tight culture were able to develop simple. Several factors suggest. insufficient attention has been given to the less quantifiable ingredients of organisational life. They listen and learn from customers so that they are market driven. and that innovation comes from ‘where the action is’. Hence. as a form of control. Whatever the merits of this approach. These simplified forms of organisation reduced the number of managerial levels and central staff through the avoidance of bureaucracy and. have few central ‘staffers’ and intermediate levels of management. The eight key characteristics of excellent organisations are as follows: 1. They take ‘value-shaping’ seriously and inspire employees by ‘Management by walking about’ (MBWA) – regular visits to the workplace. 4. 5. Since autonomy has been ‘pushed down the line’. while the corporate level retains control over a few core values. the consequence of which has been a restrictive emphasis on rigorous organisational design. lean staff. we need to recognise that it constitutes a resurgence of universalism and is therefore somewhat at odds with contingency theory. 7. financial planning and analysis and information technologies. 8. by avoiding complicated matrix structures. etc. Productivity through people. 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 selfregulation. they promote a ‘ready-fire-aim’ ethos through temporary ad hoc mechanisms. flexible and innovative forms of organisation based on trust and participation. Autonomy and entrepreneurship. Two main points can be made about the cultural excellence school. They regularly reorganise to produce small basic units. To facilitate decision-making and problem-solving they avoid selfperpetuating bureaucratic committees. Hands on value driven.INTEGRATED MANAGEMENT 93 STRATEGY. 3. Stick to the knitting. like product divisions. lived in line with man’s limitations. like product divisions. Simple self-contained but competing structures.

and beliefs about how things should work.5 Culture and control How significant is culture for control? Academics and managers have recently suggested that culture is significant because:   it may be appropriate for organisations which have to contend with turbulent environments while employing staff who have a high regard for self-regulation. myths. and the need to measure what is most important strategically. successful organisations are managed. Thus. unfortunately. Peters produced an amazing 45 prescriptions (his term) under five headings for ‘managing change innovation and survival’. achieving flexibility by empowering people. other research. which stress what is important for the corporation.e. achievable) goals. a theme pursued by Eli Goldratt in The Goal which he subtitled A Management Accounting Textbook. stories and behaviour. This involves control systems.1 . Most of these contain a lot of common sense and are self-evident and revisit previous attempts to define ‘best practice’ or ‘excellence’:      creating total customer responsiveness. Too often management accounting systems are set up to link into financial reporting requirements. has nevertheless found variations in the degree of centralisation of organisations according to the market operated within. some of the organisations defined as excellent have subsequently experienced severe operating difficulties. while tending to confirm the relationship between performance and some of the key characteristics. learning to love change. This merely illustrates the temporary nature of organisational success.3. 2. usually on the basis of learning from what has been successful in 2005. strong corporate cultures that are closely linked to corporate strategy may be critical for success. Peters (1987) Thriving on chaos Subtitled A Handbook for a Managerial Revolution. It is expressed through symbols. Peters wants measures of product quality and customer satisfaction and wants these simple. rituals. using fast-paced innovation. Control should be bottom-up with ‘conservative’ (i. Trust and integrity come high on this list as without control. Of particular interest to the management accountancy profession is the final set of prescriptions with the unusual heading ‘building systems for a world turned upside down’. for example. Culture comprises values.94 STRATEGY. only two years after publication of the book. It consists of taken-for-granted assumptions and norms about how people should behave. 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’. While Peters and Waterman made an important contribution to the understanding of how large. trust is a de facto requirement without which systems cannot work. STRUCTURE AND CULTURE STUDY MATERIAL P5   it is quite likely that organisations facing complex environments and undertaking changing tasks will benefit more from such forms than those operating in stable environments. building systems for a world turned upside down.

however. the product teams were replaced by a number of customer-based groups. Yet many organisations are facing turbulent environments (technological developments. This often proves difficult because the existing culture.) and are attempting to change corporate strategy by. and Steve Ballmer the company president. ran into a number of management problems. To understand the tension or potential conflict between control and motivation it is useful to refer to a specific example. unpredictable markets. If an organisation has few shared values. It is this latter feature which makes corporate culture a double-edged ‘weapon’. Within their two main product divisions. despite its outstanding success as the world’s leading software company. and the interventions of Gates and Ballmer often slowed the process down. In particular. These difficulties arose at a critical time for Microsoft as it was faced with increasing competition from rivals in the development of the internet and e-commerce more generally. which are an important and systematic influence on employees. Hence. though experience suggests it is a difficult and lengthy process which should be undertaken as a last resort. STRUCTURE AND CULTURE the past. 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. for example. most organisations have important cultural values that are not spelled out in this way. deregulation. recession. Life is generally much more straightforward and easier once the basic ground rules are known.4 Improving effectiveness 2. because it is difficult to change. while some of these may be set out in formal documentation.INTEGRATED MANAGEMENT 95 STRATEGY. they tended to involve themselves in all important organisational decisions to the extent that managers lower down the organisation hierarchy felt themselves unable to influence matters or to contribute in a meaningful way to the company’s development. moving into unfamiliar markets. it has a ‘weak’ culture. the Operating Systems division responsible for Windows development and the Product Development division responsible for applications like Word and Internet Explorer. Microsoft’s innovative and charismatic founder Bill Gates. Some managers even complained that they were inhibited in their decision-making by the interventionist nature of Gates and Ballmer’s management style and others complained that the company was becoming increasingly bureaucratic. which may have been a tower of strength in the past. 2. During the late 1990s Microsoft. etc.4. the senior management changed the structure of the company. new members of the organisation have to learn these norms and be socialised to accept them. Quick decision-making was essential if Microsoft was to keep pace with its rivals.1 . and wide differences in ways of thinking and behaving in different departments.1 Balancing control with autonomy This is likely to be examined quite frequently. Some organisations. adopted a highly centralised approach to the running of the organisation. including 2005. However. some corporations have developed an interest in cultural change. The newly organised Product Development division was subdivided into six groups based on the needs of different customers. is not suited to the new strategy. heightened international competition. have very ‘strong’ cultures. In order to overcome these problems.

each group is responsible for interfacing with its customer groups. the question arises as to why it is that all companies are not decentralised. managers can economise on bureaucratic costs and avoid communication and coordination problems because information does not have to be constantly sent to the top of the organisation for decisions to be made. STRUCTURE AND CULTURE STUDY MATERIAL P5 knowledge workers. AT&T has a tall structure. researching customer needs and then developing state-of-the-art software applications to meet these needs.4. Fewer managers mean lower bureaucratic costs. but it is well known for the amount of authority it delegates to lower-level employees. Web surfers and cyber shoppers. this can be an enormous advantage for business strategy. when senior managers delegate operational decision-making responsibility to middle-level managers. Some of the better-known ways of organising to ensure a better balance between control and autonomy are as follows. which is a major source of AT&T’s competitive advantage. 2.96 STRATEGY. When authority is decentralised. The third advantage of decentralisation is that when lower-level employees are given the right to make important decisions. As a means to this they decentralised control to the heads of the six market divisions and to the team leaders in each division.2 Decentralisation One of the most common ways of seeking to balance control and autonomy is via a process of decentralisation. The result is that decentralisation promotes organisational flexibility and reduces bureaucratic costs because lower-level managers are authorised to make on-the-spot decisions. when managers in the bottom layers of the organisation become responsible for adapting the organisation to suit local conditions. Operational personnel can respond quickly to customers’ needs and so ensure superior service. they reduce information overload. If decentralisation is so effective. By delegating authority in this fashion. Centralised decision-making allows easier coordination of the organisational activities needed to 2005. and the managers at lower levels in the organisation. companies have become increasingly aware of this problem and like Microsoft have developed ways of dealing with it. The answer is that centralisation also has advantages. In this new structure. fewer managers are needed to oversee their activities and tell them what to do. Too little direction and control can result in wasted effort as the departments and divisions into which an organisation is subdivided pursue their own particular goals: too much central control and lower level managers 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. their motivation and accountability increase. There are a number of advantages to decentralisation.1 . it is delegated to divisions. The case of Microsoft 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 sufficient freedom and discretion of middle managers and other employees to contribute their particular knowledge and expertise to the organisation. functions. computer game buyers. Second. home PC users. Consequently they can make more effective decisions. As AT&T has demonstrated. Gates and Ballmer also resolved to change their management style and to be less interventionist. enabling senior managers to spend more time on strategic decision-making. In order to further speed management decision-making and allow greater involvement and generation of necessary motivation among their staff. First. The intention of this change is to transfer authority down the line and accelerate the decision-making process. In recent years.

however. In managing the new-venture division. The division is operated by controls that reinforce the entrepreneurial spirit. These measures damage the entrepreneurial culture. 2.3 New venturing Internal new venturing is a form of entrepreneurship. divisional personnel pursue the creation of new business as though they were external entrepreneurs. Merrill Lynch increased centralisation by installing more information systems to give corporate managers greater control over branch activities. Companies such as Texas Instruments. the new venture division wants to reap the benefits by producing and marketing it. If managers at all levels can make their own decisions. This focus allows for speedy decision-making and a focused response by the whole organisation. Care must be taken. consisting of proven entrepreneurs and experienced managers from the other divisions. costly mistakes may be made. One of the main design choices is the creation of new-venture divisions. corporate managers often become concerned about the division’s performance and introduce tight output controls or strong budgets to increase accountability. After spending millions of dollars. To provide new-venture managers with the autonomy to experiment and take risks. market and output controls are inappropriate because they can inhibit risktaking. Away from the day-today scrutiny of top management. sales and marketing and product development are heavily involved in this screening process. STRUCTURE AND CULTURE pursue a company’s strategy. the company sets up a new-venture division separate from other divisions and makes it a centre for new product or project development. after creating a new invention. however.INTEGRATED MANAGEMENT 97 STRATEGY. in times of crisis.4. Generally. centralisation of authority permits strong leadership because authority is focused on one person or group. Furthermore. Instead. The idea is to design organisations to encourage creativity and give new-venture managers the opportunity and resources to develop new products or markets. Thus. and resources wasted on frivolous ideas. While decentralisation is a long-established and traditional means of seeking to provide middle and lower level managers and employees with a significant decision-making role and thus to ensure their greater involvement and commitment. the costs of research and development are high. the champions of new products must defend their projects before a formal evaluation committee. Care must also be taken to preserve the autonomy of the new-venture division. to institute bureaucratic controls that put some limits on freedom of action. the idea of new venturing is relatively recent. overall planning becomes extremely difficult. for example.1 . If this happens. and the company may lose control of its decision-making. Strategic managers must take steps to provide a structure that can sustain the entrepreneurial spirit. Otherwise. As mentioned earlier. 2005. When its branch operations were getting out of hand. the company develops a culture for entrepreneurship in this division to provide a climate for innovation. the division becomes an ordinary operating division and entrepreneurship declines. Managers from research and development. to secure the resources for developing them. Sometimes. and the rewards uncertain. it is important to use integrating mechanisms such as task forces and teams to screen new ideas. Centralisation also means that decisions fit broad organisation objectives. 3M and IBM are examples of successful companies that use this method for creating opportunities internally.

The reward resulting from personal control and real or perceived effectiveness in turn improves motivation. At Xerox. One study. employees implement their own solutions to performance problems such as how better to meet deadlines and delivery schedules. as soon as a new. Tannenbaum and Cooke (1981) argue that empowerment actually increases the total amount of power in an organisation. Research by Conger and Kanungo (1988) indicates that an individual’s need for self-efficacy (a desire to produce results or outcomes) is better satisfied as a result of empowerment. empowerment is a most useful way of balancing control and motivation.1 . A virtuous circle of involvement. and they set their own work hours. established companies can maintain their momentum and grow from within. The suggestion is that power is not a zero-sum game. Another suggested that empowerment works best only in companies that are already achieving high levels of performance.4 Empowerment Another recent management trend designed to combat the debilitating effects of overcontrol has been the use of empowerment. Internal new venturing is an important means by which large. for example. This is part of a move towards the development and acceptance of flatter hierarchies and greater devolved power and manifests itself in the use of self-managed teams. Senior managers gain power because of the resultant increases in morale. At each of these companies. but that it grows through empowerment. USA. 2. reduced layers of hierarchy. effectiveness and motivation is apparent. Empowerment occurs where authority to make decisions and to resolve organisational problems is delegated to subordinates. Empowerment has taken different forms in different organisations.98 STRATEGY. self-supporting product is developed. 2005. whereas subordinates gain the power and authority to make decisions and to act autonomously. Some reports question whether empowerment promises more in terms of performance improvements than it can actually deliver. employee empowerment resulted in increased levels of worker and organisational performance. In the operating divisions. the company keeps all its divisions small and entrepreneurial. found that some companies employing empowerment strategies were actually less efficient than companies not using empowerment. flexibility and productivity. The arrangement also provides a good climate for innovation. empowerment has not been successful everywhere. STRUCTURE AND CULTURE STUDY MATERIAL P5 Hewlett Packard has a novel way of dealing with new venturing. Team members also do their own taste tests to determine whether the product is ready for shipping to the customer. The alternative is to acquire small businesses that have already developed some technological competence and to invest in them. Furthermore. There is however reason for some caution. They argue that motivation is boosted as a result of improvements in the individual’s effectiveness and the individual’s ability to choose how to complete the task using his or her creative skills.4. Lower-performing companies often lack the training resources to make empowerment work. speed of decision-making and the motivation of staff. a new division is formed to produce and market the product. According to a number of writers then. organic structures. It is believed that giving power to those doing the work of the organisation should improve flexibility. teams of employees share the responsibilities for hiring their own team members and for determining which employees are offered permanent employee status. By spinning off the product in this fashion. At Johnsonville Foods in Wisconsin. Like many other management panaceas. devolved budgetary control and decision-making.

Innovation is closely related to creativity but most authors draw a distinction between the two processes. Innovations may also be found in administrative changes. If an intranet system is introduced into an organisation it can be considered to be an innovation for that organisation even though many other companies might already be using an intranet system. Innovation involves deliberate attempts to bring about benefits from new changes. the introduction of advanced manufacturing technology or the introduction of new computer support services within an organisation. 2. not all workers are eager to take on even part of the responsibility for the problems surrounding their work. In addition.4. but with implementing them. while the improvement of a bottle opener is of relatively little importance in the order of things.4. Innovation is the introduction of new and improved ways of doing things at work. Innovation does not imply completely new solutions.6 Innovation Management gurus increasingly regard the role of innovation as the future basis for competitive advantage. but may also include new production processes.1 . Such teams are responsible for the choice. human resource management strategies. New organisational policies. while innovation is defined as the implementation of those ideas in practice. teams charged with the development of new processes or those given responsibility to see projects of various kinds through. the idea being that new ideas are more likely to come from the shared experience of people drawn from different disciplines and that such shared development and learning can help speed products to market. Innovations vary in their impact and significance. Change can be deemed an innovation if it is new for the person. It is often difficult for managers to give up or even to share the authority and responsibility that have defined the nature of management for nearly a century. 2005. such teams have a cross-functional basis. Examples of team working include those groupings charged with new-product development. are all examples of administrative innovations within organisations. Innovations may include technological changes such as new products.INTEGRATED MANAGEMENT 99 STRATEGY. or the introduction of team work. design and marketing of new products. these include increases in productivity and improvements in the design and quality of products. These teams assume the responsibility for all aspects of product development.5 Team working Associated with empowerment and the need to balance motivation and control is the use of team working (see Chapter 11). Competition in global markets requires that organisations innovate and adapt if they are to survive and compete effectively. STRUCTURE AND CULTURE This last point suggests that the problem may not be with the empowerment strategies themselves. group or organisation which is introducing it. Creativity is widely regarded as the generation of ideas for new and improved ways of doing things. The development of the internet is obviously of great significance. It is also the case that some innovations are produced quickly while others take time. especially when they do not feel they will be given the authority to make real changes or improvements. from those which are relatively minor to those which are of great significance. Quite commonly. 2.

7 Organisational learning and knowledge management Closely related to the process of innovation is the process of learning. The notion of organisational learning has been elaborated on by a number of writers including Senge. Though organisations do not have brains. it is different from simply the summation of the learning of individuals in an organisation. First. the following are generally acknowledged as being important aspects of learning organisations. and an organisation culture that is tolerant of risk taking. norms and values over time. mental maps. lays greater emphasis on the management and sharing of knowledge than does the idea of organisational learning. Fourth. only when individual learning has an impact on and interrelates with others do organisation members learn together and gradually begin to change how things are done. Innovation in organisations has been found to be related to a range of factors. Access to this knowledge is usually available by e-mail. team working. though related to organisational learning. Individuals may come and go but provided that their learning has been passed on to others in the organisation the benefit of their learning to the organisation continues.4. it may take only a few months to reorganise the production line in a company but take many years for the same organisation to change its corporate culture. The emphasis is on continuous learning rather than a particular end state of knowledge because rapid change demands new ways of doing things and new skills and knowledge to enable the organisation to compete. Second. The concept of organisational learning encompasses a range of ideas drawn from a number of sources. skills and attitudes required to cope with new challenges. the learning organisation is regarded as a process rather than a product. An example of such a system is that developed by Zeneca Pharmaceuticals to bring together information on new drug discoveries and licences. an emphasis on quality. In other words. Managers around the company are responsible for identifying relevant data and for inputting it into the system. Of course. Knowledge management tends to focus on the use of databases and the use of intelligent search engines. These are technology-based systems designed to facilitate access to expertise by creating a catalogue of specialists each with their own website in the company intranet. Argyris and Schon. Among these. Third. all 2005. they have cognitive systems and memories that preserve certain behaviours. it is not simply a matter of installing it like a piece of equipment but is a continuous process of learning that involves everyone in the organisation on an ongoing basis. including a challenging environment. strong managerial support. the learning organisation does not come in turnkey form. knowledge management is not just the use of information technology to manage information.1 .100 STRATEGY. Traditional training and development programmes while useful did not guarantee that staff would possess the knowledge. good interdepartmental and interdivisional communication. STRUCTURE AND CULTURE STUDY MATERIAL P5 For example. This increases collective competence as well as individual competence. Such companies realised that the route to a successful future in a less and less predictable world depended on the ability of everyone in the organisation. 2. To cope with change it was realised that experimentation and adaptation were necessary and that new ways of operating would be required. The phrase. ‘learning organisation’ was coined during the 1980s and referred to the aims and aspirations of a growing number of companies that were seeking to transform the nature of their organisations. Knowledge management.

Treat identification of problems as signs of failure. Again in concert with the ‘excellence school’ she emphasised culture – but also employee involvement and empowerment. When Giants Learn to Dance. rose to prominence at the same time as Peters and Waterman with her 1983 book The Change Masters. Permit more interaction between individuals and groups. role culture. 5. These are summarised below. a Harvard professor.8 Rosabeth Moss Kanter and entrepreneurship Moss Kanter. analysing. as experimentation requires trying out new ideas.INTEGRATED MANAGEMENT 101 STRATEGY. This was subtitled ‘corporate entrepreneurs at work’ and stressed the need for ‘an American renaissance’. to discourage people from letting you know when something in their area is not working. revisits these ideas but they tend to remain at a general level.4. and withhold your praise. Ask departments or individuals to challenge and criticise each other’s proposals. Moss Kanter neatly summarises some typical managerial behaviours and policies that will effectively stifle innovative efforts. sharing and using information would be included. 3.1 . STRUCTURE AND CULTURE other ways of collating. 2. Express your criticisms freely. Moss Kanter’s prescriptions for encouraging organisational creativity are as follows:      Develop an acceptance of change. This was ‘moving beyond conventional wisdom’. bureaucratic. Regard any new idea from below with suspicion – because it is new and because it is from below. These prescriptions will be difficult to implement in a traditional. It is perhaps the power of information technology and the additional ease of using information that has given added prominence to the idea of knowledge management in recent years. Rules for stifling innovation 1. ( That keeps people on their toes.) 4. not all of which will work. ( That saves you the job of deciding. She complained about the ‘quiet suffocation of the entrepreneurial spirit’ in what she called ‘segmentalist companies’ – that is. In this context she described the ‘integrative’ approach to problems (as Lawrence and Lorsch had developed in their 1967 book Organisation and Environment). Encourage new ideas at all levels of the organisation. functionally organised firms – particularly the indifference of managements to employee innovations and the stifling of innovation. To counteract this trend she produced various cases (as had Peters and Waterman) to show where and how change could be implemented. Her later book. storing. distributing. In The Change Masters. together with a discussion of the managerial skills needed to change culture and strategy. 2005. Tolerate failure. Offer recognition and rewards for creative behaviour. 2. Attempts at managing a change in culture may in these circumstances have to go side by side with attempts to improve innovation and creativity.) Let them know they can be fired at any time. Insist that people who need your approval to act first go through several other levels of management to get their signatures. you just pick the survivor. using ‘ideas from unconnected sources’.

and make sure that it is not given out to managers freely. Make decisions to reorganise or change policies in secret. Many of her ideas therefore seem recycled from earlier studies. Yet in fact Amazon owns relatively few physical assets and staff to back up its service (an alternative term ‘virtual organisation’ perhaps expresses this). These warehouses keep Amazon notified of their stock position (which is automatically transferred to the customer web pages as approximate delivery times). responsibility for figuring how to cut back. never forget that you. The company also keep them informed about new books in areas similar to ones they have bought before. 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. and then spring them on people unexpectedly. lay off. 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).5. either of which would force managers to consider their training and development expertise. thus in effect unfreezing their mind-sets.com. which can act as a Trojan horse and allow the infiltration of other ideas. And get them to do it quickly. and perhaps encourage a degree of self-analysis and a preparedness to go for other such changes.102 STRATEGY. network organisations are organisations that rely on relationships with other organisations in order to carry out their work. the higher ups. 7.) 9. Amazon sits in the middle of a network of other organisations. 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.5 The network organisation 2.1 . Control everything carefully. Perhaps the most original idea was to create a ‘vehicle’ for change. Make sure that requests for information are fully justified. credit card operators and publishers to provide it with the information and services it will need. Rover cars used the possibility of employees learning anything. already know everything important about this business. Assign to lower-level managers. 2005. but her populist appeal to American managers at a time of national crisis over entrepreneurship is indisputable. either on in-house adult education classes ( Japanese was taught to ease the partnership Rover had with Honda at the time) or at local colleges. supported by a grant from the company. frequently. A good example is the on-line bookseller Amazon. STRUCTURE AND CULTURE STUDY MATERIAL P5 6. Examples would be to go for a training accreditation such as a National Training Award or Investors in People certificate. (You do not want data to fall into the wrong hands. 10. It also has arrangements with couriers. And above all. move people around. only to get them started again down the road of learning after years away from school. (That also keeps people on their toes. The customer can order the product on-line and expect to receive it by courier within a few days. or otherwise implement threatening decisions you have made. 2.) 8. Make sure that people count anything that can be counted. in the name of delegation and participation.1 An overview of network organisations Externally.

2 Forms of network relationship The examples in Section 2. Network organisations will often take this as the norm and extend it beyond operative staff to include workers with considerable intellectual capital such as systems experts and lawyers while retaining only a very small cohort of core staff.1 . However. check-in. However. the network organisation goes considerably further by outsourcing the production of its products or the distribution of its products. The use of contract staff (or ‘temps’ ) to cope with pressure points in the workload is a long-established practice. turnkey factories and specially built machines and highly customised office accommodation. The leasing of assets has been common for many years in high capital cost industries like airlines and shipping. 2005. Many of its staff will be employed on a contract basis from agencies. library. UK hospitals: A patient in the hospital will receive medical treatment. 2. In fact it is likely that the telephone booking service. Outsourcing elements of production or service provision. leisure. Contract staffing. the network organisation frequently leases IT facilities. They argue that networks will take the place of formal organisational structures such as hierarchies and rigid divisions. However. on-board catering. the LGA relies on a series of contracts with private and public sector contracting companies to provide this service. luggage handling and departure lounges are provided under contracts from other firms. many processed food companies no longer make the food they brand and sell and fast-food restaurants do not operate their restaurants. the hospital may use private contractors for cleaning. food and accommodation services. Ancillary services such as office cleaning have often been outsourced by management who do not wish to be bothered with it.5. The on-board catering will be provided by a fifth firm and the train cleaned by a sixth firm. aircraft maintenance. Airlines: The customer of the airline will have the impression that everything is supplied by the airline itself. The passenger may also find that part of their journey is provided by another carrier under a similar arrangement.INTEGRATED MANAGEMENT 103 STRATEGY. 2. Corporations will allow their individuals to form virtual teams in order to become more creative. depart from a station and along lines operated by a third company yet maintained by a fourth. 3.1 demonstrate that network organisations can choose to ‘buy-in’ a range of value-creating activities: 1. law and order and education services. This ‘shamrock organisation’ will be discussed below.5. Use of specific capital assets. However. STRUCTURE AND CULTURE A similar analysis can be applied to the following industries: UK local government authorities (LGAs): The local taxpayer receives environmental health. For example. laundry and catering while at the same time relying on other hospitals for the use of specialist scanning and dialysis equipment. 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. inspiring them to use their initiative and knowledge to build organisational learning and competences. Ghoshal and Bartlett (1997) describe another form of network organisation which they term an individualised corporation.

Market solutions. Why have network organisations become so important in recent years? 3. It may be helpful to think of Williamson’s theory as a more complex version of the familiar ‘make-or-buy’ decision from your management accounting studies. customers are seemingly passed from organisation to organisation without realising it. car-hire firms. Staff from one organisation physically work at the other’s offices.4 Theoretical basis of network organisations There are two sets of theoretical perspectives that help us to understand the development of and decisions surrounding network organisations: 1. 2. 2. 2005. Management will make in-house the things that cost them more to buy from the market. 2.5. Hierarchy solutions. (These were reviewed in Section 1.) To a great extent these overlap and you should not worry too much if you do not see them as being different. 2. For example: through-ticketing on airlines and railways. STRUCTURE AND CULTURE STUDY MATERIAL P5 4.5. Vertically integrated companies are ones which have a high reliance on the managerial hierarchy for control. and data about customers and products are passed around in order to coordinate activities.104 STRATEGY. Transactions cost theory (see below).1 . Management decide to buy-in the use of the assets or staff from outside companies under the terms of a contract. 1. Resource-based views of strategy. Here management decide to own the assets (or employ the staff directly) and use the policies and procedures of the firm to control their use and performance. How can management develop systems to control operations in a network organisation? 2. Hierarchies will be used if the transactions costs of the market solution are too high. Williamson (1981) suggests that organisations choose between two mechanisms to control resources and carry out its operations – hierarchies or markets. Writers refer to the ‘permeable organisation boundary’ because it becomes hard to see where one organisation ends and another begins. Many network organisations have mutual customer-sharing arrangements and will cross-sell their products. Reliance on outside organisations for referral of business. How do firms decide which activities and assets to ‘buy-in’ and which to own and operate directly? 2.5 Transactions cost theory This approach is rooted in the institutional economics of Ronald Coase and Oliver Williamson. airlines and hotel chains network for corporate travel and fly-drive holidays.5. However. finance houses network with car and electrical retailers to provide low-cost consumer credit and joint promotions.5. Outsourcing is a contemporary example of increased reliance on the market.3 Implications of network organisations There are a number of issues posed by the development of network organisations: 1.

2. reliability. The decision of which mechanism to use.). 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). the innovations of a competitor may force them to vary the specification of their product that may require differently specified inputs. If these transaction costs become too high the organisation may reduce its costs by taking the supply in-house through development of its own upstream supply facility under the direct control of management (a hierarchy solution). (c) Opportunistic behaviour will lead to expensive variations in contract terms or damages claims for breach of contract. Williamson considers the circumstances that lead one firm to trade with another and therefore to incur transaction costs. Asset 2005. markets or hierarchies. the greater will be the transactions costs arising from a market solution. Bounded rationality. Opportunistic behaviour. (c) Pursuing legal actions for redress due to non-performance by the supplier. STRUCTURE AND CULTURE Williamson looks beyond just the unit costs of the product or service under consideration. it will incur the following transaction costs: (a) Negotiating and drafting a legal contract with the supplier. These risks are increased by two factors: 1. is (or should be) based on management’s desire to minimise transactions costs. Each agent is seeking to pursue their own economic self-interest. The more that these two factors are present. a firm seeking to buy components cannot know for sure the volumes they will need because they cannot perfectly forecast final product sales. (b) Legal enforcement of the contract will become more expensive. For example.1 . (b) Monitoring the supplier’s compliance with the contract (quality. They are costs arising at the interface between economic agents. Where the enterprise relies on outside suppliers for an input or service (a market solution). This he roots in the concept of asset specificity. Likewise. At the time the contract is negotiated neither party is able to perfectly anticipate the future and how the contract will unfold. in addition to the price for the bought-in input. etc. invoicing. Transaction costs are the organisational counterpart of friction in a physical system. (d) Penalty payments and cancellation payments if the firm finds it later needs to change its side of the bargain and draft a new contract with the supplier. These costs arise because both the firm and its supplier wish to be protected against loss and use the contract to define the risks each mutually takes on. For example. This means they will take advantages of any loopholes in the contract to improve their position. a small change in the specification of the product will be alighted on by the supplier as an opportunity to charge higher prices because they know the buyer is bound by contract to purchase from them. quantity. particularly between stages in a production or supply process. He is specifically interested in the costs of control that (together with the unit costs) make up transactions costs. Similarly the supplier will not know their production costs with certainty.INTEGRATED MANAGEMENT 105 STRATEGY.

In this connection it is significant to note that Eurotunnel began life as a political creation of the British and French governments rather than as a private business initiative. Eurotunnel plc is locked into the train operators. knowledge of systems and procedures peculiar to one organisation. In return they have the right to use up to 50 per cent of the tunnel capacity. This includes the Eurostar consortium that operates specially built trains between London and various destinations in France and Belgium. This company has a single asset. a unique work of art or building. for example: reserves of high-quality ores. building hotels near a certain theme park or tourist attraction. building of pipelines and harbours to service an oilfield. High asset specificity results in the buyer being denied the opportunity to periodically choose between rival producers on an external market. a tunnel under the English Channel linking the British Isles to the main European continent. Williamson examines the effect of such high ‘asset specificity’ on transaction costs. Dedicated asset specificity: a man-made asset which has only one application. Apart from some telecommunications potential. It can be seen that the high asset specificity of Eurotunnel has led to high transactions costs in the form of the contracts and franchise agreements around it. 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. Site specificity: the assets are attached to a particular geographical location. 4.1 . This poses a substantial risk to the supplier because if the contract is withdrawn it will not be able to recoup its investment. Indeed he suggests that extremely high asset specificity may result in no suppliers coming forward on the market. Williamson’s conclusion is that high asset specificity will lead firms to bring supply inhouse rather than bear the high transactions costs of the market. Human asset specificity: particular skills or knowledge.106 STRATEGY. for example: specific technical skills relevant to only one product. Eurotunnel has the exclusive right to operate the tunnel until 2086. Sydney Harbour Bridge. Williamson suggests that asset specificity can be of six types: 1. Williamson predicts that such high asset specificity will therefore result in bilateral (or quasi-bilateral) contracts between the firm and its supplier. High asset specificity arises where a supplier must invest in expensive assets with no alternative use in order to supply a client. for example: Eurotunnel. which opened in 1994 having cost nearly £5bn to build. for example: locating a components plant near the customer’s assembly plant. Consider the example of Eurotunnel plc. Physical asset specificity: this is a physical asset with unique properties. this extremely expensive asset has no conceivable alternative use other than as a rail tunnel. instead being forced to enter a long-term contract with the sole supplier. but perhaps more significantly the rail operators signed Usage Contract agreements with Eurotunnel in 1994 until 2006 under which they are committed to certain minimum financial payments to Eurotunnel. Few will take this risk without a guarantee of orders in the long term. 3. 2005. STRUCTURE AND CULTURE STUDY MATERIAL P5 specificity is the extent to which particular assets are only of use in one specific range of operations. In addition to operating its own shuttle services for passengers and freight. 2. military defence equipment. This is a situation of high asset specificity. over 30 per cent of the company’s revenues come from other railway companies which pay Eurotunnel to use the tunnel.

2. STRUCTURE AND CULTURE 5. dedicated asset and site specificity. This casts an interesting light on organisational behaviour. Predicting the reduction in the costs available from the substitution of these virtual value chains is used to drive strategic initiatives and investments. logistics and human resource development which are increasingly outsourced. Transaction costs approaches to organisation theory are being enlisted in support of a number of ends by strategy writers and business consultants. Brand name capital specificity: a brand and associations that belong to one family of products and would lose value if spread wider. 2. rights to exploit an asset for only a limited number of years. These are often put under the umbrella of e-commerce or e-business. According to the transactions cost approach this will be an operation or asset that cannot be provided by another organisation without increasing the transactions costs or risks of the firm.1 . Williamson admits that these categories often occur together. The same argument applies to particular business processes such as IT. for example:     Does Disney Corporation operate visitor and cast accommodation at its theme parks because it is cheaper than offering the financial safeguards necessary to encourage hotel operators to invest in such specific assets? Is the reason that Procter and Gamble develops its own brands for foods and detergents that the uncertainties about brand values and strategy make it very expensive to draft contracts to lease brands from brand owners? Did the same consideration lie behind Grand Metropolitan’s decision to buy Pillsbury rather than simply license the Burger King brand from it? Do large firms undertake in-house staff and management development programmes because colleges and potential recruits are unwilling to bear the costs of training themselves in such specific skills? Are some staff paid far more than they could otherwise get on the job market because they possess specific skills which the firm cannot buy from the labour market? 2005. Organisations should sell-off upstream or downstream divisions that can be provided at lower transactions costs by the market.6 Transactions cost theory and network organisations According to Williamson. Identification of distinctive competences.5. It is believed that the costs of searching the market for suppliers. To predict the impacts of developments in information technology. To support organisational restructuring. 1.INTEGRATED MANAGEMENT 107 STRATEGY. for example: Coca-Cola. For example. corporations reduce transactions costs by vertically integrating and in doing so become more multi-divisionalised and more internally complex. 3. Eurotunnel combines temporal (limited franchise till 2086). for example: the right to conduct radio broadcasts at an allotted time. 6. 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. maintaining the supplier/buyer relationship and monitoring fulfilment have been reduced by developments in information technology (IT). Temporal specificity: the unique ability to provide service at a certain time. McDonald’s.

STRUCTURE AND CULTURE STUDY MATERIAL P5 The network organisation. payments and incentive schemes to motivate performance. divisional performance measurement and evaluation. Organisations may have underestimated the costs of internal control. 2. However. A conventional absorption costing system may allocate overheads to products. however. Communications technology such as teleconferencing. This suggests that more firms will be prepared to undertake asset specific investment because the electronically facilitated global market makes them less reliant on a single customer.108 STRATEGY. Williamson suggests that a major source of transactions costs is the potential for opportunistic behaviour by the contracting parties. but these overheads are not relevant costs for decision-making purposes such as ‘make or buy’. the buyer will have a choice of suppliers rather than a single monopoly supplier. provision and maintenance of fixed assets such as premises and capital equipment. this assumes that management can accurately quantify the costs of controlling the internal operation. Common computer assisted design (CAD) systems allow collaboration in research and development with geographically remote suppliers. Hence the decision to produce internally overlooks many of the costs associated with it. Transaction costs may have been reduced by the development of trust in contractual relations. More modern management accounting techniques recognise the costs of control and this may have led to increased recognition of the savings from outsourcing. 3. provision of managerial supervision. 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. 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. Several transaction costs based explanations may be offered for this phenomenon: 1. production planning. The authors suggest a significant shift to increased outsourcing will occur as firms become able to network in an ‘unbiased market’ rather than being faced with the choice between internal production or reliance on a monopoly partner. e-mail and intranets permit much lower cost and timely maintenance of supplier relationships than was possible using face-to-face methods. and the legal and monitoring cost that arise from these. the development of budgetary control systems to coordinate activity. Firms undertake activities internally when the transactions costs of external provision are too great. One influential theory adopting a transaction costs perspective is the Electronic Markets Hypothesis of Malone et al. These costs will include: – – – – – – – staff recruitment and training. (1987). more recently. Nirmalya (1996) and others suggest that the mutual suspicions that give 2005. the internet.1 . 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. These costs of managerial control are traditionally regarded as overheads rather than something resulting from the decision to undertake production internally. Firms now have access to global partners because the cost of searching for suitable suppliers or buyers is reduced by IT. Similarly. Transaction costs may have been reduced by the impact of information technology.

7 Network organisations and resource-based theory Recurring questions raised by discussions of virtual organisations and network organisations are:    What exactly does a firm do if it relies on others for carrying out most of its operations? Is the firm vulnerable to being cut out of the network if its partners decide to deal with each other directly? Will not the relationships eventually decline into conventional adversarial relations if the firm becomes too dependent on its partners? According to resource-based theory (RBT) these problems do not need to trouble us. For example. or clan control. have suggested that the lax framework of corporate governance allows the management of a firm to pursue personal goals rather than maximise the wealth of shareholders (e. Transaction cost analysis may explain the trend to network organisations if it can be shown that external pressures are forcing firms to reduce costs. First. This is also picked up by Ouchi (1980) who suggests that the high uncertainties and impossibility of measuring performance means that contract relations must be based on shared values. it is quite possible that many hierarchies were created to enhance managers’ feelings of prestige and power rather than in an attempt to avoid transactions costs. rather than either of Williamson’s market or bureaucratic means. Williamson. 2005.e. firms that fail to do so are no longer around because market forces have eliminated them). including Williamson himself. many writers. 1964). A firm need not fear being cut out of a network.5. If all activities are undertaken in-house then these contracts are principally employment contracts monitored by the apparatus of corporate governance. RBT argues that organisations are always just a ‘nexus of contracts’. STRUCTURE AND CULTURE rise to these costs can be removed if a relationship of trust is developed between the contracting parties. or (b) only those firms that succeed in minimising costs will survive in the long run (i.g. he depends on one of two propositions: (a) that management structure organisations in this way because they seek to improve shareholder value. However. The creation of hierarchies was not economically justifiable at any time. 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. provided that it confines itself to excellence in the use of its core competences. Indeed the suspicion arises that many organisations developed as they did from reasons of history and circumstance rather than to serve any particular purpose. 4. Therefore. the notion of market forces driving high-cost firms out of business overlooks the fact that vertically integrated firms have substantial market power and may avoid these competitive pressures. Second. 2. Neither assumption can go unchallenged.1 .INTEGRATED MANAGEMENT 109 STRATEGY. This is because partners will incur higher costs if they try to carry out the activity themselves. For Williamson to argue that organisations are structured in such a way that they minimise transactions costs. it is a poor and expensive use of management time to monitor such contracts and operations if they can be done better by a partner and diverts attention from leveraging the firm’s competences.

Organisational Dynamics. G.G. J. MA: Harvard Business School Press. Aldershot: Gower. Conger. The New Corporate Cultures.G. Organisation – A Guide to Problems and Practice. A. and Woodman. Coase. C. we learn to trust as we experience the plain dealing of our partner). STRUCTURE AND CULTURE STUDY MATERIAL P5 Avoiding the decline of trust-based relationships into adversarial (or dyadic) relationships depends on the maintenance of the right atmosphere between the parties. and Cox. Vol. New York: Oxford University Press. The Individualised Corporation. and Stalker. the definition and classification of culture. (1984). Ghoshal.e. Leadership. No. (1961). and Kennedy. A. A. (1984). T. Charismatic Leadership: The Elusive Factor in Organisational Effectiveness.R. Child.1 .A. MA: Harvard Business School Press. London: Random House. Personnel Management. (1975). Burns. CA: Jossey-Bass. (1980). and Lorsch. Motivation. J. G. Goldratt. 9. This gives a leading role to human resources functions. H. Chandler. T. (1988). Lawrence. ‘The Manager’s Job: Folklore and Fact’. Hagel. approaches to improving organisational efficiency. The Nature of the Firm. Mintzberg. 1. Slocum. and Armstrong. Texere Publishing).N. 2005. J.). Summer 1980. References Atkinson. Harvard Business Review. Deal. ‘Manpower Strategies for the Flexible Organisation’. The Goal: A Management Accounting Textbook. Deliberate policies to integrate the cultures and staffing of the organisations. Boston. Corporate Cultures (new edition. Organisational Behaviour. (1991). The Management of Innovation. Williamson and S. J.W. August. New York: West. New York: Harper & Row. The Nature of the Firm. Net Gain: Expanding Markets Through Virtual Communities.M. (1997). P. E.A. the features and advantages of the different organisation structures. (1992). S. (1984). 2000.. In O. Organisation and Environment: Managing Differentiation and Integration.E.W.110 STRATEGY. 2. San Francisco. (1997). R.E. Hofstede. J. London: Tavistock. Things that will encourage this include:    Open-book accounts where each can see the other is not taking excessive profit from the relationship. Winter (eds. Hellriegel. and Bartlett. Strategy and Structure: Chapters in the History of the Industrial Enterprise. Continued reciprocity in trading relations (i. July–August. rev edn 1986).6 Summary The key points to remember are:     the relationship between strategy and structure. 42–63. MA: MIT Press. and Organisation: Do American Theories Apply Abroad?. and Kanungo. J. (2nd edn 1993). Cambridge. R. J. (1982). pp. R. Boston. D. (1967.W. New York: Perseus Books. (1962).

No. Thriving on Chaos: A Handbook for a Managerial Revolution. (2nd. and Waterman. edn). 3. (1981). Images of Organisation.E. K. The Nature of the Firm. Williamson. London: ITBP. Winter (eds. NJ: Prentice-Hall. Williamson.).A. Upper Saddle River. H. The Fifth Discipline: The Art and Practice of the Learning Organisation. J. (1985). and Cooke. vol.S. Power in and around Organisations. 2005.’ Strategic Management Journal. ‘The Power of Trust in Manufacturer–Retailer Relationships’. (1990). ‘The Economics of Organisation: The Transactions Cost Approach’.. pp. Mintzberg. CA: Jossey Bass. 87.. The Economics of Discretionary Behaviour. Reading. Harvard Business Review. Inc.M. Journal of Contemporary Business. 35–46. Ouchi. Reprinted by permission of Pearson Education. New York: Harper & Row. New York: McGrawHill. (1982).E.G. (1983). pp. The Change Masters. Schein. No. and Waters. London: Sage. 3. (1986). Weihrich. STRUCTURE AND CULTURE Mintzberg. O. E. and Koontz. (1996).INTEGRATED MANAGEMENT 111 STRATEGY. Organisational Culture and Leadership. Control and participation. 6.A. R. San Francisco. H. (1993). T.1 . Moss Kanter. New York: Simon and Schuster. pp. Williamson. The Rise and Fall of Strategic Planning. London: Pan. W. In Search of Excellence. Mintzberg. MA: Addison-Wesley Pub Co. 257–72. G. Peters. Tannenbaum. (1981). Morgan. (1998). Pearson Education. ‘Of strategies deliberate and emergent. H. Vol. Theory Z: How American Businesses can Meet the Japanese challenge. New York: Doubleday. T. November/December. H. When Giants Learn to Dance. P. (1994). H. O. Moss Kanter. (1984).E. (1964). Management: A Global Perspective. Peters. R. O. R. and S. New York: Oxford University Press. A. Englewood Cliffs. Nirmalya. (Autumn 1974). American Journal of Sociology. 548–77. (1987). NJ: Prentice-Hall. 3. R. Vol. Senge. (1982).

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However. 1982). In search of structural excellence Aelita G B Martinsons and Maris G Martinsons. the ‘right’ structure depends on contingency factors. By following well-documented prescriptions for success. 1994. There is no one right answer to this dilemma for all organisations in all circumstances. Unfortunately. what works in one company may not work in another owing to the slightest of differences. Consequently a particular organisation will be likely to move from one form of structure to another as its strategy and circumstances change and develop. this is sometimes described as the ‘trust-control dilemma’. further consideration finds that theory does not necessarily lend itself effectively to practice (Mintzberg. The models of structure advocated by early classical management writers tended to be based on military command and control principles. By matching an organisation’s contingency factors with those prescribed by management theorists the ideal structure for an organisation could be found. responsibilities and rules can operate quite successfully in stable predictable conditions. The contingency approach sees no one right structure for all organisations. Contingency or situational factors may include the 113 2005.1 . All organisations face the basic problem of finding the right balance between centralisation and decentralisation. Dynamic changes in organisational goals and resources as well as its environment may preclude a static ideal structure. However. This process is examined in the following article based on the experience of Procter and Gamble. managers should theoretically be able to easily identify and realise the ideal structure for their organisation. Certain structures undoubtedly are more conducive to realising popular corporate goals and strategies. Even the most superficial scans of the management literature reveal scores of articles addressing the topic of organisational structure. Theorists look for critical factors in successful organisations and then try to generalise their findings to produce an ideal structure and success formula (Peters and Waterman. Leadership and Organisation Development Journal. Recent literature tends to focus on after-the-fact cases. basing theories on descriptive analyses rather than prescription. but will be ineffective in more competitive and turbulent environments. 1991). Instead.Readings 2 The importance of having a structure that will facilitate the achievement of organisational objectives has long been recognised. Reproduced by kind permission of the authors. and one can easily be led to believe that there must be an ideal structure for every organisation. it is difficult to identify the single ideal structure. This type of ‘bureaucratic’ organisation with clearly defined roles. because of the complexity of an organisation’s situation. 15(2).

The structure allows for specialisation within the functional areas and facilitates coordination among its members. For such reasons. in reality. the divisional structure and the matrix structure. As Wilson (1986) explained: . . the organisation’s and industry’s stage of development. individuals become insulated in their functional groups and fail to see or understand the other functions’ jobs. The structure’s effectiveness is based on this division of labour. It is based on a group’s function or dedicated activities in an organisation. However.114 STRATEGY. and the latest organisational fad. technology and environment. STRUCTURE AND CULTURE READINGS P5 Table 2. type of industry. the divisional structure is appealing to some organisations. 2005. size. This can lead to co-ordination problems. operating efficiencies afforded by grouping specialists together in functional areas with a traditional chain of command becomes a barrier to cross-function communication and co-ordination needed effectively to implement multiple product – multiple marketing strategies. such as sales and marketing. . Smaller to medium-sized organisations with limited product ranges tend to favour the functional structure. The three most common generic organisational structures are the functional structure. finance and operations.1 Common wisdom prescriptions for organisational structures BASED ON Strategy: Single business Vertical by-products Related business Linked business Size: Small Medium Large Level of technology: Low High Business environment: Stable Dynamic Industry type: Container Plastic Food Stage of organisational development: Birth Growth Maturity Decline Death Organisational fad 1970s 1990s STRUCTURE Functional Functional Divisional Mixed structures Simple Functional Divisional Centralised Decentralised Mechanistic Organic Bureaucracy Decentralised bureaucracy Bureaucracy Entrepreneurial-dominated Functional management Dencentralised into profit or investment centres Structural surgery Dismemberment of structure Matrix Clustering organisation’s strategy.1 . Functional structure The functional structure is a direct descendant of the bureaucratic structure. A detailed account of the common wisdom relating these factors to organisational structure is given in Table 1.

The quest for the ideal organisation structure should be seen as a means of increasing business efficiency and effectiveness. This could create difficulties in co-ordinating the different units. The evolutionary nature of the corporate structure at Procter & Gamble illustrates this thesis. 1979). The functional departments are used to gain economies of specialisation while the project teams focus on particular products or markets. it can also be a combination of product and market groupings. However. However. a large multinational manufacturer of consumer goods. The units are guided by a corporate-level strategy which outlines the desired results. The relationship between functional and project managers was not clearly specified by rules and procedures. has a rich history of structural change. These matrix structures can be temporary or permanent. After focusing solely on soap for the first century. P&G began to expand by vertically integrating back into manufacturing its own chemical processing and seed crushing in the 1930s. Within the units a functional form is often adopted. P&G modified its basic product offering (adding flaked soap and beauty soap). they are relatively autonomous. hence the dual chain of command. and provides a useful illustration of the periodic decisions which senior management must make with respect to organisational structure. This led to lowered morale and job satisfaction. Hence. creating power struggles and a blurred sense of accountability. corporate efficiency decreases as many functions are duplicated in different units.1 . The matrix structure The matrix structure was the structure of the 1970s (Miller. Initially. but overall. this structure is much more flexible and adaptable to market and product needs than the functional structure. Although the matrix structure is usually a combination of functional and divisional groupings. it is difficult to generate an overall corporate identity as each unit is preoccupied with creating and maintaining its own. The company is divided into separate units based on different products or markets. The company breaks up its operations into manageable units or little companies (Pascale. From these humble beginnings the company has diversified in various directions. This decreased both efficiency and effectiveness. as with the functional structure. then later it diversified its product line (into 2005. 1990) which then operate under a mechanistic structure. However. STRUCTURE AND CULTURE Divisional structure This structure is used as companies become larger and begin to diversify their product line. depending on the needs of the organisation. such as research and development facilities. Organising Procter & Gamble As the previous descriptions suggest. Each employee in the matrix structure is responsible to one functional department and one project manager. many companies soon found the structure to be more burdensome than helpful (Peters. It was seen as a way of bridging the advantages of the functional and divisional structures. Procter & Gamble (P&G). The units may share some corporate resources. each structure has its own merits and drawbacks. the staff in a matrix structure were unclear as to where their loyalties should lie – whether it is with their functional department or the project team. Also. The matrix structure is based on a dual chain of command.INTEGRATED MANAGEMENT 115 STRATEGY. It was this flexibility that made the matrix structure very popular initially. 1986). Also. P&G was founded in 1837 as a soap company. The biggest problem was the level of ambiguity inherent in the structure. the units are free to realise corporate-level objectives of their own choosing.

The functional departments were again specialists in their own right.116 STRATEGY. it is sometimes difficult to strike the right balance. P&G’s decision-making power was skewed towards top management (Griffin and Ebert. strategy and structure are shaped by its initial focus in the industry chain. since all the businesses are built on the same ‘centre of gravity’ (Galbraith. All of P&G’s strategic decisions are made at the top in the Cincinnati Head Office. making them less responsive to environmental changes. Between 1930 and 1970. reports to an associate advertising manager and interacts with functional departments such as research and development. the company guides its employees through a myriad of specialised jobs within a particular function. 76). toothpaste). six such stages may be identified: raw materials. downstream companies adopt a divisional structure based on vertical integration. food. Also. the brand managers were product specialists. market distributor. originating as a market distributor (Galbraith. product producer. Although some control is necessary at the top to co-ordinate the organisation’s activities and overall strategy. 1991).1 . and finance. Because of their diversity and need to be more flexible and adaptable than traditional manufacturing companies. This is a common problem in organisations which have 2005. 1982). Product management should be viewed as an addition to functional management. They practised a decentralised bureaucracy. completely familiar and up-to-date with their products’ external and internal environments. 1989. Products are looked after by brand managers. 1991). According to some sources. too much centralisation would be detrimental to its responsiveness. there are product-function matrices. they were totally dedicated to co-ordinating the product’s marketing mix and the product’s profitability. Competitive advantages and co-ordinating liabilities The matrix structure may be seen as one of P&G’s competitive advantages. It can be hypothesised that a company’s culture. complementing the brand managers’ duties. They are also customer-oriented and concerned with tailoring their products to meet target market needs. p. primary manufacturing. The matrices are in the second phase of development whereby cross-functional task forces are permanent but there is not yet any dual authority. Upstream and downstream companies are fundamentally different. 1993). have multiple products and multiple markets. while the operational ones are made by the brand managers (The Economist. shampoos. Within P&G’s divisional structure. geographic location and industry. The brand manager oversees a brand group. The first three stages belong to the upstream segment which adds value by reducing raw materials into simpler components. Each brand manager is responsible for a particular brand and its extensions. STRUCTURE AND CULTURE READINGS P5 cleaners. Even this latest move may be termed ‘related’ diversification. Downstream companies. like P&G. Part of the problem was that brand managers were given the responsibility but not necessarily the authority to manage their products. The use of brand managers fits P&G’s culture. P&G has been classified as a downstream company. while the last three stages belong to the downstream segment which add value by adding extras to the product to meet specific customer needs. beverage and pharmaceutical businesses. Although this ‘loose-tight’ fit is seen as a mark of an ‘excellent’ or successful company (Peters and Waterman. Centre of gravity refers to a company’s starting supply stage in an industry chain. this structure proved to be very successful for the organisation. and retailer. For a manufacturing firm. Within the academy culture. More recently. fabrication. it has achieved industry diversification. entering the paper. which may be termed an Academy – a term coined by Jeffrey Sonnenfeld.

with no formal authority over their resources or other functional departments. P&G had moved from being a ‘salesman’ to that of a ‘drifter’. 76) comment that it ‘virtually always ceases to be innovative. The units robbed customers from one another rather than trying to gain market share from other companies’ brands. Therefore a decentralised and minimum top-down control structure would seem more suitable. p. . P&G’s chairman. The primary responsibility of this integrating manager was to allow for greater co-ordination and quicker decision making. It also regularly degenerates into anarchy and rapidly becomes bureaucratic and non-creative’. This creates conflict and frustration. However. it must also be responsive to its highly competitive market. However. not their own company’s brands. P&G encouraged this competition. the brand managers were not encouraged by the company to co-operate among themselves. often after just a short time. Initially. Integrating the organisation Another contributing factor to the loss of market share was the harsh competition between the individual units. believing it would motivate the managers to be more responsive to customer needs. Initially the strategic planners at P&G did nothing in response to this cannibalisation. However. leading to cannibalisation. Fierce competition ensued between the individual units. However. requiring it to be both innovative and responsive to the environment.INTEGRATED MANAGEMENT 117 STRATEGY. The distribution channels had greater bargaining power and customers were less brand-loyal. Brand managers occupy staff-like positions. Companies with structures like those of P&G often became inflexible and unresponsive. P&G’s strategic orientation is that of prospector and a market-leader. Instead. He added what were called category managers. Also the environment had changed considerably. . a more decentralised structure. It may be for this reason that P&G lost considerable market share in the 1970s. Therefore. Peters and Waterman (1982. John Smale. The units became insulated. that they were to compete directly against other P&G brands. or a decentralised bureaucracy. P&G’s structure no longer matched its growth strategy. lessening the brand managers’ effectiveness in quickly reacting to product problems. who were responsible for co-ordinating the efforts of brand managers in a particular product line and sharpening its strategic focus. This may have sent brand managers the wrong message. Although P&G. making its structure less effective. bureaucratic system more efficient. One of the first things he did was to add a category management system. The category managers were delegated enough authority to make decisions previously done at higher levels.1 . which mass-produced standardised consumer goods. P&G’s decline may also be discussed in terms of Miller’s (1986) Four Trajectories of Decline. the individual brands were thought to be positioned differently in consumers’ minds so that the brand managers would compete against other companies’ brands. was better suited to their situation. becoming oppressively bureaucratic and losing its ability to be innovative. STRUCTURE AND CULTURE brand managers. Brand managers were not to compete head-on with one another. in the mid-1980s. there was some difficulty between category managers and brand managers as category managers focused on profit while brand managers focused on market share. restructured the corporation. P&G overcame this by defining work processes and designing new work systems. 2005. focusing more on their own goals than on the larger corporate goals. may find a mechanistic. The problem is inherent to the matrix structure.

one for his region. not necessarily ideal. creating more serious problems in the future. it is premature to declare this structure as ideal. In reality. So fewer layers separate the top of the (management) pyramid from the market. they felt they could maintain sufficient control and coordination over them. However. Much of it can be attributed to its restructuring. P&G has had to venture into unfamiliar and underdeveloped markets. clustering would require P&G to change its corporate culture to be less paternalistic. It fitted P&G’s culture. P&G experienced some difficulties in responding to international demands (Peters. each promising to be better than the previous ones. 1991). To what and how are the questions strategists must answer. STRUCTURE AND CULTURE READINGS P5 P&G extended this new matrix structure to its international divisions. The French manager now reports both to his country manager and to a category manager who looks after a basket of related brands. Upper levels of management are lean and there is little hierarchical control. Clustering evolved from the matrix structure but is believed to allow for more creativity. In theory. they may be ideal. supported its strategy and was flexible enough to adapt to the environment. Organisations wanting to survive and thrive in the 1990s must change. In P&G’s European structure: Each local manager wears two hats – one for his product. The category manager is a mini-profit centre. The cluster is much looser and more autonomous than the matrix structure. 1989. A cluster is a group of 30 to 50 people of different specialities who work together on a semi-permanent basis.1 . the matrix structure can reduce organisational flexibility and generate conflicts between managers. including environmental factors 2005. However. and productivity than the former structure (Mills. P&G’s turn-around success in the short term has been promising. it may be reluctant to endorse the change. Management would have to be shown that by being top-heavy.118 STRATEGY. Also. he felt the matrix structure would allow P&G to be more responsive to international market trends. communication. giving them more autonomy and flexibility. Culture is very difficult to change and requires strong commitment from upper management. It also increased individual units’ communication across different countries. the company would decline. this may be temporary. However. (The Economist. The clustering structure may allow it to be even more flexible and adaptable. Where do we go from here? The latest structural fad is clustering. The bottom line Over the years a steady stream of structural models or frameworks have been conceived. P&G tried to reduce some of the matrix structure’s difficulties by making the category managers directly responsible for the profitability of their products. In the 1970s and 1980s. P&G’s management believed that this current structure was suitable. Its new structure alleviated the problem. 77). However. With globalisation. The demise of the hierarchical structure has been heralded (Peters. 1987). Within each cluster are smaller work teams of five to seven people. There are other strategies it could have chosen which may have been still better. As clustering removes a lot of the power from upper management. this structure would help P&G be more responsive to the global market. reporting to one of P&G’s central division managers. innovation. However. an organisation faces an array of dynamic variables. by having the category managers report to P&G’s central division managers. p. 1992). helping it achieve its strategy better. Would this structure suit P&G? In terms of its environment. Although P&G’s vice-chairman recognised the problems associated with their staff reporting to two managers.

Reprinted with permission. Figure 1 indicates the relationship between drivers. The Financial Times. shorter product life cycles and greater variability of demand. shorter product life-cycles and greater variability in demand have precipitated changes in organisational structures. This was associated with hierarchy. Discussion questions    Why is it difficult to find and maintain an ideal organisation structure? What is the category management system and why was it introduced? Why would it be difficult to introduce clustering in P&G? In the next article. These structural forms allow a more rapid and flexible response to changes in the market place. This then is a structure that may be termed suitable rather than ideal.1 . planned career structures and large.INTEGRATED MANAGEMENT 119 STRATEGY. However. organisations commonly settle for structures which satisfy their current needs (satisfices) and provides a reasonable degree of flexibility for its future. Instead. 2 Full Text # 2001 Financial Times Information Ltd. growth in international markets based on mass production was accompanied by an expansion in the number of multinationals and led to the near-ubiquitous multi-divisional form (the ‘‘M-Form’’). which. joint ventures and alliances. However. Information may not be copied or redistributed. outsourcing. Network structures John Storey. the unwieldy nature of the multinationals became apparent. it would be cynical to dismiss all restructuring in this way. The large hierarchical multi-divisional structures of the midtwentieth century have been forced to give way to smaller enterprises. Why should this be so? Does it reflect economic reality or a superficial rearranging of the corporate furniture? Might these reforms simply be part of a cyclical fluctuation between centralisation and decentralisation? Do new organisational forms require different HR capabilities? Certainly. John Storey looks at how the fragmentation of markets. STRUCTURE AND CULTURE beyond its control. Storey then considers the impact of these structural changes on the management of human resources. This makes it difficult to find and especially maintain an ideal structure. Since the 1990s. p. with fragmenting markets. 2005. outsourcing. Even a casual observer of international business cannot help but notice that organisations seem forever in the process of reorganising. centralised personnel departments overseeing expatriates and home-based staff. 19 November. other forms have been ascendant. The theorised ‘ideal structure’ acts as a guide. in turn. One explanation is that there is no ‘‘best’’ structure. Economic and industrial changes have produced patterns of organisational restructuring. characterised by smaller enterprises. in many cases reform disguises routine behaviour: some changes may simply correct the deficiencies of the last attempt at restructuring. These require new capabilities among managers. joint ventures and alliances. after the second world war. capabilities and HR management. require changes in people management. When internal boundaries become network relationships Structured companies are dissolving into fluid networks of alliances. forms. 2001. (SURVEY – MASTERING PEOPLE MANAGEMENT) John Storey. to help business managers to interpret their situation and to give them direction in organising their resources. John Storey contends that managers have much to learn about coping with these changes. For example.

fragmented units. likewise. companies no longer rely on hierarchy and command as prime sources of direction and control. is being reversed. These smaller. the ‘strategic business unit’ became the focus in divisionalised corporations. New methods of working and organising require new capabilities. This period also saw dramatic growth in new enterprises funded by venture capital. Further. there is also an interactive relationship between these forms and capability requirements. STRUCTURE AND CULTURE READINGS P5 While the drivers create ‘‘needs’’ for forms and capabilities. when measured by employee numbers. In the 1980s and 1990s.1 . They have responded to turbulence and fluctuations in demand by empowering employees. It is worth reviewing the main elements in Figure 1. Product life cycles are shorter and customers require more options during the life cycle of a product.120 STRATEGY. were severely limited in their access to resources and capabilities. global markets have become more fragmented and turbulent. as each component becomes the prime responsibility of a relatively independent unit or set of units. The value chain is becoming more clearly desegregated. Forms Over the past 15 years. the size of companies and workplaces has decreased. which characterised the corporations of the early to middle part of the 20th century. These reforms are explained as attempts to make bureaucracies more responsive to the public’s needs. establishing cross-functional teams and taskforces. Drivers As mentioned. Meanwhile. technological change and the number of components in a product or service mean that few single businesses can fulfil customer demands on their own. Nonetheless. 2005. The trend towards vertical integration. Similar challenges face the public sector: many governments have outsourced public services to the private sector and reformed organisations that remain. they create pressure for new organisational forms and capabilities. while more responsive. the capabilities required by the external drivers constitute a pressure for experimenting with forms. outsourcing non-core functions and focusing on processes rather than product lines.

an Open University Business School survey of 2. including joint ventures and strategic alliances. new kinds of relationship between organisations are flourishing. In addition. since managers increasingly work across boundaries. is behaviour to be influenced? Conducting relationships through the supply chain or through a network makes hierarchical control impractical. the ability to make sense of. which is where appropriate human resource management policies can help. but they do need to be able to access and use them effectively. Companies in network relationships expect to share information. they must be good at managing relationships across unit boundaries.700 companies in the UK revealed that 61 per cent were sharing knowledge with suppliers and 41 per cent were sharing it ‘with other organisations in the network’. and by whom. Examples of these trends can be found in many countries though it is important not to assume that large organisations have abandoned traditional structural characteristics.1 . Employees may fear that re-engineering will result in job losses and extensive change. relationships are more complex than market transactions. For example. 74 per cent reported an increase in horizontal linkages such asjoint purchasing. 2005. Separate units need ‘absorptive capacity’ – that is. The survey also found extensive evidence of increased outsourcing (65 per cent) and formation of strategic alliances (65 per cent rise). competition is less between individual organisations and more between entire supply chains. employees must become skilled managers of contracts. They expect to reduce risk by collaborating across the supply chain and thereby find mutually profitable solutions. culture and power – and these are often crucial in affecting behaviour. Beyond formal contractual skills. Organisations may no longer need to own certain resources. Standard operating procedures and long reporting lines are no longer suitable. HR policies As companies become more dependent on each other. their ability to manage a complex supply chain is at a premium. Forms are still evolving. knowledge and learning. Responsiveness and flexibility are required. expectations. Reinforcing these findings. and the communication and sharing of knowledge. Trust becomes important. information from partner organisations. Equally. to be distributed around the company. Where outsourcing has been established.INTEGRATED MANAGEMENT 121 STRATEGY. What are the people management implications? How. STRUCTURE AND CULTURE In consequence. The archetypal form is now the network organisation or ‘N-Form’. sharing R&D across units and sharing marketing information. the shift from a product-based mode to a process-based one can provoke anxiety and resistance. norms. These developments were found to have implications for HR policies. or access to knowledge. Organisational structures are only one part of design. Rapid changes in customer demand require knowledge. Some organisational reforms may present problems for HR. Other aspects include measurement. But managing these new forms requires new capabilities. and internalise. managing relationships becomes critical. They must be able to assimilate the knowledge they require and use it. Capabilities Companies need to be more agile and flexible under these conditions. characterised by relationships that extend beyond market or contractual obligations. In a survey of 458 companies in Europe by academic Andrew Pettigrew and colleagues. Under these circumstances.

