CIMA Official Learning System

Managerial Level

E2 — Enterprise Management
Ann Norton Jenny Hughes

CIMA Publishing is an imprint of Elsevier Linacre House, Jordan Hill, Oxford OX2 8DP, UK 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA Copyright © 2009 Elsevier Ltd. All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone ( 44) (0) 1865 843830; fax ( 44) (0) 1865 853333; email: permissions@elsevier.com. Alternatively you can visit the Science and Technology Books website at www.elsevierdirect.com/right for further information. Notice No responsibility is assumed by the publisher for any injury and/or damage to persons or property as a matter of product’s liability, negligence or otherwise, or from any use or operation of any methods, products, instructions or ideas contained in the material herein. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data A catalogue record for this book is available from the Library of Congress 978-1-85617-788-7 For information on all CIMA publications visit our website at www.elsevierdirect.com Typeset by Macmillan Publishing Solutions (www.macmillansolutions.com) Printed and bound in Hungary 09 10 11 11 10 9 8 7 6 5 4 3 2 1

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Contents

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

xiii xiii xiii xiv xv xvii 1 3 3 3 4 4 6 7 8 9 10 12 13 14 16 16 16 18 19 20 21 23 23 23 24 24 27 28 28 29

1

The Nature of Strategic Management
1.1 1.2 1.3 1.4 Learning Outcomes Introduction to the nature of strategic management The concept of strategy 1.2.1 Common themes in strategy Levels of strategy A model of the rational strategy process 1.4.1 Mission, objectives and goals 1.4.2 The link between mission, goals and objectives 1.4.3 The goal structure 1.4.4 External environmental and competitive analysis 1.4.5 Internal analysis/position audit 1.4.6 Corporate appraisal (SWOT) 1.4.7 Strategic options and choice 1.4.8 Strategy implementation 1.4.9 Review and control Criticisms of the rational model of strategy formulation A formal top-down strategy process 1.6.1 Benefits of the formal top-down approach to strategy 1.6.2 Drawbacks of the formal top-down approach to strategy Strategy and small businesses Achieving competitive advantage – alternative perspectives: resource-based view versus the positioning view 1.8.1 Competitive advantage and economic theory 1.8.2 The positioning approach 1.8.3 Resource-based view 1.8.4 Principles of resource-based theory 1.8.5 The implications of the resource-based view for strategy development Alternative approaches to formulating strategy 1.9.1 Emergent strategies 1.9.2 Logical incrementalism
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1.5 1.6

1.7 1.8

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1.10 Stakeholders 1.10.1 The influence of stakeholders 1.10.2 The Mendelow matrix 1.10.3 Assessing power of stakeholders 1.10.4 Assessing interest of stakeholders 1.10.5 Strategies to deal with stakeholders 1.10.6 Conflict between stakeholders 1.11 Meeting the objectives of shareholders 1.11.1 Maximisation of shareholder wealth as an objective 1.11.2 Competing objectives 1.11.3 Resolving competing objectives 1.12 Summary
Section A type questions Section B type questions Section A solutions Section B solutions

31 32 32 33 33 34 35 35 36 36 37 38 55 56 59 61 67 69 69 69 70 71 73 78 78 80 81 81 82 83 83 83 84 84 86 88 89 89 90 90 91 93 93 93

2

The Nature of the Competitive Environment
2.1 2.2 2.3 Learning Outcomes Introduction Environmental impact assessment Different stages in environmental analysis 2.3.1 Analysing the macro-environment 2.3.2 Analysing the micro-environment/industry environment 2.3.3 Industry life cycle analysis 2.3.4 Illustration of external environmental analysis – Example of a car manufacturer 2.3.5 Evaluation of environmental models 2.3.6 Survival and success factors Causes of environmental uncertainty 2.4.1 Impact of uncertainty 2.4.2 Has uncertainty really increased? Competitor analysis 2.5.1 The importance of competitor analysis 2.5.2 Competitor analysis – key concepts 2.5.3 Levels of competitors 2.5.4 Gathering competitor intelligence 2.5.5 Forecasting competitors’ response profiles Competitor accounting 2.6.1 Evaluation of barriers to entry 2.6.2 Estimate competitors’ costs The global economic environment 2.7.1 The new global economy National competitive advantages 2.8.1 Porter’s Diamond 2.8.2 Demand conditions

2.4

2.5

2.6

2.7 2.8

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2.9 2.10

2.11

2.8.3 Related and supporting industries 2.8.4 Factor conditions 2.8.5 Firm structure, strategy and rivalry 2.8.6 Other events 2.8.7 National competitive advantage 2.8.8 Losing competitive advantage 2.8.9 Porter’s strategic prescriptions 2.8.10 Comment on Porter’s Diamond Country analysis and political risk 2.9.1 Political risk Sources of information for environmental analysis 2.10.1 Environmental scanning 2.10.2 Accessing environmental information 2.10.3 Detailed environmental analysis 2.10.4 Categorisation of information sources Summary
Section A type question Section B type questions Section A solutions Section B solutions

94 94 94 94 94 95 95 95 96 96 97 97 98 98 99 99 101 101 103 104 109 111 111 112 114 115 115 117 118 120 122 122 124 125 127 128 135 136 139 142

3

Contemporary Perspectives in Strategy Development
3.1 3.2 3.3 Learning Outcome Introduction Internationalisation and globalisation Complex organisation forms 3.3.1 Strategic alliances 3.3.2 Illustrations of network organisations Theoretical basis of network organisations – transactions cost theory 3.4.1 Assest specificity – an illustration 3.4.2 A critique of transactions cost theory Social responsibility and strategic decisions 3.5.1 Must social responsibility conflict with benefiting shareholders? 3.5.2 An ecological perspective and environmental responsibilities 3.5.3 Shareholder wealth and ethics 3.5.4 Implications of ethics for the chartered management accountant Summary
Section A type questions Section B type questions Section A solutions Section B solutions

3.4

3.5

3.6

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4

Understanding Project Management
Learning Outcomes 4.1 Introduction 4.2 Projects and project management – definitions 4.3 Characteristics of a project 4.4 The project life cycle 4.4.1 The project life-cycle phases 4.4.2 An alternative project life cycle – an iterative process 4.4.3 Project approaches 4.4.4 Other project management frameworks: 4, 5, 7 or 9? 4.5 The project as a conversion process 4.5.1 Inputs 4.5.2 Constraints 4.5.3 Outputs 4.5.4 Mechanisms 4.6 Strategy and scope 4.7 Projects and the project manager 4.7.1 The roles of the project manager 4.7.2 The responsibilities of the project manager 4.7.3 Organisation 4.7.4 The project manager and project planning 4.7.5 The project manager and controlling 4.8 The skills of the project manager 4.8.1 Leadership skills 4.8.2 Communication skills 4.8.3 Negotiation skills 4.8.4 Delegation skills 4.8.5 Problem-solving skills 4.8.6 Change-management skills 4.9 Projects and people – project teams 4.9.1 Problems of project team-working 4.9.2 Unclear team goals and objectives 4.9.3 Lack of team structure 4.9.4 Lack of definition of roles 4.9.5 Poor leadership 4.9.6 Poor team communication 4.9.7 Lack of commitment 4.9.8 Project management and team-building 4.9.9 Project team meetings 4.10 Project stakeholders 4.10.1 Managing stakeholder expectations 4.10.2 Stakeholder conflict 4.11 Projects and organisation structures and support 4.11.1 Matrix organisations 4.11.2 Project office 4.12 Why some projects fail

149 151 151 152 152 153 153 155 155 156 158 158 158 159 159 159 159 160 160 160 161 161 162 162 163 163 165 165 165 166 166 166 167 167 167 167 168 168 168 169 170 171 171 171 173 173

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4.13

4.14

Examples of projects 4.13.1 One successful project – ongoing 4.13.2 One not so successful project Summary
Section A type questions Section B type questions Section A solutions Section B solutions

174 175 177 179 199 200 203 205 209 211 211 212 212 212 212 213 213 214 218 219 219 221 222 223 226 227 227 227 228 231 231 232 233 233 234 234 235 235 236 237 238 239 240 241

5

The Process of Project Management
5.1 5.2 5.3 Learning Outcomes Introduction The project management process Project initiation 5.3.1 Setting project objectives 5.3.2 Identifying project proposals 5.3.3 Formation of project proposals 5.3.4 Setting project requirements 5.3.5 Assessing project feasibility 5.3.6 Risk and uncertainty 5.3.7 Uncertainty 5.3.8 SWOT analysis 5.3.9 The project Initiation Document Project planning 5.4.1 Detailed project planning 5.4.2 Project objective constraints Tools and techniques to aid project planning 5.5.1 Work breakdown structure 5.5.2 Gantt charts 5.5.3 Network analysis 5.5.4 Slack or float 5.5.5 An alternative method for constructing network diagrams: activity on node 5.5.6 Milestones and control gates 5.5.7 Project evaluation and review technique (PERT) 5.5.8 Coping with risk and uncertainty Project management (PM) software 5.6.1 PM software functions 5.6.2 Advantages of using PM software 5.6.3 PM software pitfalls Executing or performing the project Monitoring and controlling the project 5.8.1 Making effective control decisions 5.8.2 Earned value management 5.8.3 PRINCE2 methodology 5.8.4 Other project management methodologies

5.4

5.5

5.6

5.7 5.8

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5.9

5.10

5.11

Project completion and closure 5.9.1 Organising project documentation 5.9.2 Collection of receipts and making final payments Post-completion review and audit 5.10.1 Post-project review meetings 5.10.2 Post-completion audit 5.10.3 Justifying the cost of post-completion audit 5.10.4 Continuous improvement Summary

Section A type questions Section B type questions Section A solutions Section B solutions

242 242 242 243 243 243 243 244 245 265 268 273 280 289 291 291 291 292 296 297 298 300 301 302 302 302 303 304 305 306 307 308 308 309 314 314 315 315 316 316 317 318 320 321 323

6

Management
6.1 6.2 Learning Outcomes Introduction Classical and contemporary theories of management 6.2.1 The Classical School 6.2.2 The human relations school 6.2.3 Systems theory 6.2.4 Contingency theory 6.2.5 Peter Drucker: management by objectives (MBO) 6.2.6 Contemporary perspectives on organisations Power, authority, responsibility and delegation 6.3.1 Power and authority 6.3.2 Authority as legitimate power 6.3.3 Organisational power 6.3.4 Responsibility 6.3.5 Delegation Management and the Role of Managers 6.4.1 Managers or Leaders Different Perspectives of Leadership 6.5.1 Personality, trait or qualities theories of leadership 6.5.2 Management styles 6.5.3 One best style? Contingency and Situational theories of leadership 6.6.1 John Adair action-centred leadership 6.6.2 Fiedler 6.6.3 Hersey and Blanchard Transformational leaders Entrepreneurs Organisational culture 6.9.1 Different levels of culture 6.9.2 Models for categorising culture 6.9.3 Culture and organisational effectiveness

6.3

6.4 6.5

6.6

6.7 6.8 6.9

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6.10

6.11 6.12

6.9.4 Culture – The International Dimension 6.9.5 Culture and control Managing in different cultures 6.10.1 National cultures 6.10.2 Other cultural characteristics 6.10.3 Changing behaviour Mentoring Summary
Section A type questions Section B type questions Section A solutions Section B solutions

326 326 327 327 328 328 329 330 331 332 335 337

7

Management of Relationships in the Working Environment
7.1 7.2 7.3 Learning Outcomes Introduction The meaning of groups and teams Types of groups 7.3.1 Formal groups 7.3.2 Informal groups 7.3.3 Reference groups 7.3.4 Self directed and autonomous groups Effective group performance 7.4.1 Formation and development 7.4.2 Group cohesiveness 7.4.3 Team roles Group dynamics and team performance 7.5.1 High-performance teams Problems with groups Communication 7.7.1 Oral and written communication 7.7.2 The communication process Effective meetings 7.8.1 The roles of team members in meetings 7.8.2 Problems with meetings Negotiation 7.9.1 The aim of negotiation 7.9.2 Phases involved in negotiation 7.9.3 Negotiation approaches Management of the finance function 7.10.1 Business Process Outsourcing (BPO) 7.10.2 Outsourcing non-core activities 7.10.3 Benefits of outsourcing 7.10.4 Drawbacks of outsourcing 7.10.5 Shared service centres (SSC) 7.10.6 Benefits of shared services

7.4

7.5 7.6 7.7

7.8

7.9

7.10

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7.10.7 Embedding finance personnel in business and strategic decision processes 7.10.8 Contribution of finance to other functions 7.11 The finance function and external stakeholders 7.11.1 External reporting 7.12 Summary
Section A type questions Section B type questions Section A solutions Section B solutions

363 363 363 364 365 367 368 371 374 381 383 383 383 384 385 386 386 386 386 387 387 387 388 389 389 390 390 390 391 391 391 393 394 394 394 395 396 397 398 399

8

Control Systems in Organisations
Learning Outcomes Introduction The meaning of control A review of management theorists and control Basic control models Types of organisational control 8.5.1 Personal centralised control 8.5.2 Bureaucratic control 8.5.3 Output control 8.5.4 Clan or cultural control 8.6 Objectives of internal control systems 8.7 Internal control systems 8.8 Levels of control 8.8.1 Strategic control 8.8.2 Tactical control 8.8.3 Operational control 8.9 Effective control systems 8.10 Practical difficulties with control systems 8.11 An example of a control system in practice: HR and staff performance appraisal 8.11.1 Strategic level 8.11.2 Tactical level – performance appraisal and the employment contract 8.12 Health and safety 8.12.1 Safety committee and representatives 8.12.2 Managing safety 8.12.3 Working with contractors 8.12.4 Health and safety training 8.13 The nature of business ethics 8.13.1 Factors affecting ethical obligations 8.13.2 Developing an ethical organisation 8.13.3 Example of an ethical issue 8.1 8.2 8.3 8.4 8.5

3.7.1 The meaning of discipline 9. redundancy and job insecurity Fairness and commitment in the work place 9.3 Disciplinary situations 9.2 Learning Outcomes Introduction The nature of conflict in organizations 9.1 Resolving disputes without a tribunal hearing Dismissal.5.2.7.2.2.3.15.2 Working time directives 9.3.5 Immediacy: Douglas McGregor’s ‘hot stove rule’ 9.3 The combined code principles of corporate governance 8.7 Resolutions of industrial relations conflict Discipline 9.16 Summary Section A type questions Section B type questions Section A solutions Section B solutions 400 400 401 401 401 402 404 405 406 407 408 411 414 421 423 423 423 424 424 427 427 429 431 432 434 434 435 435 435 437 437 439 439 440 441 441 442 446 448 448 449 451 453 9 Conflict and Discipline 9.2 Conceptual framework 8.7 ACAS code of practice Grievance procedures Tribunal applications 9. 9.4 The benefits of corporate governance 8.2.3.15 Corporate governance 8.1 Diversity and equal opportunities 9.5 Managing intergroup conflict 9.2.3.5.15.2 Horizontal conflict 9.15.1 The symptoms of conflict 9.6 Disciplinary procedures 9.1 What is corporate governance 8.4 Taking disciplinary action 9.2 The earliest considerations of corporate governance 8.3.14.14 Professional ethics 8.15.ENTERPRISE MANAGEMENT xi CONTENTS 8.8 .3 Child care Summary Section A type questions Section B type questions 9.2 Self-discipline 9.7 9.4 9.3.6 9.6 Industrial relations and conflict 9.2.1 9.2.3 9.7.14.1 Fundamental principles 8.4 Handling conflict 9.3 Vertical conflict 9.

November 2004 Project sponsor Farchester Games Co-ordination Committee (FGCC) Definition and objectives of the project Telecommunications and Information Technology Software requirements Project activities Critical project dimensions Project status Section A solutions Section B solutions Exam Q & As Index .xii CONTENTS ENTERPRISE MANAGEMENT E2 Section A solutions Section B solutions 457 460 465 467 468 468 469 469 472 475 475 475 475 476 476 476 476 477 478 481 490 513 515 Preparing for the Examination Revision technique Getting down to work Tips for the final revision phase Format of the examination Section A type questions Section B type questions Background The World Youth Indoor Games.

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

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. and in particular the number of questions to attempt.xiv THE CIMA LEARNING SYSTEM ENTERPRISE MANAGEMENT E2 ● ● Question practice. Make a serious attempt at producing your own answers. You should know what to expect when you tackle the real exam. The final section of this CIMA Learning System provides you with the guidance you need. These are of exam standard and should be tackled in exam conditions. these indicate the length and the quality of solution that would be expected of a well-prepared candidate. It includes the following features: ● ● ● ● ● ● A brief guide to revision technique. Having worked through the chapters. and so on. A table mapping revision questions to the syllabus learning outcomes allowing you to quickly identify questions by subject area. Solutions. As before. If you work conscientiously through this CIMA Learning System according to the guidelines above. and then make your own attempt before referring back to the full solution. you should read the introductory guidance provided at the beginning of the solution. you will be giving yourself an excellent chance of exam success. A note on the format of the examination. Solutions to the revision questions. Guidance on how to tackle the examination itself. However. The test of how well you have learned the material is your ability to tackle exam-standard questions. especially as regards the time allocation. which questions are compulsory and which optional. Avoid the temptation merely to ‘audit’ the solutions provided. Revision questions. In particular. you are ready to begin your final preparations for the examination. if you are struggling to get started on a question. 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 . It is an illusion to think that this provides the same benefits as you would gain from a serious attempt of your own. but at this stage do not be too concerned about attempting the questions in exam conditions.

Later in the text we mention some techniques that you will find useful at the revision stage. Now split your total time requirement over the weeks between now and the examination. revision time. Remember to allow for holidays or other periods during which you will not be able to study (e. and the pace at which different students learn. Note that the standard amount of notional learning hours attributed to one full-time academic year of approximately 30 weeks is 1200 hours. This book will provide you with proven study techniques. ISBN: 0 7506 6357 X. The amount of time recommended for face-to-face tuition.: 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. As your course progresses you will become more familiar with how long it takes to cover topics in sufficient depth. directed home study.ENTERPRISE MANAGEMENT xv THE CIMA LEARNING SYSTEM Study technique Passing exams is partly a matter of intellectual ability. Planning To begin with. Check The notional study time for Enterprise Managerial is 200 hours. the notional study time might be made up as follows: Hours Face-to-face study: up to Personal study: up to ‘Other’ study – e. Your timetable may need to be adapted to allocate enough time for the whole syllabus. Remember that you need to allow time for revision as well as for initial study of the material.g. learning in the workplace. decide which chapters you are going to study in each week. Estimate how much time in total you are going to need for each subject that you face. In this section we briefly outline some tips for effective study during the earlier stages of your approach to the exam. By way of example. This time includes all appropriate learning activities. but however accomplished you are in that respect you can improve your chances significantly by the use of appropriate study and revision techniques. because of seasonal workloads). prior learning of the student. Chapter by chapter it covers the building blocks of successful learning and examination techniques. formal planning is essential to get the best return from the time you spend studying.g. and which weeks you will devote to revision and final question practice. personal study and/or additional learning will vary according to the type of course undertaken. 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. revision. With your study material before you. This will give you an idea of how much time you need to devote to study each week. and so on. You may find it helpful to read Better Exam Results by Sam Malone. Rather. it is essential to know your syllabus. private study. CIMA Publishing. etc. 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. learning in the workplace. . for example face-toface tuition.

set your phones to message mode. you will learn to assess the pace you need to work at. and avoids rambling. When you have finished your attempt. Organise your paperwork. Make sure that you have all the materials you need before you begin. To make the most effective use of your study periods you should be able to apply total concentration. or any areas that you failed to cover or covered only skimpily. Preparing an answer plan is a good habit to get into. or the written word. . and put up your ‘do not disturb’ sign. Your timetable will tell you which topic to study. Make notes as you study. 2. making notes as you go.xvi THE CIMA LEARNING SYSTEM ENTERPRISE MANAGEMENT E2 Tips for effective studying 1. which will not be disturbed until the next time. and discover the techniques that work best for you. but remember that you will need to refer back to them at a later date. It helps to impose a structure on your solutions. You should also allow enough time to read relevant articles from newspapers and journals. summaries. bullet points. 7. Getting into a routine helps to avoid wasting time. keep them in a box. Aim to find a quiet and undisturbed location for your study. and also in the examination room. or even a suitcase. 6. vary the pattern by attempting a practice question. Store all your materials in one place. make notes of any mistakes you made. When you have covered a suitable amount of material. Work carefully through a chapter. and plan as far as possible to use the same period of time each day. Your notes may be in the form of lists. so that you do not waste time searching for items around the house. If you have to pack everything away after each study period. while you are both studying and revising. so turn off the TV. 4. which will supplement your knowledge and demonstrate a wider perspective. ‘mind maps’. With experience. calculations and articles can be effectively filed and easily retrieved later. However. so as to minimise interruptions. make sure you have an overall picture of all the areas that need to be covered by the end of that session. Limit distractions. make sure you highlight any issues you would like to follow up with your lecturer. After an hour. If you are on a taught course. before diving in and becoming engrossed in the finer points. 3. so they must be intelligible. There are now numerous paper storage systems available to ensure that all your notes. diagrams. allow yourself a short break and move away from your books. 5.

the paper introduces the skills and tools needed to work with. plus 20 minutes of pre-examination question paper reading time. towards an holistic. Short scenarios may be given. manage and develop teams. this paper develops tools and techniques for identifying the key types of competitive environment. This includes both the legal aspects of managing individuals.ENTERPRISE MANAGEMENT xvii THE CIMA LEARNING SYSTEM Paper E2 — Enterprise Management Syllabus Overview Paper E2 moves away from the emphasis on functional knowledge within Paper E1 Enterprise Operations. integrated view of management across the organisation. Finally. The examination paper will have the following sections: Section A – 50 marks Five compulsory medium answer questions. to which some or all questions relate. . Short scenarios may be given. Building on important concepts in strategic management. each worth 10 marks. The skills and tools of project management are also addressed. Section B – 50 marks One or two compulsory questions. to which questions relate. as well as the softer elements of negotiation and leadership skills. Syllabus Structure The syllabus comprises the following topics and study weightings: A B C Strategic Management and Assessing the Competitive Environment Project Management Management of Relationships 30% 40% 30% Assessment Strategy There will be a written examination paper of 3 hours.

B) Sources. (b) Distinguish between different types of competitive environments. emergent. availability and quality of data for environmental analysis.g. Discuss important developments in strategic management. adaptive. (C) ● ● ● 2. (A. Strategic Management and Assessing the Competitive Environment (30%) Learning Outcomes Lead 1. (A. (A.g. Discuss different competitive environments and key external characteristics of these environments. (4) (a) Discuss concepts in established and emergent thinking in strategic management. (4) Component (a) Discuss the nature of competitive environments.xviii THE CIMA LEARNING SYSTEM Learning Outcomes and Indicative Syllabus Content E2 – A. (c) Explain the relationships between different levels of strategy in organisations. business-level. (A. (A. B) The use of stakeholder mapping. B) Qualitative approaches to competitive analysis. (A. (A) Approaches to strategy (e. evolutionary or system–based views. B) Porter’s Diamond and its use for assessing the competitive advantage of nations. functional) (Note: candidates are not expected to identify or evaluate options). (b) Compare and contrast approaches to strategy formulation. B) Porter’s Five Forces model and its use for assessing the external environment. ● ● ● ● ENTERPRISE MANAGEMENT E2 Content PEST analysis and its derivatives. B) Perspectives on the strategic management of the firm (including transaction cost. rational. resource-based view and ecological perspective). Corporate. ● ● ● . B) Competitor analysis and competitive strategies (both qualitative and quantitative tools of competitor analysis will be used). (B) Levels of strategy (e. (A.

resource histograms. a project. and the contrast with repetitive operations and line management. F) Scenario planning and buffering to make provision for uncertainty in projects. (4) Component (a) Identify a project. F) Earned Value Management. (G) Control of time. and their impact on project achievement. H) The production of basic plans for time. network diagrams (Critical Path Analysis). (B) The benefits and limitations of having a single process for managing projects. (E. (e) Apply key tools and techniques. (A) 4-D and 7-S models to provide an overview of the project process. (i) Discuss the value of post-completion audit. E. Project Management (40%) Learning Outcomes Lead 1. C. including the role of the project and matrix organisations. team/group behaviour and selection. gates and milestones). (J. project management. cost and quality. (f ) Produce a basic project plan incorporating strategies for dealing with uncertainty. F. G) Teamwork. H) Managing scope at the outset of a project and providing systems for configuration management/change control. J) THE CIMA LEARNING SYSTEM ● ● ● ● ● ● ● ● ● ENTERPRISE MANAGEMENT ● ● ● ● ● xix . including recognising the life-cycle of teams. completion reports and system close-down. a programme and their attributes. F.g. (J) Project completion. (j) Apply a process of continuous improvement to projects. (b) Apply suitable structures and frameworks to projects to identify common project management issues. Work Breakdown Structure.E2 – B. (B. and the nine key process areas (PMI) to show what happens during each part of the process. (C) Key tools for project managers (e. (d) Identify the characteristics of each phase in the project process. (I. D. F) Organisational structures. (h) Compare and contrast project control systems. Discuss tools and techniques of project management. (H) Evaluation of plans for projects. (E. documentation. ● Content The definition of a programme. including the evaluation of proposals. (c) Construct an basic outline of the process of project management. (E) The key processes of PRINCE2 and their implications for project staff. Gantt charts. (E. as part of the risk and opportunities management process. (I) The use of post-completion audit and review activities and the justification of their costs. in the context of a simple project. cost and quality through performance and conformance management systems. (F. (g) Identify structural and leadership issues that will be faced in managing a project team.

including project management offices. their power and interest. (c) Explain the roles of key players in a project organisation. Evaluate the relationship of the project manager to the external environment. (C) ● ● . managers and clients. ● Content Determining and managing trade-offs between key project objectives of time. cost and quality. and their needs and expectations. champions.xx ENTERPRISE MANAGEMENT E2 THE CIMA LEARNING SYSTEM E2 – B. (5) Component (a) Produce a strategy for a project. (B) Roles of support structures. marketing and communications to enhance perceptions. boards. (A) Stakeholders (both process and outcome). (b) Recommend strategies for the management of stakeholder perceptions and expectations. as well as project sponsors (SROs). Project Management (40%) (Cont’d) Learning Outcomes Lead 2.

g. leadership. teams and networks. (A. E) ● ● 2. and for managing group conflict.e. D. tax and legal). bureaucracy. shared service centres) and contribution to other functions (e. (g) Analyse issues of business ethics and corporate governance. bureaucracy. both within an organisation and with external bodies. authority. (d) Identify tools for managing and controlling individuals. D) Negotiation skills. as well as the utility and conduct of meetings) and ways of managing communication problems. authority. D) Disciplinary procedures and their operation. (a) Analyse the relationship between managers and their subordinates. (4) Component (a) Discuss the concepts of power. embedding finance personnel in business and strategic decision processes). (B. (B. safety. Discuss concepts associated with the effective operation of an organisation. importance. (B. (c) Identify the nature and causes of conflict. E) The nature and effect of legal issues affecting work and employment. (4) ● ● ● ● ● ENTERPRISE MANAGEMENT ● THE CIMA LEARNING SYSTEM xxi . business process outsourcing. including legal aspects affecting work and employment. industrial tribunals. (b) Demonstrate the importance of organisational culture. (e) Compare and contrast ways to deal effectively with discipline problems. (f ) Explain the process and importance of mentoring junior colleagues. (C) Management of relationships with professional advisors (accounting. (A. responsibility. childcare. auditors and financial stakeholders (investors and financiers) to meet organisational objectives. arbitration and conciliation). classification. E) Managing the finance function to maximise its value to the organisation through lean operation (e. (C.g.g. including the application of relevant employment law (i. responsibility and delegation and their application to relationships within an organisation and outside it. B) The sources of conflict in organisations and the ways in which conflict can be managed to ensure that working relationships are productive and effective. contracts of employment and working time). types of communication tools and their use. including the form and process of formal disciplinary action and dismissal (e. leadership and delegation. relating to health.E2 – C.e. Management of Relationships (30%) Learning Outcomes Lead 1. ● Content The concepts of power. (d) Discuss alternative approaches to the management of conflict. fair treatment. (b) Discuss the roles of negotiation and communication in the management process. (A. (c) Discuss the effectiveness of relationships between the finance function and other parts of the organisation and with external stakeholders. Discuss the activities associated with managing people and their associated techniques. (A) Communication skills (i. B) Organisational culture: definition. discrimination.

and the process of mentoring. Management of Relationships (30%) (Cont’d) Learning Outcomes Lead Component ● Content The principles of corporate governance and the CIMA Code of Ethics for Professional Accountants. (A. reporting structures). performance appraisal. obligations and expectations of a manager. D) ● ● ● ● .xxii ENTERPRISE MANAGEMENT E2 THE CIMA LEARNING SYSTEM E2 – C. D. (A. E) The use of systems of control within the organisation (e. E) The role of a mentor. (G) How to lead and manage a team. and their relevance to the role.g. (F) Motivating team members. employment contracts. (A.

1 The Nature of Strategic Management .

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The final part of the chapter will discuss the concept of stakeholders and examine how different stakeholders can influence the strategy process. There are many different approaches to strategic management but they all have the aim of establishing the purpose of the organisation and guiding managers on how to implement strategies to achieve organisational goals.The Nature of Strategic Management 1 LEARNING OUTCOMES By the end of this chapter you should be able to: compare and contrast approaches to strategy formulation. discuss the nature of competitive environments. Strategy. 1. explain the relationship between different levels of strategy. 1. to achieve a specific objective. including the specification of resources required.’ CIMA: Management Accounting: Official Terminology. These characteristics distinguish strategic issues from operational issues in organisations. discuss concepts in established and emergent thinking in strategic management. This chapter will start by defining the concept of strategy. 54. The ways in which organisations can gain competitive advantage will also be explored. ‘A course of action. 3 . It will explain the various activities involved in the strategic management process.1 Introduction to the nature of strategic management The strategic management process is essentially concerned with the decisions organisations make about their future direction and the development and implementation of strategies which will enhance the competitiveness of organisations. Some of the alternative approaches to strategic management will then be explained.2 The concept of strategy Strategy has many different interpretations and dimensions. 2005 edition p. based on the formal rational approach to strategy. Listed below are just some definitions: 1.

Delivering value to the people who depend on the firm. its relationship with different stakeholders. to achieve competitive advantage.4 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL E2 2. such as competitors and the changing needs of customers. 1. Meeting the challenges from the firm’s business external environment. purposes and goals and essential policies or plans for achieving those goals. It is the head office of the firm and will contain the corporate board. ● ● ● Whatever interpretation is put on strategy.’ Andrews. ‘Corporate strategy is the pattern of major objectives. its resources and how it interacts with the world in which it operates. 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. (2008).1 provides a simplified model of the hierarchy at which different strategies are made.’ Hofer and Schendel (1978. and overall performance. Corporate strategy The corporate centre is at the apex of the organisation. the strategic actions of an organisation will have widespread and long-term consequences for the position of the organisation in the marketplace. p. The scope of an organisation’s activities and actions required to meet its objectives (broad or narrow). this provides the framework for the development of business strategy. its stakeholders. 5. Using the organisation’s internal resources and competencies effectively and building on its strengths to meet environmental challenges.’Lynch (2006). Strategic plan. 6. such as customers and shareholders. its ambitions.’ CIMA: Management Accounting: Official Terminology. The different levels of strategy formulation are therefore interdependent in that one level should be consistent with the strategies at the next level. 4.’ Johnson et al. Figure 1.1 ● ● Common themes in strategy From these different definitions strategy is concerned with: The purpose and long-term direction of the business.3 Levels of strategy Strategy occurs at different levels in the organisation. 1. which in turn provides the framework for functional strategies. . Which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations. ‘Corporate strategy is concerned with an organisation’s basic direction for the future: its purpose. 54. At the top of the hierarchy is where corporate strategy is made. 3.2. cited in Lynch (2006). ‘A statement of long-term goals along with a definition of the strategies and policies which will ensure achievement of these goals. Strategy is the direction and scope of an organisation over the long term. 2005 edition p. ‘The basic characteristic of the match an organisation achieves with its environment is called its strategy. 4).

CIMA: Management Accounting: Official Terminology. a part of Cengage Learning. usually a division. Successful Project Management with Microsoft Project CD. high-profile corporate planners like IBM. 2005 edition. employment practices or information systems. in other words what type of business or businesses should the organisation be in. that has a significant degree of autonomy. mergers and sell-offs or closure of business units. Common issues at this level include: ● ● ● ● decisions on acquisitions. p. 27. General Motors and Ford ran into difficulties against newer and smaller ‘upstart’ competitors who seemed to be more flexible and entrepreneurial.com/permissions Corporate strategy is typically concerned with determining the overall purpose and scope of the organisation. typically being responsible for developing and marketing its own products or services. www.ENTERPRISE MANAGEMENT 5 THE NATURE OF STRATEGIC MANAGEMENT Corporate strategy Corporate centre of organisation Business strategy Strategic business unit Strategic business unit Strategic business unit Functional strategies Financial strategy Marketing strategy Human resources strategy etc. Inc. © 1999 South-Western. Business strategy This level of strategy is concerned with how an operating or strategic business unit approaches a particular market. During the 1980s. Decisions at this level tend to complex and non-routine in nature because they often involve a high degree of uncertainty based on what might happen in the future. relations with key external stakeholders such as investors. A strategic business unit (SBU) is defined by CIMA as: A section. within a larger organisation. From GIDO/CLEMENTS. The formal planning approach to strategy assumes that all strategy is formulated at corporate level and then implemented in a ‘top-down’ manner by instructions to the business divisions. Reproduced by permission. the government and regulatory bodies. Figure 1.1 Organisation chart showing corporate.cengage. 1E. strategic business unit and functional strategies. decisions to enter new markets or embrace new technologies (sometimes termed diversification strategies). One consequence was the devolution of responsibility for competitive strategy to strategic business units (SBUs). . development of corporate policies on issues such as public image.

where it should go in the future.6 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL E2 Management of the SBU will be responsible for winning customers and beating rivals in its particular market. The extent to which the management of the SBU is free to make competitive strategy decisions varies from organisation to organisation and reflects the degree of centralisation versus decentralisation in the management structure of the firm. production. Analysis of current position Formulation of strategic options Implementation of strategies Monitor. 4. Make sure you understand what activities occur during the stages included in the model.4 A model of the rational strategy process The traditional approach to strategic management is often termed the formal or rational approach. Functional strategies The functional (sometimes called operational) level of the organisation refers to main business functions such as sales. 1. Functional strategies are the long-term management policies of these functional areas. . 3. This process seeks to answer questions concerning where the organisation is now. human resources and finance. review and evaluation. The rational model therefore involves a number of interrelated stages. Consequently. and can reproduce. The considerations at this level will include: ● ● marketing issues such as product development. Figure 1. The rational strategy process is often conceived as consisting of four major steps: 1. this diagram. and can be described as a series of logical steps which involve: ● ● ● ● ● the determination of an organisation’s mission the setting of goals and objectives the understanding of the organisation’s strategic position the formulation of specific strategies the commitment of resources A continuous analysis of the external environment and the organisation’s internal resources is needed in order to plan for the future development and survival of the business. Business strategy should be formulated within the broad framework of the overall objectives laid down by the corporate centre to ensure that each SBU plays its part. pricing. it is at this level that competitive strategy is usually formulated. promotion and distribution. 2.2 below illustrates a framework of the rational strategy process and shows the various stages which management may take to develop a strategy for their organisation. how should it segment the market – should it specialise in particular profitable segments. and how it should get there. purchasing. They are intended to ensure that the functional area plays its part in helping the SBU achieve the goals of its corporate strategy.

Having made a choice on the strategic direction.4. Each of the different stages in the model above will now be elaborated on. objectives and goals Johnson.2 A model of a rational strategy process The basic idea from the model is that we start with the existing strategy of the organisation and evaluate it using information collected from internal and external analysis. 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’ .ENTERPRISE MANAGEMENT 7 THE NATURE OF STRATEGIC MANAGEMENT Position audit Internal analysis Review and control Mission and objectives Corporate appraisal (SWOT) Strategic option generation Strategy evaluation and choice Strategy implementation Environmental analysis External analysis Competitor analysis Figure 1. 1. However. From this we can determine if the organisation should continue with its existing strategy or formulate a new strategy that will enable the organisation to compete more effectively. introducing some of the tools and techniques of strategic management.1 Mission. particularly those that can be used to examine the external environment and competitive environments. It will be open-ended and reflect the core values of the business. Scholes and Whittington (2008) provide the following useful guide to help distinguish between the terminology of strategy. Term Mission Vision or strategic intent Goal Objective Strategies Definition Overriding purpose in line with the values and expectations of stakeholders. What business are we in? Desired future state: the aspiration of the organisation General statement of aim or purpose – may be qualitative in nature Quantification (if possible) or more precise statement of the goal Long-term direction expressed in broad statements about the direction the organisation should be taking and the types of actions required to achieve its objectives From the above table we can see that a mission is a broad statement of the purposes of the business. the next stage involves implementing the strategy and then evaluating performance to determine whether or not goals have been achieved. Chapter 2 will provide further explanation of some of the strategic management analytical tools.

To assist in translating purposes and direction into objectives suitable for assessment and control. Assessing the firm’s opportunities and threats. To provide a basis for consistent planning decisions. ‘Does the strategy help us along the road to being the kind of business we want to be?’ 4. 2. its strengths and its weaknesses must be related to its ability to compete in its chosen business domain. The mission sets the long-term framework and trajectory for the business. ● ● Specific – unambiguous in what is to be achieved Measurable – specified as a quantity . Does your organisation have a mission statement? What is it? How is the mission communicated to employees. To improve understanding and support from key groups outside the organisation. The crucial question will be. 2. strategic objectives and goals translate the mission into strategic milestones for the business strategy to reach.8 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL E2 ● ● DHL ‘delivers your promises’ easyEverything group wants to ‘paint the world orange’. management can use the mission as a touchstone or benchmark against which to judge their suitability. 3. 2. Mission and objectives. 5. It is the job of the strategy to progress the firm towards this mission over the coming few years covered by the strategy. Strategic evaluation. Review and control. that is. Another way of putting this is to say that objectives must be SMART. To establish organisational goals and ethics.2 The link between mission.4. 4. To provide a consistent purpose between different interest groups connected to the organisation. (1992) revealed the following purposes of mission statements: 1. 1. A strategic objective will possess four characteristics which set it apart from a mission statement: 1. Research conducted among companies by Hooley et al. In other words. Corporate appraisal. The key targets of the divisions and functions should be related to the mission. Roles of mission statements Mission statements help at four places in the rational model of strategy: 1. the outcomes that the organisations seeks to achieve. goals and objectives Whilst the mission is normally an open-ended statement of the firm’s purposes and strategies. 4. When deciding between alternative strategic options. otherwise the mission will not be accomplished. 3. Factors are relevant only insofar as they affect its ability to follow its mission. 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. 3.

5. . Budget targets are a good example of operational level objectives. senior management ensure that the business division makes a suitable return on its assets. 2. For example. however. Objectives perform a number of functions: 1.1 lists some examples of strategic objectives.4. Objectives are how senior management coordinate the firm. then managers will not pay much heed to issues such as social responsibility or innovation. departments and operations. Objectives provide the framework for planning. 4. Table 1. Motivation. per ‘000 Adoption of standard procedures Industry awards received Development time % of sales from new products Workforce composition Cubic metres of waste Notified incidents Quality Innovation Social responsibility ● ● ● Attainable – within reach Relevant – appropriate to the group or individual to whom it is applied Time-bound – with a completion date.3 suggests. It can be visualised as the diagram in Figure 1.3 The goal structure The goal structure is the hierarchy of objectives in the organisation. Objectives are given to the managers of divisions. For example. This communicates to them: (a) the activities. This means that the objectives set must cover all areas of the mission. Responsibility. Integration. Management will be motivated to reach their objectives in order to impress their superiors.1 Examples of strategic objectives Mission Growth 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 000s of units % of total volume Net assets Repeat purchases No. and perhaps receive bonuses. Senior management control the business by evaluating the performance of the managers responsible for each of its divisions. we are working at a higher level by considering the strategic objectives of the firm. Provided that the objectives handed down are internally consistent. Evaluation.ENTERPRISE MANAGEMENT 9 THE NATURE OF STRATEGIC MANAGEMENT Table 1. 3. 1. In this chapter. You may be familiar with these five functions (often recalled using the acronym PRIME) from your studies in budgetary control. this should ensure goal congruence between managers of the various divisions of the business. projects or areas they are responsible for (b) the sorts of output required (c) the level of outputs required. by setting the manager a target ROI and monitoring it. if the objectives emphasise purely financial outcomes. They are the targets which the plan is supposed to reach. Planning.

it must then determine where it wants to go in the future. education and health and so on. PEST framework The PEST framework is used to categorise environmental influences into four headings that can be used to assess the external factors that might impact on the organisation’s development in the future. an organisation should look at the various factors within its environment that may represent threats or opportunities and the competition it faces. also changes in lifestyles. Political. This will be influenced by the nature of the external environment and the organisation’s internal capability. further discussion of the framework can be found in Chapter 2. cultural or demographic factors (i. inflation. To achieve this there are a number of strategic management tools that can assist in this process. exchange rates.) and refer to attitudes. The analysis requires an external appraisal to be undertaken by scanning the business external environment for factors relevant to the organisations current and future activities. These are used to understand the key drivers of change.10 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL E2 Mission statement Translated into a small number of strategic objectives reached by following strategies communicated to management as numerous tactical objectives which in turn are implemented and reviewed through setting a large number of operational objectives which may be communicated to managers and staff responsible through their individual performance targets Figure 1. consumer disposable income. 1. A brief summary of the PEST framework is provided below.4. stability of the government. population shifts.4 External environmental and competitive analysis The strategy of an organisation must allow it to achieve ‘a good fit’ with its environment.e. These are political or legal factors affecting the organisation. Economic. These are economic factors such as tax rates. These included the PEST framework which helps in the analysis of the macro or general environment and the five forces model which can be used to analyse the competitive environment. unemployment levels and so on. goals and objectives. These are social. however. Social. interest rates.3 A goal structure Having established where the organisation is in terms of its mission. etc. As part of its strategic analysis. ● ● ● . age profiles. such as legislation or government policy. value and beliefs held by people. government attitudes to competition and so on.

defined as long-run return on invested capital.). These are changes in technology that an organisation might use and impact on the way work is done. The outcomes from the PEST analysis and five forces analysis will help determine the opportunities for an organisation. where the collective force is strong. . A well-established framework for analysing and understanding the nature of the competitive environment is Porter’s five forces model (see Figure 1. 1998 by The Free Press. 4. simply look for things that might affect the organisation. The competitive environment – five forces model As well as the macro environmental factors. Threat of entry Bargaining power of suppliers Rivalry among existing firms Bargaining power of buyers Substitute products or services Figure 1. Porter argues that competition in an industry is determined by its basic underlying economic structure – the five competitive forces 1. Some industries have inherently high profits due to the weakness of these forces. will exhibit low returns on investment.ENTERPRISE MANAGEMENT ● 11 THE NATURE OF STRATEGIC MANAGEMENT Technological. a division of Simon & Schuster Adult Publishing Group.4 Porter’s five forces model. 5. All rights reserved. Porter. The collective strength of these forces determines the profit potential. This model will be explored further in Chapter 2. 2. part of external analysis also requires an understanding of the competitive environment and what are likely to be the major competitive forces in the future. If you are asked to apply the PEST model to an organisation. rivalry among existing firms bargaining power of buyers bargaining power of suppliers threat of new entrants threat of substitute products or services. Reprinted with the permission of The Free Press. from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E.4. of the industry. © 1980. A brief explanation as to why you feel each activity creates either an opportunity or threat will suffice. and also the potential threats. Some authors have expanded the mnemonic PEST into PESTEL – to include explicit reference to ethical or environmental and legal factors. such as new system or manufacturing processes. Others. 3. and put each of them under the most appropriate heading.

To be included in the Value Chain. an activity has to be performed by the organisation better. Based on the work of Michael Porter . There is often confusion surrounding the terms ‘resources’ and ‘competences’ – essentially resources are what the organisation has.4. in the view of the customer. The analysis will involve undertaking a resource audit to evaluate the resources the organisation has available and how it utilises those resources – for example. Porter proposed a model. human skills. whereas competences are the activities and processes through which the organisation deploys its resources effectively. for carrying out such an analysis. physical assets.5 Internal analysis/position audit Internal analysis is needed in order to determine the possible future strategic options by appraising the organisation’s internal resources and capabilities. The value chain of any organisation can be divided into primary activities and support activities. That is the adequacy and suitability of the resources and competences of an organisation for it to survive and prosper.5). Michael Porter suggested that the internal position of an organisation can be analysed by looking at how the various activities performed by the organisation added (or did not add) value. financial resources. Scholes and Whittington (2008) explain that this depends upon having: ● ● ● ● threshold resources – the resources needed to meet the customers’ minimum requirements and therefore to continue to exist. It will help the organisation to assess its strategic capability. threshold competences – the activities and processes needed meet customers’ minimum requirements and therefore continue to exist. This concept will be returned to later in this chapter when examining the resource-based view of strategy. the Value Chain (Figure 1. differently or more cheaply than by its rivals.5 The Value Chain. Secondary or support activities Firm infrastructure Human resource management Technology development Procurement Primary activities Inbound logistics Operations Outbound logistics Marketing and sales Service Figure 1. unique resources – the resources that underpin competitive advantage and are difficult for competitors to imitate or obtain. This involves the identification of those things which the organisation is particularly good at in comparison to its competitors. core competences – are activities that underpin competitive advantage and are difficult for competitors to imitate or obtain. each of these activities can be considered as adding value to an organisation’s products or services. Johnson. technologies and so on.12 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL E2 1.

. Undertake a resource audit and value change analysis for your organisation. resources or activities of the organisation that are difficult to allocate to one of the other activity headings. This will have been gathered in a separate internal position audit exercise. and put each of them under the most appropriate heading. If you are asked to apply the value chain to an organisation. or advice on choosing or using the product. Marketing and sales. for example TV or point-of-sale advertising. or to buy more. Firm infrastructure. During this stage. Human resource management. The acquisition of any input or resource. (b) Information on the present business environment and how this is likely to change over the period of the strategy. Those marketing and sales activities that are clearly aimed before or after the point of sale. This will have been collected by a process of external environmental analysis and competitor analysis. for example a reputation for quality. The processes of converting inputs to outputs. A brief explanation as to why you feel each activity has strength will suffice. They will draw on two sets of information: (a) Information on the current performance and resource position of the business. or for an organisation that you are familiar with. Those general assets. The use of advances in technology. Service. for example storage and distribution of finished goods. for example new IT developments. to reach the objectives they have set.4. for example buying raw materials of capital equipment. Outbound logistics. The secondary (or support) activities of the value chain are as follows: ● ● ● ● Procurement.ENTERPRISE MANAGEMENT 13 THE NATURE OF STRATEGIC MANAGEMENT The primary activities of the value chain are as follows: ● ● ● ● ● Inbound logistics. This is often referred to as corporate appraisal or SWOT analysis. simply look for things that the organisation does well. opportunities and threats. management will assess the ability of the business. The use of the human resources of the organisation. This should help you in understanding the purpose of different strategic management frameworks. Those marketing and sales activities that are aimed at persuading customers to buy. for example by providing better training. The systems and procedures that the organisation uses to get inputs into the organisation. for example warranty provision. for example the inspection and storage of raw materials. Technology development. weaknesses. for example production processes. the next step is to bring together the outcomes from the analysis.6 Corporate appraisal (SWOT) Having undertaken an analysis of the trends and possible external environmental and competitive and internal developments that may be of significance to the organisation. Operations. following its present strategy. or a charismatic Chief Executive. 1. standing for strengths. The systems and procedures that the organisation uses to get outputs to the customer.

). 3. such as a lack of resources. This will be largely a creative process of generating alternatives. expertise or skills. and the opportunities and threats relate to the external environment. The strengths and weaknesses normally result from the organisation’s internal factors.7 Strategic options and choice Strategic choice is the process of choosing the alternative strategic options generated by the SWOT analysis. Organisations must assess why customers chose to use one organisation over another.4. These relate to events or changes outside the organisation. . that is in its external business environment. Strengths. These are the particular skills or distinctive competences which the organisation possesses and which gives it an advantage over the competitors. To be sustainable. organisations must seek to identify the activities that competitors cannot easily copy and imitate (We will return to this later in this chapter when the resource-based view to strategy is introduced. So. 2. Threats relate to events or changes outside the organisation in its business environment which are unfavourable and that must be defended against. 4. building on the strengths of the business and allowing it to tackle new products or markets to improve its competitive position. The organisation will need to introduce some strategies to overcome these threats in some way or it may start to lose market share to its competitors. This involves decisions on whether to compete across the whole marketplace or only in certain segments (this is referred to as competitive scope). which are favourable to the organisation. The events or changes can be exploited to the advantage of the organisation and will therefore provide some strategic focus to the decision-making of the managers within the organisation. Management need to seek to identify and evaluate alternative courses of action to ensure that the business reaches the objectives they have set. The strategic choice process involves making decisions on: ● ● ● What basis should the organisation compete and on what basis can it achieve competitive advantage? What are the alternative directions available and which products/markets should the organisation enter or leave? What alternative methods are available to achieve the chosen direction? Achieving competitive advantage When developing a corporate strategy. 1. 2. The answer to this question can be broadly categorised into two reasons: 1. the strengths and weaknesses come from internal position analysis tools such as the Value Chain.14 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL E2 The four categories of SWOT can be explained in more detail as follows: 1. These are the things that are going badly (or work badly) in the organisation and can hinder the organisation in achieving its strategic aims. Opportunities. and the opportunities and threats from environment analysis tools such as PEST and the five forces model. Threats. the organisation must decide upon which basis it is going to compete in its markets. that is anything that gives on organisation an edge over its rivals and which can be sustained over time. The product/service is perceived to provide better ‘added value’. The price of the product/service is lower. Weaknesses. A further consideration is the way in which the organisation can gain competitive advantage.

This is where the organisation uses it own internal resources to pursue its chosen strategy. including: ● ● ● ● Market penetration. By the end of this process. The two types of generic competitive strategies that enable organisations to achieve competitive advantage are referred to as low-cost strategies or differentiation strategies. For example. Market development. Strategies are based on launching new products or making product enhancement which are offered to its existing markets. Strategies are based on launching new products into new markets and is the most risky strategic option. The options are: ● ● ● Internal development. This is where the organisation seeks to maintain or increase its share of exiting markets with existing products. This route often has the aim of increasing exposure to potential customers or gaining access to technology. This could involve identifying new markets geographically or new market segments. branding. It may involve the building up a business from scratch. Evaluation of strategic options The evaluation stage considers each strategic option in detail for its feasibility and fit with the mission and circumstances of the business. Then for each organisation identify what the core competencies need to be to support the competitive strategy. An alternative would be to acquire resources by taking over or merging with another organisation. Strategic methods Not only must the organisation consider on what basis to compete and the direction of strategic development. In addition. Strategic alliances. organisations can compete on price-based strategies serving prices to sensitive segments of the marketplace or they can choose to pursue a differentiation strategy which seeks to be unique on dimensions valued by buyers. management will . Product development. Identify an organisation that follows a price based strategy and one that achieves competitive advantage through differentiation. Strategies are based on finding new markets for existing products. such as product design. There are a variety of arrangements for strategic alliances. There are various options that could be followed. Strategic direction The organisation also has to decide how it might develop in the future to exploit strengths and opportunities or minimise threats and weaknesses. organisations need to decide on whether they are going to compete in the broad marketplace or whether they are going to focus on one or more particular segments or niches. in order to acquire knowledge of a particular product/market area. Takeovers/acquisitions or mergers. We will return to the topic of strategic alliances in Chapter 2. it must also decide what methods it could use. Diversification. This might be to obtain a new product range or market presence or as a means of eliminating competition. product performance and service levels.ENTERPRISE MANAGEMENT 15 THE NATURE OF STRATEGIC MANAGEMENT Decisions on the above questions will determine the generic strategy options for achieving competitive advantage – known as generic because they are widely applicable to firms of all sizes and in all industries. some of which are very formalised and some which are much looser arrangements.

Notions of profit (or shareholder wealth) maximisation are merely artificially simplified assumptions left over from economics. with little basis in the real world. Does performance of the strategy still put the business on course for reaching its strategic objectives? 2. The strategy implementation stage involves drawing up the detailed plans. an organisation does not have goals of its own but rather it is the people within it that have the goals. They would argue that organisational rationality is merely a textbook assumption from economics.8 Strategy implementation The strategy sets the broad direction and methods for the business to reach its objectives. This leaves us with a picture of the goals pursued by a strategy being . Operational programmes and decisions cover routine day-to-day matters such as meeting particular production. 1. It will consider two aspects: 1. 1.16 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL E2 have decided on a shortlist of options that will be carried forward to the strategy implementation stage. recruitment or downsizing of staff or investing in new production capacity. none of it will happen without more detailed implementation.4. It will also involve obtaining the necessary resources and committing them to the strategy.4. cost and revenue targets. Management will have a number of ideas to improve the competitive position of the business. The various options must be evaluated against each other with respect to their ability to achieve the overall goals.5 Criticisms of the rational model of strategy formulation Many writers on strategy dispute the rational model of strategy formulation by questioning some of the implicit assumptions. Organisations are incapable of having objectives. Project appraisal and project management techniques are valuable at this level. or have unforeseen threats or opportunities arisen subsequently that might necessitate a reconsideration of the strategy? 1. However. policies and programmes necessary to make the strategy happen. Are the forecasts of the environment on which the strategy was based still accurate. 1. According to Cyert and March (1963).9 Review and control This is a continuous process of reviewing both the implementation and the overall continuing suitability of 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. Conventional budgetary control is an important factor in controlling these matters. This argument is derived from the insight of organisational sociology that organisations are really just collections of people.

The resulting strategy will have unanticipated harmful effects on the motivation and commitment of those required to implement it. (b) Objectives will change from time to time according to which management faction finds itself in the ascendancy. values and cultures of the staff in the division or. home life. and more fundamentally. Furthermore. strategy formulation is not a simple step-by step process aimed at finding the best way to meet the firm’s objectives. 4. job. (d) Management will inevitably find itself adjudicating between the claims of the various stakeholder groups such as investors. etc. Senior management should not be the only people involved in setting strategy. the strategy formulation process is very political. (c) Objectives are unlikely to be directly related to the economic benefit of the shareholder. Consequently. 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.ENTERPRISE MANAGEMENT 17 THE NATURE OF STRATEGIC MANAGEMENT in fact the outcome of a bargaining process between various factions around the boardroom table. you get the idea of what satisficing means. Writers argue that by making a separation between strategy formulation and strategy implementation. they will not consider the social processes. and will lack the detailed understanding of the problems of a given business division and the requirements of the particular customers and technologies there. senior management are too detached. 3. (If you consider the way you have to juggle between the elements of your daily life. These beliefs are inevitably partially irrational and so any strategy based on them is likewise not completely rational. 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. The result will be a strategy that is unlikely to address the division’s needs. 2. study. In reality. We shall return to this view in more detail later. At the time of strategy formulation. the actual strategy will need to be adapted to suit the circumstances as they unfold. In reality. . employees. these ‘soft’ factors will be misinterpreted. 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. The model described in Figure 1.2 presents the process as moving in one direction. 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’. Secondly. The consequences of this view are: (a) Objectives may be in conflict with one another.. strategy formulation is a much more jumbled-up process and can include considerable backtracking and revisiting of earlier stages in the model. In the first place. if considered.) 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. customers and government. 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. The strategies that firms eventually follow are not the same as the ones they set out in their plans. the rational approach is bound to lead to difficulties. This view favours wider participation in strategy formulation through encouraging emergent strategies to percolate up from below. leisure.

advising divisions on formulating strategy and monitoring results. 2. . including such matters as competitor behaviour. The doctrine of action rationality proposed by Brunsson (1985) is a good example of this. market trends and potential changes to laws. In this view. The following are typical features of the process: 1. 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. 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. meeting periodically to monitor the success of the present strategies and to develop new ones. Instead. You will be reading about many of these models and techniques later. In this post-rationalisation. 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. 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. Strategy is not something decided in advance by managers.18 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL E2 5. This view is most famously associated with Mintzberg.6 A formal top-down strategy process Large organisations will often formalise process of strategy formulation. This information can include: (a) Environmental scanning reports compiled by the business intelligence functions within the firm. Formal collection of information for strategy purposes. often the management teams of the SBUs. focus on just the positive consequences and then formulate objectives based on the likely outcomes of the strategy once it has become established. (c) Management accounting information on operating costs and performance. It is better that managers should select a course of action from a small number of alternatives. Another name for this view is adaptive because it sees the organisation as adapting to the circumstances around it. (d) Research reports from external consultancies on market opportunities and threats. together with financial forecasts. He argues that strategy is often recounted by managers long after the event. Strategy should not be a rational process. products or competitors. strategy emerges as a pattern from the piecemeal decisions of management. These are sometimes referred to as strategy away days because they often take place away from the office to avoid the interruptions day-to-day functioning. they will be haunted by doubts that they may have chosen the wrong alternative. (b) Groups of managers. 6. (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. 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. 1. aware of some of the inconsistency between objectives. (b) Specially commissioned reports on particular markets. Brunsson argues that excessive rationality in decision-making will rob a manager of the motivation and commitment necessary to implement the strategy successfully. A designated team responsible for strategy development. This is very similar to the ‘ready-fire-aim’ philosophy associated with some successful firms.

Avoids short-termist behaviour. This involves the senior management team working together to develop and agree business strategies. programmes and budgets based on achieving the goals laid out in the business strategy. Goal congruence. 2. (c) The development of detailed policies. 5. reporters from the business press will be invited to ensure that the information reaches a broader public. and also perhaps to other key stakeholders such as labour representatives. (c) Tactical programmes will be congruent with the strategy. There has also been an increased emphasis on competitor and other environmental information to assist managers in steering their businesses.ENTERPRISE MANAGEMENT 19 THE NATURE OF STRATEGIC MANAGEMENT 3. (b) Briefing meetings and presentations to the stakeholders mentioned above. 4. . it will help them keep ahead of change and to be more proactive. Techniques such as brainstorming ideas on flip charts and using visual graphical models to summarise complex ideas will assist this process. This could include design or acquisition of buildings and capital equipment. Collective decision-taking by the senior management team. the fine detail will remain confidential. This can be accomplished using a combination of the following methods: (a) Writing a formal document summarising the main elements of the plan. information systems or acquisitions of other businesses. Frequently. This will be distributed on a confidential basis to other managers and key investors. These are variously termed enterprise resource management systems and balanced scorecards. regulatory bodies. 3. arriving at a decision will involve considerable conflict as particular managers are reluctant to see their favoured proposal rejected and a different strategy adopted. There are many aspects to this: (a) It will help coordinate the different business units. the sophisticated competitive strategies of many firms have necessitated the development of more complex performance measurement systems to supplement traditional budgetary control information. (d) The development of performance targets for managers and staff. What are the benefits? 1.6. Management will monitor the success of the strategy by receiving regular reports on performance and on environmental changes. Regular review and control of the strategy. major customers and key suppliers. These ensure that everyone plays their part in the strategy (and perhaps receive financial rewards for doing so). Naturally. It ensures that management considers the long-term development of the business rather than focusing solely on short-term results and operational results. 1. Today. Helps identify strategic issues. (b) Asset investment decisions will be taken with the long-term needs of the business in mind. Also. A process of communicating and implementing the business strategy. By encouraging management to consider the business environment in their plans and decisions. divisions and departments and ensure that they work together to realise the full potential of the corporation. 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.1 Benefits of the formal top-down approach to strategy Business strategy formulation obviously uses a lot of organisational resource. Testing your appreciation of management’s need for non-financial measures and environmental information will be a recurring feature of questions in this examination.

It suffers from difficulties of implementation. together with operative staff. (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. Intel.20 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL E2 4. of middle and junior management. 1. The formal process is management-led and seeks to pursue the goals of the business.6. have also been that of firms whose names are associated with radical and visionary entrepreneurs. If the environment changes unexpectedly. Develops future management potential and ensures continuity. (b) There are clear programmes and policies being developed to implement it. a middle . (b) attraction and retention of staff and higher morale because employees can see that their career aspirations may be met within the firm. 6.g. (c) improved relations with suppliers who feel they can rely on orders in the future. and the time it takes to achieve any change to the strategy. 3. it enables others to make plans based on its future. The strategy of the firm is understood by all and will outlast the loss of key members of the management team. 5.2 Drawbacks of the formal top-down approach to strategy Some writers are critical of the formal process discussed above. It forbids the development of radical or innovative strategies. It is too infrequent to allow the business to be dynamic. The result will be that the goals of the strategy are not realised. say every 5 years. On the other hand. Virgin and (at points) Apple and Body Shop. 4. These business leaders tend to follow the emergent strategy approach. 2. This relates to the fact that formal strategy formulation is a collective process. this ensures that: (a) There is someone looking after the development of strategy. Provides a basis for strategic control. for example by continuing to make a product no one wants. (c) There are targets and reports enabling review of the success of the strategy. This view emphasises the infrequency of the ‘strategy round’. Successful implementation requires the participation. If the firm demonstrates that it has a clear idea of where it is going. By having a process of formulation and implementation. the firm’s performance may deteriorate as it continues to follow a business strategy which has now become inappropriate to its business environment. (c) Avoids succession problems when members of senior management retire or move on. 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. There is loss of entrepreneurial spirit. such as Microsoft. Improves stakeholder perceptions of the business. Entrepreneurs are persons who break rules and make changes to conventional ways of doing business. There is a danger that the formal process will not build the support of these people and hence will be misunderstood or resisted. because: 1. This means that: (a) Different functional managers (e. This may lead to: (a) higher share price because investors are confident of higher future returns. finance or marketing) gain an appreciation of the other disciplines of business and so develop into general managers. The need to retain consensus among the management team means that radical ideas are too often rejected. or at least acquiescence.

and management will not want to move too far away from it. 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. (c) When approaching retirement. The manager of a small business is unlikely to be skilled in the techniques needed for developing the kinds of business strategy described above. In a small firm. ● to find a buyer for the business. often with safeguards for staff. The effect will be to encourage conformity among managers. the formal top-down process described above may be unsuitable for small businesses for four reasons: 1. 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. 6. Differences in goals. 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. Having read this section. 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.ENTERPRISE MANAGEMENT 21 THE NATURE OF STRATEGIC MANAGEMENT manager in a strategically managed firm will be rewarded for carrying out their allotted part in the strategy and for not breaking the rules. It is impossible in uncertain business environments. (c) Management’s knowledge.7 Strategy and small businesses According to Birley (1982). Because in their view. 5. 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. (b) The day-to-day survival of the business will depend on success in this narrow market. They will not notice wider opportunities. 2. skills and horizons will tend to be limited to their current industry. the future cannot be forecast. Moreover. (b) Mid-life desire to achieve a balance between satisfactory financial returns and a good home life. the founder will have a number of possible objectives: ● to ensure that the business passes to children or loyal employees. 1. 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. Any new product or market venture will seem very radical. coupled with a desire for a satisfactory income and lifestyle. regardless of their skills or aptitudes. Limited scope of product/market choices. This will lose the firm potentially successful ventures and perhaps also the services of gifted entrepreneurial managers who may leave in frustration. It is too expensive and complicated for small businesses. summarise the main advantages and disadvantages of the formal top down approach to strategy. This means that growth may not be a primary consideration. . the goals of the business are often inseparable from the goals of the owner-manager and immediate family group. Critics argue that the business environment is now more uncertain than ever before.

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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. 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.

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

1.8

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

Theorists of business strategy disagree on the ways in which competitive advantage. Until the 1990s, most writers took a positioning view; however, more recently, a resource-based perspective has become popular. The two perspectives can be characterised as follows: 1. Positioning view sees competitive advantage stemming from the firm’s position in relation to its competitors, customers or stakeholders. It is sometimes called an outside-in view because it is concerned with adapting the organisation to fit its environment. 2. Resource-based view is based on competitive advantage stemming from some unique asset or competence possessed by the firm. 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.

1.8.1

Competitive advantage and economic theory

The debate over positioning versus resource-based approaches to strategy also has its origins in economic theory. The two sides disagree on the sources and durability of the competitive advantages that lead to supernormal profits. The concept of economic profit is the same as the ‘supernormal profit’ (or ‘economic rent’). According to economic theory, supernormal profit arises whenever market power belongs to firms rather than consumers. In the short run, firms in competitive markets can enjoy supernormal profits until competitive entry erodes profits by increasing buyer choice and pushing prices down. However, the only firms that can enjoy supernormal profits in the long run are those that have erected barriers to entry. (this links back to some of the components of Porter’s five forces model discussed in Section 1.4.4).

1.8.2

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 differentiated product low costs. Examples of application of the positioning approach include the following:

1. Porter’s Five Forces theory argues that the long-term return on investment (ROI) of an industry is determined by 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. These strategies are the generic strategies of overall cost leadership, differentiation or focus and can be pursued by developing a unique configuration of its value chain or value system.

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

1.8.3

Resource-based view

Resource-based theorists (RBT) make the following criticisms of the positioning view: 1. The competitive advantages are not sustainable. Positioning advantages are short run. These advantages are too easily copied in the long run by rivals or will lose their power as the product life cycle enters its decline phase. Therefore, superior long-run profitability cannot be explained or assured by possession of a world-beating product, a dominant market position or low-cost position. According to RBT writers (e.g. Barney, 1991), superior profitability instead depends on the firm’s possession of unique resources or abilities that cannot easily be duplicated by rivals. 2. Environments are too dynamic to enable positioning to be effective. Positioning depends on the customer group, buyers, suppliers, rivals, and so on, to remain the same long enough for the firm to mount an effective response. However, faster product life cycles, the impact of IT, global competition and rapidly changing technologies make this impossible. RBT writers (e.g. Stalk et al., 1992) argue that superior competitive 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. 3. It is easier to change the environment than it is to change the firm. Some RBT writers (e.g. Pralahad and Hamel, 1990; Kay, 1997) are suspicious of the positioning school’s implied belief in a ‘rubber organisation’, that is one that can have its size and shape changed at will to fit the environment. They argue that such organisational changes are likely to destroy the complex organisational architectures on which the firm’s present and future success depends. 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.

1.8.4

Principles of resource-based theory

A number of different writers have developed principles that underpin the RBT and that are needed to achieve sustainable competitive advantage. Stalk et al. (1992) suggest four principles of capabilities-based competition: 1. The building blocks of corporate strategy are business processes, not products and markets. 2. Competitive success depends on the ability to transform these processes into strategic capabilities able to provide superior value to the customer. 3. Creating these capabilities requires group-wide investments that transcend traditional functional or business unit boundaries. 4. Therefore, the champion of capabilities-based strategy is the chief executive officer (CEO).

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Superior competitive performance will result from the firm using these competences to outperform rivals on five dimensions: 1. 2. 3. 4. 5. Speed. More able to incorporate new ideas and technologies into its products. Consistency. All its innovations satisfy the customer. Acuity. Ability to see its environment clearly and forecast changing needs. Agility. Ability to adapt on many fronts simultaneously. Innovativeness. Ability to generate and combine business ideas in novel ways.

Barney (1991) argues that superior profitability depends on the firm’s possession of unique resources. He identifies four criteria for such resources: 1. Valuable. They must be able to exploit opportunities or neutralise threats in the firm’s environment. Here, Barney is accepting the view of resources taken in the SWOT model. However, the point he is making is that it is not enough just to have valuable resources. 2. Rare. Competitors must not have them too, otherwise they cannot be a source of relative advantage. 3. Imperfectly imitable. Competitors must not be able to obtain them. Generally, this will result from them having come into the firm’s possession by a unique historical event (e.g. ability to point to a long history in the business or perhaps past purchase of a unique piece of land), or because they are hard to understand and duplicate if you are an outside competitor (e.g. a particular organisational culture or relationship with stakeholder groups). 4. Substitutability. It must not be possible for a rival to find a substitute for this resource (e.g. not in the way that Microsoft used CD technology to substitute for the sales network, payments systems, printing and logistics of Encyclopaedia Britannica when it launched Encarta). Kay (1997) writes of ‘distinctive capabilities’ arising from four sources: 1. Competitive architecture. These are the relationships that make up the organisation. These can be divided into: (a) internal architecture: relations with employees; (b) external architecture: relations with suppliers and customers; (c) network architecture: relations between a group of collaborating firms. These deliver distinctive capabilities that are greater than the sum of the parts in three ways: (a) through the creation of unique organisational knowledge, which arises from collaboration and interaction; (b) through establishing a cooperative ethic among the participants; (c) by implementing organisational routines. Kay uses the examples of successful football clubs like Liverpool and Manchester United. He suggests that their football league performance is due to the networks they have built with youth clubs and their expenditure on recruiting players, their detailed analysis of other clubs’ games, a cooperative spirit that enables players to pass the ball rather than waste chances with lone shots at goal and deeply embedded routines of play. 2. Reputation. This is the high esteem that the public have for the firm. Among customers, it is a reason to buy the product and to remain loyal, while for investors, suppliers and potential employees, it is a reason to become involved and give exceptional levels

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of support to the firm. Kay argues that reputation must be built and maintained over time and requires detailed attention to all aspects of the firm’s products, procedures and processes. He uses the examples of car hire and accountancy services to demonstrate that reputation drives up margins. 3. Innovative ability. This is the ability to develop new products, services or solutions. These stave off competitors and enable the firm to enjoy the high margins of early lifecycle markets. Innovation frequently demands collaboration among staff and with suppliers and customers. Consequently, it builds on the architectures of the firm. 4. Ownership of strategic assets. This is close to the barriers to entry discussed in traditional economic theories of monopoly. The firm may have a unique source of materials or possess exclusive legal rights to a market or invention. Kay observes that these generally occur in markets with strong government involvement (e.g. medicines, defence equipment, etc.) and profits may be limited by government action too. Prahalad and Hamel (1990) describe ‘core competence’ as ‘the collective learning in the organisation, especially how to coordinate diverse production skills and integrate multiple streams of technologies’. They propose three tests to identify a core competence: 1. Must provide access to a wide variety of markets. This is sometimes called the extendibility condition. 2. Must provide a significant contribution to the perceived customer benefits of the final product. 3. Must be difficult for competitors to imitate. The authors cite as examples Honda’s skill with small reliable high-output petrol engines (cars, motorcycles, lawnmowers); Sony’s skills in miniaturisation (radios, televisions, CD players, personal stereos, laptops) and 3M’s skills in coatings (cassette and video tape, PostIt-Notes, photographic film, abrasive papers). These skills enabled the firms to deliver premium profits across and through diverse environments. They argue that core competences can be destroyed by failure to invest in them. They share with Stalk et al. (1992) the view that excessive focus on functional or SBU divisions can cause harm, and describe two concepts of the corporation (Table 1.2).

Table 1.2

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

SBU 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; the SBU ‘owns’ all resources other than cash Discrete businesses are the unit of analysis; capital is allocated business by business Optimising corporate returns through capital allocation trade-offs among businesses

Core competence Inter-firm competition to build competences Portfolio of competences, 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

Value added by top management

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

1.8.5

The implications of the resource-based view for strategy development

Resource-based theory raises a number of issues: 1. Conflict with conventional product/market-based views of strategy. The notion of core competences spreads beyond the ability of the firm to compete just in particular markets and industries. Yet many of the models we have used, such as the Porter models and the product life cycle, tend to discuss particular products and markets and develop strategic prescriptions for them. This leads to two possibilities: (a) By using techniques that focus on products and markets individually, we may develop strategies which deplete the firm’s wider core competences (e.g. by deciding to withdraw from a market or to cut costs by outsourcing a crucial source of organisational learning). (b) Even where a firm is involved in a range of industries and has a unique core competence across them all, it is no guarantee of competitive advantage against more focused players in each market (e.g. in the 1980s, IBM had a unique global architecture, reputation and ownership of proprietary technology. This did not stop it from being beaten into second or third place by focused rivals in each of its sub-industries of software development, consulting, PCs and mainframe systems). 2. Challenges the rational model of strategy. The RBT view seems to argue that strategy should not be a process of deciding a product/market mission and competing in markets by establishing what the customer wants and exploiting the weaknesses of rivals. Instead, it suggests that strategy involves deciding what makes the firm unique and building strategy on that, extending into any products or markets where it will work. The impacts of this are: (a) RBT strategy starts with the corporate appraisal, not with the mission of the business. Indeed, the mission must adapt to fit the most recent extension of core competence. (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’). This reasoning could lead to very diverse strategies or perhaps a complete drying-up of strategic avenues (as they run out of things to hit). (c) Investors cannot be clear what industry they are investing in. This may increase perceived risk and hence destroy shareholder value by reducing the share price. 3. RBT can lead to different conclusions. The basis of RBT is the suggestion that the firm should retain any unique strategic assets it has, outsource the remainder, and focus on building up relationships with internal and external stakeholders to develop its internal

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knowledge so as 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.

1.9

Alternative approaches to formulating strategy

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

1.9.1

Emergent 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 1.6). Mintzberg describes emergent strategies as ‘patterns or consistencies realised despite, or in the absence of, intentions’. By this he means us to understand that they just ‘happen along the way’, with differing degrees of management involvement. The failure of intended strategies to be fully realised as deliberate strategies does not surprise Mintzberg. He regards it as unlikely that a 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

Intended strategy

Deliberate strategy

Realised strategy

Unrealised strategy

Emergent strategy

Figure 1.6

Mintzberg’s types of strategy

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

Manage stability. Managers should be able to master the details of running their business and not feel compelled to constantly rethink the business’s strategic future. As Mintzberg says: ‘To manage strategy . . . is not so much to promote change as to know when to do so.’ Detect discontinuity. This is the ability to detect the subtle environmental changes that may affect the business and be able to assess their potential impact on its future 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.

1.9.2

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 (Figure 1.7).

Radical strategy Development Environment Strategic drift Logical incrementation

Time Past Now

Figure 1.7

Logical incrementalism

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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. Quinn (1978) takes a more positive view of logical incrementalism than Lindblom. For Quinn, a manager must map where he or she wants the organisation to go and then proceed towards it in small steps, being prepared to adapt if the environment changes or if support is not forthcoming. The managerial role functions as a management learning process with the following elements:

The manager sits at the centre of a network of formal and informal communications with staff, customers and others. They will be attuned to the problems and issues confronting the organisation. They may use formal strategy models and techniques to understand these. Once they sense that a need for change has arisen and that events are pushing the firm in a particular direction, they will start to develop a general strategic vision for the organisation. Often they will wait until circumstances have made other managers responsive to ideas for a change to the organisation. Rather than present the strategy full-blown, and risk opposition, the manager will build political support for the ideas by revealing them to key committees or on management retreats. Commitment will be gained to an initial trial of the strategy. This will build further commitment among those charged with making the project a success and erode the consensus in favour of the old way of doing business. This consensus will build and press the strategic change forward incrementally.

The use of formal strategic frameworks is valuable in developing and communicating the changed strategy. This is the logical element in Quinn’s methodology because it ensures that the process leads somewhere. The incrementalism comes from the need to subordinate rapid change to the process of gaining consensus and avoiding resistance (similar to Mintzberg’s ‘Reconcile change and continuity’). Quinn suggests four key roles for the manager in this process: 1. 2. 3. 4. Improve the quality of information used in key decisions. Overcome personal and political pressures resisting change. Deal with the varying lead times and sequencing of events in the decisions. Build organisational awareness and support for the strategies.

As we can see, Mintzberg and Quinn are essentially making the same point: that strategies are not always planned or revealed in advance and that management skill is crucial. Unlike Lindblom, they do not see this as unacceptably conservative, but see it as realistic. Logical incrementalism has been criticised as potentially being too slow to enable the organisation to cope with rapid changes in its environment.

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Evaluation of approaches to strategy The syllabus focuses on how strategy may be developed and how as a chartered management accountant, you may assist in this process. For this, it is better that we take a rational approach as the basic framework. This said, we should still recognise what Mintzberg and others have alerted us to, that in the real world, strategies can be influenced by irrational factors and that implementation is a crucial step in successful strategies. As Mintzberg has commented, most real-world strategies ‘walk on two feet’, balanced between the rational approach and the emergent approach. As a footnote to the earlier discussion of ‘dotcom’ 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. Many business writers put this down to failures by management to develop satisfactory ‘business models’. In other words, the investors had put their money into business ideas that could not make a return for shareholders or which lacked a credible strategy. This could support the view that a more formal approach to strategy brings benefits even in the age of e-commerce and e-business.

1.10

Stakeholders

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

Stakeholders are defined by CIMA as ‘Those persons and organisations that have an interest in the strategy of an organisation . . .’ (Management Accounting: Official Terminology, 2005 edition, p. 53).

They include:
● ● ● ● ● ● ● ● ● ● ●

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

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

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1.10.1

The influence of stakeholders

Strategic decision-making requires 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 shareholders, management must ensure that its decisions do not ignore the interests of other stakeholders.

1.10.2

The Mendelow matrix

Mendelow (1991) developed a framework to help analyse stakeholders power and interest (Figure 1.8). Johnson, Scholes and Whittington (2008) suggest that this technique can be used in two situations: 1. To keep track of changes in the potential influence of different stakeholder groups. By plotting the matrix periodically, management can be alerted when a strategy may need to be changed to accommodate (or avoid a threat from) particular stakeholders. 2. To assess the impact of a particular strategic development on stakeholders. For example, managers proposing a factory closure could use mapping to identify where opposition to closure may come from and how it might be managed (e.g. by shifting redundant workers from quadrant D to C or B through generous pay-offs and thus reducing the votes for a strike). Plot the different stakeholders of your organisation on Mendelow’s matrix. Then explain why you have put them in a particular quadrant.
Level of interest Low High

Low

A Minimal effort

B Keep informed

Power High

C Keep satisfied

D Key players

Figure 1.8

Mendelow’s power-interest matrix

for example: ● size of their budget ● number and level of staff employed ● volume of business transacted with them (e. alternative job. local councils or government bodies. Not all stakeholders have the time or inclination to follow management’s decisions closely. a trade union). ● high social impact of firm (e. reliable supply and reassurance about their purchases.g. 3. 2. It is important to consider what they wish to achieve. we would need to interview the powerful stakeholders to find out precisely what they wanted. ● customers – want fair prices. for example: ● their place in the organisational hierarchy ● their relative pay ● their reputation in the firm ● their social standing (e.g.10. Formal representation in decision-making processes: ● level of management where they are represented ● committees they have representation on ● legal rights (e. ● potential to be called to account for failing to monitor (e. Again. association with particular issues). for example: ● high personal financial or career investment in what the business does.4 Assessing interest of stakeholders This will be more complex because it involves two factors: 1. customer. ● local government – wants jobs. Claim on resources. We assume that powerful stakeholders will pursue their selfinterest.10. Status of the stakeholders. well-known. planning authorities). . for example: ● managers – want to further the interests of their departments and functions as well as their own pay and careers. consultation on expansions and so on.g. ● absence of alternative (e. good working conditions and some consultation. such as regulators). shareholders. ● employees – require higher pay. Where their interests rest.g.g. How interested they are. contribution to local community life. 1. some generalisations are possible about what will lead to interest. ministers of religion may carry considerable power due to their social status).g. supplier or employer). job security. prompt payment and advance notification of changes.3 Assessing power of stakeholders Factors that may be associated with a particular group having high power are: 1.ENTERPRISE MANAGEMENT 33 THE NATURE OF STRATEGIC MANAGEMENT 1. ● suppliers – want fair prices. reliable orders. suppliers and customers) ● percentage of workers they speak for (e. It is possible to make some generalisations.g. In practice. 2. visible product.

Johnson et al. the key concerns where alignment is poor are: ● ● ● ● the negative attitudes of skilled labour. this may stop them joining forces with more powerful dissenters in C and D. Box B – education/communication. Custom Pub: Organizational Behaviour: Canadian Edition. There is no need to tell the small shareholders or customers. In the example in Figure 1. the ambivalent attitude of shareholders and customers. Also if the strategy is presented as rational or inevitable to the dissenters. the possible search for power from local council and media.10.cengage. Reproduced by permission. www. It takes up the idea of a factory closure mentioned earlier and suggests where management could classify the stakeholder factions and how it might deal with them. the potentially negative interventions of national media and central government. (2008) suggests the following strategies to deal with each quadrant: ● ● Box A – direction.9. This means their lack of interest and power makes them malleable. © 1998 Nelson Education Ltd. or a show of consultation is gone through. The positively disposed groups from this quadrant may lobby others to support the strategy.34 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL E2 Level of interest Low High A Casual unskilled (–) General public (–) Small shareholders (+) B Small local suppliers (–) Local council (–/+) Un-unionised labour (–) Local press and media (–/+) Power Low C Central government (–) National media (–) Customers (–/+) Minor fund managers (–/+) D Skilled unionised labour (–) Key managers (–) National suppliers (–) Major fund managers (–/+) Research and Development Staff (–/+) Figure 1. key managers and national suppliers. They are more likely than others to accept what they are told and follow instructions.9 Illustration of Mendelow’s matrix applied to Dyson.5 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. Factory management should not reappoint the casual staff but rather provide limited redundancy support. 1. From HELLRIEGEL.9. 1E.com/permissions An illustration of Mendelow’s matrix appears in Figure 1. High .

These accounting measures have several drawbacks when used as strategic targets: ● They are not useful for start-up businesses. Key shareholders will be consulted throughout to reassure them that costs will not be excessive. Two examples are particularly important: 1. For example. The key here is to keep the occupants satisfied to avoid their gaining interest and shifting into D. 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. Differences between shareholders. there will be differences between the goals of members of the same internal stakeholder group. . The job of management is to develop and implement strategy with these differences in mind. Initially. 1. Usually. Consequently. 2. return on capital employed or earnings per share). the shareholders’ objectives have been translated into financial objectives such as profit or profitability (e.10. The factory managers should involve the unions in determining the redundancy package or redundancy policy. there should be education/communication to assure them that the change is necessary. These stakeholders can be major drivers of the change and major opponents of the strategy. During their first few years. Advance notice will give each more time for adjustment. 1.11 Meeting the objectives of shareholders Traditionally. The goals of managers and the departments they lead may conflict.g. followed by discussion of how to implement it. Key managers should be involved in deciding the basis on which early retirements should be handled and how redeployment or outplacement should be managed. This can be further complicated in organisations where the employees are also shareholders! Additionally. Profitability measures are better suited to mature businesses.ENTERPRISE MANAGEMENT 35 THE NATURE OF STRATEGIC MANAGEMENT ● ● 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. A similar message may reassure investors if it is backed up with a reassuring short-term dividend forecast. Box C – intervention. Box D – participation. Factory managers should assure the government and suppliers that the closure will result in a more competitive firm that is able to compete worldwide. this is done by reassuring them of the likely outcomes of the strategy well in advance.6 Conflict between stakeholders The objectives of the stakeholder groups will inevitably be different and may be in direct conflict. 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. many strategic objectives are the outcome of a political bargaining process at boardroom level. 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. Differences between managers.

Because profit is an annual measure. They provide no control over strategic behaviour. However. These ensure that: – managers follow courses of action consistent with the competitive 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. Shareholders will require higher returns if risks are higher but will be satisfied with lower returns if risks are low. it encourages management to focus on short-term returns at the expense of the long-term development of the business. managers may decide to cut product development. human resources. 2. Consequently. Development of consistent strategies.11.). the strategic objectives can be more easily translated into tactical and operational. The competitive strategy of the firm will seek to do business in particular ways in order to make this profit. If the organisation does not have clear objectives.1 Maximisation of shareholder wealth as an objective Traditional economic theory specifies that the objective of the firm is to maximise profit. It confuses profit with cash flows to the investor.11. etc.g. This strategy should also feature in the goal structure. promotion or staff development to improve profit performance at the expense of the long term. The investor wants cash flows.2 Competing objectives It has been shown that profit-seeking. They can be manipulated by creative accounting. This has important implications in the following areas: 1. 1. then it will not be able to follow . 3. The debate on the primacy of financial targets widens when we recognise the impact of other stakeholders and the issues of corporate social responsibility. or (b) maximisation of the share price. marketing. not-for-profit and public sector organisations may have competing objectives arising from: ● ● ● conflict between profit and social responsibilities differences in the goals of particular managers conflicts between the goals of influential stakeholder groups. – objectives for divisions and processes without an immediately discernible impact on profits (e. The profit figure is a financial summary of the effects of a year’s economic activity. The shareholder wants financial returns across many years. – shareholders and others can form an opinion of the success of the firm’s strategy even when financial results are low. 1. Hence. It ignores risk. or if its objectives are in conflict with one another. the strategic targets of firms usually contain a mixture of financial and non-financial measures of performance. this assumption does not accurately reflect the goals of the shareholder for a number of reasons: 1. not a figure for profit on the income statement.36 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL E2 ● ● ● They are inherently short-termist. It is a single-period measure (typically annual).

Each strategic option is scored according to how well it satisfies the objective (a high score showing high attainment). where each has the same set of multiple objectives to achieve. worse. If the objectives are competing. Options are evaluated against the objectives of the business before management agree to devote resources. Once this is assured. For example. 1. and so on. ensuring emotional development. a group of schools. if one option provides a good financial return while another provides jobs in an area of high unemployment. For example. Management can specify that any strategy considered must at a minimum satisfy one or more specific objectives before they are prepared to consider it. 2. Deciding between strategic options.ENTERPRISE MANAGEMENT 37 THE NATURE OF STRATEGIC MANAGEMENT consistent courses of action. It usually emerges as a result of negotiation between the competing stakeholders. stakeholders happy. they turn their attention to achieving it in a more socially responsible way. In their study A Behavioral Theory of the Firm (1963). 3. Approaches include the use of balanced scorecard measures and techniques of data envelopment analysis (DEA). However. there is a danger of conflicting signals or. Development of appropriate performance measures.11. Here. and the strategic option with the highest overall ranking is accepted. Each objective is weighted according to its relative importance to the organisation (a high weight denoting high importance). Weighting and scoring. mathematical ones. The above techniques are rational. the more control measures it will need to monitor performance towards them. Creation of composite measures. For example. DEA is used to assess performance of a group of branches or divisions (e. the strategy selected is the one that keeps all. It can also give an overall performance metric for each branch. These are used for strategy implementation and control rather than for strategy formulation and choice. a firm with both financial and social responsibility objectives will not be able to choose. However. Data is fed into a sophisticated computer programme which identifies for each objective the best performer among the group. 3. or at least the most powerful. management may set a minimum profitability threshold for any strategy (say 15% return on investment). 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. excessive focus on one at the expense of the rest. Prioritisation. hospitals or universities). based on a composite index of its performance against a notional ‘best in class at everything’ branch. The more objectives an organisation has. management researchers Cyert and March identify some less obviously rational techniques by which competing objectives are resolved: ● Satisficing. 2. a firm that seeks to satisfy objectives for short-term dividends while also pursuing long-term growth will eventually be forced to sacrifice one or the other due to lack of funds.3 Resolving competing objectives There are various techniques available: 1. . a school will have many objectives such as producing good citizens.g. It calculates the comparative performance of the remaining branches against this ‘best in class’ branch. catering for special needs. A ranking is calculated for each option by multiplying its weighting by its score.

Corporate Governance: History. London: CIMA. A Behavioural Theory of the Firm. 2. this is often resolved by one or more powerful figures using their power to force through their preferred option. ‘Corporate Strategy and the Small Firm’. 8. G. References Barney. and Schendel. Minnesota: West Publishing. and March. Stakeholders are kept happy by taking turns to get their objectives realised. and Prahalad. C. N. Reproduced in Asch. Cyert.G. Where management are deadlocked due to competing objectives. (1963). the benefits and drawbacks of the formal top-down approach to strategy development. The New Alchemists. a shareholder may be compensated for a low profit by a higher dividend. J. C. and Bowman. . E. and Handy. Hamel. Hofer. No. pp. the difference between the positioning approach and the resource-based theory view. Winter 1982–3. Brunsson. The Irrational Organisation: Irrationality as a Basis for Organisational Action and Change. Journal of Management. Practice and Future. Strategy Formulation: Analytical Concepts. (1985). pay remains static while dividends are paid. Chichester: John Wiley.12 Summary This chapter provided an introduction to the strategic management process. D. S. No. in between.K. J. The key topics introduced include: ● ● ● ● ● ● ● the different definitions of strategy. Where particular stakeholders’ objectives cannot be addressed. Boston.M. the alternative approaches to strategy. 17. R. Ch. ‘Firm Resources and Sustained Competitive Advantage’. (1991). (eds) (1989). (1994). London: Hutchinson. Competing for the Future: Breakthrough Strategies for Seizing Control of Your Industry and Creating the Markets of Tomorrow. (1999). 99–120. Therefore. 1. MA: Harvard Business School Press. Journal of General Management. For example. Vol. Birley. C. Management Accounting Official Terminology. C. D. the different ways of achieving competitive advantage and the choices organisations have in strategy development. (1978). London: CIMA Publishing.W. the importance of stakeholders and the possible competing objectives. 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. Handy. for example emergent strategies and logical incrementalism. NJ: Prentice-Hall. the different stages in the rational strategy model. CIMA (2005).38 THE NATURE OF STRATEGIC MANAGEMENT STUDY MATERIAL E2 ● ● ● Sequential attention. Exercise of power. Englewood Cliffs. 6. Vol. they are compensated in another way. (1982). CIMA (2000). staff may get a large pay rise every 3 years but. Side payments. 1.

Harvard Business Review. Foundations of Corporate Success: How Business Strategies Add Value (2nd edn). July–August. 517–526. London: CIMA. May/June. . pp. A. Kay. ‘Our Five Year Mission: To Boldly Go Where No Man Has Gone Before …’. Fall Rockart.F.J.D. Stalk. London: Financial Times Management. pp. Lindblom. Vol. 79–88. Sloan Management Review. Cambridge MA. 7–19.K. Proceedings of 2nd International Conference on Information Systems. and Whittington. ‘Strategic Change: Logical Incrementalism’. Scholes. ‘Still Muddling. (1987). (2008). K. Harvard Business Review. Harlow: FT Prentice Hall. 35–48. H. and Shulman. Johnson. (1959). Public Administration Review. and Adams. R. (1992). and Hoffman.E. Oxford: Oxford University Press. J. pp... R. Exploring Corporate Strategy (8th edn). op. pp. (1992). (1992). Lindblom. Evans. Quinn. Lynch. C. November/December. Public Administration Review.E. L. 8. ‘The Science of Muddling Through’. Mendelow. (1978). ‘Competing on Capabilities’. March/April. Cox. J. ‘Systems Delivery: Evolving New Strategies’. 7–21. (1979). Corporate Strategy (4th edn). ‘The Core Competence of the Corporation’. Summer.. pp. (1998). 110–120. (1997). (2006). Vol. ‘Crafting Strategy’. cit. Harvard Business Review. Sloan Management Review. (1990). pp. (1991). Mintzberg.B.ENTERPRISE MANAGEMENT 39 THE NATURE OF STRATEGIC MANAGEMENT Hooley. Prahalad. Cited in Corporate Performance Evaluation in Multinationals (1993). C. Not Yet Through’. G. J. A.J.. G. A. and Hamel. C. Reprinted in Mintzberg et al. Spring. 20. G. J. P. Journal of Marketing Management. G.

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It commences with a set of tentative objectives which the CEO or senior management team considers necessary for the organisation to achieve its goals. The external environment is then analysed to determine potential opportunities and threats. Alan Marsden explains these issues in the following article. to one of exploiting and building the organisation’s competences and resources. Strategic management – which way to competitive advantage? Alan Marsden. Kenneth Andrews and others (1971). most writers on strategy emphasised the importance of adopting a deliberate and systemic approach to the process of planning. an internal audit is conducted to determine the organisation’s strengths and weaknesses. 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. Among these. The approach may be illustrated by a diagram such as Figure 1. 1996). cultural and political processes within organisations. This approach to strategy generally involves a deliberate step-by-step approach.Reading 1 Approaches to strategic management have changed and evolved considerably over the last 20 years or so. through to the early 1990s. and then a plan is prepared to assist in the implementation of the chosen strategy. Management Accounting. 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. January 1998 Many readers of this magazine will associate strategic management with strategic planning. 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 the generic strategies as a tool to assist in strategy evaluation. with his development of the concept of the five forces model used for industry analysis. the most important contributor has been Michael Porter (1980). 41 . the value chain as an instrument for assessing internal organisational strengths and weaknesses. 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. More recently. which is taken from the Management Accounting Official Terminology (CIMA. Initially.

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. Porter and others discussed the importance of internal analysis and developed both the competence-grid and the value chain as aids to this. The demise of the planning approach The enthusiasm for corporate planning. found that the majority of the largest US companies had set up corporate planning departments. A study in 1963 Gilmore (1979). the major focus has tended to be on the environment. and is. Opportunities. we find the development and use of portfolio planning matrices as frameworks for selecting strategies and allocating resources in the diversified corporations. diversification was very much in fashion as a means to corporate growth. established priorities for different products and business areas and allocated resources. Ansoff. then. One reason for its demise appears to have been the increasing rate of change and the associated macroeconomic . Threats Figure 1 Long-term plan Though writers such as Philip Selznick (1957). The common assumption underlying the approach is that the environment largely determines the organisation’s freedom to manoeuvre. 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. Therefore. It is perhaps not surprising. The typical format used by these departments was a five-year corporate-planning document that set goals and objectives. that during this period. forecast the main trends. that of the planning and management of growth. One of the main purposes of corporate planning was. the company’s market share and its revenue and net income. however. such as those for market demand. Weaknesses. The approach outlined was taken on board and used by planning departments in some of the world’s largest corporations. was not to last. D and E? 1 Strategies (a) strengths/eliminate low earnings (b) expand high earnings (c) own production/buy-in (d) new products (e) acquisitions 2 Resources required 3 Personal responsibilities and motivation G LONGTERM PLAN D GAP ANALYSIS Ultimate objectives compared with extrapolated existing Performance–the ‘gap’ E CORPORATE APPRAISAL SWOT analysis Strengths. This was particularly true in the period of stability and economic growth that characterised the 1960s and early 1970s.42 THE NATURE OF STRATEGIC MANAGEMENT READING E2 A SETTING OBJECTIVES Where do we want to go? 1 Shareholder’s return/ earnings per share 2 Products/markets 3 Organisation 4 Expansion/consolidation C ENVIRONMENTAL ANALYSIS What is the environment in which we operate going to be like? Product demand Customers Competition Production technology Workforce B POSITION AUDIT Where are we now? Products/markets Production resources (a) People (b) Fixed assets (c) Finance organisation Results (a) Operating companies (b) For shareholders F ESTABLISHING STRATEGY What is the best way to get from B to A considering C. During the 1960s and 1970s.

the excessive emphasis on quantifiable data. Academics charted these developments and conducted empirical research into how strategy was actually formulated in companies. In many companies. A secondary reason for the fall in popularity of strategic planning was the failure of diversification to increase profitability. The use of portfolio planning models did not guarantee the synergy that companies sought in their various acquisitions and so this only added to the disillusion with the planning approach. There is some evidence that the reason for planning failure was partly influenced by the way in which the planning process was conducted in some organisations. corporate planning departments were dismantled and responsibility for strategy formulation passed to managers who had responsibility for its implementation. A more flexible. He observed that while strategy is often thought of as a plan or a guide to a course of action into the future. The available research shows that few planned . The main findings of this research can perhaps most easily be summarised by the use of a diagram provided by Henry Mintzberg (1994). Another factor adding to this competitive situation was the growth of Japan and other South East Asian countries as manufacturers and exporters of an increasing range of goods.ENTERPRISE MANAGEMENT 43 THE NATURE OF STRATEGIC MANAGEMENT instability with which companies had to cope from the mid-1970s onwards. while the pattern of actions which evolve from past decisions might be called realised strategies. and the drive for administrative efficiency in the planning process and the unqualified acceptance and misapplication of various analytical techniques.T. for instance. This produced fuel shortages and inflation which few if any could have anticipated and this rendered the predictions of corporate planners virtually useless. while the over-reliance on analytical tools like portfolio matrices often seemed to serve as a substitute for critical thought in the analytical process. Research by R. The emphasis on quantifiable data led to the neglect of important qualitative changes in the environment because they were difficult to measure. Developments in transport and communications resulted in the development of global competition for many products and this intensified competition. whereas strategy as a pattern refers to the observed decisions and actions after they have been taken. They found that several factors contributed to this lack of commitment including the professionalisation of planning. Organisations were faced not only with fluctuations in the economy but also with technological change. The drive for efficiency tended to result in the growth of bureaucratic procedures and to be detrimental to creative thinking. Lyles (1985). 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 difference between these is that a plan refers to intended future action. Lenz and M. Mintzberg suggests that strategy as a plan can be called intended strategy. One effect of this was that product life cycles became shorter and firms more frequently needed to update their production processes. 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. less formal approach was adopted and the time horizon for long-term plans reduced. Particularly damaging was the first oil price shock of 1974. This additional competition resulted in an ever more active search by competitors to secure competitive advantage. it could also be regarded as a pattern of consistent behaviour over time. The use of professional planners with their use of technical jargon tended to alienate some practising managers. The product of all these changes for the organisation was a dynamic and unstable environment in which any long-term plans became quickly outdated.

This occurs for a number of reasons. 1994) strategies work out exactly as expected. As things turned out. According to Pascale. 1984) of Honda Motor Company’s entry into the US motorcycle industry. the sales of the 250cc and 350cc bikes were disappointing. One of the reasons had to do with mechanical failure of some of their machines. For their part. the Honda executives were using 50cc machines to run errands around Los Angeles. 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. pressure from a stakeholder group or the fact that the original strategy may have been misconceived. . That is to say that few plans are realised in all their intended detail. The ostensible reason for Honda’s success is that the company redefined the US motorcycle industry via a brilliantly conceived intended strategy. Pascale recounts how. In the course of their work. while those that are not realised at all can be called unrealised strategies. intentions that are fully realised can be called deliberate strategies. One day. when Honda executives arrived in Los Angeles in 1959. As depicted in Figure 2. their failure to sell the expected quota of larger machines pushed them into selling the smaller 50cc machines and to sell them not through specialist motor cycle distributors but through general retailers. The strategy that emerged did so.44 THE NATURE OF STRATEGIC MANAGEMENT READING E2 Int str ende ate d gy Delib e strat rate egy Unrealised strategy Realised strategy Emergent strategy Figure 2 Forms of strategy (Mintzberg. The strategic planning approach recognises both these possible outcomes. The intended strategy looked to be failing. however. The most frequently quoted example of this type of strategy development comes from a description provided by Richard Pascale (Spring. a switch in the strategy of a competitor. the Honda team were reluctant to sell the small bikes because they feared it would alienate serious bikers who might associate the Honda Company with ‘wimp’ machines. however. such as an unexpected change in the environment like a sudden fall in demand. they did so with the intention of setting up a subsidiary to sell 250cc and 350cc machines to existing motorcycle enthusiasts. and their presence attracted a lot of attention. the Honda team received a call from a Sears’ buyer who proposed selling the 50cc machines through the department chain outlets. Sales took off and a new strategy was born. Eventually. not through planning. Honda’s intended strategy was nearly a disaster. which Mintzberg calls emergent strategy and which applies to a situation where a realised pattern evolves that was never intended. but through unplanned action taken in response to unforeseen circumstances. but it does not account for a third possibility.

The view that the realised strategies of an organisation depend on many processes in addition to systematic analysis and deliberate planning is supported by the work of other researchers like Gerry Johnson (1988). In the case of Coopers. the buyers shared the common assumption developed over years of experience in the industry that a ‘commodity’ merchandise policy (a ‘pile it high. 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. which influences the perceptions of managers. nearly one out of every two motor cycles sold in the United States was a Honda. In other organisations. by tightening controls and cutting controllable costs. The set of beliefs. the situation was eventually resolved in an incremental fashion by many small adjustments over a period of time. . and also that successful strategy can emerge without prior planning and often in response to unforeseen circumstances.ENTERPRISE MANAGEMENT 45 THE NATURE OF STRATEGIC MANAGEMENT By 1964. In his examination of how strategy developed in Coopers. 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. The critical point demonstrated by this example is that not all strategies are planned. supported by top management. 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. In addition. Abandonment of the way of doing things. Even when sales fell. the leisure centre and the park. Senior managers committed to a way of doing things. What now for strategic planning? The accumulated evidence suggests that the strategic planning approach to the development of strategy has a number of limitations. This set of assumptions and beliefs may be regarded as a sort of paradigm. and therefore the decisions they make and the actions they take. it is not uncommon for a failing company to be forced to adopt a new strategy almost overnight. resisted change. What’s more. the buyers. Johnson concluded that the strategy that emerged could be best explained in terms of the cognitive. Johnson describes how. which bring a company to the brink of ruin. are frequently replaced by those with new ideas. and methods of organisation and control that it was believed contributed to the effectiveness and efficiency of the organisation. Johnson explains the reluctance of Coopers’ management to change their strategy as arising from the mindset produced by the prevailing paradigm. any challenge to it constituted a political threat. This tacit knowledge consisted of agreed notions about trading procedures. would result in a major loss of face. assumptions and way of doing things that had served the company well in the past were not easily abandoned. because the prevailing paradigm was associated most strongly with senior executives in the company. political and cultural fabric of the organisation. 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. sell it cheap’ policy) was the one most likely to deliver competitive advantage. despite clear signals of fashion changes in the market and continuous pressure from middle management. By chance. 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 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. the retail clothing company. which they had continually defended.

many competitors can earn attractive returns. industries vary in their potential for profitability. For instance. it is becoming more difficult to plan because of the accelerating rate of change. Second. strategies can emerge that derive not only from the systematic and rational analysis used by strategic planners but also from chance observations. Here again. such as soft drinks and pharmaceuticals where the five forces are favourable. in particular. Porter’s five forces model. 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. buyers. 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 second question the entrepreneur needs to address is how to best position the firm within the industry so as to earn a rate of return above the industry average. Pascale. In Porter’s words. ‘the collective strength of these five competitive forces determines the ability of firms in an industry to earn. But again. 1980). Having selected the most favourable industry. But in industries like rubber. research by Mintzberg. The competitive forces operating in a particular industry determine the kind of strategy that will be effective for firms operating in the industry. and can change as industry evolves. 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. A firm that can position itself well can become very profitable even when the industry structure is unfavourable. 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. the problems are not such as to invalidate the approach but do require the effort and attention by managers concerned to avoid the pitfalls. In some industries. 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 are therefore greater than one in which competitive pressures are intense. Third. knowing of them. product substitutes and potential entrants to the industry). these findings do not mean that the strategic planning approach should be abandoned. Given these differences in industry profitability. as the study by Lenz and Lyles has demonstrated. producers of standardised silicon chips find themselves driven by competitive forces to adopt a low-cost strategy because price competition is fierce in an . As previously indicated.46 THE NATURE OF STRATEGIC MANAGEMENT READING E2 First. rates of return on investment in excess of the cost of capital’ (Porter. trial and error and cognitive and political processes. enable us to take account of these when formulating plans. Because the strength of the five forces varies from industry to industry. and that additional resources have to be devoted to these by the organisation. What these studies do is to inform us of the complex processes at work in the strategy-making process and. 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. 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. suggests that an industry’s profitability potential is a function of the interactions among the five forces (suppliers. This does not mean that attempts to plan should not be undertaken. 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. on average. competitive rivalry among firms currently in the industry. It also means that organisations have to be flexible and to accept change as something that has to be managed rather than resisted. Johnson and others has found that in practice.

There is. Sun Microsystems and Silicon Valley have gained market share from the established producers like IBM. competences and capabilities. a market for a small number of customised chips for specialised equipment. a five forces analysis conducted in 1980 would look completely different from the one done today. Research by Richard Rumelt (1991). but this still suggests a quite limited influence by the industry structure. If this is the case. capabilities and competence. 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. however. though still very popular among both theorists and practitioners. Other studies suggest that the variance in performance arising from industry structure is really nearer to 20 per cent. The competence-based alternative These problems with the positioning approach have been one reason for the search for an alternative. 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. The fact that innovation can revolutionise industry structure is now widely recognised. Other recent examples are in banking. The example of the development of the computer industry is one of the more dramatic recent examples. the industry and the wider environment and so achieve a strategic fit with the environment. The implication of this finding is that individual company differences explain much of the rest of the variance. 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. Digital Equipment and Wang Labs. the industry was dominated by the likes of IBM. In some cases the competitive forces will be such that differentiation is the source of competitive advantage. Manufacturers with the knowledge. 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. insurance and other financial services. As a result. which concerns itself with how companies might best position themselves in the market. but the revolution that Apple computers started when it introduced the first personal computer has transformed the structure of the computer industry. which pioneered telephone sales in insurance. advertising and superior after-sales service. for example. companies like Direct Line Insurance. by innovation. first. while de-emphasising the significance of individual company differences in the possession of resources. that it overemphasises the importance of industry structure and the wider environment. In the United Kingdom. The main shortcomings of the approach are. now companies like Compaq. it is argued. suggests that industry structure only explains about 10 per cent of the variance in profit rates across companies. Thus Prahalad and Hamel (1990) cite the core competence of miniaturisation as the basis for the success of the Sony Corporation. This competence.ENTERPRISE MANAGEMENT 47 THE NATURE OF STRATEGIC MANAGEMENT industry where the technology allows cheap mass production. Fifteen years ago. has come in for criticism in recent years. second. that it relies on a static picture of competition and thus understates the role of innovation and. Dell. This approach. banking and other financial services can be sold and this is changing the structure of the industry. has sparked off a revolution in the way in which insurance. Where a few companies existed ten years ago. has allowed Sony to make everything from the Walkman to . the company will seek to differentiate itself by improving quality.

Canon’s core competence in optics. Because the new approach is still in the process of development. the skills and capabilities required for miniaturisation and considered to be the basis of core competence for Sony take many years to be honed to perfection and give Sony an advantage because they are not readily available to competitors. Whether or not this attempt will provide a vocabulary on which all can agree remains to be seen. it is possible to describe the main characteristics of what we shall call here the ‘competence-based approach’. In contrast to the traditional planning model which takes the environment as the critical factor determining an organisation’s strategy. (1996). capabilities and competences that are relatively unique and that these provide a basis for its strategy and its ability to compete.M. Currently. 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. 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. Study its strengths and weaknesses as compared with those of competitors 2 Determine the firm’s capabilities. It is also assumed that firms can acquire different resources. These examples have led Hamel and Prahalad and other researchers to focus on the resources. 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. resources. however.48 THE NATURE OF STRATEGIC MANAGEMENT READING E2 video cameras to notebook computers. intangible assets. A diagram such as that in Figure 3 can be used to illustrate the competence-based approach. capabilities. imaging and microprocessor controls has enabled it to enter markets as diverse as copiers. Despite the confusing use of terminology. Similar terms – core competences. laser printers. strengths. skills and capabilities in the process of their development. there is as yet limited agreement on the terminology to be employed. Grant. 1 Identify the firm’s resources. cameras and image scanners. a number of writers are trying to derive a vocabulary for discussing what they have called a ‘competence-based approach to strategic management’ Sanchez et al. Similarly. For example. What do the capabilities allow the firm to do better than its competitors? Resources: tangible and intangible Inputs into a firm’s production process Capabilities Capacity of an integrated set of resources 3 Determine the potential of the firm’s resources and capabilities to become core competences and to give the organisation a sustainable competitive advantage 4 Select a strategy that best allows the firm to exploit its core competence relative to opportunities in the external environment Core competence which provides sustainable competitive advantage Ability of firm to outperform the competitors Strategy selection and implementation Action taken to earn superior profits Superior profitability Earning of above-average profits Figure 3 The competence-based approach (adapted from R. capabilities and competences. Marks & Spencer’s competitive advantage has been based on its consistent ability to deliver high-quality clothing and food products at reasonable prices. The approach assumes that an organisation is a collection of resources. 1991) . skills – are used interchangeably by different authors. distinctive competences.

proponents of the competence-based approach are agreed on the relative importance of the two types of resources. Examples cited by various authors of strategic intent include the intention by Intel to become the number-one supplier to the computer industry. some writers such as Senge (1990) and Argyris (1994) stress the acquisition of competences through internal mechanisms of individual and collective learning. the most important resource for any organisation is the skill and knowledge possessed by the organisation’s employees. is that.ENTERPRISE MANAGEMENT 49 THE NATURE OF STRATEGIC MANAGEMENT The resources of the firm in the competence-based approach are typically classified into two types: tangible and intangible resources. theorists have also concerned themselves with how competences might be best acquired. 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. 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 reason for this. organisational culture and a firm’s reputation for its products. Tangible resources are inputs into a firm that can be seen. Resources alone. they are more difficult to understand and imitate than tangible resources. Intangible resources range from intellectual property rights like patents. This is a term coined by Hamel and Prahalad (1989) to mean the leveraging of a firm’s internal resources. a number of writers have incorporated the notion of strategic intent. being less visible. They include assets like plant and equipment. are not a basis for competitive advantage. capabilities and core competences to accomplish what initially appear to be impossible goals in the face of the competitive forces confronting it. its main competitor. Aaker found that a reputation for quality was rated as the most important basis for competitive advantage by the managers questioned. difficult to imitate. competence-based theorists argue that intangible resources are the most likely source of competitive advantage. This being the case. Writers who favour internal means of acquiring competences do so because they . while others like Hamel and Prahalad (1989) put greater emphasis on strategic tools like alliances. 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. mergers and acquisitions. then they can be considered core competences and serve as the basis of an organisation’s sustained competitive advantage. informal networks. 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. As such they are therefore more likely to be a source of competitive advantage. it is argued. trade marks and copyrights to the know-how of personnel. A survey of managers by Aaker in 1989 appears to confirm this. The dividing line between the tangible and intangible is often unclear and how they are classified varies a little from one writer to another. touched and/or quantified. Thus. however. Strategic intent is said to exist in an organisation when managers and employees have a fervent belief in their organisation and its products and when they are completely focused on doing what they do better than their competitors. licensing. a trained and skilled workforce and a firm’s organisational structure. When they are rare. Although it is clear that both types of resources are required for any business to operate. As in the rest of this developing field. non-substitutable and they allow a firm to exploit opportunities or neutralise threats. access to raw materials and finance. As part of this new approach to strategy development. a variety of perspectives exist. Despite the problems with classification. the belief and intention of Microsoft that it can provide the Yellow Pages for an electronic marketplace of online information systems and the intention of Komatsu to encircle Caterpillar.

50 THE NATURE OF STRATEGIC MANAGEMENT READING E2 claim that such means give the advantages of secrecy. 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. capabilities and competences become necessary for competitive advantage. Waterman (Thomas. Companies that are successful for other reasons have been neglected. it is quicker to buy them than to spend years of trial and error in their development. Under a heading ‘Distinctive competence the forgotten trail’. This approach assumes that the characteristics and direction of the competence building activity of a company are mainly contingent on its strategic objectives. the case for its superiority is based on a few examples of successful companies that have been chosen because they appear to confirm the theory. it is argued. then. to the emergence of a new paradigm in corporate strategy. . 1984) noted that the focus on distinctive competence is not new. gives them a competitive edge. Third. Summing up so far. would suggest that a more cautious view of the socalled new paradigm should be adopted. 64). the claim is made that core competences are more critical than the external environment as a basis for strategy determination because the environment is in too much of a state of change to base any strategy on it. they disagree about the basis of competitive advantage. The reasons for caution include the following.. p. Finally. however. 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. we are told. Over thirteen years ago. Those who concentrate on external means of acquiring competences defend their approach on the grounds of flexibility and speed. combined with others. As markets change. Second. As new resources. All this adds up. Some of the claims for the competence-based approach are quite sweeping in nature. Indeed. 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. 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. which is still critical to the survival of organisations. First. Problems with the competence-based approach A review of the literature. exclusivity and surprise. old alliances can be discarded and new ones formed. Turning first to the claim that the competence-based approach represents a new paradigm. the combination of core competence and capabilities may define the universal model for corporate strategy in the 1990s and beyond’ (Stalk et al. 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. the core competences of the organisation. or will become. it is partial and one-sided and thus in danger of neglecting the environment. even when the leading exponents conduct an analysis of the same case. 1992.

In brief then. The list of the major skills and competences identified in the competence profile. technical arrangement of building blocks into a purposive social organisation. 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. Ansoff describes how to develop what he calls a grid of competences. of course. Ansoff seems to use the word competence and capability interchangeably. there is nothing radically new in the competence-based approach. Waterman argues. marketing and so on are listed together with the equipment. To be applicable to a single firm. Modern theorists have refined the terminology.’ One of the important premises of the model is that strategies should be unique and built on distinctive (now called core) competences. operations. 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). It is also clear that in all fundamental respects the approach adopted was similar to that being promoted by modern day competence-based theorists. some differences. Functions such as R&D. He recommends that for such a grid to be widely applicable. But whatever the merits of his approach. Frameworks for analysis of firms in trade. 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. finance and services can then be obtained through modification of the general model. In particular. these areas must list specific skills and resources which differentiate between success and failure in different types of business. it is simply an elaboration of one part of the overall strategic management framework formulated over 30 years ago. can then be rated with respect to those found in other firms which have the same capabilities. In their work. organisational character and distinctive competence all refer to the same basic process – the transformation of an engineered. as many of his modern counterparts do. 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. average or weak. Adopting what students today will recognise as the strengths and weakness approach to the internal analysis of the business. institution. This rating will produce a ranking for each skill or capability according to whether it is judged to be outstanding. . The individual skills and resources can then be organised according to major functional areas. Since that time. There are. and that the focus of strategy-making at that time was clearly on analysing and building distinctive competences.ENTERPRISE MANAGEMENT 51 THE NATURE OF STRATEGIC MANAGEMENT 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. organisational capabilities and management capabilities for each function. it must be constructed in terms of competence areas which are common to most industries. both Andrews and Ansoff stressed the importance of internal analysis as part of the strategic planning process. Ansoff (1965) supplied perhaps what is the most detailed account. as Ansoff called it. Ansoff recommends taking the fully integrated manufacturing firm as the most comprehensive framework of capabilities and using this as a point of reference. personnel skills. 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.

attribute organisational success to a capability that is defined as a set of business processes strategically understood. from their Honda example. capabilities and core competences which contribute to success. According to Prahalad and Hamel. In short. Existing successful companies are selected and examined. In fact. But they also emphasise the effective weaving of business process together and the need for cross-functional integration as prerequisites for a capability to exist. In fact. There is as yet a lack of agreement on terminology that results in a lack of clarity. 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. Several of these excellent companies have since failed and critics such as Guest (1992) have pointed out that a major problem with the methodology adopted by Peters and Waterman was that no comparisons were made with companies not considered to be excellent. the claim that competences are the critical basis of competitive advantage has not been conclusively established because of the limitations of the methodology applied by some researchers. and Prahalad and Hamel (1990) in respect of Honda’s success illustrates this point very well. The disagreement between Stalk et al. it is difficult to know whether the characteristics contributing to excellence were evident to a greater extent in excellent companies than in other organisations. 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.52 THE NATURE OF STRATEGIC MANAGEMENT READING E2 The second problem with the competence-based approach is that in seeking to distance itself from the positioning approach. 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. Researchers spot some excellent companies – often Japanese high-tech consumer-electronics companies whose products are characterised by relatively short product life cycles – and abstract what appear to be those resources. such as distribution. that they are referring to what are usually thought of as business functions. In many respects the methodology reminds one of the Peters and Waterman (1982) study of excellent companies. As a result. Also. after-sales service. includes so much as to invite confusion. and consultants go on to prescribe these as the basis for future success. . 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 definition of capability by Stalk et al. it is questionable whether or not it makes sense even to try to establish whether position in the industry/marketplace or the organisation’s competences are the key to critical advantage when the performance of any company is so evidently dependent on both. Stalk et al. research and development and so on. By contrast. 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. 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 are some problems with the competence-based approach. 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. The same weaknesses appear to be evident in the approach adopted by the new resource-based theorists. By business processes it is apparent. While fully accepting that organisations continually need to adapt to change by developing their core competences.

Strategic Management Journal. edn). 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. Porter. ‘Perspective on Strategy: The Real Story behind Honda’s Success’. The Concept of Corporate Strategy. capabilities and competences as critical sources of competitive advantage. No. R. Conclusions This review of developments in strategic management suggests the following state of play. (1965).I. Selznick. are currently being addressed and the less extreme advocates of the competencebased model readily agree that the approach can complement rather than conflict with the positioning approach. Mintzberg. New York: Free Press. January/ February pp. IL: Row.E. R. 38. M. pp. Ansoff. ‘Re-thinking Incrementalism’. New York: Free Press. G. Pascale. (Spring 1984). ‘Paralysis by Analysis: Is Your Planning System Becoming too Rational?’ Long Range Planning.R. 3. Copyright (c) 1991. Competitive Advantage: Creating and Sustaining Superior Performance. by permission of The Regents. Formulation and Advocacy of Business Policy (rev.ENTERPRISE MANAGEMENT 53 THE NATURE OF STRATEGIC MANAGEMENT These problems are not insurmountable. (1957). 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 to be regularly assessed. M.T. (1979). CIMA Publishing 1996. M. (1980). political and cultural processes which often influence both how the strategy is formulated and its content. (1980). K. H. pp. Johnson. Reprinted by permission of Pearson Education. (1994). Recent studies have re-established the importance of resources. Competitive Strategy: Techniques for Analysing Industries and Competitors. Gilmore. P. (1971). 75–91. Competitive Strategy: Techniques for Analysing Industries and Competitors.F. Pearson Education.E. Lenz. such as the problem with terminology. (1991). Peterson.P. Vol. Corporate Strategy. The findings do not appear to challenge the need to conduct analysis or to plan. Andrews. M. 26. IL: Irwin. by the Regents of the University of California Management Review Vol. Ithaca. Porter. Some of them. August. R. . California Management Review. H.A.E. (1985). 3. ‘How Much Does Industry Matter?’ Strategic Management Journal. (1985). 167–185. 33. The Rise and Fall of Strategic Planning. 12. and concepts for use in their analysis are currently being developed. References Management Accounting Official Terminology. New York: McGraw-Hill.T. Porter. p. and Lyles. Rumelt. Evanston. Vol. 64–72. (See the 2005 edition for all other references). New York: Free Press. pp. F. No. Leadership in Administration: A Sociological Interpretation. Holmwood. The planning process has been questioned partly because of its limited success in application but also because it fails to take account of cognitive. NY: Cornel University Press. (1988). 47–72.

‘Collaborate with Your Competitors and Win’. ‘The Core Competence of the Corporation’. ● Contrast the ‘positioning approach’ to strategy formulation with the ‘competence-based’ approach. 31. 4.K. G. ‘Right Enough To Be Dangerously Wrong: An Analysis of the In Search of Excellence Phenomena’. Corporate Strategy. No. G. 91–106. (1992).E. 67. Discussion questions ● Explain how strategies can emerge. G. R. In Search of Excellence. California Management Review. Peters. D. May/June. R. (1989). Aaker. T. L. Pralahad. Harvard Business Review. (eds). (eds). and Pralahad. and Thomas. 7–23. pp. R.J. California Management Review. ‘Competing on Capabilities: The New Rules of Corporate Strategy’. P. Thomas. 1. C. 2. No. (1994). and Thomas. Heene. ‘Strategic Intent’. (1990). (1965). (1989). and Pralahad. et al. ‘The Leader’s New Work: Building Learning Organisations’. pp. and Hamel. ‘The Resource-based Theory of Competitive Advantage: Implications for Strategy Formulation’. R. May/June.. 72. Hamel. pp. C. H. C.. Vol. 133–139. Human Resource Strategies.I. H. 3. Vol. Grant. P. California Management Review. London: Sage. (1989). and Waterman. G. 77–85. A. Harvard Business Review. pp. pp. Harvard Business Review. A. (1996). Stalk. Vol. C. 57–69. New York: McGraw-Hill. ‘The Core Competence of the Corporation’. D. Vol. Sanchez. Argyris. Harvard Business Review. Evans. Spring.. 63–76. 114–135.54 THE NATURE OF STRATEGIC MANAGEMENT READING E2 Pralahad. ‘Good Communication That Blocks Learning’. (1990). G. No. 67. ‘Strategy Follows Structure: Developing Distinctive Skills’. ‘Towards the Theory and Practice of Competence-based Competition’ in Sanchez. New York: Harper & Row. pp. (1991). H. Sloan Management Review. (1984). (1982). P. G. Dynamics of Competence Based Competition: Theory and Practice in the New Strategic Management. Oxford: Elsevier. 33 (Spring). Harvard Business Review. (1990).K. Guest.A.M. No.K.K. Hamel. Harvard Business Review. C. Senge. ‘Managing Assets and Skills: The Key to Sustainable Competitive Advantage’. in Salaman. Vol. (1992). and Scholman. Ansoff. pp. and Hamel. (fall). March/April. Heene. .