‘the quality of an organisation’s coaching is a key determinant of whether it succeeds or fails. In the modern company. The new psychological contract offers initiative in exchange for opportunity. STRUCTURE AND CULTURE READINGS P5 Maintaining commitment to the job and organisation may be difficult during and after such reforms. part market-based and part relational. claims Michael Hammer. responsibility and decision-making power. is managing these processes. 2005. roles may be enlarged as well as changed. Once lost. Innovation may be jeopardised if there is heavy reliance on strictly delineated services from external suppliers – even if service-level agreements are maintained and monitored. neither the traditional notion of win-lose competition nor hierarchical command is appropriate. no departmental manager and virtually no hierarchy. Part of a company’s know-how resides in being able to bring relevant people together and enabling them to work together. HR managers have a major task to identify. and how can they maintain and develop relationships across traditional boundaries? Should outsourced workers on the premises be included in communications. re-engineering consultants sometimes recommend that ‘workers’ become ‘process performers’. As more companies learn how to create the art of processes. Narrow job descriptions usually have to be abandoned. there is no organisation chart. there is substantial evidence of extensive take-up of these forms. In the long run. Network organisations often grow out of the fact that resources and knowledge are difficult to locate within the boundaries of a single organisation. ‘contracts’ (formal and tacit) are hybrid. While some of Hammer’s claims exaggerate actual practice. different countries present different legal regulations. These typically require that prevailing terms and conditions of employment are preserved. the advantage will belong to those with an institutionalised capacity for staffing these processes with well-selected and well-trained people.122 STRATEGY. retain and develop such resources. In some cases. For example. invited to meetings and expected to be involved in commitment-building initiatives? Where activities are outsourced. If managed skilfully. For staff transferred from the original employer to a service provider. certain activities and their associated capabilities may be difficult to recover. Under the network form. and employees given more autonomy.1 . Managers face important HR challenges as a result of these changes: how should they manage people who are not direct employees. he maintains. a task may be outsourced and the employees nominally transferred for day-to-day management purposes. this offers opportunities as well as threats. The management writer Peter Drucker argues that companies will eventually outsource all functions that do not have a career ladder up to senior management. Roles and lines of accountability were relatively clear. the process-focused organisation will use cross-functional teams and taskforces. In traditional organisations there were relatively clear boundaries between insiders and outsiders. that is to say. a critical issue is the potential loss of expertise. In the boundaryless organisation there are huge uncertainties surrounding who. In this environment. Outsourcing has other implications for HR. If this is so.’ In place of hierarchy. Process design alone is not enough. while retaining their employment contract with the original employer. He contends that corporations once built like ‘pyramids’ will become more like ‘tents’ and managers will take responsibility for their own career development by exploring their competencies and making good deficiencies. There is danger of ‘hollowing-out’ the organisation. These capabilities are more likely to be found distributed across a network of different businesses and contractors. if anyone. There is a major challenge for HR here if the organisation becomes dependent on consultants and contractors.

downsised HR departments are often uncertain about intervening in operational units. There is a paradoxical relationship between HRM as a relatively new movement and changing organisational forms. This seems to present an opportunity. Following a period when many aspects of HR such as selection. development and career management have been devolved. When activities such as recruitment. where outlines of goals. production. Further. In addition. the question is difficult enough. plans and problems can be explained and discussed. commitment building and other tenets of HRM. mergers and joint ventures have been traced to a neglect of HR issues. Information must be shared to allow managers to solve problems jointly. and respond more quickly to. In the past. Co-ordination of a value chain or network means employees need to be familiar with customer and supplier needs and preferences. Design. When it comes to a supply chain or a network. 2005. it is evident that HR specialists have a great deal yet to learn. A shift to small-scale enterprises interacting through short-term market transactions does not create a favourable climate for the exercise of HRM. companies may collaborate by giving taskforces specific aims across the value chain. On the other hand. large corporations favoured notions of ‘the human resource’. Workers can also be sent on customer and supplier field trips or seconded to these organisations. Conclusions New organisational forms require new ways of influencing behaviour. induction. flexibility and variability – may be inimical to HRM policies and procedures. many of the challenges thrown up by the new forms put a premium on strategic thinking about human resources. Yet. relocation and payroll have been outsourced. personnel departments grew to a size where systems were uniformly applied across corporations. for example. A more ambitious step is to integrate information systems. the HRM movement sought to overturn assumptions about its role in this environment. Many failures in strategic alliances. The HR function To what extent do the new forms represent a threat or an opportunity for HR? In some respects these developments allow HR to adopt a more strategic role. GE Appliances collaborates with major suppliers. changes in demand and production schedules. Old-fashioned personnel management flourished in bureaucratic structures with rigid job boundaries and detailed negotiations over minor contract variations. other routine processes are being handled via corporate intranets.1 . One way in which this can be done is to invite suppliers and customers to meetings with employees. Contractual relationships are less conducive to investment in training. empowered and agile business units. The traditional reliance on consistent procedures and rules seems misplaced when corporations are increasingly fashioned around devolved. For example. Some establish call centres to deal with enquiries.INTEGRATED MANAGEMENT 123 STRATEGY. STRUCTURE AND CULTURE Instead of developing plans and strategies independently. new forms – with an emphasis on devolved authority. career planning. scheduling and sales data can be co-ordinated. The classic age of the personnel department was that of the procedure manual. planning in the network organisation has to be co-ordinated and shared with other participants in the network. Together they plan for. Monthly sales data are shared with 25 suppliers. what role will remain for the HR specialist? In a single organisation. Companies already face this dilemma.

1 . Child. London: Sage. D. A learning outcome in the ‘evaluating strategic options’ section of the Business Strategy syllabus is ‘evaluate and recommend appropriate changes in organisational structure’.. These agreements can be regarded as transactions. London: Thomson Learning. 13. Drucker. New York. as in a shop. STRUCTURE AND CULTURE READINGS P5 Further reading Chandler. 1. (1996) Beyond Re-engineering. So. (1993) Post Capitalist Society. but a contract must be established to ensure effective and efficient performance associated with the agreement or deal struck. there may be costs associated with negotiations resulting from changes or unforeseen events. providing that the terms of the agreement have been met. is a simultaneous contract rather than a sequential one. A payment made on receipt of the goods or services. Boston. Apart from the costs of ordering. 2005. Contracts permit transactions to proceed in a sequential manner. people and activities inside or outside the organisation’. Storey. (2000) The Innovating Organisation. International Journal of Human Resource Management. and Ferlie. Establishing contracts for performance results in costs for both parties. knowledge. Pettigrew. or incremental variations to the contract. J. The Economics of Strategy (D Besanko. March 2002. W. (ed. Storey. M. markets operate where there are buyers and sellers. Hammer.M. (1986) ‘The evolution of modern global competition’. Explain the implications of outsourcing and the development of network organisations for human resource management.124 STRATEGY. (1998) Strategies of Co-operation: Managing Alliances. P. a contract protects the parties to the agreement. Taylor. and Fowle. A. J.) Competition in Global Industries. J. (ed. P.) (2001) Human Resource Management: A Critical Text. MA: Harvard Business School Press.D. Discussion questions   Describe the key drivers of organisational restructuring in recent years. D Dranove and M Shanley. ‘Flexible employment contracts and their implications for product and process innovation’. and Faulkner. Networks and Joint Ventures. In any transaction.’ Such arm’s-length transactions are regulated by contract law and this results in costs being incurred by the litigants. Oxford: Oxford University Press. the contract protects the supplier in case the buyer refuses to pay. CIMA Insider. Quintas. P. A supplier provides goods or services and the purchaser then has a contractual obligation to pay. London: HarperCollins. New York: HarperCollins. what is the connection – what is transactions cost theory? The root of the theory is vested in market economics. There are costs associated with making a transaction and acting under its terms.E. M. The syllabus content refers to ‘the basics of transaction cost analysis and the implications for the location of assets. in Porter. In simple terms. A.M. 2000) defines an arm’s-length market transaction as ‘one in which autonomous parties exchange goods or services with no formal agreement that the relationship will continue into the future. Give and take Richard Smith. John Wiley. A market price is produced for a good or a service. E..

Network organisations are defined in Management Accounting Business Strategy (A Sims and R Smith.1 . At the bidding stage. The Economics of Strategy states that suppliers view this situation as a long-term arrangement and may reduce quotes to win a contract. the contracts will be incomplete. Traditional organisational hierarchies must be broken down to establish network organisations. CIMA Publications. or the need to incur further cost to change its use. or intangible. If the contracting parties do not foresee all circumstances and contingencies. The buyer. Networking relies on market forces to meet customer demands. Examples of such organisations include local government authorities and UK hospitals. Network organisations can involve contract staffing. R-SAs may therefore relate to the buyer of goods and services as well as the supplier. The Economic Institutions of Capitalism (O Williamson. R-SAs may be in various forms:       Site specificity: location of assets close together to cut transport and stock costs. This will improve long-term shareholder value. STRUCTURE AND CULTURE Contract law reduces unforeseen problems. 2005. Dedicated assets: acquiring an asset in order to complete the contract. Free Press. It explains that such an asset cannot be employed on another transaction without some opportunity cost resulting from loss of productivity from the R-SA. Physical asset specificity: changing the construction or engineering of an asset to tailor it to the transaction. The Economics of Strategy states that a relationship-specific asset (R-SA) is ‘an investment made to support a given transaction’. These may be tangible. New York. the buyer may share information with other suppliers in case the contract breaks down. Human asset specificity: teaching employees skills to carry out the contract.INTEGRATED MANAGEMENT 125 STRATEGY. It would be interesting to know whether the development of transactions cost analysis has influenced this process. Brand name capital specificity: when a brand is associated with a specific family of products or services. airlines need to book landing slots at an airport. Transactions cost analysis requires firms to assess supply costs and consider how they can improve shareholder value. they may use unforeseen events as a reason to increase the price. may agree. This is nothing new. it should be performing the activity. outsourcing and relying on external organisations for referred business. Many higher education establishments employ teachers on part-time contracts. 1985) explains how a relationship changes from a ‘bidding situation’ where buyers select from a number of suppliers to a ‘small numbers’ bargaining situation after investment by one or both parties in R-SA as a ‘fundamental transformation’. Incomplete contracts lead to transactions costs. Temporal specificity: providing services at a specific time – for example. such as handling a new piece of equipment. This causes the supplier and the buyer to be suspicious of each other after the contract is established and may mean that they miss opportunities to improve efficiency. Therefore an R-SA ties the parties together. such as the international goods courier DHL. Subsequently. using particular capital assests. but it does not prevent them. airlines and railway. such as intellectual property. reluctant to incur the costs of changing supplier. If another supplier is cheaper than the in-house source at an adequate standard. 2001) as ‘those which rely on relationships with other organisations to carry out their work’. Such organisations may rely on others for core as well as ancillary services.

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3 In a professional bureaucracy.Revision Questions 2 Section A type questions Question 1.1 Important contingency factors in the design of organisational structures include (A) (B) (C) (D) Rate of change in the market Size of organisation Strategy of organisation All of the above Question 1. co-ordination is achieved by (A) (B) (C) (D) Standardisation of skills Standardisation of work processes Direct supervision Standardisation of outputs Question 1. The senior management of the company is considering changing the structure to accommodate this increase.4 Which of the following organisational structures violates the ‘unity of command’ principle as stated by Henry Fayol? (A) Functional (B) Matrix 127 2005.2 A business organisation with a functional structure has just increased its product lines from two to five.1 . Which of the following structural types would be most appropriate? (A) (B) (C) (D) Network Divisional Global Virtual Question 1.

research and development results in what kind of organisational structure? (A) (B) (C) (D) Network Functional Product Matrix Section B type questions Question 2 Handy lists four distinct cultural types:     power culture role culture task culture person culture How would you categorise the following organisations? Briefly explain your choice in each case: (a) a multinational insurance company (2 marks) (b) an advertising agency (2 marks) (c) a medium-sized computer company. The business divisions enjoy a fair degree of autonomy but are expected to operate within the overall umbrella of the company’s corporate strategy. catering and cleaning. maintenance. Each of its eight divisions produces a different product and serves a different market. 2005. The academic staff teach a wide range of courses and conduct research. The ancillary staff provide other necessary services such as security. owner-managed. selling highly tailored bespoke software to a diverse range of clients (2 marks) (d) a small ‘general store’ (corner shop) (2 marks) (e) a large national driving school (2 marks) (Total marks = 10) Question 3 X is a small. STRUCTURE AND CULTURE REVISION QUESTIONS P5 (C) Geographical (D) Divisional Question 1.1 . Z is a large manufacturing company which produces a wide range of products and employs 30 000 people in its various business divisions. marketing. The administrative staff ensure that university policies and procedures are observed and provide administrative support for teaching and research functions. Y is a university with 800 academic. 200 administrative and 100 ancillary staff. family restaurant business which employs 10 people.5 The division of an organisation into various departments such as purchasing. finance.128 STRATEGY. manufacturing.

In return for a half-stake in the business. 2005. Justify your choice in each case. John Goodworth acted as managing director taking responsibility for all aspects of the company’s activities from R&D through production to sales and marketing. compact disc players and several other applications. identify the most appropriate configuration for the X business. and Z Company. Y University. Ron Smart had the title of nonexecutive director but played little active part in the business. The manufacturer of some parts required specialised equipment so this work was subcontracted mainly to local firms but sometimes to companies elsewhere in the country but increasingly also to countries in the Far East. two events triggered the start of a period of sustained growth for BS Ltd. His wife Annie acted as secretary and general administrator.1 . The early success resulted from his development of a system for controlling gambling machines.INTEGRATED MANAGEMENT 129 STRATEGY. The bulk of the initial capital to start the business came from Ron Smart. From the beginning. STRUCTURE AND CULTURE Requirement Using Mintzberg’s typology of organisational configurations. The day-to-day financial transactions of the company were dealt with by a young geography graduate but the company hired a professional accountant for a few days each month to provide advice and to prepare the company’s accounts. The second was the securing of a contract with the Ministry of Defence to develop a control system for a new range of military hardware. The extra work brought in over the 3 years from 1997 required an increase in personnel from a mere twelve to nearly a hundred by the year 2000. The expansion also brought with it several management problems. The first of these was the receipt of a substantial order from South Africa for gambling machines incorporating BS’s electronic control system. The first of these events required a substantial expansion of the firm’s manufacturing capacity while the second led to the recruitment of 15 engineers to help in the development of the control electronics for the new military equipment. Smart provided financial backing for the development of a working prototype for the gambling machine control system and its subsequent manufacture. BS Ltd manufactured only the electronic control system and some of the equipment required for interfacing with the variety of appliances or machines for which they were designed. The rest of the employees were employed in manufacturing except for a young engineer who worked closely with John Goodworth on the development of control systems for a wider range of applications. His particular interest is in the field of microelectronic control systems and he has successfully applied his knowledge to a range of products from washing machines and compact disc players to the programming of military hardware. In 1997. dryers. Goodworth and Smart exhibited their product at a trade exhibition and secured enough orders to begin manufacturing with confidence. The newly recruited engineers made progress on the military hardware systems and developed control systems for programming washing machines. (10 marks) Section C type questions Question 4 The Boffin shop (BS) Ltd is the creation of a brilliant electronics engineer by the name of John Goodworth.

STRUCTURE AND CULTURE REVISION QUESTIONS P5 Requirements (a) Describe the term ‘organisation structure’ and explain how a well-designed structure can assist in the efficient operation of an organisation. (10 marks) (Total marks = 25) 2005. Interpret the six categories of asset specificity by explaining what they mean. physical asset specificity. brand name capital specificity and temporal specificity. Supporters of resource-based views of strategy contend that a firm’s sustainable competitive advantage is generated from its possession of unique assets that cannot be easily irritated by other firms. It has further been suggested that asset specificity falls into six categories: site specificity. (9 marks) (Total marks = 25) Question 5 ‘‘Asset specificity’’ is a term used within Transactions Cost Theory. Requirements (a) Briefly explain what transaction costs are and how resource-based views of strategy can be used for competitive advantage. It has been defined as the extent to which particular assets are only of use in one specific range of operations.1 . Network organisations have been defined as those which are reliant on relationships with other organisations to carry out their work. (15 marks) (b) Discuss whether analysis of transactions cost has any influence on the increase in numbers of network organisations.130 STRATEGY. (12 marks) (b) Describe an entrepreneurial organisation structure. dedicated asset specificity. (4 marks) (c) Describe the type of organisational structure you would recommend for BS following its recent process of growth and provide reasons for your choice. These unique assets have been called core competencies or distinctive capabilities. human asset specificity.

 inability to justify reasons for clarification. The bureaucratic nature of the insurance company stems from its size. renewals and claims implies a complex framework of written rules and regulations.2 (B) Solution 1.Solutions to Revision Questions Section A solutions Solution 1. 131 2005.  inability to identify the main cultures in the five different situations.3 (A) Solution 1.4 (B) Solution 1. the sheer bulk of processing required for new insurance.1 .5 (B) Section B solutions Solution 2 Common errors  Running out of time by spending too much on one sub-part. (a) The multinational insurance company is likely to have a role culture.1 (D) 2 Solution 1.

the cars will be bought in bulk (leading to operational savings). the operating core will be fairly large. The support staff in the way of administrative and ancillary staff. with most decision-making by the owner. however.e.e. a characteristic described by Mintzberg as a pull to centralise. With only 10 employees. Such division of labour as exists will probably be in terms of that between kitchen staff involved in food preparation and washing dishes and those waiting on table. but the relatively stable demand for teaching and research enables the application of standardised skills. (d) The ‘corner shop’ is likely to be managed by its owner (owner-entrepreneurial control). and advertising will be centrally controlled. who will probably be involved in all managerial activities. In addition to the owner manager. (e) The large national driving school is a good example of role culture. Most of the 10 employees can be regarded as part of the operating core. which is vital in meeting the various needs of different customers.132 STRATEGY. (c) The computer company designs and sells software according to the highly specific requirements of each customer. the prevailing culture is ‘task culture’). staff are trained in a standardised way. This project orientation allows flexibility. The culture may be intense and aggressive. will be fairly large to provide support to the academic staff. The key feature of this kind of configuration is that it has to rely on trained professionals in order to attain its objectives. little of the behaviour in the organisation will be formalised. Because the academics in Y University work independently. STRUCTURE AND CULTURE SOLUTIONS TO REVISION QUESTIONS P5 (b) The advertising agency is a good example of ‘person culture’. but the middle line will be relatively small.1 . The complexity of the task requires reliance on trained professionals. Solution 3 The configuration that would best describe X Company in Mintzberg’s terms is the ‘simple structure’ because it is a small organisation with an owner/manager who can be regarded as constituting the strategic apex. there may be one or two employees who occupy what Mintzberg calls the middle line such as the chef and the supervisor of the table waiting staff. The business will therefore have a power culture. with very little in the way of the techno-structure or support staff. the agency could be described as a task culture. The professional bureaucracy arises in circumstances in which the environment is stable. whereby obedience to particular accounts (i. There is little need for a large techno-structure since standardisation occurs as a result of training that takes place outside the organisation. yet complex. clients) would take precedence over rules or procedures. with office politics being an important cultural constituent. The most likely configuration for Y University will be the ‘professional bureaucracy’ because the tasks of teaching and research that characterise the core tasks of the University rely on a body of trained professionals to undertake them. Because ownership and management are combined. This gives the professionals an unusual degree of power and so a common problem for professional bureaucracies like Y University is how to ensure control of the professionals who constitute the operating core of this kind of organisation. there is likely to be limited formalisation. Driving lessons are standardised. Thus the overriding cultural influence is that of commitment to task (i. Alternatively. Individuals will typically be striving to achieve their personal ambitions. He is also likely to wish to retain control over decisionmaking given that it is a family business. 2005.

Though the case scenario gives us limited information it looks as if this occurred in BS before the expansion of 1997. This enables specialisation to take place so that individuals and departments can become efficient by their concentration on particular tasks. specialisation is enabled by a division of labour into eight different divisions each charged with producing a different product or set of products for a particular market. although John Goodworth acted as MD for the company as a whole.1 . We are told that. in other words the division of labour. This division of labour necessarily requires coordination of activities and so the structure also contains mechanisms such as liaison committees for ensuring this takes place. It is common to see organisation structure depicted in an organisation chart. Organisations are dynamic entities containing people with their own motives and agendas for achieving personal objectives. (b) An entrepreneurial structure is sometimes described as not having a structure at all. It is a framework that facilitates processes such as communication. In this case. Section C solutions Solution 4 (a) The term ‘organisation structure’ is defined as the established pattern of relationships within an organisation including those between job roles. This is a useful picture of the bare bones of the hierarchy and reporting relationships but such charts cannot of course capture the complexity of the relationships within the structure. Relationships tend to be informal and there tends be an absence of rules and procedures. sections and departments. In the early development of an organisation it is common for the founder of the firm to make all the decisions and to have every employee directly answerable to the owner-manager. because it has probably found that the easiest way to cope with producing a number of different products aimed at different markets is best achieved by a degree of specialisation. STRUCTURE AND CULTURE The most likely configuration for Z Company will be the ‘divisional structure’.INTEGRATED MANAGEMENT 133 STRATEGY. as the organisation structure may not in fact reflect the true nature of actual power and reporting relationships. leadership and decision-making. Thus it is not unusual to find those individuals or groups exercising power in a way that is not set out on any company organisation chart. This is because the owners or managers like John and Annie Goodworth can deal with most issues on a face-to-face basis. (c) The most common form of organisational structure adopted when an organisation starts to outgrow the ability of the owner-manager to cope with the growing number of employees and issues facing him/her is the functional structure. Organisational structure also reflects the way in which work is divided up. It is also necessary to observe that what is often set out in company documents. Annie was taking responsibility for much of the general administration and that some semblance of a finance/account department was emerging as were separate R&D and manufacturing departments. 2005. Particularly important to ensure direction and coordination is the existence of hierarchy in the structure so that those occupying superior positions have the authority and power to see that all activities are directed at ensuring the fulfilment of the organisation’s objectives.

The fact that the control systems produced have been for markets as diverse as the Ministry of Defence. and contractual arrangements may be used by each to protect their position. 3 Human asset specificity is associated with very specialist knowledge or skills such as that possessed by surgeons or an employee who has particular knowledge of a specialist process. Resource-based views of strategy take the view that unique assets which cannot be easily replicated by other firms can act as a defence. the firm itself. 6 Temporal specificity is concerned with providing a specialist product or service at a specific time as might be employed by a television broadcaster. 2 Physical asset specificity is concerned with identifying particular physical assets or possessions with particular attributes such as valuable mineral deposits or natural ingredients with particular healing qualities. 2005. that is those which cover more than the normal opportunity cost of capital. suggests the need for specialisation to cope with the very different demands of these diverse markets. such costs may include drafting legal contracts and monitoring supply and quality. In respect of an external supply. development of product-based expertise. the manufacturers of gambling machines and the manufacturers of washing machines and compact disc players. Such unique assets may enable a firm to achieve supernormal profits. clearer strategic focus and fewer co-ordination problems. Solution 5 Requirement (a) Transactions Cost Analysis is concerned with more than just unit costs of products or services. Transaction costs come about between stages in a production or supply process and it may be both internal to. internal costs of quality control and human resource management may be included as transaction costs. It is difficult to say without further information but it does appear that BS is now reaching a point where a divisional structure may be more appropriate. Even a simple divisional structure with three divisions serving the Ministry of Defence. locating a goods distribution organisation close to a motorway network. 5 Brand name capital specificity concentrates a brand name to one family of products or services such as might be employed by a food manufacturer. the manufacturers of gambling machines and miscellaneous control systems may be enough. and external from. Similarly. such as bridges or dedicated buildings. The advantages of such a division would include clear responsibility based on profit centres. type of engine or air travel service provider.1 . STRUCTURE AND CULTURE SOLUTIONS TO REVISION QUESTIONS P5 The growth following the events of 1997 have led to a proliferation of products and a growth in business. Such costs exist because all parties want to have protection against loss. The six categories of asset specificity may be interpreted as follows: 1 Site specificity relates to the assets which are connected to a particular geographical position.134 STRATEGY. for example. 4 Dedicated asset specificity relates to an asset which was built for a single purpose or application. They may be viewed in Porter’s terms as a defence barrier allowing the firm to reduce threats and exploit opportunities within a highly competitive environment. It is also concerned with the costs of control specifically relating to the delivery of a product or provision of a service.

This is a constant concern of organisations which may have been exacerbated by the traditional form of absorption costing. They are concerned with more than just outsourcing as they look to other organisations to supply core products as well as ancillary services. This aims to increase shareholder value by reducing organisational costs. ancillary service provision and often pay more than the going market rate in order to retain key staff. a broadcaster might employ human asset specificity in terms of a presenter delivering the broadcast at a specific time (temporal specificity) from a purpose-built studio (dedicated asset specificity). they have not necessarily operated in the best interests of shareholders. Although such organisations have been able. Many organisations do carry out their own branding. for example.  Advances in information technology have led to a reduction in transaction costs. Many organisations have entered long-term relationships with suppliers and customers resulting in much higher degrees of trust and collaboration for mutual benefit. but this may be based on false assumptions regarding in-house costs because of arbitrary and sometimes absurd apportionments of fixed overheads. training.  The traditional economic theory of a hierarchical organisation as provided by classical organisational theorists has become outdated. to provide management with high degrees of control. Activity based costing has done much to identify true overhead costs associated with specific products and services. This approach seems to be at odds with the theory of networking as described. Electronic developments have in themselves led to greater awareness of choice and outsourcing. Oliver Williamson stated that the reduction of transaction costs occurs by vertical integration resulting in organisations becoming more divisionalised and complex. There are many examples of such organisations. possibly a monppoly supplier is no longer as prominent as it once was. 2005.INTEGRATED MANAGEMENT 135 STRATEGY. particularly in respect of leisure services and supply of produce such as flowers being delivered to domestic households through a worldwide network. The perception of the need to rely on a single source of supply. in fact. The reasons for the diversity existing may be as a result of:  Firms underestimating the cost of internal control to provide goods and services inhouse. These have not necessarily had increasing shareholder value as the main driver. 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.1 . many firms believe that the provision of a good or service by an outside contractor may be ‘‘more expensive’’. In fact. large hierarchical organisations have often developed as a result of agency theory and managers building their own empires. Such organisations may have. been operating inefficiently. Essentially. then let it do so. Requirement (b) Network organisations establish relationships with other organisations to supply goods and services. securing their own positions and creating power domains.  The development of trust between contracting partners have also led to greater outsourcing. but they survive because of their sheer size and market power. in general. STRUCTURE AND CULTURE Some of these categories may be employed together by the same provider. Networking is reliant on market forces to provide goods and services in order to meet customer demands.

1 .136 STRATEGY. All employees within an organisation have customers whether they are internal or external. It has caused them to look in more detail at how well they meet their shareholder requirements. but firms must be wary of losing their core competencies by other network firms recruiting key staff. This. Thus. Some staff. The increasing development of network organisations is clear. has led them to take note of market forces in delivering their product or service in a cheaper manner. but it is a natural response by a firm to protect its position. may lead to reduced overall efficiency. STRUCTURE AND CULTURE SOLUTIONS TO REVISION QUESTIONS P5 Transaction Cost Analysis has forced firms to look more seriously at their own supply costs. for example. in itself. This. are placed on restrictive long-term contracts to protect the firm. in turn. both internal and external. Transactions Cost Analysis firmly embraces the concept of continual improvement. in turn. 2005. it can be argued that Transaction Cost Analysis has to some extent influenced the increase in the number of network organisations. may be facilitated by networks of contracts. This.

1 Trends in the general management and structure of organisations The selection and interpretation of trends in the general management and structure of organisations varies from author to author but an examination of a number of accounts provides us with the following general picture. 3. evaluate competitive situations and apply this knowledge to the organisation.1. with the effect that competition becomes ever fiercer. has been eliminated or at least reduced by such technical developments as the internet and jet-propelled aircraft. spur the development of global markets by advertising the 137 2005. the liberalisation of trade and the deregulation and privatisation of industries and developments in the technology of communication and transportation. Geographical space.1 Changes in the business environment Most commentaries on such trends commence with observations about changes in the business environment. Such developments it is argued have helped to produce a global market. it is claimed. 3. Technological developments in the mass media. particularly in satellite television. These developments mean that companies are able to compete more easily anywhere in the world. explain the importance of business ethics and corporate governance to the organisation and its stakeholders.Contemporary Thinking on Strategy 3 L EARNING O UTCOMES After completing this chapter you should be able to: " " " discuss concepts in contemporary thinking on strategic management.1 . These include the drive by multinational companies for new markets as domestic markets become saturated. Changes in this environment are seen as the result of a number of developments.

The links between these interdependent organisations are made much easier with the development of electronic mail and allow communication and coordination not achievable in the past. companies have been forced to change the way they manage and operate their businesses and the way they structure their organisations. rigid. tall. The rest of the employees in the so-called flexible firm. have opportunities for promotion and a fair degree of security. Increasing competition it is argued requires organisations to be more flexible so that they can be more responsive to changes in the market place. Domestic organisations long ago found that it could be to their advantage to form collaborative relationships with suppliers and buyers but with the globalisation of markets the need for international strategic alliances has also increased. more task-orientated organic organisations has been achieved to some extent by downsising. fitter. Such networks. so it will suffice here to introduce and to outline the more important of these. organisations need to be flatter. Removal of protectionism and deregulation have eased access to foreign markets and again made for increases in competition between domestic producers and foreign suppliers. in the sense that an organisation with a corporate centre does not exist. 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. Such firms are said to be flexible because they are able to flex their workforce in a number of ways. market and distribute goods and services. hierarchical forms of organisation to flatter. the flexible firm is regarded as consisting of a core of key employees who possess the scarce skills and competences considered critical for the organisation’s survival. Numerically they find it easy to reduce or increase their workforce in 2005. One of the most frequently mentioned changes concerns developments in the structure of organisations. These changes are discussed in Chapter 2. Also covered in Chapter 2 is the shift towards ‘network’ forms of organisation. In summary. delayering and outsourcing. The need for a rapid response to changes in competitor offerings and/or consumer tastes has led theorists to propose the notion of the ‘flexible firm’. less bureaucratic and more organic in the way they operate than in past more settled times. Access to markets can be greatly facilitated by developing an alliance with a local partner who is familiar with the market that a company wishes to enter. This image of a better life generates a desire for ever-more consumer goods. consist of a number of partner organisations that collaborate with each other to produce. sometimes called ‘virtual organisations’. leaner. The economic rationale for such developments therefore has to do with access to markets. often referred to as ‘peripheral workers’ enjoy none of these benefits. The kinds of changes that are taking place in organisations and in their management are elaborated upon in the later sections of the Study System. are well paid. less chance of promotion and paid lower wages than the core employees. The competitive forces (discussed later in this chapter) are also seen as influencing the way people are managed in organisations.1 . The organisation is ‘virtual’. In particular. The increase in the number of these networks has been greatly facilitated by developments in communication technology. These individuals have high status. Instead the ‘organisation’ as a set of cooperative linkages between partner companies operates in many ways as if it had an independent existence. with the sharing of knowledge and expertise and with economies of scale and scope. They are often temporary or part-time workers with limited skills.138 CONTEMPORARY THINKING ON STRATEGY STUDY MATERIAL P5 lifestyle of people in the more affluent countries. The shift from mechanistic. and with rising affluence comes increasing demand.

or the exploitation of economies of scale. improvements in the technology of transportation and communication are allowing firms to reconfigure their value chains so as to gain greater value from the use of scarce resources. By the 1990s. Large corporations locate their manufacturing plants where labour and other costs are lowest and locate their headquarters. Recognition that differences in the history.1. There is also a perception that smaller organisations can be more focused on customer needs. While a large organisation should be able to exist with a relatively simple management structure. The idea of the global corporation entails the notion that production is for the global market. many strategists were beginning to question the logic of large conglomerate organisations. functionally they have a core of skilled talent that can adapt to new task demands. This was achieved by merger or acquisition. One means of gaining low unit costs derives from economies of scale. and large numbers of managers. temporally they can adapt by flexing the working hours of their employees to meet peaks and troughs in demand and they are financially flexible in the way they reward the workforce by using performance-related payment systems that enables wage costs to be related to output. This organisational form which seems more an aspiration than an achieved form seeks to reconcile the objective of operating globally to produce goods and services of a good standard at low cost with that of seeking to customise its product to meet the differing needs of customers in different countries at the same time.1 .1. 3. local organisations. Add to this the inevitable costs of control and compliance. with organisations often acquiring new subsidiaries at a rate of several each year.2 International structures The globalisation of markets has also contributed to the emergence of the global corporation. such as time-consuming reporting procedures and the need to integrate information systems. infrastructure and living standards of different countries and regions produces differences in requirements and tastes has led to the idea of the ‘transnational corporation’. the reality is often greater complexity in the organisation structure. The arguments for acquisition often centre around the concept of ‘synergy’ – that the whole organisation has a greater value than the sum of its parts. the other derives from producing in low-cost locations. and more responsive to the 2005. The advantages and disadvantages of this method of managing people are elaborated upon in this chapter. marketing and other functions in those parts of the world that enable their activities to be conducted most efficiently and effectively. the fewer synergies are available to it. Such synergies can arise from the sharing of resources or skills.3 Mergers and de-mergers Much of the growth of global corporations was achieved by consolidating smaller. culture. Organisations that are structured and operated on these lines are often called global corporations – especially if they operate in a large number of different countries. research and development. 3. and the cost of being part of a large organisation might outweigh any synergies. The more diverse the mix of business within an organisation. Such global companies seek to gain competitive advantage by producing large volumes of standardised products at low cost.INTEGRATED MANAGEMENT 139 CONTEMPORARY THINKING ON STRATEGY response to changes in market demand. Expressed rather more technically. for example. A simple example of the latter is the increase in purchasing power of a large organisation: Buying ‘in bulk’ raises the opportunity to demand greater levels of discount from suppliers.

2. The development of new organisational structures: these network-form organisations feature loose and fluid workgroups and the breakdown of permanent structures. Contract-based flexibility: job contracts will be less closely defined in terms of the tasks and duties of the permanent employee. Numerical flexibility: the numbers of employees can be increased and reduced with the volume of demand for their services. Atkinson (1984) identifies the implications of this for human resources as the requirement for three forms of flexibility: 1. The need to be adaptive: through being able to respond quickly to the need for change in highly turbulent business conditions. Functional flexibility: employees can respond quickly to changes tasks through multi-skilling.2 Implications of flexibility for employment Armstrong (1992) outlines six sets of implications: 1. for example. Financial flexibility: the ability of pay levels to reflect the external costs of labour and also the financial position of the business.2.1 The flexible firm A recurring theme in ‘new management’ and in strategy is the need for the organisation to be flexible. 2. There may be a decline in the set minimum periods of work. another large pharmaceutical company. including some that were very large and high profile. staff employed either on a casual basis or to complete designated projects. 3.2 New patterns of employment 3. Xeneca has since merged with Astra. Similarly.2.140 CONTEMPORARY THINKING ON STRATEGY STUDY MATERIAL P5 changing business environment. the investors valued Vodaphone more highly as an independent business than as part of Racal. the nature of competitors. Once again. An example of this is ICI which demerged into ICI (chemicals) and Xeneca (pharmaceuticals). which included ‘stick to the knitting’ – find a ‘core competence’ and build a business model around it. 4. The impacts of new technologies: which have changed the products demanded. suggesting that investors agreed that the demerger added value. through controversial 2005.1 . the ways of working and the possibilities for organisational structures. 3. All of the above factors led to an increase in demergers during the 1980s and 1990s. Vodaphone (a telecommunications company) was demerged from the Racal group (an electronics conglomerate) as the board of Racal recognised that the risks and market conditions of Vodaphone did not ‘fit’ with the remainder of the business. 2. that is. Strategists were also familiar with the ‘excellence principles’ of Peters and Waterman. The need to be competitive: through better use of assets. There will also be a significant increase in the use of contract staff. The market capital of the two demerged organisations exceeded the pre-demerger value of ICI. 3. This has arisen for four reasons: 1. Time-based flexibility: staff will be required to work longer during peak times but may also receive the opportunity to vary their times of work from week to week. 3.

profit-related bonus schemes and merit-based payment schemes. Peripheral workers. Extending the time spent each day to obtain a lower number of days per week at work.4 Homeworking Information systems facilitate homeworking by recreating the information resources available in the office at remote locations: (a) Provision of access to corporate database and communications through internet (or extranet) connections. Pay-based flexibility: payments should vary with the economic circumstances of the employer.2. (c) Job sharing. 2. Organisation-based flexibility: this means making greater use of part-time. (b) E-mail. 3. Gives firm access to high-calibre staff who do not wish to commit to full-time employment or who cannot be afforded full-time.3 Flexible time arrangements (a) Flexible working hours (FWH).2. 3. systems analysts. (c) Video calls and videoconferencing.2. (d) Mobile telephones. 2005. Low-skilled and non-company-specific jobs. Staff are poorly paid and the firm makes little effort to invest in them. 5. Effectively this means reducing the fixed element of the payroll through greater use of contract staff. payment by results. ‘Flexi-time’ contracts for a given number of hours with a ‘bandwidth’ of hours during the day. zero-time contracts in which the staff member is not promised any hours of employment at all. (b) Compressed hours. Conduct the key. 6. Two or more persons share between them the demands of a full-time job. company-specific activities. Usually full-time salaried staff of middle and senior management grade. for example.INTEGRATED MANAGEMENT 141 CONTEMPORARY THINKING ON STRATEGY 3. Core workers. Job-based flexibility (or functional flexibility): staff can move from task to task and location to location as the requirements of the business demand. Some firms operate hot-desks where staff do not have desks of their own but rather are assigned desks of standard design on each visit to the office.1 . 4. contract and casual staff (the non-core) to supplement the permanent staff (the core).5 Core and periphery workers Many firms seek to cut fixed costs and increase flexibility by having several levels of workers: 1. 3. delivery drivers. Skill-based flexibility: to switch jobs staff must also be multi-skilled and willing to undertake greater responsibility for what they do. This presumes that staff are prepared to accept changing journey times and geographical locations and tends to lead to pressure for standard conditions of work across the firm.

Many are created by contracting-out: a process where the firm trims headcounts and then re-employs them as consultants on more flexible terms. 3. External workers. 3. From The Age of Unreason by Charles Handy published by Random House Business Books. Potential breakdown in management control. Not all staff will have this role. These are workers with the knowledge and. In terms of a resource-based view of strategy the knowledge worker is the crucial strategic asset that must be retained and utilised to gain competitive advantage. temporary and self-employed staff with the general skills needed. (b) Allow them sufficient scope without losing control. through high pay. By working together. groups are able to develop patterns of work and shared knowledge.7 Implications for management accounting Flexible human resource management strategies pose the following issues for management accounting: 1. intellectual skills.g.1). not treated as costs to be minimised and reduced. The knowledge worker is effectively an asset to the firm. maintained and improved (e. These can be more effective than rules and procedures in ensuring the attainment of work goals.6 The knowledge worker One aspect of the flexible organisation is the importance of knowledge workers. This inevitably cuts across the rigid departmental demarcations of conventional business organisations.2. whereas the conventional view of staff is to see them as an expense. Assets should be retained.1 . A major form of control in an organisation is the collective skill and social culture of the staff cohort. The knowledge worker needs the space to be creative and develop networks with other knowledge workers. Used by permission of The Random House Group Limited 3.2. The knowledge worker poses a number of interesting problems for management control: (a) Treat them as assets not expenses.1 Shamrock organisation. to make the business operate and innovate. They will inevitably be the core and indispensable staff in Handy’s shamrock organisation. Contractors. more importantly. They are also more 2005. Handy (1989) calls this the shamrock organisation (after the shape of the Irish plant) (Figure 3. This raises the problem of deciding which staff shall be treated as knowledge workers and which not.142 CONTEMPORARY THINKING ON STRATEGY STUDY MATERIAL P5 Figure 3. (c) Decide which staff are knowledge workers. training and careful manmanagement).

particularly in situations of crisis. The development of the factory system enabled trades unions to organise in the workplace and to influence the political system. paid by piecework and lacked any job security. Conventional budgetary control treats human resources as a cost which is divided into two classes: direct labour which is used in proportion to production and indirect and overhead labour which is effectively a fixed cost. from Marx. Greater participation in the business decision process. the nineteenth century factory owner’s possession of the means of production gave them the upper hand in any negotiations with individual workers. these teams will need such information to monitor their performance in order to control it. Moreover. Management accountants will be subject to the same human resource strategies. The latter were frequently hired by the day. been voiced about the flexible organisation due to its apparent similarity to the exploitative practices of nineteenth century capitalism. 3. Replacing permanent teams with an everchanging group of workers will lose this form of clan control.2. Others depended on ‘outwork’ arrangements. Flexible labour arrangements will also make it difficult to assign labour costs to particular departments or products because labour will be switching between them. It may need to be replaced by additional layers of bureaucratic control. 5. Where the rewards to staff are related to business performance and justified by concepts of participation. Revision to budgetary control systems.INTEGRATED MANAGEMENT 143 CONTEMPORARY THINKING ON STRATEGY 2. 4. Need for additional performance-measurement systems. Concern has.8 A critical perspective on flexible organisations The discussion so far has suggested that flexible organisations are both inevitable and ultimately desirable. Factory owners (capitalists) were forced by commercial competition and falling prices to exploit workers further to extract their customary profit (or surplus value). An ‘iron law’ ensured that wages rarely rose above subsistence level. Consequently the management accounting function may be staffed by a mixture of permanent and contract staff. such as sewing and lace-making at home. flexible. Furthermore the costs of the labour will be harder to forecast because pay rates will differ according to market conditions and whether it is permanent or contract staff that are being used. More flexible human resource strategies will lead to less labour being a fixed cost.1 . Together. It was noted above that staff flexibility often requires the institution of payment by results systems. Changes in the employment of management accountants. however. This may result in management accounting information being directed to and used by staff below the level of senior management. To operate these fairly there will need to be performance-measurement systems that can track the outputs of individual teams. Key functions may be outsourced and the individual accountant may need to exhibit greater flexibility in their skills and the tasks they undertake. 2005. According to a writer of the times (Marx 1954. it will inevitably follow that these staff will seek to influence the performance of the business and monitor the decisions of senior management. 1867). old-age benefits and even safe conditions of work. 3. these led to legal protections for workers and the creation of the welfare state. Many of the theories that lead to a belief in the flexible organisation have the effect of justifying a return to the systems of the nineteenth century.

Porter. of the industry. Some industries have inherently high profits due to the weakness of these forces. Reprinted with the permission of The Free Press. defined as long-run return on invested capital.3 Competition – Porter’s five forces model This is likely to be examined quite frequently. so management will wish to forecast how the forces may change through time. Others. To identify what competitive strategy is needed.144 CONTEMPORARY THINKING ON STRATEGY STUDY MATERIAL P5 Figure 3. it will need to deal with these forces better than they. bargaining power of suppliers. For a firm already in an industry and thinking of expanding capacity.2 Using the model The Porter model can be used in several ways: 1. they may decide to sell up and leave the industry now if they perceive the forces are strengthening. To influence whether to invest more in an industry. where the collective force is strong. 3. will exhibit low returns on investment. The present strength of the forces will be evident in present profits. Presumably they would only wish to enter the ones where the forces are weak and potential returns high. Alternatively.3.3. To help management decide whether to enter a particular industry. 3. 1998 by The Free Press. The model provides a way of establishing the factors driving profitability in the industry. 2. from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. All rights reserved.1 Basic argument of the model Porter argues that competition in an industry is determined by its basic underlying economic structure – the five competitive forces (Figure 3. 3. For an individual firm to improve its profitability above that of its peers. bargaining power of buyers. # 1980. it is important to know whether the investment costs will be recouped.2 Porter’s five forces model.2):      rivalry among existing firms. a division of Simon & Schuster Adult Publishing Group. These factors affect all the firms in the industry. If successful it will enjoy a stronger 2005. 3. threat of substitute products or services. threat of new entrants.1 . The collective strength of these forces determines the profit potential.

If they are high enough they will eliminate any price advantage the new rival may have. or experience effects 2005. A new entrant will reduce profits in the industry by: (a) Reducing prices either as an entry strategy or as a consequence of increased industry capacity. 3. (c) Reducing economies of scale available to incumbents by forcing them to produce at lower volumes due to loss of market share. termination costs. and possibly higher cost. Both will reduce potential profits. 2. 3. These are one-off costs for a customer to switch to the new rival. Porter suggests that the strength of the threat of market entry depends on the availability of barriers to entry against the entrant. (b) differentiation. These are: 1. Examples include connection charges. and expensive and time consuming to emulate them. Access to distribution channels.3 Threat of entry Entrants can affect the profitability of the industry in two ways: 1. (b) Maintenance of high capital barriers through deliberate investment in product or production technologies or in continuous promotion or research and development. Both increase shareholder wealth. Few would-be entrants will want to take the risk. These make the established firm have lower costs. unique product features or established good relations with customers it will be hard for an entrant to rival these by a price reduction. greater promotion or enhanced distribution. Porter argues this will be particularly effective if the investment is needed in dedicated capital assets with no alternative use or in promotion. the effect will be to exclude many potential entrants. If large financial resources will be needed by a rival to enter. Switching costs. Product differentiation. This gives them the ability to charge prices below the unit costs of new entrants and hence render them unprofitable. New rivals would be unlikely to gain sufficient scale to recover these investments.INTEGRATED MANAGEMENT 145 CONTEMPORARY THINKING ON STRATEGY share price and may survive in the industry longer. cheap resources. Porter classifies these successful strategies into two groups: (a) cost leadership. rivals. Incumbent firms will enjoy lower unit costs due to spreading their fixed costs across a larger output and through the ability to drive better bargains with their suppliers. 5. In view of the danger of the above. Economies of scale. If established firms have strong brands. Through the impact of actual entry. firms may take action to forestall entry by new rivals by: (a) Charging an entry-deterring price which is so low as to make the market unattractive to new. 4. special service equipment and operator training costs.1 . If the established firms are vertically integrated this leaves the entrant needing either to bear the costs of setting up its own distribution or depending on its rivals for its sales. 2. By forcing firms to follow pre-emptive strategies to stop them entering. 6. (b) Increasing costs of participation of incumbents through forcing product quality improvements. There is also the danger that a price war may break out as rivals try to recover share or push out the new rival.3. Capital requirements. Cost advantages independent of scale. Examples are unique low-cost technologies.

sometimes called operating gearing. recognise that it is not in their interest to cut prices.3. Low differentiation or switching costs mean that price competition will gain customers and so be commonplace. 2. They put an upper limit on the prices the industry can charge without experiencing large-scale loss of sales to the substitute. while others are more relaxed. For example.1 . 3. 7.5 Pressure from substitute products Substitute products are ones that satisfy the same need despite being technically dissimilar. They can force expensive product or service improvements on the industry. Where growth is slow the participants will be forced to compete against one another to increase their sales volumes.4 Rivalry among existing competitors Some industries feature cut-throat competition. If there are fewer firms of similar size they will tend to. Because variable costs are low. Ultimately. Some national governments jealously guard their domestic industries by forbidding imports or using legal and bureaucratic techniques to stall import competition. 4. the existence of dedicated assets with no other value or the stigma of failure. 2005. They can include the costs of redundancies and cancelled leases and contracts. 5. Substitutes affect industry profitability in several ways: 1. they try to restrict industry competition. they can render the industry technologically obsolete. Government policy. The latter have the higher profitability. Also. Low industry growth rate. High exit barriers. e-mail and postal services. high storage costs are often the cause of a sudden dumping of stocks on to the market.146 CONTEMPORARY THINKING ON STRATEGY STUDY MATERIAL P5 (a fall in cost gained from having longer experience in the industry. 3. Therefore. Examples include aeroplanes and trains. Porter suggests that the factors determining competition are: 1. such that any individual firm may suddenly reduce price and trigger a price war. Similarly. usually influenced by cumulative production volume). put pressure on firms to increase volumes to take up capacity. 2. Often this is because the firms are using the market as a springboard into other lines of business. High fixed or storage costs. this is usually accomplished by cutting prices. 6. The former. formally or informally. This is where a lot depends on being successful in the market. 3. High strategic stakes. These are economic or strategic factors making exit from unprofitable industries expensive. This is common in transportation and telecommunications. Numerous rivals.3. some governments prefer to allow existing firms to grow large to give them the economies of scale that they will need to compete in a global market. and soft drinks and ice cream. 3. banks may fight for a share of the current (chequing) account or mortgage markets in order to provide a customer base for their insurance and investment products.

Power will be increased by: 1. Chocolate is the country’s no. The extent of switching costs. by enabling a reduction in ‘search costs’. the supplier will be able to raise prices. This effect is enhanced if the industry’s supplies constitute a large proportion of the buyer’s costs. 3. Products are undifferentiated. 4. Relative price/performance.3. 3. For example. However.INTEGRATED MANAGEMENT 147 CONTEMPORARY THINKING ON STRATEGY The power of substitutes depends on: 1. they will try to extract low prices for their inputs. since e-mail is both quicker and cheaper! 2. The suppliers have proprietary product differences. Buyer power is concentrated in a few hands. Improvements in information technology have significantly increased this. the ‘Wintel’ domination in personal computers developed because IBM did not insist on exclusive access to Microsoft’s operating systems or Intel’s processors. In this situation. This enables them to trade round the market. 3.a. 2. 2. or the adoption of a new ordering and payments system. a coach is slower than a train. This enables the buyer to focus on price as the important buying criterion.6 Bargaining power of buyers Buyers use their power to trade around the industry participants to gain lower prices and/ or improvements to product or service quality. Their power will be greater if: 1.8 Exercise on confectionery industry The following data relates to the UK confectionery market    Yearly spend is approximately £100 per head of population Overall (slight) growth of 2% p.1 . 5. Buyers are aware of alternative producer prices. For example. 1 impulse buy 2005. This will impact on profitability.3. Supply industry dominated by a few firms. The buyer earns low profits. Low switching costs. In this case the switching costs might include the need to change the final product specification to accept a different input. branded food suppliers rely on this to offset the buyer power of the large grocery chains. Provided that the buying industry does not have similar monopolistic firms.7 Bargaining power of suppliers The main power of suppliers is to raise their prices to the industry and hence take over some of its profits for themselves. 3.3. This denies the industry any alternative markets to sell to if the prices offered by buyers are low. The trade-off is far less clear between e-mail and postal services for simple messages. A coach journey is cheaper than a rail journey that is in turn cheaper than a flight. These unique features of images make it impossible for the industry to buy elsewhere.

2005.a. – major spending on advertising. Growth in light food snacks. sugar subject to EU prices.1 Environmental responsibilities These are concerned with the relationship of the organisation with the natural environment in which it operates. – access to distribution channels: concentrated retail supermarket. – only 30% of confectionery is sold through supermarkets. – there are high exit barriers (capital intensive). – advertising necessary for brand awareness. introduces possibilities: healthier snacks. – experience in production and distribution of major operators. vending machines. competitors are in balance: – there is slow market growth. – cocoa subject to price fluctuation but larger manufacturers can hedge against this by backward integration. 3. Threat of substitutes: moderate/high. Supplier power: moderate – milk. One approach suggested by Bennett and James (1996) lays down six areas in which this might be monitored: 1. particularly chocolate to compete with the leaders. other outlets include petrol stations. – cost advantages independent of size. – competition for shelf space is high. savoury snacks. off-licences.4. Mars 20%.4 An ecological perspective 3. 3. Main barriers to entry: – economies of scale.9 Solution       The threat of entry: low. – there is a threat of backward integration especially with brand only products being introduced BUT. (the leaders jointly spend approaching £100 p.1 . fun fruit packaging. Buyer power: potentially high – as there is a concentration of buyers (the six largest retailers account for 60% of total UK food). Using Porter’s five forces model. therefore inflated but stable..148 CONTEMPORARY THINKING ON STRATEGY STUDY MATERIAL P5   The market is dominated by three major producers who share of 68% of the market (Nestle 20%.). etc. Competitive rivalry is high Substitutes threaten. so the effect is offset a little.3. perform a structural analysis of the industry. Production: primarily concerned with minimising the amount of materials and energy used to generate output. Cadbury 28%) There are many smaller companies operating within the chocolate confectionery and sugar confectionery sectors.

Quality: this anticipates a continuous improvement in the environmental performance of the business.1 Scope of social responsibility Social responsibility can be defined as ‘taking more than just the immediate interests of the shareholders into account when making a business decision’.1 . 2. treatment of waste. 6.5.1 Health and safety Voluntary indicators adopted by the UK chemical industry Fatalities Non-fatal major accidents Diseases Accidents in relation to man hours Amount of ‘special waste’ Discharges of ‘red list’ substances Site-specific data expressed in an ‘environmental index’ Number of transport incidents in relation to million tonne/miles Energy consumption per tonne of product Number of complaints made by public and regulators Environment Distribution Energy Complaints Source: Gray et al. Issues commonly associated with social responsibility include:   environmental pollution from production or consumption of products. Reproduced by permission of ACCA. Any strategies taken to reduce the impact of the firm on its environment will cause the ‘ecoprofit’ to increase and also improve the ‘ecobalance sheet ’. Environmental auditing: focuses on improving relationship with the ecological environment and will cover such things as compliance with legislation. 5.INTEGRATED MANAGEMENT 149 CONTEMPORARY THINKING ON STRATEGY Table 3. to encourage management to avoid causing the environmental damage. It should be noted that often these measures are suggested by the firm’s need to comply with legislation or the directives of regulators: 3. product and process hazard and emissions. At each point.1 shows the voluntary environmental indicators of the UK chemical industry. usually through budgets. Alternatively. 3. 4. Economic: charges environmental costs to any process. the ecological impacts are noted and targets set for reducing them. Table 3. Ecological approach: this can be a life-cycle approach in which the product is traced from the extraction of the raw material through production and consumption of the product till disposal of the final exhausted product. a single site or project can be looked at and its impacts on its immediate locale considered. Therefore targets are constantly amended to achieve better performance. (1993). Accounting: dummy shadow prices are attached to the social costs of projects to create a separate set of accounts showing the environmental consequences of the firm’s activities. standards of factory and product safety. 2005.5 Social responsibility 3. These affect strategy through their inclusion in the investment appraisal and financial reporting process.

3.  refusing to supply particular governments.150 CONTEMPORARY THINKING ON STRATEGY STUDY MATERIAL P5     non-discrimination in employment and marketing practices. the UK Millennium Dome). congestion).5. some writers question whether oil companies can be sustainable enterprises because their core business seems inevitably to lead to damage to the natural environment.  increasing product and plant safety levels.  treating emissions and waste to reduce environmental pollution.g. non-production of socially undesirable goods.  not promoting a socially undesirable good to particular consumer groups (e. These practices may be tolerated at present. Oil companies are aware of this criticism and have responded by developing processes to ‘clean up their act’. This relates to charitable donations by firms to the arts. Essential to being a sustainable enterprise. Examples include:  charging lower prices for products to avoid being accused of exploiting the consumer (e. Other industries which may need to address the issues of sustainability include:  tobacco industry (cigarettes harm quality of life and may be lethal). 2. a non-sustainable enterprise is living on borrowed time and has no longterm future. This money could otherwise be dividend perhaps. The management and staff are paid to run the business not to indulge in social engineering. avoidance of the use of non-renewable resources. 2005. production of non-degradable packaging or products. 4. the argument runs. There are counter-arguments to suggest that social responsibility in business will improve shareholder returns: 1. It is in the interests of shareholders that firms become sustainable if earning are to continue into the future. Shareholder funds may be diverted to socially worthwhile projects. a conflict may be encountered between what furthers the firm’s interests and what satisfies society. May reduce revenues. Firm may incur additional costs. In business decisions. pharmaceutical products).2 Must social responsibility conflict with benefiting shareholders? Deciding to be socially responsible may conflict with shareholders’ interests in several ways: 1.g. Put simply. relief of social need or sponsorship of national projects (e.1 . Management and staff time may be wasted on social projects. Examples of these extra costs include:  paying staff more than the minimum wage set by market forces or legislation to avoid accusations of exploitation. accidents. but must eventually be brought to an end by legislation and financial penalties prompted by the rising tide of public concern about environmental degradation.g.  car industry (pollution. 3. A ‘sustainable enterprise’ is one whose competitive strategy does not fundamentally conflict with the long-term needs and values of society. For example.  costs of monitoring compliance with social responsibility policies. cigarettes or alcohol to the young).

armaments industry (e.INTEGRATED MANAGEMENT 151 CONTEMPORARY THINKING ON STRATEGY 2. Improves relations with governments and other regulatory bodies. Section 3. This will cause their shares to trade at a premium price. on the other hand. A socially responsible firm. Ethical issues in business include:       honesty in advertising of jobs or products.g.  mining and quarrying industry (finite resources. may be able to attract these staff. This argument points to the fact that feelings of ethics and social responsibility are not solely external to the firm. the shareholder. It is not the job of this book to tell you what to believe. fairness in setting pay and working conditions.6 Shareholder wealth and ethics 3. or alternatively that firms should serve the whole society.’ This seems to single out one group of society. the assumption was made that shareholder wealth is the only proper objective of business. This represents a direct rise in shareholder wealth.  brewing and distilling industry (promotes anti-social behaviour and alcoholism). This will harm financial performance. The management and staff of the firm are members of society too and have similar values. destroys habitat. for special attention. Ethical investment funds will be attracted to firms with a good social responsibility score. Let us consider that last statement again: ‘Shareholder wealth is the only proper objective of business.2 discussed whether social responsibility may be a more enlightened way to achieve sustainable competitive performance and hence shareholder wealth. the impact will be to reduce morale and increase staff turnover. Examples include ethical cosmetics.6. landmines are now close to being outlawed worldwide). effects on customer of consuming product.1 . is ultimately a moral judgement which is yours alone. management of closures and redundancies. 5. planning permission or convivial legislation. recycled paper products and ‘fair trade’ coffee. Attracts socially conscious consumers.  3. non-exploitation of countries or peoples. 2005. If business decisions force managers and staff to contradict their private ethics on a daily basis. dealing with oppressive governments. chartered management accountants are involved in decisions like the ones cited above. 4. 3. The consumer will pay a premium price for products they regard as ‘sound’. A good record in social responsibility may help convince the decision-maker to use discretion in the firm’s favour. poor safety record). Let us consider the implications of this further by using an example. Reduces stress on management and staff and permits improved morale. Whether you believe that profit should be king. However. organic foods. Many firms depend on the goodwill of governmental bodies for the granting of production licences. so it is important that you understand the ethical debates over shareholder wealth. Throughout.1 Nature of ethics Ethics is concerned with issues of moral rightness and wrongness of decisions and actions.5. Attracts socially conscious investors.

e. They do not actually remove the problem (‘there’s no such thing as a free lunch’). If management ignore the profit motive or the state tries to intervene in the market mechanism. firms coordinate their activities to meet society’s needs. higher standard of living for all).’ 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. forcing stores to remain in town centres for the benefit of a small number of shoppers would deny the majority a better and cheaper service – this would raise alternative ethical issues about sacrificing the interests of one group of shoppers for another group’s interests. although it is inevitable that there may be some individual losers.6. on the other hand. the rising prices of the remaining store are an essential element if any stores are to remain in the town centre.1 . by being profit motivated. Elderly and poorer shoppers who lack private transport are now without a shop. Perhaps another local shop decides to exploit its monopoly position by raising prices. In a market economy. The search for profit is what incentivises firms to respond to market needs. It seems that pursuing the interests of the shareholder has harmed others. the needs of society are transmitted to firms by price signals emanating from the market.e. Friedman stresses the ethical superiority of profit-seeking behaviour by reference to its consequences (i.2 Example of an ethical issue Imagine 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 profits will be higher.4 Sternberg: shareholder wealth is natural purpose A different pro-shareholder argument is advanced by Elaine Sternberg (1994). A follower of Friedman’s argument would respond to the ethical issues in the store closure example above in several ways:     without a profit motive shoppers might not have any stores at all. Therefore. thereby forcing poorer families to forgo some of the things they need.3 Friedman: profit is the sole objective The economist Milton Friedman (1963) supports the ethical argument in favour of shareholder supremacy with a dictum: ‘The business of business is business. the greater efficiency of the out-of-town store will benefit society generally in the form of lower prices. History has shown the market economy to be superior to other forms of system such as feudalism and socialism in providing the greatest benefits to the greatest number of people. approaches from a perspective of natural justice.6. so imposing a strain on social services or family members. i. firms will produce the best outcomes for society. Disabled persons will need shopping bought for them.152 CONTEMPORARY THINKING ON STRATEGY STUDY MATERIAL P5 3. Can this be morally right? 3. 3. By following these signals. say by laws or taxation. that to do other than maximise shareholder wealth takes 2005. Some will suffer reduced quality of life by having to make a bus journey to the new store. Sternberg. they merely change the identity of the winners and losers.6.

while the problem of disadvantaged shoppers is being addressed by other social organisations (social services. 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. family. For Sternberg. The latter are different because they have other final purposes. attitudes to different social groups. 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. ‘good ethics is good business’ because just and decent behaviour will increase the value of the business to its shareholders. They impose on the business the duties of being a good corporate citizen. enforce commercial contracts and be defended by the rule of law. We understand their nature and their place in society by considering what they do and how they are different from one another. alternative profit-seeking firms) which is a fulfilment of their essential nature. the closure of the store is consistent with the principles of ordinary decency despite being a regrettable necessity. If businesses start to become involved in social responsibility by considering other goals. 3. the shareholders. 2005. including business organisations. The natural order is preserved. Rawls. A follower of Sternberg would view the store closure example very simply. Under this contract it enjoys rights. 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. because in doing so it would forsake repeat business and alienate support. to follow its own selfish interests at the expense of the rest of society.INTEGRATED MANAGEMENT 153 CONTEMPORARY THINKING ON STRATEGY business outside of its proper place in society. A simple version of this argument would proceed as follows:     A business has a social contract with society. 1999). such as to be able to carry on its business uninterrupted. This would destroy its long-term value. say governments. Business organisations are distinguished from others by their pursuit of shareholder wealth.1 . Therefore. Also.g.5 A stakeholder view of business ethics Most arguments against the primacy of shareholder interests in business ethics have their roots in a branch of philosophy called social contract theory (e. they are changing their purposes and invading the domains of charities and government agencies. This social contract does not confer the right to behave entirely selfishly because no rational society would ever agree to allowing one of its members or groups.6. The key principles of business ethics are therefore distributive justice (distributing organisational rewards among people according to the contribution they have made) and ordinary decency (building long-term trust by not resorting to dishonest or coercive means in the short run). trades unions or armies do this. make profits. charities. For example. No other organisation. Business cannot afford to ignore its impacts on customers and other stakeholders however. The precise scope of rights and obligations will change through time according to the prevailing morals in society at large. The store chain is maximising its shareholders’ wealth. Sternberg’s argument can be simplified as follows:      Organisations are social institutions.