It views its customers as central to strategic developments. The holders of this view are. and values its staff in building success. providing unrivalled customer service.’ It is believed. people who have been brought into Newco plc within the last 2 or 3 years. Unlike many of its competitors who are constantly seeking to reduce costs. This group is small in numbers but seems to be very influential. in flight comfort and reliability in the short haul airline industry. the foundation of N’s business strategy is based on providing a superior quality of service. (6 marks) Question 3 T is the owner manager of a small business that designs and produces high quality garden furniture. like the chief executive himself. Its mission is to be market leader. One of the objectives underlying Newco plc’s change of ownership was that it would be enabled to set its own goals and targets without reference to third parties. The chief executive of Newco plc has publicly stated that the aim of the business will be ‘to supply the best possible service to the greatest number of consumers at the cheapest possible cost.Revision Questions 1 Section A type questions Question 1 Newco plc is a recently privatised company that supplies energy to the general public. The business started out as a hobby using T’s creative design and carpentry 55 . often at the expense of customer service. (4 marks) (b) Illustrate how the mission for N Company could be translated into strategic objectives. within Newco plc. Requirements (a) Distinguish between the concepts of mission and objectives. Requirement Discuss the extent to which the chief executive’s aim is compatible with the interests of the shareholders. that the cheapest possible cost will only be achieved by the introduction of a number of changes to improve operating efficiency. (10 marks) Question 2 N Airline operates in the short haul flight industry.

Tub plc has invested heavily in new technology. automating processes wherever possible. Most of this expansion was financed from retained profits but.56 THE NATURE OF STRATEGIC MANAGEMENT REVISION QUESTIONS E2 talents. and he has been surprised by his success. they qualified for a state grant towards the cost of their new premises. (8 marks) . Over the last year the business has experienced unplanned growth and by chance T has just won a contract to supply a local chain of DIY stores. However. they set up a company to manufacture these items. and they expanded rapidly. (10 marks) Section B type questions Question 4 Tub plc was founded in the early 1980s by two brothers. It has developed good relationships with its suppliers and developed just-in-time purchasing and production systems. The brothers could be out-voted and in fact had been at various times in the past. His view is that it is best to let the strategies and developments for his business emerge. The demand for their products outstripped their ability to supply. By 1995 Tub plc had organised itself around eight operating companies covering the different products and sales activities of the group. 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. Economic recession in the early 1990s and a housing market which continues to remain stagnant are causes for concern. It has progressive human resource management policies in place. Spotting a gap in the middle-price range of the market for bathroom and kitchen fittings. The senior management believed in decentralisation. some to major retail DIY multiples and one of the companies coordinated the group’s export operations. The local Chamber of Commerce has recently sent him an invitation to attend a number of seminars titled ‘Formal Strategic Planning for Small Business’. At the present time the company has no new products coming on-stream and its research and development function is tiny and confines itself to modifying existing products for what is a difficult overseas market. as they happened to be located in an area of economic decline. Requirements (a) Identify the key issues involved in formulating the corporate strategy of a company such as Tub plc. Each company had its own independent board of directors on which the brothers sat with one vote each. Requirement Explain the reasons why T is right to be doubtful about the relevance of formal strategic planning for his business. arguing that it promoted enterprise and that it was easier for small companies to grow than for larger ones to do so. Some of these sold directly to housing developers. The environment in which the company operates is currently very difficult. It is also able to deliver its products within 48 hours of orders being placed. T is doubtful that the content of the seminars will be of any relevance to him and feels he cannot afford time away from his business.

To help the company develop a sustainable competitive advantage. he was surprised that P disagreed. argued that the dynamic environment that F operates in means that the formal approach is a waste of management time. CT is surprised to find that the firm does not have a mission nor any formal planning process in place. joined the company as Operations Director.ENTERPRISE MANAGEMENT 57 THE NATURE OF STRATEGIC MANAGEMENT (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 F Company is a medium sized business that manufactures electrical kitchen appliances including food processors. not responded to changing environmental conditions and have not undertaken any formal strategic planning. The firm has experienced mixed fortunes over the years in terms of business performance. She suggests that the company should assess how sustainable competitive advantage can be achieved through using its resources. the HR director. the company’s management accountant. (13 marks) (Total marks 25) Question 6 B Bakery is a family owned firm employing around 250 employees. However. but in the last few years has experienced a growth in orders for some of its new product ranges. and the customers are demanding new product and design features. However. These products have been developed as a result of the Managing Director’s wife’s interest in healthy eating. including supermarkets and pub-chains. P. In a recent conversation with . particularly its organic products. Requirements (a) Explain the benefits and drawbacks associated with F Company adopting a top-down approach to the formulation of business strategy. CT. In the last 12 months the company has lost market share to its competitors. He is also of the view that greater emphasis should be placed on understanding the external environment. It has been in business for over 50 years and supplies bread and confectionary products to a number of different businesses. juicers and coffee makers. and has underperformed on most of its key performance indicators. G proposes that a more formal top-down approach to developing business strategy should be adopted. He is even more concerned that the Bakery does not have any clear objectives or key performance indicators. Six months ago the first non-family Board member. He is also concerned that different areas of the company appear to be pursuing conflicting objectives. (12 marks) (b) Compare and contrast the different views held by of G and P on how F Company can gain competitive advantage. the Bakery has recently lost some key accounts as a result of being unable to produce some of its products at a competitive price. skills and capabilities. Its future survival is threatened as new entrants are stealing market share. at a recent meeting where G outlined the benefits that a more formal approach to planning would bring. suggests that F Company’s difficulties are because they have been too complacent. toasters. G.

58 THE NATURE OF STRATEGIC MANAGEMENT REVISION QUESTIONS E2 the Managing Director. CT suggested that the Board should be more proactive and that adopting a more formal approach to planning would help better inform the future development and direction of the Bakery. He commented that planning creates lots of analysis that does not result in action and he prefers strategies to emerge. He suggests that the Board should consider using the rational approach to strategic management. (8 marks) (Total marks 25) . Requirements (a) Distinguish between the views of the Managing Director and the Operations Director on how strategy occurs. He was somewhat taken aback by the response from the Managing Director who said that in his 30 years with the firm it had grown and been successful despite the absence of formal plans. (17 marks) (b) State the arguments that the Operations Director could use to persuade the Managing Director of the benefits of having a formal strategic plan. His view is that planned and intended strategies often turn out to be invalid.

It will also be concerned with the scope 59 . However. It is therefore possible that the chief executive’s statement focuses attention on the best method of achieving the ultimate objective of the organisation. The chief executive of Newco plc did not include the shareholders’ interests in the statement of objectives. but may cause customers to seek better service from competitors. the maximisation of shareholders’ wealth. is an intermediate objective which focuses on marketing. Solution 2 (a) A mission is a broad statement of the overall purpose of the business and should reflect the core values of the business. management may not focus sufficient attention on the maximisation of shareholders’ wealth. On the other hand. In a public utility company like Newco plc. by emphasising an intermediate marketing objective. This could be against the long-run interests of the shareholders as profitability is likely to decrease if sales decline. but expressed a view which suggests a strong marketing orientation. 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. Stating the objectives of the firm as supplying ‘the best possible service to the greatest number of customers at the cheapest possible cost’. then. the interests of customers are stressed. This. it is likely to create dissatisfaction among shareholders. It is generally assumed that the fundamental objective of a profit-seeking company is to maximise the shareholders’ wealth. It will set out the overriding purpose of the business in line with the values and expectations of stakeholders. will result in lower levels of profit for shareholders. Expenses incurred to provide the best possible service. 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. excessive concern with cost-cutting will increase profits available for shareholders. many shareholders will also be customers and there will be a conflict of interest between these two groups.Solutions to Revision Questions Section A solutions Solution 1 1 Common errors ● Not comparing and stating the extent of differences. While this situation may please the customers.

in N’ cases short haul flights. but also in terms of spending time on planning which could take him away from the main operations of his business. but also marketer based objectives. helpful staff. In a rapidly changing environment it could be argued that the outcomes on which formally planned strategies are based often become quickly outdated. Formal planning may also be considered too static and a process that tends to be infrequent. The formal approach could get in the way of T’s interest and creative talent. and relevant and time bound. and consideration of the organisation’s strengths and weaknesses. provide quantitative measures of performance. Another measure of quality could be the percentage increase in repeat customer bookings. Growth could also be measured in terms of the number of destinations or landing slots. in flight comfort. percentage of flights departing and arriving on time. Sometimes it is simply referred to as ‘What business are we in?’ Objectives differ in that they state more precisely what is to be achieved and where possible. The objectives relating to superior quality of service could be set based on customer satisfaction. against a set of customer satisfaction criteria and might include factors such as ease of booking. Whilst there can be benefits to adopting such an approach. The acronym often used when setting objectives is SMART: that is objectives should be specific. not only in terms of attending the seminars. since it could be conceived as a rigid approach bound up in processes. This information could be collected through market research. with the result that the intended strategy fails. It assumes that strategy making is a rational process with strategies based on careful analysis of the opportunities and threats posed by the external environment. measurable. T is right to be concerned about the opportunity cost. time consuming and complicated for small businesses. relative to other players in the industry. attainable. The characteristics objectives should possess include: ● ● ● ● A precise formulation of the attribute sought A measure for progress towards the attribute A target to be achieved A time frame in which it is to be achieved. the formal process may not be suitable for a small business such as T’s for the following reasons. (b) N Company could set objectives relating to its growth aspiration in terms of the numbers of passengers using the airline. ● ● ● A formal approach can be very expensive.60 THE NATURE OF STRATEGIC MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 and boundaries of the organisation. T may be worried that such a process will just end up as a bureaucratic process with systems and targets unhelpful to a small business. Solution 3 The formal approach to strategic planning usually results in a consciously thought out or deliberately intended strategy. . A further objective could be in terms of percentage reduction in the number of complaints received. or in terms of market share. for example gaining 20 per cent of short haul flights by the end of 2006. These could be expressed in financial terms. undermining T’s core competencies.

It is unlikely that T will have the economic rationality in his approach to running the business which is more often associated with businesses governed by external shareholders. It is often referred to as developing from patterns of behaviour in response to unexpected events. opportunities and threats to help him to stay ahead of the game. business strategy (which market segments to serve and how). Whilst there are many valid reasons why T might not see the seminars of any benefit to him. Even if new options are identified from formal planning T is likely to consider narrow product/market choices because his business is essentially based on his own specific knowledge and skills arising from his hobby. Section B solutions Solution 4 Common errors ● confusion over the word ‘setting’ ● lack of definitions for levels of strategy ● liability to link these levels ● lack of application to the case. as a small business it is doubtful that T will have the resources to invest in new strategic ventures and may be unwilling to share or delegate control to others. building a stronger group by gradually and organically building up stronger individual companies through related diversification. customers and suppliers in . such as that run by T is could be argued that the formal approach is not appropriate because the success is more dependent of the ideas of T. In formulating the corporate strategy of Tub plc. Indeed T may not have aspirations for growth. weaknesses. In the case of the scenario the unplanned growth was as a result of the order from the local chain of DIY stores. unanticipated or uncontrollable circumstances. However in the case of a small business the goals are likely to be inseparable from the goals of T as the owner manager. some of the strategic planning frameworks/models might be helpful in making future decisions about the business. and financing this growth internally. the directors need to consider Tub plc’s overall strengths and weaknesses in relation to competitors. 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. This approach arises from ad-hoc. it would be sensible for T to monitor the environment and conduct an informal analysis of his strengths. Despite winning the contract from the DIY stores. and functional strategy (detail by department). For example. T says that he prefers to let his strategy emerge. In a small business.ENTERPRISE MANAGEMENT ● 61 THE NATURE OF STRATEGIC MANAGEMENT ● ● One of the aims of formal strategic planning is to achieve goal congruence between different business areas and stakeholders. This was not a consciously thought out nor a deliberately intended strategy. Hofer and Schendel distinguish between corporate strategy (what business to be in). Tub plc’s corporate strategy is to grow its businesses in particular markets in the kitchen and bathroom furnishings sector.

This is also a key issue in managing corporate strategy. To support and focus the ongoing process. extended its activities into financial services. differentiated brand marketing. McDonald’s has increased its range of non-beef products in the United Kingdom following a health scare surrounding British beef. This is also the resource-based approach to strategy formation – which tends to focus not so much on where we should be heading in relation to our markets. Tub plc provides a minimalist superstructure with a coordination role. I would aim to formalise a strategic review exercise on a biennial basis. and has built good relations with distributors. Other group-level strategic choices cover such areas as: ● ● ● Degree of investment in automation. The business also uses a TQM approach. I would analyse the strategic position of each company (using techniques such as SWOT analysis.62 THE NATURE OF STRATEGIC MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 each market served. but rather seek to keep the entrepreneurial local opportunism that has characterised much of Tub plc’s past success. encouraging local empowerment of managers. value chain analysis.) determines the strategic development of that business. HR standards. and Porter’s five forces analysis) to explore the alternatives. I would then make sure that the feedback loop worked. etc. Thus. marketing. Functional strategies are important as this is the level at which strategy is implemented in detail. and assess current trends so that opportunities can be maximised and threats minimised. Each business strategy would be designed (crafted) to build incrementally upon the emergent strategic themes in that business. Culture and people strategies. buying power. while overseas activities are coordinated in one group entity. but on what tools we have to work with. . the emphasis each business puts on overseas activity appears to be determined locally. Management structure. I would not embark upon detailed large-scale planning. Group corporate strategy will decide such questions as where to focus group resources (core businesses). weaknesses. and refined the standardisation of its product range and presentation style. 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. Tub plc has favoured automation as a source of competitive advantage. At group level. capable of using its scale advantages wherever useful – for example. Tub plc has adopted good HR policies. Porter has identified three generic business strategies (cost leadership. and then choose a set of strategic moves that would be clear-cut and measurable in implementation. 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. marketing. Business strategy refers to how a business unit approaches its markets. by reference to their individual competences and local competitive conditions. opportunities and threats. Marks & Spencer (a large UK retailer) has extended its presence in out-of-town shopping centres. technology. production. 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. and niche focus) which a company might adopt in response to its analysis of its strengths. 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 by matching resources to opportunities in each company. For example. As another example. The accumulated effect of the strategic steps taken in each function of a business (finance.

Responsibilities and ownership for the development of strategic development are clearly articulated and there are a clear set of programmes and policies associated with implementation. Functional strategies within operating companies do accumulate upwards (like building blocks) into business unit development and hence into overall group strategy. There would need to be a process of communication and implementation of the business strategy. which is usually long term. By considering the longer term and the nature of the environment. ranging from 3 to 10 years depending on the industry involved. Each year the strategy should be reviewed and adjustments made in the light of changing conditions. Functional strategies provide readily measurable implementation. This helps to ensure that the right strategic decisions are taken. enabling value to be added in various ways across the company. there is both a top-down and a bottom-up communications exchange. and convert theory into practice at the sharp end. There are a number of benefits associated with this approach as G suggests. one development in a corner of a large group can spread out and influence its whole direction. that the detail will work. or alternatively setting up a strategic planning unit who report to senior management. a finance department strategy may be to buy a new computerised information system that will help control the business better. Sometimes. relationships with suppliers . Similarly. This approach should demonstrate that F Company has a clear idea of where it is going. In developing functional strategies. 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. are digestible elements of the overall plan. Targets and reports will enable the success of the strategy to be reviewed. which should improve stakeholder perceptions of the business. The first is that such an approach can avoid short-term behaviour and help identify key strategic issues facing the Company. 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.ENTERPRISE MANAGEMENT 63 THE NATURE OF STRATEGIC MANAGEMENT For example. 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). F Company should anticipate competitor actions and be more proactive in their planning to keep ahead. This would involve setting up systems for the formalised collection of information needed for the strategy process. 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. This is often achieved by having a formal document that provides a summary of the key elements of the plan. and is similar to the traditional rational planning model. for example. The formal approach should help in terms of achieving goal congruence and providing direction for the different areas of the business. Investors may be more confident of higher returns which could lead to higher share prices. and that everyone is aware of the plan and personally engaged in its fulfilment. Solution 5 (a) G’s idea of introducing a formal top-down strategy process would mean building a designated team who is responsible for the strategy development for F Company. Perhaps G’s background in management accounting is another reason that he is a proponent of such an approach since it provides a basis for strategic control.

(b) The commonality between G’s perspective and that of P is the economic view of competitive advantage. Those supporting this view criticise the position view stating that the competitive advantage is not sustainable in the long run. skills and products to fit the environment. G’s traditional perspective on strategic management is based on the view that competitive advantage is derived from the firm’s position in relation to its environment. allowing the organisation to add more value than its competitors in the same market. This is an inside-out-view where competitive advantage is gained from the exploitation of the organisation’s resources. culture. A formal approach could mean that the timing of the process is too infrequent to allow the business to be dynamic. or low cost. so effort should be focused on or involves scanning the external environment to determine potential opportunities and threats and nature of competition in order to determine a strategy which will best position F Company. competitors. Competitive advantage can be defined as the significant advantages that the organisation has over its competitors. In other words. something that enables F Company to generate superior returns on shareholder investment. It could be argued that there is evidence that this is already happening. . Despite the benefits of the formal approach to strategic planning. The disagreement is over the sources of competitive advantage. since advantages are often easily copied by rivals. This is usually referred to as the positioning view. A formal approach does not encourage the development of more radical and innovative strategies and often results in the loss of entrepreneurial spirit since it encourages rewards to be given to managers who carry out their part of the strategy sticking to the convention way of doing business. it could also help in terms of employee retention and staff morale. Supernormal profits result from achieving high market share relative to competitors. Whereas adopting the RBV means that superior profitability depends on the firm’s possession of unique resources or abilities that cannot be easily imitated by rivals. The strategy for delivering competitive advantage is one that positions the organisation within the environment that is defensible against potential competition. or strategic fit. The environment is the critical factor in determining the organisation’ strategy. Yet it is often these staff who are most in touch with the customer and can see the impact of competitor activity. sometimes referred to as the resource-based view (RBV).64 THE NATURE OF STRATEGIC MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 could improve because they can rely on orders in the future. The formal top-down approach does not encourage contributions from staff who are lower down the hierarchy. the distinctive groups of skills that allows an organisation to provide particular benefits and deliver competitor advantage. the outside-in view. If the business environment changes unexpectedly then F’s performance may deteriorate further. that is. through differentiated products. The RBV argues that the individual resources of F Company will provide a stronger basis for strategy development than the positioning approach. The approach to achieving competitive advantage suggested by P is a more recent paradigm of strategic management. It is difficult in an uncertain business environment since formal business strategies require that the strategist can make reliable assumptions about the future and particularly about the opportunities and threats that face them. there are drawbacks to process. They would then need to mould the company’s structure. customers or other stakeholders. competences and capabilities.

Mintzberg argues that strategy formulation is a continually evolving process in which strategies emerge. since it assumes the firm is flexible enough to change its size and shape to fit the environments and can develop business processes and structures that enable it to spot changing customer needs speedily and to develop commercially viable responses. bargaining and compromise. He contends that intended strategies become invalid and not implemented because the pace and unpredictability of developments in the business environment overtakes it. Solution 6 (a) The Managing Director refers to his preference for the emergent approach to strategy development. The RBV is based. The argument is that strategy should not be considered a linear process. For example there could be changes in the bakery’s external market such as changes in the market for the products it produces and in the nature of the competition. However. This perspective was suggested by Mintzberg based on the idea that most of what organisations intend to happen. P could assert that the environments facing F Company are too dynamic to enable a position approach to be effective. trained/skilled workforce or intangible such as brand. Mintzberg further maintains that the strategy development process is not so much about thinking and reasoning. For resources to be unique. This is perhaps the point being made by the Managing Director who has worked in the bakery for many years. has developed from the work of Prahalad and Hamel’s work on core competences which focuses on the strategic intent of an organisation to leverage its internal capabilities and core competencies to confront competition. access to raw materials and finance. rather than be formulated as proposed in the rational approach . capabilities and competences that are relatively unique and can provide the sources basis for its strategy and its ability to compete better than those of competitors. a feeling of intimacy and harmony. who argues that strategy is best considered as an emergent process. often do not happen and few strategies followed by organisations are consciously planned. Barney (1991) suggests that they must add value. the environment for F Company is characterised by faster product life cycles. P’s views could be considered to have some similarities to those of Mintzberg. difficult to imitate and cannot be easily substituted. as it is about involvement. it is better that the organisation retains flexibility and be ready to adapt strategy as its competitive environment changes. be rare. Resources can be tangible. it is the way the resources are used which provides the capability to compete. strategies can form. perhaps as the result of the processes of negotiation. and rapidly changing technologies making this very difficult. developed through long experience and commitment. In a rapidly changing and dynamic environment Mintzberg contends that formal planning is inadequate and rather. However. intellectual property.ENTERPRISE MANAGEMENT 65 THE NATURE OF STRATEGIC MANAGEMENT The assumption is that an organisation is a collection of resources. So. rather than due to the deliberate planning process as characterised in the rational approach being suggested by the Operations Director. but rather an iterative process in which problems raised in implementation are fed back so that the strategy can be adjusted to take account of changing circumstances. such as plant and equipment.

The first stage.66 THE NATURE OF STRATEGIC MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 Emergent strategies result from a number of ad-hoc choices or responses to circumstances. exploring how it might develop in the future. The strategies selected need to implemented. They are not consciously thought out. often linked to an annual planning cycle. which if undertaken by the Bakery would help in understanding its current position in terms of the environment in which it operates. but do needed to be shaped by management to the create advantage for the organisation. The rational approach that is being proposed by CT. In other words. gaining a better appreciation of what its strengths and weaknesses are. and determine what opportunities and threats exist. It can provide standards against which the performance of the organisation is measured and controlled. ● ● ● ● ● ● It can help the Bakery take a longer term view than a short term reactive approach and help to approach an uncertain future. helping identify future strategic issues and promote a more proactive approach. in other words strategy needs to be translated into action plans to make them happen. The three main stages are strategic analysis. strategic choice and strategic implementation. It would also help in formulating what the Bakery’s mission and objectives should be which could then be communicated to employees in the Bakery. suitable. The different options would be evaluated in terms of whether each is feasible. It involves the careful and deliberate formulation. It can help the Bakery in allocating its resources more effectively. It should help encourage the directors in the bakery to consider the business environment which should inform plans and decisions. The process is iterative. which implies rational and systematic analysis of competitors and markets and or strengths and weaknesses. The role of the manager is to craft a vision through moulding the organisation and its strategy. Analysis of the Bakery’s internal capability would reveal what its resources and competencies are and where it adds value. It can help in the co-ordination of activities. . This can be illustrated by the ideas of the Managing Director’s wife’s interest in healthy eating. with ideas being brought into the bakery Unlike the planning approach. the Operations Director. It can also provide a basis for strategic control so that there are targets and reports enabling review of the success of strategy. for example if the MD retires the strategy of the firm will still be understood and outlast the loss of a key member of the management team. given its current position. (b) The Operations Director could articulate the following benefits of having a strategic plan. In other word promotes congruence of operational plans with strategic direction. This means that they just happen along the way with differing degrees of management involvement. They can be described as developing out of patterns or behaviours that are realised despite or in the absence of specific intentions. and acceptable to the Bakery’s key stakeholders. and link to operational plans in the various parts of the Bakery. the emergent approach requires management to craft strategy. The next stage would involve generating strategic options for the Bakery. assumes a step by step systematic approach to strategy development. strategic analysis. evaluation and selection of strategies for the purpose of preparing a cohesive long term course of action to attain objectives. In a family owned business it can avoid succession problems.

2 The Nature of the Competitive Environment .

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69 . or cope with. It introduces models and frameworks that can be used to analyse the external environment. This chapter examines the different operating environments of the organisation. p. distinguish between different types of competitive environments. An understanding of the external environment is. a critical element in the development of strategy and can help in determining how to achieve a sustainable competitive advantage.The Nature of the Competitive Environment 2 LEARNING OUTCOMES By the end of this chapter you should be able to: discuss the nature of competitive environments. competitive environment and national competitive environment. including the macro environment.2 Environmental impact assessment According to CIMA environmental impact assessment is: ‘A study which considers potential environmental effects during the planning phase before an investment is made or an operation started. 2005. therefore. 2. its environment. 48.1 Introduction Strategy is concerned with the ability of the organisation to fit with. 2. It also explains the range of information sources which management may draw upon in the continuous process of environmental scanning. Since an organisation does not operate in a vacuum it is important that it continually scans its external environment in order that it can develop appropriate responses to take advantage of opportunities. or to minimise threats.’ CIMA: Management Accounting: Official Terminology.

to aid closer analysis. 2. The information is gathered as a preliminary to the corporate appraisal and may include special reports on particular factors affecting the present or proposed strategy. where it is recommended that as many staff as possible are involved in order to maximise the information and create greater acceptance of the need for change. Johnson et al. This will be a key part of an emergent approach to strategy. The level of turbulence can be explained in terms of the degree to which the external environment is likely to change. These models separate the mass of factors impacting on the firm into groups. Static Dynamic Industry/microenvironment Macro-environment Macro-environment Complex The firm Industry/microenvironment Simple Figure 2. However environmental scanning can also be a continuous process so that the organisation being constantly aware its environment. Management frequently use models to help them make sense of the environment of their organisations.70 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 This suggests that environmental analysis is undertaken during the strategy formulation process and assumes that the firm has a formal and rational strategy process.3 Different stages in environmental analysis The environment may be thought of as all the factors outside of management control which can affect the performance of the business and the success of its strategies. The first level concerns the nature of the environment in terms of the degree of turbulence and uncertainty. watching out for emerging opportunities and threats. It provides an understanding of the basic conditions surrounding the organisation. or segments. and also predictability which is concerned with the degree to which change can be predicted. The model shown in Figure 2. Uncertainty can be determined by examining the degree of complexity within the environment and the degree of dynamism. This involves assessing whether the environment is simple or complex to understand and whether it is static or dynamic. facing rapid change.1 Different levels in the environment .1 illustrates the different levels of the environment which together help in understanding the key trends and forces in the external and competitive environments and the key characteristics of these environments.

It is important to note that the various levels cannot be viewed in isolation. social and technological changes. The next level in the model is the macro-environment. unemployment disposable income.ENTERPRISE MANAGEMENT 71 THE NATURE OF THE COMPETITIVE ENVIRONMENT (2008) suggest that uncertainty increases when environmental conditions are more complex and dynamic. 2. which encompasses the competitive pressures within the industry and power of customers and suppliers. Economic factors: ● business cycles. economic. the organisation’s business strategy and performance. Where turbulence and uncertainty are high the organisation will need to structure itself so that it is adaptable and flexible in order that it can cope with rapidly changing circumstances. which includes developments in the wider business environment relating to political. for example: Political: ● taxation policy ● foreign trade regulations ● government stability. For example a change in legislation could alter the nature of the competition the organisation faces. This separates legal from political and specifies ecological separately. The inner level is the micro-environment. ● . interest rates ● inflation. Although PEST analysis is often viewed as the ‘industry standard’ for macro-environmental analysis some writers prefer the greater detail provided by a PESTEL analysis. PEST is an acronym which categorises factors under the following headings: ● ● ● ● political/legal influences economic influences social and demographic patterns and values technological forces. attitudes to work and leisure ● consumerism. either directly or indirectly. GNP trends.3. The concept of uncertainty is explored further later in this chapter.1 Analysing the macro-environment The PEST model was introduced in Chapter 1 as a popular framework for analysing the external forces driving change in the rational approach to strategy development. It is these factors that can create opportunities or threats and impact on the strategic development and ultimately business success or failure. Once this analysis has been undertaken the headings can be used as a checklist to assess the relative importance of the different influences in order to identify the key drivers of change. rather they are interrelated. Sociocultural factors: demographics ● income distribution ● lifestyle changes. It is the factors within each of these dimensions that can affect.

which adds a second dimension to the external environment which is the levels at which influences occur. An alternative approach would be to undertake scenario analysis which is concerned with developing detailed and plausible views of how the business environment of an organisation might develop in the future and then examine the strategic significance on the organisation (Johnson et al. economic. nation and global: ● ● ● Lo refers to the local level in which the organisation operates. There are other examples of frameworks using acronyms for example: DEEPLIST: demographic. for example the immediate city or region. .72 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 Technological factors: ● government spending on research ● new discoveries/development ● rates of obsolescence. environment. social and technological. 2008). for example local. product safety. and as the environment unfolds then they can adapt and adjust strategies accordingly. unpredictable. etc. The practical point for any organisation is that it is irrelevant which acronym is used as long as the process is practised within the company and that they remain aware of the business environment and the changes that are occurring within it. Legal factors: ● monopolies legislation ● employment law.. legal. informational. From the analysis identify what the key issues are and explain the implications for the organisation. Managers can develop strategies and contingency plans for the different scenarios. Another variation is LoNGPEST. which are essentially models of possible future environments for an organisation. and has high levels of uncertainty then some commentators argue that undertaking a PEST analysis is meaningless since it is based on the current situation and extrapolating forward. Ecological factors: ● protection laws ● energy consumption issues ● waste disposal. which becomes anything outside the local and national environments. political. G represents the global level. Scenario-based analysis If the environment facing an organisation is turbulent. Activity Undertake a macro-environmental analysis for your organisation. or one with which you are familiar. N is concerned with the home country in which an organisation has its headquarters. This would involve building various scenarios.

The five competitive forces are explained below. The model provides a way of establishing the factors driving profitability in the industry.2 Analysing the micro-environment/industry environment One of the key drivers for change is often in response to the nature of competition. 2005. To influence whether to invest more in an industry. they may decide to sell up and leave the industry now if they perceive the forces are strengthening. These factors affect all the firms in the industry. This framework identifies the five basic competitive forces that influence the state and structure of competition in an industry. and which collectively determine the long-term return on the capital and the profit potential of the industry as a whole. (b) Increasing costs of participation of incumbents through forcing product quality improvements. For a firm already in an industry and thinking of expanding capacity. Both increase shareholder wealth. greater promotion or enhanced distribution. 3. There is also the danger that a price war may break out as rivals try to recover share or push out the new rival.ENTERPRISE MANAGEMENT 73 THE NATURE OF THE COMPETITIVE ENVIRONMENT 2. To identify what competitive strategy is needed. According to CIMA Porter’s five forces is: External influences upon the extent of actual and potential competition within any industry which in aggregate determine the ability of firms within that industry to earn a profit CIMA: Management Accounting: Official Terminology.3. 50. (c) Reducing economies of scale available to incumbents by forcing them to produce at lower volumes due to loss of market share. For an individual firm to improve its profitability above that of its peers. p. 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. 2. they would only wish to enter the ones where the forces are weak and potential returns high. Alternatively. The present strength of the forces will be evident in present profits. . The model can be used in several ways: 1. As discussed in Chapter 1. it is important to know whether the investment costs will be recouped. If successful. it will enjoy a stronger share price and may survive in the industry longer. Through the impact of actual entry. To help management decide whether to enter a particular industry. it will need to deal with these forces better than they. Presumably. the factors driving change at the micro-level can be anlaysed using Porter’s five forces model. Threat of entry New entrants can affect the profitability of the industry in two ways: 1. so management will wish to forecast how the forces may change through time.

and soft drinks and ice cream. They put an upper limit on the prices the industry can charge without experiencing large-scale loss of sales to the substitute. 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. the effect will be to exclude many potential entrants. termination costs. This gives them the ability to charge prices below the unit costs of new entrants and hence render them unprofitable. 6. Access to distribution channels. If established firms have strong brands. Substitutes affect industry profitability in several ways: 1. (b) Maintenance of high capital barriers through deliberate investment in product or production technologies or in continuous promotion of research and development. 2. this leaves the entrant needing either to bear the costs of setting up its own distribution or depending on its rivals for its sales. Examples include aeroplanes and trains. 7. it will be hard for an entrant to rival these by a price reduction. 3. e-mail and postal services. 2. They can force expensive product or service improvements on the industry. If large financial resources will be needed by a rival to enter. Pressure from substitute products Substitute products are ones that satisfy the same need despite being technically dissimilar. they try to restrict industry competition. Also. and possibly higher cost. Government policy. and expensive and time consuming to emulate them. unique product features or established good relations with customers. or experience effects (a fall in cost gained from having longer experience in the industry. special service equipment and operator training costs. Porter argues this will be particularly effective if the investment is needed in dedicated capital assets with no alternative use or in promotion. Economies of scale. 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. they will eliminate any price advantage the new rival may have. These are: 1. Both will reduce potential profits. . Capital requirements. In view of the above danger. These make the established firm to have lower costs.74 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 2. 3. If they are high enough. Therefore. 4. Some national governments jealously guard their domestic industries by forbidding imports or using legal and bureaucratic techniques to stall import competition. rivals. New rivals would be unlikely to gain sufficient scale to recover these investments. 5. firms may take action to forestall entry of new rivals by: (a) Charging an entry-deterring price which is so low as to make the market unattractive to new. they can render the industry technologically obsolete. If the established firms are vertically integrated. These are one-off costs for a customer to switch to the new rival. Examples include connection charges. By forcing firms to follow pre-emptive strategies to stop them from entering. Porter suggests that the strength of the threat of market entry depends on the availability of barriers to entry against the entrant. Switching costs. Cost advantages independent of scale. Ultimately. Product differentiation. Examples are unique low-cost technologies. usually influenced by cumulative production volume). cheap resources. Few would-be entrants will want to take the risk.

they will try to extract low prices for their inputs. The suppliers have proprietary product differences. while others are more relaxed. Power will be increased by: 1. This effect is enhanced if the industry’s supplies constitute a large proportion of the buyer’s costs. This denies the industry any alternative markets to sell to if the prices offered by buyers are low. Their power will be greater if: 1. formally or informally. However. the ‘Wintel’ domination in personal computers developed because IBM did not insist on exclusive access to Microsoft’s operating systems or Intel’s processors. These unique features of images make it impossible for the industry to buy elsewhere. In this situation. This enables the buyer to focus on price as the important buying criterion. the participants will be forced to compete against one another to increase their sales volumes. This enables them to trade around the market. 2. recognise that it is not in their interest to cut prices. Where growth is slow. If there are fewer firms of similar size. Low industry growth rate. The extent of switching costs. 4. This will impact on profitability. Provided that the buying industry does not have similar monopolistic firms. Rivalry among existing competitors Some industries feature cut-throat competition. For example. they will tend to. Buyer power is concentrated in a few hands. 2. Relative price/performance. A coach journey is cheaper than a rail journey which is in turn cheaper than a flight. The buyer earns low profits. 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. a coach is slower than a train. Porter suggests that the factors determining competition are: 1. branded food suppliers rely on this to offset the buyer power of the large grocery chains. since e-mail is both quicker and cheaper! 2. . Low switching costs. the supplier will be able to raise prices. Supply industry dominated by a few firms. 3. The trade-off is far less clear between e-mail and postal services for simple messages. 5. the switching costs might include the need to change the final product specification to accept a different input or the adoption of a new ordering and payments system. 2. by enabling a reduction in ‘search costs’. Improvements in information technology have significantly increased this. 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. For example. Products are undifferentiated. Numerous rivals.ENTERPRISE MANAGEMENT 75 THE NATURE OF THE COMPETITIVE ENVIRONMENT The power of substitutes depends on: 1. The latter have the higher profitability. In this case. Buyers are aware of alternative producer prices. such that any individual firm may suddenly reduce price and trigger a price war.

a structural analysis of the UK Confectionary industry shows: ● ● ● ● ● ● The threat of entry: low. high storage costs are often the cause of a sudden dumping of stocks on to the market. . put pressure on firms to increase volumes to take up capacity. this is usually accomplished by cutting prices. For example. This is where a lot depends on being successful in the market. so the effect is offset a little. Growth in light food snacks. – major spending on advertising. savoury snacks. 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. – cost advantages independent of size. particularly chocolate to compete with the leaders. Similarly. especially with brand only products being introduced BUT. off-licences. Main barriers to entry: – economies of scale. other outlets include petrol stations. 5. – cocoa subject to price fluctuation. 6. High fixed or storage costs. Low differentiation or switching costs mean that price competition will gain customers and so be commonplace. the existence of dedicated assets with no other value or the stigma of failure. Often this is because the firms are using the market as a springboard into other lines of business. High exit barriers. but larger manufacturers can hedge against this by backward integration. – competition for shelf space is high. vending machines. – only 30 per cent of confectionery is sold through supermarkets. Buyer power: potentially high – as there is a concentration of buyers (the six largest retailers account for 60% of total UK food). therefore inflated but stable. 4. Because variable costs are low. Threat of substitutes: moderate/high.76 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 3. The former. – there are high exit barriers (capital intensive). This is common in transportation and telecommunications. Competitive rivalry is high Substitutes threaten. sometimes called operating gearing. competitors are in balance: – there is slow market growth. – there is a threat of backward integration. Supplier power: moderate – milk. – high advertising spend necessary for brand awareness – access to distribution channels: concentrated retail supermarket. These are economic or strategic factors making exit from unprofitable industries expensive. – experience in production and distribution of major operators. introduces possibilities: healthier snacks. They can include the costs of redundancies and cancelled leases and contracts. fun fruit packaging. and so on. Illustration: Porter’s five forces applied to the confectionery industry Using Porter’s Five Forces Model. High strategic stakes. sugar subject to EU prices.

although clear from a theoretical point of view the model becomes increasingly difficult to apply as industries become harder to define and delimit. Most of us would already have more computing power than we needed but for the development of ever more power hungry applications. But this is only part of the story. It is worth remembering that although complementors are not competitors in the industry they can affect the competitiveness of the industry influencing the demand for products or services and by influencing the purchasers’ choice between different suppliers. the more complements there are and the closer their relationship to the products supplied by the industry the better. Similarly it is difficult to define the competitive dynamics of the electronic publishing industry. as is well understood by Intel. such as economies of scale. . As the employee keys in the stock they see on the shelf the information goes to the supermarket system and to the suppliers system – speeding the restocking process and benefiting both the supermarket and their supplier. The complementor concept is particularly relevant in the information economy. This means that we will often find companies conducting development work with their suppliers or customers via joint ventures so that value may be captured. For instance. A further example of a complementor is the firm that makes the hand-held stock taking device that is seen in supermarkets. It is important to remember that Porter’s model is an analytical model and it is about the strength of the forces that impact upon the industry it is not enough to just describe the forces. cell phones bandwidth and other products which will increase the demand for faster and faster chips.ENTERPRISE MANAGEMENT 77 THE NATURE OF THE COMPETITIVE ENVIRONMENT Activity Use the five forces framework to assess the competitive environment for the industry your organisation operates in. unlike the other five forces. Evaluation and developments of Porter’s model Porter’s model owes much of its success to the fact that it provides a unitary analytical framework in which to insert. supermarkets). you can usually recognise fierce competition because there are price wars and heavy discounting. It is increasingly difficult to define the boundaries of the telecommunications industry. Hardware needs software and the Internet needs high speed phone lines or other connections. expensive advertising and promotional efforts. It is harder to define where an industry’s boundaries lie and which industries should be considered suppliers and which customers and. So Intel realises that to create a market for its faster and faster chips it must co-operate and share information with the manufacturers of computers. or to say who the competitors are in the publishing industry. airline industry. This was recognised by Brandenburger and Nalebuff (1996) with the introduction of the concept of the value net. This adds complementors to the five forces of the Porter model. since no one traditional industry can build it alone. moreover. the degree of concentration and entry barriers. However. which are competitive in nature. However. or for another industry sector (for example. in addition to some original concepts. You should expect to see declining margins and ROCE for all firms other than the market leaders. litigation and expensive commitments to investment and product development. For instance a conventional analysis using the five forces of the micro chip industry would suggest that Intel can gain competitive advantage by developing faster and faster products. As such they are relatively powerful if there are few substitutes for the service they provide. what their cost structures are. many of the partial theories of industry analysis developed by studies of industrial economics.

Direct competitors. Tax breaks to encourage innovation would be an example. This will obviously have implications for the strategy that a company chooses to adopt at the various stages of the life cycle. Ford/Jaguar/ Mazda/ Volvo/LandRover.3. Honda. Initially there will be significant expenditure on product innovation and this will bring about the birth of the industry but. Seat. These are the other car companies selling products in the United Kingdom. differentiated Widening Many new entrants Fair Maturity Superior quality standardization Mass market Competition.78 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 2. The actions of these competitors will affect prices. they mature and eventually. 1. Kia and Proton).g. BMW/Rover) increases the uncertainty in this market.1). little differentiation Sophisticated Fewer remain Low 2. Daewoo. shakeouts Falling Decline Varied quality.4 Illustration of external environmental analysis – Example of a car manufacturer The best way to understand how the various models can be used s by reference to an example. as time passes the effort will shift to process innovation with the aim of seeking cost advantage and improved product reliability as more competitors enter the market. They are large and well funded and to a greater or lesser extent are trying to attract the same customers. the diffusion of knowledge. their sales grow. Skoda. General Motors. . (see Table 2. having gone into decline they die. Let us consider the situation of a motor manufacturer with operations based in the United Kingdom (say Ford. At each stage of the life cycle we can make the following assumptions. These are growth in demand and the diffusion of knowledge. Daimler-Benz/Chrysler) and financial crises (Kia.3. It is similar to the product life cycle framework which assumes products are conceived.3 Industry life cycle analysis Industry life cycle analysis essentially charts the development of a market from introduction to growth to maturity and eventually decline. Table 2. Nissan or Toyota). The wave of mergers and acquisitions (Renault/Nissan. Daewoo. Over time the nature of the research and development effort in the industry will change and this is the second driving force.1 Industry life cycle Introduction Products Buyers Competitors Margins Poor quality. rich Few High Growth Better quality. New competitors have arrived from low-cost overseas economies (e. We have demonstrated here that the life cycle itself is dependent upon technological change but political forces can change the shape of the curve and the duration of each of the stages. As with the Porter’s five forces model industry life cycle analysis should not be used in isolation. General Motors/Saab. There are two forces which drive the evolution of the industry life cycle. promotional expenditure and product specification. levels of sales. no standards Curious. Hyundai. The model should be used in conjunction with a general environmental analysis as well.

● European Union ‘Social Chapter’ regulations on maximum working hours and labour rights. 3. During the 1990s UK car manufacturers faced competition in the home market from the arrival of low-price competitors from the Pacific Rim. absent since the demise of Hillman in the 1970s. . As demand declines. reduce prices. 4. Distribution channels. including: ● the apparent shift in government transport policy towards public transport. ● taxation of cars and petrol. 5. Amalgamation between garage chains has significantly increased buyer concentration in recent years and this has put pressure on the profits of car manufacturers. quality and flexibility of the car manufacturer. Suppliers of inputs. Relations with organised labour are based on openness and consultation. ● environmental and safety regulations affecting the design of cars and the processes by which they are made. cut sales volumes and raise product expectations. Additionally the US Chrysler Corporation. As such it is an example of buyer power. ● the Office of Fair Trading investigation into car prices and allegations of restrictive trade practices affecting car distributors. Both channels will seek to obtain the vehicles at low prices to increase their sales margins. These entrants will increase industry supply and. Potential entrants. The chief inputs used by car manufacturers based in the United Kingdom are labour. Many issues face the car manufacturer here. while supply–chain partnership agreements are formed with the component suppliers. 6. through providing distribution channels and final consumers with more choice. ● general health of the UK economy and its likely growth over the coming 5 years – this will affect demand for cars. auto components. reappeared with Jeep. the industry becomes oversupplied which introduces pressure on prices as each struggle to survive. ● European Union free-trade policies enabling easier importing of lower-price cars to the UK from continental Europe. Within the car industry there has been clear switching between classes of car as motorists have reduced their demand for ‘hot hatchbacks’ and small saloons and embraced small sports cars. Car firms will also need to keep a weather-eye on developments in rail transport and the increasing popularity of two-wheeled vehicles in metropolitan areas. Some manufacturers were obviously wrong-footed by this trend to substitutes. Many car manufacturers have deliberately changed their relationships with suppliers from one based on bargaining around prices to one based on partnership. Political/legal. 7. information services and energy. Another trend has been the growth of ‘car search’ firms. Economic. which are able to provide motorists with cheaper cars through imports or special arrangements with particular dealers. transportation services. Examples under this heading include: ● UK policy on joining the European single currency and its effects on input and sale prices. Car manufacturers sell cars through two channels: ● small firms and private motorists may buy from garage showrooms. multi-purpose vehicles and estate cars. Voyager and Neon brands imported from production bases in the United States and Austria. Substitute technologies.ENTERPRISE MANAGEMENT 79 THE NATURE OF THE COMPETITIVE ENVIRONMENT 2. These affect the costs of production. ● vehicle leasing companies are major volume customers which then provide cars to large and small business users. These can reduce demand for the firm’s product or render it obsolete altogether.

Human resource managers would certainly not agree that staff are an input from the environment with the same status as spare parts. suppliers and customers are seen as separate and external. Marketers would argue that customers are at the centre of the organisation. ● tastes and fashions in car colours and styling. They present the environment as external. ● 2. etc. For example. . distribution channel. However.80 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 employers’ contribution to employee insurance and welfare. ● size of families and growth of ‘second families’. They may cause management to overlook networks and interdependencies. combining legal with political suggests that political power works in a legal framework. They ensure that management consider a wide range of potential impacts when devising strategy. ● extent to which cars are still seen as a status symbol or lifestyle accessory. ● lifestyle changes (e. activity sports). ● development of internet and interactive TV. This affects the product but also the demand for products: ● technological developments affecting cars (e. navigation systems. while another examines the economy and reports back to the strategy team.g. They provide insight into key strategic issues. one car company will see another as a competitive rival. Had we chosen a model with a different categorisation we might have obtained a completely different perspective. 4. Technological. reducing the need for private transportation. ● increased teleconferencing and homeworking.). The models assume that there is an internal domain called the firm which management can control and that there is a boundary between this and the environment which they cannot control.4. Most managers will know the ‘Five Forces’ and PEST analysis models used above. The real business environment does not fall into neat segments. not some external force off to the right-hand side. They allow division of the work of environmental analysis. There would otherwise be a danger that they would concentrate on competitors and suppliers and not see the broader forces at work. This ignores the fact that they are joint venture partners in a particular technology.3. 8. They can distort reality. 3. For example. They provide a common language for discussion of strategy between the managers. If we separate legal from political we might recognise that in some of the countries we deal with the law is ignored and real political power lies with particular elite groups.5 Evaluation of environmental models The main benefits of environmental models are: 1. one team can look at buyers. 2. Some models have empirical research to back them up which may help the team identify key threats. This is just a structure put on it by strategy writers.1. In the example in Section 2. Social. This broad heading includes: ● attitudes to car safety and performance. 3. that the rival owns one of the car hire firms it sells to and that they are all members of the same trade association lobbying government. driverless technology. 9. ● patterns of global economic development affecting target export countries. management should be aware of the limitations of the models/frameworks: 1.g. opening the possibility for the manufacturer to sell direct to the final consumer. 2. This is very hard to square with modern strategy theory which sees them as stakeholders and partners. For example.

3. ● Success – significant scale or other cost advantage and strong buyer relationships. In practical terms it is important to: 1. For instance. Remember that PEST (or which ever acronym is in use) is only an aide memoire – rigid characterisation is unnecessary and counterproductive. ● Survival – meeting minimum buyer requirements. They overload management.ENTERPRISE MANAGEMENT 81 THE NATURE OF THE COMPETITIVE ENVIRONMENT 4. Where there are low barriers to entry.3. ● Survival – minimum economic scale. ● Survival – very difficult without success factors! ● Success – strongly differentiated product and low costs. Indicate how much and in what direction a particular theme will affect the nature of the firm’s business. However. p. 2. Remember that most important factors will transcend the categorisation as political. ● Survival – technology and cash for growth. For instance the advent of G. cash for growth and superior relationships with researchers and funders. Management cannot expect to develop a strategy to deal with all the environmental issues raised by the models. societal or technological. But its social acceptability is in some doubt. . 2.4 Causes of environmental uncertainty CIMA defines uncertainty as: The inability to predict the outcome from an activity due to a lack of information about the required input/output relationships or about the environment within which the activity takes place. Where there are powerful buyers with low switching costs. Some writers suggest that management should monitor just the small number of key factors for success and deal with those. strong relationships and bonds of trust with high negotiating skills.6 Survival and success factors At the end of an environmental analysis a company should be able to recognise the survival factors and success factors that relate to the industry in which they operate or wish to operate. Where the industry is enjoying fast growth. Where the industry is mature.M. CIMA: Management Accounting: Official Terminology. ● Success – a strongly differentiated product. ● Success – advanced technology. Outlook how these themes may strengthen or weaken in the future. 2. crops may be a technological issue at first sight which may offer economic benefits and is enjoying some political support. economic. management should ensure that they reflect on the assumptions underlying them and their value in practice. 97. The fact that such segmentation models are still popular is evidence that they are a useful tool. 2005.

The latter recognises that prediction in any open system is impossible due to the diversity of factors which may affect it. in financial markets the very large number of international banks. Examples of the factors which have increased dynamism include: (a) Swifter information communications. It also suggests that competitors will be able to respond more quickly to a firm’s initiatives. These mean that something happening on one side of the world will have global impacts very quickly. Also if the relationships between the variables is complex. Managers’ perception of uncertainty will be increased by two factors – complexity and dynamism. a multitude of countries each with its own specific sets of environmental variables. Increased dynamism means that management’s models of ‘how things work’ will become out of date much quicker. 3.4. Dynamism. Increases information needs of the organisation. this will also increase uncertainty. This is the rate of change of the business environment. (b) Accelerated product life cycles. Complexity. This has significantly increased the complexity of its environment. management will require more regular information and on a greater range of factors to make it more certain. Management will find it very hard to predict the sales of their products or their ability to recoup investment expenditure on them. For example. For example. the wide variety of assets now available and their complex structuring have all contributed to making financial forecasting very complex. The cumulative effect is to reduce the lifetime of all products. The car industry has an increased number of competitors and multinational business means that each manufacturer sources parts from.1 Impact of uncertainty High uncertainty affects business strategy in several ways: 1. Stacey (1996) suggests that formal strategy processes have failed to recognise the impact of chaos theory. He cites long-range weather forecasting as a casualty when it was abandoned once it was recognised that a falling leaf in Brazil could eventually affect weather patterns in Europe. Encourages emergent strategies. . Where the environment is no longer predictable. 2. and sells cars in. Reduces the planning horizon. These writers argue for an emergent approach to strategy and therefore suggest that management should focus on creating more-flexible organisations and encouraging strategic awareness among staff. 1. Modern competitive strategy leads most firms to invest heavily in research and development to render rivals’ products obsolete. This is the number of variables which can impact on the firm and how difficult they are to predict or understand. 2. This will increase further still if the organisation elects to adopt emergent strategy formulation because the number of recipients of such information will increase. If a firm operates in an uncertain environment its management are unlikely to develop plans for more than a few years ahead because they accept that they will be subject to large margins of error.82 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 Uncertainty can also be defined as ‘the difficulty in making reliable assumptions about the future’. 2. Some writers believe that high uncertainty brings into question the idea of planning a strategy at all. The speed with which financial crises spread is often cited as an example.

1 Competitor analysis The importance of competitor analysis CIMA: Management Accounting: Official Terminology.2 shows the impact of varying levels of competitor action on the profits of the business. Hatch (1997) observes that ‘Environments do not feel uncertain.2 Impact of competitor responses on profit . Weak competitive response Annual profits Moderate competitive response Strong competitive response Time Figure 2. 2. May lead to conservative strategies.5. These may include: ● ● ● ● price cuts launching of a rival product aggressive expansion of production which reduces the firm’s market sales inclusion of costly modifications to the product which the firm must also undertake.4.’ Figure 2. people do’. that in strategy formulation management should pay attention to only a few key success variables and ignore the rest.2 Has uncertainty really increased? The modern assumption is that the business environment has become more uncertain and that more information is needed by management in order to restore certainty. 47) defines competitor analysis as: Identification and quantification of the relative strengths and weaknesses (compared with competitors or potential competitors). 2. The more environmental data we provide to managers. This approach is flawed because under conditions of high uncertainty there is no reason to believe that old ‘recipes’ will still work. (p. Hatch’s suggestion is deliberately far-fetched to make a point. This gives weight to the argument.ENTERPRISE MANAGEMENT 83 THE NATURE OF THE COMPETITIVE ENVIRONMENT 4. noted before.5 2. She ventures that perhaps the world has always been dynamic and complex but that we never fully appreciated it before. 2005. the more uncertain and stressed-out they may become. and the only thing which has demonstrably increased is the amount of environmental information available to management. Managers will tend to stay closer to the ‘strategic recipes’ that have worked in the past because they fear trying anything new due to not being able to forecast its effects. which could be of significance in the development of a successful competitive strategy.

To these we may add a fourth: 4. Suppliers whose products satisfy the same needs as ours. to give an informed basis for developing future strategies to sustain or establish advantages over competitors. 2. . The importance of growth is relevant to strategy development. then it would be more attracted to a market which is growing rapidly. (c) Form competitors. for example: ● speedboats and sports cars ● book publishers and software manufacturers. 3. A useful starting point to competitor is to gain an understanding of market size. A larger share is usually regarded as being strategically beneficial since it may make it possible to influence prices and reduce costs through economies of scale. According to Wilson and Gilligan (1997) competitor analysis has three roles: 1. or the budget airline market – which is most helpful?) A second step involves estimating how much the market has grown. This is usually based on the annual sales of competitors. to help management understand their competitive advantages/disadvantages relative to competitors. A third step involves gaining an understanding of market share. geographical region or technology. although they are technically quite different. A suitable strategy is one which yields satisfactory financial returns after taking into account the potential responses of competitors.5.2 Competitor analysis – key concepts There are some key concepts which are helpful when undertaking competitor analysis. for example: ● British Airways and Singapore Airlines ● Unilever ice creams and Mars ice creams ● Nestlé and Cadbury’s. The implications for management’s choice of product/market strategy is clear. present and potential strategies.84 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 The unit of analysis here may be a product. 2. These are market size. to assist with the forecasting of the returns on strategic investments for deciding between alternative strategies.3 Levels of competitors Kotler (2008) identifies four levels of competitors: (a) Brand competitors. if undertaking an analysis of Easyjet. (b) Industry competitors. 2. customer segment. Suppliers who produce similar goods but who are not necessarily the same size or structure as ourselves. This relates to the specific share an organisation has of a particular market. A challenge in doing this is in actually defining the ‘market’ (e.5. is the market the airline market. over the last year. Firms who offer similar products to the same customers we serve and who have a similar size and structure of organisation as ourselves. or who compete in a more limited area or product range. for example: ● Pepsi and Coca-Cola ● Unilever and Procter & Gamble.g. since if an organisation has a strategy which involves quick growth. to generate insights into competitors’ past. market growth and market share. for example. The outcome is increased profitability.

Similarly. Mobility barriers are different and relate to a situation where an existing player in the industry attempts to change their competitive position. they have a similar or cheaper distribution network. they have a similar geographical spread. International oil firms have repeatedly lost out to discounting petroleum retailers able to buy supplies on the world’s spot markets. for example: ● home improvements and golf clubs ● foreign vacations and new homes. but because they are smaller it reduces the danger of one competitor breaking from the rest in an attempt to deliver a knockout blow. they utilise a similar technology in providing their goods and services. they utilise similar types of management and staff skills. For example.ENTERPRISE MANAGEMENT 85 THE NATURE OF THE COMPETITIVE ENVIRONMENT (d) Generic competitors. Greater numbers of rivals increases the complexity of the industry. These explain the sudden arrivals of: ● ● ● retail stores in the banking services markets. It proved an insuperable impediment when the firm tried to make tailored suits. Cost structure. be described as ‘pile it high and sell it cheap’ to a quality supermarket. Competitors who compete for the same income as the company. the Levi Strauss brand has a strong presence in the market for casual clothing. As a rule of thumb it is likely that the most significant present or potential competitors are the ones who conform most strongly to one or more of the following descriptions: ● ● ● ● ● ● they presently serve the same or similar customers to ourselves. Degree of vertical integration. at best. Skoda. Instead each will try to carve a niche and hence increase differentiation. gas and water. This makes it less likely that one can invade the market of another. For example. they are also inflexible because they are committed to buying from their own upstream supply divisions. The extent to which these pose a threat to the firm depends on factors such as: 1. Entry and mobility barriers*. very expensive refurbishment and a period of more than 10 years! . If the rival has a high-cost structure this effectively denies entry to a market that contains a cost leader. They left one strategic group and joined another. They were only able to do this because the take-over by Volkswagen allowed them to improve their production methods and image. within the UK Tesco moved from a strategic group which could. For instance. Entry barriers are fairly straightforward and refer to the situation where a new entrant tries to enter the industry. However. 4. 3. *You should distinguish carefully between entry barriers and mobility barriers. Highly vertically integrated firms have considerable strength in a market. the high-cost structure of an exclusive department store would effectively deny it access to lower market segments. who had a reputation for building cheap and low-quality cars. These are costs that the firm must pay to get admission to the industry or to the firm’s particular segment of it. had to overcome significant mobility barriers to become recognised as a supplier of high-quality vehicles. 2. Number of rivals and the extent of differentiation in the market. electronic goods manufacturers in the photographic equipment market. This involved a change of senior management. household electricity providers also offering telephone services. they are at the same stage of production as ourselves. Even then it took them roughly 4 years to change customer’s perception.

products and services and current strategies. as time goes by. but rather as a continual process recognising that organisations are subject to change all the time. A competitors’ decisions are governed by their perceptions and assumptions about industry structure and the players with whom they compete. 3. resources. limiting the players in an industry to behave in a particular way. unlikely to be achieved but is something for which a company should strive. These perceptions will often be driven by the value systems of the senior management and according to Spender (1989) these perceptions will converge over time. From this perspective it is important to recognise the goals of a parent organisation where such exists and their attitude to the performance of subsidiaries.4 Gathering competitor intelligence Competitive intelligence is not just about the gathering of information but about developing an understanding of the players in the industry. The gathering of information should not be viewed as a one of task. focus on two main issues. This can be identified from what a company says and does. Grant (2002) has produced a four-stage framework for competitor analysis: 1. We shall be considering the analysis of resources in a later chapter and can leave this section until then.5. The prediction of the competitors’ behaviour can be considered to have two main purposes: 1. this is. Lynch (2006) suggest that a starting point is to undertake competitor profiling. 4. . ‘rationally’. that is the basic analysis of leading competitors to examine their objectives. Identify the competitors’ resources and capabilities. Identifying a competitors’ assumptions about the industry. therefore. to forecast their future strategies and how to counteract them. More often than not what they do will be more important than what they say – their explicit statements of intent in the annual reports and at presentations to financial analysts may not be matched by the actions that represent their emergent strategy. to forecast their likely reactions to a firm’s strategic decisions. acquiring as much relevant information about competitors and subsequently predicting their behaviour. Ideally a company should know as much about its competitors as it knows about itself. If a company appears happy with its current level of performance then there are unlikely to be any changes to their present approach. Knowledge of competitors’ goals is an essential component of any analysis. 2. Without a rigorous analysis of the resources that a competitor possesses there can be no realistic prediction of the seriousness of a possible challenge. 2. It is easy to determine what they are doing but the emphasis here should be on what they are capable of doing. The purpose is to identify the specific competitive advantage of rival organisations. of course. Once the information has been gathered and the analysis. used to predict competitor behaviour. This often explains the complacency of existing players when a new entrant picks off a new segment of a market with out reaction from the incumbents. 2. conducted it must be presented in the most accessible format to those who will make the decisions on a timely basis. Identifying competitor’s objectives. Identifying the current strategy. market strength. Whether they are driven by short-term cash or profit goals or whether they have the reserves to focus on long-term objectives will result in them exhibiting significantly differing behaviours. Thereafter the rivals should be continuously monitored for signs of activity and the industry scanned for the emergence of potential rivals.86 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 Competitor analysis must.

to the strategic initiatives of other players in the industry. The broad headings are as follows: ● ● ● ● ● ● ● ● ● ● ● ● Products and services Marketing Human resources Operations Management profiles Sociopolitical Technology Organisational structure Competitive intelligence capacity Strategy Customer value analysis Financial. approach to the market place contributing to competitive advantage rather than leaving the firm to react.2 Detailed qualitative information for competitor analysis Products/services Number of products and services Diversity and breadth of product lines Quality. often defensively. embedded customer value Projected new products/services Current market shares by product and product lines Competitive intelligence capacity Evidence of formal CI capacity Reporting relationships Profile CEO and senior management level of support Vulnerability Integration Data gathering and analysis assets Marketing Segmentation strategies Branding and image Probable growth vectors Advertising/promotions Market research capability Customer service emphasis Key customers Sociopolitical Government contacts Stakeholder reputation Breadth and depth of portfolio of sociopolitical assets Public affairs experience Nature of government contracts Connections of board members Issue and crisis management capability Customer value analysis Quality attributes Service attributes Customer goals and motivations Customer types and numbers . It is worth noting that much of the information required for successful competitor analysis will be qualitative. Table 2.ENTERPRISE MANAGEMENT 87 THE NATURE OF THE COMPETITIVE ENVIRONMENT If the technique is well developed it will become one of the firm’s core competencies allowing a more confident. Fleisher and Bensoussan (2002) give a full listing of the information that an organisation should gather about their competitors. proactive. An extract of a few of those categories will give an indication of the detailed qualitative nature of much of the information (Table 2.2).

Their response will be aggressive. These are often masked by high prices based on high market positioning. Often does not respond to moves. The tiger competitor. Flanking or market segmentation which involves choosing a flank/market segment that is relatively undefended with the aim of taking a significant market share. for example: ● ● ● Attack competition. This is because their high operational gearing means that any fall in revenues will cause drastic cuts in profits. These make it impossible for the rival to effectively respond to price cuts. they know the market is one in which it will be hard to dislodge customers. the following might be reasons to think again about taking advantage of an apparently docile rival: ● ● ● they believe the market is not worth defending any more. ● decommissioning costs such as making former storage and workings safe. Kotler advises management to consider the reasons why a competitor does or does not have a track record of responding. (b) High unit costs. Lynch (2006) also identifies a number of strategies that can be used against competitors and potential new entrants.g. and then on one occasion decides to retaliate. Examples of exit costs include: ● dedicated assets which cannot be used elsewhere. ● firms in industries with fixed supply schedules which must be maintained regardless of demand (e. The laid-back competitor. For example. Rivals will respond more aggressively to threats to their sales volumes. No predictable pattern to responses. to price cuts but not to promotion offensives). ● firms employing capital-intensive production technologies. the management have their eyes on sequel products and so do not care if their present one is knocked out. This can be achieved though head on attack against the market leader – this often requires substantial resources and investment and attacking where the leader is weak. Cutting prices is impossible without damaging this positioning. . 3. Does not respond to competitive moves.5 Forecasting competitors’ response profiles Kotler (2008 ) identifies four response profiles: 1. and broadcasting). Where the rival cannot exit easily they are forced to stay and fight in the hope that something can be salvaged. in order to send a message to all contenders that it will retaliate. football clubs. or certain types of attack (e. scheduled transportation. These are the one-off costs of leaving an unprofitable industry.88 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 2. Reacts to attacks on certain markets but not in others. Such costs tend to characterise: ● vertically integrated firms. Always responds aggressively to any threat. ● costs of redundancies. ● danger of the stigma of failure attracting rivals to attack in other parts of its business.5. (c) High exit costs. 2. Cost structures are an important factor to consider in terms of competitor response: (a) High fixed-cost structure. The selective competitor. 4. The stochastic competitor.g. Occupy totally new territory where there is no existing product or services through innovation or seeking market niches.

etc. The threat of entry is higher and the incumbent firms must downgrade assessments of the market’s attractiveness.6 Competitor accounting Competitor accounting is a term used by Ward (1992) to refer to the calculation of the relative costs and of competitors and their likely strategies to evaluate their potential effects on the profits of the firm. You should always assume that entry barriers are low – until the evidence proves otherwise! Competitor accounting must estimate the present value of the costs that an entrant will incur to overcome these barriers and compare this with the present value of the returns an entrant could achieve: (a) If costs exceed revenues. Lynch suggests an alternative set of competitive strategies based on innovation: These include: ● ● ● ● Rewriting the rules of the game – existing players in the market will usually understand how competitors are engaged i. This requires good information to identify opportunities. branding. (b) If revenues exceed costs.ENTERPRISE MANAGEMENT ● 89 THE NATURE OF THE COMPETITIVE ENVIRONMENT ● Guerrilla movement which is a rapid sortie to seize a short term profitable opportunity. provided that they are prepared to spend the money. Blocking first mover advantage by not allowing the competitor to establish a dominant position before a response is made.e. seeking to leapfrog or outflank the first mover. 2. then there is a financial incentive to join. This could be achieved by launching an imitation product or a product with enhanced features. Higher levels of service. new players can enter the market rewriting the rules on how they operate and gain advantage. then there will be no financial incentive to join and the threat of market entry is low. as illustrated by Amazon’s success. price cutting) if economies of scale are important and the learning curve is effective.6.1 (a) (b) (c) (d) (e) (f ) (g) (h) Evaluation of barriers to entry Barriers to entry include: initial capital costs legal and patent protections the costs and economies of scale of incumbent firms extent of vertical integration brand barriers scale of investment in R&D potential defensive action by incumbent firms (e. 2. the rules of the game. acquiring an incumbent firm riding out the losses caused by high initial costs or competitive retaliation.g. In addition. Co-operation – for example by joining with other players. R&D. . Technological innovation – for example enabling revolution in distribution. for example: ● ● ● investing in the capacity. Most barriers can be overcome by an outsider. though joint ventures or strategic alliances can give strength to beat larger rivals. However.

by the company. physical observations (e. (b) their response to strategic action.90 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 Where entry is likely. with (b) the present value of profits lost as a consequence of market entry and advise management of whether to resist entry and even whether to invest further in the industry. ex-employees of competitors. physical analysis of competitors’ products. Here we are exploring specifically the economic environment: . generalisation from own cost base.g. industrial experts and consultants. inspection of wage rates for grades of staff in the firm’s area. stand outside. etc. marketers. human resource specialists. This will entail the management accountant working with other experts such as production engineers. availability of space for expansion on their present site. 2. 2. Sources of data on competitors’ costs include: ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● from partnership agreements in a joint venture. (c) their ability to remain profitable as prices fall and therefore whether they will stay in the market or not. availability and cost of their finance. or inside. their factory). banks and financial markets. trade and financial media coverage.7 The global economic environment Earlier on in the chapter the concept of LoNGPEST was introduced to recognise that the environment of a firm exists at a number of levels.6. the work methods they employ. say price reductions.2 Estimate competitors’ costs Knowing these can help strategic decisions by giving a guide to: (a) their likely future pricing behaviour. the characteristics of the market segment they serve. the incumbent firm may take entry forestalling action by increasing the entry barriers artificially: (a) (b) (c) (d) deliberate adoption of highly capital-intensive production techniques high R&D spending to increase costs of participation high advertising leading to strong branding and a psychological switching cost reduction of price to reduce segment attractiveness. Competitor accounting should compare: (a) the present value of profits lost through undertaking these pre-emptive strategies. (d) their potential prices in a tender or sealed bid for a contract. competitor press releases. published financial statements.

Factors here include: ● stage of the economy in the trade cycle ● macro-economic policies of domestic governments ● levels of interest. rather than the more traditional model of less developed countries providing raw materials into a chain where the finished goods always end up in a developed nation (Knox and Agnew. The global environment contains such factors as: ● changing patterns of global trade and economic development ● development of regional economic groupings ● international impacts on currencies and interest rates. Significant national differences remain. there will be differences from place to place in a number of factors. 2. changes markedly across the UK. Dicken cautions against getting swept up in the idea that globalisation of business is demolishing cultural and political boundaries between countries.ENTERPRISE MANAGEMENT 91 THE NATURE OF THE COMPETITIVE ENVIRONMENT 1. Patterns of foreign direct investment (FDI). Western Europe and Japan/ Australasia and . 1998). The local and nation economic environment. The main impetus here has been the strategy of multinational enterprises (MNEs) to disperse their production facilities across several continents to take advantage of resource and cost differences and also to avoid the vulnerability that arises from being dependent on a single country for production facilities and markets. propensity to save. In fact. This has been accompanied by an increase in the influence of supranational economic bodies such as the European Union (EU) or the G8 summits of the major industrial nations. the bulk of FDI has been between already well-capitalised economies. Having said that it is always worth considering economic forces at regional and local levels as well since.1 The new global economy In his influential book Global Shift. For instance. This more extensive pattern of trade does not fundamentally affect national economic and political boundaries. This relates to the immediate economic influences on the city/region and country (in which the firm operates and sells. inflation and exchange rates.7. The extension of trade across national economic boundaries. Western Europe and Japan might invest in developing productive capacity in less developed countries in order to exploit cheap labour and materials. A qualitatively different process in which there is a functional integration of internationally dispersed activities. within a country. Peter Dicken (1998) identifies two dynamics affecting world economic development: ● ● Internationalisation. Elsewhere these have been termed production networks to convey the fact that production and sales flows move in many directions. The global economic environment. This has led to the formation of a core triad of comparatively rich and well-capitalised economic zones centred on North America. One of the factors increasing the complexity of the firm’s environment has been the increased influence of global economic forces on the economies of particular states. 2. Globalisation. However he accepts that there has been a significant change in the extent of globalisation brought about by: ● ● Extension of production chains across national boundaries. which is important to the financial services industry. Traditional economic theory would suggest that the capital-rich countries of the USA.

Technology acting as an engine of economic transformation. The creation of supranational organisations. The industries Dicken singles out for inspection are textiles and clothing. Latin America and parts of the Indian subcontinent. One can imagine these problems particularly afflicting the large continental countries such as the United States or Australia. Through imposing common working practices and encouraging international staff mobility they exert a convergence influence on national cultures. Increased demand for flexibility in workforces. He notes that the financial services have tended to follow the manufacturing industries. there are obviously moves towards harmonisation of laws. in the Pacific Basin via the Asia–Pacific Economic Forum (AFTA) and through similar pacts in Latin America such as the MERCOSUR customs union. taxes and even currencies. Korea. speeded up product lifecycles by hastening innovation and swept away traditional craft-based production systems. Changes in government policies towards ones aimed at removing obstacles to economic adjustment. electronics and financial services. Knox and Agnew (1998) discuss the possibility of wide divergences emerging within national economies between the prosperous urban areas and the less involved rural areas. . the idea that technology alone determines patterns of economic and social development unmediated by the political and social culture). China. This effect has caused remarkably similar products and lifestyles to develop across the countries touched by it. Other writers broadly agree with Dicken’s hypothesis. particularly among the unskilled. Countries within these economic zones are moving towards common regulations and taxation systems. Although national economic differences remain to some extent within the three triads. Taiwan and. Widening differences in incomes and living standards within industrialised countries. promotion of small firms. lately.e. Although warning against crude technological determinism (i. both numerically (through more extensive use of part-time workers) and functionally (through multiskilling). in North America via the North American Free Trade Agreement (NAFTA). The development of ‘webs of enterprise’ through the spreading of multinational enterprises. increased harnessing of new innovative technologies and attracting foreign investment. The impact of particular industries on transferring cultures. These industries have been the major cause of FDI. poorly educated or immobile. For less industrialised nations Dicken sees considerable problems with their ability to cope with worse poverty and unemployment. Increased pressures for global governance to keep pace with the global businesses that authorities wish to regulate.92 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 ● ● ● ● a periphery of newly industrialising nations such as the dragon states of Malaysia. They also seem to possess an institutional power that rivals and transcends the political institutions of the nation-states in which they are based. automobiles. Dicken notes that technology has shrunk the world through improved transportation and communication. Dicken predicts a number of challenges facing governments and individuals in the industrialised nations as a consequence of the increased growth of the globalised economy: ● ● ● ● ● Increased unemployment in the older industrialised countries. lifestyles and personnel across national boundaries. In Europe this is through the EU. These multinationals forge trading links between countries that previously did not trade.

ENTERPRISE MANAGEMENT 93 THE NATURE OF THE COMPETITIVE ENVIRONMENT 2.8 National competitive advantages The internationalisation and globalisation of markets raises issues concerning the national sources of competitive advantages that can be substantial and difficult to imitate. a Division of Simon & Schuster Adult Publishing Group. What are the implications of this for government policy and competitive strategy? Porter concludes that entire nations do not have particular competitive advantages. Porter 1990. 2. provided that: (a) its customers are varied enough to permit segmentation into groups similar to those found in the global market as a whole. structure and rivalry fierce. (b) its customers are critical and demanding enough to force the firm to produce at world-class levels of quality in its chosen products. Why do certain nations house so many successful international firms? 2. The Competitive Advantage of Nations. Reprinted with the permission of The Free press. it is specific industries or firms within them that seem able to use their national backgrounds to lever world-class competitive advantages. Rather. from The Competitive Advantage of Nations.1 Porter’s Diamond Porter’s answer is that countries produce successful firms mainly because of the following four reasons as illustrated in Figure 2.. 1998. Porter (1992) in his book.3. he argues. Plus roles of • Chance • Government Firm strategy.8.2 Demand conditions The demand conditions in the home market are important for three reasons: 1. If the demand is substantial it enables the firm to obtain the economies of scale and experience effects it will need to compete globally. © Michael E. All rights reserved . He set out to provide answers to: 1.3 Four elements of national competitive advantage.8. How do these firms sustain superior performance in a global market? 3. The experience the firm gets from supplying domestic consumers will give it an information advantage in global markets. explored why some nations tend to produces firms with sustained competitive advantage in some industry more than others. capable national firms Factor conditions advanced specialised with good technical know-how Demand conditions sophisticated and demanding with international outlook Related and supporting industries home-based suppliers and related industries that are internationally competitive Source: Porter (1992) Figure 2. 2. 2.

4 Factor conditions These are the basic factor endowments referred to in economic theory as the source of socalled comparative advantage. enjoyed the support of world-class producers of components and related products. etc.8. 3. a phenomenon that Porter calls clustering.8.g. R&D experience.8.7 National competitive advantage Successful firms from a particular country tend to have linkages between them. initially at least.3 Related and supporting industries The internationally competitive firm must have. through staff movement and contracts) . levels of training and skill. Factors may be of two sorts: 1.g. The role of chance events. this will give the firm the incentive to enter export markets before others do. 2.5 Firm structure. Basic factors such as raw materials. legislation and education can impact on the other four elements of the diamond to the benefit of the industrial base of the country. If the maturity stage of the plc is reached quickly (say.6 Other events Porter points out that countries can produce world-class firms due to two further factors: 1. Wars. These can be influenced by: ● ● ● ● ownership structure the attitudes and investment horizons of capital markets the extent of competitive rivalry the openness of the market to outside competition.8. the development of the Swiss precision engineering tools industry owes much to the requirements and growth of the country’s watch industry). 2. strategy and rivalry National cultures and competitive conditions do create distinctive business focuses. Subsidies. These are largely ‘natural’ and not created as a matter of policy or strategy. can also change the four elements of the diamond unpredictably. due to rapid adoption). 2. etc. 2. Porter argues that only the advanced factors are the roots of sustainable competitive success.8. 2. The role of government. Clustering allows for the development of competitive advantage for several reasons: ● transfer of expertise (e. Moreover success in a related industry may be due to expertise accumulated elsewhere (e.94 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 (c) its customers are innovative in their purchasing behaviour and hence encourage the firm to develop new and sophisticated products. 2. 2. Developing these becomes a matter for government policy. semi-skilled or unskilled labour and initial capital availability. civil unrest. chance factor discoveries. Advanced factors such as infrastructure (particularly digital telecommunications).

wood pulp. This leads to shoddy products and excessive prices abroad. Companies not countries. the firm should compete in global markets. Sweden in timber. Collapse of supporting clusters. vertical integration).8. Decline of competitive rivalry. If these advantages are likely to be world class. 3. telecommunications. Local demand conditions. By focusing on their country of origin Porter does not explain why a given country produces both stars and duds in the same industry.10 Comment on Porter’s Diamond Although not as popular as his models of Five Forces. (b) allowing a differentiated product. An excessive concentration between firms or pursuit of diversified business strategies reduces the keenness of the competition at home. Here local customers may fall out of step with world demands or inappropriate government policies cause a collapse or distortion of demand at home.9 Porter’s strategic prescriptions Porter suggests that the firm identifies its most promising strategy in the following ways: 1. this model has still achieved a lot of recognition for Porter. training. 2.g.g. 3. 2. Silicon Valley. Ignore multinational or global corporations. shareholders and .e. This occurs due to poor economic policies such as: ● failure to maintain and improve the country’s skill base ● lack of investment in technology and product ● failure to have developed beyond primary advantages when they run out. The industries that must succeed globally have their own management and strategies. 2. Factor deterioration. This is usually due to firms pursuing diversification strategies and ceasing to concentrate on their core business. Toyota and Honda are both Japanese car makers which are a success. 2.ENTERPRISE MANAGEMENT ● ● 95 THE NATURE OF THE COMPETITIVE ENVIRONMENT concentration of advanced factors (e. If these advantages are not world class. wood-handling machinery. The idea that Microsoft is an American company or ICI is British seems outdated when we consider that their staff. For example. value chain and generic strategies. 2. 2.8. particleboard furniture). 4. It is not.8 Losing competitive advantage Nations may lose their competitive advantage through the erosion or deterioration of the factors which created the advantage to start with: 1.g. common geographical location (e. City of London) 2. expertise in key industry (e. the firm should find a niche market at home or abroad where it can use its available strength. Nissan and Mazda are less successful and have been rescued by Renault and Ford. Clustering may take place in two ways: 1.8. however. without its difficulties: 1. Identify which clusters in the home country give a competitive advantage – either through (a) permitting lower costs of production than global rivals. workforce) better supplier/customer relations within the value chain (i. respectively. The effect is that the members fail to remain world class against their more focused rivals overseas.

In recent years with the liberalisation of trade in Eastern Europe. changing economic conditions. taxes on specific types of business activity and local content laws. the entry of China to the WTO and the negotiation of a trade agreement between Vietnam and the US macro-political risk has diminished somewhat but still needs to be monitored by multinationals. 4. Less applicable to services. social unrest. competing religious groups. Groups that can generate political risk: current government and its various departments and agencies. 2. Porter’s examples are restricted to manufacturing and closely allied industries such as banks and management consultancies. It is important. It is hard to see how his model would apply to Starbucks or McDonald’s where so much of the product and staffing depends on the local economy and not a US industrial base. Therefore it is necessary to analyse the target country too. etc. retired persons. therefore. 3. opposition groups in the government that are not in power but have political influence. Particular emphasis should be placed on determining any political and cultural differences. Ignores the target country.or micro-level. Micro-political risk tends to affect selected sectors of the economy or specific foreign companies and is often driven by the dominance of those firms.1 Political risk Political risk can be considered to arise at the macro.9. rising nationalism. ● ● ● ● . vested interests of local business people. workers. Porter’s model seems to apply better to firms that are exporting and less well to ones who are actually setting up outside of their home country. Expropriation. newly created international alliances. terrorist or anarchist groups operating in the country. the seizure of private businesses with little or no compensation to the owners would be an example as would indigenisation laws which require that national citizens hold a majority share in all enterprises. impending or recent political independence. that as well as conducting a PEST analysis for the home country of a company a similar analysis is conducted for any country within which a firm is currently operating or considering operating. organised interest groups such as teachers. Commercial success or failure will depend more on the environment in the target country than it will on the environment in the home country. armed conflict or terrorism. students. 2. These risks often take the form of industry regulation.9 Country analysis and political risk As we have already discussed an analysis using Porter’s diamond will ignore the environmental factors in the target country. Macro-political risks will affect all foreign firms in the same general way.96 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 customers are from all over the world. Rugman and Hodgetts (2003) have produced a useful summary: ● ● ● ● ● ● ● ● ● Sources of risk: political philosophies that are changing or are in competition with each other.

indigenisation laws. For instance. Environmental scanning is low-intensity gathering of information.10 Sources of information for environmental analysis Undertaking environmental analysis for an organisation requires access to a wider range of information. etc. Effectively it is keeping a close watch on developments. Products and operations also face an element of political risk. Responsibility for scanning arguably rests at three levels: 1. cancellation or revision of contracts. Where local laws do not offer patent protection this can be a significant risk. They would also consider the strength of lobby groups within the target country.1 Environmental scanning It is important to distinguish between different intensities in the use of environmental information. 2. textiles. For instance where a government requires a joint venture to exist with a local partner there is both a limit to control and the risk of theft of product knowledge or technology. within the United States. foreign governments that have entered into international alliances with the country or that are supporting the opposition within the country. Line management. . will be responsible. it is usual to focus on two areas: 1. lobby groups have considerable strength in the areas of steel. cartels and price fixing. the goods/services to be produced and the operations to be carried out. softwood timber and semiconductors and have been able to bring considerable pressure to bear on their government to bring about favourable decisions. 2. Given the operational concerns of these members of the team. As regards the political system the major concerns would be the prospect of political upheaval in the country. ● ● ● ● ● ● ● When forecasting political risk whether the company does this on a formal or ad hoc basis. 2. hiring policies and product manufacturing. restriction of operating freedom concerning. for example. riots. the political system in which the company is doing business..ENTERPRISE MANAGEMENT ● ● 97 THE NATURE OF THE COMPETITIVE ENVIRONMENT international organisations such as the World Bank or United Nations. this scanning is unlikely to extend beyond the medium term and will be limited to the technologies and products they control. the likelihood of the government giving preference to local firms or the prospect of a government acting on a totalitarian fashion. In addition to their regular operational responsibilities line managers. or a designated manager. damage to property and/or personnel from terrorism.10. loss of financial freedom such as the ability to repatriate profits. Effects of political risk: expropriation of assets (with or without compensation). increased taxes and other financial penalties. Similarly a requirement to source a fixed percentage of components locally can be a source of risk as can the governments approach to monopolies.

2 Accessing environmental information Wilson and Gilligan (1997) note that successful environmental scanning requires two elements to be present: 1. ● provides a base of objective qualitative information. This raises the important issue of how the knowledge of staff and managers can be effectively pooled and accessed. The process of scenario planning. ● provides a continuing broad-based education for managers in general and strategists in particular. 3. 3. 2.98 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 2. The generation of an up-to-date database of information. creation of an internal environmental information database for knowledge to be entered into under specified codes or headings. For this reason more modern ‘bottom-up’ approaches to strategy may be preferable. Specialist unit. To assist with deciding whether to develop business divisions and products for another country. ● improves public image by showing that the firm is sensitive to its environment.3 Detailed environmental analysis This is more focused and looks at the specific issues.10. which we will discuss in the next chapter is often used as a means of considering the specific issues that a company needs to monitor more closely in this way. Strategic planning. encouragement of broader participation in the business strategy process. 2. ● Jain (1990) suggests that the following benefits arise from environmental scanning: ● helps firm to identify and capitalise upon opportunities rather than losing out to competitors. Persons with specific responsibility for scanning. While their time frame of analysis will be longer than that of line managers. Possible techniques include: ● ● ● regular management meetings. They may be called names such as ‘business intelligence units’. ● provides information to help the strategy formulation process. 2. 2. ● makes the firm more sensitive to the changing needs and wishes of its customers. their lack of understanding of the operational and technologies details may mean they miss many important leads. As part of an analysis of a particular business unit and its performance. The dissemination of this information to decision-makers. It may be necessary in a number of situations: 1. In deciding on the viability of a particular product which is being considered for launch or continuation. . ● provides intellectual stimulation for the strategists. Conducted by members of the strategic planning team.10.

3. (b) Market research reviews and reports produced by specialist research firms including Mintel. (c) Statistical sources such as government censuses and surveys of household expenditure. special research papers. conference reports.ENTERPRISE MANAGEMENT 99 THE NATURE OF THE COMPETITIVE ENVIRONMENT 2. Secondary sources: (a) Directories and yearbooks covering particular industries (who’s who) and ownership patterns (who owns what). business and management journals. the components of the Five Forces model and the factors which influence them. (g) Patents registered with the national patents office. (f ) Analysis services such as FAME. (c) Abstracts. Primary sources: (a) Annual reports and statements of competitors or firms in the target market or industry and those of their suppliers. A generic phrase covering theses. production and demographics. (d) Newspapers and newsletters such as the business press or industry bulletins (using databases such as Lexis/Nexis which gives access to the world’s press. economic forecasts and reports. The firm can set up a profile of keywords relevant to its industry and source the material written on it. (d) Government publications such as special reports of select committees on particular industries. (e) Grey literature. index journals and current awareness services. (b) On-line databases of professional and academic journals. Tudor (1992) provides the following categorisation of information sources: 1. These are specialist databases (on paper. Economist Intelligence Unit. etc.4 Categorisation of information sources In an excellent if now rather dated guide. (c) Internet resources such as: ● homepages of rival firms ● economic information from national governments ● homepages of management consultants and professional bodies ● discussion groups ● academic papers via sources such as Google Scholar. (b) Transcript services from newspapers.11 ● ● Summary The key points to remember are: the components of PEST and LoNGPEST . maps and photographs. CD-Rom or on-line) which index technical articles under codes and keywords. analysts and on-line data sources such as proprietary company information services. newspapers and business information. (e) Magazines and journals including the trade media. 2. Computer-based information services: (a) CD-Rom-based abstracts and journals. 2.10. technical journals. .

H. (1992). (1998). R. and Samir. International Business (3rd edn). Competitive Strategy: Techniques for Analysing Industries and Competitors. (1997). OH: South Western Publishing Company (cited in Wilson and Gilligan (1997). Englewood Cliffs. Techniques. NJ: Prentice-Hall. R. A. Porter. (2008). pp. ‘Four elements of national competitive advantage’ Figure 3. the threats that competitors can pose and alternative competitive strategies.E.M. (1989). 38. and Whittington.E. Ram. Strategic Management and Organisational Dynamics (2nd edn).D. Ward. Basingstoke: Macmillan.S. (1980). I. the frameworks for competitor analysis. 7–23. The Geography of the World Economy (3rd edn). P and Agnew. Rugman. (2006). Strategic Marketing Management. and Bensoussan.C. No. Oxford: Blackwell. J.S. op. R.. Wilson. Applications (4th edn). Oxford: Blackwell.S. P. © 1990. P. Fort Worth: Dryden Press. Contemporary Strategy Analysis: Concepts. Lynch. (1998). Oxford: Oxford University Press. Comparative Economic Systems (2nd edn). Fleisher. M. J. Harlow. Cincinnati. Kotler. Stacey. Porter. Scholes. (1997). J. New York: The Free Press. Exploring Corporate Strategy (8th edn). Vol. Hatch. R. London: Arnold. M. (1998). and Hodgetts. (1992) Macmillan Dictionary of Business Information Sources. and Gilligan. (2003).S.C. Harlow: Prentice-Hall. Knox. (2008). (1998). G.100 THE NATURE OF THE COMPETITIVE ENVIRONMENT STUDY MATERIAL E2 ● ● ● ● ● ● the elements contributing to uncertainty (complexity and dynamism). (1996).M. Strategic and Competitive Analysis. Marketing Planning and Strategy.J. Symbolic and Postmodern Perspectives. Planning. ‘Competitor Analysis Practices of U.F. K. FT Prentice-Hall. Upper Saddle River NJ: Prentice Hall. (1992) Strategic Management Accounting. Marketing Management: Analysis. Co-opetition. C. London: Pitman. Spender.1 page 72.E. Reprinted with the permission of the Free Press. Doubleday. . C. Harlow: FT Prentice Hall. factors leading to globalisation and the elements of the Porter Diamond. Companies: An Empirical Investigation’. References Brandenburger and Nalebuff (1996). R. Organisation Theory: Modern. 1. Industry Recipes: The Nature and Sources of Management Judgement. (1990). All rights reserved. S. K. the main sources of environmental information. B. the nature of political risk. Global Shift: Transforming the World Economy (3rd edn). Johnson. Management International Review. Oxford: Butterworth-Heinemann.M. London: Paul Chapman. Implementation and Control (9th edn). A Division of Simon & Schuster Adult Publishing Group from The Competitive Advantage of Nations. Porter.T. Tudor. London: Cima/Butterworth-Heinemann. Corporate Strategy (4th edn). . M. Gardner. Jain. 1998 by Michael E. Dicken. Grant (2002). (2002). S. cit.

there are other local environmental issues that need to be fully considered before entering negotiations to build a factory. Requirement Apply appropriate strategic management models/frameworks to explain the key external environmental and competitive factors on which information should be collected to help W Company evaluate its proposed strategy to move into L country. At this stage it has not identified where it will locate its manufacturing facility. The company recognises the need to understand the marketing environment of the country within which it establishes its manufacturing facility. 101 . The Board has taken the strategic decision that expansion can only be achieved through market development abroad. Initial research has identified L country as offering the potential to be a possible suitable location for W Company to develop a new market. It appreciates that. besides labour. The company believes that there are major advantages to be gained by setting up a factory in a country with a low-wage economy. If the outcomes from the research are positive W Company intends to find an existing retail chain in L country that it can acquire. (10 marks) Section B type questions Question 2 A clothing company based in the United Kingdom believes that its domestic market is limited and is proposing to expand by the manufacture and sale of its products abroad. rather than set up a new operation through internal development. Further information now needs to be collected on the external environment and competition in L country in order to help evaluate the viability of the strategy being proposed.Revision Questions 2 Section A type question Question 1 W Company is a fashion retailer which designs and sells its own brand of women’s clothes through its chain of shops in F country. However. it is facing tough operating conditions in its home market where strong competition means there is little opportunity for future growth.

102 THE NATURE OF THE COMPETITIVE ENVIRONMENT REVISION QUESTIONS E2 Requirements (a) Compare and contrast the environmental factors that apply in both the UK and the other country. recommend the factors that should be included in the monitoring system implemented by the firm. in his book Competitive Advantage: Creating and Sustaining Superior Performance. working hours and domestic amenities. the bargaining power of buyers. suggested that a firm must assess the industry’s market attractiveness by considering: ● ● ● ● ● the extent of the rivalry between existing competitors. the bargaining power of suppliers. the threat of substitutes. (5 marks) (Total marks 25) . Requirements (a) If a firm wishes to monitor the bargaining power of buyers. (10 marks) (b) Explain four different methods whereby a firm can reduce the threat of new entrants to an industry. the threat of new entrants. (10 marks) (c) Explain the reasons why firms often continue to operate in an industry which is generating below normal returns in the short run. (10 marks) (Total marks 25) Question 3 Michael Porter. technology. (15 marks) (b) Explain the possible cultural influences on the effectiveness of the workforce in respect of local education and training.

exchange rates. Information on social factors would also help in determining the cultural context of L country. This would include exploring the legislative and government policies and attitudes to competition that could impact on W Company’s development. not only of customers. for instance in terms of the customer attitudes. it may not be a positive step to enter the market. The headings can be used as a checklist to assess the relative importance of the different influences on W Company’s proposed strategy. The PEST framework is a useful way of organising information on the macroenvironmental influences that can be used to assess the external factors that might impact on W’s development in L country. level of tax rates. Research should be undertaken to determine whether the social factors are encouraging for W Company. In addition Porter’s five forces model will be helpful in analysing the nature of the competitive environment in L country. but also future employees. if there is political instability and unrest. levels of consumer disposable income and the percentage of household income spend on clothing and specifically fashion items. social-cultural and technological factors. interest rates. Technological factors that would need to be explored relate to the communications infrastructure and any technological issues that might impact on the way the retailers 103 .Solutions to Revision Questions 2 Section A solutions Solution 1 The strategic management frameworks that could be used to assess the external factors that could help in the Board of W Company to decide whether or not to pursue its market development strategy in L country are PEST and Porter’s five forces model. Information on demographic factors. values and beliefs of people in L country and the extent to which they would be likely to buy fashion clothes from a foreign retailer. economic. is the government of L country encouraging inward investment by offering grants to companies or do they have policies in place to protect its own industries? W Company would also want to consider the political stability in L country. For example. in order to gain an understanding of any potential cultural differences. All of these factors could impact on the demand for W Company’s women’s fashion clothes. such as the number of women in the age groups that W Company intends to target would be useful. Information should be collected on the nature of the economic climate such as the rate of economic growth. With regard to the information that should be gathered on the general environment in L country it will be important to assess the nature of the political and economic environment. This would involve an analysis of the political/legal.

In part (a) you should consider the impact of the PEST factors on it as both a manufacturer and a seller in the country. (a) Before making a decision to set up manufacturing facilities abroad. as well as ordering and payment systems. One of the most important aspects of the model for W Company relates to the level of barriers to entry that it might face. the management needs to consider many factors. It is a good idea to visualise a low-wage economy in your mind (say India or Mexico) and that will help bring ideas to mind. 1. An analysis using the five forces model will help W Company assess the level of competition and the attractiveness of the market in L country and hence whether it is an attractive one to enter. is it a developing or mature industry). Also. Note that the examiner asks you to contrast the factors between the United Kingdom and the low-wage economy’. Section B solutions Solution 2 ● ● ● ● ● This question is very closely structured. Economic environment. this would make it an unattractive proposition. Be careful not to repeat yourself between sections (a) and (b). In part (b) your comments are restricted to the impact of the cultural factors on its role as a manufacturer only.e. Part (a) is obviously a reference to the four elements of PEST.104 THE NATURE OF THE COMPETITIVE ENVIRONMENT SOLUTIONS TO REVISION QUESTIONS E2 operate. for example as a result of already established firms in L country having strong retail brands or if there are legal or bureaucratic factors in place to deter foreign business entering the marketplace. the state of the transport systems needs to move stock around the country would need to be assessed. It also highlights the need to assess the current competitive rivalry. Interest here will centre of the cost of packaging and disposal of waste. the company should consider the environmental factors which can be subdivided into the economic. for instance information will be needed on the number of retailers currently operating in the industry and industry growth rates (i. You should structure your answer under these four headings and try to find more than one example of each. This would involve researching the power of buyers and suppliers in L country and the extent to which substitute products exist. and the technological business environments. The marker can almost make sense of the paragraph by reading the underlined sections. . The PEST framework can be expanded to consider environmental/ethical factors. You are required to relate these factors in (a) and (b) to the strategy of the clothing manufacturer. but also about ethical conduct in the management of employees. When appraising a foreign investment. What is different between the two economies? Part (b) also has four elements: – local education and training – technology – working hours – domestic amenities. Presumably W Company would only want to enter the market in L country if the forces are weak and potential returns are high. the cultural. This could relate to computer tracking of stock. Note how key points have been underlined to add emphasis. Again you should structure your answer under these headings and find at least two examples of each. the political and legal. If there are high barriers to entry.

the low-wage economy may have a nonconvertible currency. For example. Other issues you might mention. 4. There may be differences in political stability. the management may not have this information for the foreign country. inflation rates. Because it is freely convertible. Technological environment. Management needs to investigate the foreign infrastructure. Political and legal environment. the problem of remittance of profits or management fees to the parent company does not arise in the domestic situation and the ability to remit funds is a key objective of firms that invest abroad. attitude to free-trade and the permissibility of foreign ownership of businesses. Factors that may be considered are: ● The availability of telecommunications within the country and the quality of connections back to the United Kingdom. the foreign exchange market establishes the UK exchange rate. . These may not be present in the new economy. The UK is a developed industrial nation and hence has electricity and a workforce familiar with the disciplines of factory life. 3. 2. Cultural environment. extent to which markets are developed. (b) In planning the move of the manufacturing operations. it is essential that the management know about any issues which are particularly important to the workers. The UK political system is mature and governments are elected and bound by the rule of laws passed democratically. The firm may decide it needs to provide its own generators as a primary or back-up power source. This will affect the decision on what level of technology to employ and how much expatriate management and staff to use. This means that agreements reached to safeguard investments or give access to markets may be rescinded without warning and even assets sequestrated. The firm knows these for its home market in the UK but to sell overseas it will have to be sure that the design of the clothing and the styles and fabrics are acceptable in the new markets. The experience of operating within the domestic market will mean that the management is aware of both the supply and skills of the local labour force available. ● The reliability of electrical power. given time. Another economic issue will be the effect of the exchange rate regime on the costs and earning from the overseas subsidiary. The political risk must be investigated before making any decision to set up a manufacturing process abroad. This will ensure that facilities are adequate to allow the firm to operate with a reasonable level of efficiency. In some low-wage economies these democratic safeguards are not in place.ENTERPRISE MANAGEMENT 105 THE NATURE OF THE COMPETITIVE ENVIRONMENT A particular issue is the cost of materials and of labour with an adequate level of skills. The customs and values of the country are often important in determining the ultimate success of an investment. include the relative growth rates of the economies. Governments in host countries may have policies to forbid such flows. Market research and past experience should provide the company with information to forecast accurate future sales. thereby forcing the firm to invest funds in developing businesses and assets in the host country. The languages spoken in the foreign economy may be different from the UK and this will present communication problems for management from the UK. However. However. This will affect the ability to repatriate profits and also the costs of goods exported back to the home economy. extent of state involvement in the economy. This will have implications for management control.

However. Working hours. attitudes to the aged and special conditions regarding holidays and ‘free time’. Education and training. 2. It is therefore important that the power of buyers is monitored in order that organisations are aware of the forces which are important in the development of a strategic plan. a lack of understanding may result in problems within the workforce. Factors which will influence the relative bargaining strength of the buyers include: ● the number of different buyers and sellers in the market. The foreign employees are likely to need training in order to work efficiently. ● the relative size of both the buying and selling organisations. This can extend to the provision of other amenities such as clean water. Solution 3 This is a very standard revision of basic theory in part (a). At a micro-level local workers may not have experience of particular technological processes such as computer-controlled machinery or computer-assisted design for clothing or laying out of jobs. 4. health care and education for workers and their families. Their level of previous experience will be vital to the success of the investment in their country. ● the buyer’s purchases are large in relation to the total sales of each seller. (a) The bargaining power of buyers represents a major factor in establishing the attractiveness of an industry. especially if the cost structure of the seller includes a high level of fixed costs. This will reduce the travelling time of the workers. Social and religious factors can sometimes differ in a foreign environment. the management may consider these demands to be excessive. but may increase the amount of capital employed in the project.106 THE NATURE OF THE COMPETITIVE ENVIRONMENT SOLUTIONS TO REVISION QUESTIONS E2 1. . Once trained. it is expected that an employer will provide facilities for the staff. In particular. these local staff present a staff-retention problem because other firms will wish to employ them. It is likely that the employer who provides housing will be seen as ‘caring’ and this may be important for achieving acceptance within the foreign country. Parts (b) and (c) require additional thought. This would necessitate use of expatriate workers in the short run and considerable training. as a major customer can often dictate terms and conditions. Others are agricultural societies where the day is measured by the progress of the sun and hence notions of keeping factory hours is altogether strange. safeguard future labour sources and may permit lower wage costs. Specific areas include the importance of the family unit. 3. In some countries. In some situations. These enable the firm to be seen to make a contribution to the local society. Technology. At the macro-level some low-wage economies already have substantial experience of factory working. ● the level of profit earned by the buyers is low. additional holidays may be required by groups of workers in order to allow them to perform religious rites or undertake significant social commitments. The firm may discover that in addition to the need for training in specific skills the workforce lack basic skills of numeracy and literacy which will affect their abilities to follow written job instructions and understand machine read-outs. Provision of local housing and amenities.

The ability to change to another supplier without many costs being incurred. 5. Patents. Switching costs. then this can represent a significant entry barrier. special delivery facilities or electronic ordering systems. 8. 4. In some industries. 3. finance or other expenses at a lower rate than their competitors. This provides an example of ‘overall cost leadership’ which can be very significant in planning for competitive advantage. ● the ‘switching costs’ are low. ● Information may be published by specialist organisations such as industry groups. The gross margins they report give an indication of the potential for their suppliers to raise prices if the buyer power could be reduced. as they have been able to obtain materials. labour. Technological advantages that result in cost leadership. ● the quality of the component purchased is not particularly important in the final product. licences and government/legal constraints. Some firms are able to produce products at a lower cost. an organisation will try to establish customer loyalty which will ensure that people will buy the product in preference to other brands and substitutes that are available. ● A survey of the structure of the supply industry will reveal the number and location of alternative suppliers. ● The uniqueness of the technical specification of the product could be considered to reveal whether it is unique or whether several suppliers are capable of making it. Branding or customer loyalty (differentiation). Potential competitors can be deterred and competitive advantage retained by any of the following: 1. ● (b) There are a number of different barriers to entry that are likely to reduce the number of potential entrants to the industry. it can be of great value in retaining competitive advantage. Access to cheaper factors of production. 6. large-scale operations can produce the products at a lower cost than the smaller producers. The scale of investment needed to establish the operation. These include: ● Details can be obtained from the financial reports of companies buying the product. 2. Once this type of legal barrier has been obtained by a firm. It is possible for a firm to use any of these as a form of protection and to prevent new entrants to the industry. Economies of scale including the learning curve. Incumbent firms can increase these by offering volume discounts. . Estimates can be made of their ability to supply and the costs of transport that might be involved. Often at considerable expense. Control of unique distribution channels. Successful research and development often results in a firm having a process that reduces the cost of production so that competitors are unable to compete on a level playing field’ This gives the firm that has invested in the R&D an important advantage over their competitors and will exclude potential entrants to the industry.ENTERPRISE MANAGEMENT 107 THE NATURE OF THE COMPETITIVE ENVIRONMENT the product is undifferentiated. If a firm can exclude other producers from distributing their products through the most effective distribution channels. There will be a number of different sources of information that could be obtained to enable a firm to monitor the bargaining strength of buyers. 7. If the amount of investment is so large that most competitors are unable to consider entering the industry. this represents a way in which potential competitors can be excluded and the existing firms have competitive advantage and possibly even a monopoly. ● the extent to which buyers can undertake backward integration. and ad hoc reports could be commissioned.

108 THE NATURE OF THE COMPETITIVE ENVIRONMENT SOLUTIONS TO REVISION QUESTIONS E2 (c) There are exit barriers that result in firms remaining in an industry. When a firm realises that the probability of success is low or acknowledges that there is excess capacity in the industry. even though the returns are below the normal level. This is likely to occur if the closure will result in substantial costs being incurred by the firm. In these situations. a firm may decide to stay in an industry because the market has a strategic importance to the firm. the costs of closure are estimated to be higher than continuing the operation. the closing may be delayed until a more appropriate time. a commercial bank may continue to provide current (checking) accounts despite their low profitability because they are the cornerstone of a client relationship from which more valuable products can be sold. In general terms. These are termed exit costs. The ownership of assets with no resale value or assets shared with other processes could be another factor that delays the decision to close an operation. However. Particular costs are redundancy payments to staff or long-term supply contracts that will result in damages being due as a result of breaking the contract. Similarly. Apart from the exit costs. common costs that are absorbed by a particular process may influence the decision to close down a portion or the whole of an operation. For example. decisions of this kind are often postponed. a decision to close may be appropriate. .

3 Contemporary Perspectives in Strategy Development .

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3. with the effect that competition becomes even fiercer. This chapter will go on to review the debates surrounding social responsibility. companies have been forced to change the way they manage and operate their businesses. and developments in the technology of communication and transportation have helped to produce a global market and mean that companies are able to compete more easily anywhere in the world. 111 . In addition. 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. the liberalisation of trade and the deregulation and privatisation of industries. These changes are seen as the result of a number of developments including the drive by multinational companies to seek new markets as domestic markets become saturated. Some of the recent developments in the field of strategic management and contemporary ideas on meeting the challenges of the dynamic environment facing organisations are explored in this chapter. Another important trend is the spotlight on social responsibility and the ethical considerations when developing strategy.Contemporary Perspectives in Strategy Development 3 LEARNING OUTCOME After completing this chapter you should be able to: discuss concepts in established and emergent thinking in strategic management. and the reasons why there is a need to consider the interests of more than just shareholders when making strategic decisions. The implications of the move to more complex organisation forms such as strategic alliances and ‘network’ organisations will be discussed.1 Introduction Most commentaries on contemporary trends in strategic management commence with observations about the changes in the business environment.

Global companies can seek to gain competitive advantage by producing large volumes of standardised products at low cost. the other derives from producing in low-cost locations. It can be argued that there is a move away from national economic systems towards a system where national markets are merging into one huge global market place. globalisation can be viewed from a structural perspective. produced and sold in the same way throughout the world to meet standardised customer demand. Large corporations locate their manufacturing plants where labour and other costs are lowest. Alternatively. increased competition in home markets. free trade opening up new opportunities in emerging markets. liberalisation of trade. As global competition becomes increasingly evident. In most industries organisations can no longer afford to formulate and implement strategies in response to just local conditions. they must be willing to adapt to the conditions of a ‘borderless world’. lower production costs in less developed countries. however. become a global player. wide ranging reasons to explain the move towards globalisation. giving rise to huge increases in investment across national boundaries. for example in terms of organisational structure. many different interpretations of the concept ‘globalisation’. developments in transportations technologies and networks. A number of factors will influence an organisation’s ability to operate effectively as a global player. then. or at the other extreme. organisations must choose the geographical boundaries in which they are going to operate. 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. a major challenge for business growth will be the ability to deal effectively with the demands of a global economy. marketing and other functions in those parts of the world that enable their activities to be conducted most efficiently and effectively. These include: ● ● ● ● ● ● ● ● ● ● limited growth in traditional and home markets. There are.112 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT STUDY MATERIAL E2 3. where operational units are fully integrated across national boundaries and functions such as HRM. potential cost and market share advantages. independently of national boundaries. Marketing and R&D are grouped together. All these factors have implications for global effectiveness and development and implementation of strategies. . global financing. in search of the most economic production costs.2 Internationalisation and globalisation As discussed in Chapter 2. with the tastes and preferences of consumers from around the world beginning to converge. research and development. and locate their headquarters. One means of gaining low unit costs derives from economies of scale. consolidation and development of trading blocks. cultural issues and the need for a set of specific leadership skills. development in communication networks – ability to communicate more easily and rapidly due to new technology. Organisations can now choose the whole world as their geographic market place. developing a global strategy with standardised products. for example retain a strong domestic force. There are.

the reality is often greater complexity in the organisation structure. Whilst each national operation will operate independently. This was achieved by merger or acquisition. Porter states that any organisation structure competing in a global market has to balance two dimensions: 1. Much of the growth of global corporations was achieved by consolidating smaller. Bartlett and Ghoshal’s contribution to the debates on internationalisation strategies has been their work on transnational corporations which seeks to combine the local responsiveness of the international subsidiary with the coordination advantages found in global product companies.ENTERPRISE MANAGEMENT 113 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT Although on the one hand. act local’. this is sometimes termed ‘glocalisation’. for example. Strategists were also familiar with the ‘excellence principles’ of Peters and Waterman. but more recently. organisations have to make choices on the need for local independence and responsiveness (high to low) and the need for global coordination (high or low). The transnational structure attempts to achieve both high local responsiveness and high global coordination. The more diverse the mix of business within an organisation. or the exploitation of economies of scale. How organisations organise themselves to become global players raises some key challenges. hence the need to ‘think global. gaining access to efficiencies and expertise that would be difficult to achieve as quickly through internal development. including some that were very large and high profile. They suggest that in managing across borders. for example to address a lack of resources or competences and to speed up learning. such as time-consuming reporting procedures and the need to integrate information systems. local organisations. global dimension for world-wide coordination to achieve economies of scale. which included ‘stick to the knitting’ – find a ‘core competence’ and build a business model around it. markets are becoming global. 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. Added to this. local dimension that enables country managers to respond to local customer needs. There is also a perception that smaller organisations can be more focused on customer needs. it is a source of ideas and capabilities for the whole organisation. and more responsive to the changing business environment. All of the above factors led to an increase in de-mergers during the 1980s and 1990s. this has been done by establishing or acquiring subsidiaries in other countries. and large numbers of managers. The arguments for acquisition often centre on the concept of ‘synergy’– that the whole organisation has a greater value than the sum of its parts. there is also a trend towards customisation – with the product/service adapted to some extent for local conditions. the inevitable costs of control and compliance. While a large organisation should be able to exist with a relatively simple management structure. and the cost of being part of a large organisation might outweigh any synergies. An example of this is ICI which . By the 1990s. Such synergies can arise from the sharing of resources or skills. with organisations often acquiring new subsidiaries cross-border at a rate of several each year. many strategists were beginning to question the logic of large conglomerate organisations. Conventionally. alliance and networks are becoming a vital aspect to achieve success within a global marketplace. the fewer synergies are available to it. 2. Other motives for developing through mergers or acquisitions may be to enhance the capability of the company.

Xeneca has since merged with Astra. hierarchical forms of organisation result (see later in this chapter). sometimes called ‘virtual organisations’. market and distribute goods and services. with the sharing of knowledge and expertise and with economies of scale and scope. while in trying to avoid them by internalisation. Vodaphone (a telecommunications company) was de-merged from the Racal group (an electronics conglomerate) as the board of Racal recognised that the risks and market conditions of Vodaphone did not ‘fit’ with the remainder of the business.3 Complex organisation forms Complex forms of organisation are usually thought of as occupying the ground between pure forms of market transactions and hierarchical organisations. . Unfortunately. The complex forms attempt to overcome the inadequacies of both market and hierarchical forms through collaboration between existing organisations. or more recently. in the sense that an organisation with a corporate centre does not exist. The economic rationale for such developments therefore has to do with access to markets. suggesting that investors agreed that the de-merger added value. consist of a number of partner organisations that collaborate with each other to produce. the lack of competition within hierarchical organisations itself results in a lack of control on costs. to all forms of partnerships and strategic alliances in which coordination of resources was based on cooperation between the parties concerned. Similarly. 3. The market capital of the two de-merged organisations exceeded the pre-de-merger value of ICI. another large pharmaceutical company. the ‘organisation’ as a set of cooperative linkages between partner companies operates in many ways as if it had an independent existence. They are regarded as an alternative way of coordinating resources. as mentioned earlier. Increasingly organisations are forming collaborative relationships through international strategic alliances as part of their global strategies.114 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT STUDY MATERIAL E2 de-merged into ICI (chemicals) and Xeneca (pharmaceuticals). 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 investors valued Vodaphone more highly as an independent business than as part of Racal. The drivers for cooperation are of two sorts – cost reduction and market penetration. The organisation is ‘virtual’. Such organisations would range from cooperatives between organisations and their suppliers. The increase in the number of these networks has been greatly facilitated by developments in communication technology. The cutting of costs internally has resulted in a wave of outsourcing of non-core activities and research and development alliances. This relies on network relationships outside the boundaries of the organisation. Instead. The idea seems to have grown out of Williamson’s idea of ‘transaction costs’ – that market relations incur such costs. 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. where construction consortia bid for motorway contracts and the building of the Eurotunnel between the UK and France. Once again. 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. Such networks.

allows the franchisee to undertake specific activities. It also has arrangements with couriers.com. credit card operators and publishers to provide it with the information and services it will need. and organisational arrangements. From the customer’s point of view. Amazon sits in the middle of a network of other organisations. a good example to use is the online bookseller Amazon. Scholes and Whittington (2008) suggest the ingredients of successful alliances include: ● ● ● ● a clear strategic purpose for all parties in the alliance.g.2 Illustrations of network organisations To illustrate the notion of a network organisation.3. whilst the franchiser is responsible for managing the brand and marketing (e. with sunk costs from each of the partners and which terminate at the end of the project. it ‘feels’ like one organisation: the books arrive in an Amazon carton and they have their own account with the company. but where the sponsoring organisation remains independent.3. distribution or selling. Licensing gives the right to manufacture a patented product. These warehouses keep Amazon notified of their stock position (which is automatically transferred to the customer web pages as approximate delivery times). such as manufacturing.ENTERPRISE MANAGEMENT 115 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT 3.000 top-selling titles in stock. compatibility between parties. This form of alliance is often used where organisations want to enter new markets. . McDonald’s). Johnson. joint ventures which involve two or more organisations setting up a newly created organisation. Franchising. The customer can order the product online and expect to receive it by courier within a few days. The company also keeps them informed about new books in areas similar to ones they have bought before. governance.1 Strategic alliances A strategic alliance can be defined as where two or more organisations share resources and activities to pursue strategies. For example. Consortia are short-term legal entities and will usually be focused on a particular project. There are different forms of alliance. 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). for a fee. defining and meeting performance expectations – having clear goals. The Body Shop. trust and integrity between the partners to the alliance. It has contract arrangements with book warehouses throughout the world to process and dispatch its orders so that it need keep only the 80. Coca-cola. Can you identify organisations who have developed strategic alliances? What were the reasons for the strategic alliance? What are the potential benefits and drawbacks of such a relationship? 3. some which depend on formalised inter-organisational relationships and others which are much looser arrangements and informal networks between organisations.

food and accommodation services. In fact. Ancillary services such as office cleaning have often been outsourced by management who do not wish to be bothered with it. Outsourcing elements of production or service provision. Airlines. The train itself may be owned by a separate leasing company. Many of its staff will be employed on a contract basis from agencies. The customer of the airline will have the impression that everything is supplied by the airline itself. inspiring them to use their initiative and knowledge to build organisational learning and competences. Use of specific capital assets. library. The leasing of assets has been common for many years in high capital cost industries like airlines and shipping. 3. many processed food companies no longer make the food they brand and sell and fast-food restaurants do not operate their restaurants. The use of contract staff (or ‘temps’) to cope with pressure points in the workload is a long-established practice. A passenger will buy their ticket from a train-operating company and travel according to the timetable the company has laid down. the network organisation frequently leases IT facilities. 2. The local taxpayer receives environmental health. aircraft maintenance. Ghoshal and Bartlett (1997) describe another form of network organisation which they term an individualised corporation.116 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT STUDY MATERIAL E2 Yet in fact. yet maintained by a fourth. UK hospitals. Contract staffing. such as systems experts and lawyers. Amazon owns relatively few physical assets and staff to back up its service (an alternative term ‘virtual organisation’ perhaps expresses this). law and order and education services. Corporations will allow their individuals to form virtual teams in order to become more creative. Network organisations will often take this as the norm and extend it beyond operative staff to include workers with considerable intellectual capital. on-board catering. The on-board catering will be provided by a fifth firm and the train cleaned by a sixth firm. depart from a station and along lines operated by a third company. the network organisation goes considerably further by outsourcing the production of its products or the distribution of its products. This shamrock organisation will be discussed in the next chapter. leisure. The passenger may also find that part of their journey is provided by another carrier under a similar arrangement. the hospital may use private contractors for cleaning. UK railways. laundry and catering while at the same time relying on other hospitals for the use of specialist scanning and dialysis equipment. check-in. A similar analysis can be applied to the following industries: UK local government authorities (LGAs). For example. the LGA relies on a series of contracts with private and public sector contracting companies to provide this service. it is likely that the telephone booking service. turnkey factories and specially built machines and highly customised office accommodation. However. However. The various examples demonstrate that network organisations can choose to ‘buy-in’ a range of value-creating activities through: 1. They argue that networks will take the place of formal organisational structures such as hierarchies and rigid divisions. luggage handling and departure lounges are provided under contracts from other firms. A patient in the hospital will receive medical treatment. while retaining only a very small cohort of core staff. However. . However.

For example: through-ticketing on airlines and railways. Reliance on outside organisations for referral of business. Staff from one organisation physically work at the other’s offices. finance houses network with car and electrical retailers to provide low-cost consumer credit and joint promotions. Where the enterprise relies on outside suppliers for an input or service (a market solution). quantity. However. invoicing. Many network organisations have mutual customer-sharing arrangements and will cross-sell their products. It may be helpful to think of Williamson’s theory as a more complex version of the familiar ‘make-or-buy’ decision. airlines and hotel chains network for corporate travel and fly-drive holidays. Why have network organisations become so important in recent years? 3. He is specifically interested in the costs of control that (together with the unit costs) make up transactions costs. There are a number of issues posed by the development of network organisations: 1. Hierarchy solutions. Williamson (1981) suggests that organisations choose between two mechanisms to control resources and carry out its operations – hierarchies or markets. Hierarchies will be used if the transactions costs of the market solution are too high. How do firms decide which activities and assets to ‘buy-in’ and which to own and operate directly? 2. etc. and data about customers and products are passed around in order to coordinate activities. reliability. Transaction costs are the organisational counterpart of friction in a physical system. Market solutions. 2. particularly between stages in a production or supply process. 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. Management decide to buy-in the use of the assets or staff from outside companies under the terms of a contract. Outsourcing is a contemporary example of increased reliance on the market. it will incur the following transaction costs: (a) negotiating and drafting a legal contract with the supplier. Management will make in-house the things that cost them more to buy from the market.ENTERPRISE MANAGEMENT 117 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT 4. Williamson looks beyond just the unit costs of the product or service under consideration. Writers on network organisations refer to the ‘permeable organisation boundary’ because it becomes hard to see where one organisation ends and another begins.). car-hire firms. Vertically integrated companies are ones which have a high reliance on the managerial hierarchy for control. How can management develop systems to control operations in a network organisation? 3. Here. They are costs arising at the interface between economic agents. in addition to the price for the bought-in input. . customers are seemingly passed from organisation to organisation without realising it. (b) monitoring the supplier’s compliance with the contract (quality.4 Theoretical basis of network organisations – transactions cost theory Transaction cost theory is rooted in the institutional economics of Ronald Coase and Oliver Williamson. 1.

the innovations of a competitor may force them to vary the specification of their product that may require differently specified inputs.4. The decision of which mechanism to use. Similarly. a firm seeking to buy components cannot know for sure the volumes they will need because they cannot perfectly forecast final product sales. The more that these two factors are present. This he roots in the concept of asset specificity. is (or should be) based on management’s desire to minimise transactions costs.118 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT STUDY MATERIAL E2 (c) pursuing legal actions for redress due to non-performance by the supplier. if circumstances have moved against them since the contract was drawn up). 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). (d) penalty payments and cancellation payments if the firm later finds it needs to change its side of the bargain and draft a new contract with the supplier. which opened in 1994 having cost nearly £5 bn to build. 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. For example. Likewise. over 30 per cent of the company’s revenues come from other railway companies which pay Eurotunnel to use the tunnel. Each agent is seeking to pursue their own economic self-interest. (c) Opportunistic behaviour will lead to expensive variations in contract terms or damages claims for breach of contract. the greater will be the transactions costs arising from a market solution. 1. If these transaction costs become too high. this extremely expensive asset has no conceivable alternative use other than as a rail tunnel. 3. Williamson considers the circumstances that lead one firm to trade with another and therefore to incur transaction costs. This includes the Eurostar consortium that operates specially built trains between London and various destinations in France and Belgium. markets or hierarchies. Bounded rationality. neither party is able to perfectly anticipate the future and how the contract will unfold. . At the time the contract is negotiated. 2. For example. the supplier will not know their production costs with certainty. This company has a single asset.1 Assest specificity – an illustration Consider the example of Eurotunnel plc. 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. a tunnel under the English Channel linking the British Isles to the main European continent. This is because: (a) Bounded rationality makes the parties quibble more over the drafting of the contract and over the interpretation of it (particularly. Opportunistic behaviour. (b) Legal enforcement of the contract will become more expensive. Asset specificity is the extent to which particular assets are of use only in one specific range of operations. This means they will take advantages of any loopholes in the contract to improve their position. In addition to operating its own shuttle services for passengers and freight. Apart from some telecommunications potential.