Taken to extremes this leads to slavery and oppression. Her argument for the ‘virtue of selfishness’ can be expressed as follows:      The essence of human existence is the need for the individuals to assure their own survival. whether or not it is profitable to do so.1 . The least it should do would be to provide a free bus service to its store. Most of us end up taking a pragmatic view on these issues. and so the followers of Friedman and Sternberg may sometimes have to use corporate funds to make a 2005. which are themselves a form of oppression) is the only social and economic system which enables and rewards pursuit of unbridled self-interest. Rather we are a collection of egoists. However. someone else will. fines or consumer and employee protection legislation). It all depends on your viewpoint. Management should realise that it is not just the future profits that are at issue here. this intrudes on achieving their own self-interest and they are effectively allowing themselves to become subordinate to other people’s needs. the only rational (i. it cannot just walk away. nationalisation. Objectivism would advocate leaving to their fate the people in the store example. 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). 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. to maintain its obligations to its former customers. 3. We know that if we do not do it. We learn to accept that the business decisions we sometimes make are not always easy to square with our highest principles. It demonstrates that management does have an ethical obligation to society. Capitalism (stripped of any benevolent religious belief systems. an influential American novelist and founder of the objectivist school of ethics (Rand.6. Its right to make profits in the past impose on it a duty to be reasonable and responsible now. 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. anti-trust laws. 1989). there are the past profits to remember too. Therefore.154 CONTEMPORARY THINKING ON STRATEGY STUDY MATERIAL P5  Firms that breach this social contract may ultimately have their rights revoked or curtailed (e.7 Implications of ethics for the chartered management accountant Clearly there is no simple solution to business problems once we start bringing ethics into it. this is a last resort and shows that management have done something wrong.6 An egoistical view The stakeholder view would provoke strong reactions from a follower of the late Ayn Rand. 3. The people it is disadvantaging are its past customers with whom it had a moral contract.e. ethical) goal is the pursuit of individual survival through self-interest. Owners of firms are therefore only ethical if they ruthlessly pursue economic self-interest.g. Taking the store closure example.6. If any person shows (or is compelled by law to show) consideration for the interests of others.

M. 2. and Tilley.g. P. ‘Environment-related Performance Measurement in Business’. It is important that we appreciate other people’s viewpoints if we are to conduct business effectively. Others pick up and discard ethical arguments to suit their interests. M. The important messages to bear in mind with ethics are: 1. Human Resource Management: Strategy and Action. 3. morals change through time but not everyone changes with them).  religious fundamentalism is a major factor in the political processes of the United States and Middle East. London: Greenwich University Press. Similarly subscribers to social contract views may be forced to announce redundancies and price rises to ward off a falling share price. It is back to the issues of satisficing we discussed in Chapter 1.  from other types of organisation (e. Not everyone makes the same ethical assumptions that you do. before giving way to the ‘stakeholder society’ of the 1990s. in foreign trading and business relations). United Kingdom and Australia during the 1980s. That different stakeholders may have different expectations of the firm’s behaviour. (1996). Porter’s competitive forces model can be used to analyse the competitive nature of industries.1 . Some just work on gut feel and ‘common sense’ (itself a phrase derived from a particular theory of ethics). London: Kogan Page. What may seem totally wrong to you is acceptable to them and vice versa. References Armstrong. and organisations must react to this. P. Many lie to themselves and others about their ethical justifications for actions.g. I. That moral and ethical debates drive the actions of pressure groups and legislators:  objectivism enjoyed an influence over senior politicians in the United States.INTEGRATED MANAGEMENT 155 CONTEMPORARY THINKING ON STRATEGY donation to charity because ‘it is what’s expected’. (eds). concerns of social responsibility and business ethics also affect the mission and objectives of the firm and may dilute the importance of shareholder wealth as a primary objective. and James. industries are becoming increasingly competitive. businesses dealing with the voluntary or caring services). 3.  of different ages (i.7 Summary This chapter has looked at modern perspectives on the strategy process. The key points to remember are:     organisations are responding to dynamic environments by becoming smaller and more flexible. 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. 2005. (1992). In Baynes. Bennett.e. Ethical debates and fashions are therefore a major force in the firm’s environment. This can be a real problem for managers dealing with people  from other social cultures (e. Contemporary Issues in Performance Measurement.

London: Lawrence and Wishart. Competitive Strategy: Techniques for Analysing Industries and Competitors.E. J. Rand. C. (1989). Chicago: University of Chicago Press. London: Little. London: Business Books. Rawls. (1994). (1963). Vol. M. Signet Books. 2005. The Virtue of Selfishness.1 . Capital. (Original dated 1867. E. The Age of Unreason.156 CONTEMPORARY THINKING ON STRATEGY STUDY MATERIAL P5 Friedman M. Brown. A Theory of Justice (revised edn). (1989). (1999). K. 1. A. Capitalism and Freedom. Just Business: Business Ethics in Action. Marx. Oxford: Oxford University Press.) Porter. Handy. (1954). (1980). New York: The Free Press. Sternberg.

Copyright (c) Tim Hollins 2000. The language of business has become increasingly prevalent in corporate social investments of all companies – ‘business planning’.Readings 3 Social responsibility – the changing business paradigm Tim Hollins. Tim Hollins. ‘measurement and evaluation’ are part and parcel of the language of both social investment managers and their not-for-profit partners. 15 November 2000. For more than a century companies have prided themselves on thinking beyond the bottom line and contributing to society. to get a better understanding of which parts of society. That’s what makes it so exciting. not only by producing the goods and services that society needs. alongside this evolution of corporate citizenship. but the way we practise it is constantly evolving. 157 2005. ‘project management’. 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. have emerged a number of parallel developments. Reproduced by kind permission of the author. gives a personal view of social responsibility in the new century. are benefiting from the company’s economic activity. and formerly Head of Group Social Investment for the Royal Dutch/Shell Group. Typical phrases used at that time were that ‘you can’t have healthy high streets without healthy back-streets’. good for the community and good for the company. and a recognition of it as ‘legitimate enlightened self-interest’. win’ opportunities – good for individuals. In the nineteenth and early twentieth centuries corporate citizenship was more often than not based on the religious or philanthropic principles of a company’s founder. a growing sense of the relationship between ‘community relations’ and corporate reputation led to an increasing professionalisation of corporate citizenship. not-for-profit organisations and communities were – looking for clear and measurable returns. similar to other forms of investment. but also by acting as good corporate citizens. an increasing number of companies are addressing issues of ‘social accountability’ and ‘social auditing’. Environmental management and reporting has made enormous strides forward in the last decade. and which stakeholders.1 . a Corporate Social Responsibility consultant. The Financial Times. win. In the seventies and eighties. and that ‘good community relations offered ‘win. And. ‘leverage’. and a small number are tinkering with notions of ‘economic added-value’. Corporate citizenship is nothing new.

As Sir Mark Moody-Stuart. But. 2005. It is also evident that while many countries and communities are benefiting from international economic development and energy provision. There is also a direct relationship between the rise of energy availability around the world in the 20th century and the enormous increase in food production that has benefited so many. operating in over 140 widely differing countries and cultures. nobody would deny that. but also concern for the impact of change on societies and cultures. At one level. For Shell.158 CONTEMPORARY THINKING ON STRATEGY READINGS P5 Developments in corporate governance and ethics have added to a much wider perception of the totality of corporate social responsibility. enabling individuals and communities to better control and manage their own futures. underlying all development. it means looking for opportunities to add social value. Without detracting from our fundamental business competitiveness. all these challenges are intrinsic to the commitment it has made to contribute to Sustainable Development. But while that is something to be proud of. to look for synergies where we can share good ideas and practice and to partner with others who have common objectives. The challenge for the 21st Century Company is to bring all these developments together. is economic sustainability at a local level. It encompasses not just concern for the environment. to make our contributions go further. 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. to sit alongside (but inextricably interwoven with) economic and environmental performance. it also presents many social and environmental challenges. In the last 18 years Shell companies have contributed over $1 billion to an enormous range of community programmes and causes around the world. about social investment and social accountability into a coherent framework of practice that makes good business sense as well as benefiting society. there are still many for whom opportunities are few and the disparities increasingly great. with suppliers and customers. Here in Shell we are increasingly talking about ‘social performance’ as the allencompassing approach to these various elements. both in the way it is produced and in the way it is used. however essential energy is to development. 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. with communities and public authorities. For an oil and energy Group. the former Chairman of Shell’s Committee of Managing Directors says. It means seeking to bring together our understanding of the different facets of our interaction with society – our interaction with employees and contractors. it is clear there is a direct correlation between access to energy and a country or community’s economic and social development. to contribute our knowledge and our breadth of experience as well. the challenges in this new century are to relate what we contribute in this way to the social issues and opportunities presented by being one of the world’s largest international oil and energy providers. Shell has always been one of the world’s most significant corporate contributors.1 . ‘Building a sustainable future is the single most important challenge facing our society as we enter the 21st century’. and concern to ensure that. It is more than three years since Shell committed itself in its Business Principles to contribute to sustainable development through its operations. this is a hugely complex challenge. to integrate thinking about social and environmental management. as well as to Shell’s own long-term success. 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.

the road ahead should be a fascinating one! Websites: www. Final Accounting. the US attorney-general.shellfoundation.com www. 11 March 2003. and manage their own futures A seperate group social investment programme focuses on youth enterprise – projects that stimulate the entrepreneurship among young people on which healthy and sustainable economic and social development depends. Shell is one among many companies that are tackling the undeniably complex challenges of social performance and sustainable development. Joseph Berardino. p. Reprinted with permission. We have come a long way from the beginnings of corporate citizenship in the nineteenth century. World com and Arthur Anderson at the start of the twenty-first century tend to be attributed to the unethical conduct of particular individuals but the following article suggests that organisational culture played an major role. 13 Full Text # 2003 Financial Times Information Ltd. The e Foundation focusus on two specific 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 communities in developing countries to sustainable energy Sustainable Communities – projects that help disadvantaged communities to improve their livelihoods. Ambition.shell. There is no attempt to piece 2005. The corporate scandals that beset US corporations like Enron. whose decision to press charges over Enron in effect finished off the wounded firm.INTEGRATED MANAGEMENT 159 CONTEMPORARY THINKING ON STRATEGY As part of its response to these challenges. the Andersen partner in charge of the firm’s fateful – and ultimately fatal – relationship with Enron. Who killed Arthur Andersen? Simon London. The Financial Times. a former Harvard Business School professor turned consultant and one-time Andersen employee.1 . and John Ashcroft. When Arthur E. But whodunnit? Suspects include David Duncan. tackles in her new book. Andersen chief executive at the time of its demise. the Shell Group recently set up a new international Shell Foundation to complement and reinforce our business approach to sustainable development and social performance. it was after a long illness. greed and foul play all featured in the demise of what had once been a pillar of the bean-counting community. The book contains no breakthrough confessions. When the accounting firm he founded passed away last year. Information may not be copied or redistributed. It is a question that Barbara Ley Toffler. the cause was anything but natural.org Discussion question Explain how an organisation like the Royal Dutch/Shell Group can maintain its business competitiveness while at the same time meeting its obligations to be socially responsible. Andersen died in January 1947. The aim of the Shell Foundation is to act as a new bridge between the Shell Group and the many groups in civil society who are interested to explore with us how responsible business can become one of the most powerful drivers for genuine sustainable development.

Most Andersen employees remained on the right side of the law. This is especially true in the case of serial offenders. But criminologists long ago recognised the limitations of simply locking up the bad guys without trying to understand the social forces at work.160 CONTEMPORARY THINKING ON STRATEGY READINGS P5 together documents that passed through Andersen’s now-infamous shredders. Three of the five largest bankruptcies ever recorded involved Andersen clients with accounting problems.6bn) in expenses.1 . dissemble and turn a blind eye. and (a personal favourite) ‘It takes a real Jack-Ashcroft to put 28 000 people on the streets’. Prof Schein argues that an organisation’s culture is ‘a pattern of basic assumptions’ that develops as any group strives to deal with internal divisions and external threats. they acquire the status of truths and are taught to new members of the group ‘as the correct way to perceive. was if anything even more shocking than that at Enron. if these assumptions seem to work. the Andersen audit client that filed for bankruptcy last summer after improperly accounting for Dollars 9bn (Pounds 5. The snag is that ‘organisational culture’ remains a slippery concept. or Sunbeam? Nor was it the last. Remember Waste Management International. Many problems within organisations can be understood in terms of clashes between these mindsets. 2005. think and feel’. a business ethics consulting practice – to reach a verdict that is in many ways more disturbing: far from being murdered. the Massachusetts Institute of Technology’s great student of organisational sickness and health. dominated by technical specialists. the protesters had a point. ‘It wasn’t me’. an executive culture. Ms Toffler draws on her unhappy experience at Arthur Andersen in the 1990s – when she was running. combined with the politically motivated determination of the US Justice Department to make an example of the firm. whose priorities revolve around capital and cash flow. But he has also said that most companies have at least three distinct cultures: an operational culture of day-to-day management. in which leadership was absent when it mattered most. This point of view was expressed lucidly last year on T-shirts worn by angry Androids protesting their collective innocence: ‘I worked 0 hours at Enron’. There is no smoking gun. Enron did not cause the downfall of Arthur Andersen. Over time. and an engineering culture. it was the last straw. This conclusion will not please former Androids. the firm seemed hell-bent on committing organisational suicide over a period of many years. Enron was hardly the first corporate scandal in which Arthur Andersen was implicated. The picture she paints is of a culture gone rotten – a firm in which pursuit of fee income had become an end in itself. The kind of cultural malaise portrayed in Final Accounting in no way excuses unethical or criminal actions. What does it mean to say that the culture of any company encourages certain types of behaviour? The most widely accepted definition of ‘culture’ in this context is that offered by Edgar Schein. On one level. the ‘few rotten apples’ defence touted by Andersen apologists seems about as adequate as one of the firm’s audit opinions. Instead. as Arthur Andersen’s notoriously strait-laced employees were known. Their preferred interpretation is that a fundamentally sound business was felled by the wrongdoing of a tiny minority of their colleagues. The only sane conclusion is the one that Ms Toffler draws: there must have been something about the culture of the place that led basically honest people to cut corners. of all things. The financial backsliding at WorldCom. Faced by this record of persistently negligent behaviour.

by Barbara Ley Toffler and Jennifer Reingold. Securities and Exchange Commission. Into this power vacuum stepped Mr Berardino. a self-belief verging on arrogance. published by Broadway Books. very hard to teach its employees the ‘Andersen way’. ‘As an Arthur Andersen manager. ‘you have an obligation to every stakeholder. The firm worked very. Its people would always dress the same.1 . I began my presentation by putting a stakeholder ‘wheel’ up on the blackboard. As Ms Toffler tells it. Very quietly he said: ‘The partner. partner.95. public investor. ‘which one is most important?’ I waited patiently for someone to pipe up. finalised in 2000. no matter where in the world the Arthur Andersen product was consumed. Ecounters with Androids Final Accounting: Ambition. however. government. But if any organisation can be said to have had a single global culture it is Arthur Andersen. continued to condition the firm’s response to adversity. At the centre of the wheel was ‘You. community. I thought. Surely this is as simple-minded as pinning the blame on Mr Duncan or any other individual? Maybe so. What was once a unique strength. family. Ms Toffler draws on a rich store of experiences. identifiable culture that led to its downfall. About 120 managers sat tightly packed in a conference room at the Parker Meridien Hotel. Greed and the Fall of Arthur Andersen. left the auditors chasing hard to make up lost revenue and hastened the departure of powerful figures such as Jim Wadia. All the while. It hired young. anecdotes and corporate lore to show how the ‘pattern of basic assumptions’ changed for the worse. An account of how this happened makes up the backbone of Final Accounting.’ Hmmm. seems to have become twisted. a sense that Arthur Andersen was a cut above the rest. The acrimonious corporate divorce. Dollars 24.’ I continued. But an informed reader might question whether it makes sense to argue that Arthur Andersen had a single. fellow employees. firm. At last one young manager timidly raised his hand. the chief executive who tried and failed to negotiate a billion-dollar payment from the consulting side. even when it was painfully obvious to outsiders that it had nothing to be arrogant about. trained intensively and imposed standards in everything from dress code (hats were mandatory until the late 1960s) to audit processes. ‘OK. Murder or suicide? A few bad apples or a culture that was rotten to the core? The messy truth is that both played a part in the death of this once-great firm. adept at driving the organisation to win new business – and keep big clients happy at all costs – but hardly the last word in visionary leadership. ‘Anyone else?’ Another hand went up: ‘The 2005. managers neglect it their peril. wisely. While corporate culture cannot be arraigned or indicted. This ‘one firm’ notion was meant to ensure a McDonald’s-like quality control.’ I said.’ There was a general nodding of heads. Tensions between the old-line audit practice and the hyper-successful technology consultants at Anderson Consulting – now Accenture – preoccupied management through the 1990s and poisoned relationships within the firm. Arthur Andersen manager’ and at the end of each spoke I listed a different stakeholder: client. lack of effective leadership was a critical factor. act the same and conduct business in the same way. does not try to fight her way through this theoretical thicket. But no one did. This failing was visible even in Mr Berardino’s post-Enron protestations that his firm had done nothing wrong.INTEGRATED MANAGEMENT 161 CONTEMPORARY THINKING ON STRATEGY Ms Toffler.

because the risk of an accident was not recognised. Thousands were killed on the roads in that period. the greater our disquiet becomes. ‘but not as important as the partner. We were deluded. 10 October 1999 # News International Newspapers Limited. The whole culture of the rail companies’ attitude to safety needs exposing. very softly: ‘No. Trust has been replaced by suspicion. Friday’s interim report contained vital clues to the years of neglect that led to the collision on the approach to Paddington between a London-bound express and a commuter service that crossed its path. Finally a timid voice spoke up: ‘I guess I might ask a question. says that the £1 billion-plus price tag ‘isn’t a problem’. The more we learn about the background to the carnage. grumbling about cancellations. Partners don’t want to hear bad news. Railtrack was content for us to be deluded. we discover. Scandalously. The danger signal Comment column.1 . ‘It means I do what my partner asks me to do.’ ‘Anyone disagree?’ Silence. It could hurt my career. So why wasn’t it? Not. It notched up two years without a fatal accident before the Paddington disaster. But if he insisted I do it. They just shifted in their seats and waited in misery for the session to end.’ No one contradicted him. The rail industry had a good record. It will need to investigate a whole catalogue of errors and misjudgements that led up to the crash.’ someone said.162 CONTEMPORARY THINKING ON STRATEGY READINGS P5 partner.’ ‘So what does that mean?’ I asked. Discussion question Using appropriate examples. passengers cross those areas every day.’ And another one: ‘The partner. Rail passengers vented their frustrations. London (1999).11 am last Tuesday. We always accepted a tiny element of risk when we travelled by rail. but their right to know the risk they are running is denied. ‘What about the public investor? What about the client?’ I asked. As shock turns to anger after the Paddington rail crash. Sunday Times. Railtrack documents list the high-risk blackspots where the danger is considered greater than it was on the London-bound approach to Paddington. It says it could have been avoided by a train protection warning system (TPWS).’ Realising something really strange was going on here. the transport supremo. but most people believed it was far safer than any other form of transport – and they were right. we have the chance to make sure that safety is never again taken for granted on our railways. Worse. My career depends on the partner. ‘And what if your partner asks you to do something you think is wrong? What would you do?’ No one dared breathe. I would. Reprinted with permission. More than our cosy assumptions about safety ended at 8. Accelerated installation of failsafe equipment is now assured and John Prescott. So we look to Lord Cullen’s inquiry to unravel much more than the technical details of the disaster. late-running services and dirty and crowded compartments – everything but safety. But that is no 2005. yes. I followed up: ‘But would you tell anyone else?’ Again. as our investigations reveal.’ he said. explain the links between the culture of an organisation and the ethical behaviour of its members. ‘They’re important. Signal 109’s lack of a failsafe TPWS is only part of the story. Railtrack knew more about the dangers of trains passing red lights than it has so far admitted.

in their pursuit of profits. the operating company involved. Cost and different political priorities ruled that out at the time. What happened at signal 109 did not come out of the blue. as the Southall crash proved. the chief inspector who announced his interim findings into the Paddington crash last week. But even ATP is no guarantee of safety. Safety operations require rigorous operating procedures as well as sophisticated equipment. with the loss of seven lives. That collision led to Great Western. went out of his way in August to issue a formal warning to Railtrack to take proper account of safety.5m for not activating ATP on the crashed train. But we are not allowed to know what its response was because it is considered confidential. the HSE urged rail chiefs to do more to reduce the rising incidence of trains passing red lights and called for 22 specific actions. we want to know. How strictly have the operating companies monitored existing safety procedures is one of the questions Lord Cullen’s inquiry will need to examine. because Mr Coleman told us. The dangers were all too apparent. Only last month.INTEGRATED MANAGEMENT 163 CONTEMPORARY THINKING ON STRATEGY consolation to those who lost their lives or were maimed on the Paddington approach. is the difficulty of discovering the facts and making a balanced judgement. did he need to make what seems a statement of the obvious? Why did he formally ask Railtrack for ‘assurances that there will be no cutting of corners with respect to safety’. He was prompted by the order Railtrack received from the government’s rail regulator about its need to improve performance or face a hefty fine. whether it applies to transport. We know. a call that Railtrack responded to by filing its response last Wednesday as the families grieved. with potentially disastrous consequences. Have Railtrack and the 25 operating companies that lease its 20 000 miles of track. Signalling problems have led to calls for failsafe systems since the report into the 1988 Clapham crash made the case for the automatic train protection (ATP) system. His words were tragically borne out at signal 109. Bereaved families and the injured have years ahead of them to come to terms with the knowledge that it could have been avoided. ‘The most dangerous incidents. 2005. Why. Its call for action left no doubt about the obvious seriousness of the danger caused by trains jumping the lights. One of the problems bedevilling the issue of public safety standards.’ said Mr Coleman. are when a train runs past the junction and gets on to a line being used by another train. whether it is Railtrack’s safety record or Whitehall’s manoeuvres over genetically modified foods. ‘Targets must not be met at the expense of safety. that Railtrack sent a delayed response to the inspectorate’s call for specific measures to be taken to reduce the risk of trains passing red lights before the Paddington crash. Its investigations revealed ‘significant weaknesses’ in the way such dangers were tackled. Rail bosses cannot claim they were not warned. Lord Cullen will not stand for that and will have no trouble overriding it.1 . downgraded the overriding importance of passenger safety? Have Railtrack’s directors been unduly influenced by political pressure to concentrate on completing the prestige projects. They were asked to produce an action plan by October 1.’ says the deputy chief inspector of railways on September 3. Nor was last month the first time the railways inspectorate had warned of the need to make safety an overriding priority. being fined £1. Tell that to the crash victims and their families. The Health and Safety Executive sounded the alarm when it spent a year looking at the way rail companies handle the risk of trains passing red lights. signals and stations cut corners on safety since British Rail was privatised three years ago? Have they. the environment or health. Vic Coleman. Officialdom would rather we did not know what really goes on. Other questions follow. such as the £5 billion high-speed link between London and the Channel tunnel? Have the rail companies risked too much by overwhelming an old network with an unprecedented 25% rise in passenger traffic over the past four years? It looks that way.

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But the public’s right to know should not depend on a law lord chairing a public enquiry. The government must rethink its narrow view of freedom of information and change its proposed legislation to reduce the barriers to it. The government’s swift reaction to the tragedy showed is famed sensitivity to public opinion. It would be a mistake, however, to increase an already tangled web of operating and regulatory responsibilities by imposing another bureaucratic overlay. Sir Alistair Morton, chairman of the impending Strategic Rail Authority, diagnosed the basic problem as ‘a battered, historically underfunded’ rail network. Railtrack, he said, must invest more. More important still, a new culture of safety is needed. Only then will lasting good come from the disaster at signal 109.

Discussion question

Discuss the ethical problems facing commercial organisations for whom safety is apparently viewed as a cost. The Dell Company has been amazingly successful in recent years and represents a good example of a clear competitive strategy.

Dell seeks new routes for its lean machine
Caroline Daniel, The Financial Times, 2 April 2002, p22 Full Text # 2002 Financial Times Information Ltd. Information may not be copied or redistributed. Reprinted with permission.

In the time it takes to read this article, 20 year old Jackie Erswell, dressed in short-sleeved shirt and bell-bottomed jeans, will have assembled five desktop computers at Dell Computer’s factory in Limerick, Ireland. That fact goes some way to explaining how Dell has emerged as the victor in the brutal PC battle that has prompted a wave of upheaval in the industry. Gateway has racked up losses and sacked 16 per cent of its workforce, IBM has pulled out of the consumer market, and Compaq and Hewlett-Packard have sought protection in a merger. Dell, on the other hand, talks boldly about growing its PC market share from 15 per cent to 40 per cent. Last year the PC industry in the US declined 9 per cent year on year, but Dell’s shipments rose 10 per cent. It added five percentage points of market share in the US and two points worldwide, and snatched the crown of leading US consumer vendor from Compaq Computer. But how can this industry powerhouse maintain its momentum? In the mid-1990s, PC demand was growing at 20–30 per cent a year, helping drive Dell’s revenues from Dollars 2bn in 1993 to Dollars 31bn last year – but it is not expected to return to these levels. Having built its success on its low inventory, low cost model, passing on to customers falling component costs, Dell now faces the prospect of being one of the first PC makers to lift prices as component costs rise. The company is also contemplating acquisitions – which would be the first in its 17-year history – in order to meet its growth targets. As it prepares to set out its agenda to analysts in New York this week, 2002 is shaping up to be something of a turning point for Dell. It could determine whether it suffers the fate of many IT companies, in finding that its best years of growth are behind it.
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Over recent weeks, the Financial Times has gained extensive access to Dell’s operations and leading executives, including Michael Dell, its eponymous founder, Kevin Rollins, president, and others. It has also interviewed employees, customers and analysts about Dell and where it goes next. Dell’s biggest factory, the Round Rock plant in Texas, is a blur of primary colours, noise and speed. The conveyor belts moving parts across the factory run at 15 mph. Apart from whoops from workers changing shifts or completing a product, the sounds of machinery dominate. Buyers’ orders – more than half of them placed over the internet – emerge on the factory floor as a spool of white barcode stickers, which determine which parts are needed. Once each code is scanned, a green light flickers in front of a box of parts, identifying which to select. Most parts are clicked rather than screwed into place, made easier by colour coding. Ro Parra, senior vice-president Americas, says: ‘Eighteen months ago, we had 3m square feet of manufacturing space. Now we have 1.5m and are producing 30 per cent more.’ Such efficiencies helped Dell become the only big PC company to maintain profitability over the past year, when PC growth turned negative for the first time. ‘Basically Dell gained most of the share and made all of the profits among the top 10 vendors versus last year,’ analysts at Lehman Brothers concluded. That success has made Michael Dell, the company’s founder, a poster boy for the IT industry and elevated him to 18th in Forbes magazine’s ‘rich list’, with wealth estimated at Dollars 11bn. Though he is now aged 37, it is still easy to picture Mr Dell as the 19 year old student who came up with the idea of selling PCs direct to customers from his dorm at the University of Texas. The Dell legend is strong in Limerick, where Dell makes computers for the Europe, Middle East and Africa region, and is the dominant local employer, with 3500 workers. Joe, a burly former factory worker who repairs PCs, said: ‘There were rumours that he doesn’t have a chair in his office as he never sits down, and that he never takes lunch.’ Stephen Kiely, a technical co-ordinator, says: ‘I’ve only seen him drink iced water. When he visits, we have to have notebooks around the factory so he can check his mail whenever he stops at any location.’ Although Mr Dell, dressed in blue shirt and no tie, exudes a relaxed manner, his attention to his image is evident. Acutely conscious of a photographer’s presence, he sips water only when the camera is obscured. Even after 17 years in the industry, he remains focused and driven. Private about his personal life (a request to see his office is declined), he concedes his Texan roots have contributed to his entrepreneurialism. Sitting in his boardroom, called ‘Silver’, he points to his polished leather shoes and in a rare attempt at light-heartedness says ‘I left my boots at home today, little lady’, before adding soberly: ‘Just kidding – I don’t wear boots and I’m not a cowboy, that’s not my thing. But there is perhaps something in the Texan spirit. It’s big and bold, and maybe entrepreneurial.’ That growth has made Dell the biggest employer in central Texas, where it employs 18 000 workers (or ‘team members’, as they are known) from a total of 35 000 worldwide. Dell’s ambitious spirit is contagious. Even Kevin Rollins, the 48 year old president and chief operating officer who was poached from management consultants Bain in the early 1990s, claims Dell can treble its turnover from Dollars 30bn. ‘And when we get to Dollars 100bn, we’ll say we’d like to go to Dollars 200bn. There’s a lot of large companies out there and we have about 3 per cent market share within the
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total IT industry today and that’s pretty small. . . So we look at that and say ‘‘well, that’s a pretty nice playing field to run on to’’’. Dell’s dominance stems from its business model – a slick manufacturing and direct sales operation – rather than any technological breakthrough. It sees manufacturing as a core competence: unlike IBM and Compaq, which have outsourced production to areas such as Taiwan, Dell makes nearly all its own products. Brian Gammage, an analyst at Gartner, says: ‘Dell have simply applied good practice, and the techniques used in the car industry. They have done what others should have been doing, tying in suppliers into just- in-time relationships.’ Dell builds computers direct to order – about half its sales are made over the internet – and holds little inventory. It carries about one week of stock, compared with more than four weeks for rivals. At Round Rock, the area for inventory for the 1.5m square foot factory spans just 25 square metres. Parts are delivered every two hours from local warehouses, run by suppliers. The focus on squeezing cost is evident at head office. Posters urge employees to greater efficiency, such as one that asks: ‘Did you know that Dell could reduce its paper consumption by 20 per cent?’ In the fourth quarter, Dell reported its lowest ever level of operating expenses, at 10.2 per cent of revenues. That compares with 18.3 per cent at Compaq and 20.6 per cent at HP, according to Lehman. Dell focuses on standardised technologies suited to high volume production, rather than ‘blue sky’ product innovation. John Medica, Dell’s vice-president of client products, who spent 10 years at Apple Computer, says: ‘At Apple, demand is created through innovative products. At Dell, our innovation is around the business model. We are not positioned as a market maker.’ What marks Dell out is also its obsessive, targets-based approach. This regime was prompted by a near collapse in 1993, when sales grew too fast, doubling to Dollars 2bn. Mr Parra recalls that when he joined Dell that same year to run its small business operations in 1993, he thought he had made a mistake. ‘I asked for a profit and loss statement and was told they didn’t have them. . . I was told they did not have gross margins by product. They only tracked revenues and it was only at the end of the quarter that they knew if they made any money.’ The mistakes, says Mr Parra, forced Mr Dell to call in ‘scar tissue’, including Bain. The consultants helped impose a highly analytic approach on what had been a more entrepreuneurial kind of company. Everyone, down to factory floor workers, has to meet key targets. For workers, there are quality standards, workmanship issues and targets to hit – on an hourly basis. Every business review includes an assessment of cost and productivity per employee, per quarter. Such ‘metrics’ mean that the company claims to know exactly where is on a weekly, even hourly basis. It can adjust prices on its website according to demand and track when products – or people – are a flop. Last year, 6000 were sacked amid the IT spending slowdown. John Hamlin, head of the US consumer business and a former venture capitalist, says: ‘It is a fun place to work if you fit the mindset. . . The beauty is there are no shades of grey. That clarity flows through to financial incentives bonuses and stock options.’ But for others, the culture can be oppressive. At the Limerick plant, if a factory worker makes a mistake, such as scratching the PC, Terence Butler, 20, places a mouse mat inscribed with the words ‘100% inspection’ on the PC. It denotes that the next seven computers made by that worker are checked. The penalty for more serious failure is 20 mouse mats.
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Dave Cassidy, a former shop floor worker, says: ‘I worked there for five weeks before Christmas. We had very short notice to meet targets in a quarter and had to work impossible hours.’ Another former Dell engineer is less harsh, but adds: ‘There was an attitude that if you can’t measure it, you can’t improve. But things could get lost in translation from Austin to Limerick. . . we were often driven by a fear of failure, and worried Dell would pull out of Ireland. ‘You could see that in the stress of people. Sometimes you thought ‘‘we don’t have to crucify ourselves over some metric of 0.1 per cent’’. The image of the man always tended to be greater than the company itself. . . You couldn’t stay there for five years.’ Where does Dell go next? The company’s dilemma is summed up by Rebecca Runkle, an analyst at Morgan Stanley. ‘There is no question that Dell’s strategy and track record are top notch. But there is also no question that as Dell reaches the size it has, it is increasingly challenged to capture its historic growth rates. It has to look to new marketplaces and do that in a slower growth IT industry.’ Ms Runkle is forecasting earnings per share growth of 10 per cent over the next few years. That is a big fall on the 1990s, when she says Dells revenue growth ‘was about 40 per cent annually, with earnings north of that.’ Dell’s most basic challenge is that more than half of its revenues come from low-margin desktops – yet PC demand is unlikely ever to return to the growth of the mid-1990s. Worldwide PC growth is forecast to rebound to only about 3 per cent this year, and although consumer demand helped Dell over Christmas, corporate demand remains soft. One source of growth is market share gains and overseas expansion, as the US still accounts for 70 per cent of revenues. Asked whether the direct model is exportable, Mr Dell’s composure slips. ‘Go back and look at the press on Dell in 1987 at the UK launch. We had 22 journalists show up and 21 said it was a horrible idea. It wouldn’t work, it was some American concept. I’ve been underestimated, rejected, describe it any which way you want, but every time we opened new offices round the world, people said it wouldn’t work.’ However, in Europe, buying PCs from resellers remains the norm, with only about 30 per cent buying direct, says Francois Bornibus, a vice-president at Compaq Europe. Dell refuses to adapt its business model to local markets. But although it has enjoyed strong growth in Europe, and has done well in the UK, it has some way to go. It grew at 35 per cent in Germany last year, to take 7 per cent of the market, but lags Fujitsu-Siemens at 23 per cent market share. The immediate flash point for the PC business will be how Dell responds to rises in the cost of components, such as memory and flat screens. While it exploited falling component prices over the last few years, its low inventory model could now force it to buy parts in a rising market, pushing up costs. Analysts estimate the cost of parts for desktop PCs has risen about 11 per cent since the start of the year, and for notebooks by 17 per cent. Apple and NEC have recently said they will raise prices, and Dell is considering whether to follow suit. Nevertheless, Mr Gammage at Gartner argues the battle has not changed. ‘This is still a cost war. The difference is that this one will be about who can best constrain the cost of price rises.’ Dell says only about one-quarter of its cost advantage comes from passing on falling component prices; the remainder is from other efficiencies. It aims to take more absolute
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cost out of the business this year than in 2001, but with operating expenses already at a record low it is hard to see how much more flab can be cut. A third source of growth is Dell’s move into servers and storage, and on to Cisco Systems’ turf as it offers low-end networking products. Servers and storage now account for about 20 per cent of its revenues. IDC data show Dell’s share of standard Intel architecture servers – the most basic commodity servers – rose from 13 per cent in 1999 to 19 per cent in 2001. Compaq fell from 30 to 26 per cent. But Mark Melenovsky, analyst at IDC, says: ‘Dell are more focused on SME growth, which is slow but solid. The enterprise space is where the major growth will be. IBM have renewed their focus on the Intel space and gained share, while Compaq has more of an installed base in enterprise. Dell will need to invest more in software and services.’ Even this shift into new products may not be enough to return Dell to former growth rates. For the first time in its history, it is contemplating acquisitions. Mr Rollins says: ‘There are not many Dollars 30bn companies that have grown to Dollars 60bn, Dollars 70bn, Dollars 80bn that have done it without acquisitions, so we have concluded this is going to have to be part of what we do going forward.’ Dell has recruited Jeff Lynn, a former vice-president in consulting at both IBM and Compaq, to lead this push. The focus is on widening its services offering from basic support to professional services. ‘We would like to consider acquisitions around the network services and ones that enhance our storage service capability,’ says Mr Rollins. Randall Groves, vice-president of enterprise systems, says: ‘We will want to acquire folks with experience in deploying Intel servers, and focus on applications. But I would be surprised if acquisitions become as central as (they are to) Cisco.’ The dangers are evident. Buying services companies could create conflicts with partners. Dell has no experience in managing acquisitions. Moreover, its business model does not give it competitive advantage in services. As Mr Parra acknowledges: ‘The challenge is to ensure we focus the organisation around two or three areas of expansion. . . there is an opportunity for confusion and lack of execution.’ This all suggests that growth will be far tougher for Dell than the last 10 years. But as the carnage in the PC sector shows, it would be a mistake to underestimate Dell. After all, it took the risk of starting a PC price war, and won. Mr Dell himself is in no mood to contemplate failure. He recalls that when he founded the business in 1987, ‘I wasn’t going around asking it it was going to work. I just saw the opportunity and went off and did it.’
Discussion question

Describe the basis of Dell’s competitive advantage.

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Revision Questions

3

Section A type questions
Question 1.1
In Michael Porter’s five forces framework, which of the following conditions would a firm prefer? (A) (B) (C) (D) low bargaining power of buyers high bargaining power of suppliers few barriers to entry many substitutes

Question 1.2
An employee who exposes the ethical misconduct of others in an organisation is known as a(n): (A) (B) (C) (D) ombudsman whistleblower stakeholder monitor

Question 1.3
Any claim that unethical behaviour is in an organisation’s best interest is an attempt to (A) (B) (C) (D) follow the principle of procedural justice do the right thing for society rationalise the unethical conduct look after the interests of oneself

Question 1.4
In Charles Handy’s ‘shamrock organisation’, what are the three different types of workers?

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Question 1.5
In Porter’s competitive forces theory, which of the following is not a barrier to entry? (A) (B) (C) (D) economies of scale switching costs market share product differentiation.

Section B type questions
Question 2
P plc is a multinational conglomerate company with manufacturing divisions, trading in numerous countries across various continents. Trade takes place between a number of the divisions in different countries, with partly completed products being transferred between them. Where a transfer takes place between divisions trading in different countries, it is the policy of the board of P plc to determine centrally the appropriate transfer price without reference to the divisional managers concerned. The board of P plc justifies this policy to divisional managers on the grounds that its objective is to maximise the conglomerate’s post-tax profits and that the global position can be monitored effectively only from the head office. Requirement Discuss the ethical implications of P plc’s policy of imposing transfer prices on its overseas divisions in order to maximise post-tax profits. (10 marks)

Question 3
Eastborough is a large region with a rugged, beautiful coastline where rare birds have recently settled on undisturbed cliffs. Since mining ceased 150 years ago, its main industries have been agriculture and fishing. However, today, many communities in Eastborough suffer high unemployment. Government initiatives for regeneration through tourism have met with little success as the area has poor road networks, unsightly derelict buildings and dirty beaches. Digwell Explorations, a listed company, has a reputation for maximising shareholder returns and has discovered substantial tin reserves in Eastborough. With new technology, mining could be profitable, provide jobs and boost the economy. A number of interest and pressure groups have, however, been vocal in opposing the scheme. Digwell Explorations, after much lobbying, has just received government permission to undertake mining. It could face difficulties in proceeding because of the likely activity of a group called the Eastborough Protection Alliance. This group includes wildlife protection representatives, villagers worried about the potential increase in traffic congestion and noise, environmentalists, and anti-capitalism groups. Requirement Discuss the ethical issues that should have been considered by the government when granting permission for mining to go ahead. Explain the conflicts between the main stakeholder groups. (10 marks)

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Section C type questions
Question 4
C plc, a quoted chemical manufacturing company, has until recently achieved a steady increase in profitability over a number of years. It faces stern competition and the directors are concerned about the disquiet expressed by major shareholders regarding performance over the last 2 years. During this period it has consistently increased dividends, but its share price has not grown at the same rate as it did previously. K plc, a direct competitor, is similarly experiencing a reduction in profitability. Its shareholders are diverse, with the majority being financial institutions. K plc has been criticised for under-investment and has achieved no product development over the last two years. Following a concerted media campaign, K plc is facing prosecution for discharging untreated pollutants into a river. C plc is seriously considering making a bid to acquire K plc. The directors of C plc, however, are divided as to whether K plc should be closed down or permitted to continue production post-acquisition if a bid is made. In either situation, significant staff redundancies would follow. Requirements (a) State the strategic factors which C plc would need to consider before making a bid to acquire K plc. (10 marks) (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) (Total marks = 25)

Question 5
Router plc, a mining company, has said in its mission statement that it will ‘endeavour to make the maximum possible profit for its shareholders while recognising its wider responsibilities to society’. Router plc has an opportunity to mine for gold in a remote and sparsely populated area. The mining process proposed, in this instance, means that all vegetation will be removed from the land concerned; after mining has finished, there will remain substantial lagoons full of poisonous water for at least 100 years. The mining process is a profitable one, given the current world price of gold. However, if the company were to reinstate the mined land, the process would be extremely unprofitable. The company has received permission from the government to carry out the mining. The few local residents are opposed to the mining.

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Requirements (a) Discuss the extent to which Router plc’s mission statement is contradictory. (5 marks) (b) Explain how Router plc could establish a procedure whereby its wider responsibilities to society could be routinely considered when making strategic decisions. (8 marks) (c) Advise Router plc how it could deal with strategies that present a conflict of objectives. (6 marks) (d) Discuss the ethical dimensions of the decision to mine for gold. (6 marks) (Total marks = 25)

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Solutions to Revision Questions

3

Section A solutions
Solution 1.1
(A)

Solution 1.2
(B)

Solution 1.3
(C)

Solution 1.4
Core Peripheral External

Solution 1.5
(C)

Section B solutions
Solution 2
The ethical implications involve the social responsibility of multinational companies to use their position by reducing the amounts paid in the form of customs duties and tax. In addition, it is possible for the company to bypass a country’s financial regulations, especially in terms of the remittance of dividends. P plc could benefit from adopting transfer prices which maximise its post-tax profits, but it must be recognised that most of the policies adopted would be illegal. It is clear that the company is not operating as a ‘responsible citizen’ in the foreign country and this may lead to an unacceptable position if
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the illegal practices are exposed. This could create problems for the long-term success of P plc, as it will lose its reputation and be treated harshly by the host nation in the future. In fact, the publicity could affect P plc’s dealings with all foreign countries and this could be a major disadvantage to its future activities abroad. It is generally accepted that a company should adopt all measures to ensure that its tax liability is minimised. This is ‘tax avoidance’ and the shareholders would expect this to be organised by the company’s accountants. However, ‘tax evasion’ would not be an acceptable position, apart from its illegality, as the revenue from foreign investors is an important reason for many countries taking steps to encourage foreign investment. To adopt illegal practices in respect of tax and customs duties is not acceptable. The management should take this into account before adopting transfer pricing policies which are against the laws and regulations of the host country. It is clear that by adopting transfer prices which are illegal, P plc would be acting neither with justice nor decency and the consequences could be severe if the malpractices are revealed.

Solution 3
There are many ethical dimensions to granting outline permission for mining to go ahead. Ultimately, the government is weighing one set of claims against another and seeking to achieve a ‘right’ decision within the context of the common good. The role of government: it may take a view that it should not be seen as an obstacle to the free operation of business. Alternatively, it may acknowledge a duty of care to its citizens who might be disadvantaged by the project. Another issue concerns its efforts at regeneration: does mining ‘fit’ the overall strategy? There may be environmental costs (scars on the landscape), but these are to be balanced against gains such as jobs and profits for shareholders. Government may feel that the area is already an eyesore and one more mine will make little difference. They might reason alternatively it is counter-productive in the context of their tourism strategy. Issues of quality of life raise ethical concerns (traffic and mining pollution versus regeneration of local economies). Similarly, concerns over safety within the confines of the mine and on roads emerge as a potential ‘cost’ of the scheme. It is not possible to proceed without making certain generalisations and assumptions. The main stakeholder groups and their conflicting objectives include:   



Digwell’s shareholders and other investors who expect a good financial return on the investment in the mining project. This may, however, involve disturbing birds and wildlife which is a concern for bird protection groups. Local unemployed people probably welcome the venture as consistent with their aspirations to gain meaningful work. Meanwhile, local communities and environmentalists may be concerned by the disruption to the local way of life including increased road traffic and pollution. Staff, customers and suppliers of Digwell have the overall objective of long-term success of the company in order to safeguard their interests. Anti-capitalism groups, however, look for the downfall of this and other capitalist symbols in order to build a differently structured society. Employees are looking for higher pay, job security, good working conditions and some consultation. Customers want fair prices, reliable supply and reassurance about quality. Suppliers desire fair prices, reliable orders and prompt payment.

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Government is a key stakeholder as the planning agency. Issues associated with its objectives are discussed above. They want jobs, to actively contribute to local community life, and to be a participant in major developments.

Just as there are conflicts of objectives within government so there are likely to be conflicts between groups and differences within other groupings. Some common conflicts of expectations amongst shareholders for instance include growth or profitability; short-term gains or investment, industrial efficiency or maintenance of job levels, mass appeal or quality concerns, and so on.

Section C 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 are concerned about the future earning capacity of the company and the disquiet of the major shareholders also reflects these concerns. It seems likely that the ‘stern competition’ is responsible for this situation. One of the ways of achieving growth and, possibly, boosting earnings may be to acquire another firm. Management is considering acquiring K plc, which will mean that the combined businesses will have a much greater production capacity if the K plc plant is not closed. The crucial issue will be what C plc can do with the additional facilities and whether it is possible to benefit from the acquisition. Competition in the industry will be reduced by the acquisition of one of the companies and savings are likely to result from the rationalisations and the economies of scale which should occur. However, management must be aware of the effect on the management and staff of both companies involved in the acquisition. Although it is usual for acquisitions to be justified on the basis of the synergy which results from the combination of the organisations, there is often doubt regarding the extent of these benefits. This is particularly noticeable in markets in which there is excess capacity. It is also generally recognised that the management of the combined business poses a difficulty which reduces the synergistic effects of the acquisition. The cost of the acquisition will be very important in determining its ultimate success. It is possible that during the acquisition, another company may bid for K plc and this may raise the price to a level which makes it difficult for C plc to ensure the acquisition is financially successful. C plc’s expected cost of capital will be a major influence in determining the result of the acquisition. (b) (i) It is likely that fewer employees will be needed in the combined business. In particular, the providers of specialist expertise may be particularly vulnerable as duplication of this type of activity may not be required. It is likely, therefore, that a significant number of redundancies will occur. This will create a feeling of insecurity among staff. It is important that all staff are informed of the policy in respect of redundancies. This will be particularly important in the acquired company, especially if the bid is hostile. The rationalisation process will create uncertainty within both firms and it is important for the motivation of employees that the issue is handled with openness and honesty. Changes in employees’ working conditions within the combined firm is an important issue. If it is not handled well, it is likely that the overall synergy of the acquisition will be
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while using the sustainable enterprise to indicate that in the long run the interests of shareholders and society may not be in conflict. In the short run this reveals a significant conflict between the interests of the shareholders and the public. In part (a). As a priority. but will result in ‘substantial lagoons full of poisonous water for at least 100 years’. It is quite common for objectives of this kind to be included in mission statements. The pollution problem. The gold-mining project provides an example of such a conflict. will have to be addressed. note that the mission statement uses the term ‘profit’. This allows you to contrast the conflict of social responsibility with profit in the short run. steps will have to be taken to reduce the adverse publicity that may arise through the prosecution pending against K plc. in particular. Remuneration. At the same time. The continued success of the firm may depend on the way in which the pollution problem is handled. rather than ‘shareholder wealth’. Management must. the ‘wider responsibilities to society’ are recognised. While it is often possible to reduce adverse environmental effects.176 CONTEMPORARY THINKING ON STRATEGY SOLUTIONS TO REVISION QUESTIONS P5 adversely affected. training programmes and assistance in finding alternative employment are topics which should be discussed to improve staff morale within the firm. 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. a short-term measure. However. the company should seek to establish acceptable levels of effluent pollution and the firm would be wise to participate in establishing these standards. Router 2005. In addition. It is likely that considerable expenditure will be needed to rectify the position. This company objective is difficult to measure and there will be instances where the maximisation of profit on behalf of the shareholders conflicts with ‘wider responsibilities to society’. It will demonstrate the attitude of the directors to the staff redundancies. the presumed economic objective of businesses. Solution 5   This question tackles the problem of a mission statement with particular reference to the social responsibility of a firm if there is a conflict between profitability and pollution. (ii) After acquiring K plc. It is clear that the matter of the untreated pollutants should be investigated immediately so that the level of pollution is brought under control. particularly those living in the vicinity of the proposed mine. 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. some environmental issues will need to be tackled by management. especially in respect of the staff redundancies which appear to be inevitable. It is important that employee motivation is retained if the acquisition is to reach its potential. It is expected to provide a profitable opportunity. theories of the sustainable enterprise suggest that in the long run the following of socially responsible policies may safeguard shareholder wealth. handle the social and ethical implications of the acquisition sensitively.1 . (a) The mission statement that Router plc has published states that the firm aims to make the ‘maximum possible profit’. The projected success of the combined businesses will determine the amount of expenditure that might be incurred to reduce the pollution problems. these remedies will involve the business in costs that will reduce the profit available for distribution to the shareholders. therefore.

(c) It is usual for an organisation to have a number of objectives. 2. This one will best meet its overall objectives. Router must include the cost of reinstatement in its calculations. Include costs of environmental restoration in project appraisals. or audit. It is essential that the economic costs of a project are incorporated into the project evaluation. It is necessary that policy decisions of this type are widely publicised within the firm to ensure that all managers are aware that the environmental factors must be incorporated into all decisions. It is usual for a firm to include all relevant financial costs in a project evaluation. 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. The appointment of a person either from within the firm or an outside consultant to monitor the position could be a useful method of implementing the environmental policy. In this case. By prioritising objectives and scoring alternative projects against them. but it is also important that the effect of the investment should be considered. In this situation.1 . there may be a temptation to understate the costs by omitting the cost of coping with the ‘wider responsibilities to society’. 2005. 2. the inclusion of local people and environmentalists on such a panel would point up the issues mentioned in the case. Develop a social consultation panel. If it develops a reputation as a ‘dirty firm’. 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. (b) There are various ways that social responsibility may be incorporated into the firm’s decisions: 1. Methods of dealing with this include: 1. It is common to find that the objectives conflict and a profit-maximisation objective will always be compromised by any other objective which reduces the revenue received or increases the cost of an organisation. This will result in the rejection of the project. A procedure. This would of course be a fall in shareholder wealth. therefore. 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. Include social responsibility in the firm’s mission and objectives. This would cause a fall in both profits and share price. Establish a hierarchy of objectives.INTEGRATED MANAGEMENT 177 CONTEMPORARY THINKING ON STRATEGY requires that the authorities grant it operating licences and that shareholders continue to hold its shares. 3. Where the conflict of objectives means that no single objective can be maximised. decisions. Satisficing. especially if they are under pressure to boost the results of the company. both may change their minds. it becomes possible for management to choose the option with the highest weighted score. Furthermore such conflicts may arise from the fact that organisations are led by a group of managers and therefore the conflicting personal agendas of each must be considered. 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. as it does not meet the profitability criterion. In this example. It is possible that managers could neglect the ‘wider responsibilities’. Router could convene a panel of stakeholder representatives to act as a consultative committee to discuss its decisions. Employ outside consultants to advise on.

2. These are compensatory payments to buy acquiescence. 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. In this case perhaps quality housing might be provided for the labour force which would remain after the works had finished. Router has an ethical responsibility to minimise the effect of this pollution. 3. The principal ethical issues in mining are: 1. the resources extracted should not be wasted or used for frivolous purposes out of consideration for future generations. though not necessarily for every project. the author identified common features and issues of ethical questions:     different perceived long. but to minimise the effect would appear to be the minimum responsibility of the company. important to ensure that proper and equitable compensation is provided to the original owners of the resources. ‘Lagoons full of poisonous water for at least 100 years’ is clearly not an acceptable outcome for society. This may reassure local residents that the company is adopting a responsible attitude towards the ethical aspects of the mining operation in their area. This deprives both present owners and future generations. It is. issues of public responsibility and the accountant’s duty as a professional.1 . The effect is to keep them on board. It is essential that Router explains the steps which will be introduced to minimise the effects on the local environment. 5. 4. will be adopted. 2005. The project must consider the effect of the mining operation on the local residents. Side payments. with lesser environmental damage. Sequential attention. Safety of processes. Although they may benefit from the establishment of the mine in the area in which they live. it is too easy to give inadequate return for the value extracted. The environmentalists on the management team will feel that they have achieved something. Where the country is poor. it is important that the profit motive does not cause the developer to act improperly and exploit the present owner of the mining rights. but the next project. This could be pointed to as some compensation for the environmental damage and population displacement. and difficult implementation problems. 4. The negotiations will raise a number of issues which will bring an ethical component to the negotiations. therefore. (d) In an article in the August 1992 edition of CIMA Student. This involves giving each stakeholder group’s interests consideration over time. In this case perhaps the mine will abandoned because the consequences are so great. The mining operation results in a non-replaceable asset being extracted from the mine. It would appear to be essential for the company to develop a plan to deal with the problem. as there are bound to be significant costs to treat the effluent. advantages to one group compared with disadvantages for another. The use of power in the negotiations. Impacts on the quality of life of local residents. The use of non-renewable resources. it is likely that the pollution will also affect them. The environmental damage that will remain. Moreover.and short-term advantages and disadvantages. It is likely to reduce the profitability of the project. Mining is an industry noted for its poor safety record.178 CONTEMPORARY THINKING ON STRATEGY SOLUTIONS TO REVISION QUESTIONS P5 3. In the negotiations.

Projects have:  stakeholders – all those who are interested in the progress or the final outcome of the project including the users. The Association of Project Managers defines a project as: ‘A human activity that achieves a clear objective against a time scale. the customers (if someone is buying the output of a project. Have you organised a ‘holiday of a lifetime’ or a special anniversary such as a Golden Wedding party.’ You could also define a project as ‘a unique undertaking to achieve a specific objective that requires resources and activity’.1 Definition If you study the literature on projects. " " 4. or at work helped with the implementation of a new way of working? Do they not meet the definitions given? 4. identify the strategy and scope for a project. If you look at a project in this way. you can see that you yourself may have undertaken one.1 . identify the characteristics of each phase in the project process. you will see that there are certain similarities in the definitions of projects and their characteristics.Projects 4 L EARNING O UTCOMES After completing this chapter you should be able to: " " identify a project and its attributes.2 Characteristics of a project This is likely to be examined quite frequently. apply suitable structures and frameworks to projects to identify common management issues. 179 2005.

1999) .1 presents the four phases of the project life-cycle of large projects. information. change – there is no practice or rehearsal and once the project is completed. a computer system. opportunity or problem. Identification of a need The first phase of the project life-cycle involves identification of a need.1 The project life-cycle phases This is likely to be examined quite frequently.. Sometimes a need may be identified very quickly.). the shareholders of the customer (who want value-for-money) and those who provide the money for the project (sponsors). finiteness – a fixed time scale. quality and cost. quality – measured in terms of customer satisfaction and the organisation’s image. 4. finance (contained in budgets).3 The project life-cycle 4. and the other relating to the achievement of the organisation’s objectives (the business case): profitability. schedules – plans for events over time for resources and contingencies. prestige. a building etc.1 The project life-cycle (Gido and Clements. quantity.g. time. resources – people.1 2005. the team will ideally move on to the next project. the activities. uncertainty – inevitably uniqueness leads to a context of risk in the deliverables. gather data about the problem or opportunity and ultimately define clear requirements. subcontractors and with time/cost. Initially a feasibility study will be conducted to check the size of potential benefits and Figure 4. uniqueness – it may never have been undertaken before (the Tate Modern) or it may have innovative technology (The Eden Project). ideas. Large-scale projects usually follow separate phases. which occur in sequence.180 PROJECTS STUDY MATERIAL P5         e. etc. the contingencies associated with suppliers. Figure 4.3. whereas in other cases it may take months to clearly identify the need. materials. Such projects are ‘born’ when a need or want is identified and a sponsor is found who is prepared to provide funds in order to satisfy this need or want. objectives – projects have to meet two sets of objectives: the one relating to accomplishing customer requirements of scope (the deliverables).

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. This will include a statement of requirements (SOR or project brief ). a company that has decided to upgrade its computer system may send out an I T T to several consulting firms. The feasibility study can be done by internal staff as a mini-project or by requesting proposals from contractors. quality. Once a proposed solution has been selected. The business case is also revisited to check whether any subsequent actions are needed to ensure achievement of the anticipated benefits. 2005. such as confirmation that all deliverables have been provided and accepted. Completion The fourth stage of the project life-cycle is the completion of the project. that not all projects involve formal requests for proposals. Achievement of these deliverables may be linked to stage payments. then a project team is formed and a project initiation document is raised. 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. When a project closes. If contractors are used. important tasks need to be carried out. which then evaluates them and chooses the most appropriate solution to satisfy the need. This option–evaluation process is first filtered on quality criteria for compliance with the statement of requirements. Again. and all payments have been made and received. the project’s requirements will be presented by the company in a document called an invitation to tender (IT T ) or a request for proposal (RFP). The overall solution is subdivided into separate deliverables to be achieved at fixed milestones through this stage of the project. If it does. The project’s objectives of functionality. This process will provide additional detail to the organisation’s fact-finding exercise. The business case is an important guide to decision-making throughout the project. Even if the product is ‘off-the-shelf’. cost and time are monitored against each deliverable to ensure they are being met. It must be noted. for example fitting a sun-roof in a new car. a vision and a business case for the project. a short-list of potential contractors. the work can commence to build the required product or service. for example an accounting system.INTEGRATED MANAGEMENT 181 PROJECTS evaluate in broad outline potential alternative solutions and their lifetime costs. however. At the end of this phase the company will decide whether to proceed with the project. Then a choice will be made based on time and cost. All shortlisted contractors and/or internal design teams will submit final proposals to the company. For example. there is often build-work required to tailor it or customise it more specifically to the requirements. Obtaining customer feedback is important in improving the quality of future project provision. together with schedules of time and cost estimates. and the vision encourages motivation and congruent goals in the project team. a milestone review will decide whether to proceed further with the project. If it does and an external contractor is chosen. Implementation The third stage of the project life-cycle is the implementation of the proposed solution. a contract will be signed between the company and the contractor. Development of a proposed solution The second stage of the project life-cycle is the development of a proposed solution. to develop its own requirements and exactly which requirements are achievable. Project performance is evaluated and appraised in order to learn from the project for future reference.1 .

This involves determining a desired state and then determining all the components that would go into making that state possible. This is essentially taking an existing object apart to see how it works in order to duplicate it or enhance it. Reverse engineering. By trial use of the model. Gap analysis. For smaller projects and those where requirements are uncertain.2 An alternative project life-cycle – iteration Project life-cycles may vary from a couple of weeks to several years. the life-cycle above may be too slow and involve customers too little during development. for example. In these cases the project life-cycle may be repeated several times before a solution is agreed. 4. Here are some of the more well known:    Functional decomposition. tests and validates design techniques and tools. It is especially useful in IT projects. to see where errors or weaknesses have occurred and to correct or improve them. the best ideas from competitors and the best parts of previous projects may be built with customers into a model or prototype. (Source: Field and Keller. Phases may be simultaneous or less structured and formal.3. This is fundamentally an incremental approach. 2005. requirements are revised and the cycle is repeated until agreement is reached. rather than linearly as shown above. Key features of the proposed system are implemented in a simulated operational environment that can be used as a ‘predictive model’.3 Project approach Whichever project life-cycle is used (linear or iterative). dependent on the complexity. In project terms. there is a constant need for updating and renovating business-critical software systems as business requirements change or technological infrastructure is modernised. This approach is often used when a ‘back to the drawing board’ objective has been set. It is also important to recognise that not all projects will follow the exact phases of the project life-cycle as presented above.3. building on what has gone before.1 . a set of ‘gaps’ can appear. This would reduce risk because team members can gain experience as this process evaluates complex processes. Approximate requirements. designs test facilities. that is. The feedback from this iterative process can identify risky parts of project design or problems of integration and operation. These methods effectively identify the starting point for the project. reverse engineering is going back to the basic design blocks to see how a thing works.182 PROJECTS STUDY MATERIAL P5 4. size and content of the project. The project can then be orientated to filling in those gaps and so ‘moving from A to B’. 1998) In some cases the model then becomes the final solution with no further implementation. what will be examined first. where. This ‘decomposition’ continues until all the requirements are known. There are many different approaches that could be adopted. 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. Then each of the components are analysed in turn to determine how to make those possible. By comparing the current system/process to the desired system/process. assesses aspects of system integration and can be used to persuade suppliers and users to accept the proposed solution.

7 or 9? There are many other frameworks. as shown in Figure 4. Deliver: How do we empower. plan development. The 4-D model This model is often used for very creative projects.3. scope definition. some of which look at different aspects of project management. The 7-S model The 7-S model of culture proposed by McKinsey (see Section 2. or for those that involve intervention in the culture of an organisation. each of which is relevant in some or all of the five process areas:   Integration management. plan execution and overall change control Scope management.2 The project process areas (based on the work of the Project Management Institute) 2005. the five process areas of project management (a life-cycle of sorts) can be shown in diagrammatic form. The 9 project management knowledge areas The Project Management Institute also proposes that there are nine key knowledge areas in project management.4 Other frameworks: 4. initiation. learn and survive? Plan for continuous improvement. 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.3. 5.1 . and others that take ‘life-cycle’ approaches. Dream: What might be? What is the organisation/world calling for? Envision the results of the project Design: What is the ideal solution? Construct the elements and assemble them. Here is a selection to help you generate a few ideas.2. The 5 project management process areas According to the Project Management Institute. scope planning. scope verification and scope change control Initiating Planning Controlling Executing Closing Figure 4.2) is also sometimes used in project management.INTEGRATED MANAGEMENT 183 PROJECTS 4. covered in different textbooks.

contract administration and contract close-out. 2005. source selection. cost budgeting and cost control Quality management. quality planning. schedule development and schedule control Cost management. 4.184 PROJECTS STUDY MATERIAL P5        Time management.4. organisational planning. resource planning. published by Pearson Education. solicitation. performance reporting and administrative closure Risk management. the project can be viewed as a conversion of some resources (input) into a final product or objective (output). and the conversion process is carried out by a number of mechanisms that transform the resources during processing (Figure 4.3 The project as a conversion process from Project Management by H Maylor. activity definition.1 Inputs There will normally be a project brief. risk response development and risk response control Procurement management. risk quantification.3). staff acquisition and team development Communications management. a document that provides a statement of customer needs that is to be the foundation of the final project. procurement planning. information distribution. 4.4 The project as a conversion process An even more flexible view of a project is to use a systems approach.1 . activity sequencing. solicitation planning. risk identification. cost estimating. communications planning. that is. as described by Maylor (1996). There are likely to be explicit project requirements and also those that emerge during the course of the project as Figure 4. that is. The project will take place under a number of constraints. Reprinted by permission of Pearson Education. often outside the project boundary. quality assurance and quality control Resource management. activity duration estimating.

Use examples to support your answers. and is likely to be negotiated with the customer. The Eden Project Imagine a large hole filled with water: an abandoned china clay pit at Bodelva in Cornwall. 5 km east of St Austell.2 Constraints These may take any of the following forms:          financial – the budget amount and timing of capital needed.INTEGRATED MANAGEMENT 185 PROJECTS a result of the customer’s changing needs or perceptions. environmental – organisations must consider environmental legislation and control. Technology – the physical assets performing the conversion process.4. indirect effects – the desire to minimise disruption to other areas of the business as a result of change in one area. Tools and techniques – methods of organising resources.1 . quality – technical requirements specified and desired by the customer. An output may be tangible or intangible. but it must satisfy the current customer project objectives. 4.5 Examples of projects 4. 4. planning permission requirements. The initial project brief is often open to interpretation and the expert opinions of the organisation carrying out the project.4 Mechanisms The mechanisms by which the output is achieved and processing carried out include the following:      People – those involved directly and indirectly. a new computer system plus effective training for the staff. Capital – the money securing the resources. ethical – behaving within ethical boundaries is becoming increasingly important as customers are becoming concerned about the ethical behaviour of organisations.1 One successful project: ongoing This section will help you to become familiar with real projects. The pit was 180 years old with an area of about 35 hectares and 2005. 4. Knowledge and expertise – brought to the project by the people participating. legal – for example. for example.4.3 Outputs The output is the satisfied need – achievement of the deliverables required. crossing departmental boundaries may be beyond the scope of the project.5. time and quality – discussed earlier in this chapter. logic constraints – planning that certain activities take place before others can start. health and safety regulations. politics – for example.4. 4.

The design team. McAlpine JV (a joint venture between Robert McAlpine JV and Alfred McAlpine Ltd) won the contract in February 1997 because of its expertise in both heavy civil engineering and building construction. that is. both tenderers were invited to make final proposals including the form of contract they considered most appropriate. during which time the owner continued to extract china clay from it as the contract and project team struggled to develop the design. a model contract based on best practice because it supported project management and provided a secure basis for partnering. Eight tenderers were selected.e.186 PROJECTS STUDY MATERIAL P5 80 m in depth. This was seed-corn money that enabled the development of the millennium funding bid to be financed. people and resources . To this end. Nicholas Grimshaw and Partners Ltd. some 700 000 m3 to be dealt with annually (22 litres per second. Tenders for the construction contract were advertised in early 1997. This meant that it became responsible for the whole design. A crucial part of the project was the receipt of £25 000 from Restormel District Council. In the next 18 months. The site was not finally bought until October 1998. with the successful contractor investing equity into the project. Both chose the New Engineering Contract (NEC) and savings/bonus provisions with an activity schedule. after investigations. . obtained planning permission (including the new requirement to build a 4 km road from the project to the A390 south of Bugle linking the main A30 trunk road which ran the length of Cornwall). During the final negotiations. . £37.8m. The contractors were interviewed and. There were 13 natural springs feeding in the water. This means they chose an NEC target-cost contract. 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.) 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 mission statement was (and is) to: promote the understanding and responsible management of the vital relationship between plants. two were short-listed: Tarmac and McAlpine JV. were taken on when the 2005.1 . It was also agreed that McAlpines would have two executive directors join the Board of Directors of Eden Project Ltd: an essential realisation of the partnering concept that had underpinned the contractor’s appointment. appointed the in-house development team and finalised the project brief. In May 1997. bought the clay pit. The contract was under deed (i. one of the largest funded by the National Lottery to celebrate the third millennium. legally enforceable) with a 12-year liability period.5m was granted by the Millennium Commission as one of its ‘landmark projects’. 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. Eden Project Ltd raised matching funds. procurement. including one Anglo-German joint venture. construction and commissioning of the total built form for a total cost of around £59. 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. and to inspire positive initiatives that will lead to a sustainable future for us all. The fundamental requirement contractually was to place a design and construct lump sum contract with a guaranteed maximum price. its offer of equity investment and its construction management proposals being the most favourable.

) The project has been successfully completed. Much innovation had been required as the pit was filled to a depth of 20 m below the water table. There were eventually 87 suppliers and subcontractors managed by McAlpine for the client. some site clearance work started. Eden Project Ltd’s (the client’s) expectations were also valueengineered down to the budget (the residue of funding less the inescapable ex-contract costs). geophysical and geotechnical surveys and wind tunnel tests were commissioned and work was done towards the site start. including the two biome structures and the temperate biome with supporting buildings on the rim such as the energy centre and the central production unit for on-site catering. amicably settled. The client and investors were satisfied. anti-static and highly transparent to ultraviolet light. the estimated construction costs had to be reduced by 25% (over £11m excluding the agreed £12. These biomes were covered with triple-layered ‘cling-film with attitude’ or ETFE (ethyl-tetra-fluoro-ethylene copolymer) foil. lightweight. The contract was in two phases: Phase 1: The buildings (the Visitor Centre) and infrastructure (roads. This was completed in five different stages to allow the customer to start fitting out individual rooms. Part of these facilities.1 . the one-millionth visitor had come to see the project. when diggers and bulldozers were used round the clock to make up the time lost.INTEGRATED MANAGEMENT 187 PROJECTS contract was agreed. Phase 1 closed in January 2001 so that the link building and modifications to the Visitor Centre could be completed. 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. In August 1998. (The target had been 750 000 per annum. programmes and method statements were prepared. The 2005. technical and budgetary issues. with very small primer payments made by the Millennium Commission against rigid ‘schedules of delivery’. all parties worked at risk. The final cost was £86m. The absence of these disputes enabled the focus to remain on the considerable physical. Work did not recommence until March 1999. were taken over piecemeal to allow the employer to start work in those areas. 2 months of torrential and unceasing rain fell. dining facilities. 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. In June 2001. Horticultural planting started in September 1999.5m for the biome superstructures already negotiated) to achieve the inadequate budget. lavatories and similar facilities between the biomes. Throughout the entire project. March 2001: The Eden Project was completely opened to the public. with the first trees planted in the Humid Tropics Biome in October 2000. In October 1998. Completed sections of topsoiling and associated works in the pit were also undertaken separately to enable the horticultural planting to start. composted ‘green’ waste and composted bark. as there was none in the pit. It came in on budget. Starting in December 1998. Phase 2: All the works within the pit. has better insulation properties than glass and is recyclable. and construction had to stop. necessitating sophisticated water management and continual pumping of 100 litres per second off site. Topsoil had to be created from china clay waste/sand. the humid tropics biome and some of the biome link with the main reception area. but the final construction contract was only signed at the end of January 1999 before work could start in earnest. though a month late. with the final infrastructure. drainage and so on). There was only one subcontract dispute. It should be maintenancefree for 25 years and last 30 years. car parking. This is strong.

’ The next development phase of the Eden Project commenced in 2002. The system. The contractors refused to invest large sums themselves. geology and budget cuts with enthusiasm and skill. harmonious and profitable. Hampshire. McAlpine Joint Venture Eden Project St Austell: BCIA Awards 2001 – Major Project Award: The Eden Project The Architects’ Journal: Eden Project: www.com. Issue No. The whole project.2 One not so successful project National Air Traffic Services (NATS) In 1987.1: ‘the parties to act in a spirit of mutual trust and co-operation’) had underpinned activity and.uk/eden/facts 4. but the project team estimated an operational start date of 1998: 2 years longer than agreed. www. Between 1989 and 1990 the management strategy for the project was defined. 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. by Tim Carter. acceptance tests were 2005. By November. when it was felt that the life of the existing system (the London Air Traffic Control Centre) would have reached the end of its useful life. MPs did not appreciate being told that this was only the capital funds draw-down. on a token ring network. The new centre had to have a 40 per cent increase in capacity. The new deadline would be 2003. In 1994. and produced a result which has become an instant legend in its own lifetime. 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. Davis Langdon Management: NEC Users’ Group Newsletter. Their budget of £1m for the project definition phase was in the main used up by the next year. the reaction of project partners was that it had been exciting. comprised 200 workstations showing both aircraft data and radar information. The requirements had been set by a small and unrepresentative group of air traffic controllers. Loral bought IBM’s Air Traffic Division and conducted a secret audit of the NATS systems that showed 21 000 defects in nearly 2 m lines of code. McAlpine JV won the British Construction Industry Major Project Award for contracts above £50m. Harmonious relationships (required by contract clause 10.) In 1995. The project was authorised to go ahead on the basis of going live in 1996.5. 16. A systems implementation contract was let to IBM. There were no firm offers from subcontractors at this time: firms such as Siemens Plessey. which was based on IBM’s RS/600 AIX-based architecture.co. The deadline for operations was 1996.188 PROJECTS STUDY MATERIAL P5 revenue from the admissions. IBM and Thompson CSF won the system contract that had been subject to competition. (Having assumed that this was the total bill. it proved impossible to scale it up on the whole operational configuration. the Civil Aviation Authority made a case to the government of the day for a new air traffic control system and centre. Sources: Internet downloads: ‘Eden Project – a Landmark for the NEC’. Logica and Frequentis were involved. for the most part. including the building at Swanwick. catering and retailing facilities has been 300 per cent over estimates made in the business plan for Phase 1. At the end of 1991. with a large number of requirements still undefined. newengineeringcontract. On 24 October 2001. Material reprinted by permission of Thomas Telford.ajplus. was said to cost £350m. though the system was working well on 30 workstations.1 . An independent consultancy (the Mitre Corporation) was hired to help with the scoping of the project and its estimate of completion was 13 years to build a fully operational system as envisaged.

The contractor submitted a plan that showed system acceptance in August 1997. The air traffic control system itself continues to have problems which have left passengers delayed for considerable periods of time at Heathrow and other airports. EDS successfully sued NATS (May 2002) after NATS terminated the EDS contract after 3 years. a near-miss between a 747 and a 767. can you identify six differences that were crucial to the success of one project and the relative lack of success of the other? 2005. Meanwhile. However. Despite the original fixed-price IT contract of £132m. an education centre and more visitor facilities. 14. NATS. NATS is still hitting the headlines with problems. finally received the acceptance of its safety case by the Civil Aviation Authority and became operational on 27 January 2002. Of the 160 individual payments to the contractor. The IT contract was nearly half the cost of Swanwick. This despite the knowledge of the contractors and NATS project team that there were potential delays in the schedule.INTEGRATED MANAGEMENT 189 PROJECTS halted. There were calls for an independent audit of the NATS project to the House of Commons Select Committee on Transport chaired by Gwyneth Dunwoody. though tens of millions of pounds had not been included in the costs. insisting that the acceptance date should be June 1997. 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. The New En Route Centre. The new government agreed. The remainder was for additional options taken up by NATS after the award of the contract. as Swanwick is called. through its Private Finance Initiative partner EDS. by Tony Collins. A new operational deadline of October 1999 was approved by NATS in September 1997. NATS had accused EDS of failing to meet critical milestones. Success clearly breeds success. Over a year after it became operational. and the diversion of planes to other traffic control centres due to operator overload. These problems became public in 1996. A quarterly progress report from NATS to the Department of Transport stated that the system would be on-line by the summer of 1997.1 Having read the descriptions of the two projects. NATS turned this down. in 2001. By October 1998. (This description was based on an article in Computer Weekly. with the operational deadline 6 months later.1 . In June 1999. the price that would eventually be paid to Lockheed was £337m. the NATS system has been blamed for unreadable screens. p. The Swanwick costs were now £ 700m. The operational date for Swanwick was confirmed as January 2002. Exercise 4. Eden Project Ltd has contracted McAlpine JV for the construction of Phase 4 due to start in late 2003 and finish in 2005. Phase 4 will include building another biome. an audit by Arthur D Little into the finances and management of the project warned that the final cost would be £180m more than announced to date. 24 January 2002: ‘A Brief History of an Air Traffic Control System’. the operational deadline was agreed as 2001–2. The settlement was for an undisclosed sum thought to be many millions. installed well-written software releases that drastically reduced the number of bugs in the system from hundreds to zero. It had been due to run for 14 years. only 15 were originally specified for the software. Lockheed Martin bought out Loral and by the end of 1996 the operational date had shifted to March 1998.) Afterword The Eden Project goes from strength to strength and their relationship with McAlpine JV continues.

You can see from Table 4. Forrester. Innovation: leading-edge engineering made the project exciting 3.1 Survey results The 10 most common factors contributing to real IT project failures Time/resource estimates unrealistic: 75% Objectives not clearly defined or measurable: 71% Project manager: poor communication skills: 64% Objectives changed during project: 61% Project manager: poor leadership skills: 59% Senior management: not showing strong support: 56% Stakeholders: not taking ownership of the project: 56% Role and responsibilities of the project team not defined: 54% Resources not identified/made available at the start: 54% Project team: did not work as a team: 53% 2005. Significant elements of the project management process. No consistent contractual ownership 5. asking them under five headings to identify which of the 60 factors could affect the success of an IT project. Contract let to IBM with many requirements still unclear/time estimates poor 2. informed the world that about two-thirds of major IT projects fail to deliver some of their original objectives (NATS?) and more than a quarter fail altogether. leadership and clarity of purpose can produce a desired result.1 are taken from that article. A vision that was sold to all (communication) Unsuccessful projects 1. Good management of the large number of third parties and suppliers 6.1 . Poor communication 2. a research firm.190 PROJECTS STUDY MATERIAL P5 Solution Successful projects 1. Genuine partnership (McAlpine JV were willing to invest time and money in the project because they had belief in it) 4. Factors such as communication. To continue with this theme: NSM Research carried out a survey of 867 IT professionals. Small primer payments for rigid milestones 4. Poor cost management seen in cost overruns 6. and identifying Table 4. Changed objectives after project start 3. setting realistic estimates in terms of budgets and time. This independent market research agency was commissioned by the Coverdale Organisation (a management consultancy) and Computer Weekly. such as the defining of clear objectives. Understanding the client’s needs (opening during construction to get revenues flowing) 5. The results in Table 4.6 Why some projects fail You have seen for yourself some of the factors that are crucial to projects. Not wanting to hear bad news 4.1 that the technical or IT-specific factors were viewed as far less relevant to project success than the way people fail to work with each other. The results were published in Computer Weekly in an article entitled ‘The Project Killers’ on 28 February 2002.

you have looked at the various aspects of projects. 4. though they are more important for the project team and essential in suppliers and third parties.7. projects fail. including the specification of resources required. who works for Coverdale. necessitating the understanding of the various stakeholders. These skills should be used to communicate and to obtain agreement with clearly defined. 4. often a summary of the work breakdown structure. Project teams have to have clear roles and responsibilities. measurable objectives.’ CIMA: Management Accounting: Official Terminology. The support and involvement of senior management was essential: without it. 4. and the resources to be used. 2005.7 Strategy and scope You may find the terms ‘project strategy’ and ‘project scope’ used in textbooks or articles. to achieve a specific objective. 50 This definition also applies equally to project management. It is generally expressed as a list of tasks. The key points to remember are:  the project life-cycle and how a project may be seen as a systematic conversion process. for example. A project should have a comprehensive high level definition of what it is to achieve.’ 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. will impact seriously on the success of projects: they can head in the wrong direction from the start. These two may well be sections in a project initiation document.8 Summary In this chapter. is experienced in blue-chip IT companies’ major IT projects. Understanding the technology and technical competence are of far less importance to a project leader. defining them and examining their characteristics. Suppliers and other third parties have to be tightly managed and assurance about their technical competence given and checked by third-party references. and you may be asked to produce them in your examination. The associated skill set contains the ability to communicate well and to lead. 4. strategy was defined as ‘A course of action. Steve Goodman.1 . team-working and motivation more than technical competence or formal training.1 Strategy In Chapter 1.INTEGRATED MANAGEMENT 191 PROJECTS resources. For one task estimates ranged from half a day to two weeks.2 Scope The scope of a project is the extent of work needed to produce the project’s deliverables. p. 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. how that will happen.7.

J. and Clements. 2005. L.1 . The Open University. M.192 PROJECTS STUDY MATERIAL P5   what constitutes a successful project. H (1996). Gido. (1998). (1996). International Thompson Publishing. Project Management. Successful Project Management. J. Maylor. References Field. Project Management. the difference between strategy and scope. Ft Pitman Publishing. and Keller.

before the project can proceed. As transportation coordinator. the stock market [is down].’ says Bob Brown. 193 2005. both in front of the camera and behind the scenes. The last script change was made four days before the project was scheduled to complete shooting. it’s still a substantial amount. a comedy written. Although $2 million is considered a ‘low-budget’ film. as this newly ‘starving artist’ landed a job with Purple Rose Films in the role of transportation coordinator on the production crew of a $2 million feature film. Cheklich Copyright #PMI Publications. ‘We sat down and said. this project manager gained an insider’s view of motion picture set. By the end of the film’s production. The transportation coordinator was charged with procuring all vehicles used in the film. the crew had a rainbow script with eight different colors in it. Film production is an incredibly intense effort. so it serves as the primary requirements document for the project. However. Opening credits Super Sucker. The drama began in May 2001. The scope of Super Sucker changed several times over the course of the project. The film’s screenplay dictates how the end result will look. one that can only succeed with effective project management across all phases. ‘‘The economy has slowed. Super Sucker.’’ so investors were supportive but not overly anxious to jump back in.Readings 4 Lights. which includes a contingency amount.1 . directed by and starring Jeff Daniels. Reproduced with permission of PMI Publications via Copyright Clearance Center. managing partner at Purple Rose Films and Super Sucker’s executive producer. The executive producer develops an initial budget (financing is secured against this budget). funding is a driving concern. Project Management Diane C. and we didn’t pick up a national distribution deal for Escanaba [ Purple Rose Films’ previous movie]. The project’s department heads are responsible for working within the limits of this budget. budget and operation. is about rival door-todoor vacuum cleaner sales-men and the lengths to which they will go to prevail in a winner-take-all sales contest. seeing first hand how project management facilitates the creative process while maintaining tight business objectives. This entailed managing activity and working closely with the people who were responsible for managing the overall project schedule. Camera. Each round of script changes was printed on different colored paper (the affected pages only) and distributed to the crew.

color plays a big role in creating production schedules. With his industry experience. as on many other feature films. electricity. As in the screenplay analysis and breakdown.’ Tech scouts present an opportunity for the film’s director to describe the vision for each scene on location. key required elements are physically highlighted on the paper through color-coding. especially on low-budget films where the money is tight. and you better have it all in the can. Timing is everything Creating a film work breakdown structure begins with a detailed analysis of the screenplay. On Super Sucker. Daniels and several other crew members drove around Jackson. daniels recognises that compromises are necessary on low-budget films. a software budgeting and scheduling product was used to interface with script-writing software to automatically set up a baseline schedule driven by the written scenes and their various elements. ‘When the days are up.to 15-hour days and one Saturday to make up for some lost time. review and approve or deny requests for variances from the budget. the blockprocessing concept applies to locations.’ Because film productions are temporary concerns. ‘When the money’s gone. where all scenes at a give site happen adjacent to each other. The algorithm is similar to that on a manufacturing assembly line. the acting.. The first assistant director (first AD) assigns each scene or part of a scene to a specific day in the shooting schedule. there was room in each workday for overtime. one strip per scene. a state’s film production resource directory and the local telephone book. To reduce the risk of problems. laid side-by-side on a long board and grouped by day and week. This is tricky to maintain. Most procurement work is done on the honor system. the money’s gone. The script breakdown information directly affects a film’s production schedule. minimising the number of film changeovers required. where the work-in-progress is block-processed to minimise the number of changeovers in tooling. Risky business In any given shot. however. The final shooting schedule for Super Sucker was six weeks long (30 days). Although the Super Sucker project had an aggressive 12-hour-day.194 PROJECTS READINGS P5 The producer and/or executive producer.’ he says. The master film production schedule consists of a series of colored strips. key crew members from each production department go on location tours called ‘tech scouts. five-day-a-week schedule. Mich. Though the scheduling software assists in the process. crew members can better visualise how their parts should work. Primary resources for locating potential vendors are word of mouth. in a van for two days. which also must take external constraints into account. lighting and camera must be in precise harmony. On Super Sucker. with some checks and balances to control expenses. and there isn’t time to create and execute a formal bidding process for selecting vendors. it doesn’t make sense to set up longterm accounts with vendors. Within each scene. and it assumed 12-hour workdays. visiting all 32 shooting locations. and Saturdays were optional work-days. USA. Each page of the script is broken down into individual scenes. props.1 . set. 2005. As a result. The team worked several 14. the complex algorithms for making these assignments are mostly in first AD’s head. the days are up. In film. Industry-standard scheduling software facilitates the scheduling process.

The dreary weather actually enhanced the impact of that scene. With such a large crew. They are expected to perform together as a finely tuned machine under grueling conditions. On any given day of Super Sucker there were at least 70 people (cast and crew) who participated in the production of the film. On one day there were more than 1000 people (mostly extras) required for a particular scene. Whenever there is an exterior shot scheduled. the second AD makes sure all the elements required to shoot those scenes are mobilised on schedule and that they are managed effectively in real time through the production process. an exterior funeral scene at a cemetery was scheduled the one day the Super Sucker crew experienced torrential rain.INTEGRATED MANAGEMENT 195 PROJECTS Weather also is a wild card on film projects. the first AD always has an alternative interior location.1 . Figure 1 shows a typical organisation for a feature film. the daily call sheet told the transportation coordinator (project manager) which vehicles were required to be in the film that day. where and when. A coordinated effort While the first AD dictates which scenes are to be shot on which day. For example.’ that must be ready for shooting in case of inclement weather. it’s crucial that the production schedule facilitates maximum efficiency while accommodating other constraints. Many of a film’s crew come together in a just-in-time fashion without ever having worked together before and disband just as quickly when they are done. known as a ‘cover set. A key report called a ‘call sheet’ (Figure 2) detailed instructions for the day. Specific constraints on Super Sucker included:    Five-day work weeks Actor’s schedule conflicts The potential strike on 30 June 2001 by the Screen Actors Guild. A typical call sheet also Figure 1 Shown is the chain of responsibility in a typical film production organisation 2005. Fortunately.

when and where details: which actors are required that day and when they should report for make-up/ wardrobe activity. and contingencies do arise. Daniels says. Walkie-talkies are standard fare on film sets.1 .’ per se. There is a very small window for making changes to the next day’s plans. anytime. amount of film used and number of script pages that were covered during the day’s shoot. and that is the primary determinant of quality. detailing who is needed. as is a daily production report that details hours worked. In Super Sucker. as are twoway wireless telephones. When this happened. People must be reachable anywhere. In defining film quality.196 PROJECTS READINGS P5 Figure 2 The call sheet facilitates the film’s schedule for the day. The call sheet also is an important communication tool. 2005. which props are required. And the award goes to … In movie-making there is no ‘testing. ‘It’s all about. The whole goal of the production process is to translate the written word into an effective motion picture. a scene was added that required a 1970s convertible car with hydraulics. Calls sheets are distributed 24 hours in advance of the shooting day. when meals will be served. such as changes to the script. an informal change control process took place – the producer considered the requested change’s impact on budget and schedule and its importance to the story before approving or denying the change. what the day’s weather report is and the phone number of the nearest hospital. Communication is a constant challenge because of the logistics involved.

who is the primary project manager. Preproduction. and creativity is needed whenever you’re going to manufacture a product in a relatively short period of time.’ Brown says. The executive producer builds the initial budget and raises the money necessary to make the film. you better have creative minds working. technical or continuity) another ‘take’ is necessary. and the production coordinator. A picture is worth … Although there may not be many formally trained project managers in the motion picture industry. on 23 February 2002. The second opportunity for quality monitoring occurs the day after the film is shot and processed.. Super Sucker was shot in Jackson. USA. if a character has his hand in his pocket on a close-up shot. ‘It doesn’t matter if you’re in front of the camera or behind the camera. the key elements of project management come naturally to the industry professionals who make feature films. During actual shooting there are two opportunities to monitor quality. called ‘dailies. who is in charge of the production’s overall operations. including:  The production office facility is set up on location and establishes an operational infra-structure. Crew members watch the processed film. In this case. 2005. If a given shot is not satisfactory for whatever reason (creative. all of us are problem-solvers. USA.. which precedes the actual on-location shooting of the film. the script supervisor watches to make sure that character has his same hand in the same pocket for a different-angles shot of the same scene.INTEGRATED MANAGEMENT 197 PROJECTS was it a good movie? Did the story work? Did you believe the people? Were the actors good?’ Tech scouts represent one form of quality assurance. the film’s office took an entire floor of a local hotel where the cast and crew stayed during the shoot.1 . other team members begin to join the project. Tops and bottoms A typical film includes three major project phases: preproduction ( planning and initiation). in the offices or on the set. by improving the crew’s understanding of the director’s vision. For example. These include the producer. Preproduction accelerates once a location is selected for shooting. begins once the story concept exists and a commitment is made to turn it into a film. where several wireless monitors broadcast the cameras’ signals so key crew members can watch the action as it happens.’ The world premiere for Purple Rose Film’s Super Sucker was held in Jackson.’ to ensure not only that the script is brought to life. but that the technical quality of the film is satisfactory. Once enough money is raised to finance the film. who studies each shot to make sure continuity exists from one shot to the next. who is responsible for executing many of the project’s key tasks. Another important quality manager is the script supervisor. because that’s what it’s all about. ‘If you’re going to make a 90-minute film and you’re going to do it in 30 days. Mich. A high-level schedule is established. One is through real-time screening. a unit production manager (UPM). production (execution) and wrap (closeout) (Figure 3). Mich.

and they were finished within half a week. Contractual arrangements are made with actors and owners of locations to be used in the film. That’s a wrap Once shooting is complete. The Life Cycle of Technical Projects ´ ´ Pierre Bonnal. Reproduced with permission of PMI Publications via Copyright Clearance Center. additional sound and special effects are added. Ecole des Mines d’Albi-Carmaux ´ ´ Germain Lacoste. 1996) proposes some definitions or models. since this concept has gradually derived overtime. During post-production. As project life cycle also is handled daily by project management practitioners. Super Sucker took 30 days to shoot. but still before the targeted end date.198 PROJECTS READINGS P5 Figure 3 Motion picture industry projects often fit the standard project definition and typical life cycle    The initial project schedule is created. and they arrive at the shooting location.1 . There were 53 actors and 32 different sites. and a few assistants were left to shut down the office. Super Sucker’s initial schedule was 28 shooting days. However. Remaining production crew members are hired (as independent contractors). It is quite difficult to attribute the concept of project life cycle to one author in particular. additional or alternative 2005. In the end. the project must wind down and close out. Copyright (c) 2002 by PMI Publications. This often takes several months. which is technically not part of the production cycle. music. others can be found in the Project Management Handbook edited by Cleland and King (1988) and in many project management textbooks. Centre Europeen pour la Recherche Nucleaire ´ Didler Gourc. editing of raw footage occurs. A Guide to the Project Management Body of Knowledge (PMBOK â Guide) (PMI Standards Committee. Super Sucker had more than 60 crew members. the UPM. Ecole Nationale d’lngenieurs de Tarbes Project Management Journal. The production coordinator. two days longer than the original 28-day schedule. and arrangements are made for marketing and theatrical distribution of the film.

and may. in an attempt to appraise the benefits of each. For instance. Obviously. also called stages or steps by some authors. no title blocks on the drawings. This is typically a situation that can be observed on real-world projects. In spite of such differences. then subsubphases. while a project phase must be managed with rigor. The phasing of engineering and construction projects also are different from those used for the development and industrialisation of commercial goods. These approaches are:      Straightforward project life-cycle approach. hence. These phases can be divided into subphases. While going through these model proposals.g. one can remark that each author in some way enforces what is specific to the particular context for which the model has been made. are believed to be appropriate. no more drawing 2005. the breakdown into phases of a small project is different from the ones used for large-scale projects. a well-known project life-cycle model proposed by the U.S. Approved and funded projects then are implemented in the second phase. the term ‘phase’ is preferred. and to appraise them in terms of benefits for the organisation that intends to employ them. Control-oriented project life-cycle approach. Aoussat. Several characteristics make these two phases different. not truly reflect the original authors’ aims. and the engineer notices that basic quality assurance principles have not been respected.e. Risk-oriented project life-cycle approach. i. The preproject phases aim to identify possible projects. Quality-oriented life-cycle approach. the authors limited this paper to an overview of the major project life-cycle proposals – before proposing additional models. Reviewing all the models that have been proposed during these last two or three decades would be a cumbersome endeavor. the project phase. Fractal project life-cycle approach. Department of Defense emphasises the aspects related to the demonstration of the feasibility and viability of the project (two phases). Chrisotofol. and so on. When such phases are completed.. projects in a broad sense – technical endeavors more specially – have two very basic phases in common: a preproject phase and the project itself.1 . Reference to the information source is provided when available for more complete coverage. specifically those presenting some interests in the field of technical projects.. the authors will not differentiate between these three substantive. called project concepts. For instance. Another project life-cycle model proposed by Muench for information systems projects (PMBOK â Guide) insists on taking into account the recursive processes often associated with these project contexts. Straightforward approach to technical project life cycle Technical projects can be broken down into phases. In this paper. while the specification and the execution of the project consist of one phase each. The life-cycle models reviewed in this paper are organised around five broad approaches.INTEGRATED MANAGEMENT 199 PROJECTS models can be observed directly in real-world projects. The number and labels of these phases are deeply dependent on the field for which the model has been made. The referenced papers and practices have been summarised. it is up to the decision-makers to decide whether or not to go ahead. a designer arrives in the office of an engineer with several plant layout proposals. The aim of this paper is to review project life-cycle models. For instance. e. and Duchamp (1993) mention that a preproject phase requires creativity. therefore.

The inputs of the initiation phase. This list of differences easily could be extended. One can derive from this that these two phases should be carried out by different people with different skills. Otherwise.. Real-world projects obviously follow more pragmatic schemes. For technical projects. quantifying. and a project implementation phase. 1994.’ are the keeping pace with technological innovations. Selected project concepts – outputs of initiation phases – then are used as inputs for the second phase.e. while hundreds or thousands of people can be involved in project phases over the shortest possible time periods. 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. This breakdown into two very basic phases is theoretic in the sense that it intends to embrace all kinds of endeavors. creativity and rigor. The initial phase aims to sort all this information to identify some project concepts. Very often.200 PROJECTS READINGS P5 numbers. With this information. or brainstorming processes. on the other hand. A rational attitude towards such initiation phases is to identify as many project concepts as possible and to eliminate the discordant ones through a preselection procedure with respect to the objectives of the organisation. Clifton and Fyffe (1977) proposed to split this feasibility phase into subphases separated by intermediate decision points. Meredith & Mantel.1 . the feasibility analysis of the project concept shall be stopped at that point. These two concepts. The project life-cycle approach proposed hereafter has been derived from several models commonly presented in the literature (Kerzner. economical trends. 1995. Some project failures can be explained because this dichotomy of skills has not been respected or considered. Although this statement seems obvious. The work loads and the duration of these two very basic phases also are different. One can argue that more rigor could be detrimental to the creativity of the designer. can be opposed because creativity is generally associated with disorder. If the results suggest that there is nothing to earn. Three phases are considered: an initiation phase. is to be carried out. This second phase can be understood as follows: on the one hand. One can discuss whether or not this first phase belongs to the project in a broad meaning. new products put on the market by competitors. by product engineers or managers. also called ‘concept phase’ or ‘identification phase. it is not always the case. Morris. a technical feasibility analysis. and mitigating technical risks. there are the organisation’s needs. Few people are generally involved in preproject phases over quite long and imprecise periods of time. i. The first subphase consists of a market feasibility analysis to confirm the viability of the project concept from a pure marketing point of view. and by project managers in project phases. while rigor and order are almost synonymous. Such an analysis serves to demonstrate that the project is technically feasible. This phase aims to analytically appraise project concepts in the context of the organisation. the decision-makers should be able to decide whether or not to go ahead with each project concept proposed. It also provides the information required for estimating the costs associated with the implementation of such project concepts and for identifying. especially when projects are complex. 2005. requests from customers. and missing dimensions. but common sense leads the authors to think that the initiation phase is an endless process that continuously initiates new feasibility phases. by architects in preproject phases. there are the capabilities and the know-how of the organisation. 1988) and additional observations informally made by the authors from real-world practices. the feasibility phase. followed by a feasibility phase. This does not mean that all the concepts made out of this phase are to be carried out. or feasibility study. distributions or sales people.

will generate profits for the organisation. What makes the two design phases different is that. For instance. the financing is arranged. in the petroleum industry it is quite common to have this materialisation phase broken down into three subphases. and a preliminary organisation is established. the outputs of such a feasibility analysis can be a single figure. A detailed design phase.) is made and commissioned. immediately followed by a construction phase. the final deliverable is handled as a breakdown or parts and pieces to procure or fabricate and to assemble. A post-project phase. The outputs of the basic design phase are similar to that of a feasibility study. also called a ‘materialisation phase’ or ‘realisation phase. The feasibility phase is known to be terminated when a decision-maker decides not to transform the project concept into a project. another go or no-go decision is made to determine whether or not to initiate a financial feasibility analysis. except that they are more detailed. This phase is considered completed when engineering. Morris (1988) recalled that at that point. Based on the results of these technical feasibility analyses. but if it is negative. the architects and/or the general contractors to the owners. turnover phase. the range and the accuracy of the information used. Even if this breakdown into subphases slightly differs when transposed into other technical project 2005. and when purchase orders for long-lead equipment are issued. If it is positive. and applicable regulations. the capacity is decided. and the size and the complexity of the project proposed. laws.INTEGRATED MANAGEMENT 201 PROJECTS environmental analyses are appended to technical feasibility studies to ensure that the project does not go against external constraints related to ecological issues. equipment. Once launched. one can go ahead. carried out by one or more contractors during which the final deliverable (a plant. while in the detailed design and construction phase. or start-up phase during which the responsibility of the materialised deliverable is transferred from the engineers. It is initiated when the project has been appraised to be feasible and profitable. The milestone associated with the completion of this basic design stage is important. Its aim is to establish if a project concept. schedule and budget are reappraised based on an expanded description of the product and of the project. and construction contracts are awarded. in the case of a plant. For technical projects presenting low complexity. the project concept can be abandoned and eliminated from the project concept portfolio. procurement.’ is conducted depends on the organisational context within which the project is implemented. in a basic design phase. during which the documentation for tendering and contracting the physical construction or for procuring equipment is prepared. this phase can be split into a few subphases separated by intermediate decision points at the end of which the future owners and/or the stakeholders of the final deliverable can decide whether or not to continue the implementation of the project. Basically. The way a project implementation phase. For speculative or complex projects. etc.    A basic design phase carried out by an engineering company or an industrial architect. the processes associated with this phase are quite straightforward. nothing is supposed to interrupt the realisation of the project. the overall budget and schedule are agreed. once materialised.1 . It is reasonable to think that this figure shall be balanced with the internal (technical) and external (environmental) risks. social profitability. because the project can be stopped at that point if the conclusions of the feasibility analyses are not confirmed. the final deliverable is seen as a set of functions to satisfy. the locations are chosen.

e. especially in those devoted to the management of IT projects. i. Morris cites a project life-cycle approach attributed to Kelley (1982) (Figure 1). With the project implementation progress. The lowest level is reached when parts and pieces are being manufactured or when individual equipment is installed. the level of conceptualisation gets lower.. 1982) . At the early stage of the project.202 PROJECTS READINGS P5 contexts. the time runs from left to right – the level of conceptualisation of the project at a given time is featured on an orthogonal axis. the deliverable of the project. This model is interesting because it highlights one of the major duties of a project manager – checking that the product that is being made fulfills its specifications all along the implementation phase and that the project progresses satisfactorily to get the deliverable on time and on budget.e. Considering the evolution of the quantity of objects handled. At the early stage of the project. Quality-Oriented model The project life-cycle approach shown in Figure 2 cannot be attributed to one author in particular. this level is high.). this quantity follows an opposite scheme. or when installed equipment is networked. then assemblies. and another level using and acting on the project.1 Control-Orientated Project Life-Cycle Model (Kelley. the whole philosophy remains. In it. the processes of making it deliverable. It can be easily transposed to the fields of technical projects.. defense.g. Kelley considers a project as a servomechanism with two levels of retroactivity: one using and acting on the product. few functions are sufficient to describe the final product. It is widely used in project management classes. or big-science projects. This level grows when manufactured parts and pieces are assembled to form subassemblies. cit. these few functions can be transformed in some physical systems and subsystems. As the definition of the final product progresses. e. The highest level of conceptualisation is reached again when the project is terminated and the final deliverable is delivered.. Control-Oriented model In the Project Management Handbook (op. automotive industry. i. This is because the purpose of a basic design phase is to specify a set of functions that the final deliverable can satisfy. which are made of assemblies and Figure 1 2005.

INTEGRATED MANAGEMENT 203 PROJECTS Figure 2 Project Life-Cycle Model Highlighting Project/Product Quality Matters subassemblies. This system should include procedures describing the basic actions to be handled and control reports demonstrating that these procedures have been followed and that performance and quality aims have been reached. Risk-Oriented model Risk management is another important issue associated with the project management body of knowledge. The issues associated with the preproject phase remain the same: on the one hand. and I prove I’ve done it. the know-how and the capabilities of the organisation (what one can). and the installation. a project concept could consist in developing a new product to fill 2005. This project life-cycle model is made of two very basic phases. According to a broadly known principle of quality management.’ The project life-cycle model shown in Figure 2 can be considered as qualityoriented. ‘I say [and write] what I will do. the same principle applies. It has been said that the purpose of a basic design phase is to specify and endorse the final deliverable as a set of functions to satisfy. The final acceptance of the deliverable should be conducted in such a way that the fulfillment of these functions can be demonstrated without ambiguity. because it helps to understand the integration of this principle in the project management field. For instance. on the other hand.1 . she/he checks what I’ve said [and written]. then I do what I’ve said. At lower levels. the project manager and his or her team are committed to making a product that fulfills these functions. This model is helpful to demonstrate that the documentation associated with a product/project shall not be issued erratically but shall follow rhythms of issuing to get and use at the right time documents describing the product/project at the right level of conceptualisation. The project assembly breakdown structure allows for reconstruction of the final product for delivery. the assembly. The model proposed by Lacoste (1999) (Figure 3) partially deals with this issue. the leaves of that hierarchical scheme are finally made up of the elementary parts and pieces of the final deliverable. a final acceptance procedure should be written in accordance with the statement (the project charter) that the project manager and his or her team are committed. the requirements (what one needs) and. For this to be objectively feasible. down to the manufacture. A system should be commissioned according to the technical specification that describes it and so on.

204 PROJECTS READINGS P5 Figure 3 A Risk-Orientated Project Life-Cycle Model (Lacoste. and its mitigation. The feasibility phase consists in verifying that the marketers’ requirements are compatible or consistent with respect to the know-how of the organisation. it also is 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. during which the experience acquired is recorded. during which scenarii are elaborated. the neologism ‘projectique’ was created to define this new field 2005. its evaluation. and a closeout phase (Phase D). followed by an execution phase (Phase C) during which the final deliverable is made. This important information must feed the know-how repository of the organisation. Fractal Approach to Project Life Cycles In the closing talk of a workshop devoted to project management seen from a sociologist point of view (In French. the following studies are to be carried out: a market feasibility study to confirm the opportunity of developing the new product. a financial study to check if the organisation can financially afford the development to verify that this product does not go against external constraints. During the execution phase. a technical study to ensure the feasibility of the new product with respect to the means and the know-how of the organisation (the new product can be feasible but out of reach for the organisation).1 . 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. Typically. 1999) up a market niche. The main aim of the scenario phase is to plan risk responses. This intermediate phase is concerned with three out of the four project risk management processes (as per the PMBOK â Guide): the identification of the risks (opportunities or threats) that are likely to affect the project’s execution and the conformance to the specification of the final deliverable. This model differs from other project life-cycle proposals because a scenario phase is inserted between the feasibility phase – more precisely the decision to go ahead – and the implementation of the project. All along the realisation of this phase. The project phase itself is divided into three subphases: a planning phase (Phase B in Figure 3).

endeavors can be seen as quite homogeneous mixture of creativity and of strictness. prototypes are sub-projects of the feasibility study project. the uncertainty and imprecision associated with the execution of any project. A fractal approach to project life cycles (henceforth. the introduction of the management by projects in organisations in the ’80s and ’70s – to reach a fractal dimension. These reports must be written and the actions of writing them are no more than projects. The issuing of a technical specification describing a prototype is a sub-sub-project of the prototype subproject and so on. and. don’t plan too much if you intend to remain creative. depends on the level of elaboration of the plans.’). all along any project life cycle from an early feasibility stage to the completion of a project. The quality of these feasibility analysis reports.INTEGRATED MANAGEMENT 205 PROJECTS of knowledge. Plan your project correctly if you intend to deliver it in conformance with specification. The feasibility of a technical product/project is sometimes appraised with conclusive results made out of tests and measurements using prototypes. fractal life cycle) can explain situations that are difficult to model otherwise. the spreading of responsibilities. However. Even if creative behaviors shall animate feasibility phases. neologism could be translated into ‘projectics. French academician Joel 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. This way of reasoning also is applicable to the writing of technical specifications of Figure 4 A Fractal Approach to Project Life Cycles 2005. including their issuing on time and on budget. see Figure 4. on time and on budget. In such contexts. once gazed through a fractal lens. For some examples. and decisions that are made complicated when OBSs deal with the matrix organisation of projects.1 . 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. Especially those concerned with the overlapping or fuzziness of interfaces between phases.’ When looking to an endeavor with this in mind. When the analysts in charge of carrying out such phases agreed on content. more generally. in all the cases the deliverable of these phases are reports. a more or less formal decision is made to go ahead. it seems that some of it goes against universal project management practices.

’ every schedule should be made according to project life cycles and.e. commonly implemented planning and scheduling techniques are such – deterministic. however. is to multiply reviews. closeout reviews. On the other hand. he or she has a role of stakeholder. expecting that the delivery of a document. change control. At subproject level. or simply to go ahead. Before concluding the authors present some key points a project practitioner can use to take into account these issues when planning and scheduling her or his project. the authors believe that having such images in mind when managing a project can contribute to the reality of the world.. The activities of a project manager do not only consist of making decisions at the project level.1 . Issues such as possible rework. product and project quality. and the resources needed to complete a project is not sufficient to ensure its performance. or whatever he or she is able to request will conform with what he or she asked and delivered on time and on budget. It is obvious that this contributes to the success of a project. production readiness reviews.206 PROJECTS READINGS P5 systems and subsystems. decisions are made by project engineers or work package managers. However. As a consequence of a review. risks. Accurately forecasting the work to be done. critical design reviews. for technical projects in particular. Because project life cycles can be understood as ‘genric macro schedules. one can note that decisions are spread in all dimensions: hierarchical or temporal. it is up to the project manager to make decisions. to make decisions. and something the authors have called the fractal aspect of a project process. an assembly. but it is not enough. The four project life-cycle models presented in this paper enforce four important aspects of the project management process: control. nonrecusive (i. nondiscursive (i. Even if the consolidation is difficult to make. Rare are the project activity networks that take into account the control issue. the go/no-go decisions are made by stakeholders or the future owner of the final deliverable. such as preliminary design reviews. through the reviewers’ recommendations. 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. Down to Project Management Practices Before presenting what a project practitioner can gain in being aware of few project lifecycle models. At lower levels.. those that do not allow loops). but. It is up to the project managers to quantify these possible additional activities and to spread them as 2005. progress reviews. A tendency in technical project management practices. but also others – strongly use images as definitions. the duration. Using such a model. in many cases. the authors will discuss feelings regarding a common statement that can become a serious pitfall if not appraised carefully. project life cycles – the ones presented in this paper. It is obvious that the purpose of these reviews is. an activity that was supposedly completed may be redone.e. product and project quality. those that do not accept decision points) – that it is difficult to make schedules that can be consolidated at the life-style model levels. to the four project life cycles presented earlier. an additional activity neither planned nor scheduled may be carried out. At project level. This model also shows that project managers contribute (by their creativity) to processes that are upstream decision points in appraising pre-subproject opportunities. or project risks also shall be taken into account when planning and scheduling the project.

i.1 .’ Then all these projects. then subsystems.e. at the early and late stages of 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. Functional breakdown structure (FBS) is similar to the PBS. The risk-oriented project life-cycle model presented is helpful to understand how the six phases of the risk management process are articulated. The WBS and the OBS/RBS. One can not that there exists a wide taxonomy of such structures:       Project/product breakdown structure (PBS) aims to split the final deliverable of the project into systems.INTEGRATED MANAGEMENT 207 PROJECTS contingencies all along the project execution. i. The project risk management is one of the knowledge areas of the PMBOK â Guide. and set up limits not to overstep. develop plans to respond to these risks. the quality of the project plans and schedules is increased. As for state-of-the-art practices. Last but not least. If all these structures are correctly interlocked. are made and updated according to the PBS. which are the inputs to the schedule. The ABSs are mostly used during the materialisation of the project. 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. to identify and quantify risks. phase D shows that a continuous feedback mechanism is fundamental to fill up the know-how repository of the organisation. but it is oriented to the functions the final deliverable should satisfy. and the quality-oriented project life cycle model is helpful for that purpose. 2005. drawings) and the commissioning procedures to issue. FBS. Phase A (at a macro level) and phase B (at a micro level) aim to prepare scenarii. They are prepared as the design progresses. This life-cycle model also highlights that the risks associated with the product (related to the product definition) and those associated with the project (related to the materialisation of the product) shall be handled differently because their consequences concern different phases of the project. This approach seals the breakdown of a project into sub-projects and so on down to ‘elementary projects.. the FBS is very helpful to identify and list all the design documents (calculation notes. Organisational breakdown structure (OBS) describes the organisation of the project in terms of responsibility. and ABSs. the OBS is limited to decision-makers while the resource breakdown structure (RBS) takes into account all the resources involved in the project. whatever their level of complexity. During the design and the commissioning phase of the project. to use the right ones at the right time over the project execution period. Phase C then is conducted in such a way that the limits previously defined are not exceeded. Work breakdown structure (WBS) is a structured list of all the work packages and activities that have to be carried out to complete the project.. Assembly breakdown structures (ABSs) aim to detail the sequence of operations to get an object assembled or a plant constructed. assemblies. 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. project managers are strongly invited to break down their projects in tree-like structures. 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.e. subassemblies – down to elementary parts. specifications.

the bottom level of planning and scheduling deals with operational issues. The purpose of a project life cycle is to find something commong to all projects among all these differences. a time management system is made of two or more levels. It is followed by a procurement coordination schedule. The project shall benefit from that. Because the world of projects does not consist of a very small number of variables. for instance in the offshore oil platform or nuclear waste reprocessing plant construction industries. The first level of such a planning and scheduling system deals with strategic issues. Generally. Many project practitioners are familiar with such practices. The first coordination schedule to be issued covers the design phase of the project. As for work packages. seldom do take ‘preproject activities’ into account. Hence. this intermediate level is made of several overlapped coordination schedules covering the midterm. This intermediate level of planning and scheduling is made of work packages that are roughly defined at the early stage of the project and which become more precisely detailed as the project progresses. and the master schedule aims to reflect the strategy of the project. Practically. from a few weeks to a few months. to project schedules that are precise and detailed but only applicable to oen specific project. Three levels can be beneficial for understanding what follows. are located on a continuum going from the simplest project life cycle.e. In some domains. It covers the long term. It is the tool the project manager uses to communicate with the external world. project managers and team members must share a common view of their projects and 2005. detailed schedules cover short-term periods. Because project life cycles are models. a construction and installation coordination schedule. it is difficult to imagine – and perhaps impossible to make – a model that could integrate all the variables that make all projects specific. Conclusions Projects are characterised by their specificity: an endeavor that has a start and a finish. This schedule is issued prior to the go decision. the way elementary activities are consolidated at the corresponding coordination level constitutes a prerequisite to the issue of the detailed schedule. and finally a commissioning coordination schedule. Nevertheless. One can argue that ‘creativity’ is something difficult to estimate and. especially on largescale industrial projects. therefore.208 PROJECTS READINGS P5 This fractal view very often is implemented on technical projects. Real-world schedules. In order to understand the projects they are involved in. which is made of two very basic phases and applicable to all types of projects. to schedule. The way the work packages are consolidated at the top level is obviously a prerequisite to the issue of the corresponding coordination schedule. i. the whole duration of the project from the go decision to the closeout. the time spent in dealing with these preproject activities must be considered in the project overall work load.1 . The consequence is that project work breakdown structure viewed through this fractal lens is much more exhaustive and closer to reality. The intermediate level of planning and scheduling deals with tactic issues. a precise and unique aim that is carried out by a team set up for the purpose of the project. in the case of a large-scale project it is difficult for someone to have a precise and detailed view of the installation and commissioning phases when the project is just launched. if ever. four or five levels of schedules are common practices. their purpose is to explain the real world in a simpler and understandable way.. whatever their level. Still within the scheme. For instance. Project life-cycle models. they are made of the elementary activities. whatever they are.

J.-P. New York: Van Nostrand Reinhold. Larrasquet. Claveranne. & Fyffe. New dimensions of project management. Cleland & W.S. D. Project management. (1999). J. A guide to the project management body of knowledge. J. United Kingdom: John Wiley. E ` Meredithy.Claveranne. PMI Standards Committee. (1982).). Kelley. United Kingdom: John Wiley.336–345. Project feasibility analysis: A guide to profitable new ventures.) Projectique. (1993). Ecoles ´ NSIGC. Upper Darby. Construction d’un modele fractal ` du processus de conception de la coloration d’un produit. J. Risques et analyse des risques (Cours de DEA Systemes Industriels). J. & King. A.). The new project environment. Toulouse. France. Parris: Economica. PA: Project Management Institute. Kerzner. G. New York: Van Nostrand Reinhold. S. In D.. Project management: A systems approach to planning.). W. (1988). A al recherche d’un sens perdu. H. 403–407. (Eds. Conference de cloture.-M. scheduling and controlling (5th ed. & N.. D.-P. ˆ de Rosnay. (1993). Chichester. Project Management Handbook (2nd ed. D. 16–55).INTEGRATED MANAGEMENT 209 PROJECTS especially on the way a project progresses. J. Jayaratna (Eds. P. ´ ` Lacoste. Managing project interfaces: Key points for project success.G. Project management handbook (2nd ed. Christofol.I. New York: Van Norstrand Reinhold.. (1994). Paris: Economica.) (1988).-M. Larrasquet. A. R.1 . Doctorales Systemes. (1977). a managerial approach (3rd ed. King (Eds. Chichester.R.W. A la recherche d’un sens perdu. Lexington. H. 2005. & Mantel..E. (1996). (1995).) Projectique. pp. It is the purpose of project life-cycle models to illustrate simply the ‘progress philosophy’ of the projects to promote a better understanding and a better communication within the projects. Morris.. (pp. & Duchamp. Jayaratna (Eds. Clifton. & ´ N. MA: Lexington Books. References Cleland.J. Aoussat. pp.).).

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does the acronym ITT stand? Question 1. the four stages are Dream.1 For what. schedule development and schedule control are all components of which of the nine project management knowledge areas? (A) (B) (C) (D) Integration Scope Time Risk Question 1.4 Complete the following sentence with the most appropriate word or phrase: The extent of work needed to produce the project’s deliverables is known as the project’s ________. Question 1.1 . Question 1. Discover and Design.2 In the ‘4-D’ model of the project life-cycle. at which stage is a feasibility study normally performed? (A) (B) (C) (D) Identification Development Implementation Completion 211 2005.5 In the project life-cycle.3 Activity definition.Revision Questions 4 Section A type questions Question 1. in connection to procurement. Place these stages in the correct order. activity sequencing. activity duration estimating. Deliver.

Requirements Define the terms ‘project’ and ‘project objective’. the IT director notes that many computer systems are old and need significant upgrading to enable ZM to maintain any competitive advantage for its products. where possible. or a large-scale construction effort such as the Channel Tunnel. can be classified as projects. (4 marks) (6 marks) (Total marks = 10) 2005. However. be they a small-scale undertaking such as organising an office move. how each phase relates to the ZM company.212 PROJECTS REVISION QUESTIONS P5 Section B type questions Question 2 The board of the ZM company are discussing a report that they commissioned concerning the company’s computer systems. there are insufficient resources in-house either to propose new systems or to perform any upgrade. Provide examples of project objectives.1 . In the report. (10 marks) Question 3 Many organisational events and activities. Requirement Briefly explain the phases of the project life-cycle showing.

then proposals will be required to address the needs within ZM and propose solutions to those needs.2 Discover. Design.3 (C) Solution 1.4 Scope Solution 1.1 Invitation to tender Solution 1. An Invitation to Tender (ITT) will be issued to obtain quotes for this work. Deliver. the latter option appears to be more favourable.1 . The initial phase of any project involves the identification of a need or a problem that needs to be resolved. However. the board of ZM have recognised that a new computer system is required.Solutions to Revision Questions 4 Section A solutions Solution 1. If the ZM company decides to use external contractors. 213 2005.5 (A) Section B solutions Solution 2 Project planning. Solution 1. Dream. Development of a proposed solution. In this situation. Given the lack of in-house expertise. the lack of in-house resources means that the organisation must either hire new staff or outsource some or all of the systems development work.

Organising the relocation of the company. Solution 3 A project is an undertaking to accomplish a specific objective/goal. When a choice of solution has been made. There are various activities that must be carried out before a project can be termed ‘complete’. It is also hoped that the project will be completed to the customers’ satisfaction and quality expectations. 2. not losing furniture or other assets. checking that all payments have been made. These activities include:     confirmation that all deliverables have been provided. as well as ideas concerning the costs and benefits of those changes.1 . The stage is complete when the board of ZM is satisfied that the new system has been implemented. along with time and cost summaries for that work. Completion. Implementation. a contract will be drawn up between ZM and the contractor containing details of the proposed work. These proposals can now be reviewed and the possible solutions discussed. The length of project life cycles will vary from project to project. However. Reorganising an office layout. in the case of ZM the life-cycle is unlikely to be less than six months. minimising disruption to staff. It is likely that the solutions will be analysed by a small working group with the responsibility of suggesting one solution to the board. improving management decisionmaking information and providing quality management reports in a timely and costefficient manner. meeting the plan in terms of cost–benefit. The project objective is usually defined in terms of scope. reducing rent costs. completing the project by a certain date. improving office productivity and team communication. ensuring that performance has been evaluated and is satisfactory. Examples of objectives could include the following: 1. individual projects may last well in excess of one year. acquiring more efficient premises due to its location and facilities. Given the significance of the systems changes. and checking that a list of learning points has been made for reference for future projects. through a unique set of interrelated tasks and activities while utilising resources effectively. Designing and implementing a computer system. on an appropriate timescale and to the expected level of quality.214 PROJECTS SOLUTIONS TO REVISION QUESTIONS P5 Responses to the ITT will include details of the work to be done. The stage is completed when the contract is signed. the contractor will first liaise with staff at ZM to produce a detailed plan for the new system and then implement that plan to achieve the system objectives. In this situation. On receipt of this information. timescale and cost to be incurred. The last stage of the project life-cycle is completion of the project. the board of ZM will have a greater understanding of amendments required to the company’s systems. 2005. schedule and cost. There is a lot of detailed work involved in this stage. The project objective is the anticipated result or final outcome. 3.

This is illustrated in Figure 5. The key role must be to ensure the success of the project objective.1 Introduction As you have already seen in Chapter 4. As projects are interdisciplinary and cross organisational reporting lines. it is the people carrying out the project who determine the overall success or failure. the skills of the project manager. (1993) see the role of the project manager as one of managing people (the project team. attributes and knowledge that the project members and especially project managers bring to the project are critical to its success. identify structural and leadership issues that will be faced in managing a project team. the responsibilities of the project manager. " 5. controlling and communicating project tasks. carrying out processes (the work/tasks being done) and producing the product (the final deliverable). The skills.1 . the project manager has a complex task in managing. 215 2005. Obviously. identify stakeholder groups and recommend basic strategies for the management of their perceptions and expectations. Norris et al.2 The roles of the project manager This is likely to be examined quite frequently. 5. coordinating. but those procedures are only the tools people use to carry out their job. using the correct procedures is important. customers and suppliers).People and Projects 5 L EARNING O UTCOMES After completing this chapter you should be able to: " " demonstrate the role of key stakeholders in the project. therefore it is important to understand:    the roles of the project manager.1.

2005.1 . The specific responsibilities of the project manager are discussed in more detail in the following sections. The project manager will lead and coordinate the activities of the project team to ensure that activities are performed on time. For tasks to be carried out internally. 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.1 One view of project management (Norris et al. Solution     Secure project resources. 5. within cost and to the quality standards set by the customer. Assign responsibility. An important aspect of project management is to ensure that the team members are organised.216 PEOPLE AND PROJECTS STUDY MATERIAL P5 Figure 5. Exercise 5. 1993) 5. Assign tasks to internal/external providers. For example.3. 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. this may often involve the project manager delegating responsibility to team leaders responsible for a group of specific tasks. coordinated and working together.3 The responsibilities of the project manager The ultimate responsibility of the project manager is to ensure the successful completion of the project objectives to the satisfaction of the final customer. In complex projects. who will then be accountable to the project manager for the accomplishment of the task within budget and on time. Organise team. This will involve those tasks that can be carried out internally and those that may need to be subcontracted externally. in projects to implement information systems. the project manager is responsible for assigning particular people within the organisation to carry out the work.1 Organisation The project manager is responsible for ensuring that the necessary resources are available to carry out the project.1 List the activities that the project manager must do in order to perform the organising function. The project manager will delegate responsibility for performing project tasks to team members. In essence.

then action must be instigated at this level.INTEGRATED MANAGEMENT 217 PEOPLE AND PROJECTS 5. the project manager will collect and analyse actual project data on costs.2 Planning It is important to understand the responsibilities of the project manager within the planning stage.3. Communicate the objective to the team. Solution  Implement and monitor the project information system. in order to instil involvement. Control activities.e. then to communicate this objective to the rest of the project team. If the project manager considers that corrective action needs to be taken in order to get the project back on target.2 List the activities that the project manager must do in order to perform the planning function. Agree the objective with the customer. ensuring that team members receive information on their own area of influence).3 Controlling Following the planning stage of the project. Solution     Define the project objective. commitment and ownership of the project. must be carried out as quickly as possible. This may involve setting up a project-reporting information system. The primary responsibility is to define the project objective clearly with the customer. because participation in the decision-making process will help to foster commitment of team members to the successful completion of the project objective. but this must be carefully weighed against ensuring that project team members do not forget that their particular area of control is likely to affect other areas and will ultimately affect the overall achievement of the whole project objective. Exercise 5. to record and monitor the progress of the project against the plan and then communicate the plan and actual comparisons to team members on a regular basis. Set up a system to compare actual results with the plan. when required. making it clear what constitutes a successful project outcome.3 List the activities that the project manager must do in order to perform the controlling function. 2005. It is important that the project manager takes the advice of team members before deciding on a particular course of corrective action. The project manager must engender participation of the team members in the planning process.3. schedule and progress.1 . Exercise 5. Responsibility structures may be used (i. 5. Along with the project team members carrying out the particular tasks. the project manager is responsible for monitoring and controlling its progress towards successful completion.