In return. At the same time. ● rights to exploit an asset for only a limited number of years. for example: ● Eurotunnel. Williamson examines the effect of such high ‘asset specificity’ on transaction costs. the train operators are locked into Eurotunnel because their investment in rolling stock and stations would be useless without the tunnel. ● building hotels near a certain theme park or tourist attraction. Indeed. 6. ● building of pipelines and harbours to service an oilfield. for example: ● locating a components plant near the customer’s assembly plant. Sydney Harbour Bridge.ENTERPRISE MANAGEMENT 119 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT This is a situation of high asset specificity. Particular skills or knowledge. Temporal specificity. he suggests that extremely high asset specificity may result in no suppliers coming forward on the market. Site specificity. 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. A brand and associations that belong to one family of: ● products and would lose value if spread wider. McDonald’s. ● knowledge of systems and procedures peculiar to one organisation. instead being forced to enter a long-term contract with the sole supplier. High asset specificity arises where a supplier must invest in expensive assets with no alternative use in order to supply a client. Physical asset specificity. for example: ● specific technical skills relevant to only one product. dedicated asset and site specificity. A man-made asset which has only one application. but perhaps more significantly. The assets are attached to a particular geographical location. 2. 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. Williamson predicts that such high asset specificity will therefore result in bilateral (or quasi-bilateral) contracts between the firm and its supplier. for example: ● reserves of high-quality ores. for example: ● the right to conduct radio broadcasts at an allotted time. Few will take this risk without a guarantee of orders in the long term. Human asset specificity. This is a physical asset with unique properties. Eurotunnel has the exclusive right to operate the tunnel until 2086. military defence equipment. This poses a substantial risk to the supplier because if the contract is withdrawn. For example. Williamson admits that these categories often occur together. High asset specificity results in the buyer being denied the opportunity to periodically choose between rival producers on an external market. In this connection. 3. 4. 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. 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. they have the right to use up to 50 per cent of the tunnel capacity. Dedicated asset specificity. Williamson suggests that asset specificity can be of six types: 1. for example: ● Coca-Cola. 5. . Eurotunnel plc is locked into the train operators. it will not be able to recoup its investment. The unique ability to provide service at a certain time. ● a unique work of art or building. Eurotunnel combines temporal (limited franchise till 2086). Brand name capital specificity.

3. 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.120 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT STUDY MATERIAL E2 Transaction costs approaches to organisation theory are being enlisted in support of a number of ends by strategy writers and business consultants. This casts an interesting light on organisational behaviour. maintaining the supplier/buyer relationship and monitoring fulfilment have been reduced by developments in information technology (IT). become more multi-divisionalised and more internally complex. 2. this assumes that management can accurately quantify the costs of controlling the internal operation.2 A critique of transactions cost theory According to Williamson. – provision of managerial supervision. These are often put under the umbrella of e-commerce or e-business. According to the transactions cost approach. The same argument applies to particular business processes such as IT. however. These costs will include: – staff recruitment and training. logistics and human resource development which are increasingly outsourced. 1. To support organisational restructuring. Identification of distinctive competences. and in doing so. Several transactions costs based explanations may be offered for this phenomenon: 1. It is believed that the costs of searching the market for suppliers. 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 & 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? The network organisation. this will be an operation or asset that cannot be provided by another organisation without increasing the transactions costs or risks of the firm. However. 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. 3. Firms undertake activities internally when the transactions costs of external provision are too great. Organisations should sell-off upstream or down stream divisions that can be provided at lower transactions costs by the market. Predicting the reduction in the costs available from the substitution of these virtual value chains is used to drive strategic initiatives and investments. . corporations reduce transactions costs by vertically integrating.4. To predict the impacts of developments in information technology. Organisations may have underestimated the costs of internal control.

but these overheads are not relevant costs for decision-making purposes such as ‘make or buy’. he depends on one of two propositions: (a) that management structure organisations in this way because they seek to improve shareholder value. – payments and incentive schemes to motivate performance. – provision and maintenance of fixed assets. 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. Similarly. This is also picked up by Ouchi (1981) who suggests that the high uncertainties and impossibility of measuring performance means that contract relations must be based on shared values. the buyer will have a choice of suppliers rather than a single monopoly supplier. (1987). Common computer assisted design (CAD) systems allow collaboration in research and development with geographically remote suppliers. More modern management accounting techniques recognise the costs of control and this may have led to increased recognition of the savings from outsourcing. The creation of hierarchies was not economically justifiable at any time. 2. rather than either of Williamson’s market or bureaucratic means. 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. more recently. the internet. – divisional performance measurement and evaluation. 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. One influential theory adopting a transaction costs perspective is the Electronic Markets Hypothesis of Malone et al. For Williamson to argue that organisations are structured in such a way that they minimise transactions costs. and the legal and monitoring cost that arise from these. e-mail and intranets permit much lower cost and timely maintenance of supplier relationships than was possible using face-to-face methods. A conventional absorption costing system may allocate overheads to products. such as premises and capital equipment. Communications technology such as teleconferencing. or clan control. 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. Transaction costs may have been reduced by the impact of information technology. Williamson suggests that a major source of transactions costs is the potential for opportunistic behaviour by the contracting parties. These costs of managerial control are traditionally regarded as overheads rather than something resulting from the decision to undertake production internally. or . Transactions costs may have been reduced by the development of trust in contractual relations. Nirmalya (1996) and others suggest that the mutual suspicions that give rise to these costs can be removed if a relationship of trust is developed between the contracting parties. Hence. the decision to produce internally overlooks many of the costs associated with it. – the development of budgetary control systems to coordinate activity.ENTERPRISE MANAGEMENT 121 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT – production planning. Firms now have access to global partners because the cost of searching for suitable suppliers or buyers is reduced by IT.

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. 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. ● increasing product and plant safety levels. including Williamson himself. ● treating emissions and waste to reduce environmental pollution. For example. 3. Williamson. Firm may incur additional costs. .122 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT STUDY MATERIAL E2 (b) only those firms that succeed in minimising costs will survive in the long run (i. a conflict may be encountered between what furthers the firm’s interests and what satisfies society. standards of factory and product safety. Issues commonly associated with social responsibility include: ● ● ● ● ● ● environmental pollution from production or consumption of products. many writers. 1964). Therefore. Second. non-production of socially undesirable goods. Transaction cost analysis may explain the trend to network organisations if it can be shown that external pressures are forcing firms to reduce costs. Indeed. ● costs of monitoring compliance with social responsibility policies. production of non-degradable packaging or products.5. non-discrimination in employment and marketing practices. Examples of these extra costs include: ● paying staff more than the minimum wage set by market forces or legislation to avoid accusations of exploitation.1 Must social responsibility conflict with benefiting shareholders? Deciding to be socially responsible may conflict with shareholders’ interests in several ways: 1.g.5 Social responsibility and strategic decisions Social responsibility can be defined as ‘taking more than just the immediate interests of the shareholders into account when making a business decision’. First. Neither assumption can go unchallenged. 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.e. 3. firms that fail to do so are no longer around because market forces have eliminated them). In business decisions. 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. the suspicion arises that many organisations developed as they did from reasons of history and circumstance rather than to serve any particular purpose. avoidance of the use of non-renewable resources.

The management and staff of the firm are members of society too and have similar values.g. This money could otherwise be dividend. Oil companies are aware of this criticism and have responded by developing processes to ‘clean up their act’. ● brewing and distilling industry (promotes anti-social behaviour and alcoholism). cigarettes or alcohol to the young). not to indulge in social engineering. 5. 3. ● armaments industry (e. This argument points to the fact that feelings of ethics and social responsibility are not solely external to the firm. This represents a direct rise in shareholder wealth. 2. This will cause their shares to trade at a premium price. . landmines are now close to being outlawed worldwide).ENTERPRISE MANAGEMENT 123 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT 2. The management and staff are paid to run the business. poor safety record). congestion). A ‘sustainable enterprise’ is one whose competitive strategy does not fundamentally conflict with the long-term needs and values of society. the UK Millennium Dome). 4.g. Improves relations with governments and other regulatory bodies. This relates to charitable donations by firms to the arts. Examples include: ● charging lower prices for products to avoid being accused of exploiting the consumer (e. ● mining and quarrying industry (finite resources. on the other hand. Attracts socially conscious investors. ● not promoting a socially undesirable good to particular consumer groups (e. recycled paper products and ‘fair trade’ coffee. Ethical investment funds will be attracted to firms with a TO good social responsibility score. if earnings are to continue into the future. This will harm financial performance. Many firms depend on the goodwill of governmental bodies for the granting of production licences. The consumers will pay a premium price for products they regard as ‘sound’. If business decisions force managers and staff to contradict their private ethics on a daily basis. Attracts socially conscious consumers. the impact will be to reduce morale and increase staff turnover. These practices may be tolerated at present. It is in the interests of shareholders that firms become sustainable. A good record in social responsibility may help convince the decision-maker to use discretion in the firm’s favour. Essential to being a sustainable enterprise. pharmaceutical products). For example. some writers question whether oil companies can be sustainable enterprises because their core business seems inevitably to lead to damage to the natural environment. Firm may reduce revenues. 3. Put simply. the argument runs. 4.g. planning permission or convivial legislation. may be able to attract these staff. organic foods. a non-sustainable enterprise is living on borrowed time and has no long-term future. Management and staff time may be wasted on social projects. but must eventually be brought to an end by legislation and financial penalties prompted by the rising tide of public concern about environmental degradation. Reduces stress on management and staff and permits improved morale. ● refusing to supply particular governments. Shareholder funds may be diverted to socially worthwhile projects. Other industries which may need to address the issues of sustainability include: ● tobacco industry (cigarettes harm quality of life and may be lethal). ● car industry (pollution. perhaps. accidents. A socially responsible firm.g. Examples include ethical cosmetics. destroys habitat. There are counter-arguments to suggest that social responsibility in business will improve shareholder returns: 1. relief of social need or sponsorship of national projects (e.

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. This anticipates a continuous improvement in the environmental performance of the business. (1993). 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. 4. Table 3.5. It charges environmental costs to any process. usually through budgets. Production. Therefore targets are constantly amended to achieve better performance.1 Voluntary indicators adopted by the UK chemical industry Health and safety Environment Distribution Energy Complaints 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. Table 3.124 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT STUDY MATERIAL E2 3. It is concerned with the relationship of the organisation with the natural environment in which it operates. Quality. 3. Economic. product and process hazard and emissions.2 An ecological perspective and environmental responsibilities The ecological perspective of strategy is closely aligned with social responsibility. It focuses on improving relationship with the ecological environment and will cover such things as compliance with legislation. At each point.1 shows the voluntary environmental indicators of the UK chemical industry. Environmental auditing. the ecological impacts are noted and targets set for reducing them. Reproduced by permission of ACCA. 5. This is primarily concerned with minimising the amount of materials and energy used to generate output. Ecological approach. . treatment of waste. 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. One approach suggested by Bennett and James (1996) lays down six areas in which this might be monitored: 1. to encourage management to avoid causing the environmental damage. a single site or project can be looked at and its impacts on its immediate locale considered. 2. These affect strategy through their inclusion in the investment appraisal and financial reporting process. Source: Gray et al. 6. Accounting. It should be noted that often these measures are suggested by the firm’s need to comply with legislation or the directives of regulators. Alternatively.

Sternberg: shareholder wealth is natural purpose A different pro-shareholder argument is advanced by Elaine Sternberg (1994).’ 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. on the other hand. Social responsibility and business ethics may affect the mission and objectives of the organisation and may dilute the importance of shareholder wealth as a primary objective. Friedman: profit is the sole objective The economist Milton Friedman (1963) supports the ethical argument in favour of shareholder supremacy with the dictum: ‘The business of business is business. If management ignore the profit motive or the state tries to intervene in the market mechanism.5. 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. such as feudalism and socialism. although it is inevitable that there may be some individual losers. 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.e.ENTERPRISE MANAGEMENT 125 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT 3. they merely change the identity of the winners and losers. The views of a number of researchers who have presented arguments for and against the primacy of shareholder interests are discussed below. Therefore. History has shown the market economy to be superior to other forms of systems. The search for profit is what incentivises firms to respond to market needs.3 Shareholder wealth and ethics Whist issues of business ethics will be considered later in the Learning System it is appropriate here to consider the debates concerning ethics on strategic decision makings. the needs of society are transmitted to firms by price signals emanating from the market. Sternberg. higher standard of living for all). firms will produce the best outcomes for society. by being profit motivated. approaches from a perspective of natural justice. Sternberg’s argument can be simplified as follows: ● Organisations are social institutions. They do not actually remove the problem (‘there’s no such thing as a free lunch’). Friedman stresses the ethical superiority of profit-seeking behaviour by reference to its consequences (i. the rising prices of the remaining store are an essential element if any stores are to remain in the town centre. the greater efficiency of the out-of-town store will benefit society generally in the form of lower prices. . say by laws or taxation. By following these signals. that is that to do other than maximise shareholder wealth takes business outside of its proper place in society. firms coordinate their activities to meet society’s needs. We understand their nature and their place in society by considering what they do and how they are different from one another. In a market economy. in providing the greatest benefits to the greatest number of people.

The precise scope of rights and obligations will change through time according to the prevailing morals in society at large. 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. . family. they are changing their purposes and invading the domains of charities and government agencies. Business cannot afford to ignore its impacts on customers and other stakeholders however. Therefore. despite being a regrettable necessity. trades unions or armies do this. 1999). to follow its own selfish interests at the expense of the rest of society.126 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT STUDY MATERIAL E2 ● ● ● ● Business organisations are distinguished from others by their pursuit of shareholder wealth. They impose on the business the duties of being a good corporate citizen. enforce commercial contracts and be defended by the rule of law. this is a last resort and shows that management have done something wrong. No other organisation. fines or consumer and employee protection legislation). alternative profit-seeking firms) which is a fulfilment of their essential nature. A simple version of this argument would proceed as follows: ● ● ● ● ● A business has a social contract with society. It demonstrates that management does have an ethical obligation to society. including business organisations. while the problem of disadvantaged shoppers is being addressed by other social organisations (social services. 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. such as to be able to carry on its business uninterrupted. make profits. because in doing so it would forsake repeat business and alienate support. Also. 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). If businesses start to become involved in social responsibility by considering other goals. For example. nationalisation. attitudes to different social groups. This would destroy its long-term value. Firms that breach this social contract may ultimately have their rights revoked or curtailed (e. The store chain is maximising its shareholders’ wealth. 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. Rawls. charities. say governments. 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.g. ‘good ethics is good business’ because just and decent behaviour will increase the value of the business to its shareholders. The natural order is preserved. the closure of the store is consistent with the principles of ordinary decency. anti-trust laws. the shareholders. The latter are different because they have other final purposes. 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. However. Under this contract it enjoys rights. A follower of Sternberg would view the store closure example very simply. For Sternberg.g.

Most of us end up taking a pragmatic view on these issues. An egotistical view The stakeholder view would provoke strong reactions from a follower of the late Ayn Rand. 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). We learn to accept that the business decisions we sometimes make are not always easy to square with our highest principles. this intrudes on achieving their own self-interest and they are effectively allowing themselves to become subordinate to other people’s needs. 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. Rather. we are a collection of egoists. Objectivism would advocate leaving to their fate the people in the store example. 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. this leads to slavery and oppression. ethical) goal is the pursuit of individual survival through self-interest. whether or not it is profitable to do so. Owners of firms are therefore only ethical if they ruthlessly pursue economic self-interest. an influential American novelist and founder of the objectivist school of ethics (Rand. someone else will. Capitalism (stripped of any benevolent religious belief systems. Its right to make profits in the past impose on it a duty to be reasonable and responsible now. Therefore. subscribers to social contract views may be forced to announce redundancies and price rises to ward off a falling share price. and so the followers of Friedman and Sternberg may sometimes have to use corporate funds to make a donation to charity because ‘it is what’s expected’.4 Implications of ethics for the chartered management accountant Clearly. 1989). Similarly. Taken to extremes. Management should realise that it is not just the future profits that are at issue here. It is back to the issues of satisficing we discussed in Chapter 1.e. 3. The least it should do would be to provide a free bus service to its store. which are themselves a form of oppression) is the only social and economic system which enables and rewards pursuit of unbridled self-interest. there is no simple solution to business problems once we start bringing ethics into it. 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. We know that if we do not do it.5. there are the past profits to remember too. Some just work . the only rational (i. to maintain its obligations to its former customers. If any person shows (or is compelled by law to show) consideration for the interests of others. It all depends on your viewpoint.ENTERPRISE MANAGEMENT 127 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT Taking the store closure example. on the basis that to compel the store (or the families and state) to help them would be to deny the self-interest of the helpers. it cannot just walk away. The people it is disadvantaging are its past customers with whom it had a moral contract.

in foreign trading and business relations). This can be a real problem for managers dealing with people: ● from other social cultures (e. ● from other types of organisation (e. Ghoshal. Hagel. ‘The Power of Trust in Manufacturer-Retailer Relationships’. before giving way to the ‘stakeholder society’ of the 1990s. London: Random House. M.g. C. Capitalism and Freedom. morals change through time but not everyone changes with them). ● of different ages (i. Net Gain: Expanding Markets Through Virtual Communities. The key points covered include: ● ● ● industries are becoming increasingly global and organisations must decide how to respond to the challenges of globalisation. (1997). Scholes. Nirmalya.G. November–December. discussion of the theoretic base of network organisations – transaction cost the theory. Different stakeholders may have different expectations of the firm’s behaviour. 2. and Bartlett. (1963). J.A. The Individualised Corporation. (1997). Harvard Business Review. K. Not everyone makes the same ethical assumptions that you do. 3. (2008). (1996). Chicago: University of Chicago Press.128 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT STUDY MATERIAL E2 on gut feeling and ‘common sense’ (itself a phrase derived from a particular theory of ethics). K. G. The important messages to bear in mind with ethics are that: 1. Many lie to themselves and others about their ethical justifications for actions. United Kingdom and Australia during the 1980s. and Whittington. References Friedman.. businesses dealing with the voluntary or caring services). Exploring Corporate Strategy (8th edn). Harlow: FT Prentice Hall. It is important that we appreciate other people’s viewpoints if we are to conduct business effectively. Ethical debates and fashions are therefore a major force in the firm’s environment. the implications for organisations of moving to more complex organisational forms such as strategic alliances and network organisations. ● religious fundamentalism is a major factor in the political processes of the United States and the Middle East. What may seem totally wrong to you is acceptable to them and vice versa. social responsibility and business ethics may affect the mission and objectives of the firm and may dilute the importance of shareholder wealth as a primary objective. Johnson.6 Summary This chapter has looked at contemporary perspectives in strategic management. A. 3. and Armstrong.e.g. S. . R. MA: Harvard Business School Press. Boston. Moral and ethical debates drive the actions of pressure groups and legislators: ● objectivism enjoyed an influence over senior politicians in the United States. Others pick up and discard ethical arguments to suit their interests.

Vol. (1989). (1981). W. pp. NJ: Prentice-Hall. (1964). Englewood Cliffs.E. Reading. Brown. (1981). A. London: Little. The Economics of Discretionary Behaviour. Theory Z: How American Businesses can Meet the Japanese Challenge. O. American Journal of Sociology. . Oxford: Oxford University Press. 3.E. Just Business: Business Ethics in Action. ‘The Economics of Organisation: The Transactions Cost Approach’. Rand. E. Rawls. (1994). Williamson. Sternberg. 548–577.ENTERPRISE MANAGEMENT 129 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT Ouchi. Signet Books. No. MA: Addison-Wesley Pub Co. A Theory of Justice (revised edn). Williamson. 87. J. O. (1999). The Virtue of Selfishness.

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but also by acting as good corporate citizens. an increasing number of companies are addressing issues of ‘social accountability’ and ‘social auditing’. For more than a century companies have prided themselves on thinking beyond the bottom line and contributing to society. 15 November 2000. ‘project management’. alongside this evolution of corporate citizenship. Copyright © Tim Hollins 2000. Environmental management and reporting has made enormous strides forward in the last decade. The Financial Times. 131 . are benefiting from the company’s economic activity. 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. a Corporate Social Responsibility consultant. Typical phrases used at that time were that ‘you can’t have healthy high streets without healthy back-streets’. In the 19th and early 20th centuries corporate citizenship was more often than not based on the religious or philanthropic principles of a company’s founder.Reading 3 Social responsibility – the changing business paradigm Tim Hollins. win. not-for-profit organisations and communities were – looking for clear and measurable returns. gives a personal view of social responsibility in the new century. In the seventies and eighties. And. and which stakeholders. not only by producing the goods and services that society needs. win’ opportunities – good for individuals. Corporate citizenship is nothing new. That’s what makes it so exciting. and a small number are tinkering with notions of ‘economic added-value’. ‘leverage’. Reproduced by kind permission of the author Tim Hollins. good for the community and good for the company. to get a better understanding of which parts of society. Developments in corporate governance and ethics have added to a much wider perception of the totality of corporate social responsibility. and formerly Head of Group Social Investment for the Royal Dutch/Shell Group. but the way we practise it is constantly evolving. The language of business has become increasingly prevalent in corporate social investments of all companies – ‘business planning’. ‘measurement and evaluation’ are part and parcel of the language of both social investment managers and their not-for-profit partners. and a recognition of it as ‘legitimate enlightened self-interest’. and that ‘good community relations offered ‘win. a growing sense of the relationship between ‘community relations’ and corporate reputation led to an increasing professionalisation of corporate citizenship. similar to other forms of investment. have emerged a number of parallel developments.

there are still many for whom opportunities are few and the disparities increasingly great. it means looking for opportunities to add social value. Without detracting from our fundamental business competitiveness. It means seeking to bring together our understanding of the different facets of our interaction with society – our interaction with employees and contractors. to contribute our knowledge and our breadth of experience as well. about social investment and social accountability into a coherent framework of practice that makes good business sense as well as benefiting society. But. ‘Building a sustainable future is the single most important challenge facing our society as we enter the 21st century’. to look for synergies where we can share good ideas and practice and to partner with others who have common objectives. it is clear there is a direct correlation between access to energy and a country or community’s economic and social development. but also concern for the impact of change on societies and cultures. underlying all development.132 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT READING E2 The challenge for the 21st Century Company is to bring all these developments together. 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. nobody would deny that. It encompasses not just concern for the environment. Here in Shell we are increasingly talking about ‘social performance’ as the allencompassing approach to these various elements. with communities and public authorities. this is a hugely complex challenge. 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. For an oil and energy Group. to integrate thinking about social and environmental management. the former Chairman of Shell’s Committee of Managing Directors says. It is also evident that while many countries and communities are benefiting from international economic development and energy provision. 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. however essential energy is to development. 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. operating in over 140 widely differing countries and cultures. with suppliers and customers. both in the way it is produced and in the way it is used. But while that is something to be proud of. enabling individuals and communities to better control and manage their own futures. is economic sustainability at a local level. it also presents many social and environmental challenges. 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. For Shell. It is more than 3 years since Shell committed itself in its Business Principles to contribute to sustainable development through its operations. to sit alongside (but inextricably interwoven with) economic and environmental performance. In the last 18 years Shell companies have contributed over $1 billion to an enormous range of community programmes and causes around the world. and concern to ensure that. all these challenges are intrinsic to the commitment it has made to contribute to Sustainable Development. As Sir Mark Moody-Stuart. At one level. the Shell Group recently set up a new international Shell Foundation to complement and reinforce our business approach to . as well as to Shell’s own long-term success. Shell has always been one of the world’s most significant corporate contributors. As part of its response to these challenges.

com www. the road ahead should be a fascinating one! Websites: www. The Foundation focuses 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.shell. Sustainable Communities – projects that help disadvantaged communities to improve their livelihoods.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. 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.shellfoundation. A separate 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.ENTERPRISE MANAGEMENT 133 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT sustainable development and social performance. The corporate scandals that beset US corporations like Enron. and manage their own futures. . Shell is one among many companies that are tackling the undeniably complex challenges of social performance and sustainable development. But the following article suggests that organisational culture played a major role. 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 21st century tend to be attributed to the unethical conduct of particular individuals.

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been vocal in opposing the scheme. and anti-capitalism groups. A number of interest and pressure groups have. Requirement Explain the main arguments for and against the view that socially responsible business decisions can achieve sustainable competitive performance and improve shareholder value. has just received government permission to undertake mining. (10 marks) 135 . has a reputation for maximising shareholder returns and has discovered substantial tin reserves in Eastborough. Digwell Explorations. its main industries have been agriculture and fishing. Government initiatives for regeneration through tourism have met with little success as the area has poor road networks.Revision Questions 3 Section A type questions Question 1 Many organisations now include explicit reference to their commitment to act in a socially responsible manner in their mission statement. Since mining ceased 150 years ago. which is creating maximum shareholder wealth. (10 marks) Question 2 Eastborough is a large region with a rugged. villagers worried about the potential increase in traffic congestion and noise. Explain the conflicts between the main stakeholder groups. mining could be profitable. provide jobs and boost the economy. a listed company. However. however. This then forms an integral part of organisational strategies and policies. many communities in Eastborough suffer high unemployment. Digwell Explorations. beautiful coastline where rare birds have recently settled on undisturbed cliffs. It could face difficulties in proceeding because of the likely activity of a group called the Eastborough Protection Alliance. With new technology. after much lobbying. This group includes wildlife protection representatives. unsightly derelict buildings and dirty beaches. today. Requirement Discuss the ethical issues that should have been considered by the government when granting permission for mining to go ahead. environmentalists. However. some shareholders see social responsibility as conflicting with their main interest in the company.

significant staff redundancies would follow. Following the appointment of a new CEO. which is on the same site as its head office. K plc. The company faces a challenging time with the growth and increased strength of competition in the sector. such as catering. (10 marks) Section B type questions Question 4 C plc. has unsettled staff. They have heard that D is proposing a major restructure aimed at improving efficiency and controlling costs. K plc is facing prosecution for discharging untreated pollutants into a river. It also seems that the senior management is investigating the possibility of moving the call centre to another country where operating costs are lower. Its shareholders are diverse. (8 marks) . The company has its head office. It faces stern competition and the directors are concerned about the disquiet expressed by major shareholders regarding performance over the last 2 years. They understand that this will mean some of the manufacturing plants will be closed and more emphasis placed on selling cheaper ‘bought-in’ products. has until recently achieved a steady increase in profitability over a number of years. the recent arrival of D. It also has a call centre. a quoted chemical manufacturing company. is similarly experiencing a reduction in profitability. certain activities related to the facilities management of the company. During this period it has consistently increased dividends. store maintenance are likely to be outsourced. however. In addition. TVs. cleaning. the senior management of N Company is evaluating options for its future strategic development. then new CEO. PCs. K plc has been criticised for under-investment and has achieved no product development over the last 2 years. a direct competitor. The directors of C plc. C plc is seriously considering making a bid to acquire K plc. four manufacturing plants and a chain of 350 retail outlets in K country. Requirement Use transaction cost theory to analyse the restructure strategy D is proposing in N Company. but its share price has not grown at the same rate as it did previously. N Company has previously had excellent employee relations and staff have enjoyed superior reward and recognition packages. to deal with customer queries and provide service support for PCs. with the majority being financial institutions. However. In either situation. Requirements (a) State the strategic factors which C plc would need to consider before making a bid to acquire K plc. and hi-fi equipment. are divided as to whether K plc should be closed down or permitted to continue production post-acquisition if a bid is made.136 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT REVISION QUESTIONS E2 Question 3 N Company is a manufacturer and retailer of electrical goods such as cameras. Following a concerted media campaign.

brand name capital specificity and temporal specificity. Requirements (a) Discuss the extent to which Router plc’s mission statement is contradictory. physical asset specificity. (6 marks) (Total marks 25) Question 6 ‘Asset specificity’ is a term used within Transactions Cost Theory. (8 marks) (ii) Discuss the environmental issues which would face the directors of C plc if it proceeds with the acquisition of K plc. the process would be extremely unprofitable. in this instance. human asset specificity. (8 marks) (c) Advise Router plc how it could deal with strategies that present a conflict of objectives. given the current world price of gold. (7 marks) (Total marks 25) Question 5 Router plc. 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. However. if the company were to reinstate the mined land. there will remain substantial lagoons full of poisonous water for at least 100 years. The company has received permission from the government to carry out the mining. The few local residents are opposed to the mining. (6 marks) (d) Discuss the ethical dimensions of the decision to mine for gold. 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’. (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. dedicated asset specificity. means that all vegetation will be removed from the land concerned. The mining process is a profitable one. Network organisations have been defined as those which are reliant on relationships with other organisations to carry out their work.ENTERPRISE MANAGEMENT 137 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT (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. Interpret the six categories of asset specificity by explaining what they mean. Requirements (a) Briefly explain what transaction costs are and how resource-based views of strategy can be used for competitive advantage. It has further been suggested that asset specificity falls into six categories: site specificity. a mining company. after mining has finished. (15 marks) (b) Discuss whether analysis of transactions cost has any influence on the increase in numbers of network organisations. Router plc has an opportunity to mine for gold in a remote and sparsely populated area. The mining process proposed. These unique assets have been called core competencies or distinctive capabilities. (10 marks) (Total marks 25) . It has been defined as the extent to which particular assets are only of use in one specific range of operations.

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Conflicts can occur between shareholder interests and socially responsible business decisions for a number of reasons. However. The diversity of opinion on the issue of social responsibility stems from one school of thought. advocated by Milton Friedman. for example issues relating to environmental pollution and production on non-degradable products. An alternative view is founded on stakeholder theory which emphasises that the actions of an organisation should be designed to balance different stakeholder interests. providing products that are fit for the stated purpose. non-discrimination in employment. Examples of this may be related to paying staff more than the minimum wage to avoid accusations relating to the exploitation of labour. environmental impact of products/services – from creation to disposal. marketing practices. and impact of product/service on customers (e. Organisations need to weigh up the costs of social responsible business decisions against the benefits. One argument against is the perception that extra costs will be incurred in implementing socially responsible strategies. the debates about the extent to which organisations should consider issues under the heading ‘social responsibility’ when they are formulating and implementing business strategies continue to provoke conflict and tension between different stakeholders. Acting in a socially responsible manner concerns the extent to which the organisation should move beyond the minimum obligation provided through regulation and corporate governance. 139 . based on the view that the management of an organisation should only be concerned with strategies that maximise the wealth of shareholders. non-production of socially undesirable products.Solutions to Revision Questions 3 Section A solutions Solution 1 Social responsibility is the concept that gives rise to how an organisation should conduct itself within society and the need to deal with the impact of business decisions on different stakeholder groups. for example job security and good conditions of work for the employees. This will vary from firm to firm but can include issues related to a range of factors such as: human rights.g. the cost of treating emissions and waste to reduce environmental pollution. health and exclusion).

Ultimately. and fair-trade products such as coffee and chocolate. Examples of these types of products currently in the news are organics foods. This can manifest in terms of refusing to do business in certain countries. British Nuclear fuel has had to promote an image of having the deepest concern for the safety of nuclear waste. where the impact of pollution on the environment is a major issue. All these arguments would suggest that there is evidence of positive links between social and financial performance. Another example would be the negative public relations received by some organisations who have moved manufacturing to countries to gain the benefits derived from lower labour costs and to improve profitability. Charitable donations and sponsorship are also useful methods of public relations and can reflect well on the organisation. Solution 2 There are many ethical dimensions to granting outline permission for mining to go ahead. but these are to be balanced against gains such as jobs and profits for shareholders. oil refining. This in turn can attract ethical investment funds to the organisation which can have a positive effect on share price and hence represent a direct increase in shareholder wealth. The risk for organisations who do not respond is that customers will not buy their products and ultimately they will lose customers. Another issue concerns its efforts at regeneration: does mining ‘fit’ the overall strategy? There may be environmental costs (scars on the landscape). it could be argued that acting in a socially responsible manner can have positive outcomes on corporate image. These organisations are criticised for the exploitation of labour as in the cases of Nike and Gap. they have responded to the criticisms by introducing ‘healthier’ menus. They may also think that management time is being wasted on socially worthwhile projects instead of ‘running the business’. Therefore. Another positive outcome is that socially responsible organisations could attract socially conscious consumers who may be willing to pay a premium price for products. Government may feel that the area . Using the example of McDonald’s. an organisation whose strategy or core business conflicts with the needs and values of society is unlikely to survive in the long term. organisations must operate in a socially responsible manner and amend their strategies. Examples. However. A more recent example is the negative publicity McDonald’s has received for encouraging what some perceive to be promoting unhealthy eating for children.140 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT SOLUTIONS TO REVISION QUESTIONS E2 Shareholders may view socially responsible actions as reducing revenues. of this can be seen in industries such as tobacco. Alternatively. it may acknowledge a duty of care to its citizens who might be disadvantaged by the project. They may also take the view that funds that may otherwise have been paid out in dividends are instead being used to make charitable donations. there are counter-arguments to support the business case that pursuing socially responsible strategies can build shareholder value. The role of government: it may take a view that it should not be seen as an obstacle to the free operation of business. The first argument is based on the future sustainability of the organisation. in terms of health related problems. In other words. the government is weighing one set of claims against another and seeking to achieve a ‘right’ decision within the context of the common good. to ensure future earnings of shareholders. Finally. or not promoting certain products to particular customer groups.

short-term gains or investment. customers and suppliers of Digwell have the overall objective of long-term success of the company in order to safeguard their interests. Employees are looking for higher pay. it is a more complex development of the ‘make or buy’ decision. growth or profitability. a situation facing N Company. It is not possible to proceed without making certain generalisations and assumptions. mass appeal or quality concerns. overhead costs grow and there becomes a need to search for economic advantage. to actively contribute to local community life.ENTERPRISE MANAGEMENT 141 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT is already an eyesore and one more mine will make little difference. industrial efficiency or maintenance of job levels. 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. alternatively. Solution 3 The basis of transaction cost theory is rooted in market economics. Meanwhile. Some common conflicts of expectations amongst shareholders. however. is assessing if any of N Company’s activities can be performed at less cost by external contractors. involve disturbing birds and wildlife. including increased road traffic and pollution. Similarly. Suppliers desire fair prices. look for the downfall of this and other capitalist symbols in order to build a differently structured society. in other words internalise transactions. reliable orders and prompt payment. concerns over safety within the confines of the mine and on roads emerge as a potential ‘cost’ of the scheme. Issues associated with its objectives are discussed above. They want jobs. Transaction cost analysis deals with the way in which resources are organised for producing a product or delivering a service and is focused on economic efficiency. Government is a key stakeholder as the planning agency. and so on. Staff. Local unemployed people probably welcome the venture as consistent with their aspirations to gain meaningful work. it is counter-productive in the context of their tourism strategy. where products are produced within the organisation by use of internal hierarchical arrangements or markets where products are bought in. local communities and environmentalists may be concerned by the disruption to the local way of life. Anti-capitalism groups. include. Essentially. reliable supply and reassurance about quality. Issues of quality of life raise ethical concerns (traffic and mining pollution versus regeneration of local economies). in his attempt to increase efficiency. The CEO. which is a concern for bird protection groups. Hierarchy solutions occur when management decide to own the assets or employ staff directly. As organisations grow. job security. outsourcing every activity that is not core should be considered by organisations. They might reason. The policies and procedures of the . in other words obtained through the market mechanism. good working conditions and some consultation. for instance. It suggests that whilst asset specificity may drive vertical integration. Just as there are conflicts of objectives within government so there are likely to be conflicts between groups and differences within other groupings. and to be a participant in major developments. Customers want fair prices. is that an organisation chooses between two mechanisms to control and carry out its operations in production or the delivery of service. developed by Williamson. This may. The two mechanisms are hierarchy. The foundation of the theory. however.

in other words the costs that arise at the interface between economic agents. security and asset specificity. However. There are additional costs such as those associated with supplier selection. boosting earnings may be to acquire another firm. for instance. particularly if they use just one manufacture as their main supplier. and this perhaps reflects the position N Company currently finds itself in. to include also the cost of control. coordination. possibly. writing and managing the contract. Section B solutions Solution 4 (a) Despite an increase in dividends. The market solution will enable N Company to benefit from have access to resourcing from global partners. Market solutions are when management decide to buy in the use of assets or staff from outside under the terms of a contract. enforcing the contract. Management is considering acquiring K plc. The proposal to outsource and buy in products would suggest that the senior management of N company are considering a shift from hierarchy solutions to market solutions. In N Company’s case the future scenario will be one where it increases reliance on outside suppliers. doing as much as possible in-house. An important aspect of the theory is that it bases costs beyond just the unit cost of the product or service. as a vertically integrated organisation. which will mean that the combined businesses will have a much greater production capacity . N Company must consider the extent to which suppliers could exploit their vulnerability. The costs of supply are not the same as merely the price paid per unit. communications with the supplier etc It is argued that developments in IT have reduced some of the costs related to searching the markets for suppliers and in maintaining the supplier/buyer relationship. It seems likely that the ‘stern competition’ is responsible for this situation. the manufacturing and retailing of their product range. One of the ways of achieving growth and. This involves an increased reliance on the market and organisations incur transaction costs. The restructuring plans are based on the assumption that both downstream activities (manufacturing) and upstream activities (call centre) can be provided at lower transaction costs by markets. These are often internal overhead costs of production and staff costs. there are some issues regarding outsourcing such as problems of control. but it should take into consideration the costs connected with managing the transactions and operating under the terms of the contract. the rate of increase in the share price of C plc has decreased.142 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT SOLUTIONS TO REVISION QUESTIONS E2 company are used to control resources and their performance. specifying what is required. Transactions costs are those costs associated with performing a transaction. This is an indication that the investing public is concerned about the future earning capacity of the company and the disquiet of the major shareholders also reflects these concerns. It would seem that this is the way N Company has tended to operate to date. The other side of the argument is that in vertically integrated companies there can be a lack of internal competition which can result in a lack of control of costs.

there is often doubt regarding the extent of these benefits. training programmes and assistance in finding alternative employment are topics which should be discussed to improve staff morale within the firm.ENTERPRISE MANAGEMENT 143 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT if the K plc plant is not closed. It is important that all staff are informed of the policy in respect of redundancies. (b) (i) It is likely that fewer employees will be needed in the combined business. 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. The crucial issue will be what C plc can do with the additional facilities and whether it is possible to benefit from the acquisition. Remuneration. 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. It is also generally recognised that the management of the combined business poses a difficulty which reduces the synergistic effects of the acquisition. This will be particularly important in the acquired company. Changes in employees’ working conditions within the combined firm is an important issue. 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. In particular. Management must. in particular. If it is not handled well. C plc’s expected cost of capital will be a major influence in determining the result of the acquisition. handle the social and ethical implications of the acquisition sensitively. It is clear that the matter of the untreated pollutants should be investigated immediately so that the level of pollution is brought under control. especially in respect of the staff redundancies which appear to be inevitable. that a significant number of redundancies will occur. (ii) After acquiring K plc. steps will have to be taken to reduce the adverse publicity that may arise through the prosecution pending against K plc. However. 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. especially if the bid is hostile. It is important that employee motivation is retained if the acquisition is to reach its potential. As a priority. some environmental issues will need to be tackled by management. therefore. The cost of the acquisition will be very important in determining its ultimate success. At the same time. will have to be addressed. The pollution problem. therefore. . Although it is usual for acquisitions to be justified on the basis of the synergy which results from the combination of the organisations. the providers of specialist expertise may be particularly vulnerable as duplication of this type of activity may not be required. It will demonstrate the attitude of the directors to the staff redundancies. it is likely that the overall synergy of the acquisition will be adversely affected. This is particularly noticeable in markets in which there is excess capacity. This will create a feeling of insecurity among staff. 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. the company should seek to establish acceptable levels of effluent pollution and the firm would be wise to participate in establishing these standards. It is likely. management must be aware of the effect on the management and staff of both companies involved in the acquisition. It is possible that during the acquisition.

Router requires that the authorities grant it operating licences and that shareholders continue to hold its shares. this reveals a significant conflict between the interests of the shareholders and the public. The projected success of the combined businesses will determine the amount of expenditure that might be incurred to reduce the pollution problems. 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. both may change their minds. but will result in ‘substantial lagoons full of poisonous water for at least 100 years’. 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. (a) The mission statement that Router plc has published states that the firm aims to make the ‘maximum possible profit’. In addition. Include costs of environmental restoration in project appraisals. particularly those living in the vicinity of the proposed mine. theories of the sustainable enterprise suggest that in the long run the following of socially responsible policies may safeguard shareholder wealth. (b) There are various ways that social responsibility may be incorporated into the firm’s decisions: 1. It is expected to provide a profitable opportunity. note that the mission statement uses the term ‘profit’. . the presumed economic objective of businesses. This allows you to contrast the conflict of social responsibility with profit in the short run. In part (a). 2. While it is often possible to reduce adverse environmental effects. It is quite common for objectives of this kind to be included in mission statements. these remedies will involve the business in costs that will reduce the profit available for distribution to the shareholders. but it is also important that the effect of the investment should be considered. the ‘wider responsibilities to society’ are recognised. Router must include the cost of reinstatement in its calculations. 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’. as it does not meet the profitability criterion. Include social responsibility in the firm’s mission and objectives. If it develops a reputation as a ‘dirty firm’. rather than ‘shareholder wealth’. This would of course be a fall in shareholder wealth. It is essential that the economic costs of a project are incorporated into the project evaluation. This will result in the rejection of the project. In the short run. 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. a short-term measure. This would cause a fall in both profits and share price.144 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT SOLUTIONS TO REVISION QUESTIONS E2 It is likely that considerable expenditure will be needed to rectify the position. However. The gold-mining project provides an example of such a conflict. The continued success of the firm may depend on the way in which the pollution problem is handled. while using the sustainable enterprise to indicate that in the long run the interests of shareholders and society may not be in conflict. It is usual for a firm to include all relevant financial costs in a project evaluation. In this example.

In this case perhaps. This involves giving each stakeholder group’s interests consideration over time. 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. Where the conflict of objectives means that no single objective can be maximised. 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. Router could convene a panel of stakeholder representatives to act as a consultative committee to discuss its decisions. By prioritising objectives and scoring alternative projects against them. 4. . Develop a social consultation panel. with lesser environmental damage. and difficult implementation problems. Furthermore. but the next project. The environmentalists on the management team will feel that they have achieved something. 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. 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. 4. it becomes possible for management to choose the option with the highest weighted score. These are compensatory payments to buy acquiescence. (c) It is usual for an organisation to have a number of objectives. This one will best meet its overall objectives. Side payments. 3. especially if they are under pressure to boost the results of the company. A procedure. the inclusion of local people and environmentalists on such a panel would point up the issues mentioned in the case. 2. the author identified common features and issues of ethical questions: ● ● ● ● different perceived long-and short-term advantages and disadvantages. The effect is to keep them on board. or audit. Sequential attention.ENTERPRISE MANAGEMENT 145 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT 3. advantages to one group compared with disadvantages for another. It is possible that managers could neglect the ‘wider responsibilities’. issues of public responsibility and the accountant’s duty as a professional. In this situation. decisions. there may be a temptation to understate the costs by omitting the cost of coping with the ‘wider responsibilities to society’. In this case. 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. Methods of dealing with this include: 1. therefore. In this case perhaps quality housing might be provided for the labour force which would remain after the works had finished. 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. Satisficing. Establish a hierarchy of objectives. This could be pointed to as some compensation for the environmental damage and population displacement. the mine will be abandoned because the consequences are so great. will be adopted. though not necessarily for every project. (d) In an article in the August 1992 edition of CIMA Student. Employ outside consultants to advise on.

This deprives both present owners and future generations. In respect of an external supply. In the negotiations. The use of non-renewable resources. . The project must consider the effect of the mining operation on the local residents. Mining is an industry noted for its poor safety record. Transactions costs come about between stages in a production or supply process and it may be both internal to. 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. and contractual arrangements may be used by each to protect their position. Safety of processes. 4. Router must ensure that it conforms to best practice in the safety measures it follows. the firm itself. it is too easy to give inadequate return for the value extracted. Although they may benefit from the establishment of the mine in the area in which they live. It would appear to be essential for the company to develop a plan to deal with the problem. It is essential that Router explains the steps which will be introduced to minimise the effects on the local environment. Resource-based views of strategy take the view that unique assets which cannot be easily replicated by other firms can act as a defence. and external from. It is likely to reduce the profitability of the project as there are bound to be significant costs to treat the effluent. Such unique assets may enable a firm to achieve supernormal profits. such costs may include drafting legal contracts and monitoring supply and quality. Router has an ethical responsibility to minimise the effect of this pollution. internal costs of quality control and human resource management may be included as transactions costs. Where the country is poor. It is also concerned with the costs of control specifically relating to the delivery of a product or provision of a service. important to ensure that proper and equitable compensation is provided to the original owners of the resources. Solution 6 (a) Transactions cost analysis is concerned with more than just unit costs of products or services. but to minimise the effect would appear to be the minimum responsibility of the company. Such costs exist because all parties want to have protection against loss. ‘Lagoons full of poisonous water for at least 100 years’ is clearly not an acceptable outcome for society. the resources extracted should not be wasted or used for frivolous purposes out of consideration for future generations. The negotiations will raise a number of issues which will bring an ethical component to the negotiations. 3. therefore. it is important that the profit motive does not cause the developer to act improperly and exploit the present owner of the mining rights. 5. The mining operation results in a non-replaceable asset being extracted from the mine. This may reassure local residents that the company is adopting a responsible attitude towards the ethical aspects of the mining operation in their area. The environmental damage that will remain. 2.146 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT SOLUTIONS TO REVISION QUESTIONS E2 The principal ethical issues in mining are: 1. It is. it is likely that the pollution will also affect them. which may be more stringent than the legal minimums in the country of operation. Impacts on the quality of life of local residents. Moreover. The use of power in the negotiations. that is those which cover more than the normal opportunity cost of capital. Similarly.

Brand name capital specificity concentrates a brand name to one family of products or services such as might be employed by a food manufacturer. for example. (b) Network organisations establish relationships with other organisations to supply goods and services. They are concerned with more than just outsourcing as they look to other organisations to supply core products as well as ancillary services. Essentially. 4. There are many examples of such organisations. Some of these categories may be employed together by the same provider. type of engine or air travel service provider. 3.ENTERPRISE MANAGEMENT 147 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT The six categories of asset specificity may be interpreted as follows: 1. then let it do so. 2. particularly in respect of leisure services and supply of produce such as flowers being delivered to domestic households through a worldwide network. 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. This is a constant concern of organisations which may have been exacerbated by the traditional form of absorption costing. many firms believe that the provision of a good or service by an outside contractor may be ‘more expensive’. 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. Many organisations do carry out their own branding. 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. Dedicated asset specificity relates to an asset which was built for a single purpose or application. but this may be based on false assumptions regarding in-house costs because of arbitrary and sometimes absurd apportionments of fixed overheads. as might be employed by a television broadcaster. 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). This aims to increase shareholder value by reducing organisational costs. for example. ancillary service provision and often pay more than the going market rate in order to retain key staff. Temporal specificity is concerned with providing a specialist product or service at a specific time. such as bridges or dedicated buildings. 5. 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. 6. locating a goods distribution organisation close to a motorway network. training. Networking is reliant on market forces to provide goods and services in order to meet customer demands. . 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 above. Site specificity relates to the assets which are connected to a particular geographical position. Oliver Williamson stated that the reduction of transaction costs occurs by vertical integration resulting in organisations becoming more divisionalised and complex.

but firms must be wary of losing their core competencies by other network firms recruiting key staff. This. but they survive because of their sheer size and market power. possibly a monopoly supplier is no longer as prominent as it once was. large hierarchical organisations have often developed as a result of agency theory and managers building their own empires. It has caused them to look in more detail at how well they meet their shareholder requirements. in turn. These have not necessarily had increasing shareholder value as the main driver. . they have not necessarily operated in the best interests of shareholders. has led them to take note of market forces in delivering their product or service in a cheaper manner. securing their own positions and creating power domains. are placed on restrictive long-term contracts to protect the firm. The increasing development of network organisations is clear. in general. to provide management with high degrees of control. in fact. for example. both internal and external. may be facilitated by networks of contracts. Electronic developments have in themselves led to greater awareness of choice and outsourcing. This. Transactions Cost Analysis firmly embraces the concept of continual improvement. been operating inefficiently. All employees within an organisation have customers.148 CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT SOLUTIONS TO REVISION QUESTIONS E2 ● ● ● Advances in information technology have led to a reduction in transaction costs. Although such organisations have been able. in itself. Transactions Cost Analysis has forced firms to look more seriously at their own supply costs. it can be argued that Transactions Cost Analysis has to some extent influenced the increase in the number of network organisations. The traditional economic theory of a hierarchical organisation as provided by classical organisational theorists has become outdated. may lead to reduced overall efficiency. whether they are internal or external. This. Thus. The development of trust between contracting partners have also led to greater outsourcing. The perception of the need to rely on a single source of supply. but it is a natural response by a firm to protect its position. Some staff. In fact. Many organisations have entered long-term relationships with suppliers and customers. Such organisations may have. resulting in much higher degrees of trust and collaboration for mutual benefit. in turn.

4 Understanding Project Management .

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along with their different roles in the process of project management. explain the roles of key players in the project management organisation. identify the characteristics of each phase in the project process. including the various communications and meetings that are needed during a project. construct an outline of the process of project management. In this first chapter on projects. the majority of their work is accomplished through projects).Understanding Project Management 4 LEARNING OUTCOMES After completing this chapter you should be able to: identify a project.1 Introduction There are a vast array of projects going on within organisations varying in size and complexity. identify structural and leadership issues that will be faced in managing a project team. The key stakeholders in project management will then be determined. 4. However. the management of projects is often not straightforward and many projects fail as a result of ineffective project management. recommend strategies for the management of stakeholder perceptions and expectations.e. and there are an increasing number of organisations that are now project-based (i. a programme and its attributes. apply suitable structures and frameworks to projects to identify common management issues. the defining features and characteristics of projects will be considered. and the skills they need to be effective in that role will be investigated. The issues involved in developing a successful project team will be explored. 151 . The final part of the chapter will consider why some projects fail and provide two examples of successful and unsuccessful projects. This will be followed by an explanation of project management and some of the various project management frameworks and structures. The critical role of the project manager will be discussed.

prestige and so on. profitability. 94) There are other definitions of project management that refer to a group of loosely connected techniques. uniqueness – it may never have been undertaken before and each project will differ from every other in some respect. .2 Projects and project management – definitions If you study the literature on projects. The Association of Project Managers defines a project as: ‘A human activity that achieves a clear objective against a time scale. You could also define a project as ‘a unique undertaking to achieve a specific objective that requires resources and activity’. the shareholders of the customer (who want value-for-money) and those who provide the money for the project (sponsors). .152 UNDERSTANDING PROJECT MANAGEMENT STUDY MATERIAL E2 4. meeting standards and communication. Have you organised a ‘holiday of a lifetime’ or a special celebration such as a Wedding. 2005 edition. and above all to ensure that the expected outcome is produced in a timely. some of which are useful in bringing projects to a successful conclusion. cost-effective manner. tools and techniques to project activities in order to meet or exceed stakeholder needs and expectations from the project’.’ An alternative. All have a common ground of planning. ensuring that the proper knowledge and resources are available when and where needed. . helped with the implementation of a new way of working? Do they not meet the definitions given? Project management is the term used to describe ‘the application of knowledge. . quantity. p. e. or at work. a building. objectives – projects have to meet two sets of objectives: the one relating to accomplishing customer requirements of scope (the deliverables). the customers (if someone is buying the output of a project.). you will see that there are certain similarities in the definitions of projects and their characteristics. projects can be considered to have the following characteristics: ● ● ● stakeholders – all those who are interested in the progress or the final outcome of the project including the users. Others refer specifically to the coordination of resources necessary to complete projects as required. quality and cost. a computer system. and the other relating to the achievement of the organisation’s objectives (the business case).3 Characteristics of a project In distinguishing between projects and business as usual. etc.g. These can be seen in the processes involved in project management discussed later in this chapter.’ (CIMA: Official Terminology. or ‘the integration of all aspects of a project. the Project Management Body of Knowledge (PMBoK) defines a project as ‘a temporary endeavour undertaken to create a unique product or service’. skills. 4.

the activities. uniqueness leads to a context of risk in the deliverables.4 The project life cycle Large-scale projects usually follow separate phases. finiteness – a fixed time scale. The feasibility study can be done by internal staff as a mini-project or by requesting proposals . quality – measured in terms of customer satisfaction and the organisation’s image. which occur in sequence. time and so on. the contingencies associated with suppliers. whereas in other cases. materials. Effort Identify a need Develop a proposed solution Project performance (including monitoring and control ) Project closure Time Figure 4. a need may be identified very quickly. subcontractors and with time/cost. change – there is no practice or rehearsal and once the project is completed. information. schedules – plans for events over time for resources and contingencies.4. 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. Figure 4. opportunity or problem.1 The project life cycle (Gido and Clements. finance (contained in budgets). 4. ideas. a feasibility study will be conducted to check the size of potential benefits and evaluate in broad outline potential alternative solutions and their lifetime costs. it may take months to clearly identify the need.1 presents the four phases of the project life cycle of large projects. gather data about the problem or opportunity and ultimately define clear requirements. Sometimes. Initially.1 The project life-cycle phases The different phases of the project life cycle include: Identification of a need The first phase of the project life cycle involves identification of a need. 1999) 4. uncertainty – inevitably.ENTERPRISE MANAGEMENT ● 153 UNDERSTANDING PROJECT MANAGEMENT ● ● ● ● ● resources – people. the team will ideally move on to the next project.

Achievement of these deliverables may be linked to stage payments. This phase is the actual performance of the project and will involve doing the detailed planning. At the end of this phase. Project Performance/Implementation The third stage of the project life cycle is the implementation of the proposed solution. together with schedules of time and cost estimates. For example. Development of a proposed solution The second stage of the project life cycle is the development of a proposed solution. for example amending the chart of accounts in the software to match that of the organisation. Once a proposed solution has been selected. quality. which then evaluates them and chooses the most appropriate solution to satisfy the need. then a project team is formed and a project initiation document (PID) is raised. a contract will be signed between the company and the contractor. Again. It must be noted. that not all projects involve formal requests for proposals. If it does. however. and all payments have been made and received. cost and time are monitored against each deliverable to ensure they are being met. The project’s objectives of functionality. Project performance is evaluated and appraised in order to learn from the project for future reference. When a project closes. The overall solution is subdivided into separate deliverables to be achieved at fixed milestones through this stage of the project. . a milestone review will decide whether to proceed further with the project. 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. a vision and a business case for the project. If contractors are used. All shortlisted contractors and/or internal design teams will submit final proposals to the company. important tasks need to be carried out. The company. such as confirmation that all deliverables have been provided and accepted. a company that has decided to upgrade its computer system may send out an ITT to several consulting firms. Then a choice will be made based on time and cost.154 UNDERSTANDING PROJECT MANAGEMENT STUDY MATERIAL E2 from contractors. This option-evaluation process is first filtered on quality criteria for compliance with the statement of requirements. If it does and an external contractor is chosen. Project Closure/Completion The fourth stage of the project life cycle is the completion or closure of the project. This will include a statement of requirements (SOR or project brief ). a shortlist of potential contractors. The business case is an important guide to decision-making throughout the project. the company will decide whether to proceed with the project. Even if the product is ‘off-the-shelf ’. the work to build the required product or service can commence. the project’s requirements will be presented by the company in a document called an invitation to tender (ITT) or a request for proposal (RFP). This process will provide additional detail to the organisation’s fact-finding exercise. and then implementing that plan to accomplish the project objective. for example an accounting system. to develop its own requirements and decide exactly which requirements are achievable. Obtaining customer feedback is important in improving the quality of future project provision. The business case is also revisited to check whether any subsequent actions are needed to ensure achievement of the anticipated benefits. and the vision encourages motivation and congruent goals in the project team. there is often build-work required to tailor it or customise it more specifically to the requirements.

By comparing the current system/process to the desired system/process. Here are some of the more well known: ● ● ● Functional decomposition. This involves determining a desired state and then determining all the components that would go into making that state possible. Gap analysis.2 An alternative project life cycle – an iterative process Project life cycles may vary in terms of time frame from a couple of weeks to several years.4. building on what has gone before. dependent on the complexity. By trial use of the model. Approximate requirements. requirements are revised and the cycle is repeated until agreement is reached. For smaller projects and for those where requirements are uncertain. size and content of the project. assesses aspects of system integration and can be used to persuade suppliers and users to accept the proposed solution. It is especially useful in IT projects.3 Project approaches Whichever project life cycle is used (linear or iterative). In project terms. project tasks) that will be needed to achieve the project objective. This is essentially taking an existing object apart to see how it works in order to duplicate it or enhance it. This approach is often used when a ‘back to the drawing board’ objective has been set. This ‘decomposition’ continues until all the requirements are known. the best ideas from competitors and the best parts of previous projects may be built with customers into a model or prototype. This is fundamentally an incremental approach. a set of ‘gaps’ can appear. Phases may be simultaneous or less structured and formal. It is also important to recognise that not all projects will follow the exact phases of the project life cycle as presented above. reverse engineering is going back to the basic design blocks to see how a thing works. there is a constant need for updating and renovating business-critical software systems as business requirements change or technological infrastructure is modernised. the life cycle above may be too slow and involve customers too little during development. to see where errors or weaknesses have occurred and to correct or improve them.1. for example. rather than linearly as shown in Figure 4. Reverse engineering. .4. In some cases. These methods effectively identify the starting point for the project. In these cases. 4. The feedback from this iterative process can identify risky parts of project design or problems of integration and operation (Source: Field and Keller. where. a project may adopt a particular method or approach to identify all the requirements (and hence. what will be examined first. 1998). the project life cycle may be repeated several times before a solution is agreed. the model then becomes the final solution with no further implementation. tests and validates design techniques and tools. This would reduce risk because team members can gain experience as this process evaluates complex processes.ENTERPRISE MANAGEMENT 155 UNDERSTANDING PROJECT MANAGEMENT 4. The project can then be orientated to filling in those gaps and so ‘moving from A to B’. Key features of the proposed system are implemented in a simulated operational environment that can be used as a ‘predictive model’. designs test facilities. that is. Then each of the components are analysed in turn to determine how to make those possible. There are many different approaches that could be adopted.