Software Skills). Negotiation skills. praise or formal monetary rewards. Leadership in projects involves influencing others through the personality or actions of the project manager. Process. Change-management skills.1 Leadership skills Leadership is the ability to obtain results from others through personal direction and influence. The course was about project management (important in its own right) and not project leadership which he considered to be essential. and this will encourage team members to also feel part of the overall project achievement. results are achieved by the whole project team. Another important attribute of leadership is recognition. Recognition must be carried out throughout the life of the project so as to maintain motivation of the team. 5. 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.218 PEOPLE AND PROJECTS STUDY MATERIAL P5   Take action if variations occur. Delegation skills.4 The skills of the project manager This is likely to be examined quite frequently. The project manager should encourage open communication between team members in order to encourage team spirit and support. inspiration.1 . Prince 2. discussed how sad he was to receive an advertising flyer from a training organisation because the contents of the twoday course ( Methodologies. As project managers are responsible for bringing together a team of experts. Project Management Meetings. did not seem to cover the aspects of successful project delivery that he had identified. Bar Charts. President of the IT directors’ association Certus. Motivation will be enhanced if the project manager continually recognises the achievements of the team members via encouragement. 2005. The project manager should provide overall direction but should not be autocratic or prescriptive in leading the team. Good project management requires both participation and consultation. The following project management skills will be discussed in the next section:       Leadership skills. ‘IT Projects Need Leaders’ (26 October. 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. Communication skills. persistence.4. With empowerment comes ownership of and responsibility for their part of the project. Problem-solving skills. These were communication. In an article in Computer Weekly. motivation. leadership. focus and action. 2001) David Taylor. though important. Communicate with the team on the progress of the project. The project manager requires a set of skills that will encourage and lead the project team to succeed and to create customer confidence in the project team. The project manager cannot achieve the project objectives alone. 5.

we will get exactly what we have always got. Project managers should communicate by using a variety of methods:      regular team meetings. They must communicate regularly with a variety of people. Davis Langdon Management: NEC Users’ Group Newsletter. and who really understand processes. communication and radical thinkers:    Scars: he asks about the biggest mistake the applicant has ever made on a project. The last point can certainly be evidenced in the innovative approach to many aspects of the Eden Project discussed in the previous chapter. 5. written reports to senior management and the customer. 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. Radical thinkers: ‘If we do what we have always done. listening to all the stakeholders involved in the project. 3. p.1. If none.’ He went on to indicate that he looked for scars. are they confident. The project manager must also provide timely feedback to both the team and the customer. The deeper the scars the better. Reproduced by permission of Thomas Tetford. Taylor wrote that you can turn projects around if leaders are appointed who are given the freedom to do what they have to do to get the project delivered. It is important for the project manager to have regular and open communication with both the customer and the team members. identification of potential problems.1 . including the customer. then he is not interested. 16. Team members will also require less formal communication methods in order to bring individual concerns to the attention of the project manager. Communication is vital for the progression of the project. suppliers. Communication: do they look you in the eyes when speaking to you.) 2005. are their heads high? Forget the project when considering this essential skill. The project manager must therefore be available for open informal discussions with team members when required. who have consistently delivered quality systems. the main contractor. No. informal meetings with individual team members. The project team members must have a formal forum on a regular basis when the whole teams gets together to discuss project issues. regular meetings face-to-face with the customer. (Source: ‘Eden Project – a Landmark for the NEC’: Tim Carter. generation of solutions and keeping up to date with the customer’s requirements and the perceptions of the team.’ He looks for people who can think outside the planet not just outside the box.4.2 Communication skills As indicated by Taylor in the section above. The number and range of the communications required can be seen in Table 5. These were surpassed by the communications required from McAlpine JV.INTEGRATED MANAGEMENT 219 PEOPLE AND PROJECTS He wrote: ‘Too many companies advertise for project leaders with specific technical experience. subcontractors. project managers must be effective communicators. because learning has occurred. project team and senior management.

Implement the results of the negotiation. To help ensure successful negotiation. Negotiation skills are covered in more detail in Chapter 11.4. Delegation is about empowering the project team and each team member to accomplish the expected tasks for his or her area of responsibility. the customer). to correct them by themselves. Reach agreement by compromise or by selecting the alternative proposal most suitable to both parties. one achieving the project objective(s). costs. 5. Delegation ensures effective performance by the project team and fosters conditions necessary for teamwork and coordination. 2. 5.220 PEOPLE AND PROJECTS STUDY MATERIAL P5 Table 5. schedules. and will then further clarify the individual team member’s role in achieving that objective by a process of delegation.4. standards. Negotiation is a process of satisfying a project’s needs by reaching an agreement with others. Identify and define the problem. a logical process can be followed: 1. procedures. such as availability and level of resources. 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. Project managers need to be able to manage the outcome of a negotiation so that the differences in what each side gets are kept to an absolute minimum and conflict is avoided. The project manager may have to negotiate with someone over whom he or she has no direct authority (e. if they are able.4 Delegation skills A further key skill required for a project manager is that of delegation. consultants).g. Delegation is also partly about allowing team members to learn from their mistakes and. i. Evaluate these alternatives and their outcomes to the project. The project manager has neither the time nor the skills to carry out all the project tasks. Generate a number of possible solutions that could be accepted.1 Project manager documentation/communications on the Eden Project Instructions/notifications issued Communications to contractors Communications to client/quantity surveyor/ supervisor/direct contractors. There may 2005. or who has no direct authority over him or her (e. A project manager will communicate and clarify the overall project objective to the team members. priorities. without fear of blame. etc.1 . so he or she must delegate responsibility to those who do have the skills. Table 5.e.2 highlights the kind of negotiations a project manager is likely to be involved in. 3. quality and people issues.g.3 Negotiation skills Project managers will have to negotiate on a variety of project issues. 4. Assessments issued Certificates issued Meetings chaired/minuted 1140 1100 750 27 8 130 5.

an important attribute of project management is communication. 5.4. he 2005. Delegation should foster this approach.1 . but a good project manager will be able to spot potentially dangerous situations quickly and take control of the decision-making process. quality and time Of team members’ activities Methods Roles and responsibilities Reporting Relationships Assurance checks Performance measures Fitness for purpose Estimates Budgets Expenditure Getting team to work together Getting required skills Work allocations Effort needed Negotiate with Senior management Line managers Purchasing/estates departments Customer/senior management Customer/teams Line managers/team members Line managers/team members Customer/line managers Senior management Customer/team members Team members Team members Team members/customer Senior management/customer Team members Customer/teams Customer/teams Customer/team members Accountants/team members Customer/senior management Customer/accountants Team Team Team Team members members/line managers members/line managers members/line managers Negotiation point Resource Schedules Priorities Procedures Quality Costs People be times during a project’s life when the project manager needs to step in to stop serious errors occurring. The project manager should encourage team members to identify problems within their own tasks and try to solve them on their own initially. Appropriate team members should be involved to analyse and present information in order to generate a solution.5 Problem-solving skills Project managers will inevitably face numerous problems throughout the project’s life. As the project manager is the person who retains the ‘big picture’. in particular listening skills. Again. It is important that the project manager gathers information about the problem in order to understand the issues as clearly as possible.2 Negotiations of the project manager (adapted from Field and Keller.INTEGRATED MANAGEMENT 221 PEOPLE AND PROJECTS Table 5. where tasks are large or critical to the overall achievement of the project. as various opinions and possible solutions are being generated. 1998) Possible issues Funding Staff Equipment Time scale Order of activities Duration of activities Timing of activities Deadlines Over other projects or work Between cost. it is important that team members communicate with the project manager as soon as possible so that they can lead the problem-solving effort. However.

5 Project teams The issues relating to the formation and development of teams are covered in the sections on groups and conflict in Chapters 11 and 13. 5. and this requires the project manager to listen carefully to those concerns and to communicate regularly to the users the objectives and benefits of the project undertaken. caused by unexpected events during the project performance. developing and implementing the new system. the greater its likely impact on achieving the overall project objective successfully. and that is change. 2005. good communication skills are vital in this situation as the users are likely to be suspicious and fearful of the change process. such as the introduction of computerised information systems. requested by the project team. Again. Some changes are necessary as a result of unexpected events such as the loss of a key member of staff or materials shortage. The project manager should then present these estimates to the customer for approval prior to implementing the change. open meetings and one-to-one meetings provide a good opportunity for users to express their concerns and fears.6 Change-management skills One thing is certain in projects. the project manager must request the appropriate team member to estimate the effect on project schedule and cost. You should think about the issues raised there in relation to project teams. Generally. Only after agreement by the customer should project schedules and budgets be updated to include the additional costs or activities. In many projects. design and implementation stage with the users in order to overcome fears and resistance to change. Therefore it is important that the project manager has the skills to manage and control change. Most likely to be affected by change is the project budget and its timescale. Project changes may also occur as a result of user requirements of the final project. This will involve the project manager in regular communication throughout the development. If a customer requires a change. These will have an impact on the project schedule and/or cost and will require modifications to the plan. If change is initiated by the project team or the project manager. required by the users of the final project outcome. the later the change is identified in the project life-cycle.4. then the project manager must present a proposal to the customer for approval. 5. procedures need to be put in place regarding how changes are to be documented and approved.1 . At the start of a project. but also for ensuring that the users accept the final product. the project manager is not only responsible for designing. The impact that change has on accomplishing the project objective must be kept to a minimum and may be affected by the time in the project’s life-cycle when the change is identified.222 PEOPLE AND PROJECTS STUDY MATERIAL P5 or she is in the optimum position to consider how the decision will affect the overall project. 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. Discussion groups. Changes may be:     requested by the customer.

the project manager can demonstrate to the team how everyone’s work fits together to achieve the project objective. All project procedures should be documented and kept in one location for reference by all team members. which identifies individual tasks and when they need to be carried out. When the project plan is formulated by the team. Therefore. This should be presented and discussed at the first project meeting and the project manager must ensure that all team members understand these goals and the benefits of achieving them.6.6 Problems of team-working There may be barriers that hinder the achievement of the team objectives. 5. approvals.INTEGRATED MANAGEMENT 223 PEOPLE AND PROJECTS 5. with the team and with individual team members. He or she must demonstrate the importance of the project and the benefits its success will have for the organisation and the team members. Also. each team member must be given a plan of work.6. normally a work breakdown structure (WBS). it is important for the project manager to involve the team members in project planning at an early stage.4 Poor leadership The project manager must create an environment in which the team members can feel free to contribute and provide feedback. and to explain how they interact with other team members. The following section highlights some of these potential issues and makes suggestions for overcoming them. so that all the team can understand clearly what they have to do. The project manager must meet with each team member early on in the life of the project to describe and discuss individual roles. reporting.1 . all team members should be issued with a critical path analysis of the project and the baseline plan so that they can view all tasks together and see how their activities fit into the overall plan. The project manager must also determine and communicate team-operating procedures. or may feel that there are no established procedures. 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.6. and what the other team members are also doing. duties and responsibilities. such as communication. This plan must be given to each team member by the project manager. etc. 5.1 Unclear team goals and objectives It is the responsibility of the project manager to explain the project objective to the team. 5. It is important for the project manager to set 2005.3 Lack of definition of roles Team members may not clearly understand their roles in the project or may feel that their lines of responsibility and duty overlap with those of another team member.2 Lack of team structure Team members may not know or understand what roles or activities the other team members are contributing. The project manager needs to review the project objectives on a regular basis. to ensure that the objective remains an important target and that the team remains focused. as stated earlier.6. Using tools such as critical path analysis (see Chapter 9) and the project budget and baseline plan. 5.

to communicate progress and to provide a forum for team discussion and airing of views. 5. but must also be strong enough to enforce his or her own suggestions and decisions when necessary. Commitment may also be lacking where an individual is being split between work on the project and a full-time job. Possible methods of team-building could be as follows:    Physically locate the team in one place. but he or she must be able to balance the requirements of many individuals within this framework of project rules. must be kept up to date and circulated to the team regularly. The project manager must speak to each team member in order to communicate his or her importance to the achievement of the project. perhaps as a result of poor communication. 5.5 Poor team communication It is important that the project manager holds regular team meetings and status reviews. there are a number of other stakeholders who need to be 2005. The project manager should recognise and deal with the situation by clarifying priorities and. such as plans and budgets. The project manager needs to determine the motivating factors important to each individual and should ensure that the project environment is a motivating one.6 Lack of commitment Team members may not be committed to the overall project objective. Socialise outside the work environment. if necessary.7 Project management and team-building Team-building should be an ongoing process throughout the life of the project. Effective team members need to be committed and want to feel accountable for their individual activities. Participation in team meetings should be encouraged. 5. Fairness and objectivity when dealing with team members is critical. The project manager should encourage open and frank discussion among the team members. bidding for the individual to join the team on a full-time basis.224 PEOPLE AND PROJECTS STUDY MATERIAL P5 guidelines for team operations. and should be the responsibility of all the team members.6. Project documents. Periodically call team meetings (rather than project meetings). The project manager must continually encourage individuals and support progress. both formally and informally. and certain team members should be required to report on the status of their activities. open communication and trust and also a strong commitment to the achievement of the project objective. Physical location of team members can often be an important factor in helping or hindering communication.1 . 5.6. However.8 Project stakeholders We have already discussed at some length the project managers and their relationship with the team members. Team-building should foster honesty. The project manager must be flexible enough to listen and take advice from his or her team.

simply because they control the budget for IT capital investments. They are more interested in scope and functionality than in budget. If we take the example of the development of a new accounting system. you should make sure that you are aware of the needs of each stakeholder. They often authorise the project.1 .    Project sponsor. It may be difficult to get agreement from the customers as to what their needs 2005. They are interested in the end-result being achieved and their needs being met. the person responsible for ensuring that the project is successful at the business level. They must also be satisfied that a business case exists to justify the project. In the case of the new accounting system. that is. The sponsor is the person or organisation providing the resources for the project. and there are often different names for the same stakeholder. Different textbooks have different lists of stakeholders. They will also be particularly concerned that the project does not go over budget. and the conflicts between those needs. Customers/users. The customer/user is the person or group of people whose needs the project should satisfy. The project owner is the person for whom the project is being carried out. and are responsible for its budget. the sponsor might be the Head of IT. 1999) considered (Figure 5. They would normally sit on the steering committee. in respect of the project. The sponsor may also chair the steering committee (or project board) to which the project manager reports progress.INTEGRATED MANAGEMENT 225 PEOPLE AND PROJECTS Figure 5. The fact that this stakeholder is a ‘group’ leads to its own problems. and may also represent the users.2 Project stakeholder hierarchy (adapted from Gido and Clements. Project owner. the owner would be the Finance Director or Financial Controller. The following is a selection of the most common.2).

5. if the project forms a major part of the business of the organisation. This may simply mean representation on the steering committee. and reduce its scope and quality. purchasing or internal audit departments. as you have seen in the example of the Eden Project or the NATS project in the previous chapter. this may necessitate an organisation structure such as a matrix.8. there is often a lack of clarity as to how authority is divided between line managers and project managers. outlined in Chapter 1. like the project owner. such as in a construction company. Each of them will have their own objectives. they may try to ‘hijack’ the project to satisfy their own personal objectives. However. some of which conflict with those of the project. this may not be a major issue.9 Projects and organisation structure This chapter has covered a number of issues relating to project organisation structures. If a project is relatively small or short term. Once these have been identified. Identifying stakeholders. For example. Suppliers/subcontractors/specialists. Conventional logic dictates that users should be. However. past behaviour towards the projects. what can be expected of their future behaviour and how they may react to future changes. This will allow the project manager to assess the risks associated with various stakeholder groups. despite theoretically being ‘on the same side’. where lines of authority are clearer. This conflicts directly with the objectives of the sponsor and customers. assessing their interests in the project and then using that information to manage the relationships with such groups is a vital project management activity. or may involve being part of the project team. suppliers may provide hardware and software. This may bring them into conflict with the project owner. the users would come from the different parts of the finance function. a table can be drawn up listing each stakeholder’s goals.1 . for example an information system redevelopment. in order to reduce cost. The project will often require inputs from other parties. suppliers will seek to maximise the price of the supply. are primarily interested in the scope of a project. In the case of the new finance system. 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. if possible. we need to consider the relationship of the project to the organisation within which it exists. You may choose to use the Mendelow matrix.1 Managing stakeholder expectations Even the simplest project is likely to have a large range of potential stakeholders. Users. rather than those of the organisation. invited to participate in the project. 2005. it is useful to draw up a systematic plan to secure and maintain their support or to foresee and react to any problems. such as material suppliers or possibly specialist labour such as consultants. indeed there may be conflicts within the customer group. 5. In the case of the new finance system. Once the project manager has established the key stakeholder groups. and indicate where attention needs to be focused. In conventional (functional or divisional) structures. However.226 PEOPLE AND PROJECTS STUDY MATERIAL P5  are. and specialists might include members of the organisation’s IT.

9. P.10 Summary In this chapter. A Practical Guide for Managers 1st edition. Rigby. J. References Field. so having resources controlled by functional heads should lead to improved utilisation and reduced duplication across projects. the membership.thomsonrights. (1993). M. There you saw that this form of structure has been widely criticised. International Thompson Publishing. consultancy. Project Management. www. The projects are customer-facing. skills and attributes. role and issues relating to project teams. J. and Keller. M. 2005. but it is still used by many organisations in industries such as engineering. Reprinted with permission of SouthWestern a division of Thomson Learning.. M. so staff benefit from also being assigned to a technical function (such as finance of logistics) where they can share knowledge with colleagues. and Clements. you have looked at the various stakeholders in a project.1 .INTEGRATED MANAGEMENT 227 PEOPLE AND PROJECTS 5. so the customer requires a single point of contact (the project manager) to deal with their needs and problems. in the right circumstances. audit and even education. and Payne. the stakeholders within a project. John Wiley & Sons Ltd. L. Gido. The characteristics of the organisation that lead to a matrix being the most suitable organisation structure are as follows:      The business of the organisation consists of a series of projects. The projects are complex.1 Matrix organisations The details of matrix organisation structures are covered in Section 2. Fax: 800 730 2215.com. (1999). UK. Thus it can be seen that. and how to manage them. 5. The projects are expensive.2. each requiring staff and resources from a number of technical functions. The projects have different start and end dates. Reprinted with permission of John Willey. The Healthy Software Project: A Guide to Successful Development and Management. a matrix structure can be the most appropriate. (1998). construction.10 of Chapter 2. The key points to remember are:     the project manager’s role. Successful Project Management with Microsoft Project CD. Norris. so the organisation is continually reassigning resources from project to project. the responsibility of the project manager to engender a feeling of commitment and honesty within the project team.

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as led by the new chief executive. charismatic leadership. No one could imagine Condit’s predecessor. today’s passenger jets are basically commodities to Boeing’s customers. The skills of project management The scenario below analyses the importance of project leadership skills and of project team management. Nobody states the problem better than Ronald Woodard. Frank Shrontz. The article specifically highlights the importance of interdisciplinary teamwork and the need for a more flexible approach to project management.1 . 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. singing in the shower much less in front of strangers. The seventh man to run Boeing since its founding by timberman William Boeing in 1916. all of this being achieved by strong. Forbes. the world’s airlines.Readings 5 In this section there are three Readings on the skills of project management. June 1996. the aspects of teamwork and the importance of communication with project stakeholders. Reprinted by permission of Forbes Magazine # 2002 Forbes Inc. the importance of strong leadership and the need for effective interpersonal skills. We aren’t an engineering. Booming on the surface. the blunt-spoken president of Boeing’s Commercial Airplane Group: ‘We have to understand that we are a manufacturing enterprise. Much as they are technological marvels. Each is followed by discussion points with suggested outline solutions. Philip Condit. Their job is to move people and goods from point A to 229 2005. This case study should aid you in understanding:   the importance of teamwork. At a recent charity event. technology-development enterprise. a lawyer by training and a former Pentagon deputy. The change in personalities at the top of the world’s largest aircraft manufacturer is rich in symbolism. Destroying the old hierarchies Seth Lubove. The case discusses the transformation of Boeing. Boeing Co’s new chief executive officer. Boeing is in fact a company in transition. tightly unionised by the militant International Association of Machinists and Aerospace Workers. fiftyfour-year-old Condit is a Boeing lifer who faces the tough task of redefining Boeing’s often confrontational relationship with its 108 000-employee workforce. 64.’ There’s a world of meaning in that seemingly bland statement. Philip Condit.

(Boeing’s engineers are represented by another. rather than by cables and levers. with about 33 000 members. compared with two to three weeks on older aircraft. not a high-technology company. the pilot’s commands to the rudder and flaps are communicated electronically. now go build it. Boeing makes great airplanes. hard-to-build design specifications. No marketing detail was too small. so that the production teams aren’t stuck with overly costly.230 PEOPLE AND PROJECTS READINGS P5 point B at minimum cost consistent with safety. Condit’s biggest change was in the organisation of the program. The Street expects earnings to go on rising through the decade. instead of loudly smacking. Condit broke down the old-fashioned procedural walls within the company. Boeing jets represented two-thirds of the dollar value of all commercial airplanes ordered in 1995.’ This is where the job gets tough. is competing on the Joint Strike Fighter jet project. Condit instead organised hundreds of integrated ‘design-build’ teams. the Seattle Professional Engineering Employees Association. as they proved during last fall’s sixty-nine-day strike. That’s what Boeing’s Woodard means when he talks about making people understand that Boeing is a manufacturing company. It’s a pilotfriendly and airline-friendly product. Airlines can internally reconfigure such areas as galleys and lavatories within as few as seventy-two hours. Boeing’s largest union. a potential $160 billion contract. known internally as the ‘triple seven’. composed of members of all these groups. Boeing’s defence division. the 777 is Boeing’s first plane designed entirely on computers. ‘None of us is as smart as all of us. Adopting the theme of ‘Working Together’. Here it is. and they didn’t care. ‘The thing that’s different is ten years ago we could have had a strike and delivered airplanes late to customers. For the first time. Frank Shrontz hammered at reducing cycle times and cutting costs. even the toilet seats gently sink on to the toilet bowls. Each consults the other.’ says Woodard. He wants to reorganise the whole company along these lines. Explains Ron Woodard: ‘We’re trying to destroy all the old functional hierarchies. to the point when Boeing now delivers an airplane within ten months of the order. explaining his new integrated design strategy. less combative union. But for Boeing. Wall Street expects per share earnings to rise by 20 per cent this year (before charges in 1995) to $2. Any significant changes involving the workforce still have to get past the Machinists’ Local.75 on sales of $22 billion. compared with eighteen 2005. the designers would say. Smaller than Boeing’s humpback 747. for example. already the prime contractor on NASA’s space station. But today a strike means lost sales. terms and availability. But that will happen in what is now a commodity business only if Boeing can do what companies like General Electric do so successfully: take costs out of the product and continue to take out. This sort of reform. the 777. the fact is that the Machinists can still bring Boeing to its knees.’ Condit says.) Say what you may about the shrinking clout of private-sector unions in this country. Condit made his mark when he oversaw development of Boeing’s latest generation airplane. In the past. came late to Boeing. but so do Airbus and McDonnell Douglas. common now in manufacturing. First put into service by United Airlines last June. the 777 is more distinctive for what you don’t see than for its profile. Who gets the sale depends to a large degree on price.1 . design engineers worked independently of the production and operations people who actually built the plane.

Selection of supervisors and managers. Russell. In April. too. 9 Oct 1995). who was rarely seen on the shop floor. why it used to take the company eighteen months to deliver a product as complex as a giant jet. He pushed toward greater standardisation of parts and shrank the workforce from 161 700 in 1990 to 108 000. too. and making him a supervisor of rivets. it would run a classified ad in the newspaper for. Back at work now. Addressing the message to Russell’s wife. Russell noticed that the metal deck he received was bigger than the deck on the blueprints.’ Unlike Shrontz. Shrontz cited Condit’s interpersonal skills – not necessarily his engineering abilities – as the characteristic he considered most important for the next leader of the company. if Russell detected something wrong in his engineering plans. plant and asked the supervisor to leave the plane so the workers could speak without feeling intimidated. military style of management. will change. Washington.1 . Multiply this sort of shortcut throughout a company as large as Boeing and you can see how much expensive time was wasted before. he’d have to go through his supervisor and the problem would move through the chain of command until it eventually reached the engineer. he’s not just going through a public relations exercise. 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. Russell called the engineer and quickly fixed the problem. the company will look for managers who can motivate. but that misses the point: Boeing is also recognising that an efficient workforce is one that genuinely believes in what it is doing and gets along well as a team. qualified assembly mechanics. In keeping with the new attitude Boeing is putting more time and effort into the hiring process. When Phil Condit chats up workers on the factory floor. but it’s a big change for Boeing. just so many bodies in the machine. say. when Boeing needed additional hands. We need to motivate people to understand the importance of the change and to help make it happen. It would get maybe 2500 applicants and hire perhaps 1500. when most Boeing executives kept a low profile. usually tie-less and dressed casually. Under the old. 2005. Rather than promoting a person who is good at. Boeing also said it would put applicants through extensive aptitude tests. Traditionally. say. a tool builder. In naming Condit as his successor. He is obviously sincere when he talks about making the workers partners rather than just a factor of production.’ says Shrontz. riveting. A cynic might say that Boeing wants to weed out potential malcontents. During the strike last fall. for instance. ‘Phil is motivational. Now Russell speaks with the engineer directly. announcing that it would hire 8200 new hands. When he was building the scaffolding for the 777 line. Thus such questions as: How does a worker respond in a confrontation with a supervisor? None of this is new in manufacturing circles (Forbes. the workforce. sitting in his orderly office overlooking historic Boeing Field. ‘We can make pronouncements up here all day long. Condit walked over to a group of picketers outside his Seattle office and chatted amiably about the proposed contract for forty minutes. You can see. Recently he walked unescorted on to a 777 undergoing final assembly in Boeing’s Everett. Condit frequently pops into plants unannounced. another Boeing employee. rather than intimidate. Condit wrote: ‘We all need to work together’. is already seeing some differences in his job.INTEGRATED MANAGEMENT 231 PEOPLE AND PROJECTS months previously. He even signed striking union member Tony Russell’s picket sign.

’ says C. Boeing makes 52 per cent of its planes’ parts in-house and wants to shrink down to 48 per cent. 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’. now done in-house. And there can be no doubt: Condit really means it. It says it is willing to relax job specifications to allow cross-training of workers. as he motions to a schedule that indicates his team is days behind on its work. ‘Gosh. the company is really interested in my welfare’. Condit plans incentive pay and rewards for achieving individual performance goals. president of the local that represents the Boeing workers. not just shareholders. Management thinks it can save an estimated $600 million annually by such outsourcing. In settling the latest strike.’ But Mahoney doesn’t deny that Phil Condit is doing his best to reconcile those seemingly irreconcilable objectives. a lead mechanic on the 777 wing line. If the work falls behind. senior vice president of human resources. The company also put 75 000 employees through a program that discussed the realities of a tough market. To make this point. they just walked upstairs for an answer. But what is perhaps the biggest current irritant in management/labour relations at Boeing remains the constant pressure on the workforce to meet constantly shrinking delivery schedules. act and do. 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.1 . union and management compromised on outsourcing. but we don’t really have time. or what the union calls ‘off-loading’ work. while aircraft are now a commodity. Gerald King. Designers were on the top floor.232 PEOPLE AND PROJECTS READINGS P5 To underscore the emphasis on communications. The machinists’ union is responding – cautiously. he says. We have these extraordinary leaders in management who are willing to treat the rank and file with great respect and listen to their ideas. but Condit is determined to show that at the new Boeing. He says he wants his employees to think. Can Boeing get back to that as an employer of over 100 000 people spread over 76 million square feet of factory floor? No.’ says a frantic Robert Boudreau. he banishes Boeing’s model airplanes to a display case outside of his office and in their place displays his mother’s black-and-white photos of children from around the world. a fundamental change in the way we think. 2005. ‘It has been a cultural change. general counsel of the engineers union. production was downstairs. Front-line managers – and the workers below them – are evaluated on how fast they can get the planes out the door. at least symbolically. ‘In the old days we would have fired them. sums up the dilemma neatly: ‘You just can’t have peer democracy in the workplace. president of Boeing’s Defence and Space Group. people no longer are.’ says Larry McKean. the team must go on overtime. If production people had a problem with a blueprint. is hard-nosed about subcontracting. Boeing now sends annual reports to all its employees. the customers tell us our planes cost too much and take too long to deliver. Daniel Mahoney. Visit the restored converted barn where William Boeing first began building planes. Boeing agreed to give the union warning on any major subcontracting deals and to retain surplus workers for other jobs in the company. ‘They’re trying to get into cross-training. The message: We no longer have it made just because we’re Boeing. But William Johnson. But at the same time they have a responsibility to get the best product out on time. He rightly says that many new ideas are just old ideas the people forgot.

He signed a picket sign with the words ‘We all need to work together’. the Boeing 777. He was an excellent motivator as he adopted a policy of being viewed as facilitating the project. Discuss some of the key management skills needed to run a project or enterprise. again sent out a message that conformed to the idea that people mattered. He added to this impression by his karaoke activities at a charity event. The key management skills required for the effective management of projects will be discussed in the light of the case study. He did this by organising hundreds of integrated design-build teams. His removal of the model planes at Head Office replaced by pictures of the world’s children. He turned up and did not appear as a ‘suit’. This concern he translated into better pay and conditions. Communicating. So he was seen popping up at the plants unannounced. as shown in the article. This structure was supported by teams. Does this management approach resemble the work organisation used in project management? Outline solutions 1.INTEGRATED MANAGEMENT 233 PEOPLE AND PROJECTS Discussion points Discuss these with your study group before reading the outline suggested solutions: 1. which removed the barriers between the design and production units. though the reality was that the planes had to be smarter. His predecessor had driven down the costs in the organisation so Condit had to focus on people. His non-verbal communication (the way he dressed) reinforced his aim of collaborative working. alienating the people he wanted to talk to by appearing as a remote figure from Head Office. The article states that the previous CEO Frank Shrontz considered interpersonal skills to be one of the most important characteristics of his successor. Philip Condit demonstrated his leading from the front when overseeing the development of the ‘triple seven’. even to the extent of discussing a disputed contract face to face with striking pickets. He asked supervisors to leave so that he could hear the ‘real story’ from the final assembly workers. 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. He saw workers genuinely as partners in the project. He effectively listened to what he was told.   Leading. by breaking down the procedural walls within the company under the slogan ‘Working Together’. 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. that is. He altered selection processes so that he got promotees or new entrants with commitment and with the right interpersonal skills. putting his money where his mouth was. he demonstrated his concern for the successful outcome of the 777 project. The concessions on 2005. He gave out a consistent message of collaborative work. They were seeing in their daily lives that changes were being made. that is. Condit communicated his vision for cooperative working on the project in a variety of ways. By talking directly to the workforce.1 . The biggest change made by Condit on the 777 project was the organisational design. again communicating his desire for the common goals of the project. 2. ‘Working Together’ challenged all previous ways of operating and brought together the design and production areas of Boeing. dressed in a way that did not set him apart from the workforce.

The union was cautiously starting to relax job specifications to allow this process to happen. This empowerment from his supervisor meant that problems. Condit found himself in a situation where much change had been imposed on the organisation by his predecessor. He changed the organisation of work to facilitate the faster delivery of the planes because problems would be solved on the design-operational interface faster: they were on the same side with the same goals. In the article there are examples of delegation and of non-delegation. However. He discussed the situation with them in detail (the discussion about the new contract with the strikers. The time pressure of reducing schedules was constant and an important performance indicator was the speed of delivery. It would give the recognised union warning about any large outsourcing deal but would re-deploy any surplus workers. An example of delegation was seen in the way Tony Russell. Boeing is in business. and if it did not produce planes to customers’ delivery requirements and at reasonable cost. reducing delivery times and reducing staff from 161 700 in 1990 to 108 000 in 1996. He had to set his own managers the example. could be sorted out very quickly. There was the acceptance by the counsel to the union that Boeing had to get the best product out on time. Negotiating. for example). In the past. 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. In the final analysis. Change management. as seen in the number of strikes there were. He involved the workforce by communicating with them directly and by effectively listening.234 PEOPLE AND PROJECTS READINGS P5    outsourcing showed that there was a determination to listen to what the company was being told and they would act on it. Teams had to work overtime to make up the time. it would have sacked them. as may be seen in the changes to recruitment and reward policies. It was not available. A reinforcement of the delegation of responsibility could be seen in the new criteria for hiring new staff and for promotion. he would have delegated the everyday activities of management because of the size of the organisation. Technical expertise was no longer sufficient in itself: the interpersonal skills and commitment had to be consonant with the new culture of empowerment. Boeing compromised about it. Delegation may be defined as the handing over of authority for a piece of a boss’s work to a subordinate while retaining responsibility for it. Employee relations were not always excellent. 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. This had been based on radical cost-cutting by standardising parts. as customers felt that the planes were still too costly and took too long to be delivered.1 . could talk directly to the designers when there was a problem with his engineering plans. a tool-builder. Delegation. This was an issue to be negotiated in the future. His way of change management was to educate the workforce in the realities of the market. 2005. Frank Schrontz. Boeing negotiated the new deal on outsourcing with the retention of the surplus workers. The negotiations over outsourcing revealed that though this was seen as an effective way of reducing costs ($600m was quoted in this article). There were attempts to increase the flexibility of the workforce by cross-training but there was a need for time to do it effectively. such as the sizing of the metal deck. no amount of people management would keep people at work. and by giving them annual reports so that they could see the figures for themselves. Condit could not stop the process of change. Condit led the way on this.

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. production. is expressed by reference to the evidence in the article or case study. The individual personalities and characteristics of team members. There were no artificial barriers to the solution of the problem because they both had the same objectives: swift delivery of the best product. Using the Boeing example. Further thoughts Although this case primarily concerns reorganisation and team structures. Consider projects you have been involved in. The old methods of change management under the military style of management would have included coercion (there are no jobs in this section. marketing. there was great synergy between the designers and production staff because of attitude and close proximity. the student. 2005. you’ll be sacked).1 . constant training. and should aid you in understanding the importance of the following factors in project management:   The quality of team members. Without this. If Boeing could not get back to that ideal as a large organisation. The factors highlighted include the following:    the importance of clear objectives. having the right team members. The proselytisation of this team spirit by Condit under the slogan ‘Working Together’ emphasised the need to focus on the superordinate objective: To deliver fast to customer requirement. you’re sacked) or manipulation (if you do what we ask. 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 problem was fixed between them.INTEGRATED MANAGEMENT 235 PEOPLE AND PROJECTS It facilitated cross-training. another important factor to come out of the case is the importance of strong leadership. 2. Teams are a critical feature of projects which help organisations achieve future objectives and ensure the future life of the business. organisations may make incorrect decisions about itself and its projects. The process of dealing with and managing organisational change will require input from diverse areas such as design. Note that the desired information that the Examiner wants from you. Were/are they effective? The characteristics of team members The case in the article below concerns the fateful Apollo 13 mission and analyses the key factors that ensured the successful completion of the project. This approach would save time and thus money. and how these factors relate to project management. you’ll be rewarded: if you don’t. and think about the leadership styles used. or your own organisation. enabling Boeing’s attractiveness to its customers. in the early stages of the organisation. This case also sets out general guidelines for a project. it managed the empowerment of staff so that they saw themselves as teams with goal congruence. finance and sales to get a holistic view of the organisational objectives.

Support them with the best team. a mission that came close to causing the first loss of life in space for a United States astronaut. Pick the best people.1 . With the Apollo program that objective was to land a man on the moon and return him safely to earth. More than anything else. especially for the project manager and lead technical staff. Selected from the top test and military pilots. The astronauts were only a third of the way into the mission when one of the oxygen tanks in the command ship Odyssey exploded. IS projects must also have clear goals and objectives. and requirements. programmers. This also keeps everyone focused on the business reason for doing the project in the first place. testers. milestones. the success of the Apollo missions resulted from thousands of people pulling together to achieve something that once seemed impossible. Ron Howard’s epic movie Apollo 13 recounts the ill-fated Apollo 13 mission to the moon. A complete statement of project’s objectives. they were the most highly qualified and capable people available. Project risk management. to the programmers who wrote the navigation programs. PMI Network. We should seek to hire industry specialists with broad experience drawn from diverse assignments – people who can overcome the unexpected problems that occur in even the best-planned project. crippling the spacecraft. a goal that was achieved just seven short years after President Kennedy first issued the challenge to the nation and the world. and perseverance.236 PEOPLE AND PROJECTS READINGS P5    The importance of project planning. What are these parallels? Consider the factors that contributed to the success of the Apollo program. it’s not the project manager but the project team that achieves the project objectives. embodied in a statement of work or similar contractual document. No matter how good the astronauts were. you acquire people who have already been tempered by the fires of adversity and have overcome them. Learning the lessons of Apollo 13 Michael S Lines. they would never have been successful without the team that supported them and their mission. and endangering the lives of the crew. The Apollo astronauts were the best of the best. and one that holds many useful parallels for those in the field of information systems (IS) project management. From the scientists and engineers who built the rockets. as was often required to complete the Apollo missions. we must also seek to employ the best people available. By hiring the best. Team leaders. Reproduced with permission of PMI Publications via Copyright Clearance Center. tech writers: the typical large IS project needs all these people and more to pull together diverse technology to meet a customer’s 2005. Have a clear objective. to the seamstress who sewed the spacesuits. To achieve success in IS projects. In IS projects. 1996 Copyright #1996 by PMI Publications. The story of Apollo 13 is one of hope. helps to ensure that everyone agrees on the purpose and deliverables of the project. inspiration. To be successful. That level of excellence showed when it came to overcoming obstacles and achieving the impossible. having a clear objective helps to ensure a successful project. The need for a positive attitude.

that technology was created specifically for the Apollo program and in turn led to advances in commercial industry. even when all precautions are taken and all the planning. training is also essential. the improvements in productivity and quality that technology brings are well worth the initial capital costs to the project. enabled the Apollo 13 astronauts to survive. For IS project teams. From personal development systems. the mission controllers. and crew of Apollo 13 never allowed themselves to consider the possibility that the crew would not make it back. along with the redundancies and engineering of their spacecraft for those contingencies. However. Train constantly. IS projects don’t have the luxury of the ‘blank chequebook’ that the managers of the Apollo program did. While human lives are not at stake for most IS projects. mission team. An active risk management program should be in place from the beginning of the project and updated throughout the project life cycle to ensure that the project is as prepared as possible for whatever problems. When this disaster struck. either technological or otherwise. 2005. and management expresses surprise when the quality and productivity gains expected are not realised. preparing for the unknown starts with the initial project planning. you’ll find you have the drive to see that it will succeed. therefore. Prepare for the unexpected. Their training for the unexpected. Nevertheless. technology can be used in numerous ways to boost the productivity of the project team and help to ensure its success. ‘Murphy’ can still strike. All too often team members are expected to just ‘read the manual’ to bring themselves up to speed with a new system or tool. as long as you proceed from the standpoint that the project can succeed and must succeed. may arise. Support them with the best equipment and technology. Whether it was the initial objective of getting to the moon. to CASE and design tools. They knew they were exploring unknown territory and. Whether it is training to understand and use the technology being deployed (such as client server). The project manager melds this diverse group of people into the effective team needed to meet the project objectives. to project management software and even e-mail to facilitate communication. The Apollo program achieved its objective by employing the best technology available at the time. The Apollo astronauts trained constantly and kept training until the last moment. For the astronauts and mission planners. and therefore they made sure they didn’t. when allowances should be built into the plan to account for both known and unknown possibilities. In many cases. A backup crew trained beside them so that someone would be available to carry out the mission if for any reason the primary team was unable to. or the revised objective of bringing the astronauts home safely. preparing for the unexpected was a crucial part of the program. When disaster strikes on a project. they knew they could not fail.INTEGRATED MANAGEMENT 237 PEOPLE AND PROJECTS business objectives. training in the use of tools. For IS projects. had to prepare contingencies for situations they might encounter. these factors were not only instrumental in their success. Never consider defeat.1 . or training in project management or some other facet of project implementation. the principle remains the same. training and engineering has been done to the best of everyone’s ability. they were also integral to ensuring their survival. This attitude toward training would have been unacceptable for the Apollo program and should be unacceptable for IS projects as well. training is better done beforehand rather than in the heat of project implementation. For the Apollo astronauts.

it should be looked on as an opportunity to learn and improve so that future failures can be prevented. Discussion points Discuss these with your study group before reading the outline suggested solutions. so that you can turn certain failure for the entire project back into success for a modified project that still meets the fundamental business objectives. when the oxygen and power on the command ship Odyssey failed. For the Apollo 13 mission. the project manager must also take calculated risks to help ensure its survival – a gamble with new technologies. Likewise. The following points are raised by the author when analysing Apollo 13’s project management: (a) The need for a clear objective. In IS projects. leading to the Challenger disaster). Think about a project or an everyday activity in which the unexpected happened. Hundreds of thousands of miles from Earth. What characteristics of effective teamwork were demonstrated by the Apollo 13 project when disaster struck? Outline solutions 1. A project cannot have a clear focus on its final outcome if the objectives are not clearly defined up front.238 PEOPLE AND PROJECTS READINGS P5 Improvise. When an IS project is in trouble. they had to make new ones from what they had available. whether the schedule. The objective of the Apollo mission was to land a man on the moon and get him safely back to earth. 2005. the mission team members had to use their ingenuity to solve their problems. The interest this generated revived the flagging public support for the Apollo program (for a time) and helped renew the commitment to safety within the space program (until it flagged again. When the Apollo 13 ship was crippled. and did it work out? Discuss the need to deal with the unexpected as an important part of project management. we are doomed to repeat it’ is as true for IS projects as it is for missions to the moon. over budget. when disaster strikes – the project is late.1 . From piloting the spacecraft manually to cutting checklists to a minimum. 1. budget or deliverables. the mission team took calculated risks to ensure survival. List and discuss four examples from the Apollo 13 mission where project management elements were evident. Take risks. or delivering poor-quality products – improvising with what you have available can provide a solution. This often means redefining the parameters of the project. the project manager must have the guts to take the risks and to face the consequences if failures occur. even when we fail and the project is cancelled there is always a lesson to be learned. For IS projects. that success was the achievement of bringing the crew back safely against all odds. or new processes. Whatever the reason for the failure or cancellation. Success can be found even in failure. new people. with no way to replace the failed CO2 scrubbers. 3. When faced with a choice between certain failure or possible success. How did you handle it. The adage ‘unless we learn from history. Turn failure into success. The crew and mission team of Apollo 13 knew that they had to cut corners and take chances if the astronauts were going to survive. with certain death the alternative. the team improvised and made use of the lunar lander Aquarius. 2.

Training prior to and throughout a project ensures a knowledgeable and well-prepared team. Even the seamstresses of the spacesuits were considered the best they could get. (d) Train constantly. response control. rocket scientists and navigation programmers. quantification. Risk management is a critical aspect of project management and must be an important consideration point for all projects. 2005. To this end. the project may not achieve its objectives at the level of quality and success expected. The mission crew did not query the origin of the ideas. Everyone felt that they belonged and could contribute and that their involvement would be valued. including the making of new CO2 scrubbers and using Aquarius when the oxygen and power systems failed on Odyssey. The use of checklists was an aid to this training. In doing so. A high-quality project team is necessary to achieve project objectives successfully. Project teams are responsible for developing contingency plans throughout the life of the project. they demonstrated the following characteristics of an effective project team:      The primary objective of getting to the moon to land a man on it was unanimously abandoned by all concerned: the objective now was to get the crew back home safely. everyone contributed to the solutions. you must give specific examples from your experience in the same way that the Examiner will expect you to refer to the evidence in a case study. response development. Everyone believed that this was achievable.1 . mission team and Apollo crew had to work together effectively and efficiently because of the time-critical nature of the problems they faced. The support teams included the best engineers. (c) Support the team with the best equipment and technology. The Project Management Body of Knowledge (PMBOK) lays down the steps required for dealing with unplanned outcomes. If the project does not have the best or most appropriate people. Apollo’s astronauts were the best military and test pilots. 3. Not only did the Apollo crew train constantly but also did a back-up crew. When answering a question like this. This can help to improve the productivity and quality of output of the project team. to ensure that if there were problems the launch could still also go ahead. the synergy achieved in the team interactions meant that solutions were devised in time. The mission controllers. Because of the time-critical nature of the problems. as follows:     Risk Risk Risk Risk identification. The technical nature of their tasks was such that they had to train so that the work became second nature to them. The crew trusted the solutions that the mission specialists came up with. assessed as highly qualified and capable. 2. The crew trusted the advice concerning the manual piloting of the ship and the reduction of checklists which the mission team recommended. again helping to ensure successful completion of the project objectives. They assumed that these would be the best solutions in the circumstances because of the high performance expected of the earth-bound team. the command ship.INTEGRATED MANAGEMENT 239 PEOPLE AND PROJECTS (b) Choose the best people. Everyone was committed and involved in the delivery of the objective.

business interests. Two Illinois transportation projects illustrate the five essential elements of a public/agency involvement process. Others. Reproduced by permission of the publisher. The author describes five elements of a project that has a high impact on the community. organised community groups. was consultant to Illinois DOT on both projects. and the increasing focus on safety in the space programme was enhanced after some concern. one of the oldest freeways in Illinois. known as the Heart of Illinois Project. chambers of commerce and agencies that have regulatory oversight. historical societies. Hearing and addressing all stakeholder concerns early in project development can avoid many pitfalls and adversities in the long run. The case study stresses the need to involve the stakeholders in the project and to address their concerns early in the project development phase in order to avoid resistance and changes in the future. Comprehensive public/agency involvement programs cleared the way for unimpeded approval of two recent transportation projects in Illinois: a feasibility study for improvement of Interstate 74 through Peoria. Identifying stakeholders Some stakeholders in a public-works project are obvious: city and county councils. pp 51–53. Everyone felt that they had achieved a great success because not only was the crew back safely. everyone felt enormous pride in bringing the crew home because it showed what they had achieved under pressure. August 1995.240 PEOPLE AND PROJECTS READINGS P5   When the solutions worked. transportation projects. Vol 65. then public participation. Chicago. with parts designed in the mid-1950s before design standards were established for interstate highways. ASCE. tiered approach to involvement. the challenges of the above to project management. No 8. including the general public. and formal approval. such as some 2005. state and federal agencies. and a feasibility study of a new highway connection between Peoria and Chicago. active investigation to identify issues of concern or conflict. Gaining project acceptance Larry Martin and Paula Green.1 . Civil Engineering. even when the final plan contains aspects that some stakeholders find disagreeable. and local. CH2M Hill. Public/agency involvement programs include five essential elements: identification of stakeholders. The next case describes the processes used to gain project acceptance in two Illinois. resolution of concerns and conflict to an acceptable solution. how to deal with multiple project stakeholders. This case study should aid your understanding of:    the power of stakeholders. The last stage in the evolving process of gaining approval of a public-works project is public/agency involvement – a comprehensive program that provides avenues for receiving and responding to input from all project stakeholders. Involving every constituency early in the development of public-works projects can build acceptance even when parties don’t get exactly what they want. but also the space programme received great interest after a period of flagging public support. environmental groups. USA. First there was public education.

visits to adjacent businesses. the region’s largest employer (Caterpillar. one formal public information hearing and one local public hearing. the study team was able to address the specific concerns of each group. Federal Highway Association ( FHWA) representatives. institutions and residences. All told. However. composed to ensure representation of each geographic region and special interest. including:       executive briefing for senior Illinois DOT officials. organised neighbourhood and business area groups. nearly any project will affect groups that are unknown at the beginning of the process. are vocal and visible enough to be quickly identified. By meeting individually with the various tiers. and consultations with local representatives. We added representatives from these groups to the technical group and held meetings with them. some neighbourhood groups surfaced that felt they weren’t being involved.). and key technical support staff (an on-site briefing and field trip was also provided for FHWA and Illinois DOT representatives). about sixty-five meetings were held with all tiers of project stakeholders. and others. Efforts to identify these stakeholders might include drives through the area. more than twenty meetings with representatives of two area hospitals affected by the project.1 . the technical group was limited to about thirty members. Remaining flexible as the project unfolds may be the most important aspect of stakeholder identification. These neighbourhood groups could have proved more contentious had we not veered from the original membership or meeting schedule. Inc. In I-74/Peoria project. The group included elected officials from each geographic region (selection so 2005. institutions. and various other agencies. the Salvation Army. We used another method of tiering. the project team put extra effort into publicity efforts and paid special attention to the formation of a technical group to ensure representation of geographic and special interest.INTEGRATED MANAGEMENT 241 PEOPLE AND PROJECTS environmental interest groups. presentations for city councils and the regional planning agency. meetings of the technical groups. and business organisations. In the Heart of Illinois project. ‘Who cares about this project?’ and ‘What groups represent the interests of those individuals?’ The most significant challenge in identifying Heart of Illinois stakeholders was the size of the potentially affected region – a 3000-square-mile area encompassing ten counties with a population of 700 000. we conducted meetings with various tiers of participants. One method is to solicit input approval from various categories of stakeholders at different times. in which various constituencies are reached through an advisory or other representative group. Tiering approach It would be impossible to conduct an input meeting that allows every stakeholder to speak. the local chamber of commerce. industries. Besides identifying as many stakeholders as possible. Instead. presentations and working sessions for Illinois DOT technical leads. a technical group composed of representatives from every stakeholder group in a 3000-square-mile area would have been unwieldy. The questions to ask are. Seven months after start-up of I-74/Peoria project development. neighbourhood and historical associations. which consisted of technical representatives of the local governments. Tiering can make the input/reporting process less daunting.

the study team will not be blind-sided at the formal hearings. the project team learned of proposed developments and recreational areas that it had not previously known about and found out about an underground natural-gas storage area within one proposed corridor. Through public/agency input. members were getting information back to their local government bodies. They were most successful when a technical-group member made the arrangements and took responsibility for involving local constituents. Identifying issues By seeking out potentially contentious issues and addressing them promptly. Nearly all of the public information about the project emphasised that the study would not ‘select a preferred corridor. The technical group was supplemented by a mailing list of several hundred interested parties who received regular newsletters and project update. Having familiar faces at public meetings to discuss the project significantly increased the comfort levels of local participants and decreased the workload for project team members. through-trips account for only 2 per cent of peak period traffic on I-74 at the Illinois River. industrial/economic interests. If through traffic used the I-474 bypass. One divisive issue that could have seriously impeded project approval involved I-74 through-trips. and natureconservancy groups. the remaining steps in the public/ agency involvement process – resolution and approval – were relatively small parts of the process. but only determine if any corridors are physically. The project team assumed. instead. Because the project established only finalist corridors. environmentally and economically feasible’. agricultural and rural quality-of-life concerns. we also used meetings to revisit stakeholders once the issues were resolved. again through local technical-group members. Also the group members were already informed about the project. they contended.1 . and co-hosted project meetings in their communities. helping to ensure that all stakeholders had an opportunity to have their say about the project. An important aspect of issue identification for the Heart of Illinois project was to define clearly the scope of the project to the stakeholders. In addition to identifying contentious issues. publicised. We set up a series of local drop-in centres to present basic project information and solicit comments. Technical group members arranged. instead of trying to gather stakeholders from far and wide to voice their concerns. city councils. In fact. Heavy reliance on technical-group members does have drawbacks. traffic congestion would disappear. it added to the list of corridor candidates and considerations. the project team developed a ‘road show’. incorrectly in a few cases. We also responded to requests from service groups. and other organisations by arranging additional meetings.242 PEOPLE AND PROJECTS READINGS P5 that the group did not weigh too heavily with representatives from the Peoria area). Illinois DOT authorised a survey that showed about 75 per cent of all through-trips (and 98 per cent of through-truck trips) already use I-474. For the Heart of Illinois project. Even if the solutions ran contrary to their 2005. We recommend confirming important communications to avoid such potential failures. issue identification for the I-74 Peoria project led directly to points of contention that required resolution. Issue identification did not lead to conflicts to be resolved. These statistics were exceptionally valuable in dispelling further doubts about the need for the project as final recommendations were developed. In contrast. Many stakeholders believed that existing traffic problems resulted from through-trips (particularly trucks) clogging the freeway at peak periods.

Initial work to Summer 2004 is improving access routes to and from the planned I-74 route. Afterword The I-74 project is now underway. Formal approval The first four steps in the public/agency involvement programme benefit the final stage. and (2) a commitment to meet with stakeholder groups as needed to assure them that their concerns have been addressed in the plans. A decision on corridor feasibility is expected soon. St Francis and Methodist hospitals. At present I-74 access to and from the medical centres needs to be improved. formal approval. stakeholders’ antagonism toward the final plan was tempered by the knowledge that their concerns were heard and addressed. preserving its character while enhancing access to the downtown business district. The project has now moved into preliminary engineering. The feasibility study had laid the groundwork for public communication and involvement in future phases of the work. Based on input from about twenty special meetings with the hospitals and interest groups. Input from West Bluff residents led to a proposed bike/pedestrian path across I-74 for local access through neighbourhoods split by the highway. The process also helps to dispel any feelings that a project is being forced on the community. The project team is not likely to be taken by surprise by any new issues or concerns. The I-74/Peoria corridor study results in adoption of $180 million in highway improvements with almost complete acceptance by the affected agencies and the general public. respectively. CH2M Hill will reconstitute the technical group to provide continuity of public/agency involvement during this phase. and the hospitals formed a subcommittee to address the I-74 study. Again through a series of meetings.INTEGRATED MANAGEMENT 243 PEOPLE AND PROJECTS position. The fact that agencies have had the opportunity to provide feedback on the project along the way also aids the formal agency approval process.1 . Two historic neighbourhoods are also in the area: the West Bluff Historic District and the East Bluff Neighborhood Improvement Association. hospital access will improve with a half-diamond interchange. two large. and access ramps and turn restrictions will direct traffic away from the West Bluff Historic District. left-hand ramps will be eliminated. Chicago. As a subcontractor to Alfred Benesch & Company. we were able to develop an acceptable alternative in which ramps are located outside the historic district. In downtown Peoria. The major upgrade is expected to commence in 2005. prestigious health-care institutions. nor will the public be surprised about any project elements. border I-74 on the north and south sides of the freeway. the preliminary improvement alternatives were modified. Master planning projects undertaken by two hospitals also had to be integrated with any I-74 modifications in the area. the existing I-74 runs through the North Side Historic District and abuts various structures and properties of historical significance. in several ways. Just west of the Peoria central business district. CH2M Hill brought in the consultants working on the hospital plans. Resolution Resolution involves: (1) an effort to refine project plans to address stakeholders’ concerns. In the recommended plan. Funding has been earmarked in the stage highway program for the next phase of the Heart of Illinois Highway.

The method used by the Heart of Illinois Project to gain project acceptance has five key elements. Functional managers. Society. With their help the project manager should be able to identify who has a stake in this project. 3.’ The Project Management Body of Knowledge (PMBOK). local businesses and local representatives. Identify the internal and external stakeholders for each project and discuss their stakes in the project. Competitors. 2. Interest groups. or whose interests may be positively or negatively affected as a result of project execution or successful project completion. In some projects it is also useful to identify the relative power of each of the stakeholder groups to influence the success of the project. states: ‘Project stakeholders are individuals and organisations who are actively involved in the project. Project manager and project team. planned disruptions and alternative routes.1 . 1997. Discuss this question with your group members. every project has to deal with stakeholders. Discuss each of those elements. Regular press packs are provided to all local media and individuals can request email updates. Think about projects in which you have been involved. Put together a list of the most common stakeholders on any project.’ Regardless of the size of the endeavour.upgrade74. www. or cases already discussed in this text. External stakeholders       Clients. The five elements and their definitions are as follows:  Identifying stakeholders: this process involves the identification of groups or individuals with a stake in the project. 2005. True to its earlier promise. the I-74 project is continuing to communicate with its major stakeholders.244 PEOPLE AND PROJECTS READINGS P5 2004 through to 2006.com. 3. This may involve visiting the area. Suppliers. Outline solutions 1. 1. John Wiley & Sons Inc. All projects will have a variety of stakeholders. A definition provided by Kharbanda and Pinto (Successful Project Management. Chapter 2) states: ‘An organisational ‘‘stakeholder’’ refers to any individual or group that has an active stake in the activities of the organisation. Discussion points Discuss these with your study group before reading the outline suggested solutions. A dedicated website. keeps the public informed of all work. Government. A list of the most common stakeholders on any project is as follows: Internal stakeholders     Top management. Explain the term ‘stakeholder’. 2. Employees.

the project manager must listen to any concerns or objections raised. thus allowing stakeholders to identify how they will be affected by the project. This infrastructure will help the project through the project life-cycle. Resolution: in this phase the project plans are adjusted to meet stakeholder concerns. In some projects it is also useful to consider what power you may have to influence their actions and opinions.INTEGRATED MANAGEMENT  245 PEOPLE AND PROJECTS    Tiering approach: this approach was used in this particular project owing to the physical difficulties of holding a meeting with all stakeholders at the same time. Meetings are held with stakeholders to guarantee that their individual concerns are taken into consideration. 2005. this phase should be free of unexpected surprises. Input or approval from the many different stakeholders must be gained at different stages and at different times throughout the project. Once stakeholders have established this. Identifying issues: the project must clearly establish its scope.1 . Formal approach: following the previous four steps. This process proceeds with the final launching of the project plan.

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1 Complete the following sentence with the most appropriate word or phrase: The person or organisation providing the resources for the project is known as the project ____.4 In a typical project.1 .3 In any project. what term is used to describe all those individuals and organisations that are interested in the progress of the project? (A) (B) (C) (D) Project Project Project Project team customers stakeholders managers Question 1. who is responsible for ensuring that the project meets its objectives? (A) (B) (C) (D) The The The The project team project manager steering committee project sponsor 247 2005.Revision Questions 5 Section A type questions Question 1.2 Which type of organisation structure is most likely to contain a series of projects as one of its formal elements? (A) (B) (C) (D) Entrepreneurial Functional Divisional Matrix Question 1. Question 1.

1 . Comnet selected a UK company called Dantec to service the project. Christian Rueber. Figure 5. The client The client. 2005. Comnet. and product (10 marks) involved in a project. process. It requires effective teamwork and team motivation. After several months of tendering from numerous suppliers. It has recently gone through a process of reorganisation (1996) and has since been investigating the potential of a new telecommunications network. Explain what the project manager can do to help foster a motivated project team environment. together with the roles they play in the project and their countries of origin. Section C type questions Question 4 Introduction Five firms from four countries are playing major roles in a large project devoted to the development and implementation of an extensive communications network.248 PEOPLE AND PROJECTS REVISION QUESTIONS P5 Question 1. head of telecoms development. (10 marks) Question 3 Requirement Explain the role of the project manager in respect of the:    people. is one of the major telecommunication providers in Germany. Section B type questions Question 2 Requirement The project manager does not and cannot complete a project on his or her own. spent last year leading a team of engineers. ( The selection was based on numerous financial selection techniques and cost–benefit analysis.) The final contract was signed between the two parties in October 1997. programmers and software analysts from Comnet in selecting a contractor who would supply the telecoms network.5 Identify four project management skills.3 shows the firms.

Richard Norton. the final master project plan is complete. Richard gets together his project team for the first project coordination meeting.1 . and has worked with Comnet previously on a successful small-scale network installation. is placed in charge of the Comnet project requirements. a computer manufacturer in the United States. where they begin to draw up a schedule of events and key milestone activities. Dantec have many years’ experience of working with Solar on several previous successful projects. Each member of the team is made aware of their individual team’s responsibilities in the overall project. the management team at Dantec are more than happy with his progress – after all.to medium-scale telecommunications networks throughout Europe. It has several years of experience in installing small. the general manager of networks coordination division.INTEGRATED MANAGEMENT 249 PEOPLE AND PROJECTS Figure 5.3 The prime contractor Dantec is a telecommunications development and installation company based in the north of England. Phil Rogers. after several further planning meetings. the project manager. Richard’s background is as a telecoms engineer. By the end of October. and he has only very recently moved into a managerial role. including the delivery dates for the subcontracted work. for the required computer hardware as well as the operating systems needed to implement and control the network. Dantec entered into a contract with Solar. However. he successfully won the contract! Having signed the contract. although this is his first role in charge of a full network installation. has been in charge of the project throughout the tendering process. Many of the project team at Dantec consider Richard to be lacking in managerial experience to handle such a large project. 2005. 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.

(8 marks) (b) an assessment of main responsibilities in relation to both the main client Comnet. and all data 2005. entered into negotiations with Yotamo and Exactest. Phil Rogers agrees the dates and targets set for Solar. it is your responsibility to communicate with all SRHA medical centres and hospitals on the progress of the project. paper-based system. Responsibility for integrating the hardware and software components developed by Solar.1 . (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. most information within the hospitals and medical centres was kept by a manual. well renowned for its high-level skills in integration. Yotamo was given the responsibility for the development of major elements of the software that could meet the functional requirements of the overall communications system. (12 marks) (Total marks = 25) Question 5 GPConnect (GPC) is the name given to a project being undertaken by the Southern Regional Health Authority (SRHA) to connect all medical centres and hospitals within the region to a national information network. Each regional health authority manages and controls the provision of medical care to the public within its local area. with the approval of Comnet. The SRHA is one of four regional government-controlled authorities. Dantec. as of today. Your answer should include: (a) an assessment of his main tasks internally as the project manager at Dantec. irrespective of which firm wrote the software. Exactest was obligated for additional ancillary software for some specific components of the overall system as well as for the development and implementation of a testing strategy for all functional software developed under contracts with Solar. responsible to the central government Department of Health. all of which are publicly funded (that is. called the ‘Healthweb’. Requirements Critically assess the role of Richard Norton of Dantec in the overall telecommunications project. as part of the project team. proposed in the master plan drawn up by Dantec the previous month. 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. The SRHA is responsible for fifty medical centres and ten hospitals within the region. Yotamo and Exactest also rested with Exactest. and the major supplier Solar. as prime contractor.250 PEOPLE AND PROJECTS REVISION QUESTIONS P5 In November. Solar’s role Solar. You are a senior management accountant working for one of the southern region hospitals. 23 May 2002. the SRHA is not responsible for private medical centres and hospitals). was responsible for integrating all project deliverables to the final client in Germany. and. Prior to the project commencement.