In other words. Dream. as shown in Figure 4. . understandable if we are dealing with creative projects. The 4-D model This model is often used for very creative projects. from the above. learn and survive? Plan for continuous improvement. You can see. Apart from the ‘creative’ terminology used for the stages. evaluation and changes for the future. What is the ideal solution? Construct the elements and assemble them. and others that take ‘life-cycle’ approaches. He identifies the stages as: ● ● ● ● Define the project. This will involve determining how the project will be done.2. This stage concerns continuous improvement. The key issues here will be the organisation. the five process areas of project management can be shown in diagrammatic form. estimating and resource analysis will be critical issues at this stage. Develop the project process. It will concern how the project should be managed on a day-to-day basis. Deliver. It is at this stage that the possible alternatives to the problems presented can be explored. 7 or 9? There are many other project management frameworks. that this model follows the project life cycle quite closely. of course. through assessment of the process. Design. of course. its reason for existence. but very poor at implementing them. This provides the opportunity for people to be creative and think beyond boundaries and constraints. How do we empower. according to this model. a common criticism of ‘creative’ staff – that they are great at dreaming up big ideas. though there is little emphasis on the implementation and completion stages of the life cycle. What gives the current system or organisation life? Appreciate the good things about what we do and what the organisation already has that can be built on. Whichever framework is used.4 Other project management frameworks: 4.156 UNDERSTANDING PROJECT MANAGEMENT STUDY MATERIAL E2 4. or for those that involve intervention in the culture of an organisation. Planning. This is. what will be involved in each part and when it can start and finish. the main difference between this model and the project life cycle is that this model puts more emphasis on the ‘dream’ stage. 5. some of which look at different aspects of project management. The four stages of the project. What might be? What is the organisation/world calling for? Envision the results of the project. are as follows: ● ● ● ● Discover. Some alternative frameworks are discussed in the next section. do it. This involves determining what the project is about. The rest of the model follows the project life cycle quite closely. Deliver the project. This is. leadership and control of the project along with problem solving. Design the process.4. Another 4-D model is that proposed by Maylor (2003). The 5-project management process areas According to PMBoK which is adopted by the Project Management Institute. its purpose is essentially to help in understanding the various processes so that projects can be effectively managed and deliver the desired outcomes.

plan execution and overall change control. It provides a framework which can be used to consider the set of issues surrounding project management. as is to be expected from a professional project management institute. Skills. This reminds management that the nature of the appropriate structure for the project needs to be determined. monitored and controlled. This involves the selection of staff to work on the project. Initiation. Systems are the methods for project work to be designed. This will provide the high level requirements needed to fulfill the project objectives. along with motivation.cengage. Inc. a part of Cengage Learning. 1E. These refer to the guiding beliefs and the significant principles guiding the project. Plan development. For example: ● ● ● ● ● ● ● Strategy. referred to in Chapter 2.) The 9-project management. www. it appears to place greater emphasis on the ‘planning’ and ‘controlling’ activities. Activity definition. is also sometimes used in project management.ENTERPRISE MANAGEMENT 157 UNDERSTANDING PROJECT MANAGEMENT Initiation Planning Controlling Executing Closing Figure 4. Time management. each of which is relevant in some or all of the five process areas discussed above: 1. 2. Integration management. activity duration estimating. These are the distinctive capabilities needed by staff working on the project. Scope management. team management and staffing levels. The 7-S model The 7-S model of culture proposed by McKinsey. knowledge areas The Project Management Institute also proposes that there are nine key knowledge areas in project management. (Maylor adapts the 7-S framework to include Stakeholders – to reflect the importance of the various individuals and groups who have an interest in the project process or outcome. Staff. scope verification and scope change control. Style. Structure. However. scope planning. scope definition. From GIDO/CLEMENTS. activity sequencing.2 The project process areas (based on the work of the Project Management Institute). Systems. 3.com/permissions This model is also very similar to the ‘general’ project life cycle discussed earlier. . Successful Project Management with Microsoft Project CD. © 1999 South-Western. This refers to how the project manager leads the project and project team. Reproduced by permission. Shared Values. schedule development and schedule control.

information distribution. risk quantification. performance reporting and administrative closure. legal – for example. 9.158 UNDERSTANDING PROJECT MANAGEMENT STUDY MATERIAL E2 4. crossing departmental boundaries may be beyond the scope of the project. Procurement planning. environmental – organisations must consider environmental legislation and control. 4. 5. This model is not intended as an alternative to the project life cycle (or 5 project management process areas. and the conversion process is carried out by a number of mechanisms that transform the resources during processing. ethical – behaving within ethical boundaries is becoming increasingly important as customers are becoming concerned about the ethical behaviour of organisations. Resource management. 6. a document that provides a statement of customer needs that is to be the foundation of the final project. source selection. politics – for example. ● ● ● ● ● ● . Risk management. Communications management.5 The project as a conversion process A more flexible view of a project is to use a systems approach. quality – technical requirements specified and desired by the customer. contract administration and contract close-out. and so on. that is. the project manager would need to consider integration management activities.1 Inputs There will normally be a project brief. Communications planning. The project will take place under a number of constraints. that is. for example. So.2 ● ● ● Constraints These may take any of the following forms: financial – the budget amount and timing of capital needed. Procurement management. There are likely to be explicit project requirements and also those that emerge during the course of the project as a result of the customer’s changing needs or perceptions. staff acquisition and team development. scope management activities. at the ‘initiating’ stage. but rather as a view of the knowledge and skills required in order to carry out each of the stages of the life cycle. solicitation.5. cost estimating. Quality planning. quality assurance and quality control. indirect effects – the desire to minimise disruption to other areas of the business as a result of change in one area. 8. as described by Maylor (2003). health and safety regulations. 4. 7. Risk identification. risk response development and risk response control. Organisational planning.5. often outside the project boundary. Resource planning. cost budgeting and cost control. time and quality – discussed earlier in this chapter. solicitation planning. Quality management. the project can be viewed as a conversion of some resources (input) into a final product or objective (output). in this case). and is likely to be negotiated with the customer. All of these knowledge areas are considered in this text. Cost management. 4. logic constraints – planning that certain activities take place before others can start. planning permission requirements. The initial project brief is often open to interpretation and the expert opinions of the organisation carrying out the project.

knowledge and expertise – brought to the project by the people participating. These two may well be sections in a project initiation document. capital – the money securing the resources. An output may be tangible or intangible. a new computer system plus effective training for the staff. including the specification of resources required. attributes and knowledge that the project members. In Chapter 1.’ CIMA: Management Accounting: Official Terminology. tools and techniques – methods of organising resources. The scope of a project is the extent of work needed to produce the project’s deliverables. bring to the project are critical to its success. The skills. 4.7 Projects and the project manager It is the people carrying out the project who determine the overall success or failure. technology – the physical assets performing the conversion process. and you may be asked to produce them in your examination. Obviously. and especially project managers. therefore it is important to understand: ● ● ● the roles of the project manager the responsibilities of the project manager the skills of the project manager. This definition also applies equally to project management.3 Outputs The output is the satisfied need – achievement of the deliverables required. 4. how that will happen.5. but it must satisfy the current customer project objectives. strategy was defined as ‘A course of action. 2005 edition. p. for example. but those procedures are only the tools people use to carry out their job.4 Mechanisms The mechanisms by which the output is achieved and processing carried out include the following: ● ● ● ● ● people – those involved directly and indirectly. to achieve a specific objective.6 Strategy and scope You may find the terms ‘project strategy’ and ‘project scope’ used in textbooks or articles. It is generally expressed as a list of tasks. 54. and the resources to be used. 4. A project should have a comprehensive high level definition of what it is to achieve. . often a summary of the work breakdown structure (this will be explored in Chapter 5). using the correct procedures is important.ENTERPRISE MANAGEMENT 159 UNDERSTANDING PROJECT MANAGEMENT 4.5.

In essence. customers and suppliers). For tasks to be carried out internally.7.7. This will involve those tasks that can be carried out internally and those that may need to be subcontracted externally. this may often involve the project manager delegating responsibility to team leaders responsible for a group of specific tasks. within cost and to the quality standards set by the customer. Exercise 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. The specific responsibilities of the project manager are discussed in more detail in the following sections.3 Organisation The project manager is responsible for ensuring that the necessary resources are available to carry out the project. 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. As projects are interdisciplinary and cross organisational reporting lines. the project manager is responsible for assigning particular people within the organisation to carry out the work. in projects to implement information systems. In complex projects. who will then be accountable to the project manager for the accomplishment of the task within budget and on time.160 UNDERSTANDING PROJECT MANAGEMENT STUDY MATERIAL E2 4.1 The roles of the project manager The key role must be to ensure the success of the project objective. . 4. carrying out processes (the work/tasks being done) and producing the product (the final deliverable). Norris et al.7. controlling and communicating project tasks. 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. coordinated and working together. coordinating. 4. the project manager has a complex task in managing. The project manager will lead and coordinate the activities of the project team to ensure that activities are performed on time.2 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. (1993) see the role of the project manager as one of managing people (the project team. Solution ● ● ● ● secure project resources assign tasks to internal/external providers assign responsibility organise team. For example. An important aspect of project management is to ensure that the team members are organised.

then action must be instigated at this level. when required. the project manager will collect and analyse actual project data on costs. then to communicate this objective to the rest of the project team. because participation in the decision-making process will help to foster commitment of team members to the successful completion of the project objective. 4. 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. Agree the objective with the customer. The project manager must engender participation of the team members in the planning process. Solution ● ● ● ● Define the project objective. the project manager is responsible for monitoring and controlling its progress towards successful completion. must be carried out as quickly as possible. Set up a system to compare actual results with the plan. It is important that the project manager takes the advice of team members before deciding on a particular course of corrective action. The primary responsibility is to define the project objective clearly with the customer.5 The project manager and controlling Following the planning stage of the project. commitment and ownership of the project.4 The project manager and project planning It is important to understand the responsibilities of the project manager within the planning stage.7. Control activities.7.ENTERPRISE MANAGEMENT 161 UNDERSTANDING PROJECT MANAGEMENT 4. in order to instil involvement. Along with the project team members carrying out the particular tasks. 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. ensuring that team members receive information on their own area of influence). making it clear what constitutes a successful project outcome. Communicate the objective to the team. Exercise List the activities that the project manager must do in order to perform the controlling function. Exercise List the activities that the project manager must do in order to perform the planning function. . Responsibility structures may be used (i. schedule and progress. This may involve setting up a project-reporting information system. If the project manager considers that corrective action needs to be taken in order to get the project back on target.e.

though important. As project managers are responsible for bringing together a team of experts. The project manager cannot achieve the project objectives alone. . Project Management Meetings. results are achieved by the whole project team. motivation. inspiration. President of the IT directors’ association Certus. leadership. ‘IT Projects Need Leaders’ (26 October. Motivation will be enhanced if the project manager continually recognises the achievements of the team members via encouragement. discussed how sad he was to receive an advertising flyer from a training organisation because the contents of the 2-day course (Methodologies. Recognition must be carried out throughout the life of the project so as to maintain motivation of the team. Process. did not seem to cover the aspects of successful project delivery that he had identified. The following project management skills will be discussed in the next section: ● ● ● ● ● ● leadership skills communication skills negotiation skills delegation skills problem-solving skills change-management skills. 4. Good project management requires both participation and consultation. With empowerment comes ownership of and responsibility for their part of the project. Bar Charts. praise or formal monetary rewards. 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. The project manager should encourage open communication between team members in order to encourage team spirit and support. Another important attribute of leadership is recognition. David Taylor. Software Skills). Communicate with the team on the progress of the project. Leadership in projects involves influencing others through the personality or actions of the project manager. 2001). 4.162 UNDERSTANDING PROJECT MANAGEMENT STUDY MATERIAL E2 Solution ● ● ● Implement and monitor the project information system.1 Leadership skills Leadership is the ability to obtain results from others through personal direction and influence. In an article in Computer Weekly. persistence. Take action if variations occur. The project manager should provide overall direction but should not be autocratic or prescriptive in leading the team.8.8 The skills of the project manager 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. and this will encourage team members also to feel part of the overall project achievement. These were communication. The course was about project management (important in its own right) and not project leadership which he considered to be essential. focus and action. Prince2. 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.

we will get exactly what we have always got. including the customer. generation of solutions and keeping up to date with the customer’s requirements and the perceptions of the team. suppliers. The project manager must also provide timely feedback to both the team and the customer. Do they look you in the eyes when speaking to you. priorities.8. The project manager must therefore be available for open informal discussions with team members. Taylor wrote that you can turn projects around if leaders are appointed. not just outside the box. The project team members must have a formal forum on a regular basis where the whole teams get together to discuss project issues. They must communicate regularly with a variety of people.ENTERPRISE MANAGEMENT 163 UNDERSTANDING PROJECT MANAGEMENT He wrote: ‘Too many companies advertise for project leaders with specific technical experience. procedures. The last point can certainly be evidenced in the innovative approach to many aspects of the Eden Project discussed earlier in this chapter. and are given the freedom to do what they have to do to get the project delivered. when required. It is important for the project manager to have regular and open communication with both the customer and the team members. If none. such as availability and level of resources. quality and people issues. Team members will also require less formal communication methods in order to bring individual concerns to the attention of the project manager. then he is not interested. 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. standards. who have consistently delivered quality systems. are their heads high? Forget the project when considering this essential skill. and who really understand processes. 4. project team and senior management.2 Communication skills As indicated by Taylor in the section above.3 Negotiation skills Project managers will have to negotiate on a variety of project issues. are they confident. 4. project managers must be effective communicators. subcontractors. Negotiation is a process of satisfying a project’s needs by reaching an agreement .’ He looks for people who can think outside the planet. Communication is vital for the progression of the project. The deeper the scars the better. communication and radical thinkers: ● ● ● Scars.8. Radical thinkers. Project managers should communicate by using a variety of methods: ● ● ● ● ● regular team meetings regular meetings face-to-face with the customer informal meetings with individual team members written reports to senior management and the customer listening to all the stakeholders involved in the project. ‘If we do what we have always done. He asks about the biggest mistake the applicant has ever made on a project. costs. because learning has occurred. identification of potential problems. schedules. Communication.’ He went on to indicate that he looked for scars.

5. 4.g. the project manager will be involved in many negotiation processes and the main objective must bring in a successful project.1 Negotiations of the project manager (adapted from Field and Keller. 2.164 UNDERSTANDING PROJECT MANAGEMENT STUDY MATERIAL E2 with others. The project manager may have to negotiate with someone over whom he or she has no direct authority (e. 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 members Team members/line managers Team members/line managers Team members/line managers Schedules Priorities Procedures Quality Costs People . consultants). the customer). To help ensure successful negotiation. that is. Generate a number of possible solutions that could be accepted. Identify and define the problem. one achieving the project objective(s). 3. or who has no direct authority over him or her (e. 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. a logical process can be followed: 1. Reach agreement by compromise or by selecting the alternative proposal most suitable to both parties. Negotiation skills are covered in more detail in Chapter 7.1 highlights the kind of negotiations a project manager is likely to be involved in. Table 4.g. Table 4. It is likely that throughout the project’s life. 1998) Negotiation point Resource Possible issues Funding Staff Equipment Time scale Order of activities Duration of activities Timing of activities Deadlines Over other projects or work Between cost. Implement the results of the negotiation. Evaluate these alternatives and their outcomes to the project.

so he or she must delegate responsibility to those who do have the skills. The project manager should encourage team members to identify problems within their own tasks and try to solve them on their own. Changes may be: requested by the customer requested by the project team caused by unexpected events during the project performance required by the users of the final project outcome. the project manager must request the appropriate team member to estimate the effect on project schedule and cost.8. Appropriate team members should be involved to analyse and present information in order to generate a solution. as various opinions and possible solutions are being generated. If a customer requires a change. if they are able. initially. At the start of a project. However. to correct them by themselves. Most likely to be affected by change is the project budget and its timescale.8. As the project manager is the person who retains the ‘big picture’. A project manager will communicate and clarify the overall project objective to the team members. and that is change. where tasks are large or critical to the overall achievement of the project. it is important that team members communicate with the project manager as soon as possible so that they can lead the problem-solving effort. Delegation should foster this approach.ENTERPRISE MANAGEMENT 165 UNDERSTANDING PROJECT MANAGEMENT 4. 4. Delegation is about empowering the project team and each team member to accomplish the expected tasks for his or her area of responsibility.5 Problem-solving skills Project managers will inevitably face numerous problems throughout the project’s life. Generally. It is important that the project manager gathers information about the problem in order to understand the issues as clearly as possible. the later the change is identified in the project life cycle. The project manager has neither the time nor the skills to carry out all the project tasks.4 Delegation skills A further key skill required for a project manager is that of delegation. an important attribute of project management is communication. and will then further clarify the individual team member’s role in achieving that objective by a process of delegation. Delegation is also partly about allowing team members to learn from their mistakes and. . in particular listening skills.6 ● ● ● ● Change-management skills One thing is certain in projects. the greater its likely impact on achieving the overall project objective successfully. 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. Therefore. 4.8. it is important that the project manager has the skills to manage and control change. Again. Delegation ensures effective performance by the project team and fosters conditions necessary for teamwork and coordination. There may be times during a project’s life when the project manager needs to step in to stop serious errors occurring. without fear of blame. but a good project manager will be able to spot potentially dangerous situations quickly and take control of the decision-making process. procedures need to be put in place regarding how changes are to be documented and approved. he or she is in the optimum position to consider how the decision will affect the overall project.

4.9. 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. design and implementation stage with the users in order to overcome fears and resistance to change. . with the team and with individual team members. The following section highlights some of these potential issues and makes suggestions for overcoming them. You should think about the issues raised there in relation to project teams. These will have an impact on the project schedule and/or cost and will require modifications to the plan. open meetings and one-to-one meetings provide a good opportunity for users to express their concerns and fears. If change is initiated by the project team or the project manager. The project manager needs to review the project objectives on a regular basis. In many projects. This will involve the project manager in regular communication throughout the development. 4. developing and implementing the new system. 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. but also for ensuring that the users accept the final product. Some changes are necessary as a result of unexpected events such as the loss of a key member of staff or materials shortage. then the project manager must present a proposal to the customer for approval. Project changes may also occur as a result of user requirements of the final project. to ensure that the objective remains an important target and that the team remains focused. Only after agreement by the customer should project schedules and budgets be updated to include the additional costs or activities. 4. 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. Again.1 Problems of project team-working There may be barriers that hinder the achievement of the team objectives. such as the introduction of computerised information systems. good communication skills are vital in this situation as the users are likely to be suspicious and fearful of the change process. 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.166 UNDERSTANDING PROJECT MANAGEMENT STUDY MATERIAL E2 The project manager should then present these estimates to the customer for approval prior to implementing the change. the project manager is responsible not only for designing.9 Projects and people – project teams The issues relating to the formation and development of teams are covered in the sections on groups and conflict in Chapters 7 and 9. He or she must demonstrate the importance of the project and the benefits its success will have for the organisation and the team members. Discussion groups.9.2 Unclear team goals and objectives It is the responsibility of the project manager to explain the project objective to the team.

Participation in team meetings should be encouraged. such as communication. such as plans and budgets. normally a work breakdown structure (WBS). must be kept up to date and circulated to the team regularly. This plan must be given to each team member by the project manager so that all the team members can understand clearly what they have to do.9. approvals.5 Poor leadership The project manager must create an environment in which the team members can feel free to contribute and provide feedback. reporting. All project procedures should be documented and kept in one location for reference by all team members. Therefore. Physical location of team members can often be an important factor in helping or hindering communication. it is important for the project manager to involve the team members in project planning at an early stage. .9.3 Lack of team structure Team members may not know or understand what roles or activities the other team members are contributing. The project manager must be flexible enough to listen and take advice from his or her team. 4. or may feel that there are no established procedures. which identifies individual tasks and when they need to be carried out.ENTERPRISE MANAGEMENT 167 UNDERSTANDING PROJECT MANAGEMENT 4. It is important for the project manager to set guidelines for team operations. 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. and certain team members should be required to report on the status of their activities. but must also be strong enough to enforce his or her own suggestions and decisions when necessary. The project manager must also determine and communicate team-operating procedures. the project manager can demonstrate to the team how everyone’s work fits together to achieve the project objective. 4. Using tools such as critical path analysis (see Chapter 5) and the project budget and baseline plan.6 Poor team communication It is important that the project manager holds regular team meetings and status reviews to communicate progress and to provide a forum for team discussion and airing of views. Project documents. When the project plan is formulated by the team. and also what the other team members are doing. Also. as stated earlier. but he or she must be able to balance the requirements of many individuals within this framework of project rules.9.9. both formally and informally.4 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. each team member must be given a plan of work. and to explain how they interact with other team members. 4. The project manager must meet with each team member early on in the life of the project to describe and discuss individual roles. The project manager should encourage open and frank discussion among the team members. Fairness and objectivity when dealing with team members is critical. and so on. duties and responsibilities.

Team-building should foster honesty. if necessary.168 UNDERSTANDING PROJECT MANAGEMENT STUDY MATERIAL E2 4.9. They should be scheduled regularly so that potential problems can be identified and acted upon quickly. 4. These meetings should involve the team members. There are a range of different types of project team meeting. and should be the responsibility of all the team members.7 Lack of commitment Team members may not be committed to the overall project objective. Possible methods of team-building could be as follows: ● ● ● physically locate the team in one place periodically call team meetings (rather than project meetings) socialise outside the work environment. bidding for the individual to join the team on a full-time basis. schedules. Cost. schedules. open communication and trust and also a strong commitment to the achievement of the project objective. The project manager must continually encourage individuals and support progress. Commitment may also be lacking where an individual is being split between work on the project and a full-time job. Solution ● ● ● Achievements since last meeting.9.8 Project management and team-building Team-building should be an ongoing process throughout the life of the project. The project manager needs to determine the motivating factors important to each individual and should ensure that the project environment is a motivating one. Cost. The project manager should recognise and deal with the situation by clarifying priorities and. perhaps as a result of poor communication. . the project manager and the customer. 4. below are just three examples. Project status review meetings The purposes of such meetings are to inform others about project status to date.9. scope – current status. Exercise List some of the items that may be on the agenda of a project status review meeting.9 Project team meetings As discussed above regular project team meetings are an important way to improve relationships and to communicate the objectives of the project to the whole team. scope – forecasts. Effective team members need to be committed and want to feel accountable for their individual activities. The project manager must speak to each team member in order to communicate his or her importance to the achievement of the project. to identify any issues or problems and to identify subsequent action plans for the remainder of the project.

It is important that the project manager provides clear guidelines on the authority of the problem-solving team to make decisions and the allocation of responsibility to named individuals for action to solve the problem. and there are often different names for the same stakeholder. and are responsible for its budget.3). The fact that this stakeholder is a ‘group’ leads to its own problems. They would normally sit on the steering committee. schedules. However. in order to identify and resolve the issue. the person responsible for ensuring that the project is successful at the business level. Project design review meetings Projects that involve a design element are likely to require a number of design review meetings. A quick response to the identification of a problem is critical and it is important that the appropriate team members are made aware and are allowed to participate in the problem solution.ENTERPRISE MANAGEMENT ● ● ● ● 169 UNDERSTANDING PROJECT MANAGEMENT Cost. The customer/user is the person or group of people whose needs the project should satisfy. Project problem-solving meetings As soon as a problem occurs within a project. Assignment of action plan tasks. the owner would be the Finance Director or Financial Controller.10 Project stakeholders We have already discussed at some length about the project managers and their relationship with the team members. ● ● ● Project sponsor. The sponsor may also chair the steering committee (or project board) to which the project manager reports progress. simply because they control the budget for IT capital investments. They must also be satisfied that a business case exists to justify the project. They are interested in the end result being achieved and their needs being met. If we take the example of the development of a new accounting system. a problem-solving meeting should be called for appropriate team members to attend. In the case of the new accounting system. They will also be particularly concerned that the project does not go over budget. They often authorise the project. Corrective action plan. there are a number of other stakeholders who need to be considered (Figure 4. The sponsor is the person or organisation providing the resources for the project. Customers/users. scope – variances. and the conflicts between those needs. you should make sure that you are aware of the needs of each stakeholder. They are more interested in scope and functionality than in budget. This may be a forum to present new technical specifications for customer approval or to present design problems for problem-solving. the sponsor might be the Head of IT. in respect of the project. It may be difficult to get agreement from the customers as to what their needs . Assignment of deadlines for action plan tasks. and may also represent the users. Different textbooks have different lists of stakeholders. 4. Project owner (also referred to as project client). The project owner is the person for whom the project is being carried out. The following is a selection of the most common. that is.

Each of them will have their own objectives. some of which conflict with those of the project. in order to reduce cost. In the case of the new finance system.3 Project stakeholder hierarchy (adapted from Gido and Clements. In the case of the new finance system. or may involve being part of the project team. invited to participate in the project. For example. 4. if possible. allocation of funds. Users. the users would come from the different parts of the finance function. suppliers will seek to maximise the price of the supply. schedules. Suppliers/subcontractors/specialists. This conflicts directly with the objectives of the sponsor and customers. status reports Project customer – End-User Project manager – Responsible for achieving overall project output Project team – Responsible for achieving project tasks that make up overall project Figure 4. purchasing or internal audit departments.1 Managing stakeholder expectations Even the simplest project is likely to have a large range of potential stakeholders with different levels of interest and power. This may bring them into conflict with the project owner. indeed there may be conflicts within the customer group. Once these have been identified. The project will often require inputs from other parties. are primarily interested in the scope of a project. like the project owner. However. This may simply mean representation on the steering committee. assessing their interests in the project and then using that information to manage the relationships with such groups is a vital project management activity. rather than those of the organisation. despite theoretically being ‘on the same side’. they may try to ‘hijack’ the project to satisfy their own personal objectives. and reduce its scope and quality.170 UNDERSTANDING PROJECT MANAGEMENT STUDY MATERIAL E2 Project sponsor – Makes investment decision Project brief.10. such as consultants. such as material suppliers or possibly specialist labour. suppliers may provide hardware and software. it is useful to draw . and specialists might include members of the organisation’s IT. Conventional logic dictates that users should be. Identifying stakeholders. 1999) ● are. terms of reference Project owner – Wants end results Project proposals.

Hence. the sponsor will be interested in the project being completed ‘within budget’. what can be expected of their future behaviour and how they may react to future changes. 4. 4. You may choose to use the Mendelow matrix. You should think about the other likely conflicts in a typical project and how you.4). If a project is relatively small or short term.11 Projects and organisation structures and support This chapter has covered a number of issues relating to project organisation structures. for example an information system redevelopment. where lines of authority are clearer. as they are specific to each project. several obvious conflicts can be identified by looking at the objectives of each stakeholder as summarised in Section 4. 4. 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. and employees within a department will report to both a functional and a product manager.10. a table can be drawn up listing each stakeholder’s goals. projects are susceptible to conflict between the various stakeholders. The project owner and sponsor will want the best possible solution at the lowest possible cost. would manage them. This will allow the project manager to assess the risks associated with various stakeholder groups. there is often a lack of clarity as to how authority is divided between line managers and project managers. we need to consider the relationship of the project to the organisation within which it exists.10. outlined in Chapter 1. Although it is not possible to list all of the potential conflicts. both vertical and horizontal relationships are emphasised.2 Stakeholder conflict As in any group management situation. suppliers will want to maximise their profit from the project. as project manager. this may not be a major issue. such as in a construction company. In conventional (functional or divisional) structures. .1 Matrix organisations A matrix structure seeks to add flexibility and lateral coordination to the traditional vertical hierarchy. as he or she maintains functional/divisional responsibilities as well as membership of the project team (see Figure 4.11. 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. for example: ● ● While the project owner will be seeking the ‘best’ possible solution. However. Once the project manager has established the key stakeholder groups. past behaviour towards the projects. and indicate where attention needs to be focused. if the project forms a major part of the business of the organisation.ENTERPRISE MANAGEMENT 171 UNDERSTANDING PROJECT MANAGEMENT up a systematic plan to secure and maintain their support or to foresee and react to any problems. above. This is the same conflict that always exists in customer-supplier relationships. this may necessitate an organisation structure such as a matrix. However.

but is still used by many organisations in industries such as engineering. audit and even education. so staff benefit from also being assigned to a technical function (such as finance of logistics) where they can share knowledge with colleagues. so having resources controlled by functional heads should lead to improved utilisation and reduced duplication across projects. aiding the speedy implementation of new ones. construction. There is a dual chain of command which violates classical management principles. consultancy. A matrix structure suits rapidly changing environments because the equal balance of power between functional and project management aids communication and coordination. If implemented successfully matrix structure can: ● ● ● ● improve decision-making by bringing a wide range of expertise to problems that cut across departmental or divisional boundaries. The projects are expensive. assist in the development of managers by exposing them to company-wide problems and decisions. improve lateral communication and cooperation between specialists. The projects have different start and end dates. . so the organisation is continually reassigning resources from project to project. The projects are complex. The matrix organisation structure has been widely criticised.172 UNDERSTANDING PROJECT MANAGEMENT STUDY MATERIAL E2 Chief executive Project manager 1 Project manager 2 Project manager 3 Division A Production Marketing 1 1 2 2 3 3 Division B Production Marketing 1 1 2 2 3 3 Technical development 1 2 3 Figure 4. It is an organic structure which facilitates adaptation to unfamiliar and unexpected problems. replace formal control by direct contact. People can be flexibly relocated across products or projects.4 Matrix Organisation (new diagram taken from old chapter 2 on structures) each of which has equal authority. so the customer requires a single point of contact (the project manager) to deal with their needs and problems. each requiring staff and resources from a number of technical functions. The projects are customer-facing. 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.

for large complex projects may need project support teams. however. disadvantages with a matrix structure: ● ● ● ● ● ● ● ● ● a lack of clear responsibility. it is beneficial to retain information on projects and learn from experiences. the project manager will probably take care of the administration with the support of an administrator or a secretary. clashes of priority between product and function. 4.ENTERPRISE MANAGEMENT 173 UNDERSTANDING PROJECT MANAGEMENT There are. Tasks which may be undertaken include. servicing progress meetings. In organisations where the there is a significant number of large scale projects there will often be a permanent project office/project support office. functions lose control of the psychological contract. making arrangements. In summary the project office can provide administrative support. The project office provides a central function comprising staff who have the specialist skills and knowledge of how to run the project process. If projects follow the same processes then staff transfer between projects is easier and staff do not have to learn new ways of working. preparing contracts and monitoring progress. managers will need to be able to resolve interpersonal frictions and may need training in human relations skills.2 Project office The effective management of any project requires a lot of administrative work to keep the project in order. (e. asking them under five headings to identify which of the 60 factors could affect the success of an IT project. using network analysis and updating. scheduling. In addition. The project office can be the central repository for this knowledge. maintaining project files. To continue with this theme: NSM Research carried out a survey of 867 IT professionals. There are considerable benefits from having a consistent approach to running projects through a project office. 4. project managers are reluctant to impose authority as they may be subordinates in a later project. The function of the project office is to assist in all aspects of the management of project work and provide administrative support to an ongoing programme of projects. difficult for one specialist to appraise performance of another discipline in multi-skilled teams. This can be used to inform future projects to improve the quality and accuracy and avoid mistakes made in earlier projects. managers spend a great deal of time in meetings to prioritise tasks. career development can often be stymied.11. Project management and planning software will usually be kept under the control of the project office. but in some organisations it is central to the overall control of projects. In a small project. sending out the agenda and minutes). employees may be confused by reporting to two bosses. However. monitoring costs and budgets.12 Why some projects fail There are a number of factors that are crucial to projects. This independent market research agency was commissioned by the Coverdale Organisation (a management consultancy) and Computer Weekly. The results were published in Computer Weekly in .g.

. Suppliers and other third parties have to be tightly managed and assurance about their technical competence given and checked by third-party references. who works for Coverdale. necessitating the understanding of the various stakeholders. projects fail. The support and involvement of senior management was essential: without it.2 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. For one task estimates ranged from half a day to 2 weeks. 4.13 Examples of projects This section will help you to become familiar with real projects. will impact seriously on the success of projects: they can head in the wrong direction from the start. teamworking and motivation more than technical competence or formal training. The associated skill set contains the ability to communicate well and to lead. and identifying resources.2 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% an article entitled ‘The Project Killers’ on 28 February 2002. is experienced in blue-chip IT companies’ major IT projects. informed the world that about two-thirds of major IT projects fail to deliver some of their original objectives and more than a quarter fail altogether.2 are taken from that article. Understanding the technology and technical competence are of far less importance to a project leader. setting realistic estimates in terms of budgets and time. though they are more important for the project team and essential to suppliers and third parties.’ 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. These skills should be used to communicate and to obtain agreement with clearly defined. Forrester. Significant elements of the project management process. for example. measurable objectives. 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.174 UNDERSTANDING PROJECT MANAGEMENT STUDY MATERIAL E2 Table 4. such as the defining of clear objectives. a research firm. You can see from Table 4. Factors such as communication. leadership and clarity of purpose can produce a desired result. The results in Table 4. Steve Goodman. Use examples to support your answers. Project teams have to have clear roles and responsibilities.

some 700.000 m3 to be dealt with annually (22 litres per second. two were shortlisted: Tarmac and McAlpine JV. 5 km east of St Austell. This meant that it became responsible for the whole design. its offer of equity investment and its construction management proposals being the most favourable. The mission statement was (and is) to: promote the understanding and responsible management of the vital relationship between plants.5 m was granted by the Millennium Commission as one of its ‘landmark projects’. with the successful contractor investing equity into the project. Tenders for the construction contract were advertised in early 1997. The contractors were interviewed and. including one Anglo-German joint venture. The fundamental requirement contractually was to place a design and construct lump sum contract with a guaranteed maximum price. to be opened to the public as soon as possible. which was involved in the project from early 1996. that is. a model contract based on best practice because it supported project management and provided a secure basis for partnering. In May 1997. Eden Project Ltd raised matching funds. The project was to construct a botanical garden and education centre within that china clay pit. 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. 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. procurement. after investigations. both tenderers were invited to make final proposals including the form of contract they considered most appropriate. obtained planning permission (including the new requirement to build a 4 km road from the project to the A390 .000 from Restormel District Council.13. legally enforceable) with a 12-year liability period.e. 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. £37. To this end. construction and commissioning of the total built form for a total cost of around £59. The contract was under deed (i. This means they chose an NEC target-cost contract. During the final negotiations. Eight tenderers were selected. This was seed-corn money that enabled the development of the millennium funding bid to be financed.ENTERPRISE MANAGEMENT 175 UNDERSTANDING PROJECT MANAGEMENT 4. Both chose the New Engineering Contract (NEC) and savings/bonus provisions with an activity schedule.) 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. In the next 18 months.8 m. who saw the site and had the vision in 1994 and the skills of the principal project teams. one of the largest funded by the National Lottery to celebrate the third millennium. The customer/employer of the project was Eden Project Ltd and the Financial Project Manager was Davis Langdon Management (DLM). people and resources . There were 13 natural springs feeding in the water.1 One successful project – ongoing The Eden Project Imagine a large hole filled with water: an abandoned china clay pit at Bodelva in Cornwall. . . A crucial part of the project was the receipt of £25. The pit was 180 years old with an area of about 35 hectares and 80 m in depth. and to inspire positive initiatives that will lead to a sustainable future for us all.

dining facilities. the estimated construction costs had to be reduced by 25 per cent (over £11 m excluding the agreed £12. These biomes were covered with triple-layered ‘cling-film with attitude’ or ETFE (ethyl-tetra-fluoro-ethylene copolymer) foil. 2 months of torrential and unceasing rain fell. The contract was in two phases: Phase 1: The buildings (the Visitor Centre) and infrastructure (roads. Starting in December 1998. when diggers and bulldozers were used round the clock to make up the time lost. Eden Project Ltd’s (the client’s) expectations were also value-engineered down to the budget (the residue of funding less the inescapable ex-contract costs).5 m for the biome superstructures already negotiated) to achieve the inadequate budget. during which time the owner continued to extract china clay from it as the contract and project team struggled to develop the design. In October 1998. drainage and so on). In August 1998. the humid tropics biome and some of the biome link with the main reception area. lightweight. but the final construction contract was only signed at the end of January 1999 before work could start in earnest. This is strong. some site clearance work started. This was completed in five different stages to allow the customer to start fitting out individual rooms. (The target had been 750. bought the clay pit. Phase 2: All the works within the pit. with the final infrastructure. Phase 1: The Gateway to Eden – was opened to the public in May 2000 while construction was still underway: 500. has better insulation properties than glass and is recyclable. It should be maintenancefree for 25 years and last 30 years. Horticultural planting started in September 1999. The design team. all parties worked at risk. car parking. 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. The site was not finally bought until October 1998. were taken over piecemeal to allow the employer to start work in those areas. Part of these facilities. Much innovation had been required as the pit was filled to a depth of 20 m below the water table. Topsoil had to be created from china clay waste/sand. Throughout the entire project. as there was none in the pit. appointed the in-house development team and finalised the project brief. Nicholas Grimshaw and Partners Ltd. composted ‘green’ waste and composted bark. programmes and method statements were prepared. necessitating sophisticated water management and continual pumping of 100 litres per second off site. with the first trees planted in the Humid Tropics Biome in October 2000.) . the one-millionth visitor had come to see the project. In June 2001. and construction had to stop. 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. Work did not recommence until March 1999. lavatories and similar facilities between the biomes. Phase 1 closed in January 2001 so that the link building and modifications to the Visitor Centre could be completed.176 UNDERSTANDING PROJECT MANAGEMENT STUDY MATERIAL E2 south of Bugle linking the main A30 trunk road which ran the length of Cornwall). March 2001: The Eden Project was completely opened to the public. There were eventually 87 suppliers and subcontractors managed by McAlpine for the client. were taken on when the contract was agreed. with very small primer payments made by the Millennium Commission against rigid ‘schedules of delivery’. geophysical and geotechnical surveys and wind tunnel tests were commissioned and work was done towards the site start. Completed sections of topsoiling and associated works in the pit were also undertaken separately to enable the horticultural planting to start.000 visitors came to watch the Big Build. anti-static and highly transparent to ultra-violet light.000 per annum.

Logica and Frequentis were involved.uk/eden/ facts.1: ‘the parties to act in a spirit of mutual trust and co-operation’) had underpinned activity and. McAlpine Joint Venture Eden Project St Austell: BCIA Awards 2001 – Major Project Award: The Eden Project The Architects’ Journal: Eden Project: www. At the end of 1991. The final cost was £86 m. The deadline for operations was 1996. Issue No. harmonious and profitable. Hampshire. The contractors refused to invest large sums themselves. On 24 October 2001. comprised 200 workstations showing both aircraft data and radar information. 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.co. The requirements had been set by a small and unrepresentative group of air traffic controllers. on a token ring network. The absence of these disputes enabled the focus to remain on the considerable physical. Between 1989 and 1990 the management strategy for the project was defined. Harmonious relationships (required by contract clause 10. but the project team estimated an operational start date of 1998: 2 years longer than agreed. though a month late. newengineeringcontract. was said to cost £350 m. by Tim Carter. There were no firm offers from subcontractors at this time: firms such as Siemens Plessey. 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. Davis Langdon Management: NEC Users’ Group Newsletter. The revenue from the admissions. catering and retailing facilities has been 300 per cent over estimates made in the business plan for Phase 1. A systems implementation contract was let to IBM. Sources: Internet downloads: ‘Eden Project – a Landmark for the NEC’. and produced a result which has become an instant legend in its own lifetime.ajplus. There was only one subcontract dispute. It came in on budget. The new centre had to have a 40 per cent increase in capacity.ENTERPRISE MANAGEMENT 177 UNDERSTANDING PROJECT MANAGEMENT The project has been successfully completed. the Civil Aviation Authority made a case to the government of the day for a new air traffic control system and centre. (Having . 4. The new deadline would be 2003. amicably settled. which was based on IBM’s RS/600 AIX-based architecture. including the building at Swanwick. 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.2 One not so successful project National Air Traffic Services (NATS) In 1987.000 defects in nearly 2 m lines of code.13. Their budget of £1 m for the project definition phase was in the main used up by the next year. The whole project. for the most part. 16.com. with a large number of requirements still undefined. technical and budgetary issues. Material reprinted by permission of Thomas Telford. www. 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. IBM and Thompson CSF won the system contract that had been subject to competition. Loral bought IBM’s Air Traffic Division and conducted a secret audit of the NATS systems that showed 21. The client and investors were satisfied. The project was authorised to go ahead on the basis of going live in 1996. McAlpine JV won the British Construction Industry Major Project Award for contracts above £50 m. geology and budget cuts with enthusiasm and skill.’ The next development phase of the Eden Project commenced in 2002. In 1994. The system. the reaction of project partners was that it had been exciting.

The remainder was for additional options taken up by NATS after the award of the contract. NATS. There were calls for an independent audit of the NATS project to the House of Commons Select Committee on Transport chaired by Gwyneth Dunwoody. In June 1999. through its Private Finance Initiative partner EDS. the operational deadline was agreed as 2001–02. A new operational deadline of October 1999 was approved by NATS in September 1997. by Tony Collins. MPs did not appreciate being told that this was only the capital funds draw-down. Of the 160 individual payments to the contractor. acceptance tests were halted. 14. the operational date had shifted to March 1998. Despite the original fixed-price IT contract of £132 m. 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. The contractor submitted a plan that showed system acceptance in August 1997. it proved impossible to scale it up on the whole operational configuration. The New En Route Centre. This despite the knowledge of the contractors and NATS project team that there were potential delays in the schedule. the NATS system has been blamed for unreadable screens. only 15 were originally specified for the software. The operational date for Swanwick was confirmed as January 2002. 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. . Eden Project Ltd has contracted McAlpine JV for the construction of Phase 4 due to start in late 2003 and to be finished in 2005. Little into the finances and management of the project warned that the final cost would be £180 m more than announced to date.) Afterword The Eden Project goes from strength to strength and their relationship with McAlpine JV continues. p. The IT contract was nearly half the cost of Swanwick. Lockheed Martin bought out Loral and by the end of 1996. A quarterly progress report from NATS to the Department of Transport stated that the system would be online by the summer of 1997. and the diversion of planes to other traffic control centres due to operator overload. Success clearly breeds success. NATS turned this down. an education centre and more visitor facilities. in 2001. an audit by Arthur D. However. insisting that the acceptance date should be June 1997. installed well-written software releases that drastically reduced the number of bugs in the system from hundreds to zero. Over a year after it became operational. The new government agreed. The Swanwick costs were now £700 m. NATS is still hitting the headlines with problems. though the system was working well on 30 workstations. a near-miss between a 747 and a 767. as Swanwick is called. By October 1998. EDS successfully sued NATS (May 2002) after NATS terminated the EDS contract after 3 years. NATS had accused EDS of failing to meet critical milestones. (This description was based on an article in Computer Weekly. By November. with the operational deadline 6 months later. It had been due to run for 14 years. The settlement was for an undisclosed sum thought to be many millions. the price that would eventually be paid to Lockheed was £337 m. These problems became public in 1996. though tens of millions of pounds had not been included in the costs. 24 January 2002: ‘A Brief History of an Air Traffic Control System’. Phase 4 will include building another biome.) In 1995. finally received the acceptance of its safety case by the Civil Aviation Authority and became operational on 27 January 2002. Meanwhile.178 UNDERSTANDING PROJECT MANAGEMENT STUDY MATERIAL E2 assumed that this was the total bill.

com. and Payne. Poor communication 4. Norris. A Practical Guide for Managers 1st edition. why some projects fail. (1999). role and communication issues relating to project teams. L. Innovation: leading-edge engineering made the project exciting 3. M. Changed objectives after project start 3. UK. John Wiley & Sons Ltd.ENTERPRISE MANAGEMENT 179 UNDERSTANDING PROJECT MANAGEMENT Exercise Having read the descriptions of the two projects. J. H. the membership. you have looked at the various aspects of projects. P. No consistent contractual ownership 5. the project life cycle and how a project may be seen as a systematic conversion process.14 Summary In this chapter. London: The Open University. M.thomsonrights. and how to manage them. and Clements. Maylor. Genuine partnership (McAlpine JV were willing to invest time and money in the project because they had belief in it) 4. Project Management. A vision that was sold to all (communication) 2. Understanding the client’s needs (opening during construction to get revenues flowing) 5. M. Good management of the large number of third parties and suppliers Unsuccessful projects 1. the project manager’s role. defining them and examining their characteristics. www. Poor cost management seen in cost overruns 4. the stakeholders within a project. (1993). Ft Prentice Hall. References Field. the different frameworks for understanding the process in project management. Gido. (2003). Rigby. can you identify six differences that were crucial to the success of one project and the relative lack of success of the other? Solution Successful projects 1. the difference between strategy and scope. The Healthy Software Project: A Guide to Successful Development and Management. Contract let to IBM with many requirements still unclear/time estimates poor 2.. and Keller. Reprinted with permission of John Willey. Fax: 800 730 2215. . (1998). J. Reprinted with permission of SouthWestern a division of Thomson Learning. Project Management. Successful Project Management with Microsoft Project CD. The key points to remember are: ● ● ● ● ● ● ● ● the characteristics of a project. skills and attributes.

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others can be found in the Project Management Handbook edited by Cleland and King (1988) and in many project management textbooks. The referenced papers and practices have been summarised. not truly reflect the original authors’ aims. The life-cycle models reviewed in this paper are organised around five broad approaches.S. 1996) proposes some definitions or models. a well-known project lifecycle model proposed by the U. École des Mines d’Albi-Carmaux Germain Lacoste. the authors limited this paper to an overview of the major project life-cycle proposals – before proposing additional models. while the specification and the execution of the project consist of one phase each. Department of Defense emphasises the aspects related to the demonstration of the feasibility and viability of the project (two phases). Another project lifecycle model proposed by Muench for information systems projects (PMBoK ®Guide) insists on taking into account the recursive processes often associated with these project contexts. A Guide to the Project Management Body of Knowledge (PMBoK ®Guide) (PMI Standards Committee. specifically those presenting some interests in the field of technical projects. For instance. are believed to be appropriate. therefore. since this concept has gradually derived over time. Reference to the information source is provided when available for more complete coverage. Centre Européen pour la Recherche Nucléaire Didler Gourc. Reproduced with permission of PMI Publications via Copyright Clearance Center It is quite difficult to attribute the concept of project life cycle to one author in particular. Reviewing all the models that have been proposed during these last two or three decades would be a cumbersome endeavour. École Nationale d’Ingénieurs de Tarbes Project Management Journal. hence.Readings 4 The Life Cycle of Technical Projects Pierre Bonnal. While going through these model proposals. However. 181 . As project life cycle also is handled daily by project management practitioners. one can remark that each author in some way enforces what is specific to the particular context for which the model has been made. The aim of this paper is to review project life-cycle models. additional or alternative models can be observed directly in real-world projects. and may. in an attempt to appraise the benefits of each. Copyright © 2002 by PMI Publications. These approaches are: ● ● ● ● ● Straightforward project life-cycle approach Control-oriented project life-cycle approach Quality-oriented life-cycle approach Risk-oriented project life-cycle approach Fractal project life-cycle approach.

In spite of such differences. or brainstorming processes. and to appraise them in terms of benefits for the organisation that intends to employ them. Approved and funded projects then are implemented in the second phase. also called ‘concept phase’ or ‘identification phase. The project life-cycle approach proposed hereafter has been derived from several models commonly presented in the literature (Kerzner. new products put on the market by competitors. especially when projects are complex. Some project failures can be explained because this dichotomy of skills has not been respected or considered. Three phases are considered: an initiation phase. that is. and a project implementation phase. For instance. for example. and missing dimensions. while hundreds or thousands of people can be involved in project phases over the shortest possible time periods. no more drawing numbers. it is up to the decision-makers to decide whether or not to go ahead. and the engineer notices that basic quality assurance principles have not been respected. The initial phase aims to sort all this information to identify some project concepts. and so on. 1994. by architects in preproject phases. Chrisotofol. projects in a broad sense – technical endeavors more specially – have two very basic phases in common: a preproject phase and the project itself. These two concepts. Although this statement seems obvious. Meredith & Mantel. the term ‘phase’ is preferred. This does not mean that all the concepts made out of this phase are to be carried out. that is. Real-world projects obviously follow more pragmatic schemes. Morris. Several characteristics make these two phases different. requests from customers. the project phase. it is not always the case. This breakdown into two very basic phases is theoretic in the sense that it intends to embrace all kinds of endeavors. The preproject phases aim to identify possible projects. Few people are generally involved in preproject phases over quite long and imprecise periods of time. The inputs of the initiation phase.182 UNDERSTANDING PROJECT MANAGEMENT READINGS E2 Straightforward approach to technical project life cycle Technical projects can be broken down into phases. These phases can be divided into subphases. called project concepts. distributions or sales people. Aoussat. economical trends. and Duchamp (1993) mention that a preproject phase requires creativity. When such phases are completed.’ are keeping pace with technological innovations. A rational attitude towards such initiation phases is to identify as many . The phasing of engineering and construction projects also are different from those used for the development and industrialisation of commercial goods. In this paper. a designer arrives in the office of an engineer with several plant layout proposals. also called stages or steps by some authors. the authors will not differentiate between these three substantive. This is typically a situation that can be observed on real-world projects. and by project managers in project phases. The number and labels of these phases are deeply dependent on the field for which the model has been made. then sub-subphases. while a project phase must be managed with rigor. The work loads and the duration of these two very basic phases also are different. followed by a feasibility phase. For instance. can be opposed because creativity is generally associated with disorder. the breakdown into phases of a small project is different from the ones used for large-scale projects. One can derive from this that these two phases should be carried out by different people with different skills. 1988) and additional observations informally made by the authors from real-world practices. This list of differences easily could be extended. Obviously. no title blocks on the drawings. while rigor and order are almost synonymous. creativity and rigor. One can argue that more rigor could be detrimental to the creativity of the designer. 1995. by product engineers or managers.

Based on the results of these technical feasibility analyses. a technical feasibility analysis. there are the capabilities and the know-how of the organisation. the range and the accuracy of the information used. is to be carried out. Clifton and Fyffe (1977) proposed to split this feasibility phase into subphases separated by intermediate decision points. in the petroleum industry it is quite common to have this materialisation phase broken down into three subphases. laws. For technical projects. If the results suggest that there is nothing to earn.ENTERPRISE MANAGEMENT 183 UNDERSTANDING PROJECT MANAGEMENT project concepts as possible and to eliminate the discordant ones through a preselection procedure with respect to the objectives of the organisation. the capacity is decided. For instance. will generate profits for the organisation. If it is positive. This second phase can be understood as follows: on the one hand. another go or nogo decision is made to determine whether or not to initiate a financial feasibility analysis. With this information. It also provides the information required for estimating the costs associated with the implementation of such project concepts and for identifying. The way a project implementation phase. 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. Basically. the feasibility analysis of the project concept shall be stopped at that point. For speculative or complex projects. One can discuss whether or not this first phase belongs to the project in a broad meaning. Its aim is to establish if a project concept. and mitigating technical risks. Very often. The feasibility phase is known to be terminated when a decision-maker decides not to transform the project concept into a project. the decision-makers should be able to decide whether or not to go ahead with each project concept proposed. 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. social profitability. This phase aims to analytically appraise project concepts in the context of the organisation. Otherwise. and applicable regulations. the processes associated with this phase are quite straightforward. Selected project concepts – outputs of initiation phases – then are used as inputs for the second phase. the project concept can be abandoned and eliminated from the project concept portfolio. environmental analyses are appended to technical feasibility studies to ensure that the project does not go against external constraints related to ecological issues. the overall budget and schedule are agreed.’ is conducted depends on the organisational context within which the project is implemented. the financing is arranged. but common sense leads the authors to think that the initiation phase is an endless process that continuously initiates new feasibility phases. It is reasonable to think that this figure shall be balanced with the internal (technical) and external (environmental) risks. and a preliminary organisation is established. in the case of a plant. It is initiated when the project has been appraised to be feasible and profitable. the feasibility phase. the locations are chosen. The first subphase consists of a market feasibility analysis to confirm the viability of the project concept from a pure marketing point of view. the outputs of such a feasibility analysis can be a single figure. Morris (1988) recalled that at that point. nothing is supposed to interrupt the realisation of the project. but if it is negative. one can go ahead. on the other hand. Once launched. quantifying. Such an analysis serves to demonstrate that the project is technically feasible. or feasibility study. once materialised. and the size and the complexity of the project proposed. there are the organisation’s needs. For technical projects presenting low complexity. also called a ‘materialisation phase’ or ‘realisation phase. .

and another level using and acting on the project.). A post-project phase. the processes of making it deliverable. Kelley considers a project as a servomechanism with two levels of retroactivity: one using and acting on the product. cit. that is. and when purchase orders for long-lead equipment are issued. during which the documentation for tendering and contracting the physical construction or for procuring equipment is prepared.184 UNDERSTANDING PROJECT MANAGEMENT READINGS E2 ● ● ● A basic design phase carried out by an engineering company or an industrial architect. while in the detailed design and construction phase. equipment. Morris cites a project life-cycle approach attributed to Kelley (1982) (Figure 1). except that they are more detailed. for example. or big-science projects. The outputs of the basic design phase are similar to that of a feasibility study. carried out by one or more contractors during which the final deliverable (a plant. defense. the architects and/or the general contractors to the owners. 1982) . schedule and budget are reappraised based on an expanded description of the product and of the project.) is made and commissioned. because the project can be stopped at that point if the conclusions of the feasibility analyses are not confirmed. turnover phase. etc. that is. procurement. Even if this breakdown into subphases slightly differs when transposed into other technical project contexts. and construction contracts are awarded. Control-oriented model In the Project Management Handbook (op. immediately followed by a construction phase. A detailed design phase. 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. automotive industry. the final deliverable is seen as a set of functions to satisfy. This phase is considered completed when engineering. in a basic design phase. the whole philosophy remains. The milestone associated with the completion of this basic design stage is important. What makes the two design phases different is that. the deliverable of the project. Need Economics Technology Concept Feasibility Definition Procurement Implementation Turnover Project Control Product Control Planning Execution Operation Figure 1 Control-Orientated Project Life-Cycle Model (Kelley. the final deliverable is handled as a breakdown or parts and pieces to procure or fabricate and to assemble. or start-up phase during which the responsibility of the materialised deliverable is transferred from the engineers.

especially in those devoted to the management of IT projects. The final acceptance of the deliverable should be conducted in such a way that the fulfillment of these functions can be demonstrated without ambiguity. the level of conceptualisation gets lower. these few functions can be transformed in some physical systems and subsystems. Considering the evolution of the quantity of objects handled. As the definition of the final product progresses. This is because the purpose of a basic design phase is to specify a set of functions that the final deliverable can satisfy. The project assembly breakdown structure allows for reconstruction of the final product for delivery. this quantity follows an opposite scheme. At the early stage of the project. the project manager and his or her team are committed to making a product that fulfills these functions. The lowest level is reached when parts and pieces are being manufactured or when individual equipment is installed. the time runs from left to right – the level of conceptualisation of the project at a given time is featured on an orthogonal axis. 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. This level grows when manufactured parts and pieces are assembled to form subassemblies. It can be easily transposed to the fields of technical projects. then assemblies. A system should be commissioned according to the technical Level of Conceptualisation High What Was Specified What is Done Materialisation Phase Conceptualisation Phase Turnover Phase Time Low Figure 2 Project Life-Cycle Model Highlighting Project/Product Quality Matters . With the project implementation progress.ENTERPRISE MANAGEMENT 185 UNDERSTANDING PROJECT MANAGEMENT Quality-oriented model The project life-cycle approach shown in Figure 2 cannot be attributed to one author in particular. few functions are sufficient to describe the final product. At the early stage of the project. and I prove I’ve done it. For this to be objectively feasible.’ The project life-cycle model shown in Figure 2 can be considered as quality-oriented. which are made of assemblies and subassemblies. the same principle applies. The highest level of conceptualisation is reached again when the project is terminated and the final deliverable is delivered. In it. the leaves of that hierarchical scheme are finally made up of the elementary parts and pieces of the final deliverable. this level is high. ‘I say [and write] what I will do. then I do what I’ve said. 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. she/he checks what I’ve said [and written]. According to a broadly known principle of quality management. because it helps to understand the integration of this principle in the project management field. It is widely used in project management classes. or when installed equipment is networked. At lower levels.

the requirements (what one needs) and. followed by an execution phase (Phase C) during which the final deliverable is made. during which scenarios are elaborated. during which the experience acquired is recorded. a project concept could consist in developing a new product to fill up a market niche. The feasibility phase consists in verifying that the marketers’ requirements are compatible or consistent with respect to the know-how of the organisation. the know-how and the capabilities of the organisation (what one can). The issues associated with the preproject phase remain the same: on the one hand. the following studies are to be carried out: a market feasibility study to confirm the opportunity of developing the new product. down to the manufacture. The project phase itself is divided into three subphases: a planning phase (Phase B in Figure 3). and the installation. Typically. Requirements “What One Needs” Ph Feasibility ase A Scenarii Know-How “What One Can” Phase B Phase C LIMITS LIMITS Execution Feedback Go/No-Go Decision Phase D Preproject Project Figure 3 A Risk-Orientated Project Life-Cycle Model (Lacoste. a financial study to check if the organisation can financially afford the development to verify that this product does not go against external constraints. 1999) .186 UNDERSTANDING PROJECT MANAGEMENT READINGS E2 specification that describes it and so on. 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). on the other hand. The model proposed by Lacoste (1999) (Figure 3) partially deals with this issue. the assembly. For instance. Risk-oriented model Risk management is another important issue associated with the project management body of knowledge. 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. and a closeout phase (Phase D). 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. This project life-cycle model is made of two very basic phases. 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.

This important information must feed the know-how repository of the organisation. and its mitigation. depends on the level of elaboration of the plans. 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.’ When looking to an endeavor with this in mind. French academician Joël de Rosnay (1993) scrutinises the evolution of project management from a linear motion – the emergence and development of project planning and scheduling techniques in the ’50s and ’60s – via a reticular countenance. When the analysts in charge of carrying out such phases agreed on content. don’t plan too much if you intend to remain creative. the uncertainty and imprecision associated with the execution of any project. The issuing of a technical specification describing a prototype is a sub-sub-project of the prototype subproject and so on. the introduction of the management by projects in organisations in the ’80s and ’70s – to reach a fractal dimension. The main aim of the scenario phase is to plan risk responses. These reports must be written and the actions of writing them are no more than projects. prototypes are sub-projects of the feasibility study project. to the performing of calculations or to the drawing of some plant layouts in basic design phase. This way of reasoning also is applicable to the writing of technical specifications of systems and subsystems.’). once gazed through a fractal lens. For some examples. 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. Plan your project correctly if you intend to deliver it in conformance with specification. A fractal approach to project life cycles (henceforth. in all the cases the deliverable of these phases are reports. . the spreading of responsibilities. Especially those concerned with the overlapping or fuzziness of interfaces between phases. it is also up to the project team to record the uncertain events that occur and the responses implemented to restrain in the case of threats or to enhance their outcomes for opportunities. it seems that some of it goes against universal project management practices.ENTERPRISE MANAGEMENT 187 UNDERSTANDING PROJECT MANAGEMENT This intermediate phase is concerned with three out of the four project risk management processes (as per the PMBoK ® 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. its evaluation. 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. Even if creative behaviours shall animate feasibility phases. However. endeavors can be seen as quite homogeneous mixture of creativity and of strictness. on time and on budget. the neologism ‘projectique’ was created to define this new field of knowledge. a more or less formal decision is made to go ahead. All along the realisation of this phase. In such contexts. including their issuing on time and on budget. and. see Figure 4. The quality of these feasibility analysis reports. all along any project life cycle from an early feasibility stage to the completion of a project. The feasibility of a technical product/project is sometimes appraised with conclusive results made out of tests and measurements using prototypes. more generally. and decisions that are made complicated when OBSs deal with the matrix organisation of projects. 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. During the execution phase. neologism could be translated into ‘projectics. fractal life cycle) can explain situations that are difficult to model otherwise.

to the four project life cycles presented earlier.. but. nondiscursive (i. those that do not allow loops). change control. one can note that decisions are spread in all dimensions: hierarchical or temporal. At lower levels.’ every schedule should be made according to project life cycles and.g.. he or she has a role of stakeholder. project life cycles – the ones presented in this paper. Writing a Feasibility Document ? e. or whatever he or she is able to request will conform with what he or she asked and delivered on time and on budget.. At subproject level. Writing a Specification ? ? e. expecting that the delivery of a document.188 UNDERSTANDING PROJECT MANAGEMENT READINGS E2 Go/No-Go Decision Final Deliverables Preproject (Feasibility) Phase ? Project (Execution) Phase ? e. Down to project management practices Before presenting what a project practitioner can gain in being aware of few project lifecycle models. the go/no-go decisions are made by stakeholders or the future owner of the final deliverable. the duration. the authors believe that having such images in mind when managing a project can contribute to the reality of the world. an assembly. Even if the consolidation is difficult to make. Realisation of a Prototype e. Before concluding. the authors will discuss feelings regarding a common statement that can become a serious pitfall if not appraised carefully. Accurately forecasting the work to be done. The activities of a project manager do not only consist of making decisions at the project level.. and something the authors have called the fractal aspect of a project process. risks. those that do not accept decision points) – that it is difficult to make schedules that can be consolidated at the life-style model levels. Fabrication of a Tooling Time Figure 4 A Fractal Approach to Project Life Cycles Using such a model. Because project life cycles can be understood as ‘generic macro schedules. The four project life-cycle models presented in this paper enforce four important aspects of the project management process: control. decisions are made by project engineers or work package managers. On the other hand. commonly implemented planning and scheduling techniques are such – deterministic. for technical projects in particular. product and project quality. It is obvious that this contributes to the success of a project. the .e.e.g. This model also shows that project managers contribute (by their creativity) to processes that are upstream decision points in appraising pre-subproject opportunities. Issues such as possible rework. and the resources needed to complete a project is not sufficient to ensure its performance. but also others – strongly use images as definitions.g.g.. product and project quality. it is up to the project manager to make decisions. or project risks also shall be taken into account when planning and scheduling the project. However. but it is not enough. in many cases.. nonrecusive (i. At project level.

critical design reviews. to use the right ones at the right time over the project execution period. The risk-oriented project life-cycle model presented is helpful to understand how the six phases of the risk management process are articulated. closeout reviews. 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. such as preliminary design reviews. to make decisions. 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. develop plans to respond to these risks.ENTERPRISE MANAGEMENT 189 UNDERSTANDING PROJECT MANAGEMENT authors present some key points a project practitioner can use to take into account these issues when planning and scheduling her or his project. through the reviewers’ recommendations. or simply to go ahead. Phase C then is conducted in . If all these structures are correctly interlocked. Assembly breakdown structures (ABSs) aim to detail the sequence of operations to get an object assembled or a plant constructed. The ABSs are mostly used during the materialisation of the project. The WBS and the OBS/RBS. 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. but it is oriented to the functions the final deliverable should satisfy. that is. however. subassemblies – down to elementary parts. that is. A tendency in technical project management practices. It is up to the project managers to quantify these possible additional activities and to spread them as contingencies all along the project execution. production readiness reviews. FBS. and the quality-oriented project life-cycle model is helpful for that purpose. The project risk management is one of the knowledge areas of the PMBoK ® Guide. assemblies. the OBS is limited to decision-makers while the resource breakdown structure (RBS) takes into account all the resources involved in the project. Phase A (at a macro level) and phase B (at a micro level) aim to prepare scenarii. and ABSs. and set up limits not to overstep. Organisational breakdown structure (OBS) describes the organisation of the project in terms of responsibility. the quality of the project plans and schedules is increased. Rare are the project activity networks that take into account the control issue. are made and updated according to the PBS. is to multiply reviews. an activity that was supposedly completed may be redone. It is obvious that the purpose of these reviews is. progress reviews. specifications. project managers are strongly invited to break down their projects in tree-like structures. then subsystems. to identify and quantify risks. Functional breakdown structure (FBS) is similar to the PBS. 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. which are the inputs to the schedule. an additional activity neither planned nor scheduled may be carried out. As a consequence of a review. 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. As for state-of-the-art practices. the FBS is very helpful to identify and list all the design documents (calculation notes. drawings) and the commissioning procedures to issue. During the design and the commissioning phase of the project.