1 . (ii) the project board. Include in your answer a discussion of the potential conflicting project objectives of the above stakeholders. (iii) the medical and administrative users (in medical centres and hospitals). 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.INTEGRATED MANAGEMENT 251 PEOPLE AND PROJECTS exchange was done by means of telephone or by post. (25 marks) 2005. Requirements You have been asked by the executives of your own hospital to prepare a memorandum to the other senior managers in the hospital which should discuss the relationship of the project manager to: (i) the project sponsor (that is. the central government).

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1 . Section B solutions Solution 2 Guidance and common problems This question again provides you with an opportunity to demonstrate your basic project management knowledge.  Delegation skills.1 Sponsor 5 Solution 1. The project manager needs to understand his or her team members first in order to understand what motivates them. you must be prepared to apply this knowledge to a scenario.2 (D) Solution 1. A straightforward question such as this could appear in this examination.Solutions to Revision Questions Section A solutions Solution 1. but again.3 (C) Solution 1.  Negotiation skills. Project management techniques for motivation may include regular project meetings whereby team members can participate and air 253 2005.4 (B) Solution 1.  Problem-solving skills. How does the project manager create such an environment? By encouraging participation in project decision-making and by delegating decisions to the team members.  Change-management skills.5 Any four of the following:  Leadership skills. thus encouraging involvement and ownership.  Communication skills. 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.

 Control of coordinating internal deadlines. (a) Internally the responsibilities of Richard Norton are as follows:  Coordinate complex internal team. materials.254 PEOPLE AND PROJECTS SOLUTIONS TO REVISION QUESTIONS P5 their views and put forward their experience.  The formulation of internal resource needs: people. Solution 3 Guidance and common problems The question provides a useful guide for remembering some of the key roles of the project manager. It is therefore a useful memory jogger. The manager will therefore be involved in checking that the specification has been met. Also. Section C solutions Solution 4 Role of Richard Norton As the main contractor. both internal and external. and also provide strategic progress reports for the decisionmakers at the client. 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. Process. installation. time. The outcome from the project will (hopefully) be the completed installation of a new or revised system. etc. including: technicians. The manager needs to manage the people involved with the project. The project process itself will have to be managed. ‘People’ in this sense means not only the project team. 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.  Team motivation. Dantec has the major responsibility for coordination of all parties involved in the project. The manager will therefore need to delegate and monitor the work of the more junior members of the team. programmers. Part of the ongoing monitoring of the project is therefore directed at ensuring the project does provide the finished project. the project manager should have regular contact individually with team members. He should be the focus of the negotiation process. People. marketing. but also the client staff who will be working with the project team. 2005. This split of jobs is likely to be quite difficult and time-consuming. network experts. The use of Gantt charts or network diagrams will help in this respect. This objective implies that the manager will have significant project management skills and be able to manage the three ‘Ps’ outlined below. Product. setting time scales and milestones (and ensuring that all parties agree and achieve these project targets).1 .  Project planning and scheduling. and appropriate sign-offs and review meetings are held to confirm project completion.  Preparation of the project master plan. that is Richard Norton is the link point to all parties.  Internal negotiator and arbitrator. encouraging them to put forward their own ideas and suggestions for project improvement. The project manager needs to demonstrate that he/she values the contribution made by team members and that their contribution is important to the overall project. finance. finance.  Control of the financial budget.

particularly in such a large and complex project as this. 2005.1 .INTEGRATED MANAGEMENT 255 PEOPLE AND PROJECTS (b) Responsibilities to Comnet and Solar. His technical skills are strong as a result of his previous background. It is also likely that Richard Norton will face challenges in the financial control and budgeting of the project if he has no experience of this particular aspect of project management. this should help to gain team confidence (but may be insufficient to build the confidence of nontechnical members). The role of the central government in this project as a fund provider may cause conflict between central government and the SRHA. the project manager will need to work through the project sponsor for any contractual dealings with T. is contracted directly by the central government (the project sponsor). Therefore. which may be difficult to foster when the project manager has little prior experience at this level. but in this case the amount of funding from the central government is not clear. again. Solution 5 Project management relationships and conflicts ( i) Project manager and project sponsor T. He may also have a lack of contractual negotiation experience. Communication with some team members may be difficult. (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. This is likely to be important in such a large project with high financial resource requirement. The project sponsor is usually the party responsible for payment of projects. particularly in a multi-disciplined team (in fact. This will be of importance when in negotiations and discussions regarding technical issues. Externally. Technical knowledge will obviously be important in this type of project. However. the team is already slightly dubious about the choice of project manager).  Contractual negotiations for all parties. There are potential team leadership problems as a result of his inexperience in a senior management position. the project manager will need to work with the sponsor to resolve potential conflict over project costs. therefore Richard Norton could build support by proving his technical ability. It will be important for Richard Norton to foster and build on management support as early as possible in the project’s life. particularly those with experience who may resent a project manager with less experience than themselves. agreement on technical issues is reached. to ensure agreement and consensus.  The coordination of internal and external activities and milestones. good project managers must be able to balance this technical ability with a strong managerial ability.  The primary communication link between the complex supply chain within this project and the final customer. Richard Norton also has a number of key roles. neither in the initial funding nor the on-going running costs.  Ensuring that technical negotiations take place between the various contracted parties and that. as the company responsible for carrying out the GPC project. Key skills required in project management include leadership and inspiration. This could lead to lack of motivation. Therefore.

However. (iii) Project manager to medical and administrative users The project manager is responsible for the overall delivery of the final working system to the end users.1 . As a public sector project. Direct communication between the project manager and the project board is necessary. There is also likely to be conflict between the sponsor and the project board over funding. Good communication between the project manager and the end users is essential to the implementation of a successful project. while minimising their workload. Possibility of conflicting objectives The sponsor’s objectives are the achievement of improved service to patients. 2005. Although a technology fund has been set up by the central government. the on-going costs and workloads and the patient record security. as without their backing the project is unlikely to succeed. thus reducing the value of the end product.256 PEOPLE AND PROJECTS SOLUTIONS TO REVISION QUESTIONS P5 The project manager has little direct reporting/communication with the central government. rather than on direct patient care. causing a financial burden upon the SRHA and the individual hospitals and medical centres. The project board will be concerned with the achievement of management/ business level objectives. as responsibility for the project progress is mainly to the project board. However. whereas the end users may see this as cost cutting. Staff are likely to have concerns about the implementation workload. The objectives of the users are to care for their patients. The administrative and medical staff will be evaluating the operational day-to-day objectives of the project. as the project sponsor. in particular that the project improves business efficiency and effectiveness. Quality and customer perspective should be of more importance to all of the stakeholders. However. the ultimate achievement of long-term project objectives is to the central government. with on-going regular reporting of project milestone review meetings. who. In addition. 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. the central government and project board may be concerned with funding and cost minimisation. 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. it is evident that this funding has not been easy to obtain. The first role of the project manager is to ‘‘sell’’ the benefits of the new system to the users. public funds must not be seen to be wasted. and ensuring that training is effective. will be evaluating strategic level objectives and who will be concerned with ensuring that the whole project is not seen to waste public resources. who will seek to minimise their workload while providing good care for their patients. the central government are sending out rather mixed signals by allowing individual hospitals and medical centres to decide upon their individual method of operation. This may conflict with the objectives of the staff. but the central government has made it quite clear that this project is not discretionary. In addition. A number of doctors have already expressed concern over resources being spent on the new system. financial objectives should not be primary ones. (ii) Project manager and the project board The project manager is responsible for achieving the objectives set by the project board. the project manager will need to manage both medical and administrative staff expectations of the system as the project progresses.

some of which are useful in bringing projects to a successful conclusion. the level of complexity differs but the underlying requirements of achieving deliverable results to a customer within given constraints remain the same.The Project Management Process 6 L EARNING O UTCOMES After completing this chapter you should be able to: " " produce a basic outline of the process of project management. 6. This chapter presents an overview of project management concepts. meeting standards and communication. and above all to ensure that the expected outcome is produced in a timely. In Chapter 4 we discussed different life-cycles whereby projects are completed. Others refer specifically to the coordination of resources necessary to complete projects as required. Let us look now at the process of project management.’ (CIMA: Official Terminology: 2000 edition. Obviously.2 A definition of project management ‘The integration of all aspects of a project. p.1 Introduction We have already examined projects. business managers every day will tackle equally important but smaller-scale projects. 257 2005. All have a common ground of planning. cost-effective manner. Mention the term ‘project management’ to most people and they will think of images of large-scale construction projects – the Channel Tunnel or the Millennium Dome. Whereas these are obvious examples.1 . the people who are crucial to their success and project communication. 117) There are other definitions that refer to a group of loosely connected techniques. ensuring that the proper knowledge and resources are available when and where needed. These can be seen in the processes involved in project management. for example. identify the characteristics of each phase in the project process. 6.

subcontractors or consultants) that will result in achieving project objectives. performance specifications and resources (this is further discussed below).4 Controlling Measuring the project’s progress and assessing whether it differs from the plan. to determine the needs.3. Executing the project is discussed in more detail in Chapter 8. devising a schedule. cost.1 Initiation This phase sets out the development of a vision for a project and the establishment of goals and objectives. quality. 6.3. Feasibility analysis will be undertaken at this stage (see Chapter 7). The early stages of the project must be spent carefully establishing a baseline plan that provides a clear definition of how the project scope will be accomplished on time.3. Post-completion review is discussed in Chapter 8. If it differs. 6. which may in turn lead to a goal change. This stage stresses the need to keep resources and team members focused upon the project tasks. time.3. developing a budget and planning how the project team will achieve the constraints of time. scope. Controlling the project is discussed in more detail in Chapter 8. to budget and using available resources. the project manager must decide among alternatives for solving problems.258 THE PROJECT MANAGEMENT PROCESS STUDY MATERIAL P5 6. the key individuals will be brought together to form the project team.4 Project planning A major responsibility for the project manager is the initial planning of the project. subordinates and others (e. At this stage. budget.2 Planning Planning involves defining the resources required to complete the project. 6.3 Executing leadership Providing leadership and coordination to project team members. 2005.g. 6. A project plan comprises separate plans for:     project initiation/authorisation. corrective action needs to be taken. this may lead to re-planning. At this stage. 6.3 The project management process The project management process requires five different managerial stages and can be represented by a five-step process.1 .3. objectives and customer expectations of the project. 6.5 Completing Ensuring that the project is finally completed and conforms to the latest definition of what was to be achieved.

and the estimated completion date of the whole project. a network diagram is created showing the required sequence and interdependencies of work packages to achieve the project objectives (see Chapter 9 for some examples of network diagrams). plus cost of purchases from the resource plan. The cost plan uses a rate per hour for each activity in the time plan. to calculate total time. Work packages can be further divided by defining the tasks and activities that comprise them. This may include safety and security planning. who will do what and how long each is planned to take. The resource plan checks peaks and troughs of workload to ensure the plan is feasible and lists purchases to be bought. The content of each of these plans is as follows:        A project initiation document defines the roles and responsibilities. Portray the activities graphically using a network diagram. their likely concerns. Because some work packages occur in parallel.INTEGRATED MANAGEMENT 259 THE PROJECT MANAGEMENT PROCESS Larger projects will also include plans for:    resources. otherwise motivation and creativity is reduced and monitoring becomes costly. This includes the milestone finish dates of each stage of the project life-cycle. planned method of communication and who will be responsible. but only where this is essential to allow delegation and control. you cannot add together all the times of the WBS to estimate how long the project will take. message needed. Make a cost estimate. Evidence from past similar projects is used wherever possible to improve the accuracy of time estimates. and responsibility for each test. A work breakdown structure (WBS) is a hierarchical tree of these work elements that need to be accomplished by the project team during the project. communication. The quality plan includes identification of the customers. the key outcomes each expects. 2005. A risk register will identify contingency plans for each of the key risks and allocate responsibility for monitoring each. plus contingency costs to create a budget for the project. 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. Therefore. The communication plan identifies the key people in the project. Dividing a project into work packages with defined deliverables and responsibilities for each allows the project manager to delegate. scope and deliverables required (see below). Using rates per hour and costs of purchased resources needed. It will also include an audit plan for the project management process. The time plan lists all the activities. acceptance criteria that has been agreed with them. This will be time phased to provide a cash flow forecast.1 . a test plan for how each outcome will be tested. Estimate times and resources. Creating this plan involves the following stages:     Divide the project into work packages. the WBS is used to calculate a total of how much the project will cost. contingency. 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.

any areas excluded from the project.1 . A realistic project plan is then issued. the schedule and costs are open to uncertainty.2 Detailed project planning Detailed planning involves the same steps as the front-end planning previously discussed in Chapter 4. to act as a base document against which progress and changes can be assessed. etc. the approach to be taken to the project. any interfaces between this project and others. Also the time and cost are built into the plan for communications. the range of tasks included in it).). such as a steering committee. explaining why the project is necessary. any constraints. meetings. or by suppliers. such as budget or available resources.e. the project objectives.4.4. the project manager and team. for example.1 What aspects of project management are likely to involve some degree of uncertainty? Solution Most aspects of project management are open to some degree of uncertainty! For example. and is briefly described again below. meetings.). the project deliverables and desired outcomes. any assumptions on which the PID is based. 2005. owing to unforeseen events such as adverse weather conditions. There are two primary reasons for having a PID:   for authorisation by the project steering committee or project board. 6. etc. whether it is primarily to be carried out in-house. Exercise 6. any mechanisms to ensure that the project objectives are achieved. or with other organisations or parts of the organisation.260 THE PROJECT MANAGEMENT PROCESS STUDY MATERIAL P5   The above plan assumes infinite resource availability and no risks.1 Initiation At the beginning of a project. A typical PID will contain the following:              the background to the project. the communication plan (reports. the controls in place in the project (that is. the project scope (i. Calculate a project schedule and budget. 6. a Project Initiation Document (PID) should be produced. reports. a shortage of resources or increase in costs of raw materials. the project organisation structure. Larger projects therefore create a resource plan to check that workloads are achievable. Risk analysis is also done to estimate what additional contingency allowance is needed for time and cost.

Section title Overview or summary Contents Overview of the plan: project objectives. Estimation of resources It is necessary to plan how long it will take to complete each activity. This is described in detail in Chapter 9. organisation of the project team. and how much of each resource each activity will require to complete the activity on time. the contracting company. Project Manager. especially the milestones. A work breakdown structure (WBS) must be created. It is also necessary to provide a cost estimate based on the type of resources required and the quantities anticipated for each activity. Some illustrative examples have been used. and the available resources to complete the project objective. and the project team. schedule of work. There may be ‘commercial-inconfidence’ elements in it that would only be shown to senior management. and the tasks therein completed by the project team during the project. This forms the baseline plan for the whole project – a complete guide for accomplishing the project scope on time and within cost. the project manager. There are no set layouts or contents of management plans. Determine the project schedule and budget A baseline budget needs to be produced that presents a realistic assessment of the time and funding required.INTEGRATED MANAGEMENT 261 THE PROJECT MANAGEMENT PROCESS Dividing the project into work packages Breaking the project into work packages requires the identification of individuals responsible for elements of work. Define the activities graphically By using a network diagram (often referred to as critical path analysis – see Chapter 9) the required sequence and interdependencies of activities to achieve the project objective can be displayed in a more ‘user-friendly’ format.1 . The work breakdown structure clearly identifies the person or people responsible for each activity or work package. This then involves further definition of all the specific activities that must be carried out for each work package. customers and the project team. resources required including the budget and an assessment of significant risks For example. An example of a project management plan in outline The plan below would be issued to stakeholders such as corporate management. project for the upgrade of a computer system for the Exam Company The project authorisation document will identify roles and responsibilities such as the project board. For example: Henry Smith. Project name Project players and responsibility 2005.

acceptance criteria agreed. selecting the project team. preparing and implementing plans. In-house or subcontracted provision of modules will be specified The quality plan identifies our customer.262 THE PROJECT MANAGEMENT PROCESS STUDY MATERIAL P5 Section title Contents Responsible for: initiating the project.1 . the work breakdown structure (higher levels) time and cost limits. A major assumption for the Exam Company project is that the system is accessible in the quiet period between major application periods or examination diets The technical features of the project are identified. maintaining pre-existent standards but catering for an increase in candidate applications This is identified in the project authorisation document. with Oracle software The project team will use project management techniques consistent with accepted UK standards. system-diagrams. a test plan of how each outcome is to be tested. the key outcomes it expects. as this system must be 100 per cent secure. An audit plan will be included Project objectives Project scope and contract Methodology Assumptions Technical plan Quality and management 2005. etc. the availability of particular staff. the completion of the contract with all user training by 30 September 2003 at a cost of £x).g. standards and any relevant document relating to the provision of the new exam administration system. Safety and security planning will be essential. for clarity’s sake. assumptions made when drawing up the plan and any items that will not be included. They will include requirements. techniques. inflation. costs of supplies. site plans. the customer. Henry Smith is an experienced and methodical project manager These may refer to site access. say blue-chip hardware such as Compaq. managing the successful delivery of the project to time. From previous experience. tools. cost and quality applications For example. and responsibility for each test. Reasons for undertaking this project. to design and implement an upgraded examination system for the Exam Company. support functions. the cost of borrowing money. the Exam Company. what is to be achieved in terms of the deliverables (e. the customer may have insisted on using particular equipment. specifications.

what communication is planned and the responsible person. monthly resource reports (financial – critical to this project – and human resource reports) will be issued and any milestones will be reported on in writing. recruitment methods.1 . In our project. Monthly status projects. Should any critical status reports be needed. so Henry Smith must ensure as much as possible that his costings and time/resources management is accurately assessed. Included will be any subcontract staff and staff from the Exam Company with any input to the project. the Exam Company’s IT manager on a weekly basis to update her on progress and to tackle any concerns she has. an activity on node format will be used This includes checks on peaks and troughs of workload to ensure the plan is feasible and to ensure procurement is achieved by the provision of lists The cost plan will give a rate per hour for all work and the costs of purchases Contingency costs are included to give the project budget. what their interest in the project is and their concerns that will need to be addressed consistently. In our project. Henry Smith will be responsible for communicating with Jane Elliott. they will be made outside the weekly meeting The organisation plan describes the structure of the project team and each person’s responsibilities. we need to recruit one extra software engineer for bespoking the application This will describe the main phases of the project and highlight all key milestones. Organisation charts will be drafted by position if staff need to be recruited. It is usually illustrated by a Gantt chart with a network diagram. If so.INTEGRATED MANAGEMENT 263 THE PROJECT MANAGEMENT PROCESS Section title Communication plan Contents This will identify the key personnel in the project (or stakeholders). The contracting company will be bearing the risk of over-run and any other contingencies Organisation and personnel Project schedule Resources and facilities including budget breakdown 2005. sources and training required will be identified with start times. Time phasing will give a cash flow forecast The Exam Company has made it clear that no extra project money will be available. As Jane Elliott is familiar with computer-based projects.

These will be reviewed and approved by the project board with decisions in writing After the project.264 THE PROJECT MANAGEMENT PROCESS STUDY MATERIAL P5 Section title Risk assessment and risk management Contents The risks are identified and contingency plans made. It will include a summary of performance reviewing all aspects of the project. the start and end date of each activity.3 The baseline plan This should include a number of details:   the start and end date of the whole project.1 . including extra activities and cost and time buffers to be added to ensure reliable budget and completion date. unauthorised access to candidate details or results is the greatest outcome risk. Security must be 100 per cent. An action plan with recommendations for prevention should be drawn up. input should be sought from the project team. the delivery of quality as required. when all change requests have been reviewed to ensure completion. All documentation should be reviewed after filing Acceptance Change management Post-implementation audit Think about a project you have worked on or are currently involved in. the performance of the team and its relationship with all other project members. the time it took. Acceptance will be in writing. suppliers and the customer. in our example the Exam Company. It may sign off the project or return it with a specific statement of requirements that will make it acceptable. any subcontractors.4. The managing director of Exam Company will sign off the project with Jane Elliott Requests for change may be initiated by Henry Smith or the Exam Company represented by Jane Elliott. There will be cost implications which Henry Smith has taken account of. 2005. This may mean that the best encryption software will be needed for on-line applications. He must also make contingency costing in line with his contingency plans The project manager will submit the final system for acceptance to the customer. 6. the tools used. List the planning activities you carried out before starting the project. The lessons learned to prevent recurrence of any problems should be identified. the costs incurred against estimates. The risk register identifies each contingency plan for each key risk and allocates responsibility for monitoring. In the Exam Company project. including the way it was managed.

the final cost estimate for the project. For example. fitness for purpose (i. 6. project materials. when building a house the project scope will include clearing the land. matches the business process it is intended to support) etc. cost and customer satisfaction/quality. It is important to ensure that prior to the project planning the project team has a clear understanding of the customer specifications and requirements. equipment purchase or hire.5. For example. The project cost is based on the budget. 6. 6.5.5 Project objective constraints This is likely to be examined quite frequently.e. The successful accomplishment of the project objective is usually constrained by four factors: scope/functionality. This will include salaries of the people working on the project. or a garden full of rubble. response times.5.1 .4 Customer satisfaction/quality The objective of any project is to complete the scope within budget and by the agreed date to the customers’ satisfaction and quality requirements.1 Project scope/functionality The scope of the project is all of the work that must be carried out to satisfy the project’s objective. which includes a cost estimate of the resources that will be used in the project.3 Project cost The cost is the amount the customer agrees to pay for the final project or product. either set by the customer or negotiated and agreed upon with the customer. building the house and landscaping. The project will have a finite date for completion. Quality in computer systems can be measured in the number and type of errors (‘bugs’) it still contains. planning a wedding will require organisation of all activities to occur at a specific time and on a specific wedding date.2 Project schedule/time The schedule is the timetable for activities involved in achieving the project objective. the cost estimate (budget) for each period. will be unlikely to satisfy the customer! In computer systems. schedule/time. a hole in the roof. the scope is often defined by all the functions that the system is expected to fulfil.5. 6. The customer will expect the work to be carried out to completion and that there is nothing expected which is missing. 6. 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. 2005. subcontractors’ or consultants’ costs and facilities costs. Leaving windows or walls unfinished.INTEGRATED MANAGEMENT    265 THE PROJECT MANAGEMENT PROCESS the resources needed for each activity (this may be shown as resources needed per activity per month). all within the agreed quality standards expected by the customer.

266 THE PROJECT MANAGEMENT PROCESS STUDY MATERIAL P5 Take a few moments to think about a project that you have been involved in.1 . The key points to remember are:   the five project management stages (try using the acronym IPECC). 2005. Consider the constraints involved in the project and how you carried out the planning process to achieve the final objective of the project.6 Summary This chapter has looked at the project management process. 6. the constraints acting on a project. The following chapters will further discuss the project management stages.

project owner Eurotunnel will pay the contracting organisation. As one project executive says with some irony.7 billion. ASCE. conflict and complexities in managing project stakeholders. Under the settlement. But it is also the world’s largest privatised project with implications for other such financial arrangements. Vol 64. Civil Engineering. the fares for the Channel crossing are higher than hoped ($325 to $465). 267 2005. About 600 000 shareholders as well as banks and other governments looking at privatisation will wait until the next century for the promised returns. in addition to payments already made under an earlier agreement. The final cost of the system is $149 billion. pp.Readings 6 Project scope and an introduction to the complexities of project management The article in this section describes the potential scope of project management and focuses upon the complex nature of one particular project – the construction of the Channel Tunnel. The Channel Tunnel linking Great Britain and France is an engineering achievement and a symbol of man’s imagination and daring. and late Virginia Fairweather. May 1994. The existing ferries cost less. The list of obstacles to that payback is a long one.25 billion was resolved in early April with the final contract value fixed at approximately $1. Reproduced by permission of the publisher. the project of the century had the ‘claim of the century’. until the middle of the next century. 42–46. Some of the payback pressure was eased when the two governments agreed to extend the concession to Eurotunnel for another ten years. This real-life. the importance of balancing planning and implementation activities.1 .) The privatisation payback will come long after the ribbons have been cut and the champagne has been drunk. bankers and the governments of France and England were trying something unprecedented and there are lessons to be learned from their experiences. The high-speed rail link on the United Kingdom (UK) side to London is only on the drawing board. This case study should provide you with a better understanding of:    project scope management. Transmanche Link (TML). and ticket sales are lower than expected. The Channel Tunnel: larger than life. No 5. about double the original estimate. Along with engineers and contractors. high-profile case study introduces some of the concepts and ideas fundamental to understanding the importance of successful project management. approximately $105 million– $127 million. (This claim for $2.

and worse.25 billion claims and its origin in a speech to the Project Management Institute last autumn. men were standing on the lining segments trying to hold them together with a belt. make it pay’ phase. many of those involved look back at the job as an adventure of a lifetime. John Noulton. Nonetheless. to which he has since returned. If its lessons are heeded. TML. as was the tunnel lining system. In the end. which he calls ‘a miracle’. he says. a Eurotunnel executive. Neerhout came from the Bechtel Co. The public offering of shares in the project was made right after the United States stock market’s Black Friday. By the time they proceeded to the rail tunnels. That task looks daunting. engineers knew what to expect. catenaries. but ‘once you’ve got the machinery down there your main cost is manpower’. the job was ‘pretty well’ on time. the first of the three running tunnels. a costly endeavour. in this case. John Neerhout Jr was project executive at Eurotunnel from early 1990 to 1993. and the bureaucracy. The third phase was construction. the designed-for compression could not take place in the hollows in the outside ground. At one point. he recalls. but perhaps the central problem was the banks’ early involvement in the renegotiation of the contract. As to claim. and multiple methods of compensation for different parts of the work. signalling.’ he says. he says. Raising the money was the next high point. Eurotunnel advanced $75 million each month to TML to complete the job. Noulton describes just one hitch in the original plans. First was the ‘tremendous elation and momentum’ created when both nations signed the treaty approving the project in 1987. water affected the electronic system. but payoff wasn’t expected until the next century. That contract resulted in the $2. means the mechanical and electrical work. Under that arrangement. ‘overnight we had more than 100 000 shareholders. Neerhout made some sharp comments on the $2. this was an ‘unstoppable project’ says Noulton. In spite of delays. When they hit the bad patch. Noulton joins a general chorus second-guessing whether the project’s equipment should have been contracted on a lump-sum basis. ‘We had to inject grout to solidify the ground. says Noulton. but that costs had ‘ratcheted up’ nonetheless. has been with the project since the mid-1980s and helped draft the concession documents the French and British governments signed off on in 1986. The pre-cast concrete lining segments were supposed to lock together by compression. Tunnelling was done on a cost-plus-fixed-fee basis with a target cost above or below which there would be 2005. But even with the delays.’ says Noulton. He says the original government White Paper relied on tried. he says. in October 1987. Now the project is in the ‘make it work.25 billion claim against Eurotunnel by the contracting organisation. In a classic underground construction scenario. The claim wound its way through the project appeals system until a protocol was reached in July 1993. The fixed equipment. the tunnel-boring machine with its sophisticated computer controls was designed for compact chalk. the tunneling was finished on schedule. he says. and telecommunications. Noulton says these costs were encountered in the service tunnel. Even under those inauspicious circumstances. San Francisco. cost overruns. and a portion of that speech follows: Managing the construction contract was complicated by numerous factors.1 . the Channel Tunnel will point the way for the future international privatisation projects.268 THE PROJECT MANAGEMENT PROCESS READINGS P5 The extension is conditional on Eurotunnel’s next public offering (summer 94) raising about $750 million. technology. ticking off what he sees as the high points. Some participants look back at the project and touch on a few of the problems. and tested..

They sub-contracted designs to 46 contractors. TML’s cost forecasts kept increasing. the Agent Banks and the Bank of England on 27 July 1993. Eurotunnel had to pay. Rolling stock was procured on a cost-plus-percentage-fee basis. it was fixed equipment that caused the most intractable problems. 2005. We tried again for a settlement in the second half of 1992. Every three months. TML must still substantiate their entitlement [This was done in December 1993. Middleton says the group prepared a ‘hefty’ status for the owners. But on fixed equipment. It was signed by Eurotunnel. TML made the claim of the century demanding an additional amount equal to 150 per cent of the original lump-sum price for M&E (i. Their reaction was to make a claim for recovery of all costs on the basis that Eurotunnel had caused such delay and disruption. SETEC and Atkins. asking for an urgent award to stop the interim payments. From our perspective this was nonsense. Under the protocol. . In March 1992.INTEGRATED MANAGEMENT 269 THE PROJECT MANAGEMENT PROCESS a sharing difference. the contractors.25 billion at 1985 prices!). The first of these agreements was made in late 1988 and again in late 1989. but could not reach agreement. both in Eurotunnel’s favour.] We estimate the process to resolution will last well into 1995! ˆ Peter Middleton is an executive with the Maıtre D’Oeuvre (MDO). In September 1992 they ruled that the payments were incorrect. to be done on a lump-sum turnkey basis. the panel ruled in TML’s favour. . and the banks.e. from $930 million to $2. again under the auspices of the Bank of England. That’s the good news. TML’s attention had been devoted primarily to tunnelling in the early years. TML rejected offers to settle made in December 1992 and in May 1992. Eurotunnel referred this claim immediately to the disputes panel as per the contract. Several overtures were made through various channels and finally. but filed for arbitration with the International Chamber of Commerce. So when subcontractors’ bids came in and commitments were made. going through very detailed and lengthy negotiations.1 . as required by the contract. like just about everything on the project. That was in July 1991. Eurotunnel took early control of the sites and conducted the final testing with TML’s assistance. The major tunnelling claims were settled. Parallel negotiations during mid-1992 did settle new claims for the tunnels and old claims for the terminals. No serious negotiations were held in the first half of 1993 as TML adopted an ‘economic’ slowdown. to Eurotunnel’s and the banks’ horror. agreement was reached on a protocol to secure the transfer of control (from TML) and phased opening. Several high-level negotiations resulted in agreements and contract amendments while others got nowhere. They maintained that all of the cost overruns were due to Eurotunnel’s interference and disruption. Their organisation was not adequately set up for M&E work. The bad news is that Eurotunnel has to advance additional money against the fixed equipment claims not settled. a scrupulously even combination of French and British firms. As fitting for the project of the century. In March 1993 they ruled TML had to reformulate its claim into individual claims for variations and/or breach of contract. and did this without any substantiation of their claim. respectively. This oversight group was. ordering Eurotunnel to pay $75 million per month until a negotiated settlement was reached. The bank insisted on the least defined portions. the terminals and the mechanical and electrical (M&E) equipment. The arbitrators made two interim awards. that the contract lump sum was no longer valid. As difficult as some of the earlier technical and commercial problems were. and the rolling stock fee was capped. TML.

But there was a lot of pressure to go forward. Europe. the higher of the two should prevail. and the scope familiar to the parties. this aspect of the entire project possibly caused the greatest cost overruns and resulted in the claim. Lemley says his greatest initial challenge was to meld what were two operations: Translink (the five English contractors who were part of the original proposal in the mid1980s) and Transmanche (the five French counterpart contractors). Middleton says the civil work contract definitions and the contract terms were ‘reasonable’. he says.’ he says. On the claim on the fixed equipment. he faults IGC for both. Safety on this project was ‘far ahead of the rest of the industry. was troubleshooting in Nepal when he was asked to take charge for TML. 2005. it instituted an ‘arbitrary’ and last-minute requirement for Euroscan at both terminals. He talks about the organisational challenge and government interference. Nonetheless. the bankers wanted certainty. ‘Parties came close to an agreement in early 1993. but the banks would not buy in. Cain thinks the lump-sum contract was inevitable: ‘Banks always want lump sums and certainty’. in which Eurotunnel paid TML every month against a final settlement. one for all engineering and one for all construction. Lemley changed these two managing directors. and the Middle East. Middleton says the banks and the contractors who put the deal together in the mid-1980s were a daring lot. ‘It’s easier to pick up pieces to agree on. says Middleton. Lemley. says Middleton. Idaho. Each had its own managing director. The lump-sum contract was inappropriate for work. The contractors wanted the work. While there have been delays and unanticipated costs elsewhere. The Intergovernmental Commission (IGC). they went ahead with what is regarded by many as a ‘disastrous’ lump-sum contract for the fixed equipment. As a result. but ‘had no idea how to be owners’.’ he says.270 THE PROJECT MANAGEMENT PROCESS READINGS P5 Looking back to the beginning of the project. Africa. This part of the contract was written on a cost-plus-fixed-fee basis. spent a year as Eurotunnel’s project chief executive. succeeding colleague Neerhout. At this point the current protocol took effect. and so the lump sum prevailed. Reluctant at first. he says. senior vice-president Bechtel Power. and this is the other achievement he likes to point to. ‘imperfectly understood’ by the banks and the contractors. mandated that where there were differences in the two countries’ standards.’ says Lemley. with overruns to be shared by the owner and the contractor. In theory this was a great idea. Lemley thinks this and other changes made for a more efficient operation and got the project back on schedule. says Cain. Frank Cain.1 . a heavy-construction veteran who had set up his own niche consulting firm out of Boise. the Transmanche director for coordination of all engineering. but contractors couldn’t easily interpret this when differences related to items such as a concrete pour. Design and installation of the Euroscan caused delays and higher costs. Jack Lemley is another American asked to help salvage the troubled project on the contractor side as chief executive for TML. the oversight body made up of civil servants from France and the UK. Cain takes the construction veteran’s view that ‘delays and cost overruns are not unusual in a large project’. The Translink director had responsibility for commercial and business affairs. This first of its kind electronic anti-terrorist device will check trucks at random before they enter the tunnel. The safety record improved during his tenure. Under its safety charge. Cain has tried to ‘particularise’ the claim – break it down. Lemley decided to take on his ‘European adventure’. with quite a different point of view from that of John Neerhout.

2005. cost and procurement management techniques.INTEGRATED MANAGEMENT 271 THE PROJECT MANAGEMENT PROCESS Lemley adds. One of the critical aspects of this project was the continuing conflict between the contracting organisation. the Channel Tunnel is one of the most spectacular engineering projects ever undertaken. one executive. However. Apparently the owners were pressured into agreeing to it. In an interview in the article above. Transmanche Link ( TML) and the project owner. ‘We all were running half the national average of accidents for the French or the British. In explaining where the owners of the Channel Tunnel project failed. 2. A protocol was not agreed until July 1993.9 billion left over from the construction of the Channel Tunnel. it could be argued that project owners have three main roles:    ensuring that the project.’ Afterword As at December 2002. What do you think the role of the owner should be? Outline solutions 1. Explain where you think the owners of the Channel Tunnel project failed.  Agreeing to an inappropriate contractual agreement for this type of project (i. Eurotunnel still had a debt of £5. Suggest possible actions that could have been taken to prevent or reduce this conflict. ultimately meets its objectives. said that they ‘had no idea how to be owners’. The primary reason was a contractual misunderstanding regarding the lump-sum payments between the two organisations. allowing a lump-sum contract for the fixed equipment). The original contract resulted in a protracted claim by TML for over $2 billion dollars. as originally conceived and achieved. in referring to the banks and the contractor who put the project together. Possible ways to avoid this kind of problem include the following:  Allocation of sufficient time to the planning and contractual negotiation stage of the project. we need to consider why the conflict arose. there are a number of areas we can consider here:  Lack of understanding of the technical details. that is a reduction from the £9 billion it owed when the tunnel was opened in 1994.  The use of proper project scope. hugely delaying the project. First. Despite encountering numerous operational and managerial difficulties and management failures. Eurotunnel. Eurotunnel moved into a cash-flow profit for the first time despite spending £4 million on asylum seeker measures. ensuring that the project will perform successfully once handed over by the contractors. as a result of re-structuring its debt. In early 2003.1 . ensuring that the project is achieved effectively and efficiently. 2.e. In considering the role of the owners. Discussion points Discuss these with your study group before reading the outline suggested solutions: 1.

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1 . Christian Rueber.2 In project management. After several months of tendering from numerous suppliers. is one of the major telecommunication providers in Germany. together with the roles they play in the project and their countries of origin. programmers and software analysts from Comnet in selecting a contractor who would supply the telecoms network. spent last year leading a team of engineers. head of telecoms development.1 What type of project plan determines 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) Quality plan (B) Activity plan (C) Resource plan (D) Contingency plan Question 1. It has recently gone through a process of reorganisation (1996) and has since been investigating the potential of a new telecommunications network. Comnet selected a UK company called Dantec to service the project. and answer the two questions (2 and 3) based on it. what is meant by the acronym WBS? Section B type questions Questions 2 and 3 Read the following scenario.1 shows the firms. (The selection was based on numerous 273 2005. Comnet.Revision Questions 6 Section A type questions Question 1. The client The client. Introduction Five firms from four countries are playing major roles in a large project devoted to the development and implementation of an extensive communications network. Figure 6.

has been in charge of the project throughout the tendering process. Richard’s background is as a telecoms engineer. and he has only very recently moved into a managerial role. including the delivery dates for the subcontracted work. By the end of October. Dantec have many years’ experience of working with 2005. Dantec entered into a contract with Solar. after several further planning meetings. the management team at Dantec are more than happy with his progress – after all. The prime contractor Dantec is a telecommunications development and installation company based in the north of England. although this is his first role in charge of a full network installation.1 . 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.1 financial selection techniques and cost–benefit analysis. the project manager. he successfully won the contract! Having signed the contract. Many of the project team at Dantec consider Richard to be lacking in managerial experience to handle such a large project.274 THE PROJECT MANAGEMENT PROCESS REVISION QUESTIONS P5 Figure 6. and has worked with Comnet previously on a successful small-scale network installation. Richard gets together his project team for the first project coordination meeting. the final master project plan is complete.) The final contract was signed between the two parties in October 1997.to medium-scale telecommunications networks throughout Europe. a computer manufacturer in the United States. Each member of the team is made aware of their individual team’s responsibilities in the overall project. However. where they begin to draw up a schedule of events and key milestone activities. It has several years of experience in installing small. Richard Norton. for the required computer hardware as well as the operating systems needed to implement and control the network.

1 . Yotamo and Exactest also rested with Exactest. Phil Rogers. well renowned for its high-level skills in integration. is placed in charge of the Comnet project requirements. Solar’s role Solar. proposed in the master plan drawn up by Dantec the previous month. Responsibility for integrating the hardware and software components developed by Solar. Yotamo was given the responsibility for the development of major elements of the software that could meet the functional requirements of the overall communications system. Exactest was obligated for additional ancillary software for some specific components of the overall system as well as for the development and implementation of a testing strategy for all functional software developed under contracts with Solar. with the approval of Comnet. Requirement Explain the main internal and external responsibilities of Richard Norton as the project manager at Dantec. In November. was responsible for integrating all project deliverables to the final client in Germany. Dantec.INTEGRATED MANAGEMENT 275 THE PROJECT MANAGEMENT PROCESS Solar on several previous successful projects. (10 marks) Requirement Explain the potential managerial problems likely to be encountered by Richard Norton as a result of his particular background and previous experience. the general manager of networks coordination division. irrespective of which firm wrote the software. entered into negotiations with Yotamo and Exactest. Phil Rogers agrees the dates and targets set for Solar. as prime contractor. (10 marks) 2005.

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network experts. to ensure agreement and consensus. time. Ensuring that technical negotiations take place between the various contracted parties and that. finance. programmers. The coordination of internal and external activities and milestones. materials. Project planning and scheduling. Richard Norton also has a number of key responsibilities. the responsibilities of Richard Norton are as follows:         Coordinate complex internal team.1 . Contractual negotiations for all parties. again.2 Work Breakdown Structure Section B solutions Solution 2 Internally.Solutions to Revision Questions Section A solutions Solution 1.1 D 6 Solution 1. finance. including: technicians. The formulation of internal resource needs: people. agreement on technical issues is reached. Control of the financial budget. installation. marketing. Preparation of the project master plan. Externally. 277 2005. Internal negotiator and arbitrator. Team motivation. Control of coordinating internal deadlines.     The primary communication link between the complex supply chain within this project and the final customer. etc.

This will be of importance when in negotiations and discussions regarding technical issues. This is likely to be important in such a large project with high financial resource requirement. particularly in such a large and complex project as this. Technical knowledge will obviously be important in this type of project.1 . good project managers must be able to balance this technical ability with a strong managerial ability. particularly those with experience who may resent a project manager with less experience than themselves. His technical skills are strong as a result of his previous background. This could lead to lack of motivation. It is also likely that Richard Norton will face challenges in the financial control and budgeting of the project if he has no experience of this particular aspect of project management. therefore Richard Norton could build support by proving his technical ability. 2005. Communication with some team members may be difficult. Key skills required in project management include leadership and inspiration. the team is already slightly dubious about the choice of project manager). He may also have a lack of contractual negotiation experience. However. It will be important for Richard Norton to foster and build on management support as early as possible in the project’s life. particularly in a multi-disciplined team (in fact. There are potential team leadership problems as a result of his inexperience in a senior management position. which may be difficult to foster when the project manager has little prior experience at this level. this should help to gain team confidence (but may be insufficient to build the confidence of non-technical members).278 THE PROJECT MANAGEMENT PROCESS SOLUTIONS TO REVISION QUESTIONS P5 Solution 3 It is apparent that Richard Norton is likely to face problems as a result of his lack of managerial experience in a complex project.

Not all objectives can be attained within the same time frame because of limited resources.Identifying and Selecting Projects 7 L EARNING O UTCOME After completing this chapter you should be able to: " produce a basic project plan. A project becomes a strategy to achieve an objective. if a 279 2005. 7.1 . brainstorming and negotiation. as different members of the organisation will have different priorities. as the key organisational strategies are identified and increasingly defined by discussions. There is likely to be more than one way to achieve any objective. of members. recognising the effects of uncertainty and recommending strategies for dealing with this uncertainty. These objectives are then converted from ‘whats’ into ‘hows’ by undertaking projects. At a strategic level a project manager may have very little or no input at all in the process of identifying projects.2 Identifying project proposals Turning objectives into realizable projects can be difficult for organisations for a number of reasons:    Prioritising objectives is not always straightforward. top-level objectives are profit-oriented. in the context of a simple project. 7. For example. However.. etc. strategies will become programmes of change. objectives will be to improve the standard of living or education.1 Setting project objectives Projects are initiated when a need or an objective is identified. Typically. Objectives are those things that the organisation wants to achieve. or in non-profit-making organisations. It is usually a function of the board of directors to determine the high-level organisational objectives.

1 Assessing project feasibility Sometimes the potential project manager is involved in the feasibility study stage. in order to examine their feasibility (i. no attempt will have been made to determine the benefits of achieving a particular objective. Obviously this must be done before a project can be carried out. it must be clearly defined. it is important for project managers to understand the process of 2005. rating them according to need and organisational importance. leads to the final formulation of a project. but not always. continual changes and customer dissatisfaction. a research project into an endemic disease might achieve this. 1998). as the organisation identifies its key objectives more clearly. 7.3 Formation of project proposals As the organisation determines its objectives and the strategies to achieve these objectives. it is important to identify those strategies that provide the most benefit and achieve the organisation’s most important objectives.5.e. 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.4 Setting project requirements A requirement is a statement of what is expected of a project or product.1 . Once objectives and strategies have been identified and ranked and requirements and specifications have been identified. 7.5 The feasibility study This is likely to be examined quite frequently. gradually a set of priorities will emerge. refining and classifying them. and appropriate to meet the organisation’s objectives. It is likely at this point that the organisation will have a number of strategic options. A requirement is different from a specification. 7.280 IDENTIFYING AND SELECTING PROJECTS STUDY MATERIAL P5 corporate objective for a pharmaceutical company is to expand its Asian markets. how achievable they are). whereas a specification is the statement of the detailed characteristics of the project or product such as size or performance criteria. the project has a greater chance of success. This will be considered later in this chapter. in that the requirement is the statement of the reason for what is being done or developed. that is. that is. 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. However. If a project requirement is set out clearly from the outset. This process of identifying objectives. a project cannot exist without an objective to achieve. those strategies that are considered the most effective to realise objectives. the next stage is to identify those strategies that should be investigated. and less chance of escalation of costs due to rework. As organisations are unlikely to have the resources to carry out all strategies. 7. As yet. the proposals for action become more detailed and more accurate judgement can be made on costs and benefits. and finally establishing the links between objectives and strategies. nor whether it is feasible. Also.

or larger social awareness regarding the effect of projects or products on workers or employment. Features analysis is a further method used to gather information regarding different products in order to aid comparison and evaluation. These are likely to vary greatly and may require numerous experts to evaluate them. focusing attention on the features of any requirements that are going to be important in the achievement of satisfying a need.1 . that is. 7. customer and economic conditions. with two or three alternative proposals for change. Feasibility studies compare the ‘no change’ option of achieving objectives. Other technical considerations could include the following:   The ease of use of the technology. technology and processes have been thoroughly tested and are readily usable and available? Applicability. when building the London Eye.) A software developer will need advice from hardware manufacturers before developing programs for a particular computer system configuration. Environmental considerations may be stimulated primarily 2005. When important features have been identified. however good the concept and design. Features analysis identifies those features in the requirements likely to be vital to the final outcome of the proposal. 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. fit with business goals. The technical features of a strategy that need to be considered are as follows:   Development. that is. These were resolved. engineering. Marketing campaigns must take account of specific market. will it require further testing prior to usage or are we confident that the material.3 Social and ecological feasibility It is becoming increasingly necessary to assess social factors affecting feasibility. Criteria used are technical capability.g.5. These may include awareness of the social issues within a group or office (e.2 Technical feasibility There are a number of key aspects regarding technology.5. 7. Features are those elements of the project that are considered to be important or necessary requirements. For example. they can be assigned a weighting indicating the relative importance of one feature to all others. introducing a computerised system). Relevant considerations might include questions such as: Will the introduction of computerised systems lead to redundancy? How will the general public be affected or what position would people take about a project such as constructing a new road or nuclear power plant on a community? Ecological considerations may be driven by the understanding that customers would prefer to purchase alternative products or services as they are more ecologically sound and less harmful to the environment.INTEGRATED MANAGEMENT 281 IDENTIFYING AND SELECTING PROJECTS feasibility assessment. The degree of disruption during the construction and installation phase. (The delay in opening was caused by safety concerns which was not good for the image of the project. environmental and safety issues needed to be evaluated by a number of experts. social impact and risk sensitivities. a number of technical. financial benefit.

2005. repair.1 Make a brief list of technical. Solution Technological factors Does the technology exist to carry out the recycling? How developed is the recycling process? Ecological factors How much energy is consumed in the processing? Is the process clean or dirty? What waste products are produced. may divert the company from its primary goals.5.282 IDENTIFYING AND SELECTING PROJECTS STUDY MATERIAL P5 by health and safety legislation.5. newspapers. with high potential financial gain. etc. 7. It is important for organisations to consider the raw material input.) within a local town by building a recycling plant. building.4 Fit with business goals Some great project proposals. ecological and social questions you would need to ask to assess a proposal to collect and recycle household waste (such as bottles. etc. The other side to cost–benefit is the identification and evaluation of the benefits of the project over its life. Cost–benefit analysis helps to identify and evaluate the costs of the proposal over its anticipated life (such as purchase. 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.1 . the production processes and the disposal of the product at the end of its life. 7.). maintenance. Exercise 7. and how can they be utilised or disposed of? Is the location of the site likely to affect the local environment? Does the local road network have the ability to support the new site? Social factors Are local people interested in recycling? Are there available locations to place recycle points.5 Financial feasibility This is likely to be examined quite frequently. cans. A technique often used in a feasibility study is the cost–benefit analysis.

if a project proposal requires funding it is important to know exactly how much it requires. For every item of the project proposal. Capital expenditure usually occurs at the beginning of the project. These costs are those incurred on a regular basis and include repair and running costs of the assets. Capital invested by shareholders. Financing costs are usually incurred as interest charges that have to be paid on the balance of funds outstanding. equipment. 2005. Therefore. general management salaries and depreciation. land and building. whether it is capital or revenue. whether it is a one-off cost or recurring. 7.g.6 Types of cost 7.6. Sources of finance include the following:     Finance borrowed from a lending institution (bank).7 Risk sensitivity The assumptions upon which the financial feasibility is made need to be made clear. The project itself will also incur direct revenue costs such as materials and the salaries and wages of the direct workers. but also the general overheads not necessarily directly incurred by the project. 7. when payments would be due and how much interest would be paid. Also any political sensitivities need to be identified. 7. it is necessary to identify:     its value (in monetary terms or in terms of benefits). Grants or subsidies from government (for specified projects only).6.1 . since these are the most common reason for project failure.3 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. when it occurs.2 Revenue costs Any cost incurred by the project other than for the purchase of assets.6.1 Capital costs These are incurred in the acquisition of assets. Capital costs will include the purchase price of an asset (e. plant) plus any additional costs of installation and maintenance. Retained profit from the business.INTEGRATED MANAGEMENT 283 IDENTIFYING AND SELECTING PROJECTS The types of costs and benefits involved in a project will depend upon the precise nature and scope of that project and can vary greatly. Examples are costs such as rent and rates. 7.

revenue and finance costs associated with building a factory. you would not rely on a single measure to determine the financial feasibility of a project. equipment. Accounting rate of return: based on profits not cash flows.284 IDENTIFYING AND SELECTING PROJECTS STUDY MATERIAL P5 Exercise 7. but here is a brief reminder of the main financial appraisal techniques using definitions from CIMA’s Official Terminology (2000 edition):     The payback method: a ‘quick and dirty’ way of assessing the time required for the cash inflows from a capital investment project to equal the cash outflows.9 Risk and uncertainty This is likely to be examined quite frequently. Although it is unlikely that you will be asked to carry out detailed calculations of the above financial techniques. 2005. Return on investment: a form of return on capital employed comparing income with operational assets used to generate that income. 7. this is a form of return on capital employed. Discounted cash flow: the discounting of the projected net cash flows of a capital project to ascertain its present value. you may be required to discuss their relevance to a project decision. Solution Capital costs Land purchase Building costs Equipment purchase Revenue costs Rent and rates Staff costs Utility expenses Finance Bank loans for land. The following sections provide an overview of risk terminology and the various approaches to its management. 7.1 . buildings. Identifying different types of risk will allow us to plan to reduce them or avoid them.8 Financial evaluation techniques A detailed analysis of financial evaluation techniques is beyond the scope of this syllabus.2 List the types of capital. Remember.

2 Socially constructed risk People often believe some things to be risks. the monetary cost of the worst possible potential loss associated with that accident – M The value of the quantitative risk is therefore p(E ) Â p(L) Â M. 7. It does. An example of this can be seen on commercial airlines.9.9. Socially constructed risk may well exceed quantitative risk. We are all ‘risk illiterate’. we can generate a table such as the following: High Potential scale or significance of loss Medium Low C D E Low B C D Medium Likelihood A B C High Having done this. then the Bs and so on.3 Qualitative risk Since risks cannot always be quantified accurately. wearing a ‘lap strap’ beat belt on a plane does nothing to reduce the risk of injury. 7. so it reduces the socially constructed risk. It can be considered to be the product of three values:    the likelihood of an event occurring – p(E ). we need a pragmatic solution.1 .9.INTEGRATED MANAGEMENT 285 IDENTIFYING AND SELECTING PROJECTS Risk can be defined as the probability of an undesirable event. so when seeking to put people’s minds at rest. 7. qualitative risk assessment may not be enough. Most evidence suggests that. Risk identification means recognising that a hazard exists and trying to define its characteristics. 2005.4 Managing risk Risk management (RM) comprises risk assessment (identifying and analyzing risk) and risk control (taking steps to reduce risk.1 Quantitative risk This is a risk that can be expressed as a financial amount. in the event of a serious accident. Risks can be classified under three headings. 7. multiplied by the financial or non-financial consequence of the event. make people feel a lot more secure. in that we do not think logically about risk.9. but some way of categorising risks is useful. Do not worry too much about the Es. the likelihood that the event will lead to a loss – p(L). in our risk management programme we should address the category A risks first. provide contingency and monitor improvements). Estimation of risk is usually based on the probability of the event occurring. even when statistics indicate they are not (and vice versa). however. If we look at a subjective assessment of the scale and likelihood of risk. We must also manage people’s perceptions of risk.

1 . 7. it can be used to identify strategies needed by the business. Risk prioritisation – producing a ranked ordering of risk items. it can be used to check the feasibility of a project. 2005. Risk analysis – assessing the loss probability and magnitude for each item. Reduction   Take an alternative course of action with a lower risk exposure. 7. Escape the specific clause in the contract. Instead. If the event is uncertain. each to be implemented if an uncertain event occurs. perhaps by avoiding. such as a specialist supplier or insurer. An example of a contingency plan is given after the following SWOT analysis. Risk management – deciding how to address each risk item. uncertainty is impossible to evaluate because it is impossible to assign a probability to an uncertain event. Leave the risk with the customer or supplier. Risk monitoring – tracking progress toward resolving risk items and taking corrective action.9. we must use contingency planning to construct a series of action plans.286 IDENTIFYING AND SELECTING PROJECTS STUDY MATERIAL P5 Risk management can be seen as a series of steps:       Risk identification – producing lists of risk items.5 Uncertainty Unlike risk. Examples of risk management approaches would include the following: Avoidance    Abort the plan.10 SWOT analysis SWOT is an analytical tool that can be used in two ways:   applied to a whole company. transferring or reducing the risk. applied to a specific project. we cannot put in place management controls to reduce the probability of its occurrence. Transference  Subcontract the risk to those more able to handle it. Invest in additional capital equipment or security devices to reduce the risk or limit its consequences. Risk resolution – producing a situation in which risk items are avoided or reduced. simply because we do not know that probability.

in its external business environment. The company will need to provide some strategies to overcome these threats in some way or it may start to lose market share to its competitors. 9. 8.  the project is on schedule. lack of technology. and the opportunities and threats relate to the external environment. conflict with other projects). 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. for example. The strengths and weaknesses normally result from the organisation or project’s internal factors. Weaknesses. 1. Eliminate unfeasible or inappropriate projects (based on issues such as cost. Threats.1 . Prioritise the rest. Establish rough delivery dates. 4. Select the most important project. feasibilities and risks with project team and senior management. construction of the fireplace and re-wiring the lounge.1 An example of a SWOT analysis Let’s assume that we are part way through a project to renovate a house.10. Weaknesses:  the project is over budget in the areas of plumbing. Establish the risk associated with each project. 5. Weaknesses. 7. Checklist for project proposal selection Prioritising potential projects List potential projects. 3. such as its competitive advantage or the skills and competencies and morale of the individuals within it. and the current forecast is for completion on time. 2. 10.INTEGRATED MANAGEMENT 287 IDENTIFYING AND SELECTING PROJECTS SWOT actually stands for Strengths. 6. The project SWOT analysis might look as follows: Strengths:  relationships with key sub-contractors are good. 7. and major successes. Establish preliminary costings and budget schedule. Determine the need or opportunity for each project. 2005. They include skills that are lacking within the organisation as a whole or the project team. These are the things that are going well (or work well) in the organisation or project. Opportunities. Establish the overall feasibility of each project. skill. These are the things that are going badly (or work badly) in the organisation or project. Threats relate to events or changes outside the organisation or project (in its business environment) that must be defended against. conflict with long-term organisational objectives. The four categories of SWOT can be explained in more detail as follows:     Strengths. objectives. These relate to events or changes outside the organisation or project. Review project list. Opportunities and Threats.

discussing an alternative design to allow the use of a paint that is easier to obtain. as we are unable to assign probabilities to them. (1998). re-planning the remaining project with a longer duration for the bathroom works to see what the effect would be. contacting lenders to discuss possible additional finance. 2005. International Thompson Publishing. You will note that the purpose of contingency planning is to speed up the planning process in the event that the uncertain event occurs. Actions to be planned in case the bathroom estimate is too low would include. Reference Field. the different costs incurred in a project. L. The contingency plans may never be used.  the supplier says that the paint we have ordered is not in stock at the supplier – it may take six weeks to arrive.288 IDENTIFYING AND SELECTING PROJECTS STUDY MATERIAL P5 Opportunities:  the local furniture store is having a sale.11 Summary This chapter has looked at the initiation of a project. Threats:  the builder is concerned that the cost and time estimates for the bathroom may be too low. this may further delay the project.10. Project Management. These are uncertainties. investigating other manufacturers’ product ranges to see if a close alternative can be identified. If we wait for the uncertain event before doing any planning. 7. the difference between risk and uncertainty. as a result of recommendation by a satisfied customer. identifying other possible paint suppliers. rather than risks. and Keller. He says he won’t know for sure until he is part way through the work. M. SWOT analysis when used in project management.1 . and the ways to manage risk.2 A contingency plan The SWOT analysis for our project (see above) has identified two threats.  a decorator has been identified. The key points to remember are:     the different aspects of feasibility. 7. but we can do our contingency planning when it suits us. What we have to do is to plan for action to be taken if these threats materialise. The contingency plan for paint supply might include.

quality and time. on budget. and the increasing problems of managing the two other major project factors of cost and quality. Summary The Sydney 2000 Olympic Games is a large-scale and very complex project involving a diverse range of activities and large numbers of people. complex projects. at a price consistent with the organiser’s budget and to the satisfaction of the end-users.Readings 7 Identification of project proposals and setting project requirements The first article covered in this section reinforces the need for sound project management techniques and processes in large-scale. Given the nature and vast scale of this project. the critical relationships between cost. the need to break complex projects into a number of smaller. Good quality means meeting the needs specified by the organiser.1 . with a predictable degree of reliability and uniformity. and to the required quality. Copyright #1996 by PMI Publications. This review discusses issues that need to be addressed to make this project a success. The strict time constraints set for the project increase the difficulties of managing cost and quality. Introduction The bid was prepared by Sydney Olympics Bid Limited which drew on funds from the private and public sectors and worked in close co-operation with the Australian Olympic Committee. The Sydney 2000 Olympic Games: a project management perspective David Eager. It enjoyed broad public support with 90 per cent of the people across 289 2005. This case study should aid you in understanding:    the importance of project identification and definition. The case discusses the Sydney Olympic Games from a project management viewpoint. Proceedings of the PMI Annual Seminar. The project will be regarded as successful if it is finished to time. more feasible project actions. to the standard and specification laid down. Reproduced with permission of PMI Publications via Copyright Clearance Center. sound and exemplary project management techniques and principles are essential for its success. focusing attention on strict constraints of time.

290 IDENTIFYING AND SELECTING PROJECTS READINGS P5 Australia supporting the bid. situated at Homebush Bay about 14 km west of the Sydney city centre. namely: the Sydney Olympic Park. broadcasting. Sydney will require 35 000 people from 2005. water conservation. The guidelines promote energy conservation. and invited the world to come and share the spirit of Sydney at the Olympic Games in the year 2000. protection of air. together with the major projects currently in progress. Airport City Link and the railway loop line to link the Olympic Park with the Sydney rail network’s main western rail line. No training facility will be more than forty-five minutes away from the village. a campaign to register volunteers was conducted by the St George Bank which attracted more than 100 000 people. Ultimo-Pyrmont light rail system. development of residential and retail areas. M4 and M5 Motorways. A series of test events in the years preceding the Olympic Games is planned with the aim of trialling the Olympic venues. Recently completed major transport projects such as Sydney Harbor Tunnel. security and healthcare. The construction of new sporting facilities and refurbishment of existing facilities for the games is being undertaken by the State Government’s Olympic Co-ordination Authority. The focus is mainly on two Olympic zones. During Sydney’s bid. and protection of significant natural and cultural environments. media and other services. Infrastructure – preparation work for the games A significant number of Sydney’s Olympic venues already exist. Most of the remaining facilities required for the games will be constructed as part of the redevelopment programme being undertaken at Homebush Bay. establishment of a new showground and major exhibition centre. More than 100 000 volunteers offered their services. and selectively trialling arrangements for accreditation. It also provides support services. The staging of the 2000 Games is the responsibility of SOCOG. Except for some football preliminaries. such as City West Development. waste avoidance and minimisation. particularly in the areas of transport. A main press centre and the Olympic village with accommodation for 10 000 athletes and team officials also comes under the umbrella of the Olympic Park. The bid also included a comprehensive set of environmental guidelines recognising the principle of ecologically sustainable development. training the technical officials and volunteers who will help conduct the events at the Olympic Games. all Olympic events are planned to be held in metropolitan Sydney in venues within thirty minutes’ travel from the Olympic Village. transport. and the Sydney Harbor zone located near the Sydney city centre and accessible by road. and the establishment of a commercial centre for hightechnology industries.1 . Key elements of the Homebush Bay area include the construction of new sporting facilities. and Glebe Island bridge. rail and ferry from Sydney Olympic Park. which was established in November 1993 by legislation in the New South Wales Parliament. security. water and soil from pollution. Some significant features The New South Wales Government underwrites the games and is responsible for the provision of new permanent venues and facilities needed for the games. The bid was centred on the theme Share the Spirit and called on the people of Sydney to join in the excitement of the bid. namely: Sydney Organising Committee for the Olympic Games (SOCOG). will ensure that an effective transport system will be available for the Olympic Games.

the Australian people. The games budget in nominal terms is A$1.3 million visitors to Australia. Criteria for the success of the project include trouble-free performance of the games. Sydney City Council and Olympic Co-ordination Authority (New South Wales Government) have been made party to the host city contract. the level of public enthusiasm and enjoyment generated by the activities and resultant sustained economic activity generated within New South Wales and Australia. In addition to SOCOG there are other organisations that directly contribute to the success of the games. The scope of the project comprises organising all the games and ceremonies. the International Olympic Organisation. These projects are either already under way or are being re-programmed to accommodate the games. Australian Olympic Committee.INTEGRATED MANAGEMENT 291 IDENTIFYING AND SELECTING PROJECTS all walks of life to form a volunteer workforce essential for the smooth running of the games. and Australian and international business communities. Definition of the project The objective of the Sydney Olympic Games Programme is to stage the year 2000 Olympic Games at specified locations in Sydney. Any major cost overruns will alienate the public and will have adverse effects on the success of the games. licensing fees. putting in place technology and resources required to stage the games. including accommodation. There is an explicit need to control the cost of all its activities very carefully.847 billion (US$1. The infrastructure construction is the responsibility of the government and is overseen by the Olympic Co-ordination Authority. sponsorships. almost all of which are not being built specifically for the Olympic Games. transport. media facilities and co-ordination. the New South Wales Government. The project can be broken into the following major areas of work (as a work breakdown structure):     events. venues and facilities. coin marketing royalties. and bring an extra 1. It is estimated that during the period 1994–2004 the Olympics could add A$7. SOCOG was appointed to manage the project by legislation. including the citizens of New South Wales. and fundraising. create 150. public relations. Although the New South Wales Government is underwriting the project activities. the scope of work of SOCOG is restricted to organisation of the events. The general rule of thumb used by the Government has been to relocate infrastructure projects initially external to the games under the games umbrella. there is no clearly defined client for the programme. Revenue for the games is expected primarily from television rights fees. In order to safeguard sponsorship fees and sponsors’ and licensees’ benefits from ambush marketing. the New South Wales Government has legislated the Sydney 2000 Games (Indicia and Images) Protection Bill 1996.000 full.4 billion). Completion of these projects on time is vital to the success of the Olympic Games. and ticket sales.3 billion to Australia’s gross domestic product.and part-time jobs. Olympic Co-ordination Authority is responsible for all the infrastructure projects. 2005. the international community as a whole. There are many stakeholders and customers. the athletes. International Olympic Committee. and continued interest in the Olympic Games for the future.1 . To make matters more complicated.

and trialling events as milestones for the critical items. an enormous co-ordination effort will be required to ensure these. and so on. performance on all three dimensions is vital for the success of the project. test games and trial events. setting target dates well in advance of the main event. All persons who may be affected by these programmes should have an opportunity to comment on the plan. sponsorship management and control of ambush marketing. are delivered on time. Any delays in the completion dates could be accommodated without much difficulty. human resources. Each of these items could be treated as a project in its own right. However. financing. and an adequate series of milestones must be established to allow monitoring of the progress of the programme.292 IDENTIFYING AND SELECTING PROJECTS READINGS P5             telecommunications. Instruments should be put in place to monitor the progress against the programme continually. Elements which are expected to have most impact on the programme must be identified and defined as early as possible. As the project must be completed and ready for staging the Olympic Games on the stipulated dates. Time dimension Sydney is fortunate in having sufficient infrastructure capacity either existing or under construction to cater for an event of this magnitude. For the construction projects. opening and closing ceremonies. information technology projects. The programme should include enough leeway or float to allow minor problems to be accommodated without causing major changes to the timing of the overall programme. pre-games training. opening and closing ceremonies. precedence block diagrams and programme evaluation and review are employed to control the uncertainties in the time dimension. the Sydney Organising Committee for the Olympic Games has adopted strategies such as: holding frequent co-ordination meetings with the organisations and parties responsible for delivering the required items. Proper plans must be prepared for these construction activities.1 . To ensure that the time dimension is achieved. 2005. Critical path methods. public relations. It is anticipated that the infrastructure projects under construction will be completed well in advance of the commencement of the Olympic Games. The criticality of the time dimension applies mainly to other activities and timing of individual activities such as events. security arrangements. estimation of the time dimension should be relatively straightforward. and therefore the entire games project. Critical project dimensions Time is the most critical dimension of the Sydney 2000 Olympic Games project. including volunteers. Expertise is available within the construction industry to produce reasonable estimates. medical care. cultural Olympiad. Further. any shortcomings in the time dimension will have to be offset by sacrificing the other two dimensions. designing test events. namely: cost and quality.

Receipts are mainly from television rights and international and local participation. Further. 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. Cost escalations would lead to disillusionment among the public and would diminish the public appeal of the games. For example. Any cost overrun will have to be met by the taxpayer. thus affecting public support and a vital source of volunteer games staff. it is undesirable to allow too many such changes. Due to the predicted rapid change in technology it is highly likely that there will be variations in requirements or design. 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. Since Internet technologies are changing very rapidly. review and analysis of results and budgets from previous games and bid candidature. However. It is difficult to predict what these advances may involve until much closer to the actual event. As a general rule. the time and cost dimensions of these events are tightly interrelated. the Atlanta 1996 Olympic Games had a dedicated Internet facility to give the public access to games information. Some variations may be to a cost advantage. These uncertainties are related to the nature of the tasks involved. the International Olympic Committee. The NSW Audit Office cost estimates appear to have been produced using appropriate methodologies. 2005. as the New South Wales Government has underwritten the host city contract. Consequently. The financial planning process included:      consultations with both national and international experts in the fields relevant to both receipts and payments. training and testing of these activities could lead to large cost escalations. Cost dimension The cost estimates of the construction projects are not reflected in the games’ budget as the infrastructure projects are undertaken outside the games project. independent review of the estimates by auditors Price Waterhouse. Sydney’s games’ budget is based on conservative assumptions and estimates of games’ receipts and payments. any slippage in timing of the programming. This could also become a major political issue. since they are a major source of cost escalation in any project and especially in projects such as this. the way information is given out to the public may also change in line with advances in technology. establishing the games’ database and systems to disseminate the information to general public – have larger uncertainties inherent in the system.1 .INTEGRATED MANAGEMENT 293 IDENTIFYING AND SELECTING PROJECTS At this early stage of the programme or project life cycle the time required to complete tasks for particular events introduces uncertainties. consultations with the Barcelona Organising Committee. Some non-construction projects – such as developing software to monitor the games’ progress. Maintaining the costs within budget is vital to the games’ success. and the nature of these programmes is such that there are considerable uncertainties inherent in these items. independent analysis of construction costs by quantity surveyors Rider Hunt. but this is the exception rather than the norm. and the Australian Olympic Committee.

allowing ample time to make necessary modifications at least cost.294 IDENTIFYING AND SELECTING PROJECTS READINGS P5 Quality dimension This is the most difficult dimension of the project to define. quality management process. Each programme component will have its own definition of quality and standards. Responsibility for management of Olympic Games security lies with the Olympic Security Planning and Implementation Group (OSPIG). Rather than being developed as a strategic programme. Quality comes at a price. As the project progresses through its life cycle these standards need to emerge. The product (e. One of the major areas of quality which should not be underestimated nor forgotten is the aspect of security. As mentioned above. Adoption of total quality management techniques in these programmes could improve the quality of the delivered Olympic Games. The public demands very high quality standards. It would appear that there is a significant weakness in the security planning process in that it lacks co-ordinated project control. activities are being undertaken as disparate tactical operations. This applies particularly to a project like the Olympic Games when completion on time is 2005.1 . A good management process is vital to the delivery of a high-quality product. The focus has been on integrating existing activities to provide security for the games. It is necessary to establish milestones and set procedures for the management process to achieve quality. The essential ingredients of a total quality management system are: quality of the product as the ultimate goal. The SOCOG itself will set its own quality standards mainly in performing its duties. This has occurred because Olympic Security is being used to expand existing programmes rather than being managed as a separate programme. Where clear specifications and well-defined standards are difficult to formulate. The quality of security will be judged by perceived public safety and lack of incidents such as terrorism. quality is judged by lack of traffic jams and hold-ups. rather than on developing an effective games security plan and then integrating existing programmes when practical. In projects such as the games there are difficulties in defining quality. In the case of transport. for example. fit for purpose. quality assurance systems. The quality is threefold:    good quality versus high quality. In construction projects quality can be clearly defined. events or performances) should be thoroughly tested prior to the games. Wherever there is public involvement in large projects. conforming to the customer requirement. and attitude. particularly in the early stages of the development cycle.g. 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. Sponsors will demand a certain quality standard. as fit for purpose or conforming to strict environmental guidelines. As part of the host city contract the International Olympic Committee has specified certain quality requirements for the Sydney 2000 Olympic Games. cost and quality are closely related. Within the public mind there is also a concept of the level of quality and excellence the Olympic Games should achieve. it is generally not sufficient to have good quality or fit for purpose quality. engaging experienced personnel and experts may be particularly desirable. Some of these standards are currently only at the conceptual stage. The New South Wales Government has specified certain environmental guidelines that all Olympic ventures should follow.

2005. 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. Discuss the concept of quality. Effective project scope management should safeguard or at least reduce these problems.3 billion to pay for the games whose total bill only came to A$1. 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. clarifying scope in the early stages of the project management process is vital for project success. and the cost of failure is extremely high for any of the items included in the project.INTEGRATED MANAGEMENT 295 IDENTIFYING AND SELECTING PROJECTS critical. The infrastructure changes to airport terminals. As evidenced by the above narrative. This kind of project will be open to constant and detailed public scrutiny. Recent large-scale public projects have had a history of overrunning on time and cost (for example. As a public project. Trial games and test programmes will serve to control all three dimensions and should be treated seriously. Project scope verification and acceptance will be essential to ensure that quality requirements are achieved. Only through closely controlled quality management processes and early identification of the possibility of failure can the success of the programme be ensured. Afterword The preparations of SOCOG appear to have paid off handsomely. as discussed in the previous chapter). SOCOG raised A$2. Try to illustrate your answer with other projects you may know about or have worked on yourself and draw parallels. Outline solutions 1. 2. the management and control of all aspects is critical to the overall success of the project.1 . the Channel Tunnel. Explain why project scope management was critical to the Sydney 2000 project. but Sydney now benefits from greater levels of international investment as a result of its higher and more prestigious profile. the scope of the Sydney 2000 project was very large and complex. control or correct any deficiencies in the project. The planned trials in the coming years will be an excellent opportunity to monitor. Not only were the games and associated events eminently successful. transport networks and the sports facilities have all added to the effect on the economy: six to seven billion tourist dollars in 2000 (the year of the games) alone. Discussion points Discuss these with your study group before reading the outline suggested solutions: 1. Explain why time management was critical to the Sydney 2000 project. Importantly. Conclusion Good communications are vital to the success of the project and to effective control of all three dimensions. 3. with reference to what you consider the meaning of quality to be for the Sydney 2000 project.9 billion.

This may involve:  Balancing high quality with desired quality. they must simultaneously evaluate the probability of their risks. Desired quality is defined by the purpose of the project. quality means satisfying the needs of the organising committees. the largest power operating subsidiary of Atlanta-based Southern Company. utilities must then estimate their external exposure. ‘‘Project managers have to be results-oriented and have a strong commitment.  Achieving the customer requirements. lead project manager for Georgia Power. To get it done.296 IDENTIFYING AND SELECTING PROJECTS READINGS P5 2. whether due to 2005. Facing a glut of aging infrastructure. The notion of fitness for purpose must also consider customer requirements. PM Network. Closing the Circuit Ken Silverstein. If market demand necessitates the building of new infrastructure.  Fitness for purpose. For the Sydney 2000 games. rapidly growing customer demands and recent security breaches. project managers have plenty of opportunity to learn how to manage projects at these low points. Different aspects of the games project will have different quality requirements. If the games are not ready on time. 3. This again will depend upon each individual element of the project. Reproduced with permission of PMI Publications via Copyright Clearance Center. Too much risk may obviate the need to go forward. 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. However. the project will quite obviously be considered a failure. ‘‘They have to be able to control the highs and lows. It’s about directing traffic. if the risks are manageable. If any element of the project is not considered to be fit for purpose then it cannot be used and is therefore poor quality. It is important to consider quality in the context of each project. transport arrangements for the athletes. This will include both political embarrassment. Integral to a project’s success. or understanding resources and availability and keeping a cross-section of participants in tune with the process. project managers have to be able to tacitly influence others. Quality will also mean reliability and.1 . because as of September 2000 the eyes of the world will be focused upon the Sydney Olympic Games. to a certain extent.’’ Given the current state of the utility industry. as well as always have a handle on costs and timetables. As companies assess their scopes and strategies. to a predefined standard and set of specifications required for a large-scale sporting event. uniformity. But. 2003 August. utilities will likely decide to plan accordingly to mitigate their effects.’’ says Brian Larson. Therefore any aspect of the project can only be of sufficient quality if it meets customer requirements. for example the security measures. 17(8): 40–44 Copyright # 2003 by PMI Publications. and financial implications for the organisers and commercial sponsors relying on financial profits. utility projects have become intrinsically linked with high risk. sound risk management practices are crucial where complex infrastructures such as transmission lines. Time management is a critical aspect of the Sydney 2000 project. power plants and gas pipelines are concerned. or the location and adequacy of the sporting facilities.

many projects do not fully account for the high degree of risk. the Edison Electric Institute says that 27 000 gigawatt-miles are required in the United States but only 6000 such miles are planned. Once a threat level is determined. and the permitting process has been cut from years to a matter of months. Similar problems have arisen across the United States. pipelines and power lines operational. ‘Not in my back yard. That’s partly what happened during the California energy crisis of 2000 to 2001 when rolling blackouts occurred.INTEGRATED MANAGEMENT 297 IDENTIFYING AND SELECTING PROJECTS shortsightedness or community rejection. risk manager for Bad Homburg. project managers should consider barricading those assets behind gates and limiting access by using ‘smart cards. Coupled with the fact that the underlying cost of natural gas has risen substantially. Most utilities in the United States.’ says Wilhelm Kross. Credit ratings have fallen into the ‘junk’ category. Immediately. That so-called redundancy rate would make the results of such incidences far less severe. Consider the recent fall of the ‘merchant generation’ sector. However. Most of the details are secret for security reasons. the easy solution is to wait until power outages become the norm and consumers start bellowing for reliable forms of electricity. but project managers are advised to prioritise their facilities and assets as well as characterise potential risks based on historical accounts. recent violent episodes such as the bombing of a power station on Mindanao Island in the Philippines have raised fears that wanton acts of terrorism could disrupt critical infrastructures. Mayor Michael Bloomberg has said that if the issues are not addressed now. ‘Projects are set up with too narrow a focus and from a somewhat reactive standpoint. As local governments and residents reject locating utility projects nearby. communities are saying.’ Cameras and alarms should 2005. officials said it was symptomatic of a larger problem – an aging transmission system that desperately needed upgrading. congestion will occur and reliability will suffer. some merchant utilities are struggling to survive. Unfortunately. the city can expect more outages. which builds plants and sells that power on the open market through trading organisations: Rosy forecasts in the late 1990s led to a boom in the power generation business that has not been sustainable. To be sure. already have developed robust systems that can continue to generate and deliver power if attacked. and if new technologically superior systems are not built. Germany-based Value & Risk. Now the state is scrambling to get more generators. is aging. Altogether. whether in forecasting a need. Meanwhile. Safety First Furthermore. the North American Electric Reliability Council has developed guidelines to help companies protect their plants and transmission systems from the effects of an attack. some failures have been linked to improper planning. That attack left parts of the island without power for several hours. which in turn may cause a lot of problems down the line.1 . When one of Con Edison’s transformers blew up in 2002. dealing with regulators or projecting cost schedules. The resulting glut of power plants has led to diminishing wholesale prices. it cut off electricity in the New York City area for about 63 000 customers. But project managers could help mitigate the effects of such attacks. for instance. specifically. and stock values have plummeted.’ making it increasingly difficult to get such projects sited. Estimating Exposure Transmission. these strained resources are all too apparent.

Such careful consideration from all ends of the project’s life cycle determines a utility project’s success. Indeed. then it translates into a higher degree of project management risk. USA-based Preventative Maintenance designs and implements distributed generation projects or smaller power plants set up to meet the needs of a fixed community or a business that needs uninterruptible power. project managers must be able to make fully informed decisions based on the input from several groups. British Columbia. Toward that end. the company determined that the plant had outlived its useful life and had set out to develop a plan to dismantle it – one that was satisfactory to all stakeholders. any contract must consider all unforeseen circumstances.’ Similarly.’ says Sean McFarland. Ontario. Project managers facilitate that effort. along with carrying out sophisticated communications strategies. with their critical infrastructure. La. If the manager has considered all the contingencies and come up with ways to maneuver around any obstacle. Today. it is functional. project managers must be able to spearhead communications efforts. utilities. and the site was suitable for use. ranging from engineers. Once a project gets the necessary permits. and all attempts at getting permits must be done meticulously. worst and most likely scenarios. Going Public To mitigate some of these risks. Imperial Oil. ‘If you don’t have the people that can manage and do the technical risks. Take the project to decommission a refinery then owned by Texaco Canada in Mississauga. It’s the tack that Golder Associates takes on all projects it assumes. construction workers and system operators. Canada. ‘You also need to handle competing stakeholder interests and to be able to achieve a middle ground. Decisions. Businesses. through the help of Golder. Project managers must understand what products are on the market that can meet all stakeholders’ needs. In particular. the deal likely will reach fruition.1 .298 IDENTIFYING AND SELECTING PROJECTS READINGS P5 pervade plants. he says.. may want generators that can gear up almost immediately. ‘Any project that has a chance of surviving public hearings and winning permits in a reasonable amount of time has to be set up as an iterative process and has to appreciate uncertainties to be effective. This includes notifying policy and medical teams as well as accounting for all personnel. 2005. furthermore. no matter the size or severity. To overcome potential obstacles. LeLeux says. Kanzaki says. including establishing neighborhood meetings and creating a common communications strategy. which bought Texaco Canada in 1989. had taken down infrastructure and cleaned up contamination. to allow for more leeway to remedy potential problems. suggests implementing best practices that involve hiring seasoned workers who have the essential skills. In the event of a serious threat. Canada. New Iberia. the company should begin conducting outreach programs. In 1985. especially when they are involved in the selection of any equipment. Communities may have strict emissions requirements that necessitate certain parts. the most effective strategy spells out all the issues on the front end so nothing comes back to haunt a project. Any solution will involve a series of tradeoffs. manager of environmental sciences group for Golder in Mississauga. must remain flexible and be based on best.’ Kross says. determine what future demand will be at the time of construction and work to accommodate that potential growth. project manager for Terasen Gas in Vancouver. and communities are beginning to sprout up around it. By 1996. Art Kanzaki. however. cannot simply bypass public concern. According to President Chris LeLeux.

but also the general overheads not necessarily directly incurred by the project’? (A) Capital costs (B) Revenue costs 299 2005. what type of costs can be described as ‘those incurred on a regular basis and include repair and running costs of the assets.Revision Questions 7 Section A type questions Question 1.4 In the formula for calculating quantitative risk.3 In risk analysis. (A) (B) (C) (D) Qualitative risk Virtual risk Human risk Socially constructed risk Question 1. R = p(E ) Â p(L) Â M. contrary to statistical evidence’.2 In less than ten words. what does p(L) represent? (A) (B) (C) (D) The The The The probability probability probability probability of of of of an event leading to a loss a lower cost arising the project resulting in a loss a lower level of performance Question 1.1 Identify four aspects of project feasibility.5 When assessing the economic feasibility of a project. Question 1. define risk. Question 1. what type of risk could be defined as ‘a risk that is perceived.1 .

You are currently employed by Trend as project finance manager on a major capital investment – the full refurbishment of a newly acquired city centre store. Requirements (i) Explain the term feasibility. (5 marks) (Total marks = 10) Section C type questions Question 4 Trend plc is a large fashion retail chain. It currently has 48 stores throughout the country. water. where the interior is installed.) installed on time. (2 marks) (ii) Discuss the aspects of feasibility that are typically considered in project selection. The building is now undergoing its ‘fit-out’ stage. and how a SWOT analysis is used in project selection. mostly in prime high street locations. has been in progress for nine months and is nearing completion. All the major structural work has been completed to schedule. 2005.300 IDENTIFYING AND SELECTING PROJECTS REVISION QUESTIONS P5 (C) Finance costs (D) Opportunity costs Section B type questions Question 2 The term feasibility is often used when assessing the viability of projects. These are coordinated by head office through six regional general managers who take full responsibility for the performance of the stores in their region. etc. should the lowest price proposals always be selected? Give reasons for your answer. This project. (5 marks) (ii) When selecting a project.1 . and the services (gas. (8 marks) (Total marks = 10) Question 3 SWOT analysis is commonly used in project selection. with a total budget in excess of US$8 million. as it helps the organisation focus upon projects that will facilitate the organisation’s achievement of its strategic objectives. electricity. Requirements (i) Explain the term SWOT analysis.

Jane feels that she should have been informed about the possible delay at the earliest opportunity. the project manager resigned and left the site. Jane says she has been ‘left in the dark’ by the project manager and ‘doesn’t like surprises’.1) and says that it ‘proves the point’. Shortly afterwards. and that opening would not be delayed.INTEGRATED MANAGEMENT 301 IDENTIFYING AND SELECTING PROJECTS Today On arriving at work this morning you received a message from Jane Bell (the regional general manager responsible for the new store) informing you that the project manager of the refurbishment project has resigned. this has been her only contact with the project manager.1 Gantt Chart 2005. Jane has called a ‘crisis meeting’ for Figure 7. Jane. and the subcontract supplier of the goods elevator which is being installed to carry stock from the basement stockroom to the retail floors.1 . and has received only three written progress reports during the last 9 months. Other than occasional conversations when she visited the site. Jane asked you to deputise as project manager until a replacement could be recruited. you have managed to establish the circumstances leading to the unexpected departure of the project manager. and that the project manager and subcontractor were trying to hide the delay from her. Talking to colleagues. At some point during the meeting Jane appears to have become angry with the subcontractor and the project manager. with disastrous cash flow impact. not Jane’s. The project manager also suggested that the delay was ‘a minor detail’. Jane pointed out that this situation would delay the opening of the store. the site manager of the elevator supplier apparently mentioned that the installation was running late by 3 weeks. The project manager apparently claimed (rather forcefully) that it was his responsibility to manage the project. Jane apparently disagreed. Apparently Jane had always experienced problems in persuading the project manager to discuss progress. Apparently there was a very heated meeting between the project manager. At the meeting. The subcontractor has refused to do further work until Jane apologises. and you expect to gain valuable experience from it. This situation obviously provides you with a challenging opportunity. Jane has given you an extract from the Gantt chart for the original project plan (Figure 7.

The staff fall into the following categories. ABC has recently formed a steering committee to oversee the e-commerce project. senior systems analysts also act as project managers. with staff from the UK and the USA working together. some of which are being held up as the specialist required is not available when needed. Each project has a project manager but can utilise any of the specialist staff as required. (8 marks) (c) a prioritised action list based on the SWOT analysis. (4 marks) (b) a SWOT analysis for the project as at today. 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. At present there are a lot of projects in progress. IDC Ltd provides a full development and maintenance service for their clients. Designers – IDC regularly use specialist consultant graphic designers to design the graphics for the websites. IDC employ 150 staff split evenly between the United Kingdom and the United States. Some projects are shared jointly between the two sites. which she wants you to attend.302 IDENTIFYING AND SELECTING PROJECTS REVISION QUESTIONS P5 tomorrow with the managing director and finance director of Trend.     Systems analysts – the main contact with the client. A large proportion of IDC’s work can be done via the Internet. starting with an initial idea. (13 marks) (Total marks = 25) Question 5 IDC Ltd is a software development company that specialises in designing and implementing internet websites and e-commerce systems for their clients. the membership of which can vary depending on the requirements of the projects. 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. Administrators. ‘I think we could do with setting up a Website’ through to the handover to the client’s staff. Most of the staff are specialists and can only work on a small part of a project. IDC have recently started talking to ABC Inc. 2005. systems testing and implementation.1 . IDC Ltd are based in the United Kingdom with a branch office in the United States. their clients are worldwide. The staff work on projects in development teams. The workload does not follow any particular cycle but does vary from time to time. Programmers – create the code required to run the website. sales and marketing. In the past this has caused problems due to lack of adequate communication between the staff. You are working with IDC Ltd as a member of a systems development team. although they do have to visit their clients’ sites for the initial systems analysis and sometimes to participate in presentations. ABC is considering the possibility of setting up a website and moving into e-commerce. 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. IDC has many projects in progress at any one time.

(15 marks) (c) Outline the contents of a feasibility report. should consider in evaluating the feasibility of the e-commerce project.1 . (5 marks) (Total marks = 25) 2005. a feasibility study. (5 marks) (b) Explain the factors that ABC Inc.INTEGRATED MANAGEMENT 303 IDENTIFYING AND SELECTING PROJECTS (a) Explain to ABC the need for. and purpose of.

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Solutions to Revision Questions 7 Section A solutions Solution 1.4 (A) Solution 1.2 The probability of an undesirable event Solution 1.1 . The second part of the question requires you to think about a range of aspects that affect project feasibility.3 (D) Solution 1.5 (B) Section B solutions Solution 2 Guidance and common problems The first part of this question should be no problem. As accountants 305 2005.1     Technical Financial Business/commercial Social/ecological Solution 1.

the effect of constructing a new road or nuclear power plant on a community). Social feasibility It is becoming increasingly necessary to assess social factors affecting feasibility.). the degree of disruption during the construction/installation phase. technical and financial considerations (i. Cost–benefit analysis helps to identify and evaluate the costs of the proposal over its anticipated life (such as purchase. The other side to cost–benefit is the identification and evaluation of the benefits of the project over its life. Environmental considerations may be stimulated primarily by health and safety legislation. Financial feasibility A technique often used in a feasibility study is cost–benefit analysis. Feasibility is normally established by means of a feasibility study. building.g. including social. The types of costs and benefits involved in a project will depend upon the precise nature and scope of that project and can vary greatly. This may include awareness of the social issues within a group or office (e. introducing a computerised system). will it require further testing prior to use or are we confident that the material/technology/processes have been thoroughly tested and are readily usable and available? applicability – that is. (i) Feasibility is a term used to describe how achievable various project options are.e. ecological. do not just concentrate on the financial aspects). employment (i. maintenance.g.306 IDENTIFYING AND SELECTING PROJECTS SOLUTIONS TO REVISION QUESTIONS P5 we may be primarily concerned with the financial feasibility. which may be carried out on a number of potential strategies.1 . Technical feasibility There are a number of key aspects regarding technology. will the introduction of computerised systems lead to redundancy) and the general public (e. The aim of the study is to decide which proposal to choose. It is important for organisations to consider the raw material input. 2005. (ii) Feasibility can be examined from a number of perspectives. the production processes and the disposal of the product at the end of its life. repair. but examination questions will require you to consider all aspects of feasibility. is the technology suitable to satisfy the objective of the project effectively? Other technical considerations could be:   the ease of use of the technology.e. The technical features of a strategy that need to be considered are:   development – that is. etc. or larger social awareness regarding the effect of projects or products on workers. Ecological feasibility Ecological considerations may be driven by the understanding that customers would prefer to purchase alternative products/services as they are more ecologically sound and less harmful to the environment.

Opportunities. Cost is obviously an important factor in deciding who to choose to provide a project. The answer above is mainly concerned with your ability to describe the technique and its uses. therefore. after-sales support and warranty terms are of more importance as deciding factors. such as the reputation and experience of the project provider. it is important that you consider the application of SWOT as well as being able to describe the technique. or provides the organisation with sufficient opportunities to do so in the future. Weaknesses. such as quality. Therefore. the level of quality and the level of technology being used. whether it is an one-off cost or recurring. (i) A common analytical tool used in assessing project proposals and their feasibility is SWOT analysis (Strengths. consider a project proposal to implement a new marketing database. a SWOT analysis can establish whether a particular proposal has sufficient strengths that are compatible with the achievement of the organisation’s objectives. There are many other factors to consider when evaluating proposals. and. whereas the opportunities and threats arise in the organisation’s external environment. 2005. when it occurs. The strengths and weaknesses arise from the organisation’s internal environment. A SWOT analysis will also highlight the weaknesses and threats of particular proposals. The lowest priced proposals should not necessarily be chosen.1 . Increasing market share could be one of the organisation’s long-term objectives.INTEGRATED MANAGEMENT 307 IDENTIFYING AND SELECTING PROJECTS For every item of the project proposal. but often other factors. In this examination SWOT may also be examined in a very practical way. it is necessary to identify:     its value: in monetary terms or in terms of benefits. for any project proposal. and the SWOT results may form part of your evidence in recommending a particular project option. that is. whether it is capital or revenue. Solution 3 Guidance and common problems SWOT analysis is a commonly used tool in strategic planning and project selection. Thus. and Threats). (ii) The answer to this question is no. this would be an important factor in final project selection. you may have to perform a SWOT analysis on the data provided in the scenario. the timescales being offered. A SWOT analysis for this proposal may indicate a strength of improving customer relationships and an opportunity to increase market share. expertise. it is important to establish whether the proposal helps to achieve the organisation’s long-term aims and objectives. When evaluating a project proposal. the materials used. For example.

things we do that others do not. weaknesses.  Insufficient slack in project programme. or as a communication document to report progress to project sponsors. Purpose A SWOT analysis is used. Strengths and weaknesses relate to the project itself. opportunities and threats relating to the entity (project or organisation).1 . Threats are: events or changes that we should protect ourselves from or defend ourselves against. Strengths are: things we do well. 2005. The real value of SWOT analysis is not in the analysis itself. what is the current situation. to provide a critical analysis of the project in relation to its environment. on a periodic basis.  Misunderstandings and communication breakdown.308 IDENTIFYING AND SELECTING PROJECTS SOLUTIONS TO REVISION QUESTIONS P5 Section C solutions Solution 4 Trend plc (a) SWOT analysis SWOT analysis is one of the most commonly used business and project management tools. Opportunities are: events or changes that we can exploit to our advantage. It is a brief summary of the major strengths. it is in how we use it as a basis to discuss and agree future action.  Absence of project control procedures.  Poor reporting of progress. things to be proud of.  Recognition of the scale of the problem. opportunities and threats to the business environment in which the project is based. (b) Strengths  Major structural work completed to schedule. what might happen in the future. It can be used by the project team. in order to help them to improve their performance. Weaknesses  Resignation of project manager. Each of the SWOT sections should consider:    what has happened in the past.  Relationships within project. Weaknesses are: things we do badly. things to correct or improve. things we do not do (that we should).

the project programme must be examined for any possible slack. Short-term actions In the short term. The responsibility for replacing the project manager lies with Jane and Samantha. and having a project manager in place for the remainder of the project will improve control and reduce risk. Anne may require additional resource or external help to produce these. designed to improve control. as it is possible that a simple solution exists to rescue the project. even if she feels she was right. Successful completion of the project must be our first priority. Long-term actions We can learn a lot by comparing our project management process against models of best practice. This should only happen after the programme has been re-evaluated. It appears that elevator installation is a critical activity. Anne Martensen should be asked to prepare a set of procedures for project management in Trend. I will be briefing you later on the different types of benchmarking and the likely benefits for future projects. Jane and Samantha must be fully briefed. This will allow projects to learn from each other.  Potential impact on project completion. This will require a meeting to air and resolve differences. rather than confrontational. I shall be producing a report for Jane on how we can improve relationship management in the project.  Potential impact on business cash flow. Reporting of progress is an important part of managing the relationship between the project team and the project sponsors. It is important that we adopt at least some aspects of these to improve project management in the future. It is also important for the project that we identify or recruit a permanent project manager as soon as possible.INTEGRATED MANAGEMENT 309 IDENTIFYING AND SELECTING PROJECTS Opportunities  Good relationship with subcontractor prior to this project. Once the project programme has been studied (and hopefully amended).1 . (c) Immediate actions The first priority for the project must be to get the elevator subcontractor back to work. but there may be some opportunity to reschedule subsequent activities or allocate more resource to them in order to ‘claw back’ the lost weeks. There are a number of formal project management methodologies. It is essential that this meeting is friendly and conciliatory. Once work on the project has recommenced. Looking at the whole SWOT analysis it is clear that the current situation is critical. The on-time completion of the refit is seriously threatened by continuing delays on elevator installation. All projects need certainty and consistency. Threats  Relationship with elevator subcontractor. the control and reporting procedures relating to the project must be reviewed and improved. 2005. it may be necessary for Jane to apologise to the subcontractor. A number of actions are necessary to regain control of the project. and should improve both the quality and consistency of project management.

specification and age of the existing hardware. operational. It will therefore have to consider a range of topics in sufficient depth to allow a report to be prepared. The steering committee sets the terms of reference for the study team. (v) Prepare system specification. (vi) Compare alternatives. quantity and source of sales orders currently processed. (iii) Establish objectives.  networking capabilities. Examples of the information that will need to be established and taken into account in the design of the new system include:  quantity.  security software and access controls available.’s management to establish the objectives of the proposed e-commerce system and to discuss critical success factors for the project. The study team will need to interview ABC Inc. The analysis of the current system. legal and economic feasibility of the proposed system. e-mail or EFT. The feasibility study is documented in a feasibility report which will make recommendations on the way to proceed. 2005. (ii) Analyse existing system.  any current use made of the internet. who will then carry out the study and prepare a report based on the terms of reference. The feasibility study will be carried out by a team who have been appointed by the steering committee. the operating system used. (b) Factors that should be considered during the e-commerce feasibility study (i) The feasibility study provides the basis for the feasibility report.  type.  type of processors used.  current structure of the stock and customer records.  communication technology available. An outline logical system can then be prepared and alternative outline physical specifications specified. in order to establish whether the current configuration could support an e-commerce operation. A feasibility study examines the current operational systems and considers alternative ways of meeting the systems and organisation’s objectives. The study team will also need to discuss the system requirements with users to establish the requirements of the system.  type. The feasibility and advantages of each of the alternative systems can then be analysed. The answer will determine the scale of change proposed for the new system.310 IDENTIFYING AND SELECTING PROJECTS SOLUTIONS TO REVISION QUESTIONS P5 Solution 5 (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. the requirements of users and the information requirements of management will be combined to determine the new system requirements and a system specification prepared. (iv) Involve users.’s current hardware and software provision will need to be carefully examined.1 . They can be judged by their:  technical feasibility – to determine which alternative is most likely to meet the technical specifications of the system.  speed and capacity of the CPU and disks. quantity and timing of payments from customers. ABC Inc. A feasibility study is needed to establish the technical. The information requirements of management will also need to be established. The study will start by analysing the current systems.

those rejected and the results of the evaluation of the remaining alternatives. It does this by presenting the work and conclusions of the feasibility study team. economic feasibility – the costs and benefits of each proposal need to be established. while the benefits can be quantified into those that are tangible and can be quantified and those that are intangible and unquantifiable. if the recommendation is to go forward it will recommend a preferred option.: – 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. is that many of the benefits associated with e-commerce will be intangible and therefore very difficult if not impossible to calculate. the extent of the survey carried out on the existing system and the range of interviews. the alternative outline systems considered. the timescale of their inflow or outflow established and discounted to present values. a timescale. (c) The contents of a feasibility report The primary purpose of the feasibility report is to enable the steering committee to make a decision on whether to approve a systems design project or to cancel the project. 2005. a budget and a schedule of other resources required to implement the system if it is approved. etc.1 . organisational and political aspects of ABC Inc. – The levels and types of changes proposed in the current jobs and possible changes to organisational structures.. The feasibility report may therefore have to report an NPV for each proposal based on the quantifiable costs and benefits along with a list of unquantified benefits. a clear recommendation for the steering committee to consider. The recommendation could be to cancel the project. This means that a full cost–benefit analysis will be difficult to carry out. – The consequent effects on status and promotional expectations of staff. The proposal with the greatest NPV is selected. The problem in organisations like ABC Inc. performed to assess the system requirements.INTEGRATED MANAGEMENT  311 IDENTIFYING AND SELECTING PROJECTS  operational feasibility – the study will need to take account of the human. The costs need to be separated into one-off costs and continuing costs. The report will set out:      the feasibility study terms of reference.

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the next step is to perform the project (the third stage of the project life-cycle). through selected review and audit. 8. It is vital to provide a thorough plan of action that demonstrates how project tasks will be accomplished. how much it will cost. This chapter will introduce the final three stages of the project life-cycle and will include discussions on:    the elements involved in project planning. 313 2005. evaluate the process of continuous improvement to projects. who will do it.1 . at what time. 8.Performing the Project 8 L EARNING O UTCOMES After completing this chapter you should be able to: " " " " identify methodologies and systems used by professional project managers.2 Planning the project The importance of planning prior to the commencement of a project cannot be stressed enough. how long it will take. steps needed to control and monitor progress of the project. The planning phase involves taking the plan of activities. Planning determines:     what needs to be done. recommend appropriate project control systems. the learning outcomes of a project. evaluate.1 Introduction Having completed the first two stages of the project life-cycle. the schedule (time plan) and the budget (cost plan). This stage begins when a contract is agreed between the customer and the project organisation. The project ends with the completion of the project objectives. actions required to complete the project. and breaking it down into greater detail. using which resources and at what cost.

selecting the optimum changeover method and the time that is least disruptive to the organisation’s operations. 9. 2. It is important that the people who will be involved in performing the project also participate in the planning process. the resources required. Participation is a key aspect in getting team members’ commitment to the project’s goals and success. 8. 10. Integrating hardware and software and testing the whole system. a time estimate. 8. 6. 1999.1 . Carrying out training. as and when scheduled in the plan. 11. programmes and a list of required hardware. for example. price or schedule. The project team will perform the tasks they are responsible for. Preparation of training materials to enable users to understand. Purchasing. 5. p. the project can commence. development and installation of an organisational information system could include the following work elements (Gido and Clements.3 Performing the project Once a baseline plan has been developed and agreed by the customer and project team. 4. including systems specifications. flow charts. Carrying out the writing and construction of the software. assembling and testing the hardware. 8. Testing the software. 7. including detailed testing of sub-assemblies of hardware. 12.3. Carrying out design reviews on a continual basis. This may result in a change in project scope. and then a final test of the entire hardware system interface.314 PERFORMING THE PROJECT STUDY MATERIAL P5 This detailed planning is critical to the success of any project. Carrying out the installation and changeover procedure. which may result in modifications and design changes. Determine:    the major work elements. Planning installation. There will also be a plan prepared for systems testing once the system has been designed. operate and maintain the system. Undertaking detailed design work. Conducting final acceptance testing of the new system to demonstrate that the system meets the original objectives. It may also involve re-planning the original schedule. This may involve the customers who may wish to participate in testing or at least review the test procedures. 66): 1. 3. Think of a project such as organising a conference or planning a relocation. 2005.1 An example – development of an information system The activities involved in design.

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. weekly or monthly).g. The project manager should meet with the project board to discuss progress. following authorisation if necessary. scope and time. with a major summary report quarterly (or on completion of a life cycle stage). the project manager must report the deviation and. take corrective action to get the project back on target. A regular project reporting period should be set up (e. If. The project manager needs to consider very carefully the implications of any corrective action upon the project scope.INTEGRATED MANAGEMENT 315 PERFORMING THE PROJECT 8. the project manager reports to a steering committee or project board. a deviation is discovered (such as overspending or taking longer than anticipated). depending on the complexity or duration of the project. and the project manager would present their summary report. In most projects. These reports should have a standard format. adding extra resources in order to get a project back on time will incur extra costs and may therefore overrun the project budget. towards the final objective. In most projects. it is important to monitor it continually in order to ensure that it is progressing as expected. 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.1 . should a major contingency arise. For instance.4 Monitoring and controlling the project As the project evolves. In many projects such a meeting might take place quarterly. It should also be possible for the Project Manager to meet with the project board in exceptional circumstances. so the recipients become familiar with their content. how long it has taken so far (and how long it is estimated to take up to completion). Corrective action requires consideration of alternatives before implementation. and how much money has been spent on that activity. timely basis. 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. 8. with any anticipated variances from plan highlighted. including monitoring activities started and completed. This requires a continual measurement of actual activities. Figure 8. 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. Making decisions about changing the project plan or adding more resources can only be effective if the project manager is using the most 2005.4. This will allow the project board to ask questions that are not covered by the written report.1 Making effective control decisions It is vitally important that the data collected about the actual progress of the project are reported on a regular. both within and between projects. after comparison of actual versus plan. written reports are made monthly. budget and schedule. More complex projects are likely to require more frequent progress assessment. There should also be provision for exception reports.1 demonstrates the control process. daily. Areas covered by the report would obviously focus on progress in terms of cost.

For example. a comparison must be made against baseline budget and schedule in order to determine if any variances have occurred. schedule or scope of the original baseline plan. getting the project back on time may require extra resources and therefore additional costs or a compromise on the original scope. If it is considered that the project is satisfactorily on target. 68) up-to-date. time and scope.1 Project control process (Gido and Clements. as changes are likely to affect cost.316 PERFORMING THE PROJECT STUDY MATERIAL P5 Figure 8. It is also important for the project manager to agree any changes in the plan with the customer. the next decision is to determine how to revise the schedule or budget. 2005. accurate project information. These decisions may be very difficult. as they will often require a trade-off of cost. p. Reducing excess expenditure may mean using less or lower-quality resources. If corrective action is required. When the updated schedule and budget have been calculated. which again may affect the overall scope and performance of the final project. 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. then no corrective action is required.1 . 1999.

other methodologies have been developed by proprietary interests often with accompanying consultancy and software services.  Ensures the production of a number of ‘management products’ associated with the management and control of the project: for example.  Includes a number of different types of plan. gaining in popularity in various industry sectors and hence are worth inclusion. within budget. Features of PRINCE 2  Enforces a clear structure of authority and responsibility on the project team.1 . The PRINCE 2 methodology is discussed in detail in the second reading later in this chapter. The PRINCE 2 (PRojects IN Controlled Environments version 2) methodology contains a large number of control elements and. If it is considered that the project is likely to have a high control risk. the monitoring progress should be carried out more frequently.2 PRINCE 2 methodology Control in this context is any mechanism designed to ensure that a project achieves its objectives.4. the third phase of the project lifecycle will end when the project objective has been met and the customer requirements have been achieved. it can be applied to projects of all kinds. They are. the relationships between them and their roles in the tasks’ completion. These ensure that work is completed both on time and at the appropriate level of quality. If this is carried out successfully. The structure of supervision and reporting ensures that each party has clear objectives and that they are supported in achieving these objectives. on time. The project manager must take a continually proactive approach in controlling a project. The main purpose of PRINCE 2 is to deliver a successful project. although initially intended for the management of IS projects. 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. which is defined as:     delivery of the agreed outcomes. the changes must be incorporated into the schedule and budget.  Contains several quality controls.3 Other project management methodologies A number of other methodologies have emerged in the project management marketplace. the project plan and various progress reports. however. 8. the project budget. Whereas PRINCE 2 is largely in the public domain (due to sponsorship by the UK Government). the project initiation document. 8.4.INTEGRATED MANAGEMENT 317 PERFORMING THE PROJECT Once a decision is taken. such as clearly defined and documented technical and management procedures. You should study this reading now. 2005. Project control processes cannot be overemphasised in their importance to the success of the project. conforming to the required quality standards. This project control process will be carried out continually throughout the duration of the project.

8. Solution  It ensures that all team members are aware of the importance of regular monitoring and control. outputs. agreeing formally with the customer that all agreed deliverables have been provided successfully.318 PERFORMING THE PROJECT STUDY MATERIAL P5 Here is a list of some of the more popular alternatives to PRINCE 2:    IDEAL/INTRo – IDEAL is a process-improvement and defect-reduction methodology from the Carnegie Mellon Software Engineering Institute (SEI). so that full payment can be received. for example. SixSigma – another process-improvement and defect methodology that has its roots in improving manufacturing and product development processes.1 .1 Explain the features of a well-defined reporting period. reviewing the business case to check that intended benefits are likely to be achieved. reviewing project organisation and methods to recommend future improvements. Exercise 8. It is also necessary to keep information for future audit purposes. A number of vendors encapsulate PMBoK into their own service and software offerings. techniques and how they fit together. receiving and making final payments to suppliers of resources. weekly or monthly. tools. a new computer system. depending on the complexity and timescales involved. there are now extensions to apply the statistical measurements (upon which SixSigma is based) and corrective measures to more generic project management processes. The institute has a reputation for researching and improving the project management process (particularly in the software development and deployment arena).  It must be done regularly to ensure progress is maintained.5 Project closure The final stage of the project life-cycle is the closure of the project once the project work is finished. This should help the project organisation improve its performance on future projects. rewarding the project team and ensuring they have jobs to move on to. Project termination activities would include the following:       organising and filing all project documentation.  It is necessary to compare actual performance with plan. PMBoK (Project Management Body of Knowledge) – the US-based Project Management Institute (PMI) has defined best-practice project management principles and processes into a volume entitled PMBoK. organised and stored efficiently for future reference. However. 2005. 8.  Reporting can be daily.5.1 Organising project documentation The project organisation must ensure that all appropriate and related project documentation is collected. The main purpose of closure procedures is to evaluate the overall project and to learn from the experiences gained. INTRo is a particular application of the methodology for rolling out technology. It describes nine key areas in terms of inputs.

the final phase – an audit of the entire project – is conducted. In some contracts. the effectiveness of the management process and structures in managing the project. Assessment of the following should take place:       the extent to which the required quality has been achieved. Are the benefits intended in the feasibility study likely to be realised? If not. 8. The internal review is an opportunity for the organisation to discuss the successes and failures of the project process and to establish what can be learned in future for the benefit of other projects. This is an obvious incentive to ensure that the project organisation carries out the project successfully. 2005. the significance of any problems encountered. 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 business perspective is essential. the time taken to develop the solution compared with the targeted date for completion. 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. and the effectiveness of the solutions generated to deal with them. An evaluation of the project from the customer’s perspective is also a crucial aspect of project closure. Likewise. what ongoing actions need to be taken? 8. the project organisation must ensure that it has paid for its materials or contractors at the end of the project.6.2 Collection of receipts and making final payments Some contracts may include a progress payments clause whereby the customer will make a final payment on the successful completion of the project. and externally with the customer. the actual cost of the project compared with the budgeted expenditure and the reasons for over.1 Post-project review meetings Evaluation meetings should be carried out both internally with the project team members.or under-expenditure identified. final contract accounts can be analysed and the contract profitability established. and reasons for a variance identified.6.INTEGRATED MANAGEMENT 319 PERFORMING THE PROJECT 8.5.1 . the efficiency of the solution during operation compared with the agreed performance standards. Once payments and receipts have all been recorded. this may be a significant proportion of the total contract price – as much as 20 per cent. It also allows the customer the opportunity to voice any concerns regarding how the project was carried out and provides a framework for open dialogue and improved customer relationships.6 Post-completion review and audit 8.2 Post-completion audit When the project solution has been delivered.

and each level represents a different degree of maturity in project management. Level 3 – Singular methodology In this level. 8. the centre of which is project management.1 . This is particularly true of organisations in project-based industries. the organisation recognises the synergistic effect of combining all corporate methodologies into a singular methodology. In this case. proposed by Kerzner. Excellence in project management requires the development of a methodology.3 Justifying the cost of post-completion audit The primary benefit derived from the post-completion audit is to augment the organisation’s experience and knowledge. One such approach is the Project Management Maturity Model (PMMM). 8. the organisation recognises that common processes need to be defined and developed such that successes on one project can be repeated on other projects. such as engineering and consultancy. The synergistic effects also make process control easier with a single methodology than with multiple methodologies. Also included in this level is the recognition that project management principles can be applied to and support other methodologies employed by the company. the extent to which these have been achieved would also be investigated. The emphasis here is on training and education. 2005. it may be necessary to justify the cost of a post-completion audit by carrying out a cost-benefit analysis. which provides guidance on how to become excellent in project management. along with the accompanying language/terminology. and continues improvements to the methodology. The audit would lead to the production of a report to management. 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. such as total quality management and time-to-market.4 Continuous improvement Many organisations view project management as a strategic competence. a culture that believes in the methodology. Level 1 – Common knowledge In this level. in some firms the information systems personnel may still have a separate methodology.6. The PMMM consists of five levels. Although this benefit may be difficult to quantify. structured around the above points. However.320 PERFORMING THE PROJECT STUDY MATERIAL P5 If the project objectives have been stated in terms of learning outcomes. the expected savings to future projects should be offset against the cost of the audit. Level 2 – Common processes 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.6. from which they can gain a competitive advantage.

Reprinted with permission of SouthWestern.1 . The key points to remember are:    the content of a project plan. as well as the establishment a professional development career path for project managers.7 Summary This chapter has looked at the performance and completion of a project. in series). 1st edition. the company can create a centre for excellence in project management before benchmarking is undertaken. 8. As companies begin recognising the importance of strategic planning for excellence in project management. Successful Project Management with Microsoft Project CD. A Practical Guide for Managers. The company must decide whom to benchmark and what to benchmark. Digital Download. the market place may see several more maturity models similar to the one described above.e. J. the features of PRINCE 2. Kerzner. the organisation evaluates the information obtained through benchmarking. References Gido. these models should be generic such that they can be applied and custom-designed to individual companies. When the levels of maturity (and even life-cycle phases) are discussed. John Wiley & Sons. Strategic Planning for Project Management Using a Project Management Maturity Model. Benchmarking must be performed on a continuous basis. there exists a common misbelieve that all work must be accomplished sequentially (i.com. a division of Thomson Learning: www. The magnitude of the overlap is based upon the amount of risk the organisation is willing to tolerate. Level 5 – Continuous improvement In this level. (1999). Like strategic planning.thomsonrights. For example. Certain levels can and do overlap.INTEGRATED MANAGEMENT 321 PERFORMING THE PROJECT Level 4 – Benchmarking This level contains the recognition that process improvement is necessary to maintain a competitive advantage. the process and justification of post-completion review and audit. and must then decide whether or not this information will enhance the singular methodology. fax: 800 730 2215. Project management maturity models allow companies to more easily identify corporate-wide training initiatives for each level. J. and Clements. This is not necessarily true. 2005. (2001). H.

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This case serves to illustrate:    how project management methods can be successfully applied to situations where the objectives are. even in nebulous areas such as ‘managerial technology. for sharpening the planning and implementation processes. its mandate is similar to other governmental tourism bodies throughout the world.Readings 8 The importance of project planning and approaches to implementation The first article below analyses an initially failed project management approach. 323 2005. and the methods applied to ensure that the final project was successfully implemented. why it failed and the methods used to ensure final project success. Goal definition and performance indicators in soft projects: building a competitive intelligence system Francois Lacasse. that is. 1986 ¸ Copyright # 1986 by PMI Publications. The conclusion draws some lessons on the specifics of managing soft projects.’ such indicators can be selected and applied. This case study should aid you in understanding:    the importance of planning. The case considers a government agency’s attempt to introduce a competitive intelligence system (CIS). at the outset. more importantly. how performance indicators need to be tackled early on for purposes of control and. The context and the project The government agency where the project took place is concerned with tourism. PMI Canada Proceedings. the problems associated with an informal implementation strategy. we review the project itself.1 . when trying to successfully complete a project. the need to establish clear milestones for the attainment of goals. Reproduced with permission of PMI Publications via copyright Clearance Center. illustrating how the project management process and procedures can be used in situations where the original project objectives are uncertain. The case describes what was done. in particular the need to evaluate all key assumptions. how success requirements were determined and subsequently used to keep the project on track and how. relatively unclear. After describing the context of the project. Introduction This paper describes a ‘soft’ project: the setting up of a competitive intelligence system (CIS) in an agency of government.

at which time it would merge with the internal team. concentrate all efforts first on expanding Canadian exports.1 . The very existence of an external team was seen as an expression of top management’s commitment to the project: this team was totally insulated from ‘crises’ and emergencies. The organisation is structured into three divisions: marketing. 2005. storage. The product management structure was under the responsibility of the head of research and planning. described below. limit its domestic role to helping a small set of Canadian destinations compete directly with foreign destinations). one internal to the organisation. As with all such systems. line managers and top management were its relatively passive consumers rather than active participants/producers). Two teams were set up. and policy (including most data collection and analysis). technical support. The key feature of a CIS was the collection. the goal of the project was: ‘to have in place. Pacific Rim countries). assistance to private-sector industries related to tourism (grants. made the following assumptions.g. This reorientation called for a clearer role definition and a more commercially aggressive stance for the organisation (i. albeit implicitly:    A clear set of rules or a dominant model for setting up and successfully running a CIS existed in large corporations. fully operational. This ‘proven technology’ could be imported without extensive modification. etc). within two years a complete CIS which would be at least as good as the best ones existing in the private sector’. As well as laying the groundwork for the system. When arrayed against information on the evolving state of Canadian attractions. such intelligence was intended to prove (1) a continual monitoring of how Canadian destinations were likely to fare in the competition for tourist dollars. assumptions and structures In its original formulation. and retrieval of information (i. this CIS was to inform management about the actions and the intentions of Canada’s chief competitors for tourist dollars in markets identified as among the most promising (e. The competitive intelligence system project idea flowed from a complete review and strategic reorientation launched in 1984. and (2) early identification of threats and opportunities in this sector. and for providing technical assistance during the last implementation phases.324 PERFORMING THE PROJECT READINGS P5 marketing and promotion. and co-ordination requires substantial resources. product development and research. the internal team was also given the task of preaching the new gospel to the rest of the organisation. The internal team was to proceed immediately with reorganising the datagathering and analysis function (from the library to EDP). the other made up of consultants. for ensuring that it met the quality and completeness standard of ‘best business practices’ in the field. The first project plan.e. the need was felt by management for a competitive intelligence system to generate high-quality information for itself and the various line managers. This intelligence was to focus on other countries’ marketing strategies and on trends in new tourist products. Initial goals.e. In this context. standards. The external team was responsible for the overall design of the system. for defining the final implementation strategy. The rivalry between divisions is relatively high.

the management of the project had to be guided as much by determinants for successfully effecting organisational changes as by technical indicators. The assumed clarity of goals. Indeed. The ‘easy’ job of establishing the fine points of what constituted a good private CIS proved quite difficult. drift into turf battles (‘Research power grab has to be resisted’). The situation was no better within the external team. establishing performance criteria. to be successful as a project. and fit into the organisation’s culture and mandate (congruence). evaporated as soon as they were confronted with reality. be inspired by ‘best business practices’ (to give it legitimacy). be designed for and perceived as allowing improvement in job performance. wherever they had been successful. but also a change in its modus operandi. Contrary to initial expectations. part of the EDP and research function. Even more importantly. The hasty partial implementation attempts had forgotten that ‘building blocks’ cannot be put together before consensus is reached on plans for the whole structure. how and why. the internal team would busy itself with reorganising the library. a bewildering array of techniques.INTEGRATED MANAGEMENT 325 PERFORMING THE PROJECT The co-ordination structure was both simple and rigid: at least every other week. both internal and external. Consequently. all loosely terms ‘CIS’. For instance. as summarised above in four assumptions. managerial practices and structures existed. had been treated as if it were the purchase and installation of a well-known machine.1 . (3) good choice of computers. (2) precision in formulating instructions to personnel. demand for highly detailed instructions (not forthcoming) on what to collect. The goal. while the external team was working on refining knowledge of the exact structure of private CIS to be borrowed. The success of the project itself was predicated on (1) rigorous determination of the CIS features to be copied. and (4) fast and efficient training/recruitment. etc. The key feature for this project structure was that implementation and planning were. Serious organisational resistance was encountered in all implementation aspects: unrealistic budgetary requests. The project had clearly been under-planned. and with pre-marketing potential CIS clients. they had become embedded into existing strategic decision processes and so had been moulded by a particular company’s culture and environment. the two teams would meet to assess progress and report to the overall project co-ordinator. which in fact was a rather delicate change in a strategic management process. 2005. Competitive intelligence systems were differently organised in various companies essentially because. to proceed simultaneously. apparent lack of interest from potential CIS clients. in practice. the setting up of a CIS had to:    meet needs felt at lower levels (specially those of middle line management). with the appropriate rewards. In practice. On the brink of disaster Within a matter of weeks it became obvious that the project was heading for serious trouble if its structure and purposes were not modified. project and system and designing the system’s implementation primarily for participants (functions) other than those reached by the internal team. the realisation had come too late that CIS constituted not only an addition to the organisation. Getting on with the ‘real’ job of designing its integration into the organisation was consequently stalled. no single dominant private sector model of a CIS existed.

specifically. the basis for selecting these options was to be their ‘fit’ within the organisation (external team). obtain informal reactions to the fit between them and the interested parties within the organisation. they must have a say in its design and implementation. the system involves a series of mini-projects. No less important results were that in virtually all observed instances:   The key element in a successful CIS was that rather ill-defined step called analysis. Deadlines and budget were only slightly modified. in terms of goal definition. the collection stage. To keep costs under tight control in information-gathering and to minimise the risks of flooding the organisation with papers and meetings. Implementation The original intent. review budgets and make adjustments. practices which might be useful but were not essential. despite variations in company size. and transmit feedback to the other project team.1 . the users (line and top management) would be involved in requesting such assessments and line personnel in providing them. that is. since the problems had been detected early. a classification of ‘best business practices’ emerged. clearly separating the necessary characteristics of a CIS from those which were really options. For instance. at least implicitly.e. and industry. the crucial link in the system was the quality of the analysis of the information not. defining options for the rest of the system. the revamped project focused on:   distinguishing those best business practices which were essential to implement within the organisation (external team). the dominant requirement was that the quest for information be very carefully targeted. i. The partial implementation measures envisaged at the outset were dropped. progress (success) indicators. The criteria were equally straightforward for deciding whether a CIS was successful: survival for more than five years and top-management satisfaction with it. explain them to selected personnel (training). were considered to be compulsory features of a CIS. First and foremost. business environment. This requirement for what otherwise would be an ongoing activity provided the most practical avenue for building feedback mechanisms right into the CIS. This meant that small-scale competitive assessments had to be conducted to define the identity of competitors and the threats and opportunities they represented. and 2005. had been to proceed in standard mechanical fashion according to the following sequence: define techniques. as was believed at the outset. that is to say. As the work progressed on those two aspects. This confirmed the key role of line involvement as a requirement for success. and distribution of tasks. Briefly. The project: second wind and preliminary results The above considerations for a successful project led to a drastic reorganisation in terms of goals.326 PERFORMING THE PROJECT READINGS P5  be part ‘owned’ by the people who would have to run and use it. assign tasks and responsibilities. The criterion used for this classification was simple: only practices which were observed in all or virtually all companies running successful CISs. the internal team was to float the various options.

1 . In practice. and an evaluation framework for these mini-projects. good evaluations. Provide support services and follow-up mechanisms for the people initially involved in the CIS.INTEGRATED MANAGEMENT 327 PERFORMING THE PROJECT introduce control a few months later. Each team would submit a short project proposal to the CIS team (e. competition and technical support. Test the feasibility of the options selected on personnel involved and adjust accordingly (involves extensive information dissemination). Given the now more precise goals and awareness of key organisational/behavioural constraints. a gradual transition from what some had seen as a power grab by one division under the guise of a ‘newfangled system’ to a standard operating procedure for deciding what information to use (and how) in the normal course of managerial decision-making. The bulk of the work would be done by line personnel. 2005. it was decided to keep specialised CIS staff to a minimum.e. they would assume the responsibility – initially at least – for running this monitoring system.).g. the sequence and the approach had to be altered. Essentially to ensure relevant collection and analysis of information. This implication strategy provided:    solid control of costs. deadlines (no longer than three months). rewards (trips. Within one week management would select a few proposals/teams and negotiate budgets. money and technical support. time allocation with respect to ‘normal’ line duties. to analyse the competition facing Canadian western ski resorts and to design and implement a costefficient system for subsequent monitoring of this segment). a sense of ‘ownership’ throughout the organisation of this CIS by various individuals whose diligence and commitment could not be commanded but who would respond favourably to incentives. involving the three divisions. it was hoped). the implementation was quite different from what had been envisaged: the approach selected relied on imitation and competition inside the organisation via a series of mini-projects carried out by small teams of volunteers drawn from all three divisions within the organisation. At least two other rounds of such mini-projects would be called for. which had to include personnel from each division. etc. The implementation consisted essentially of providing guidelines. For instance. each time with more precise criteria for selecting and judging the success of the mini-projects. This choice meant feedback and integration would be maximised. structures) both for the ultimate design of a CIS adapted to the organisation and for the implementation strategy. in a setting where employees had no direct commercial contact with tourists. it should spread like wildfire. Teams of volunteers were needed of no more than three to four people. and the amount of support required from the original external and internal teams. since each mini-project was controlled separately. the following was communicated to the staff:       CIS was a high priority and its concrete input was needed. The following sequence emerges:    Formulate and present options to the management team (costs. By the end of the first year the entire CIS was to be in place (i.

Define scope management. purchases of new data-gathering and processing equipment. it should always be remembered that all projects are ‘business change’ projects. Defining in operational terms the goal of the project becomes a rather detailed first implementation step. this experiment showed how useful a systematic project management framework can be even in relatively unstructured situations. Discussion points Discuss these with your study group before reading the outline suggested solutions: 1. that the indicators of success have to be systematically devised early on by the project team. 3.328 PERFORMING THE PROJECT READINGS P5 The project was a success insofar as the CIS became a reality. Lastly. it has to be accepted that initial formulation of the objective cannot be much more than a general direction. the project was saved by acknowledging the fundamental ‘people issues’ and addressing them as an important part of the overall solution. 2.’ The original goal was to have a competitive intelligence system (CIS) that was at least as good as the best system encountered in the private sector. the approach must devote more resources and time to what is usually termed ‘the planning phase’. Focussing on the actual software system to the detriment of how it changes the organisation will often take a project to the brink of a disaster. Furthermore. to complete the project successfully. etc. and only the work required. In most soft projects. the approach allowed for early detection and use of relevant performance indicators. This flexibility leads to a sequential approach to both goal definition and implementation. For instance. The Project Management Body of Knowledge (PMBOK) states that ‘Project scope management includes the processes required to ensure that the project includes all of the work required. When applying project management methods to organisational and strategic changes. and met the basic criteria of adapting proven private-sector techniques and exhibiting good control of costs and deadlines – by the standards of organisational changes. gained acceptance. 2. 3. Can you see any potential problems with this implementation approach? Outline solutions 1. First and foremost. It is primarily concerned with defining and controlling what is or is not to be included in the project. in this case.1 . Conclusion: the lessons 1. Discuss some of the scope management problems encountered by using one goal statement as the only guidance in this case. Projects which centre around the development/purchase and implementation of IT systems actually involve more business change not less. which was to be 2005. What do you think were the keys to project success as discussed in the case? Discuss other factors that may influence project success or failure. Those moves would have been costly and would have required very extensive (and protracted) changes and soul-searching within the newly established structures and responsibilities. the original intent of management could have been carried out by decree: change in unit and job descriptions. Luckily. Analyse the final implementation strategy used on the project. The attendant risks of low morale and of line managers dismissing the whole idea as hare-brained were very high.