Conclusions Projects are characterised by their specificity: an endeavor that has a start and a finish. This fractal view very often is implemented on technical projects. One can argue that ‘creativity’ is something difficult to estimate and. It is the tool the project manager uses to communicate with the external world. the whole duration of the project from the go decision to the closeout. Generally. and finally a commissioning coordination schedule. whatever their level. The intermediate level of planning and scheduling deals with tactic issues. It is followed by a procurement coordination schedule. seldom do take ‘preproject activities’ into account. 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. Many project practitioners are familiar with such practices. detailed schedules cover short-term periods. Still within the scheme. whatever their level of complexity. 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.190 UNDERSTANDING PROJECT MANAGEMENT READINGS E2 such a way that the limits previously defined are not exceeded. It covers the long term. The consequence is that project work breakdown structure viewed through this fractal lens is much more exhaustive and closer to reality. In some domains. and the master schedule aims to reflect the strategy of the project. This approach seals the breakdown of a project into sub-projects and so on down to ‘elementary projects. this intermediate level is made of several overlapped coordination schedules covering the midterm. that is. Three levels can be beneficial for understanding what follows. 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. The project shall benefit from that. Practically. from a few weeks to a few months. for instance in the offshore oil platform or nuclear waste reprocessing plant construction industries. phase D shows that a continuous feedback mechanism is fundamental to fill up the know-how repository of the organisation. Last but not least. Real-world schedules. a precise and unique aim that is carried out by a team set up for the purpose of the project. As for work packages. to schedule. The first coordination schedule to be issued covers the design phase of the project.’ Then all these projects. the bottom level of planning and scheduling deals with operational issues. four or five levels of schedules are common practices. The way the work packages are consolidated at the top level is obviously a prerequisite to the issue of the corresponding coordination schedule. Nevertheless. Hence. 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. they are made of the elementary activities. the way elementary activities are consolidated at the corresponding coordination level constitutes a prerequisite to the issue of the detailed schedule. . a time management system is made of two or more levels. The first level of such a planning and scheduling system deals with strategic issues. For instance. a construction and installation coordination schedule. especially on largescale industrial projects. This schedule is issued prior to the go decision. the time spent in dealing with these preproject activities must be considered in the project overall work load. therefore.

PMI Standards Committee (1996). Construction d’un mode’le fractal du processus de conception de la coloration d’un produit. France: Ecoles Doctorales Syste’mes. R. Morris. References Cleland. charismatic leadership. which is made of two very basic phases and applicable to all types of projects. Christofol. Parris: Economica.. Lexington. 16–55. their purpose is to explain the real world in a simpler and understandable way. New York: Van Nostrand Reinhold. MA: Lexington Books. New York: Van Nostrand Reinhold.-M. pp. (1977). J. J. and W. Paris: Economica.S. UK: John Wiley. Because the world of projects does not consist of a very small number of variables. (1995). PA: Project Management Institute. United Kingdom: John Wiley.ENTERPRISE MANAGEMENT 191 UNDERSTANDING PROJECT MANAGEMENT The purpose of a project life cycle is to find something common to all projects among all these differences. Scheduling and Controlling (5th edn).I. de Rosnay.-P. (1988). Project Management Handbook (2nd edn). all of this being achieved by strong. Clifton. H. whatever they are.J. and Fyffe. Upper Darby. G. and N. are located on a continuum going from the simplest project life cycle. Project Management. Conference de cloture. and N.-M. as led by the new chief executive. 336–345.W. 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. and King. P. The case discusses the transformation of Boeing. project managers and team members must share a common view of their projects and especially on the way a project progresses. (1982). Jayaratna. (1993). A. Project Management Handbook (2nd edn). Risques et analyse des risques (Cours de DEA Syste’mes Industriels). The skills of project management The scenario below analyses the importance of project leadership skills and of project team management. Kerzner. pp.G. D. it is difficult to imagine – and perhaps impossible to make – a model that could integrate all the variables that make all projects specific. Lacoste. A. Jayaratna (eds) Projectique.R. pp. a Managerial Approach (3rd edn). Chichester. Larrasquet. (1999). (1994). (eds) (1988). J. S. D. New York: Van Norstrand Reinhold. H. Project Feasibility Analysis: A Guide to Profitable New Ventures. A la recherche d’un sens perdu. (eds). J. Chichester. and Duchamp. New Dimensions of Project Management.E.-P. ENSIGC. Kelley. Larrasquet. Because project life cycles are models. Philip Condit. Meredithy. D. Cleland. and Mantel. Aoussat. (eds) Projectique. J. to project schedules that are precise and detailed but only applicable to one specific project. King. Project Management: A Systems Approach to Planning. In D. A Guide to the Project Management Body of Knowledge. W. Project life-cycle models. In order to understand the projects they are involved in. Toulouse. Claveranne. The article specifically highlights the importance of interdisciplinary teamwork and the need for a more flexible approach to project management. (1993). A al recherche d’un sens perdu. J. . Claveranne. ‘The New Project Environment’. 403–407. ‘Managing Project Interfaces: Key Points for Project Success’.

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. the 777 is Boeing’s first plane designed entirely on computers. Frank Shrontz. The Street expects earnings to go on rising through the decade. Airlines can internally reconfigure such areas as galleys and lavatories within as few as seventy-two hours. We aren’t an engineering. Nobody states the problem better than Ronald Woodard. Wall Street expects per share earnings to rise by 20 per cent this year (before charges in 1995) to $2. Boeing’s defence division. but so do Airbus and McDonnell Douglas.75 on sales of $22 billion. fifty-four-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. compared with two to three weeks on older aircraft. . Boeing makes great airplanes.’ There’s a world of meaning in that seemingly bland statement. First put into service by United Airlines last June. Much as they are technological marvels. is competing on the Joint Strike Fighter jet project. a lawyer by training and a former Pentagon deputy. technology-development enterprise. already the prime contractor on NASA’s space station. Smaller than Boeing’s humpback 747. No marketing detail was too small. Their job is to move people and goods from point A to point B at minimum cost consistent with safety. June 1996. Condit made his mark when he oversaw development of Boeing’s latest generation airplane. Boeing is in fact a company in transition. Boeing Co’s new chief executive officer. much less in front of strangers. Forbes. Boeing jets represented two-thirds of the dollar value of all commercial airplanes ordered in 1995. The seventh man to run Boeing since its founding by timberman William Boeing in 1916. even the toilet seats gently sink on to the toilet bowls. Booming on the surface. The change in personalities at the top of the world’s largest aircraft manufacturer is rich in symbolism. 64. tightly unionised by the militant International Association of Machinists and Aerospace Workers. It’s a pilotfriendly and airline-friendly product. Destroying the old hierarchies Seth Lubove. Reprinted by permission of Forbes Magazine 2002 Forbes Inc At a recent charity event. the pilot’s commands to the rudder and flaps are communicated electronically. a potential $160 billion contract. For the first time. donned a cowboy hat and belted out a rendition of the country and western classic ‘Could I Have This Dance?’ A karaoke machine provided the accompaniment. No one could imagine Condit’s predecessor. not a high-technology company. the 777. singing in the shower. the importance of strong leadership and the need for effective interpersonal skills. rather than by cables and levers.192 UNDERSTANDING PROJECT MANAGEMENT READINGS E2 This case study should aid you in understanding: ● ● the importance of teamwork. Philip Condit. known internally as the ‘triple seven’. today’s passenger jets are basically commodities to Boeing’s customers. instead of loudly smacking. the world’s airlines. the blunt-spoken president of Boeing’s Commercial Airplane Group: ‘We have to understand that we are a manufacturing enterprise. Who gets the sale depends to a large degree on price. terms and availability. the 777 is more distinctive for what you don’t see than for its profile. That’s what Boeing’s Woodard means when he talks about making people understand that Boeing is a manufacturing company.

Now Russell speaks with the engineer directly. Explains Ron Woodard: We’re trying to destroy all the old functional hierarchies. less combative union. the Seattle Professional Engineering Employees Association. ‘None of us is as smart as all of us. In the past.700 in 1990 to 108. compared with eighteen months previously. Recently. (Boeing’s engineers are represented by another. who was rarely seen on the shop floor. so that the production teams aren’t stuck with overly costly. He wants to reorganise the whole company along these lines. But today. Condit broke down the old-fashioned procedural walls within the company. to the point when Boeing now delivers an airplane within ten months of the order. In naming Condit as his successor. plant and asked the supervisor to leave the plane so the workers could speak without feeling intimidated. Condit wrote: ‘We all need to work together’. Any significant changes involving the workforce still have to get past the Machinists’ Local. Russell called the engineer and quickly fixed the problem. if Russell detected something wrong in his engineering plans. explaining his new integrated design strategy.’ Unlike Shrontz.ENTERPRISE MANAGEMENT 193 UNDERSTANDING PROJECT MANAGEMENT But for Boeing. Under the old. Boeing’s largest union. Condit walked over to a group of picketers outside his Seattle office and chatted amiably about the proposed contract for forty minutes. now go build it. Each consults the other. hard-to-build design specifications. another Boeing employee. Russell. he’d have to go through his supervisor and the problem would move through the chain of command until it eventually reached the engineer. and they didn’t care.’ This is where the job gets tough.) Say what you may about the shrinking clout of private-sector unions in this country. is already seeing some differences in his job. a strike means lost sales. Back at work now. for instance. This sort of reform.’ Condit says. came late to Boeing. 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.’ says Shrontz.000. He even signed striking union member Tony Russell’s picket sign. military style of management. Adopting the theme of ‘Working Together’. Condit frequently pops into plants unannounced. Addressing the message to Russell’s wife. he walked unescorted on to a 777 undergoing final assembly in Boeing’s Everett. Russell noticed that the metal deck he received was bigger than the deck on the blueprints.’ says Woodard. usually tie-less and dressed casually. the fact is that the Machinists can still bring Boeing to its knees. ‘We can make pronouncements up here all day long. design engineers worked independently of the production and operations people who actually built the plane. Frank Shrontz hammered at reducing cycle times and cutting costs. sitting in his orderly office overlooking historic Boeing Field. 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. when most Boeing executives kept a low profile. ‘Phil is motivational. the designers would say. During the strike last fall. Here it is. with about 33 000 members. a tool builder. When he was building the scaffolding for the 777 line. common now in manufacturing. Condit instead organised hundreds of integrated ‘design-build’ teams. Condit’s biggest change was in the organisation of the program. ‘The thing that’s different is ten years ago we could have had a strike and delivered airplanes late to customers. Washington. for example. We need to motivate people to understand the importance of the change and to help make it happen. He pushed toward greater standardisation of parts and shrank the workforce from 161. as they proved during last fall’s sixty-nine-day strike. . composed of members of all these groups.

riveting. . say. You can see. now done in-house. He is obviously sincere when he talks about making the workers partners rather than just a factor of production. In keeping with the new attitude. Boeing is putting more time and effort into the hiring process. 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 ‘worldclass competitiveness’. rather than intimidate. senior vice-president of human resources.’ says Larry McKean. In settling the latest strike. In April. why it used to take the company eighteen months to deliver a product as complex as a giant jet. Thus such questions as: How does a worker respond in a confrontation with a supervisor? None of this is new in manufacturing circles (Forbes. When Phil Condit chats up workers on the factory floor. a fundamental change in the way we think. the customers tell us our planes cost too much and take too long to deliver. at least symbolically. qualified assembly mechanics.’ says a frantic Robert Boudreau. the team must go on overtime. Boeing agreed to give the union warning on any major subcontracting deals and to retain surplus workers for other jobs in the company. say. A cynic might say that Boeing wants to weed out potential malcontents. Selection of supervisors and managers. ‘It has been a cultural change. It would get maybe 2500 applicants and hire perhaps 1500. To underscore the emphasis on communications. is hard-nosed about subcontracting. announcing that it would hire 8200 new hands. Boeing now sends annual reports to all its employees. Front-line managers – and the workers below them – are evaluated on how fast they can get the planes out the door. just so many bodies in the machine. 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. The company also put 75. The message: We no longer have it made just because we’re Boeing. but we don’t really have time. The machinists’ union is responding – cautiously. Traditionally. he’s not just going through a public relations exercise. 9 Oct 1995). will change. union and management compromised on outsourcing. act and do. ‘In the old days we would have fired them. or what the union calls ‘off-loading’ work. Boeing makes 52 per cent of its planes’ parts in-house and wants to shrink down to 48 per cent. 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. the workforce.194 UNDERSTANDING PROJECT MANAGEMENT READINGS E2 Multiply this sort of shortcut throughout a company as large as Boeing and you can see how much expensive time was wasted before. Boeing also said it would put applicants through extensive aptitude tests. president of Boeing’s Defence and Space Group. as he motions to a schedule that indicates his team is days behind on its work.’ says C. not just shareholders. president of the local that represents the Boeing workers. It says it is willing to relax job specifications to allow cross-training of workers. it would run a classified ad in the newspaper for.000 employees through a program that discussed the realities of a tough market. Management thinks it can save an estimated $600 million annually by such outsourcing. 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. but it’s a big change for Boeing. a lead mechanic on the 777 wing line. Gerald King. ‘They’re trying to get into cross-training. If the work falls behind. too. and making him a supervisor of rivets. But William Johnson. too. when Boeing needed additional hands. Rather than promoting a person who is good at. the company will look for managers who can motivate.

that is. The key management skills required for the effective management of projects will be discussed in the light of the case study.’ But Mahoney doesn’t deny that Phil Condit is doing his best to reconcile those seemingly irreconcilable objectives. Condit plans incentive pay and rewards for achieving individual performance goals. But at the same time they have a responsibility to get the best product out on time. he says. he demonstrated . people no longer are. He altered selection processes so that he got promotees or new entrants with commitment and with the right interpersonal skills. The biggest change made by Condit on the 777 project was the organisational design. So he was seen popping up at the plants unannounced. they just walked upstairs for an answer. He asked supervisors to leave so that he could hear the ‘real story’ from the final assembly workers.000 people spread over 76 million square feet of factory floor? No. By talking directly to the workforce. This structure was supported by teams. 2. This concern he translated into better pay and conditions. He was an excellent motivator as he adopted a policy of being viewed as facilitating the project. He did this by organising hundreds of integrated design-build teams. the company is really interested in my welfare’. ● Communicating. Visit the restored converted barn where William Boeing first began building planes. Designers were on the top floor. Discussion points 1. the Boeing 777. 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. If production people had a problem with a blueprint. which removed the barriers between the design and production units. He says he wants his employees to think. Does this management approach resemble the work organisation used in project management? Outline solutions 1. by breaking down the procedural walls within the company under the slogan ‘Working Together’. general counsel of the engineers union. sums up the dilemma neatly: ‘You just can’t have peer democracy in the workplace. but Condit is determined to show that at the new Boeing. Can Boeing get back to that as an employer of over 100. dressed in a way that did not set him apart from the workforce. as shown in the article. To make this point. He saw workers genuinely as partners in the project. His predecessor had driven down the costs in the organisation. Philip Condit demonstrated his leading from the front when overseeing the development of the ‘triple seven’. 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. Discuss some of the key management skills needed to run a project or enterprise. And there can be no doubt: Condit really means it.ENTERPRISE MANAGEMENT 195 UNDERSTANDING PROJECT MANAGEMENT Daniel Mahoney. putting his money where his mouth was. We have these extraordinary leaders in management who are willing to treat the rank and file with great respect and listen to their ideas. while aircraft are now a commodity. Condit communicated his vision for cooperative working on the project in a variety of ways. ‘Working Together’ challenged all previous ways of operating and brought together the design and production areas of Boeing. production was downstairs. The article states that the previous CEO Frank Shrontz considered interpersonal skills to be one of the most important characteristics of his successor. so Condit had to focus on people. ‘Gosh. ● Leading. He rightly says that many new ideas are just old ideas the people forgot.

It would give the recognised union warning about any large outsourcing deal but would re-deploy any surplus workers. The union was cautiously starting to relax job specifications to allow this process to happen. His removal of the model planes at Head Office replaced by pictures of the world’s children. 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. no amount of people management would keep people at work. could be sorted out very quickly. The time pressure of reducing schedules was constant and an important performance indicator was the speed of delivery. such as the sizing of the metal deck. Technical expertise was no longer sufficient . He added to this impression by his karaoke activities at a charity event. Boeing compromised about it. Annual reports were sent out to all employees and 75. He turned up and did not appear as a ‘suit’. In the past. while retaining responsibility for it. Delegation.196 UNDERSTANDING PROJECT MANAGEMENT READINGS E2 ● ● his concern for the successful outcome of the 777 project. He effectively listened to what he was told. He signed a picket sign with the words ‘We all need to work together’. Negotiating. could talk directly to the designers when there was a problem with his engineering plans. alienating the people he wanted to talk to by appearing as a remote figure from Head Office. that is. Delegation may be defined as the handing over of authority for a piece of a boss’s work to a subordinate. it would have sacked them. There were attempts to increase the flexibility of the workforce by cross-training but there was a need for time to do it effectively. as may be seen in the changes to recruitment and reward policies. a tool-builder. However. again communicating his desire for the common goals of the project. Boeing is in business. 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. He gave out a consistent message of collaborative work. This was an issue to be negotiated in the future. In the final analysis. The negotiations over outsourcing revealed that though this was seen as an effective way of reducing costs ($600 m was quoted in this article). They were seeing in their daily lives that changes were being made. In the article there are examples of delegation and of non-delegation. This empowerment from his supervisor meant that problems. The concessions on outsourcing showed that there was a determination to listen to what the company was being told and they would act on it. as seen in the number of strikes there were. Condit led the way on this. It was not available. even to the extent of discussing a disputed contract face to face with striking pickets. There was the acceptance by the counsel to the union that Boeing had to get the best product out on time. and if it did not produce planes to customers’ delivery requirements and at reasonable cost. again sent out a message that conformed to the idea that people mattered. A reinforcement of the delegation of responsibility could be seen in the new criteria for hiring new staff and for promotion. An example of delegation was seen in the way Tony Russell. he would have delegated the everyday activities of management because of the size of the organisation. Teams had to work overtime to make up the time. though the reality was that the planes had to be smarter. He had to set his own managers the example. His non-verbal communication (the way he dressed) reinforced his aim of collaborative working.000 employees were put on a training programme so that they could grasp the market problems that Boeing was (and is) affected by. Employee relations were not always excellent.

you’re sacked) or manipulation (if you do what we ask. Using the Boeing example. . enabling Boeing’s attractiveness to its customers.000 in 1996. Condit found himself in a situation where much change had been imposed on the organisation by his predecessor. The new reward and incentives package was being negotiated to support the acceptance of greater responsibility and tighter delivery schedules. He involved the workforce by communicating with them directly and by effectively listening. 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. it managed the empowerment of staff so that they saw themselves as teams with goal congruence. for example). This had been based on radical cost-cutting by standardising parts. Boeing negotiated the new deal on outsourcing with the retention of the surplus workers. is expressed by reference to the evidence in the article or case study. His way of change management was to educate the workforce in the realities of the market. ● Change management. Condit could not stop the process of change.700 in 1990 to 108. It facilitated cross-training. though the time constraints had themselves proved a constraint. Note that the desired information that the Examiner wants from you. production. The problem was fixed between them. organisations may make incorrect decisions about itself and its projects. 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. finance and sales to get a holistic view of the organisational objectives. The proselytisation of this team spirit by Condit under the slogan ‘Working Together’ emphasised the need to focus on the super ordinate objective: To deliver fast to customer requirement. Teams are a critical feature of projects which help organisations achieve future objectives and ensure the future life of the business. The creation of the design-build teams set up synergies that helped save time and money. The old methods of change management under the military style of management would have included coercion (there are no jobs in this section. reducing delivery times and reducing staff from 161. you’ll be rewarded: if you don’t. marketing. There were no artificial barriers to the solution of the problem because they both had the same objectives: swift delivery of the best product. there was great synergy between the designers and production staff because of attitude and close proximity. the student. 2. The process of dealing with and managing organisational change will require input from diverse areas such as design. He discussed the situation with them in detail (the discussion about the new contract with the strikers.ENTERPRISE MANAGEMENT 197 UNDERSTANDING PROJECT MANAGEMENT in itself: the interpersonal skills and commitment had to be consonant with the new culture of empowerment. as customers felt that the planes were still too costly and took too long to be delivered. If Boeing could not get back to that ideal as a large organisation. and by giving them annual reports so that they could see the figures for themselves. in the early stages of the organisation. Without this. This approach would save time and thus money. you’ll be sacked). Frank Schrontz.

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Requirement Briefly explain the phases of the project life cycle showing. (10 marks) 199 . there are separate functions for Production. he is proposing that the best way to manage the process would be through introducing a matrix structure and the use of cross functional teams. the company must improve its practices involved with new product development (NPD). at a recent meeting of the functional heads. 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. The Marketing Director feels that the functional structure is impeding the NPD process. Requirement Describe the advantages and disadvantages of H Company using a matrix structure in project management work for NPD. where possible. and the time taken to get from the product idea to launch needs to be much quicker. The company has a functional structure with the Marketing Director heading up the marketing function. However. the potential difficulties in using a matrix structure offset the benefits. However. Human Resources. there are new competitors entering the market with innovative new product offerings.Revision Questions 4 Section A type questions Question 1 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. The Marketing Director is aware that to retain market leader position. Having recently read an article on organising for NPD. how each phase relates to the ZM company. (10 marks) Question 2 H Company designs and manufactures sports equipment and is currently positioned as the market leader in the industry. In the report. whilst operating in a growth market. the Research and Development Director said that. the R&D Director heading up the function responsible for research and product development. Finance. in addition. However. in his experience. Sales and IT.

the project manager. It has several years of experience in installing small-to medium-scale telecommunications networks throughout Europe. process. Figure 4. Many of the project team at Dantec consider Richard to be lacking in managerial experience to handle such a large project. together with the roles they play in the project and their countries of origin. he successfully won the contract! . Richard Norton. and he has only very recently moved into a managerial role.5 shows the firms. The client The client. (10 marks) Section B type questions Question 5 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. After several months of tendering from numerous suppliers. and has worked with Comnet previously on a successful small-scale network installation. Comnet selected a UK company called Dantec to service the project. spent last year leading a team of engineers.200 UNDERSTANDING PROJECT MANAGEMENT REVISION QUESTIONS E2 Question 3 Requirement The project manager does not and cannot complete a project on his or her own. programmers and software analysts from Comnet in selecting a contractor who would supply the telecoms network. (The selection was based on numerous financial selection techniques and cost-benefit analysis. and product involved in a project. It has recently gone through a process of reorganisation (1996) and has since been investigating the potential of a new telecommunications network. It requires effective teamwork and team motivation. head of telecoms development. Explain what the project manager can do to help foster a motivated project team environment. (10 marks) Question 4 Requirement Explain the role of the project manager in respect of the: ● ● ● people. Christian Rueber. although this is his first role in charge of a full network installation. is one of the major telecommunication providers in Germany.) The final contract was signed between the two parties in October 1997. However. The prime contractor Dantec is a telecommunications development and installation company based in the north of England. has been in charge of the project throughout the tendering process. the management team at Dantec are more than happy with his progress –after all. Comnet. Richard’s background is as a telecoms engineer.

entered into negotiations with Yotamo and Exactest. 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. Each member of the team is made aware of their individual team’s responsibilities in the overall project. a computer manufacturer in the United States.5 Project roles and country of origin Having signed the contract. Dantec entered into a contract with Solar. as prime contractor. with the approval of Comnet. is placed in charge of the Comnet project requirements. 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. Solar’s role Solar. Dantec have many years’ experience of working with Solar on several previous successful projects. . Responsibility for integrating the hardware and software components developed by Solar. including the delivery dates for the subcontracted work. Dantec.ENTERPRISE MANAGEMENT 201 UNDERSTANDING PROJECT MANAGEMENT COMNET The client (Germany) DANTEC The prime contractor (UK) SOLAR Major hardware supplier USA YOTAMO Major software supplier Japan EXAC TEST Software testing and integration USA Figure 4. Yotamo and Exactest also rested with Exactest. irrespective of which firm wrote the software. the final master project plan is complete. for the required computer hardware as well as the operating systems needed to implement and control the network. the general manager of networks coordination division. after several further planning meetings. Phil Rogers. well renowned for its high-level skills in integration. 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. was responsible for integrating all project deliverables to the final client in Germany. where they begin to draw up a schedule of events and key milestone activities. Richard gets together his project team for the first project coordination meeting. By the end of October. proposed in the master plan drawn up by Dantec the previous month. Phil Rogers agrees the dates and targets set for Solar. In November.

23 May 2002. responsible to the central government Department of Health. called the ‘Healthweb’. and all data exchange was done by means of telephone or by post. (25 marks) . (b) the project board. most information within the hospitals and medical centres was kept by a manual. (c) the medical and administrative users (in medical centres and hospitals). (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. (8 marks) (b) an assessment of main responsibilities in relation to both the main client Comnet. The SRHA is one of four regional government-controlled authorities. You are a senior management accountant working for one of the southern region hospitals. it is your responsibility to communicate with all SRHA medical centres and hospitals on the progress of the project. as part of the project team. the SRHA is not responsible for private medical centres and hospitals). Your answer should include: (a) an assessment of his main tasks internally as the project manager at Dantec.e. 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. Prior to the project commencement.e. Include in your answer a discussion of the potential conflicting project objectives of the above stakeholders. 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. Each regional health authority manages and controls the provision of medical care to the public within its local area. and. and the major supplier Solar. The SRHA is responsible for fifty medical centres and ten hospitals within the region. all of which are publicly funded (i.202 UNDERSTANDING PROJECT MANAGEMENT REVISION QUESTIONS E2 Requirements Critically assess the role of Richard Norton of Dantec in the overall telecommunications project. as of today.. 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: (a) the project sponsor (i.. the central government). paper-based system. (12 marks) (Total marks 25) Question 6 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.

Solutions to Revision Questions Section A solutions Solution 1 4 Project planning. Completion. ensuring that performance has been evaluated and is satisfactory. and checking that a list of learning points has been made for reference for future projects. 203 . the board of ZM will have a greater understanding of amendments required to the company’s systems. on an appropriate timescale and to the expected level of quality. There is a lot of detailed work involved in this stage. checking that all payments have been made. the latter option appears to be more favourable. The last stage of the project life cycle is completion of the project. It is likely that the solutions will be analysed by a small working group with the responsibility of suggesting one solution to the board. Implementation. Development of a proposed solution. If the ZM company decides to use external contractors. a contract will be drawn up between ZM and the contractor containing details of the proposed work. Responses to the ITT will include details of the work to be done. In this situation. An Invitation to Tender (ITT) will be issued to obtain quotes for this work. then proposals will be required to address the needs within ZM and propose solutions to those needs. 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. There are various activities that must be carried out before a project can be termed ‘complete’. These proposals can now be reviewed and the possible solutions discussed. These activities include: ● ● ● ● confirmation that all deliverables have been provided. 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. the board of ZM have recognised that a new computer system is required. The initial phase of any project involves the identification of a need or a problem that needs to be resolved. The stage is complete when the board of ZM is satisfied that the new system has been implemented. In this situation. Given the lack of in-house expertise. along with time and cost summaries for that work. as well as ideas concerning the costs and benefits of those changes. The stage is completed when the contract is signed. When a choice of solution has been made. However. timescale and cost to be incurred. On receipt of this information.

Inevitably. but again. Lateral communication and cooperation should be improved. cutting across boundaries which can be stifled by normal hierarchical structures. the life cycle is unlikely to be less than 6 months. Solution 3 Guidance and common problems This question again provides you with an opportunity to demonstrate your basic project management knowledge. creating flexibility across the project. One of the main problems is associated with the lack of clear responsibilities and potential clashes and tensions between the different priorities of the project tasks and the specialist function. However. you must be prepared to apply this knowledge to a scenario. There is also the question of who should do the appraisal of their performance? The complexity of the matrix structure can often make it difficult to implement. with the aim of speedy implementation It can improve the decision-making process by bringing together a wide range of expertise to the new product development process. broadening a specialist’s outlook. How does the project manager create such an environment? By encouraging participation in project decision-making and by delegating decisions to the team members. This type of structure is based on a dual chain of command and is often used as a structure in project management.204 UNDERSTANDING PROJECT MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 The length of project life cycles will vary from project to project. Employees would report both to a functional manager and a project manager. As the Marketing Director suggests. 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. in the case of ZM. The matrix structure is particularly suited to a rapidly changing environment. Given the significance of the systems changes. the ability to develop new products and get them to market quickly requires the cooperation of a range of individuals from various functions. From an employee’s perspective it can facilitate the development of new skills and adaptation to unexpected problems. The project manager needs to understand his or her team members first in order to understand what motivates them. the Research and Development Director is also correct in his view that there are downsides to the matrix structure. Each individual would have a dual role in terms of their functional responsibility as well as membership of a project team. In the case of H Company it would involve establishing a cross functional team to design and develop new sports equipment products. an individual could belong both to the marketing function and to the NPD project. Employees may end up being confused by having to report to two bosses and deciding whose work should take precedence. H could fundamentally reorganise to form a matrix structure. this structure does bring a number of benefits to NPD project work. Project management . individual projects may last well in excess of 1 year. conflicts will arise due to the differences in the backgrounds and interests of staff from different functional areas. thus encouraging involvement and ownership. Solution 2 As the Marketing Director in H Company has noted. Whilst there are benefits. A straightforward question such as this could appear in this examination. For instance. such as that facing H Company.

The project process itself will have to be managed. Product. 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. encouraging them to put forward their own ideas and suggestions for project improvement. including: technicians. the responsibilities of Richard Norton are as follows: ● coordinate complex internal team. network experts. and also provide strategic progress reports for the decision-makers at the client’s. The manager will therefore need to delegate and monitor the work of the more junior members of the team. This split of jobs is likely to be quite difficult and time-consuming. This objective implies that the manager will have significant project management skills and be able to manage the three ‘Ps’ outlined below. ● project planning and scheduling. programmers. The manager will therefore be involved in checking that the specification has been met. Dantec has the major responsibility for coordination of all parties involved in the project. installation. . and appropriate sign-offs and review meetings are held to confirm project completion. It is therefore a useful memory jogger. People.ENTERPRISE MANAGEMENT 205 UNDERSTANDING PROJECT MANAGEMENT techniques for motivation may include regular project meetings whereby team members can participate and air their views and put forward their experience. ‘People’ in this sense means not only the project team. Solution 4 Guidance and common problems The question provides a useful guide for remembering some of the key roles of the project manager. Also. finance. both internal and external. Section B solutions Solution 5 Role of Richard Norton As the main contractor. that is Richard Norton is the link point to all parties. The manager needs to manage the people involved with the project. Process. 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. (a) Internally. The outcome from the project will (hopefully) be the completed installation of a new or revised system. the project manager should have regular contact individually with team members. 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. marketing. and so on. but also the client staff who will be working with the project team. He should be the focus of the negotiation process. Part of the ongoing monitoring of the project is therefore directed at ensuring the project does provide the finished project. setting time scales and milestones (and ensuring that all parties agree and achieve these project targets). The use of Gantt charts or network diagrams will help in this respect.

● There are potential team leadership problems as a result of his inexperience in a senior management position.206 UNDERSTANDING PROJECT MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 control of coordinating internal deadlines. His technical skills are strong as a result of his previous background. this should help to gain team confidence (but may be insufficient to build the confidence of non-technical members). This will be of importance when in negotiations and discussions regarding technical issues. good project managers must be able to balance this technical ability with a strong managerial ability. The project sponsor is usually the party responsible for payment of projects. Therefore. ● The primary communication link between the complex supply chain within this project and the final customer. therefore Richard Norton could build support by proving his technical ability. finance. to ensure agreement and consensus. (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. as the company responsible for carrying out the GPC project. However. ● the formulation of internal resource needs: people. particularly in a multi-disciplined team (in fact. ● Ensuring that technical negotiations take place between the various contracted parties and that. time. ● team motivation. ● control of the financial budget. Communication with some team members may be difficult. but in this case the amount of funding from the central government is not clear. ● preparation of the project master plan. the team is already slightly dubious about the choice of project manager). materials. which may be difficult to foster when the project manager has little prior experience at this level. This could lead to lack of motivation. again. the project manager will need to work through the project sponsor for any contractual dealings with T. He may also have a lack of contractual negotiation experience. particularly in such a large and complex project as this. ● Contractual negotiations for all parties. 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 is likely to be important in such a large project with high financial resource requirement. (b) Responsibilities to Comnet and Solar. Technical knowledge will obviously be important in this type of project. is contracted directly by the central government (the project sponsor). particularly those with experience who may resent a project manager with less experience than themselves. Key skills required in project management include both leadership and inspiration. Solution 6 Project management relationships and conflicts (a) Project manager and project sponsor T. It will be important for Richard Norton to foster and build on management support as early as possible in the project’s life. ● The coordination of internal and external activities and milestones. Externally. ● internal negotiator and arbitrator. agreement on technical issues is reached. neither . Richard Norton also has a number of key roles.

Direct communication between the project manager and the project board is necessary. The project board will be concerned with the achievement of management/business level objectives. as the project sponsor. However. In addition.ENTERPRISE MANAGEMENT 207 UNDERSTANDING PROJECT MANAGEMENT in the initial funding nor the on-going running costs. the on-going costs and workloads and the patient record security. The project manager has little direct reporting/communication with the central government. The project board is responsible for the overall running of the project. (b) Project manager and the project board The project manager is responsible for achieving the objectives set by the project board. while minimising their workload. There is also likely to be conflict between the sponsor and the project board over funding. it is evident that this funding has not been easy to obtain. 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. Although a technology fund has been set up by the central government. . However. The administrative and medical staff will be evaluating the operational day-to-day objectives of the project. Possibility of conflicting objectives The sponsor’s objectives are the achievement of improved service to patients. Therefore. as responsibility for the project progress is mainly to the project board. and ensuring that training is effective. with on-going regular reporting of project milestone review meetings. The first role of the project manager is to ‘sell’ the benefits of the new system to the users. the project manager will need to manage both medical and administrative staff expectations of the system as the project progresses. The objectives of the users are to care for their patients. in particular that the project improves business efficiency and effectiveness. Staff are likely to have concerns about the implementation workload. Good communication between the project manager and the end users is essential to the implementation of a successful project. causing a financial burden upon the SRHA and the individual hospitals and medical centres. the project manager will need to work with the sponsor to resolve potential conflict over project costs. the central government are sending out rather mixed signals by allowing individual hospitals and medical centres to decide upon their individual method of operation. (c) 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. and their objectives are to delegate the achievement of the sponsors’ targets without disrupting the achievement of their own business objectives. who will seek to minimise their workload while providing good care for their patients. This may conflict with the objectives of the staff. will be evaluating strategic level objectives and who will be concerned with ensuring that the whole project is not seen to waste public resources. The role of the central government in this project as a fund provider may cause conflict between central government and the SRHA. A number of doctors have already expressed concern over resources being spent on the new system rather than on direct patient care. as without their backing the project is unlikely to succeed. who. the ultimate achievement of long-term project objectives is to the central government. but the central government has made it quite clear that this project is not discretionary.

208 UNDERSTANDING PROJECT MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 In addition. However. public funds must not be seen to be wasted. the central government and project board may be concerned with funding and cost minimisation. thus reducing the value of the end product. whereas the end users may see this as cost-cutting. financial objectives should not be primary ones. . As a public sector project. Quality and customer perspective should be of more importance to all of the stakeholders.

5 The Process of Project Management .

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produce a basic project plan. apply a process of continuous improvement to projects. therefore the different ways of minimising and managing project risk will be discussed. identify methodologies and systems used by professional project managers. Different aspects of project control will be explored and the project methodologies that can be used (such as PRINCE2).The Process of Project Management 5 LEARNING OUTCOMES After completing this chapter you should be able to: produce a strategy for a project. including some of the tools and techniques that can help the process of project management. along with consideration of how learning from projects can facilitate continuous improvement. incorporating strategies for dealing with uncertainty. The different aspects involved in project planning will be examined. The final stage of the project life cycle involves project closure. discuss the value of post completion audit. It will start by exploring the project initiation stage. The different activities at this stage will be discussed. in the context of a simple project. Risk is a feature of virtually all projects. setting of project objectives. To ensure that the outcomes of a project are delivered. Project planning is crucial to the effective management of any projects.1 Introduction This chapter develops on some of the themes introduced in the previous chapter by working through the different stages involved in the project life cycle. identify the characteristics of each phase in the project process. including the evaluation of proposals. compare and contrast project control systems. apply key tools and techniques. 5. developing project proposals and the role of feasibility studies. controls need to be in place throughout the life of a project. 211 .

3. . At this stage. or in non-profit-making organisations objectives will be to improve the standard of living or education. The scope.3 5. This stage is concerned with measuring the project’s progress and assessing whether it differs from the plan. providing leadership and coordination to project team members and others (e. 5. budget. This stage stresses the need to keep resources and team members focused upon the project tasks. It is usually a function of the board of directors to determine the high-level organisational objectives. the key individuals will be brought together to form the project team.2 Identifying project proposals Turning objectives into realisable projects can be difficult for organisations for a number of reasons: ● ● ● Prioritising objectives is not always straightforward. 2. subcontractors or consultants) that will result in achieving project objectives. There is likely to be more than one way to achieve any objective. At this stage. Objectives are those things that the organisation wants to achieve. 5. which may in turn lead to a goal change. performance specifications and resources. Closing. Controlling. A project becomes a strategy to achieve an objective. strategies will become programmes of change.212 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 5. This phase is about ensuring that the project is finally completed and conforms to the latest definition of what was to be achieved. At a strategic level. This involves defining the resources required to complete the project. Executing. The stages are: 1. and so on of members.1 Project initiation Setting project objectives Projects are initiated when a need or an objective is identified. developing a budget and planning how the project team will achieve the constraints of time. Not all objectives can be attained within the same time frame because of limited resources. corrective action needs to be taken. Initiation. If it differs. and negotiation. this may lead to re-planning.g. as the key organisational strategies are identified and increasingly defined by discussions. According to the Project Management Institute this can be represented by a five-step process. However. top-level objectives are profit-oriented. devising a schedule. Typically. Planning. 5. a project manager may have very little or no input at all in the process of identifying projects. objectives and customer expectations of the project will need to be determined. 4. For example. These objectives are then converted from ‘whats’ into ‘hows’ by undertaking projects.2 The project management process The project management process follows the stages of the project life-cycle. This is sometimes referred to as project implementation and performance and involves putting the plan into action. the project manager must decide among alternatives for solving problems.3. 3. as different members of the organisation will have different priorities. This phase sets out the development of a vision for a project and the establishment of goals and objectives. brainstorming.

a research project into an endemic disease might achieve this. Establish the overall feasibility of each project. it must be clearly defined and appropriate to meet the organisation’s objectives. Determine the need or opportunity for each project. 9. If a project requirement is set out clearly from the outset. This process of identifying objectives. continual changes and customer dissatisfaction. rating them according to need and organisational importance. Also.4 Setting project requirements A requirement is a statement of what is expected of a project or product. 6. 1998). the project has a greater chance of success. 8. Review project list. the proposals for action become more detailed and more accurate judgement can be made on costs and benefits. As yet. 4. nor determine whether it is feasible. 2. and less chance of escalation of costs due to rework. 3. and finally establishing the links between objectives and strategies. refining and classifying them. leads to the final formulation of a project. List potential projects. gradually a set of priorities will emerge. that is those strategies that are considered the most effective to realise objectives. It is likely at this point that the organisation will have a number of strategic options. Eliminate unfeasible or inappropriate projects (based on issues such as cost. A requirement is different from a specification. 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. Establish rough delivery dates. 10. Checklist for project proposal selection Prioritising potential projects 1.3 Formation of project proposals As the organisation determines its objectives and the strategies to achieve these objectives.3. conflict with other projects). no attempt will have been made to determine the benefits of achieving a particular objective. Obviously. . as the organisation identifies its key objectives more clearly. This will be considered later in this chapter. lack of technology. 5. it is important to identify those strategies that provide the most benefit and achieve the organisation’s most important objectives. conflict with long-term organisational objectives. Prioritise the rest. Establish preliminary costings and budget schedule. that is a project cannot exist without an objective to achieve. skill.ENTERPRISE MANAGEMENT 213 THE PROCESS OF PROJECT MANAGEMENT if a corporate objective for a pharmaceutical company is to expand its Asian markets. feasibilities and risks with project team and senior management. 7. objectives. whereas a specification is the statement of the detailed characteristics of the project or product such as size or performance criteria. 5. As organisations are unlikely to have the resources to carry out all strategies. Select the most important project. this must be done before a project can be carried out. Establish the risk associated with each project. in that the requirement is the statement of the reason for what is being done or developed. 5.3.

they can be assigned a weightage indicating the relative importance of one feature to all others. with two or three alternative proposals for change. Feasibility studies compare the ‘no change’ option of achieving objectives. that is will it require further testing prior to usage or are we confident that the material. customer and economic conditions. a number of technical. The degree of disruption during the construction and installation phase. Other technical considerations could include the following: ● ● The ease of use of the technology. it is important for project managers to understand the process of feasibility assessment. Technical feasibility There are a number of key aspects regarding technology. Social and ecological feasibility It is becoming increasingly necessary to assess social factors affecting feasibility. social impact and risk sensitivities. However. Criteria used are technical capability. These may include awareness of the social issues within a group or office (e. in order to examine their feasibility (i. 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. When important features have been identified. however good the concept and design. Features are those elements of the project that are considered to be important or necessary requirements.g. These are likely to vary greatly and may require numerous experts to evaluate them.3. 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.) A software developer will need advice from hardware manufacturers before developing programs for a particular computer system configuration. but not always. fit with business goals. when building the London Eye. financial benefit. Features analysis identifies those features in the requirements likely to be vital to the final outcome of the proposal. focusing attention on the features of any requirements that are going to be important in the achievement of satisfying a need. introducing a . Features analysis is a further method used to gather information regarding different products in order to aid comparison and evaluation. technology and processes have been thoroughly tested and are readily usable and available? Applicability.e. that is. These were resolved. The technical features of a strategy that need to be considered are as follows: ● ● Development. (The delay in opening was caused by safety concerns which was not good for the image of the project. Marketing campaigns must take account of specific market. how achievable they are). and requirements and specifications have been identified. environmental and safety issues needed to be evaluated by a number of experts.214 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 5. engineering. For example. the next stage is to identify those strategies that should be investigated.5 Assessing project feasibility Once objectives and strategies have been identified and ranked. Sometimes the potential project manager is involved in the feasibility study stage.

the production processes and the disposal of the product at the end of its life. Exercise Make a brief list of technical.) within a local town by building a recycling plant. It is important for organisations to consider the raw material input.ENTERPRISE MANAGEMENT 215 THE PROCESS OF PROJECT MANAGEMENT computerised system). with high potential financial gain. 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. 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. may divert the company from its primary goals. 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. or larger social awareness regarding the effect of projects or products on workers or employment. cans. newspapers. ecological and social questions you would need to ask to assess a proposal to collect and recycle household waste (such as bottles. etc. Environmental considerations may be stimulated primarily by health and safety legislation. 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. Cost-benefit analysis helps to identify and evaluate the costs of the proposal over its anticipated life . Fit with business goals Some great project proposals. Financial feasibility A technique often used in a feasibility study is the cost-benefit analysis.

Capital costs will include the purchase price of an asset (e. if a project proposal requires funding. whether it is a one-off cost or recurring. when it occurs. The other side to cost-benefit is the identification and evaluation of the benefits of the project over its life. it is necessary to identify: ● ● ● ● its value (in monetary terms or in terms of benefits). equipment. Sources of finance include the following: ● ● finance borrowed from a lending institution (bank) capital invested by shareholders . repair. Revenue costs Any cost incurred by the project other than for the purchase of assets are revenue costs. plant) plus any additional costs of installation and maintenance. These costs are those incurred on a regular basis and include not only repair and running costs of the assets but also the general overheads not necessarily directly incurred by the project. For every item of the project proposal. maintenance.g. when payments would be due and how much interest would be paid.216 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 (such as purchase. Examples are costs such as rent and rates. whether it is capital or revenue. The different costs can be considered in terms of: Capital costs These are incurred in the acquisition of assets. The project itself will also incur direct revenue costs such as materials and the salaries and wages of the direct workers. etc. land and building. 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. it is important to know exactly how much it requires.). Therefore. general management salaries and depreciation. Financing costs are usually incurred as interest charges that have to be paid on the balance of funds outstanding. building. Capital expenditure usually occurs at the beginning of the project. 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.

Revenue costs Rent and rates Staff costs Utility expenses. revenue and finance costs associated with building a factory. but here is a brief reminder of the main financial appraisal techniques using definitions from CIMA’s Official Terminology (2005 edition): ● ● ● The payback method. you may be required to discuss their relevance to a project decision. Accounting rate of return. Also. this is a form of return on capital employed. Finance Bank loans for land. any political sensitivities need to be identified. ● Although it is unlikely that you will be asked to carry out detailed calculations of the above financial techniques. The discounting of the projected net cash flows of a capital project to ascertain its present value. The assumptions upon which the financial feasibility is made need to be made clear. Return on investment. Solution Capital costs Land purchase Building costs Equipment purchase.ENTERPRISE MANAGEMENT ● ● 217 THE PROCESS OF PROJECT MANAGEMENT retained profit from the business grants or subsidies from government (for specified projects only) Exercise List the types of capital. equipment. you would not rely on a single measure to determine the financial feasibility of a project. Discounted cash flow. buildings. The time required for the cash inflows from a capital investment project to equal the cash outflows. . Financial evaluation techniques A detailed analysis of financial evaluation techniques is beyond the scope of this syllabus. since these are the most common reasons for project failure. Based on profits not cash flows. Remember. A form of return on capital employed comparing income with operational assets used to generate that income.

The following sections provide an overview of risk terminology and the various approaches to its management. Risk identification means recognising that a hazard exists and trying to define its characteristics. the monetary cost of the worst possible potential loss associated with that accident – M. Most evidence suggests that.3. in that we do not think logically about risk. the likelihood that the event will lead to a loss – p(L). the likelihood of an event occurring – p(E).6 Risk and uncertainty Identifying different types of project risk will allow us to plan to reduce them or avoid them. It can be considered to be the product of three values: 1. Quantitative risk This is a risk that can be expressed as a financial amount. 3. Socially constructed risk may well exceed quantitative risk. but some way of categorising risks is useful. Risk can be defined as the probability of an undesirable event. An example of this can be seen on commercial airlines. 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 . Qualitative risk Since risks cannot always be quantified accurately. however. multiplied by the financial or nonfinancial consequence of the event. so when seeking to put people’s minds at rest. make people feel a lot more secure. in the event of a serious accident. It does. We are all ‘risk illiterate’. Socially constructed risk People often believe some things to be risks. If we look at a subjective assessment of the scale and likelihood of risk. quantitative risk assessment may not be enough. We must also manage people’s perceptions of risk. 2. Risks can be classified under three headings. even when statistics indicate they are not (and vice versa). we need a pragmatic solution. The value of the quantitative risk is therefore p(E) p(L) M. wearing a ‘lap strap’ beat belt on a plane does nothing to reduce the risk of injury. Estimation of risk is usually based on the probability of the event occurring. so it reduces the socially constructed risk.218 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 5.

in our risk management programme we should address the category A risks first. then the Bs and so on. 2. uncertainty is impossible to evaluate because it is impossible to assign a probability to an uncertain event. it can be used to assist in project selection.ENTERPRISE MANAGEMENT 219 THE PROCESS OF PROJECT MANAGEMENT Having done this. ● Leave the risk with the customer or supplier.3. Transference ● Subcontract the risk to those more able to handle it.3. it can be used to identify strategies needed by the business (this use of SWOT was discussed in Chapter 1). Risk resolution – producing a situation in which risk items are avoided or reduced. Risk analysis – assessing the loss probability and magnitude for each item. applied to a whole company. 5.7 Uncertainty Unlike risk. Examples of risk management approaches would include the following: Avoidance ● Abort the plan. transferring or reducing the risk. Managing risk Risk management (RM) comprises risk assessment (identifying and analysing risk) and risk control (taking steps to reduce risk. we cannot put in place management controls to reduce the probability of its occurrence. If the event is uncertain. ● Escape the specific clause in the contract.8 SWOT analysis SWOT is an analytical tool that can be used in two ways: 1. An example of a contingency plan is given after the following SWOT analysis. Risk management – deciding how to address each risk item. applied to a specific project. we must use contingency planning to construct a series of action plans. 5. such as a specialist supplier or insurer. Instead. Do not worry too much about the Es. simply because we do not know that probability. ● Invest in additional capital equipment or security devices to reduce the risk or limit its consequences. . Risk management can be seen as a series of steps: ● ● ● ● ● ● Risk identification – producing lists of risk items. perhaps by avoiding. Risk monitoring – tracking progress toward resolving risk items and taking corrective action. Risk prioritisation – producing a ranked ordering of risk items. Reduction ● Take an alternative course of action with a lower risk exposure. provide contingency and monitor improvements). each to be implemented if an uncertain event occurs.

Weaknesses. 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. the local furniture store is having a sale. The four categories of SWOT can be explained in more detail as follows: 1. or provides the organisation with sufficient opportunities to do so in the future. construction of the fireplace and rewiring the lounge. such as its competitive advantage or the skills and competencies and morale of the individuals within it. 4. the project is over budget in the areas of plumbing. Strengths. They include skills that are lacking within the organisation as a whole or the project team. The strengths and weaknesses normally result from the organisation or project’s internal factors. 2. SWOT can establish whether a particular project proposal has sufficient strengths that are compatible with the achievement of the organisation’s objectives. 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.220 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 SWOT stands for Strengths. The project’s SWOT analysis might look as follows: Strengths: ● ● relationships with key sub-contractors are good. These relate to events or changes outside the organisation or project. the supplier says that the paint we have ordered is not in stock with the supplier – it may take 6 weeks to arrive. When evaluating a project proposal. These are the things that are going badly (or work badly) in the organisation or project. Weaknesses. for example in its external business environment. He says he won’t know for sure until he is part way through the work. the builder is concerned that the cost and time estimates for the bathroom may be too low. the project is on schedule. Threats. and the opportunities and threats relate to the external environment. Weaknesses: ● Opportunities: ● ● Threats: ● ● . a decorator has been identified. Threats relate to events or changes outside the organisation or project (in its business environment) that must be defended against. and major successes. 3. Opportunities. An example of a SWOT analysis in the context of project management Let’s assume that we are part way through a project to renovate a house. it is important to establish whether the proposal helps to achieve the organisation’s objectives. It will also highlight the threats and weaknesses of particular proposals. Opportunities and Threats. and the current forecast is for completion on time. These are the things that are going well (or work well) in the organisation or project. as a result of recommendation by a satisfied customer.

a Project Initiation Document (PID) should be produced – this is sometimes referred to as the ‘project charter’. A typical PID will contain the following: ● ● ● ● ● ● ● the background to the project. or by suppliers. such as budget or available resources. as we are unable to assign probabilities to them. . You will note that the purpose of contingency planning is to speed up the planning process in the event that the uncertain event occurs. identifying other possible paint suppliers. the schedule and costs are open to uncertainty owing to unforeseen events. explaining its purpose and why the project is necessary. rather than risks. contacting lenders to discuss possible additional finance. this may further delay the project. the project key deliverables and desired outcomes. a shortage of resources or increase in costs of raw materials. to act as a base document against which progress and changes can be assessed. 5.9 The project Initiation Document At the beginning of a project. re-planning the remaining project with a longer duration for the bathroom works to see what the effect would be. for example whether it is primarily to be carried out in-house. the range of tasks included in it). and the roles and responsibilities. but we can do our contingency planning when it suits us. the approach to be taken to the project. The contingency plan for paint supply might include. such as adverse weather conditions.ENTERPRISE MANAGEMENT 221 THE PROCESS OF PROJECT MANAGEMENT Contingency planning The SWOT analysis for our project (see above) has identified two threats. investigating other manufacturers’ product ranges to see if a close alternative can be identified. These are uncertainties. Exercise 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. in order to provide the overriding terms of reference for the life of the project. any constraints. any areas excluded from the project.3. 2. for authorisation by the project steering committee or project board. the project scope (i. There are two primary reasons for having a PID: 1. The contingency plans may never be used. the project objectives. discussing an alternative design to allow the use of a paint that is easier to obtain. If we wait for the uncertain event before doing any planning.e. The purpose of the document is to define the overall mission. scope and deliverables required. What we have to do is to plan for action to be taken if these threats materialise. Actions to be planned in case the bathroom estimate is too low would include.

who will do what and how long each is planned to take. separate plans for: ● ● ● ● ● ● time cost quality resources contingency communication. The resource plan checks peaks and troughs of workload to ensure the plan is feasible and lists purchases to be bought. such as a steering committee. to budget. their likely concerns. the project manager and team – roles and responsibilities and signatory powers. and the estimated completion date of the whole project. plus cost of purchases from the resource plan. a test plan for how each outcome will be tested. meetings. A risk register will identify contingency plans for each of the key risks and allocates responsibility for monitoring each. any assumptions on which the PID is based. It will also include an audit plan for the project management process. The cost plan uses a rate per hour for each activity in the time plan. The quality plan includes identification of the customers. any mechanisms to ensure that the project objectives are achieved. the controls in place in the project (i. This includes the milestone finish dates of each stage of the project life cycle. or with other organisations or parts of the organisation. meetings. For example. acceptance criteria that has been agreed with them. . 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. and responsibility for each test. This may include safety and security planning.222 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 ● ● ● ● ● ● any interfaces between this project and others.4 Project planning A major responsibility for the project manager is the planning of the project. the key outcomes each expects.e. and using available resources. In the planning stage. etc. reports. plus contingency costs to create a budget for the project. The PID can be used to ensure that the project team and project shareholders are in general agreement about the nature and parameters of the project. 5. The content of each of these plans is as follows: ● ● ● ● ● ● The time plan lists all the activities. 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. message needed. a number of separate detailed plans will be drawn up.). This will be time phased to provide a cash flow forecast. etc. planned method of communication and who will be responsible.). the project organisation structure. the communication plan (reports. The communication plan identifies the key people in the project.

Evidence from past similar projects is used wherever possible to improve the accuracy of time estimates. The work breakdown structure clearly identifies the person or people responsible for each activity or work package. Work packages can be further divided by defining the tasks and activities that comprise them. the resources needed for each activity (this may be shown as resources needed per activity per month). This then involves dividing a project into work packages with defined deliverables and responsibilities for each package and allows the project manager to delegate. Determine the project schedule and budget A baseline budget needs to be produced that presents a realistic assessment of the time and funding required. the final cost estimate for the project.ENTERPRISE MANAGEMENT 223 THE PROCESS OF PROJECT MANAGEMENT 5. It is necessary to plan how long it will take to complete each activity. and how much of each resource each activity will require to complete the activity on time. It is also necessary to provide a cost estimate based on the type of resources required and the quantities anticipated for each activity. and the available resources to complete the project objective. . A work breakdown structure (WBS) must be created. the WBS can be used to calculate a total of how much the project will cost. Risk analysis is also done to estimate what additional contingency allowance is needed for time and cost. otherwise motivation and creativity is reduced and monitoring becomes costly. you cannot add together all the times of the WBS to estimate how long the project will take. a network diagram (also referred to as critical path analysis) is created showing the required sequence and interdependencies of work packages to achieve the project objectives in a more ‘user-friendly’ format (see later in this chapter). Estimation of resources and costs Using rates per hour and cost of purchased resources needed.1 Detailed project planning Detailed planning involves the following steps: Dividing the project into work packages Breaking the project into work packages requires the identification of individuals responsible for elements of work. the start and end date of each activity. This forms the baseline plan for the whole project – a complete guide for accomplishing the project scope on time and within cost. Define the activities graphically Because some work packages occur in parallel. but only where this is essential to allow delegation and control. Therefore. the cost estimate (budget) for each period. Also. 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. to calculate total time. the time and cost are built into the plan for communications.4. this is a hierarchical tree of the work elements that need to be accomplished by the project team during the project. The baseline plan This should include a number of details: ● ● ● ● ● the start and end date of the whole project.

the contracting company. project for the upgrade of a computer system for the Exam Company. with Oracle software. This is identified in the project authorisation document. Section title Overview or summary Project name Project players and responsibility Contents Overview of the plan: project objectives. selecting the project team. they will be made outside the weekly meeting. This will identify the key personnel in the project (or stakeholders). support functions. Responsible for: initiating the project. the customer. These may refer to site access. the WBS (higher levels) time and cost limits. The technical features of the project are identified. standards and any relevant document relating to the provision of the new exam administration system. what communication is planned and the responsible person. especially the milestones. monthly resource reports (financial – critical to this project – and human resource reports) will be issued and any milestones will be reported on in writing. managing the successful delivery of the project to time. site plans. assumptions made when drawing up the plan and any items that will not be included for clarity’s sake. the customer may have insisted on using particular equipment. An audit plan will be included. acceptance criteria agreed. customers and the project team. costs of supplies. say blue-chip hardware such as Compaq. to design and implement an upgraded examination system for the Exam Company. They will include requirements. From previous experience. resources required including the budget and an assessment of significant risks. Should any critical status reports be needed. the Exam Company. tools. cost and quality applications. schedule of work. In-house or subcontracted provision of modules will be specified. Reasons for undertaking this project. maintaining pre-existent standards but catering for an increase in candidate applications. Henry Smith is an experienced and methodical project manager. Monthly status projects. inflation. as this system must be 100 per cent secure. The project authorisation document will identify roles and responsibilities such as the project board. what their interest in the project is and their concerns that will need to be addressed consistently. A major assumption for the Exam Company project is that the system is accessible in the quiet period between major application periods or examination dates. For example: Henry Smith. the cost of borrowing money. the completion of the contract with all user training by 30 September 2003 at a cost of £x).224 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 An example of a project management plan in outline The plan below would be issued to stakeholders such as corporate management. techniques. Safety and security planning will be essential. preparing and implementing plans. specifications. Henry Smith will be responsible for communicating with Jane Elliott. In our project. what is to be achieved in terms of the deliverables (e. the availability of particular staff and so on. The project team will use project management techniques consistent with accepted UK standards. Some illustrative examples have been used. system-diagrams. For example. the key outcomes it expects. and the project team. There may be ‘commercial-inconfidence’ elements in it that would only be shown to the senior management. organisation of the project team. a test plan of how each outcome is to be tested. For example. the project manager. Project Manager.g. and responsibility for each test. There are no set layouts or contents of management plans. the Exam Company’s IT manager on a weekly basis to update her on the progress and to tackle any concerns she has. Project objectives Project scope and contract Methodology Assumptions Technical plan Quality and management Communication plan . The quality plan identifies our customer.