 Schedule – a clear definition of each activity at each stage. selection.  Communication – gathering.1 . work breakdown structures established and activities and timescales then assigned to the most appropriate team members. 1997. 2. The specialist. processing and distributing all relevant project information to the right people at the right time. Although the individual projects appear to be sufficiently controlled and directed.  The system must be designed and perceived to allow improvements in job performance that are followed by future rewards. Chapter 4. dedicated CIS staff were kept to a minimum. Although the case does state that the CIS system requirement had been identified in a strategic orientation. It could also be argued that the informal task force nature of the project increased the feeling that this project was not important. Preferably. 3.  Troubleshooting – the ability to make the right decisions. John Wiley & Sons Inc.  Personnel – search. 60). These teams would submit a proposal to the CIS team and.INTEGRATED MANAGEMENT 329 PERFORMING THE PROJECT operational in 2 years. This informal approach appeared to be along the lines of an informal task force with no clear centralised plan or direction linking all of these individual mini-projects. if approved. and not to simply fit in with cultural structure. Setting up small project teams is a method often used in project management. milestones need to be developed (i. The key project success factors identified in the case are as follows:  Design the system in order to satisfy the needs of the lower levels. authority).  The need to have a system inspired by the best business practices. technical support and a means to evaluate these smaller projects. using the right resources when the unexpected happens. However. p. hiring and training of correct project team members. would take responsibility for running the system. One could question whether this is in fact a goal at all.  Client consultation – to obtain project acceptance and feedback.  Monitoring and feedback – control systems to ensure that adequate revision and control is carried out in each activity and at each stage. in this case there was no clear link between this goal and the final objectives of the agency. this approach appears to lack real focus and any sense of direction. short-term goals) prior to developing an action plan.e. within a clear and logical time plan. but only after clear overall project objectives have been established. A goal can be seen as a specific step that leads to the accomplishment of the organisation’s final objectives.. Using the agency 2005. the lack of central direction and unified procedures inevitably leads to confusion and a breakdown of objectives. finance. with the majority of the work being carried out by line staff using an informal team process. The government agency provided the necessary guidelines. Other critical success factors that need to be considered (as recommended by Kharbanda and Pinto in Successful Project Management. Generally. resulting in a goal that was too vague to be of use. what is not clear is exactly how this goal ties into the overall strategy of the agency.  Those responsible for the running and use of the system must need to feel ownership of the project. may include the following:  Top management support – support required to carry out implementation (resources. The implementation strategy required a competitive atmosphere in which the overall project was divided into a series of smaller projects to be carried out by small project teams.

‘Planning’ and ‘Directing a project’ are continuous processes supporting the other six. project managers and project teams. PRINCE2 speaks of ‘stages’ rather than ‘phases’ and states that while the use of stages is mandatory. process diagrams and timely ‘Hints and Tips’. It must be borne in mind that both sets of documentation must be tailored to suit the occasion.1 . scalability is a topic specifically included in the description of each process. Published with permission. bulleted checklists. their number is flexible according to the management requirements of the project. For example.com.’ The 408-page document. We have been taking an in-depth look at PRINCE2. # R. there is no link between what needs to be done and what the individual project teams are actually doing. PMBOK is not intended to tell people how to do any of the techniques or use any of the tools described. and because we are located in North America. are six ‘Components’ some of which are documents and others that are themselves processes. Project life cycle and major processes The first difference to notice is that PRINCE2 is clearly project life cycle based with six out of eight major processes running from ‘Starting up a project’ to ‘Closing a project’. Max Wideman http://www. Max Wideman. ‘PRINCE’ stands for Projects IN Controlled Environments and is described as a structured method for effective project management for all types of project. As a basis for comparison. Comparing PRINCE2â with PMBoKâ R. but the content is clearly generic common sense. The remaining two. the application of PRINCE2 must be scaled for the size and needs of the project. or to compare them as part of some selection process. 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. feeding into the system. ‘Quality Review’ and ‘Change Control’. tools-and-techniques. Somewhat similarly. Then. 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.maxwideman. how they link together and the tools and techniques that can be invoked. Indeed. Introduction From time to time we are asked to recommend project management systems and methodologies. and outputs. There are a number of interesting differences between the Guide and PRINCE2 philosophies. and the methodology sets out to remove these causes. By comparison. although the influence of that industry is very clear in the methodology. Finally. not just for information systems.330 PERFORMING THE PROJECT READINGS P5 approach. a widely recognised de facto standard used extensively by the UK government and in the private sector. It only lays out the processes. like the Guide (216 pages) is copyright. It may not be used by commercial or non-commercial organisations without permission. Each of these have their respective sub-process totaling 45 in all. The whole document is presented as an easy-to-follow narrative. PRINCE2 also differentiates between technical stages and 2005. The PRINCE2 Introduction lists a significant set of reasons why projects fail. This material is offered to individual readers freely in connection with their project work. PRINCE2 describes three techniques namely: ‘Product Based Planning’. 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).

on the other hand. Implementation (or realisation). that it has clear authority and that the work. Indeed. The chairperson of the project board. Operation and Termination but. the Project Board. The Guide.’ 2005. time and cost within which the project manager must manage. where required. ‘Directing a Project’ (i. PRINCE2 describes a product’s life span as having five phases: Conception. Technical stages are typified by a particular set of specialist skills. The Guide defines project manager simply as ‘An individual responsible for managing a project. The two may or may not coincide. the individual who directs. is actively managed. administers. .INTEGRATED MANAGEMENT 331 PERFORMING THE PROJECT management stages. This individual ensures that the project or programme maintains its business focus. For example. chaired by the ‘Executive’. of these. Feasibility. recognises that the project needs assessment or feasibility study may be the first phase of the project. 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. usually culminating in the completion of a major deliverable.’ In sharp contrast. although it also defers to other life cycles used in various industries. PRINCE2 assumes that the project is run within the context of a contract and does not include this activity within the method itself.’ The Software Engineering Institute goes further and calls it ‘The role with total business responsibility for an entire project. rather than a whole project management methodology. perhaps as separate projects in their own right. the manual states ‘Most of what in PRINCE2 terms will be stages will be divisions of ‘‘implementation’’ in the product life span. including risks. [and] is the individual ultimately responsible to the end user. The project board is chaired by a person referred to as ‘executive’ and it is this person who has the real responsibility for the project. the corporate business or program management interests are closely integrated with both project management at the project level as well as with the management of the project’s technology at the team level. . Another interesting feature is the responsibility of the project manager. The PRINCE2 project life cycle does not start with original need. The presumption in the Guide is that Project Procurement Management. solution generating and feasibility studies – these are considered as inputs to the project life cycle. controls. more often called ‘Project Director’ in North America).’ management. while management stages equate to commitment of resources and authority to spend.e. represent[s] the customer and [is] owner of the business case. Any trend beyond these limits becomes an ‘issue’ and must be brought to the attention of the project board. However. Indeed. the project manager’s level) and ‘Managing Product Delivery’ (i.’ It does not distinguish between phases and stages and in the text uses either indiscriminately. and regulates a project . it suggests that since contracting and procurement are specialist activities these can be managed separately using the methods. team-level technology management. quality.e. ‘Managing a Project’ (i. is part of the overall project management process and is viewed from the perspective of the buyer in the buyer-seller relationship. only implementation is covered by PRINCE2.1 .) In this way. The Guide defines a project phase as: ‘A collection of logically related project activities.e. Management levels and responsibilities PRINCE2 recognises four parallel levels of management: ‘Corporate or Programme Management’.’ These constraints are referred to as ‘tolerances’ and prescribe the ranges of acceptability of each of scope.

who provides the leadership on the project. Authority documentation PRINCE2 tends to be heavy on documentation.1 . the Guide does not recognise either ‘executive’ or ‘project director’ but uses the term ‘sponsor’. one can conclude that under the Guide. By comparison. while the project manager provides the managership. A project has a set of progressive governing documents in its series of processes. The Guide recognises neither business case nor project brief. in cash or in kind for the project. As PRINCE2 states. It must contain sufficient information to trigger the first ‘Starting up a Project’ (SU) process and in that process is converted into a ‘project brief ’. this sounds very much like a project director. 2005.332 PERFORMING THE PROJECT READINGS P5 Figure 1 Overview of Project Management Knowledge Areas and Project Management Processes To us. it is the project manager who is firmly in charge.’ So. this document may come from anywhere. The sponsor is one of the project’s stakeholders and is defined as ‘The individual or group within or external to the performing organisation that provides the financial resources. a sequence that we had a little difficulty in following. 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. The very first document is the ‘Project Mandate’.

It assumes that a provisional ‘Business Case’ exists. time and risk and the source of this information is the project mandate or the project brief. benefits. are in place prior to the real start of the project. although if it does not. the project plan and information from the customer.INTEGRATED MANAGEMENT 333 PERFORMING THE PROJECT Figure 2 Use of PRINCE2 components and techniques in the processes The SU process is intended to be of short duration and is designed to ensure that all the necessary players. The business case is 2005. cost.1 . and pieces. The business case justifies the undertaking of the project in terms of reasons. it is created during the SU process.

The manual states that a PSO is not essential. what the project needs to achieve).1 . acceptance criteria and any known risks. It is the base document against which the project board will assess progress. For example: Project Support Office (PSO) is conceived as a central pool of skilled resources. is the person who chairs the project board. the output of which is a ‘Project Initiation Document’ (PID). He or she ensures that a project or programme meets its objectives and delivers the projected benefits. why.334 PERFORMING THE PROJECT READINGS P5 a dynamic document that is updated throughout the project to reflect changing conditions. Executive.’ Special project management roles PRINCE2 does not define management jobs. and the ongoing viability of the project. Concurrently with the preparation of the PID. estimating. although it is ‘baselined’ during the subsequent ‘Initiating a project’ process. who. Senior User. project manager. facilitating. 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. Senior Supplier. when. team manager and so on. Unlike the business case. The output of the SU process is an ‘Initiation Stage Plan’ that ensures the required people are identified. shared. and that the information they will need is contained in a project brief. 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. procuring. also a member of the project board. In addition to the usual roles of project board. executive is the single individual with ultimate responsibility for the project. the first project stage is planned leading to the authorisation by the project board of the project’s first stage. To the above list we would add other expertise such as planning and scheduling. such as clerical.e. instead preferring to define roles. The project brief is a relatively simple document providing background. which is updated. a member of the project board. developing. divided or combined according to the project’s needs. and the how of the project. and executive as described earlier. This documentation feeds into the ‘Initiating a project’ (IP) process. configuration librarians and even PRINCE2 consultants serving a number of projects. PRINCE2 introduces a number of other distinctive roles to facilitate its methodology. the outline business case. the change management issues. but it can be useful to support managers with their administrative tasks and ensure proper use of PRINCE2 across all projects. the customer’s quality expectations. Supported by the senior user and the senior supplier. except for the background attachments such as the business case. the PID is a substantial and stable document. The Guide defines project charter as ‘A document issued by senior management that formally authorises the existence of a project. The PID is intended to define all of the questions what. functionality and ease of use. 2005. represents the interests of those designing. project definition (i. forecasting and project accounting. is responsible for the specification of the needs of all those who will use the product(s). In fact a number of other special responsibilities are suggested in the role description. that may be allocated. as noted earlier. implementing and possibly operating and maintaining the project products. And it provides the project manager with the authority to apply organisational resources to project activities. The senior supplier is accountable for the quality of products delivered by the supplier(s) and must have the authority to commit o acquire supplier resources required.

However. for which it is most useful to have detailed listings of required contents. Therefore. user and supplier. as does the Guide in its chapter ‘Project Human Resources Management’. The role is part of project support. distributing and maintaining the project’s issues records. stage and team plans. nonetheless it is not a trivial task on most projects. The configuration item record provides the required information about the status of each and every item and makes reference to the product breakdown structure. This is either provided by program management. For example: Acceptance Criteria. 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. in addition to those mentioned earlier. a deficiency) to a request for scope change. Issues may range from a question or statement of concern. the Risk Log provides a repository for the identification of all project risks. It also maintains the project’s issue log. It seems to us that this is essential information often overlooked in many projects. It includes controlling the receipt. rather than physical objects. Document description outlines PRINCE2 includes descriptions of thirty-three standard management ‘products’ that are invoked through the PRINCE2 methodology. to an off-specification (e. and that they liaise directly with the team members who are responsible for producing the project’s products. PRINCE2 does describes in detail the responsibilities of ten project management team roles that are included in its methodology. Similar to the issue log. great care must obviously be taken to ensure that the project manager’s authority on the project is not circumvented and that his or her ability to manager the project is not thereby undermined. Project assurance is a responsibility shared between the executive. the quality log and change control. Although this refers primarily to management documents and product documentation. identification. or is developed during the starting-up-a-project process.INTEGRATED MANAGEMENT 335 PERFORMING THE PROJECT Note that both these roles may each be represented by more than one person. Many of these documents are standard fare. their analysis. problems and similar events in a consistent way before their proper disposition has been determined. defines in measurable terms what must be done for the final product to be acceptable to the customer and staff who will be affected. such as various plans and reports. certain unique documents are worthy of special mention in the context of managing projects successfully. identification. PRINCE2 does not discuss the ever-popular-in-North-America subject of people management. Project Assurance covers all interests of a project. In PRINCE2 the issue log is an essential part of controlling project stages by capturing all queries. Each item can then be followed up until the required action has been taken and the item cleared. PRINCE2 requires that this service is independent of the project manager and therefore cannot be delegated there. countermeasures and status. Such issues may be raised by anyone associated by the project at any time. covering planning. [etc]. providing information on the status of all projects.1 . relevant work packages. control. storage and retrieval of all such documents. However. including business. PRINCE2 recognises risk as a 2005. as well as numbering.g. recording. senior user and senior supplier. Configuration Item Record: Configuration management is defined as the discipline that gives management precise control over its assets (including the products of a project). Configuration Librarian is a role responsible as custodian and guardian of all master copies of the project’s products.

However. or another iteration. that cover management experiences or use of specialist products and tools. Control In PRINCE2. We have some concern over this last item 2005. complete and unambiguous description of products is a tremendous aid to their successful creation. such as a machine. According to the manual. and every product must be included to capture every activity.1 . that if it is not possible to write the description. In step 3. providing a focus on the products to be delivered and their quality.336 PERFORMING THE PROJECT READINGS P5 major component to be considered during the management of a project and is factored into all of the major processes. A correctly formed product flow diagram. (2) Writing Product Descriptions. these items provide the basis for writing up a formal lessons learned report at the end of the project. Planning is discussed in the chapter Project Integration Management. these documents are not discussed in the Guide. at any level. 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. and so on that can be usefully applied to other projects. a document or a piece of software. Because of this fragmentation. the products are re-ordered into their logical sequence to form a product flow diagram. and Maintain viability against the business case. such as a culture change or a different organisational structure. PRINCE2 provides a good explanation of the technique and specifies the associated documentation to go with it. not only identifies the activities involved but also leads to a network dependency-based schedule or Gantt chart. Its purpose is to: Produce the required products. meeting the defined quality criteria. is necessary to ferret out the necessary information. Project management must control and contain risks if it is to stand a chance of being successful. then more work.’ With the exception of lessons learned. an attempt is made for ease of reference to map the Guide’s various content to the planning process. Captured during the project. A ‘product’ may be a tangible one. In the Guide. therefore. Planning and scheduling Product-based planning is a key feature of PRINCE2. Each step is described in detail and excellent examples are provided as illustration. PRINCE2 describes three steps to the PL technique: (1) Producing a Product Breakdown Structure (PBS). control of the technical work is exercised through the authorisation of work packages. coherent document that can be used to guide both project execution and a baseline against which changes will be controlled. Carry out the work according to schedule. or it may be intangible. control is all about decision making and is central to project management. of course. planning also appears in each knowledge area and must be integrated across all of them. In step 2. and the essence of which is to create a consistent. to give a logical sequence to the project’s work. We recognise this as an essential feature of the ‘Learning Organisation. The corollary is. The Lessons Learned Log is a repository of any lessons learned. and (3) Producing a Product Flow Diagram. resource and cost plans. It provides a product-based framework that can be applied to any project. planning generally is seen as part of key general management skills. both good and bad. The original PBS can become very detailed because the links between the products in the product flow diagram represent the activities required to create them. The converse is that no activity is necessary unless it contributes to the final outcome. is one of the five process groups applied to each phase and is therefore recognised as an ongoing effort throughout the life of the project. writing a clear.

The work package control is used to allocate work to individuals or teams. for example.1 . that is. That is. that is to say. ‘contingency’ and ‘change control’. and how they are related. and. which will only be invoked if a linked risk actually occurs. with a developer using construction management techniques. We believe that the Guide takes that best approach for purposes of teaching the subject content of each knowledge area. updated from time to time.e. Consequently. time and cost and identifies reporting and hand-over requirements. as we discussed under planning and scheduling. is to be found referenced in many of the other Guide chapters. 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. the issues of work coordination responsibility is much more complex. therefore be a tendency to match the business case to the current reality rather than controlling the current reality to the business case justification. where the objectives are clear and the deliverables are either well described. 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. or capable of being so. from the project owner’s perspective rather than from that of a supplier or seller. including submission. The process is described in detail starting with project issue management. Of course the corollary is also true. PRINCE2 establishes a good distinction between ‘tolerance’. In describing a project. 2005. but is not so affective when it comes to providing guidance for running a particular project. The individuals or teams report back to the project manager via checkpoint reports or other identified means such as triggers. Change Control is discussed as part of Project Integration Management. over whether a work breakdown structure should be product or activity based. There could. like planning. Nevertheless. analysis and decision making.’ The Guide is generally written from this perspective throughout. In the context of control. The manual as such does not cover the situation of multiple prime contracts (i.INTEGRATED MANAGEMENT 337 PERFORMING THE PROJECT because the business case is a ‘dynamic’ document. which comes first. Contingency. they really serve different purposes and are therefore not directly comparable. it is difficult to do justice to each knowledge area. PRINCE2 provides a robust easy-to-follow methodology for running most projects. the manual has been written on the assumption that the project will be run for a customer with a single (prime) supplier involved throughout. Indeed. is a plan including the time and money set aside to carry out the plan. This has a bearing on both the organisation and the details of control. For example. In the Guide. and by updating the quality log. Summary PRINCE2 and the Guide take very different approaches to the presentation of their material. in PRINCE2 terms. In our view. trade contracts) directly under the control of an owner as is the case. Change control is a procedure designed to ensure that the processing of all project issues is controlled. the Guide covers more ground than does PRINCE2. The implication is that PRINCE2 is in the hands of the supplier rather than the sponsoring organisation. PRINCE2’s approach is a single unified methodology starting from developing the initial product breakdown structure through to identifying the corresponding network schedule. this straight forward and well-explained proposition should clearly lay to rest the controversies that we have seen in North America. While PRINCE2 is designed for a variety of customer/supplier situations. It includes controls on quality. within its self-prescribed limitations. In such cases. also like planning. In a life-cycle-based presentation like PRINCE2.

The whole can then be assembled into a formal project brief or project charter and presented to management for approval of a major commitment of cash and resources. the reaction to it may still be negative and the project seen as a failure. We use the term ‘delicacy’ advisedly. At the same time.com 2005. The product resulting from the project may be excellent and fully up to specification. Indeed. In this phase the project’s concept is developed by studying and testing alternatives and conducting feasibility studies. Max Wideman is a retired canadian professional engineer and project manager with experience in systems. is the opportunity to assemble the owning orgnaisation’s needs that could be potential projects. the Engineering institute if Canada. both the front and back ends of the project are fruitful territories for academic research and improved best practices: the front end for better project identification and selection. and for whom he developed the 1987 version of the Project mangement Body Knowledge. Considering that it is in the conception and definition phases that the most critical project decisions are made. because this part of the project is often fraught with political overtones. After all. He also enjoys Fellow status in the institution of Civil Engineers (UK). and analyse and select the best opportunity for serious study. custody and control of the customer or user. and time and cost tolerances. Program and Portfolio Integration. and the back end for better communication and training in the use of the project’s product. chapters. Comprehensive coverage of project mangement theory and practice can be found on his web site at http://www. there is room for improvement in both documents for dealing with the final phase of a project in which the product(s) are transferred into the care. the project then moves into its second major phase. He has lectures or presented papers in 11 countries and has contributed books. social and environmental projects. perhaps sponsors would be more willing to set aside the necessary funding to ensure higher chances of project success. His latest book is A Management Framework for Project. ‘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. Our strong preference is for the generic project example to start with a ‘conception’ phase. He is a Fellow of Project Management Institute.’ While on the subect of project life cycle. It should result in a viable business case as the stage-gate meassure. 2004. Such a life cycle design represents a simple straight forward progression with only two major project documents as stage-gate controls. If these aspects were properly recognised and documented in standard methodologies. as well as design and engineering projects.338 PERFORMING THE PROJECT READINGS P5 It seems to us that both PRINCE2 and the Guide have chicken-and-egg problems in the area of documentation for project initiation. This is the time to articulate that best opportunity in terms of big picture. vision and benefit. an implementation plan can be formulated that covers the project’s scope and quality grade. short or long. as PRINCE2 observes. it is surprising that more focus is not given to this part of the project life cycle by both the Guide and PRINCE2.maxwideman. This phase. With the products defined. who wants to change the way they do things anyway? Clearly. and the Canadian Society of Civil Engineering. BC. the intended products are defined as far as possible through the necessary customer/user input. Trafford.1 . of which he is past president and chairman. papers and articles on many project management topics. Following approval of the business case. but if the final transfer is not handled with appropriate delicacy.

proposed by Kerzner. the first four levels are. common processes. for what does the acronym PRINCE stand? Question 1. . common knowledge. complete the following sentence: The primary benefit derived from the post-completion audit is. the project budget.1 .or under-expenditure identified? (A) (B) (C) (D) Feasibility study Planning Implementation Post-completion audit Question 1.2 In the project management methodology PRINCE 2. singular methodology and benchmarking.5 In less than ten words. the project initiation document.1 At which stage in a project is the actual cost of the project compared with the budgeted expenditure and the reasons for over.4 In the PRINCE 2 methodology. 339 2005. and the project plan are all examples of (A) (B) (C) (D) progress reports management products work packages customer requirements Question 1.Revision Questions 8 Section A type questions Question 1.3 In the Project Management Maturity Model (PMMM). . What is level five? Question 1.

and to clearly state what planning involves. and this question requires you to clearly explain why this is so. (3 marks) (7 marks) (Total marks = 10) Question 3 Once a project is under way.340 PERFORMING THE PROJECT REVISION QUESTIONS P5 Section B type questions Question 2 Project planning is a critical stage of the project management process. and therefore it is important to have the basic knowledge of project planning stages. etc. This project. In an exam question. This question is designed to ensure that you understand the importance of control and how it is undertaken. Today On arriving at work this morning you received a message from Jane Bell (the regional general manager responsible for the new store) informing you that the project manager of 2005. (7 marks) (Total marks = 10) Section C type question Question 4 Trend plc is a large fashion retail chain. you could be asked to put together a project plan for a given scenario. and the services (gas. These are coordinated by head office through six regional general managers who take full responsibility for the performance of the stores in their region. Requirements (i) Explain why it is important to control a project once it is under way. water. The building is now undergoing its ‘fit-out’ stage. has been in progress for nine months and is nearing completion. control of the project tasks and activities is critical. (3 marks) (ii) Briefly explain how control is carried out.) installed on time. mostly in prime high street locations. (ii) Describe the steps involved in a detailed planning process. It currently has 48 stores throughout the country.1 . All the major structural work has been completed to schedule. Requirements (i) Explain why project planning is vital to project management. where the interior is installed. electricity. with a total budget in excess of US$8 million. Project planning is considered to be one of the most important stages of the project management process. You are currently employed by Trend as project finance manager on a major capital investment – the full refurbishment of a newly acquired city centre store.

This situation obviously provides you with a challenging opportunity. Other than occasional conversations when she visited the site. (10 marks) (b) Explain how such controls could be used in this and future projects. you have managed to establish the circumstances leading to the unexpected departure of the project manager. At some point during the meeting Jane appears to have become angry with the subcontractor and the project manager. Jane pointed out that this situation would delay the opening of the store. PRINCE2). Jane. Jane apparently disagreed. The subcontractor has refused to do further work until Jane apologises. Requirements (a) Describe the main controls used in formal approaches to project management (e. the head of quality assurance at Trend’s head office. Shortly afterwards the project manager resigned and left the site. Jane has called a ‘crisis meeting’ for tomorrow with the managing director and finance director of Trend.INTEGRATED MANAGEMENT 341 PERFORMING THE PROJECT the refurbishment project has resigned. as all her department’s time is taken up with designing and implementing control procedures for the retail activities of the organisation. (15 marks) (Total marks = 25) 2005. which she wants you to attend.g. the site manager of the elevator supplier apparently mentioned that the installation was running late by three weeks. not Jane’s. Apparently there was a very heated meeting between the project manager. and you expect to gain valuable experience from it. this has been her only contact with the project manager. and the subcontract supplier of the goods elevator which is being installed to carry stock from the basement stockroom to the retail floors. and that opening would not be delayed. and that the project manager and subcontractor were trying to hide the delay from her. Jane asked you to deputise as project manager until a replacement could be recruited. and has received only three written progress reports during the last nine months.1 . Anne is surprised to hear about the problem with your project. Jane says she has been ‘left in the dark’ by the project manager and ‘doesn’t like surprises’. but is unable to offer any help as she and her staff have little experience of managing major projects. Apparently Jane had always experienced problems in persuading the project manager to discuss progress. Anne says that she is sure that other project managers would appreciate a set of procedures to improve the project management process. with disastrous cash flow impact. Talking to colleagues. You then call Anne Martensen. She tells you that there are no standard procedures for the control of capital projects. The project manager also suggested that the delay was ‘a minor detail’. At the meeting. The project manager apparently claimed (rather forcefully) that it was his responsibility to manage the project. Jane feels that she should have been informed about the possible delay at the earliest opportunity.

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1 . so if there are signs of projects going out of control. . Projects often go wrong at this early stage of the project life-cycle. you may be able to explain these causes by analysing the planning stage. Part (ii) of this 343 2005. . to augment the organisation’s experience and knowledge.5 .1 (D) Solution 1.3 Continuous improvement Solution 1.Solutions to Revision Questions 8 Section A solutions Solution 1.2 PRojects IN Controlled Environments Solution 1.4 (B) Solution 1. Section B solutions Solution 2 Guidance and common problems As stated in the question. planning is a key aspect of the project management process and students need to analyse the scenario data provided in the exam to ascertain the planning procedures undertaken by the scenario organisation.

it is important to keep an up-to-date record of which activities have begun. which can be used to put together a sound project plan. Solution 3 Guidance and common problems (i) and (ii) 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.e. during this monitoring process. It is important to lay out a ‘road map’ that clearly shows how the project activities and tasks will be accomplished. To gain full marks you would be expected to give some detail for each category. it is behind schedule or is over budget) then the project manager must 2005. If. (ii) Detailed planning involves the following stages:  Obtaining project authorisation  Time plan  Resources plan including staffing  Contingency plan  Quality plan  Cost plan  Communication plan  Audit plan. it is also important to record the actual costs of each activity. it is found that the project is not progressing as planned (i. Control involves measuring actual results and progress versus the planned progress. From these can be developed:  Work packages  Estimates of time and cost  Graphic illustrations of the schedule: Gantt charts. which are completed. Getting from A to B (the start of the project to final successful completion) is most likely to be achieved if all of the stages and tasks between A and B are broken down and planned carefully before beginning the project.344 PERFORMING THE PROJECT SOLUTIONS TO REVISION QUESTIONS P5 question should give you a clear structure. The risk of project failure is much greater without project planning. excluding any sensitive information that would only be given to senior management.  Risk analysis and plans  Project schedule and the budget  Change management  Acceptance process  Post-project implementation audit. and at what time they started or were completed.1 . (i) Planning is a vital part of any project. Attempting to begin a project without a plan would be like trying to assemble a set of cabinets without first reading the instructions. or trying to drive from Glasgow to Southampton without first reading a map. within budget and to schedule. In order to measure actual project progress. Then the plan is issued to all major stakeholders. etc.

For example.  In PRINCE2 there are a series of ‘management products’ associated with the management and control of the project. Similarly. It will depend very much upon the customer’s final project needs as to which elements of the project will be forgone or reduced to achieve the project target. The control responsibilities of the various parties are outlined below. 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.  PRINCE2 contains many quality controls such as clearly defined technical and management procedures. reducing project costs to get the project back on budget may require the reduction of quality in materials or functionality of the technology. the project plan. as a minimum. the project initiation document. Changes to the project scope. These change decisions may involve a trade-off of time. These ensure that all the participants in the project have a clear understanding of the tasks to be completed and the relationships between them. I would suggest that. This approval would be in overview only.1 . they must be incorporated into a revised project plan that must then be distributed to the team members and customer. schedule or budget must first be agreed by the project team and the customer.  The Trend organisation (in the form of its directors) is responsible for project selection and the overall approval of the project plan and budget. as the detailed breakdown of both plan and budget are operational issues. 2005. The organisation should provide a clear set of objectives and constraints to the project. Once changes are made to the budget or schedule.  The PRINCE2 methodology includes various different types of plans.  Each project should have a formal organisation structure. Section C solution Solution 4 (a) Types of control. (b) Control framework. the quality plan and various checkpoint and progress reports. cost or scope. for example. If we take as our basis for discussion that a control is any mechanism designed to ensure that a project achieves its objectives. the following aspects of project management should be covered by control procedures. These include. These ensure that work is completed not just on time but also at an appropriate level of quality. the project budget.  The organisation structure of the project team under PRINCE2 enforces a clear structure of authority and responsibility on the participants. then the PRINCE2 methodology (as do others) contains a wide number of control elements. The structure of supervision and reporting (see below) seeks to ensure that each party has clear objectives and that they are supported from both above and below in achieving those objectives.INTEGRATED MANAGEMENT 345 PERFORMING THE PROJECT instigate some form of corrective action. or it may involve reducing the scope of the project by not carrying out a particular part of the project. 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. Decisions must then be made as to how to revise the schedule or budget.

A series of review meetings (weekly) will take place between project manager and sponsor.1 . and the representatives of subcontractors. At the end of the project. This will take the form of daily briefings. and provides advice and support downwards. including a project overview using SWOT analysis and a report of progress against plan using a Gantt chart. The project manager is responsible for the day-to-day management of the project team and subcontractors. The project sponsor agrees the detailed plan and budget with the project manager. Their suggestions for the improvement of future projects will be recorded and circulated widely throughout the organisation. and these will be supported by periodic progress reports (monthly). in a complex project. supported by weekly or monthly written progress reports. Copies of all project documentation and reports will be kept in a well-referenced filing system. Any variations to the project must be recorded and agreed with the sponsor. The members of the project team. an independent quality assurance inspector will carry out a full post-completion audit of the project.346 PERFORMING THE PROJECT SOLUTIONS TO REVISION QUESTIONS P5      The project sponsor (or. All participants will be briefed on the findings of the audit and encouraged to discuss the issues that arise. and any issues or slippages reported upwards. He/she will communicate objectives and monitor performance against the plan and budget. The sponsor also reports progress and issues on a periodic basis (perhaps quarterly) to the organisation. 2005. the steering committee) is responsible for ensuring that project objectives are achieved. will report to the project manager on a frequent basis. This will allow any of the project participants to check what has been agreed. This will allow the participants in other projects to learn and improve.

1 A project planning and control model (Maylor. 9. 1996).Project Management Tools 9 L EARNING O UTCOME After completing this chapter you should be able to: " distinguish the key tools and techniques that would need to be applied in the project process. The plan will also become the benchmark against which the progress of the project will be compared.1 .1 Introduction This chapter demonstrates the tools and techniques used by project managers in planning and controlling the activities to achieve the project objective. # Pearson Education Limited. including the evaluation of proposals. Planning is the first step in achieving the objective.1 (Maylor. A project planning and control model is given in Figure 9. 1996). The comparison against plan and any subsequent corrective action is the control element of the project management process. reprinted by permission 347 2005. The plan will be the statement of intended timing of project activities and the basis for estimating the resource requirements. Figure 9.

348 PROJECT MANAGEMENT TOOLS STUDY MATERIAL P5 9. By converting complex projects and their constituent tasks into a graphical and therefore more understandable picture.1 Benefits of planning methods       Breaks complex tasks into manageable pieces. Provides a logical framework for making decisions.2 Communication of project planning Because of the complexity of tasks involved in many projects. Provides an input into subsequent project processes. The work breakdown structure (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. communication of responsibility for those tasks is often facilitated by means of graphical planning techniques. The following sections will introduce a number of these planning techniques used by project managers. such as estimating time and resources. We begin by looking at Gantt charts. one of the most important stages of project management is the definition of the project objective and the breakdown of work into a comprehensive list of activities.2. Sets out the logical sequence of project events. a pioneer of scientific work study.2. 9.3 Gantt charts 2005. Provides a framework for continuous assessment of the project progression. 9. named after Henry Gantt. 9.2 The planning process As already discussed in Chapter 7.1 . Provides a communication tool. the project manager can more easily communicate the project activities to the project team and the project sponsors.

To calculate the start and finish times of each activity on a Gantt chart. i. It is the latest time at which all previous activities must have been completed to prevent the whole project being delayed. as discussed below.1 . Latest event time (LET). Arrows can be added to show the interrelationship between different activities.4 Network analysis This is likely to be examined quite frequently. Gantt charts are a simple representation of a project from the view of the time taken for each activity and the resources required for each activity at any point in time. However. .e. and the project as a whole. B. . 9. This is the earliest time at which any subsequent activity can start. being easy to understand and providing a compact overview of responsibilities and progress on the project. The main aim of network analysis (critical path analysis) is to analyse activities that occur in parallel. for 2005. beginning with some definitions. Some activities are dependent on others. this will be determined by the time taken by preceding activities. the main advantage of Gantt charts is that they are a useful communication tool. We shall now consider the main elements of constructing a critical path analysis. and slack time shown on each activity. This occurs at the same time or later than the EET. a further technique known as network analysis (or critical path analysis. H. One of the key features of critical path analysis is the identification of activities that are critical. Consider a project comprising eight activities. CPA) must be used. in order to identify start and finish times for each activity. activities where any delay will lead to a delay in the project overall. Critical path analysis can also be used as an aid to allocating resources by identifying those activities that are critical and therefore require additional resources to ensure they are completed on time. . Gantt charts can be produced separately for each person to show their total workload. labelled A.. Each activity in the network is designated by a symbol of the following type:   Earliest event time (EET).INTEGRATED MANAGEMENT 349 PROJECT MANAGEMENT TOOLS This is likely to be examined quite frequently. They are often used to monitor actual progress against plan on a week-by-week or possibly day-byday basis. We illustrate these definitions by looking now at a simple example.

the completion of Activity A) + (Duration of Activity B) ¼5þ4 ¼9 The EETs for the completion of Activities C and D are calculated in exactly the same way. the table below indicates that Activity B cannot begin until Activity A is complete. and similarly Activity H cannot begin until Activities. The network is then constructed by building the activities from left to right.1 Calculation of the EET The EET for Event 3 (i. The first complication occurs at Event 6. In this case.350 PROJECT MANAGEMENT TOOLS STUDY MATERIAL P5 example. 9. the EET is calculated. F. the completion of Activity B) is: ¼ (EET at Event 2.e. F and G are completed. First. E.e. there are three possible EETs: EET at Event 3 + Activity E ¼ 9 þ 5 ¼ 14 EET at Event 4 + Activity F ¼ 10 þ 6 ¼ 16 EET at Event 5 + Activity G ¼ 8 þ 7 ¼ 15 2005. the start of Activity H. which cannot begin until E.4. the start of Activity A). F and G are all complete. i.1 . making sure that activities follow only after any preceding activities have been completed. that is. G Expected time taken 5 4 5 3 5 6 7 7 The first event is assumed to start at time 0 (i. Activity A B C D E F G H Preceding activity – A A A B C D E.e.

as indicated on the network diagram. H cannot start until all of E. The EET for the last event (i. the completion of Activity H) is the earliest time that the project can be completed. and the LET is calculated as follows: LET at 6 ¼ (LET at Event 7) À (Activity H duration) ¼ 23 À 7 ¼ 16 The same calculations can be carried out for events 3. For the worked example above this would be 23 days. has an EET of 16. A complication arises when trying to establish the LET for Event 2 as there are three possible LETs: LET at Event 3 À Activity B duration ¼ 11 À 4 ¼ 7 LET at Event 4 À Activity C duration ¼ 10 À 5 ¼ 5 LET at Event 5 À Activity D duration ¼ 9 À 3 ¼ 6 2005. 9.e. the start of Activity H. Moving from right to left. F and G are fully complete). the next event is number 6 (the start of Activity H). The LET of the final event is always the same at the EET (assuming that the project is to be completed in the shortest possible time). 4 and 5: LET at Event 3 ¼ 16 À 5 ¼ 11 LET at Event 4 ¼ 16 À 6 ¼ 10 LET at Event 5 ¼ 16 À 7 ¼ 9 Note that for Events 3 and 5 the EET and LET are different. The earliest time that this project can be completed is 16 days + 7 days for Activity H = 23 days. given the duration of the preceding events. This will be explained later. Therefore Event 6.INTEGRATED MANAGEMENT 351 PROJECT MANAGEMENT TOOLS In this instance.2 Calculation of the LET The calculation of the LET begins at the right-hand side of the network diagram.4. the earliest time that all preceding activities will have been completed is 16 days (i.1 .e.

4. slack may occur.5 An alternative method for constructing network diagrams: activity on node This method is based on project software such as Microsoft Project. and at this point it is now possible to identify the critical path. 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. Activity E has an earliest start date of day 9. Activity flows from left to right as for the activity on arrow diagrams you have previously studied. This is the sequence of activities that begin and end in events where the EET = LET. the LET will be 5. but if activities do not occur on the critical path. Obviously the critical path has no slack (because activities on the critical path.1 .3 Slack or float This can be calculated by taking the difference between LET and EET. This is shown on the diagram by the bold lines. 9. have EET = LET).352 PROJECT MANAGEMENT TOOLS STUDY MATERIAL P5 In this case. 9. there are 2 days of slack. For example. the critical path is Activity A – C – F – H = 23 days. if it occurs later than this the whole network will be delayed. Above is the completed network diagram. This can be input into the network diagram at Event 2. by definition. Each node is subdivided in the following way: 2005. In this case. Each activity is shown in a rectangular box or node. that is.

To calculate the latest start time (LST): this is worked out right to left.1 Activity A B C D E F G H ID number* 1037 1038 1039 1040 1041 1042 1043 1044 Preceding activity – – A B B E C. Similarly G: total duration is 17 weeksÀ4: the latest start time for G is 13 weeks. working backwards throughout the diagram until all boxes are completed. Proceed through the whole diagram from left to right. Start with the final duration figure and subtract the next duration figure from it. the duration of the previous activity needs to be deducted from the latest start time at the following activity. Once you have worked out the first logical precedence. For example. To calculate the latest start times from right to left to identify the critical path.1 . you can then calculate the duration of the various paths: ACG ¼ 5 þ 2 þ 4 ¼ 11 weeks BDG ¼ 4 þ 1 þ 4 ¼ 9 weeks BEFH ¼ 4 þ 5 þ 5 þ 3 ¼ 17 weeks These durations will be the starting points for working out your backwards pass to calculate your latest start times. take the lower figure. take the higher figure. Should there be two previous activities (working backwards remember).INTEGRATED MANAGEMENT 353 PROJECT MANAGEMENT TOOLS To calculate the earliest start time (EST): look at the box for the preceding activity and add the bottom left figure to the top right figure. Exercise 9. completing all the EST boxes. So H. Should there be two preceding activities. final duration 17 weeksÀ3 weeks’ duration means the latest possible start time for this activity is 14 weeks. D F Duration in weeks 5 4 2 1 5 5 4 3 *The ID number would come from the computerised listing of activities. the latest start time for activity C is given by: (Activity C duration) À (Latest start at Event G) ¼ Latest start at C 2 À 13 ¼ 11 2005.

1 PM software functions The following is a list of functions that would commonly be found within a standard project management software package. A pessimistic estimate (p) – the duration it would take if a number of things went wrong. A probable estimate (denoted by the letter m) – the duration it would take if conditions were normal. The expected duration is then calculated (using expected values) and the network drawn. To overcome this uncertainty PERT uses three time estimates for each activity in the network:    An optimistic estimate (denoted by the letter o) – the duration it would take if conditions were ideal.7 Project management (PM) software It is clear that many project management techniques are complicated and involve large amounts of constantly changing data. work-scheduling facilities. The degree of risk in each activity can be estimated using standard deviations. therefore.9. with features such as easy access to graphical user interface. in order to reduce the risk of overrun. 2005. This would allow calculation of any necessary contingency to be added to the plan. to learn that all of these techniques can now be carried out quickly and effectively using project management software applications. 9. 9. or for the whole project.1 . Network analysis is often complicated by uncertainty of events so that a single time given for an event is likely to have a degree of error.354 PROJECT MANAGEMENT TOOLS STUDY MATERIAL P5 As you can see from the precedence diagram below. It is not surprising. numerous PC-based PM software packages exist. actual costs can be compared with budgeted costs for individual resources or activities. Today. resource management and project progress monitoring and control. planning activities.6 Project evaluation and review technique (PERT) The issues of risk and uncertainty in project management were covered in Section 7.7. You should re-read that section now. ability to view relationships among tasks and other projects. or as expected. 9. such as Microsoft Project:  Budgeting and cost control. At any time during the project. the critical path is BEFH.

Graphics. Particularly in large projects. Most systems will build Gantt charts and network diagrams based on the task and resource list and all of their associated information. budget reports. Resource histograms. The ability to create and modify graphics. These provide the project manager with a visual display showing the usage and availability of resources over the project’s life. A critical issue in project planning is resource management. PM software provides the facility to generate standard reports. Planning. individual task or WBS reports and financial reports. It will allow the tasks in Gantt charts to be linked so that preceding activities can be shown. 9. PM software has inbuilt error checks and automatic calculation facilities. Multiple project handling. to set priorities for tasks. setting start and completion dates and calculating expected time to complete. All PM software allows the user to define the activities that need to be performed. 2005. Resource planning. that is.INTEGRATED MANAGEMENT   355 PROJECT MANAGEMENT TOOLS      Calendars. Any changes to those lists will automatically create a new schedule for the project. by allocating resources. Scheduling. An example of a resource histogram is shown below: 5 Number of technicians required 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Week Number 29 30 4 H O L I D A Y H O L I D A Y Maximum  Reporting. ensuring the project has the correct level of manpower.2 Advantages of using PM software  Accuracy. manually drawing network diagrams can be prone to error. 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. and to specify ‘must end by’ and ‘no later than’ dates. equipment and material at the right place at the right time and in the right quantities. It will maintain detailed task lists and create critical path analyses.7. Most PM software packages will store numerous projects quite easily. is a useful feature of PM software. allocation of resources reports. Large projects often have to be broken down into smaller projects to make them more manageable. Alternatively. to schedule tasks to start as late as possible. such as Gantt charts. 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. It will allow the project manager to plan several thousand activities. such as progress to date. project managers may be responsible for more than one project at a time. Calendars can be used for reporting purposes and to define working periods. The project manager has to report on the progress of the project to the stakeholders. It is also possible to schedule recurring tasks.1 .

The software allows the user to see the effect of different scenarios by altering elements of the project data. 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. based on the estimator’s experience or inexperience (or even mood) and subject to company politics (e. It is important to realise that PM software is a tool and can be used wisely or unwisely. Ability to handle complexity. In a large project. Estimates. For planning purposes. 2005.3 PM software pitfalls Despite the extensive use of project management software.7. Typically. which for businesses is an affordable investment. Needless to say. In order to ease the project manager’s burden of recording the actual effort and revised estimates to complete a task. 9.g. 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. Skill levels. a comprehensive plan built on incorrect estimates may look impressive but is fatally flawed: garbage in. Most PC-based software costs between £200 and £400. Where one individual may find a task within his/her skillset. Human beings are not interchangeable items like nails or screws. estimates can vary wildly. garbage out. For large. They are subjective. This enables the project manager to plan for contingencies and to assess consequences. complex projects. Also estimates have been made at a fixed point in time with a particular set of assumptions. it is often better for project managers to delegate the input/maintenance responsibility to a project administrator and receive regular reports as a basis for managing the project. This leaves little time for issue-management and man-management. 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. ‘What if ’ analysis. A task that was thought simple can prove anything but. Windows-based packages with graphical user interfaces make the use of PM software easy and quick. the accuracy of estimates is vital to the identification of the critical path and the key milestones of the project. Here are some common pitfalls:     Emphasis on maintaining the plan rather than managing the project. the paying customer does not want to hear bad news). a number of PM software packages allow this data to be captured from individual team members. This especially applies when tasks are over-budget. 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). Ease of use.356 PROJECT MANAGEMENT TOOLS STUDY MATERIAL P5       Affordability. Costs of maintaining the data need to be added to this. It is important to manage resources realistically. project team members will capture the time already spent and the time expected to complete a task on a timesheet. Hence. projects can still go spectacularly wrong – over schedule and over budget. A 3-day training course is usually needed. maintaining the detail estimates against actuals of a plan can be a full-time task. Plans tend to talk about resources when actually they are referring to human beings with all the uncertainty that that brings.1 . However. PM software is indispensable in managing and controlling large volumes of activities. Speed. Mythical man-month. Timesheet recording.

The key points to remember are:   the common techniques used by project managers – Gantt charts. reporting and scheduling.INTEGRATED MANAGEMENT 357 PROJECT MANAGEMENT TOOLS  another person may struggle. Quite often real-world tasks merge into several tasks. which may contain facilities such as planning.1 . critical path analysis (CPA) and project evaluation and review technique (PERT). People see additional required tasks while they are working and tackle them simultaneously. the use of PM software. H.g. Reference Maylor. A project manager must be aware of the effect that the departure of a key person would have on the plan. e. A static plan (with PM software) cannot keep up with all these changes. 9. Some plans fail because the work breakdown into tasks does not match how people work. 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. people have careers and home-lives and can leave a project. If the most competent person has given all the task estimates then it is unlikely that the overall schedule reflects the true performance capacity of the team. 2005. Further. making tea may mean making coffee while the kettle has boiled etc. Project Management.8 Summary This chapter has looked at tools used in planning and controlling projects. budgeting. Work breakdown. Work breakdown assumes discrete units of work that someone will spend a fixed amount of time on before moving to the next task. It matters which person does which task. Pearson Education. (1996).

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is a huge component of any project management environment. etc. Virtually all of the scheduling software on the market today is based on a type of calculation designed about 50 years ago and honed over the years by various project management practitioners. Computing Canada. Still.Readings 9 The relevance of project planning techniques to the modern project environment The following article critically assesses the relevance of PM scheduling techniques. Toronto. It’s true that these products are in the project management category but it’s a little unfair to consider the functionality they deliver to be a complete answer to all project management issues. The author challenges the practical use of project software based upon techniques that were designed over 50 years ago. I won’t bore you with the textbook details but suffice it to say that the purpose of CPM is to determine the shortest period possible for the project to be completed in. however. 1998. for example. Ontario. The products (including one from Microsoft itself) were short-lived and we’ve not seen their like since. ITBusiness Group. as is team management. Recently. time-constrained project environment of today. # Computing Canada.1 . After all. Contract management. let’s get a basic definition sorted out. There is also a range of other algorithms which could be considered but this is the predominant calculation used for all major scheduling tools on the market today. A couple of years ago there was a brief flurry of product announcements of new software systems which would seamlessly (don’t you love that word?) marry the functionality of traditional project management systems with every employee’s to-do-list. in particular those used in PM software. It’s called the Critical Path Method or CPM for short. client meetings and so on. When people refer to ‘project management systems’ they are typically referring to project scheduling systems such as Microsoft Project. and which may not be completely relevant in the fast-moving. Critical path not so critical? Chris Vandersluis. Primavera. 359 2005. there are many other elements to project management than just the schedule. I’ve noticed a number of requests for such functionality returning and thought it might be worthwhile to take a moment to give the idea of such systems a reality check. Transcontinental Media. First of all. it’s not too harmful to call it project management software. the first software ever delivered for project managers was scheduling software and so long as we keep straight what it can and can’t do. communications.

descriptions. yet that is essentially what a scheduling system does when it does resource scheduling. in his or her head. thinking you’ve just invented the human factor algorithm and if I just knew about it. It’s an insidious issue though. so what does this have to do with the price of eggs? Only this: these algorithms were designed for mega-projects years ago when the notion of a project was hundreds or more likely thousands of workers in a few identifiable categories working on thousands of tasks over the years of a project. The reason that no one puts it into your agenda is that the likelihood of that task actually happening on that day two years from now is extremely low. This only becomes a problem when we take the results of a complicated analysis and try to marry it with an action-item system. 2005. Why is this a problem? Two reasons: first. When we take the results from a scheduling system and try to use them to determine tomorrow’s to-do list. because the data sure looks the same between both types of systems. in the end scheduling software is designed to perform and display the results of a calculation. resource requirements.360 PROJECT MANAGEMENT TOOLS READINGS P5 Combined with the Critical Path calculation is usually some kind of resource levelling calculation which identifies where you may be short of resources or what the schedule impact would be of not hiring additional resources. Put up your hand if you worked on something today that wasn’t on your to-do list when you started today. The data just don’t belong together. everything would be fine. If you’re reading this. Managing your to-do list in your Daytimer is now mandatory to get through your day. The era of the mega-project if not gone is in hiding. We can match due dates. but the amount of disposable time available to everyone is much less than in times gone by.1 . hold that thought. For example. See a lot of hands in the air? Me too. Not only that. A much more significant factor is something I call ‘level of resolution’. Even when we take a one-week perspective your agenda won’t hold up. then move back to project 1 and finish off some testing. the world has changed and is changing faster and faster as time goes on. But a supervisor may elect to have Mary finish project 1 in its entirety because the dynamics of pulling her off the project team prematurely may upset everyone on the team. A scheduling system has a perspective of weeks or months or even years in creating the schedule. Don’t think so? Let’s take a show of hands. The problem is level of resolution. This is fine if you accept the software for what it is. no matter how user-friendly the next version of Microsoft Project or any other vendor. This kind of human element is impossible to design into an algorithm but may be perfectly obvious to everyone involved. it pegs existing project management software into one category: analysis. No matter which way you turn. Project management is no longer the purview of only the large defence/aerospace or huge construction organisation. take your results and then go off to make your own decisions. There are even textbooks of the era that suggest that the minimum duration of a task should be measured in weeks or months rather than days or hours. it may make perfect sense to a scheduling system that in a given week Mary should do the analysis of project 1. Look around. almost everything together. Now everyone would like to do it. You may be seeing the problem by now. we skip the ‘eyeball’ analysis which comes from every supervisor who. OK. Projects are typically much shorter. then move to project 2 and work on documentation there. analyses a thousand minute variables before tasking employees with a particular piece of work. Secondly. Can you imagine filling in your agenda for a task to do two years from now? It would seem nonsensical.

Do you think that the author is correct? Put forward suggestions to support project management scheduling software. It started in the ’50s and lasted until the end of the ’80s. 14(1): 26. the placing of a man on the moon. It was the era of the megaproject. access a PM software package (such as Microsoft Project). Until then there is a lesson to be learned here which is universal.org/content/trane. finish on time. Time was the only constraint: the pressure to finish early. Available on-line at: http:// knowledge.pmi. and I mean lots! Resources were basically unlimited. Can you see any limitations to using PM software? Has CPM Had Its Day? Chris Vandersluis. and those resources were expected to work across multiple years to accomplish their tasks. it was the ‘Space Race. this time there’s not one to be had. you’ve got to do more than map the common fields in the separate databases.htm Many of us remember what it was like: aerospace and defense were spending money on a scale never before seen in peacetime. January. 28. and the birth of the modern computer. not to be late drove everything. Perhaps then we’ll see systems which can move into the level of daily to-do list from the level of project without incident. If you were in aerospace. Project management has been around for as long as there have been projects – the Pharaohs obviously used some kind of project management in creating the pyramids.1 . But never before in the history of the world have so many great projects occurred simultaneously. If you can. It saw power projects that harnessed rivers and atoms.’ If you were building infrastructure to accommodate the new world.INTEGRATED MANAGEMENT 361 PROJECT MANAGEMENT TOOLS Still waiting for the magic solution? Sorry.’ If you were in defense. move on beyond the Critical Path Methodology calculation to something which is designed for today’s kind of projects. History will record the birth of the ‘discipline of project management’ in the middle of the last century – circa 1950. at the very least. there were lots of activities. It started with a postwar world and saw us through the Cold War. Discussion points Discuss with your study group the following issues: 1. and for project management as a discipline it was a time of coming of age. it was the ‘Arms Race.’ If you were in defense. 2. Analyse the features and functions that you think are useful to the project planning process. it was about finishing fast enough to just keep up with demand. construction and infrastructure projects were beyond comprehension in their scope and vision. First of all. I believe that we’ll see a new paradigm of project management systems in the next couple of years which take a view other than just algorithmic or. You’ve got to look at the data in its own context and see if it fits. 2000. PM Network. 2005. The Birth of Critical Path Methodology Those of us who were able to work on some of those megaprojects can remember how they were organised. If you are looking to integrate systems together. Explain why the planning techniques developed several decades ago may no longer be relevant to today’s project environment. it was the ‘Arms Race.

Even when ‘online’ systems became available. and for the most part. we could look at a project and know just what tasks we had to focus on in order to avoid delaying the project. shorter run times. Yet. It is a function of today’s economy. The earliest systems on mainframes and minicomputers were originally loaded with punch cards. but there was nothing like that in the thinking of the time. No one much cared how the megaproject had originally been planned. one of the first business applications to appear in each new iteration has been a project management system. while those products have advanced with the times. In fact. we can still see traces of their original design. (Can anyone say ‘Primavision’ ?) These days we talk about resource calendars and split activities. There were variants and innovative displays.S. easy-to-use systems of today. as an add-on. We learned about forward and backward passes and early versus late dates. And. Gantt had his bar chart. Yes. for those of us who remember the first versions. but what we all knew we meant was that these were CPM scheduling systems. 2005. all that counted was when it would be finished. Welcome to a New World The world that project managers face today is a far cry from that of the ’50s through ’80s. the changes we’ve seen over the years in that software have been an evolving theme rather than a rethinking for the times. but that’s when the software we see today had its start. Today’s MTV generation lives in a world where 10-year-long projects are remarkable exceptions. It is a world ruled by time to market. it seems obvious. Remember that resources on a megaproject were considered essentially unlimited. In fact. I remember that the first system I worked with had eight calendars – whatever would I do with all those calendars? Baseline changes were also something not originally conceived. with some systems. these systems were created in the world of the time. It was miraculous. yet clearly defined. They were called ‘project management systems. Early project scheduling systems didn’t do resource leveling – it was a later invention. enabling project teams to adjust their forecasts as fast as events occurred.1 . and the U. Early Computerised CPM Systems The application of computers to this calculation methodology was a natural. The PC-based software that got its start in the early ’80s is still very much part of today’s market. Navy had PERT. rapid application development – and it is skewing everything we know about project management. The fundamental algorithm of those original scheduling systems is essentially unchanged over the years. Computers were tailor-made to handle the arduous. There was no thought of scheduling down to the individual level. they looked more like an airline reservation system than today’s point-and-click. Resource-limited scheduling? It was an afterthought.’ and.362 PROJECT MANAGEMENT TOOLS READINGS P5 It was into this world that critical path methodology (CPM) was born. where an individual is more likely to be working on multiple projects at one time – even multiple projects in a single day. with all the calculations to do. Those first systems didn’t look much like the graphical. Graphical reports were considered a luxury that not everyone wanted or needed. design/build. they were in the project management category. It was all designed to focus on one thing: ‘Don’t be late!’. For the first time. it was a different time. Resources were considered at best as disciplines or categories. they showed the bias of the times. calculations. the resource calculator was sold separately. Even as systems became available on PCs. as computers have evolved. indeed.

for example. It made the PC interface so easy that a whole new category of user was able to adopt it and become proficient with much less training. but at heart most of these systems are still built around that original CPM algorithm. and so on and so on. if you’re one of those critical chain advocates. We tend to think a lot about the impact of Windows on the current landscape and.) In a world where skilled individual resources move from project to project over a period of hours. for Something Completely Different Imaging a world where the driving criterion for successfully completing a project is the availability of highly skilled individuals. and flashy. It may be true. Projects can now be huge. There are hierarchical resources. the basic concept of the vast majority of these products continues to be based around the old CPM model. Changes in project management software have been focused on specific areas. and how marvelous it is to work across a worldwide 2005. (sound familiar?) I question whether the CPM algorithm is a useful method of analysis for many of today’s projects. of course. it requires a list of tasks. (Wait. but with the capabilities of the resources and technology available to us. fun-to-user software make for more sales. and many high-end tools do multiproject scheduling. user friendliness. If there is a logical sequence to the tasks. sexy. some of them are remarkable. please don’t write to me explaining how different it is – I don’t believe that’s the answer either. The CPM algorithm requires a few key elements to automatically calculate a schedule. rather than the other way around. that was Windows’ claim to fame. At its heart. guess what algorithm is used. a world where even the technology upon which a project is based will change multiple times over the life of the project. A duration or a method of calculating the duration must be given for each task. MS Project is still a CPM product. Resources may be defined along the way. but if you do a calculation of schedule in MS Project. it must also be defined. online tutorials. A famous (infamous?) white paper was written by someone at Microsoft a few years ago describing how MS Project version 3 ‘de-emphasised’ the CPM model.’ Now. There were lots of software announcements at PMI ’99. There is great focus at the moment on the Internet. the world of computers was changing too. Sure. Given this information. there have been plenty of additions and enhancements in all of today’s popular project management products.INTEGRATED MANAGEMENT 363 PROJECT MANAGEMENT TOOLS While the world was changing for project managers. It sounds fine. Yet. But when you look at the core.1 . with any thought about Microsoft must come a thought about MS Project. Perhaps the projects and tasks to which one commits and the schedule that becomes possible should be driven around available technology capacity and skills. but basically the resource calculation is laid on top of the CPM dates and scheduled from there. It’s remarkable. Something starting not with a list of tasks perhaps. but remember that the algorithm was designed in a period where the only driving criterion was ‘don’t be late. Microsoft tried to break out of the model a couple of years ago. risk analysis. integrated costing functions. the most significant changes in project management products have been interface-driven. the Web. Forget about eight calendars and a single baseline – ‘unlimited’ is the latest limit described by almost all project management software vendors on such functions. After all. perhaps we need a whole new way of thinking about project management software—a completely new paradigm. a CPM calculation can tell you the earliest feasible date that each task can start (and finish) and the latest date that it can start (and finish) without delaying the project as a whole.

2005. some new and some old. are touching on some new areas. It makes for ‘sexy’ press. I’ll be looking for developments from these firms throughout the year to see if they can get over the initial teething stages and get something into the market addressing the new world in which we work. no matter how many new people will play with it because it is simpler to use. and I’m sure I’ll end up being a user or proponent of some of these systems. The focus is all too much on the interface for my tastes. Being able to look at the same old paradigm in a Web browser is not a shift in thinking.1 . but many are not ready for prime time. A few firms. When I find some answers. but it is a variant on a theme.364 PROJECT MANAGEMENT TOOLS READINGS P5 network. room for something completely different. One thing is for sure: When there is a need in the marketplace. There is room in the project management software market for the some innovation. I’ll let you know. someone will find a way to fill it. Some of the solutions are innovative. I don’t doubt that there is merit in many of them.

Revision Questions 9 Section A type questions Question 1.2 In critical path analysis. Activity A B C D E F G Duration 2 3 2 4 3 2 3 Depends on – A A B C. the difference between LET and EET is known as (A) (B) (C) (D) elapsed time slack or float duration critical activity The three questions that follow (1.5) are all based on this project programme.1 .3 to 1.D E E 365 2005.1 The development of critical path analysis that incorporates uncertainty is known as (A) (B) (C) (D) BERT PERT PEST BEST Question 1.

1 . (ii) State the critical path and the expected duration of the project. (8 marks) (2 marks) (Total marks = 10) 2005.4 What is the critical path of the project? (A) (B) (C) (D) ABCEF ABDEF ABDEG ACEFG Question 1.366 PROJECT MANAGEMENT TOOLS REVISION QUESTIONS P5 Question 1.3 What is the elapsed time for the project? (A) (B) (C) (D) 14 15 17 19 Question 1.5 How much slack/float is there in the programme? (A) (B) (C) (D) None 1 5 6 Section B type questions Question 2 Activity A B C D E Preceding activity – A B B C Expected time 6 3 8 6 1 Requirements (i) Prepare a network diagram from the above information.

The design stage has been completed and the project is progressing through the implementation stage. but is falling behind schedule.5 2. An analyst on your team at IDC has prepared the following schedule of events for the 16-week implementation phase of the project: AZ Ltd Implementation Schedules: Task Planned Write programs Purchase and install hardware Create databases Convert existing files Test programs Test system Select and train personnel Cutover Planned start Start of week 1 Start of week 1 Start of week 6 Start of week 9 Start of week 6 Middle of week 11 Start of week 8 Start of week 14 Planned duration 8 5 4.INTEGRATED MANAGEMENT 367 PROJECT MANAGEMENT TOOLS Question 3 The information below relates to the proposed installation of some new software: Activity Install new software Test installation Prepare master file data Install and test master file data Ensure all data entered into old software Train staff on new system Transfer account balances to new sy