The contracting company will be bearing the risk of over-run and any other contingencies. These will be reviewed and approved by the project board with decisions in writing. so Henry Smith must ensure as much as possible that his costings and time/resources management are accurately assessed. including the way it was managed. we need to recruit one extra software engineer to bespoke the application. Time phasing will give a cash flow forecast. The managing director of Exam Company will sign off the project with Jane Elliott. If so. Requests for change may be initiated by Henry Smith or the Exam Company represented by Jane Elliott. As Jane Elliott is familiar with computer-based projects. In the Exam Company project.Acceptance will be in writing. the performance of the team and its relationship with all other project members. when all change requests have been reviewed to ensure completion. suppliers and the customer. List the planning activities you carried out before starting the project. The project manager will submit the final system for acceptance to the customer. This may mean that the best encryption software will be needed for online applications. It may sign off the project or return it with a specific statement of requirements that will make it acceptable. Included will be any sub-contract staff and staff from the Exam Company with any input to the project. unauthorised access to candidate details or results is the greatest outcome risk. Project schedule Resources and facilities including budget breakdown Risk assessment and risk management Acceptance Change management Post-implementation audit Think about a project you have worked on or are currently involved in. All documentation should be reviewed after filing. the costs incurred against estimates. The cost plan will give a rate per hour for all work and the costs of purchases. input should be sought from the project team. It will include a summary of performance reviewing all aspects of the project. sources and training required will be identified with start times. an activity on node format will be used. in our example the Exam Company. any subcontractors. The risks are identified and contingency plans made. He must also make contingency costing in line with his contingency plans. . recruitment methods. The lessons learned to prevent recurrence of any problems should be identified. including extra activities and cost and time buffers to be added to ensure reliable budget and completion date. Organisation charts will be drafted by position if staff need to b recruited. the time it took. 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 tools used. It is usually illustrated by a Gantt chart with a network diagram. Security must be 100 per cent. Contingency costs are included to give the project budget. After the project. This will describe the main phases of the project and highlight all key milestones. The Exam Company has made it clear that no extra project money will be available. The risk register identifies each contingency plan for each key risk and allocates responsibility for monitoring. There will be cost implications which Henry Smith has taken account of. An action plan with recommendations for prevention should be drawn up.ENTERPRISE MANAGEMENT 225 THE PROCESS OF PROJECT MANAGEMENT Section title Organisation and personnel Contents The organisation plan describes the structure of the project team and each person’s responsibilities. In our project. the delivery of quality as required.

either set by the customer or negotiated and agreed upon with the customer. or by scheduling expensive overtime working. schedule/time. when time increases. the scope is often defined by all the functions that the system is expected to fulfil. . subcontractors’ or consultants’ costs and facilities costs. this is not always the case. as taking longer to complete a project generally means that human resources are needed for longer. For example. building the house and landscaping.226 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 5. Project scope tends to be positively correlated with both cost and time. a hole in the roof. The project cost is based on the budget. all within the agreed quality standards expected by the customer. The project will have a finite date for completion. The customer will expect the work to be carried out to completion and that there is nothing expected which is missing. in that increasing the number of tasks to be performed within the project will normally lead to an increase in both the cost of the project and its overall duration. While each of these is described in detail below. Project scope/functionality The scope of the project is all of the work that must be carried out to satisfy the project’s objective. Project cost The cost is the amount the customer agrees to pay for the final project or product. though there will be diminishing returns in terms of satisfaction from increases in time and cost spent. Both of these situations will increase cost while reducing time. cost and customer satisfaction/ quality. However. equipment purchase or hire.4. project materials. so does cost). Leaving windows or walls unfinished. planning a wedding will require organisation of all activities to occur at a specific time and on a specific wedding date. will be unlikely to satisfy the customer! In computer systems. Time and cost tend to be positively correlated in projects (i. the customer is informed of (and ‘signs off ’) the cost and time consequences of that change. Such changes should also be fully recorded and documented to avoid arguments about what changes were required and authorised. The manager must ensure that every time the customer asks for a change or addition to the scope of the project.2 Project objective constraints The successful accomplishment of the project objective is usually constrained by four factors: scope/functionality. or a garden full of rubble. This will include salaries of the people working on the project. which includes a cost estimate of the resources that will be used in the project. If there is a degree of urgency in a project. For example. when building a house the project scope will include clearing the land. Similarly. it is worth thinking about the conflicting nature of these various constraints. customer satisfaction also tends to be positively correlated with both time and cost.e. it may be possible to reduce the timescale to completion by allocating additional resources. Project schedule/time The schedule is the timetable for activities involved in achieving the project objective. Managing variations to scope is one of the most complex aspects of project management.

2 Gantt charts 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. that the customer is kept informed of project progress throughout the project life. . Provides an input into subsequent project processes. Gantt charts can be produced separately for each person to show their total workload. Provides a communication tool. Provides a framework for continuous assessment of the project progression. Provides a logical framework for making decisions.1 Work breakdown structure As already discussed. being easy to understand and providing a compact overview of responsibilities and progress on the project. as discussed below.5. communication of responsibility for those tasks is often facilitated by means of graphical planning techniques. and that the plan includes progressive testing to ensure that quality requirements are fully met. 5. the main advantage of Gantt charts is that they are a useful communication tool. such as estimating time and resources. Consider the constraints involved in the project and how you carried out the planning process to achieve the final objective of the project. ● ● ● ● ● ● Breaks complex tasks into manageable pieces. 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. matches the business process it is intended to support) and so on. the project manager can more easily communicate the project activities to the project team and the project sponsors. They are often used to monitor actual progress against plan on a week-by-week or possibly day-by-day basis. However. response times. By converting complex projects and their constituent tasks into a graphical and therefore more understandable picture. Sets out the logical sequence of project events.5 Tools and techniques to aid project planning Because of the complexity of tasks involved in many projects. Arrows can be added to show the interrelationship between different activities. Take a few moments to think about a project that you have been involved in. fitness for purpose (i.5.e. The following sections will introduce a number of these planning techniques used by project managers. Quality in computer systems can be measured in the number and type of errors (‘bugs’) it still contains. An example of the use of Gantt charts can be seen in question 7 at the end of this chapter. 5. The WBS provides a systematic approach for breaking projects into manageable units in order to ensure that all of the activities required to complete the project are included and carried out. It is important to ensure that prior to the project planning the project team has a clear understanding of the customer specifications and requirements. and slack time shown on each activity. 5.ENTERPRISE MANAGEMENT 227 THE PROCESS OF PROJECT MANAGEMENT Customer satisfaction/quality The objective of any project is to complete the scope within the budget and by the agreed date to the customers’ satisfaction and quality requirements.

5. this will be determined by the time taken by preceding activities.e. First. 5. We shall now consider the main elements of constructing a critical path analysis. CPA) must be used. and similarly Activity H cannot begin until Activities E. F and G are all complete. …. Latest event time (LET). and the project as a whole. Some activities are dependent on others. in order to identify start and finish times for each activity. labelled A. The network is then constructed by building the activities from left to right.228 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 To calculate the start and finish times of each activity on a Gantt chart. G Expected time taken 5 4 5 3 5 6 7 7 The first event is assumed to start at time 0 (i. It is the latest time at which all previous activities must have been completed to prevent the whole project form being delayed. H. making sure that activities follow only after any preceding activities have been completed. the EET is calculated. for example. a further technique known as network analysis (or critical path analysis. We illustrate these definitions by looking now at a simple example. This occurs at the same time or later than the EET. F. the start of Activity A). Consider a project comprising eight activities. This is the earliest time at which any subsequent activity can start. .3 Network analysis The main aim of network analysis (critical path analysis) is to analyse activities that occur in parallel. that is activities where any delay will lead to a delay in the project overall. B. One of the key features of critical path analysis is the identification of activities that are critical. the table below indicates that Activity B cannot begin until Activity A is complete. Activity A B C D E F G H Preceding activity – A A A B C D E. beginning with some definitions. Each activity in the network is designated by a symbol of the following type: Earliest event time (EET) Event label Latest event time (LET) ● ● Earliest event time (EET). 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.

Calculation of the LET The calculation of the LET begins at the right-hand side of the network diagram. H cannot start until all of E. The LET of the final event is always the same as the EET (assuming that the project is to be completed in the shortest possible time). Therefore. the completion of Activity A) (Duration of Activity B) 5 9 The EETs for the completion of Activities C and D are calculated in exactly the same way. In this case. has an EET of 16. The first complication occurs at Event 6. that is the start of Activity H. For the worked example above. the start of Activity H. the next event is number 6 (the start of Activity H). and the LET is calculated as follows: LET at 6 (LET at Event 7) 23 7 16 (Activity H duration) . the completion of Activity H) is the earliest time that the project can be completed. the earliest time that all preceding activities will have been completed is 16 days (i. given the duration of the preceding events. Moving from right to left.e.e. F and G are fully complete).e. which cannot begin until E. The EET for the last event (i. i. The earliest time that this project can be completed is 16 days 7 days for Activity H 23 days. this would be 23 days.e. Event 6.ENTERPRISE MANAGEMENT 229 THE PROCESS OF PROJECT MANAGEMENT Calculation of the EET The EET for Event 3 (i. as indicated on the network diagram. there are three possible EETs: EET at Event 3 EET at Event 4 EET at Event 5 Activity E Activity F Activity G 9 10 8 5 6 7 14 16 15 4 In this instance. the completion of Activity B) is: B 4 3 9 E 5 0 1 0 A 5 5 2 C 5 10 4 F 6 16 6 H 7 23 7 23 8 D 3 5 G 7 (EET at Event 2. F and G are completed.

the critical path is Activity A C F H 23 days. In this case. and at this point it is now possible to identify the critical path. This is shown on the diagram by the bold lines. This will be explained later. This can be input into the network diagram at Event 2. . the LET will be 5. 4 and 5: LET at Event 3 LET at Event 4 LET at Event 5 16 16 16 5 6 7 11 10 9 Note that for Events 3 and 5 the EET and LET are different. This is the sequence of activities that begin and end in events where the EET LET. B 4 3 11 9 E 5 0 1 0 A 5 5 2 C 5 10 4 10 F 6 16 6 16 H 7 23 7 23 8 D 3 5 9 G 7 A complication arises when trying to establish the LET for Event 2 as there are three possible LETs: LET at Event 3 LET at Event 4 LET at Event 5 Activity B duration Activity C duration Activity D duration 11 10 9 4 5 3 7 5 6 In this case.230 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 The same calculations can be carried out for Events 3. B 4 3 11 9 E 5 0 1 0 A 5 5 2 5 C 5 10 4 10 F 6 16 6 16 H 7 23 7 23 8 D 3 5 9 G 7 Above is the completed network diagram. if it occurs later than this the whole network will be delayed.

D F Duration in weeks 5 4 2 1 5 5 4 3 * The ID number would come from the computerised listing of activities. have EET LET).044 Preceding activity – – A B B E C.4 Slack or float This can be calculated by taking the difference between LET and EET. 5. Each node is subdivided in the following way: Task/Activity. Start with the final duration figure and subtract the next duration figure from it.5. etc.g. Obviously.038 1. take the higher figure. For example. working backwards throughout the diagram until all boxes are completed.040 1. Exercise Worked Example Activity A B C D E F G H ID number* 1. the critical path has no slack (because activities on the critical path. completing all the EST boxes. Activity E has an earliest start date of day 9. Should there be two preceding activities. by definition.043 1. . Proceed through the whole diagram from left to right.037 1. To calculate the latest start time (LST): this is worked out right to left.039 1. e. C. Activity flows from left to right as for the activity on arrow diagrams you have previously studied. 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. A. slack may occur.5. B. but if activities do not occur on the critical path.5 An alternative method for constructing network diagrams: activity on node This method is based on project software such as Microsoft Project. Should there be two previous activities (working backwards remember).ENTERPRISE MANAGEMENT 231 THE PROCESS OF PROJECT MANAGEMENT 5.042 1. Identity number of the activity Earliest start time Duration of the activity Latest start time 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. Each activity is shown in a rectangular box or node. that is there are 2 days of slack. take the lower figure.041 1.

To calculate the latest start times from right to left and to identify the critical path. but they are often shown on a Gantt chart as a small triangle or other symbol.5. Milestones are important in assessing the status of the project and quality of the work. of course. as the name implies.039 11 C 2 5 1.040 11 D 2 4 13 G 4 7 E 1.044 14 H 3 14 5. In order to facilitate this.042 9 F 5 9 1. for the end of activities).043 B 1.038 0 4 0 1.232 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 First you need to work out the first logical precedence. the duration of the previous activity needs to be deducted from the latest start time at the following activity. and how far it has to run.041 4 5 4 1. Milestones are not specifically shown on a network diagram (except. the latest possible start time for this activity is 14 weeks. A 1. Monitoring the achievement of milestones enables the project manager to keep control over the project’s progress. This involves partitioning the project into identifiable and manageable phases that are well defined key events and unambiguous targets of what needs to be done and by when. the latest start time for G is 13 weeks. and allows any delays to be identified immediately. then you can then calculate the duration of the various paths: ACG BDG BEFH 5 4 4 2 1 5 4 4 5 11 weeks 9 weeks 3 17 weeks These durations will be the starting points for working out your backwards pass to calculate your latest start times. So.037 6 5 0 1. and should be established during the project planning phase. A milestone.6 Milestones and control gates One of the main reasons for constructing a network diagram is to improve the control of the project duration. the latest start time for activity C is given by: (Activity C duration) 2 13 11 (Latest start at Event G) Latest start at C As you can see from the precedence diagram below. a number of ‘milestones’ can be identified in the network. final duration 17 weeks – 4 weeks. For example. . the critical path is BEFH. Similarly G: total duration is 17 weeks – 4 weeks. is an event that is clearly identifiable as a measure of how far the project has progressed.

Such milestones are known as ‘control gates’ and represent the significant completion of milestones. Wherever risk is identified as taking the form of alternative outcomes. milestones should relate to the completion of stages in the project with clear outputs.7 Project evaluation and review technique (PERT) The issues of risk and uncertainty in project management were covered in earlier in this chapter. 2. Another. the project should not continue. the end of an activity. . The degree of risk in each activity can be estimated using standard deviations. This requires the identification of stages in the development of the project that are recognised as steps towards the final project deliverable. developed from the information in work breakdown structures and network analysis.5. They are key points in the project life cycle which give the project sponsor or steering committee an opportunity to review project progress. PERT uses three time estimates for each activity in the network: 1. or attendance at a meeting. in order to reduce the risk of overrun. but should not be encouraged because it leads to a build-up of slack in the programme and may lead to complacency. So. or as expected. This is known as ‘buffering’. and a gate review will be required to formally pass each gate. a series of contingency or scenario plans may be constructed for each alternative. and make a decision whether to proceed further or to terminate the project. If at the gate review the criteria have not been met. 3. much more simplistic. Not only would this allow the project manager to look at the project network incorporating each different alternative.5. but it would also allow the manager to ‘switch’ to the appropriate plan for whichever contingency arose. An optimistic estimate (denoted by the letter o) – the duration it would take if conditions were ideal.ENTERPRISE MANAGEMENT 233 THE PROCESS OF PROJECT MANAGEMENT The characteristic of a good milestone is that there should be no room for doubt about whether it has been past. 5. Network analysis is often complicated by an uncertainty of events so that a single time given for an event is likely to have a degree of error. which should signal the accomplishment of a particular milestone. A pessimistic estimate (p) – the duration it would take if a number of things went wrong. the production of a report. A gate can only be ‘passed’ if the process meets pre-defined performance standards. This would allow calculation of any necessary contingency to be added to the plan.8 Coping with risk and uncertainty Although the use of PERT is one way to cope with risk in time planning. Some milestones take a very specific form. ‘Gates’ should be identified in the project plan. 5. delivery of a completed work package. To overcome this uncertainty. A probable estimate (denoted by the letter m) – the duration it would take if conditions were normal. This may mean changes are needed to the overall project plan. For example. This could take the form of technical reviews or completion of documents. way to incorporate risk is to add artificial slack into risky activities. The expected duration is then calculated (using expected values) and the network drawn. there are ways of planning in a contingency for risk that are less complex.

Calendars can be used for reporting purposes and to define working periods. At any time during the project. ability to view relationships among tasks and other projects. Most systems will build Gantt charts and network diagrams based on the task and resource list and all of their associated information. Calendars. Large projects often have to be broken down into smaller projects to make them more manageable.234 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 5. Resource planning. project managers may be responsible for more than one project at a time. Scheduling. to set priorities for tasks. 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. 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. It will maintain detailed task lists and create critical path analyses. Any changes to those lists will automatically create a new schedule for the project.6. that is ensuring the project has the correct level of manpower. to learn that all of these techniques can now be carried out quickly and effectively using project management software applications. to schedule tasks to start as late as possible. Resource histograms. planning activities. with features such as easy access to graphical user interface. Most PM software packages will store numerous projects quite easily. therefore.6 Project management (PM) software It is clear that many project management techniques are complicated and involve large amounts of constantly changing data. Graphics. equipment and material at the right place at the right time and in right quantities. by allocating resources. . It is also possible to schedule recurring tasks. These provide the project manager with a visual display showing the usage and availability of resources over the project’s life. or for the whole project. It will allow the tasks in Gantt charts to be linked so that preceding activities can be shown. A critical issue in project planning is resource management. work-scheduling facilities. All PM software allows the user to define the activities that need to be performed. 5. Planning. numerous PC-based PM software packages exist. and to specify ‘must end by’ and ‘no later than’ dates. setting start and completion dates and calculating expected time to complete. Multiple project handling. resource management and project progress monitoring and control. such as Gantt charts. The ability to create and modify graphics. actual costs can be compared with budgeted costs for individual resources or activities. such as Microsoft Project: ● ● ● ● ● ● ● ● Budgeting and cost control. is a useful feature of PM software.1 PM software functions The following is a list of functions that would commonly be found within a standard project management software package. Today. An example of a resource histogram is shown on top of next page. It is not surprising. Alternatively.

Windows-based packages with graphical user interfaces make the use of PM software easy and quick.ENTERPRISE MANAGEMENT Number of technicians required 5 H 4 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 ● 235 THE PROCESS OF PROJECT MANAGEMENT H O L I D A Y Maximum O L I D A Y 29 30 Reporting. Ability to handle complexity. Here are some common pitfalls: ● Emphasis on maintaining the plan rather than managing the project. project team members will capture the time already spent and the time expected to complete a task on a timesheet. allocation of resources reports. Hence.2 ● Advantages of using PM software ● ● ● ● ● Accuracy.3 PM software pitfalls Despite the extensive use of project management software. it is often better . such as progress to date. For large. Affordability.6. A 3-day training course is usually needed. In a large project.6. budget reports. Most PC-based software costs between £200 and £400. PM software provides the facility to generate standard reports. The project manager has to report on the progress of the project to the stakeholders. It is important to realise that PM software is a tool and can be used wisely or unwisely. Typically. maintaining the detail estimates against actuals of a plan can be a full-time task. complex projects. Timesheet recording. a number of PM software packages allow this data to be captured from individual team members. PM software is indispensable in managing and controlling large volumes of activities. Ease of use. This leaves little time for issue-management and man-management. What if analysis. PM software has inbuilt error checks and automatic calculation facilities. which for businesses is an affordable investment. 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. projects can still go spectacularly wrong – over schedule and over budget. Costs of maintaining the data need to be added to this. manually drawing network diagrams can be prone to error. 5. In order to ease the project manager’s burden of recording the actual effort and revised estimates to complete a task. The software allows the user to see the effect of different scenarios by altering elements of the project data. 5. Particularly in large projects. individual task or WBS reports and financial reports. This enables the project manager to plan for contingencies and to assess consequences.

236 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 ● ● ● ● for project managers to delegate the input/maintenance responsibility to a project administrator and receive regular reports as a basis for managing the project. As an example. another person may struggle. Plans tend to talk about resources when actually they are referring to human beings with all the uncertainty that it brings. the paying customer does not want to hear bad news). p. Also. 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. development and installation of an organisational information system could include the following work elements in performing the project (Gido and Clements. flow charts. Quite often real-world tasks merge into several tasks. garbage out. 66): ● Undertaking detailed design work. For planning purposes. a comprehensive plan built on incorrect estimates may look impressive but is fatally flawed: garbage in. Skill levels. as and when scheduled in the plan. The project team will perform the tasks they are responsible for. People see additional required tasks while they are working and tackle them simultaneously. then it is unlikely that the overall schedule reflects the true performance capacity of the team. A task that was thought simple can prove anything but. to the extent that the PM software is abandoned in favour of a simpler monitoring system. based on the estimator’s experience or inexperience (or even mood) and subject to company politics (e. 5. A project manager must be aware of the effect that the departure of a key person would have on the plan. estimates can vary wildly. They are subjective. 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. including systems specifications.g. A static plan (with PM software) cannot keep up with all these changes. the project can commence. 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. Work breakdown assumes discrete units of work that someone will spend a fixed amount of time on a task before moving to the next task. It matters which person does which task. the activities involved in design. 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). estimates have been made at a fixed point in time with a particular set of assumptions. programmes and a list of required hardware. Estimates.7 Executing or performing the project Once the project plan has been developed and agreed by the customer and project team. Some plans fail because the work breakdown into tasks does not match with how people work. the accuracy of estimates is vital to the identification of the critical path and the key milestones of the project. Hence. Further. 1999. It is important to manage resources realistically. Needless to say. Where one individual may find a task within his/her skillset. However. people have careers and home-lives and can leave a project. . Work breakdown. Human beings are not interchangeable items like nails or screws. If the most competent person has given all the task estimates. for example making tea may mean making coffee while the kettle has boiled and so on. Mythical man-month. This especially applies when tasks are over-budget.

Testing the software.ENTERPRISE MANAGEMENT ● 237 THE PROCESS OF PROJECT MANAGEMENT ● ● ● ● ● ● ● ● ● ● Carrying out design reviews on a continual basis. it is important to monitor it continually in order to ensure that it is progressing as expected towards the final objective. . If. price or schedule.g. Conducting final acceptance testing of the new system to demonstrate that the system meets the original objectives. including monitoring activities started and completed. This requires a continual measurement of actual activities. which may result in modifications and design changes. weekly or monthly). More complex projects are likely to require more frequent progress assessment. A regular project reporting period should be set up (e. daily. and carrying out corrective action where necessary as soon as possible. take corrective action to get the project back on target. for example selecting the optimum changeover method and the time that is least disruptive to the organisation’s operations. 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. Planning installation. Carrying out the writing and construction of the software. There will also be a plan prepared for systems testing once the system has been designed. This may result in a change in the project scope. 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. including detailed testing of subassemblies of hardware. Carrying out the installation and changeover procedure. Think of a project such as organising a conference or planning a relocation. Preparation of training materials to enable users to understand. how long it has taken so far (and how long it is estimated to take up to completion). Effective project control will involve a system to regularly gather project data on actual project progress and performance. and then a final test of the entire hardware system interface.8 Monitoring and controlling the project As the project evolves. operate and maintain the system. 5. Carrying out training. and how much money has been spent on that activity. Purchasing. depending on the complexity or duration of the project. Determine: ● ● ● the major work elements the resources required a time estimate. Integrating hardware and software and testing the whole system. assembling and testing the hardware. the project manager must report the deviation and. It may also involve re-planning the original schedule. a deviation is discovered (such as overspending or taking longer than anticipated). following authorisation if necessary. after comparison of actual versus plan. This may involve the customers who may wish to participate in testing or at least review the test procedures.

238 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 In most projects. which again may affect the overall scope and performance of the final project. It is also important for the project manager to agree any changes in the plan with the customer. 5. A progress report is likely to cover the following issues: ● ● ● ● ● ● Current status in terms of schedule cost and scope. Milestones expected to be achieved before the next reporting period. Figure 5. accurate project information. In most projects.1 demonstrates the control process. The project manager needs to consider very carefully the implications of any corrective action upon the project scope. For instance. Reducing excess expenditure may mean using less or lower-quality resources. 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. written reports are made monthly. The project manager should meet with the project board to discuss progress. Planned corrective actions. the project manager reports to a steering committee or project board. This will allow the project board to ask questions that are not covered by the written report. so the recipients become familiar with their content. When the updated schedule and budget have been calculated. getting the project back on time may require extra resources and therefore additional costs or a compromise on the original scope. as they will often require a trade-off of cost. These decisions may be very difficult. adding extra resources in order to get a project back on time will incur extra costs and may therefore overrun the project budget. schedule or scope of the original baseline plan. These reports should have a standard format. 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. Areas covered by the report would obviously focus on progress in terms of cost. timely basis. If corrective action is required. and time. such a meeting might take place quarterly. a comparison must be made against baseline budget and schedule in order to determine if any variances have occurred. then no corrective action is required. both within and between projects. and the project manager would present their summary report. with any anticipated variances from plan highlighted.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. It should also be possible for the project manager to meet with the project board in exceptional circumstances. should a major contingency arise. Progress towards resolution of previously identified issues. scope. Date of next report. Making decisions about changing the project plan or adding more resources can only be effective if the project manager is using the most upto-date. For example. In many projects. as changes are likely to affect cost. There should also be provision for exception reports. the next decision is to determine how to revise the schedule or budget. If it is considered that the project is satisfactorily on target.8. budget and schedule. with a major summary report quarterly (or on completion of a life-cycle stage). time and scope. Corrective action requires consideration of alternatives before implementation. . New or potential problems and issues.

budget and forecasts Analyse current status compared with plan (schedule. 68) Once a decision is taken.budget) 239 THE PROCESS OF PROJECT MANAGEMENT Start project Wait until next report period During each report period Collect data on actual performance (schedule.1 Project control process (Gido and Clements. If it is considered that the project is likely to have a high control risk. the third phase of the project life cycle will end when the project objective has been met and the customer requirements have been achieved. 1999.8. p. schedule. If this is carried out successfully. the monitoring progress should be carried out more frequently. 5. budget) No Are corrective actions needed? Yes Identify corrective actions and incorporate associated changes Figure 5. This project control process will be carried out continually throughout the duration of the project.2 Earned value management Earned value management is a method of assessing the progress on a project which takes account not only what has been done (and spent) to date but also what value has been . costs) Incorporate changes into project plan (scope. the changes must be incorporated into the schedule and budget. Project control processes cannot be overemphasised in their importance to the success of the project. budget) Calculate updated project schedule. The project manager must take a continually proactive approach in controlling a project.ENTERPRISE MANAGEMENT Establish baseline plan (schedule.

the project budget. which is defined as: ● ● ● ● delivery of the agreed outcomes on time within budget conforming to the required quality standards. ● Ensures the production of a number of ‘management products’ associated with the management and control of the project: for example. The following list provides the different values that are needed to assess earned value on a project. This is based on the original planned costs for an activity and the rate at which the project team is completing work on the activity. and variances on time and cost. The results from earned value management analysis can inform project progress. ● Contains several quality controls.240 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 added for that effort or expenditure. the relationships between them and their roles in the tasks’ completion. The main purpose of PRINCE2 is to deliver a successful project. small and large. time and cost goals by using information from the project and comparing it to the baseline plan. it can be applied to projects of all kinds. Rate of performance (RP) is the ratio of actual work competed to the percentage of work planned to have been completed by a particular point in time. the project plan and various progress reports.3 PRINCE2 methodology Control in this context is any mechanism designed to ensure that a project achieves its objectives.8. Project management software. Actual cost (AC) is the total direct and indirect costs incurred in carrying out work on a particular activity during a given period. it is a technique for monitoring progress as part of overall project monitoring and control. Earned value (EV) is an estimate of the value of the physical work completed. ● ● ● ● Planned value (PV) is the proportion of the approved total cost estimate to be spent on an activity during a given period. ensuring that all the participants in the project (both internal and external to the organisation) have a clear understanding of the tasks to be completed. The structure of supervision and reporting ensures that each party has clear objectives and that they are supported in achieving these objectives. the project initiation document. The PRINCE2 (Projects IN Controlled Environments version 2) methodology contains a large number of control elements and. It can be used to determine how well the project is meeting scope. ● Includes a number of different types of plan. . Hence. such as Microsoft Project provides functions for entering data and viewing earned value information. such as clearly defined and documented technical and management procedures. These ensure that work is completed both on time and at the appropriate level of quality. Features of PRINCE2 ● Enforces a clear structure of authority and responsibility on the project team. although initially intended for the management of IT projects. 5.

to sequence the activities.4 Other project management methodologies A number of other methodologies have emerged in the project management marketplace. PRINCE2 call team this the project board. This involves reporting on the progress and problems encountered in a particular stage and their implications for the next stage. Initiating a project. This is usually carried out by the senior management team. The project manager is then given authority to manage the project within constraints set by the project board. Closing a project. Planning a project. 5. This involves all aspects of control and problem-solving to ensure the project meets its objectives. Managing product delivery. resources requirements and associated risks. Whilst these could all be considered to be elements of good project management. these include: ● ● ● ● ● ● ● ● Directing the project. Whereas PRINCE2 is largely in the public domain (due to sponsorship by the UK Government). (Comparing PRINCE2® with PMBoK®. Starting up a project. however. Controlling a stage. The PRINCE2 methodology is discussed in detail in a reading later in this chapter. using project management tools and techniques. Here is a list of alternatives to PRINCE2: ● ● IDEAL/INTRo – IDEAL is a process-improvement and defect-reduction methodology from the Carnegie Mellon Software Engineering Institute (SEI). Reporting and feedback on performance relative to the original objectives. the resources to be allocated and whether the project should continue. Managing the stage boundaries. gaining in popularity in various industry sectors and hence are worth inclusion. the difference is the level of structure and documentation that is required. 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. to help make improvement to future projects. This involves the appointment of the project manager and project team and assigning objectives.) You should study this reading now. who define the need for the project.ENTERPRISE MANAGEMENT 241 THE PROCESS OF PROJECT MANAGEMENT Key processes are identified as part of the PRINCE2 framework. The institute has a reputation for researching and improving the project management process (particularly in the software development and deployment arena).8. for example a new computer system. Co-coordinating the various aspects of the project –particularly where multiple project teams are involved. This is an ongoing activity. by Max Wideman. INTRo is a particular application of the methodology for rolling out technology. This helps in providing controls on the planning and execution of projects and forces the identification of potential problems. The constituents of the Board will vary to suit the requirements of a particular project The project board will decide on the project manager and team responsibilities. also considers duration. other methodologies have been developed by proprietary interests often with accompanying consultancy and software services. They are. Setting out the project strategy and criteria against which the project will eventually be judged. It describes nine key areas in terms .

A number of vendors encapsulate PMBoK into their own service and software offerings. .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. reviewing the business case to check that intended benefits are likely to be achieved.1 Organising project documentation The project organisation must ensure that all appropriate and related project documentation is collected.242 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 ● of inputs.9. agreeing formally with the customer that all agreed deliverables have been provided successfully. techniques and how they fit together. receiving and making final payments to suppliers of resources.9. This should help the project organisation improve its performance on future projects. reviewing project organisation and methods to recommend future improvements. Reporting can be daily. SixSigma – It is another process-improvement and defect methodology that has its roots in improving manufacturing and product development processes. It is also necessary to keep information for future audit purposes. Solution ● ● ● ● It ensures that all team members are aware of the importance of regular monitoring and control. organised and stored efficiently for future reference. there are now extensions to apply the statistical measurements (upon which SixSigma is based) and corrective measures to more generic project management processes. However. The main purpose of closure procedures is to evaluate the overall project and to learn from the experiences gained. 5.9 Project completion and closure The final stage of the project life cycle is the closure of the project once the project work is finished. depending on the complexity and timescales involved. It is necessary to compare actual performance with plan. It must be done regularly to ensure progress is maintained. outputs. In some contracts. 5. so that full payment can be received. weekly or monthly. tools. Exercise Explain the benefits of a well-defined project reporting system. rewarding the project team and ensuring they have jobs to move on to. 5. Project termination activities would include the following: ● ● ● ● ● ● organising and filing all project documentation. This is an obvious incentive to ensure that the project organisation carries out the project successfully. this may be a significant proportion of the total contract price – as much as 20 per cent.

An evaluation of the project from the customer’s perspective is also a crucial aspect of project closure. If the project objectives have been stated in terms of learning outcomes.1 Post-project review meetings Evaluation meetings should be carried out both internally with the project team members. the efficiency of the solution during operation compared with the agreed performance and standards. and provides a framework for open dialogue and improved customer relationships. the extent to which these have been achieved would also be investigated. 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. the time taken to develop the solution compared with the targeted date for completion. Although this benefit may be difficult to quantify. Are the benefits intended in the feasibility study likely to be realised? If not.10. It also allows the customer the opportunity to voice any concerns regarding how the project was carried out. The audit would lead to the production of a report to the management. 5. structured around the above points.ENTERPRISE MANAGEMENT 243 THE PROCESS OF PROJECT MANAGEMENT Likewise. the project organisation must ensure that it has paid for its materials or contractors at the end of the project. it may . the final phase – an audit of the entire project – is conducted. 5. the significance of any problems encountered and the effectiveness of the solutions generated to deal with them. 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. Assessment of the following should take place: ● ● ● ● ● ● the extent to which the required quality has been achieved.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.10. the actual cost of the project compared with the budgeted expenditure and the reasons for over. Once payments and receipts have all been recorded.2 Post-completion audit When the project solution has been delivered.10 Post-completion review and audit 5. and externally with the customer. An evaluation of the project from the business perspective is essential.10. what ongoing actions need to be taken? 5.or under-expenditure identified. 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. final contract accounts can be analysed and the contract profitability established. the effectiveness of the management process and structures in managing the project. and reasons for a variance identified.

the organisation evaluates the information obtained through benchmarking. from which they can gain a competitive advantage. and must then decide whether or not this information will enhance the singular methodology. In this case. The PMMM consists of five levels. One such approach is the Project Management Maturity Model (PMMM).4 Continuous improvement Many organisations view project management as a strategic competence. the expected savings to future projects should be offset against the cost of the audit. such as engineering and consultancy. Level 4 – Benchmarking This level contains the recognition that process improvement is necessary to maintain a competitive advantage. in some firms the information systems personnel may still have a separate methodology.244 THE PROCESS OF PROJECT MANAGEMENT STUDY MATERIAL E2 be necessary to justify the cost of a post-completion audit by carrying out a cost-benefit analysis. the organisation recognises the synergistic effect of combining all corporate methodologies into a singular methodology. proposed by Kerzner (2001). Level 5 – Continuous improvement In this level. and continues improvements to the methodology. The company must decide whom to benchmark and what to benchmark. The emphasis here is on training and education. However. such as total quality management and time-to market. Excellence in project management requires the development of a methodology. 5. Level 3 – Singular methodology In this level. 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. the organisation recognises the importance of project management and the need for a good understanding of the basic knowledge of project management. along with the accompanying language/terminology. This is particularly true of organisations in project-based industries. Benchmarking must be performed on a continuous basis. Level 1 – Common knowledge In this level. the centre of which is project management.10. a culture that believes in the methodology. Also included in this level is the recognition that project management principles can be applied to and support other methodologies employed by the company. and each level represents a different degree of maturity in project management. the organisation recognises that common processes need to be defined and developed such that successes on one project can be repeated on other projects. which provides guidance on how to become excellent in project management. . Level 2 – Common processes In this level. The synergistic effects also make process control easier with a single methodology than with multiple methodologies.

a division of Thomson Learning: www. 5. (1998). the common techniques used by project managers (Gantt charts. the different costs incurred in a project. the different aspects of feasibility.com. . the company can create a centre for excellence in project management before benchmarking is undertaken. (2001). For example. budgeting. Gido. and Keller. J. the marketplace may see several more maturity models similar to the one described above. and the ways to manage risk. Digital Download. Project Management. A Practical Guide for Managers. London: International Thompson Publishing.). critical path analysis (CPA) and project evaluation and review technique (PERT)). in series). ● ● ● ● References Field. fax: 800 730 2215. there exists a common belief that all work must be accomplished sequentially (i. the process and justification of post-completion review and audit. which may contain facilities such as planning. The key points to remember are: the five project management stages (try using the acronym IPECC). Reprinted with permission of South Western. Project management maturity models allow companies to more easily identify corporate-wide training initiatives for each level.e. as well as the establishment of a professional development career path for project managers. Strategic Planning for Project Management Using a Project Management Maturity Model. The magnitude of the overlap is based upon the amount of risk the organisation is willing to tolerate. Certain levels can and do overlap. the key aspects of project control. the constraints acting on a project. (1999). Successful Project Management with Microsoft Project CD. the use of PM software.thomsonrights. Kerzner. these models should be generic such that they can be applied and custom-designed to individual companies. H.11 ● ● ● ● ● ● ● ● Summary This chapter has looked at the life cycle of a project.ENTERPRISE MANAGEMENT 245 THE PROCESS OF PROJECT MANAGEMENT When the levels of maturity (and even life-cycle phases) are discussed. As companies begin recognising the importance of strategic planning for excellence in project management. M. including milestones and gates. John Wiley & Sons. J. This is not necessarily true. reporting and scheduling. (1st ed. the features of PRINCE2. the different aspects of project plans. and Clements. L. the difference between risk and uncertainty. SWOT analysis when used in project management. Like strategic planning.

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at a price consistent with the organiser’s budget and to the satisfaction of the end-users. with a predictable degree of reliability and uniformity. more feasible project actions. on budget. The strict time constraints set for the project increase the difficulties of managing cost and quality. This review discusses issues that need to be addressed to make this project a success. the critical relationships between cost. It enjoyed broad public support with 90 per cent of the people across Australia supporting the bid. to the standard and specification laid down. and to the required quality. The project will be regarded as successful if it is finished on time. focusing attention on strict constraints of time. The bid 247 . quality and time. The Sydney 2000 Olympic Games: a project management perspective David Eager. Good quality means meeting the needs specified by the organiser. More than 100.000 volunteers offered their services. 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 case discusses the Sydney Olympic Games from a project management viewpoint. the need to break complex projects into a number of smaller. Given the nature and vast scale of this project. Reproduced with permission of PMI Publications via Copyright Clearance Center 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.Readings 5 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. This case study should aid you in understanding: ● ● ● the importance of project identification and definition. Copyright © 1996 by PMI Publications. complex projects. sound and exemplary project management techniques and principles are essential for its success. Proceedings of the PMI Annual Seminar. and the increasing problems of managing the two other major project factors of cost and quality.

a campaign to register volunteers was conducted by the St George Bank which attracted more than 100. waste avoidance and minimisation. The focus is mainly on two Olympic zones. The staging of the 2000 Games is the responsibility of SOCOG. 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. training the technical officials and volunteers who will help conduct the events at the Olympic Games. Sydney will require 35. establishment of a new showground and major exhibition centre. and selectively trialling arrangements for accreditation. broadcasting. M4 and M5 Motorways. A main press centre and the Olympic village with accommodation for 10. No training facility will be more than 45 minutes away from the village. transport. . During Sydney’s bid.000 people. Most of the remaining facilities required for the games will be constructed as part of the redevelopment programme being undertaken at Homebush Bay.248 THE PROCESS OF PROJECT MANAGEMENT READINGS E2 was centred on the theme Share the Spirit and called on the people of Sydney to join in the excitement of the bid. all Olympic events are planned to be held in metropolitan Sydney in venues within 30 minutes’ travel from the Olympic Village. Except for some football preliminaries. which was established in November 1993 by legislation in the New South Wales Parliament. Ultimo-Pyrmont light rail system. A series of test events in the years preceding the Olympic Games is planned with the aim of trialling the Olympic venues. water and soil from pollution.000 athletes and team officials also comes under the umbrella of the Olympic Park. and the Sydney Harbor zone located near the Sydney city centre and accessible by road. and invited the world to come and share the spirit of Sydney at the Olympic Games in the year 2000. water conservation. security. namely: the Sydney Olympic Park. 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. situated at Homebush Bay about 14 km west of the Sydney city centre. and the establishment of a commercial centre for high-technology industries. The bid also included a comprehensive set of environmental guidelines recognising the principle of ecologically sustainable development. and Glebe Island bridge. Key elements of the Homebush Bay area include the construction of new sporting facilities. namely: Sydney Organising Committee for the Olympic Games (SOCOG). protection of air. will ensure that an effective transport system will be available for the Olympic Games. rail and ferry from Sydney Olympic Park. media and other services. The guidelines promote energy conservation. 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. and protection of significant natural and cultural environments. such as City West Development. It also provides support services.000 people from all walks of life to form a volunteer workforce essential for the smooth running of the 5 games. security and healthcare. particularly in the areas of transport. Infrastructure – preparation work for the games A significant number of Sydney’s Olympic venues already exist. Recently completed major transport projects such as Sydney Harbor Tunnel. development of residential and retail areas.

putting in place technology and resources required to stage the games. the international community as a whole. sponsorships.4 billion). Completion of these projects on time is vital to the success of the Olympic Games. Although the New South Wales Government is underwriting the project activities. create 150. Olympic Co-ordination Authority is responsible for all the infrastructure projects. the Australian people. the New South Wales Government. In order to safeguard sponsorship fees and sponsors’ and licensees’ benefits from ambush marketing. 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. Any major cost overruns will alienate the public and will have adverse effects on the success of the games.3 billion to Australia’s gross domestic product. These projects are either already under way or are being re-programmed to accommodate the games. licensing fees. 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. including volunteers . almost all of which are not being built specifically for the Olympic Games. It is estimated that during the period 1994–2004 the Olympics could add A$7. including accommodation transport media facilities and co-ordination telecommunications security arrangements medical care human resources. and continued interest in the Olympic Games for the future. and resultant sustained economic activity generated within New South Wales and Australia. including the citizens of New South Wales. The games budget in nominal terms is A$1. The infrastructure construction is the responsibility of the government and is overseen by the Olympic Co-ordination Authority. and ticket sales. and bring an extra 1.ENTERPRISE MANAGEMENT 249 THE PROCESS OF PROJECT MANAGEMENT Revenue for the games is expected primarily from television rights fees. To make matters more complicated. There are many stakeholders and customers.and part-time jobs. 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. public relations. there is no clearly defined client for the programme. the level of public enthusiasm and enjoyment generated by the activities. and fundraising.000 full. Australian Olympic Committee.847 billion (US$1.3 million visitors to Australia. There is an explicit need to control the cost of all its activities very carefully. The project can be broken into the following major areas of work (as a work breakdown structure): ● ● ● ● ● ● ● ● events venues and facilities. SOCOG was appointed to manage the project by legislation. the scope of work of SOCOG is restricted to organisation of the events. International Olympic Committee. coin marketing royalties. the athletes. the New South Wales Government has legislated the Sydney 2000 Games (Indicia and Images) Protection Bill 1996. the International Olympic Organisation. and Australian and international business communities. The general rule of thumb used by the Government has been to relocate infrastructure projects initially external to the games under the games umbrella.

Proper plans must be prepared for these construction activities. Any delays in the completion dates could be accommodated without much difficulty. Critical path methods. setting target dates well in advance of the main event. precedence block diagrams and programme evaluation and review are employed to control the uncertainties in the time dimension. an enormous co-ordination effort will be required to ensure these.250 THE PROCESS OF PROJECT MANAGEMENT READINGS E2 ● ● ● ● ● ● ● ● cultural Olympiad pre-games training information technology projects opening and closing ceremonies public relations financing test games and trial events sponsorship management and control of ambush marketing. estimation of the time dimension should be relatively straightforward. namely: cost and quality. Some non-construction projects – such as developing software to monitor the games’ progress. Expertise is available within the construction industry to produce reasonable estimates. are delivered on time. As the project must be completed and ready for staging the Olympic Games on the stipulated dates. and trialling events as milestones for the critical items. At this early stage of the programme or project life cycle the time required to complete tasks for particular events introduces uncertainties. 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. 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. and an adequate series of milestones must be established to allow monitoring of the progress of the programme. These uncertainties are related to the nature of the tasks involved. opening and closing ceremonies. designing test events. and therefore the entire games project. Critical project dimensions Time is the most critical dimension of the Sydney 2000 Olympic Games project. All persons who may be affected by these programmes should have an opportunity to comment on the plan. Each of these items could be treated as a project in its own right. establishing the games’ database and systems to disseminate the information to general public – have larger uncertainties inherent in . However. It is anticipated that the infrastructure projects under construction will be completed well in advance of the commencement of the Olympic Games. Instruments should be put in place to monitor the progress against the programme continually. and so on. Further. Elements which are expected to have most impact on the programme must be identified and defined as early as possible. any shortcomings in the time dimension will have to be offset by sacrificing the other two dimensions. The criticality of the time dimension applies mainly to other activities and timing of individual activities such as events. To ensure that the time dimension is achieved. performance on all three dimensions is vital for the success of the project. For the construction projects. Time dimension Sydney is fortunate in having sufficient infrastructure capacity either existing or under construction to cater for an event of this magnitude.

However. It is worth noting that the major portion of the games’ budget is for the events and ceremonies. any slippage in timing of the programming. The NSW Audit Office cost estimates appear to have been produced using appropriate methodologies. conforming to the customer requirement. Further. Since Internet technologies are changing very rapidly. training and testing of these activities could lead to large cost escalations.ENTERPRISE MANAGEMENT 251 THE PROCESS OF PROJECT MANAGEMENT the system. . Any cost overrun will have to be met by the taxpayer. since they are a major source of cost escalation in any project and especially in projects such as this. and the nature of these programmes is such that there are considerable uncertainties inherent in these items. The quality is threefold: 1. as the New South Wales Government has underwritten the host city contract. consultations with the Barcelona Organising Committee. fit for purpose 3. the International Olympic Committee. the Atlanta 1996 Olympic Games had a dedicated Internet facility to give the public access to games information. good quality versus high quality 2. thus affecting public support and a vital source of volunteer games staff. It is difficult to predict what these advances may involve until much closer to the actual event. As a general rule. Cost escalations would lead to disillusionment among the public and would diminish the public appeal of the games. 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. Due to the predicted rapid change in technology it is highly likely that there will be variations in requirements or design. 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. Some variations may be to a cost advantage. independent review of the estimates by auditors Price Waterhouse. Quality dimension This is the most difficult dimension of the project to define. 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. Consequently. the way information is given out to the public may also change in line with advances in technology. and the Australian Olympic Committee. review and analysis of results and budgets from previous games and bid candidature. Maintaining the costs within budget is vital to the games’ success. independent analysis of construction costs by quantity surveyors Rider Hunt. but this is the exception rather than the norm. it is undesirable to allow too many such changes. Receipts are mainly from television rights and international and local participation. the time and cost dimensions of these events are tightly interrelated. The financial planning process included: ● ● ● ● ● consultations with both national and international experts in the fields relevant to both receipts and payments. For example. This could also become a major political issue. Sydney’s games’ budget is based on conservative assumptions and estimates of games’ receipts and payments.

Adoption of total quality management techniques in these programmes could improve the quality of the delivered Olympic Games. in that it lacks coordinated project control. In construction projects. engaging experienced personnel and experts may be particularly desirable. This has occurred because Olympic Security is being used to expand existing programmes rather than being managed as a separate programme.252 THE PROCESS OF PROJECT MANAGEMENT READINGS E2 As part of the host city contract. It would appear that there is a significant weakness in the security planning process. events or performances) should be thoroughly tested prior to the games. In the case of transport. and attitude. Sponsors will demand a certain quality standard. One of the major areas of quality which should not be underestimated nor forgotten is the aspect of security. particularly in the early stages of the development cycle. This applies particularly to a project like the Olympic Games when completion on time is critical. Rather than being developed as a strategic programme. as fit for purpose or conforming to strict environmental guidelines. Quality comes at a price. Only through closely controlled quality management processes and early identification of the possibility of failure can the success of the programme be ensured. The SOCOG itself will set its own quality standards mainly in performing its duties. As the project progresses through its life cycle these standards need to emerge. The public demands very high quality standards. Where clear specifications and well-defined standards are difficult to formulate. 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. . The New South Wales Government has specified certain environmental guidelines that all Olympic ventures should follow. quality management process. Responsibility for management of Olympic Games security lies with the Olympic Security Planning and Implementation Group (OSPIG). As mentioned above. It is necessary to establish milestones and set procedures for the management process to achieve quality. 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. Each programme component will have its own definition of quality and standards. and the cost of failure is extremely high for any of the items included in the project. allowing ample time to make necessary modifications at least cost. quality assurance systems. A good management process is vital to the delivery of a high-quality product. quality can be clearly defined. 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. Some of these standards are currently only at the conceptual stage. The quality of security will be judged by perceived public safety and lack of incidents such as terrorism. The focus has been on integrating existing activities to provide security for the games. In projects such as the games there are difficulties in defining quality. the International Olympic Committee has specified certain quality requirements for the Sydney 2000 Olympic Games. activities are being undertaken as disparate tactical operations. Wherever there is public involvement in large projects. it is generally not sufficient to have good quality or fit-for-purpose quality.g. The essential ingredients of a total quality management system are: quality of the product as the ultimate goal. Within the public mind there is also a concept of the level of quality and excellence the Olympic Games should achieve. The product (e. cost and quality are closely related. for example.

and that the overall project does not become overburdened with unnecessary activities and costs. Effective project scope management should safeguard or at least reduce these problems. for example the security measures. This may involve: ● Balancing high quality with desired quality. Recent large-scale public projects have had a history of overrunning on time and cost (for example. Quality will also mean reliability and. the Channel Tunnel). project scope management ensures that only the work required to complete the project successfully is carried out. the management and control of all aspects is critical to the overall success of the project.3 billion to pay for the games whose total bill only came to A$1. Try to illustrate your answer with other projects you may know about or have worked on yourself and draw parallels. the scope of the Sydney 2000 project was very large and complex.9 billion. Importantly. ● Fitness for purpose. with reference to what you consider the meaning of quality to be for the Sydney 2000 project. or the location and adequacy of the sporting facilities. uniformity. transport arrangements for the athletes. 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. Trial games and test programmes will serve to control all three dimensions and should be treated seriously. For the Sydney 2000 games. As evidenced by the above narrative. 2. This again will depend upon each individual element of the project. Desired quality is defined by the purpose of the project. If any element of the project . 3. Project scope verification and acceptance will be essential to ensure that quality requirements are achieved. Outline solutions 1. control or correct any deficiencies in the project. SOCOG raised A$2. 2. Discussion points Discuss these with your study group before reading the suggested outline solutions: 1. Explain why project scope management was critical to the Sydney 2000 project. Not only were the games and associated events eminently successful. Afterword The preparations of SOCOG appear to have paid off handsomely. quality means satisfying the needs of the organising committees to a predefined standard and set of specifications required for a large-scale sporting event. The infrastructure changes to airport terminals. Discuss the concept of quality. Explain why time management was critical to the Sydney 2000 project.ENTERPRISE MANAGEMENT 253 THE PROCESS OF PROJECT MANAGEMENT Conclusion Good communications are vital to the success of the project and to effective control of all three dimensions. As a public project. clarifying scope in the early stages of the project management process is vital for project success. Different aspects of the games project will have different quality requirements. but Sydney now benefits from greater levels of international investment as a result of its higher and more prestigious profile. It is important to consider quality in the context of each project. The planned trials in the coming years will be an excellent opportunity to monitor. This kind of project will be open to constant and detailed public scrutiny. to a certain extent.

like the Guide (216 pages) is copyright. Indeed. This material is offered to individual readers freely in connection with their project work. Each of these have their respective sub-process totaling 45 in all. As a basis for comparison. because as of September 2000 the eyes of the world will be focused upon the Sydney Olympic Games. Time management is a critical aspect of the Sydney 2000 project.com. The remaining two. Comparing PRINCE2 with PMBoK R. . ● Achieving the customer requirements. 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). the application of PRINCE2 must be scaled for the size and needs of the project. the project will quite obviously be considered a failure. It must be borne in mind that both sets of documentation must be tailored to suit the occasion. and financial implications for the organisers and commercial sponsors relying on financial profits. If the games are not ready on time. It only lays out the processes. although the influence of that industry is very clear in the methodology. This will include both political embarrassment. Published with permission. and the methodology sets out to remove these causes. and because we are located in North America. We have been taking an in-depth look at PRINCE2. Max Wideman. The notion of fitness for purpose must also consider customer requirements. project managers and project teams.254 THE PROCESS OF PROJECT MANAGEMENT READINGS E2 is not considered to be fit for purpose then it cannot be used and is therefore of poor quality. any aspect of the project can only be of sufficient quality if it meets customer requirements.maxwideman. Somewhat similarly. 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’. The PRINCE2 Introduction lists a significant set of reasons why projects fail. not just for information systems. © R. 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. Therefore. but the content is clearly generic common sense. how they link together and the tools and techniques that can be invoked. For example. ‘Planning’ and ‘Directing a project’ are continuous processes supporting the other six. ‘PRINCE’ stands for Projects IN Controlled Environments and is described as a structured method for effective project management for all types of project. or to compare them as part of some selection process. Max Widemanhttp://www. scalability is a topic specifically included in the description of each process. 3. a widely recognised de facto standard used extensively by the UK government and in the private sector. PMBoK is not intended to tell people how to do any of the techniques or use any of the tools described. 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.’ The 408-page document. It may not be used by commercial or non-commercial organisations without permission Introduction From time to time we are asked to recommend project management systems and methodologies.

more often called ‘Project Director’ in North America). However. Finally. is part of the overall project management process and is viewed from the perspective of the buyer in the buyer–seller relationship. the individual who directs. Management levels and responsibilities PRINCE2 recognises four parallel levels of management: ‘Corporate or Programme Management’. document is presented as an easy-to-follow narrative. PRINCE2 describes three techniques namely: ‘Product Based Planning’. PRINCE2 assumes that the project is run within the context of a contract and does not include this activity within the method itself. and regulates a project … [and] is the individual ultimately responsible to the end user. The presumption in the Guide is that Project Procurement Management. For example. In this way. chaired by the ‘Executive’. Indeed. The Guide defines a project phase as: ‘A collection of logically related project activities. feeding into the system. Technical stages are typified by a particular set of specialist skills.’ It does not distinguish between phases and stages and in the text uses either indiscriminately. recognises that the project needs assessment or feasibility study may be the first phase of the project. tools-and-techniques. the project manager’s level) and ‘Managing Product Delivery’ (i. There are a number of interesting differences between the Guide and PRINCE2 philosophies. The PRINCE2 project life cycle does not start with original need. usually culminating in the completion of a major deliverable. are six ‘Components’ some of which are documents and others that are themselves processes. ‘Quality Review’ and ‘Change Control’. perhaps as separate projects in their own right. Implementation (or realisation). team-level technology management). ‘Managing a Project’ (i. on the other hand. of these. the corporate business or programme 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. 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.’ management. By comparison. Another interesting feature is the responsibility of the project manager. PRINCE2 describes a product’s life span as having five phases: Conception. The two may or may not coincide. ‘Directing a Project’ (i. PRINCE2 also differentiates between technical stages and management stages. although it also defers to other life cycles used in various industries. The Guide.’ The Software Engineering Institute goes further and calls it ‘The role with total business responsibility for an entire project. and outputs. only implementation is covered by PRINCE2. Indeed. solution generating and feasibility studies – these are considered as inputs to the project life cycle.e. rather than a whole project management methodology. their number is flexible according to the management requirements of the project. Operation and Termination but. the Project Board.e. it suggests that since contracting and procurement are specialist activities these can be managed separately using the methods. bulleted checklists. PRINCE2 speaks of ‘stages’ rather than ‘phases’ and states that while the use of stages is mandatory. administers.ENTERPRISE MANAGEMENT 255 THE PROCESS OF PROJECT MANAGEMENT Then. The whole t. the manual states ‘Most of what in PRINCE2 terms will be stages will be divisions of ‘‘implementation’’ in the product life span. where required. process diagrams and timely ‘Hints and Tips’.’ . Feasibility. while management stages equate to commitment of resources and authority to spend. The Guide defines project manager simply as ‘An individual responsible for managing a project. controls.e.

under PRINCE2 the project manager is ‘The person given the authority and responsibility to manage the project on a day-to-day basis to deliver the required products within the constraints agreed with the Project Board.’ These constraints are referred to as ‘tolerances’ and prescribe the ranges of acceptability of each scope. Project Time Management Activity Definition Activity Sequencing Activity Duration Estimating Schedule Development Schedule Control 7.3 7.1 Quality Planning 8.1 6.1 5.2 7.5 5.4 11.2 Project Plan Execution 4.1 7. one can conclude that under the Guide. .3 Quality Control 9. Project Scope Management Initiation Scope Planning Scope Definition Scope Verification Scope Change Control 6. who provides the leadership on the project.3 5.3 Team Development 10. time and cost within which the project manager must manage.5 6. Project Cost Management 7.4 Communications Planning Information Distribution Performance Reporting Administrative Closure 11. 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.4 6. Project Communications Management 10.2 Quality Assurance 8.1 10.1 Organizational Planning 9.2 Staff Acquisition 9.’ To us.6 Procurement Planning Solicitation Planning Solicitation Source Selection Contract Administration Contract Closeout Figure 1 Overview of Project Management Knowledge Areas and Project Management Process In sharp contrast. Project Quality Management 8.4 12.3 6. Any trend beyond these limits becomes an ‘issue’ and must be brought to the attention of the project board.4 5. in cash or in kind for the project.2 11. ‘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. Project Human Resource Management 9.3 12.’ So. the Guide does not recognise either ‘executive’ or ‘project director’ but uses the term ‘sponsor’.2 5.3 11.1 Project Plan Development 4. Project Risk Management Risk Management Planning Risk Identification Qualitative Risk Analysis Quantitative Risk Analysis Risk Response Planning Risk Monitoring and Control 12. Project Procurement Management 12. By comparison.5 12.1 12.1 11. is actively managed. it is the project manager who is firmly in charge. represent[s] the customer and [is] owner of the business case.5 11. that it has clear authority and that the work.6 11. while the project manager provides the managementship. this sounds very much like a project director. including risks. This individual ensures that the project or programme maintains its business focus.256 THE PROCESS OF PROJECT MANAGEMENT READINGS E2 PROJECT MANAGEMENT 4. quality.3 10.2 12.2 6.3 Integrated Change Control 5.4 Resource Planning Cost Estimating Cost Budgeting Cost Control 8. Project Integration Management 4.2 10. The chairperson of the project board.

As PRINCE2 states.ENTERPRISE MANAGEMENT 257 THE PROCESS OF PROJECT MANAGEMENT Controls Starting up a Project Plans Mgmt of Risk Organisation Business Case Initiating a Project Plans Quality Mgmt of Risk Business Case Controls Controlling a Stage Directing a Project Quality Review Change Control Managing Product Delivery Change Control Plans Controls Managing Stage Boundaries Plans Business Case Mgmt of Risk Controls Organisation Closing a Project Controls Configuration Mgmt Business Case Productbased Planning Key Pink = Techniques Grey = Component Clear = Process Figure 2 Use of PRINCE2 components and techniques in the processes Authority documentation PRINCE2 tends to be heavy on documentation. A project has a set of progressive governing documents in its series of processes. The very first document is the ‘Project Mandate’. this document Planning Controls Change Control Configuration Mgmt . a sequence that we had a little difficulty in following.

such as clerical. and pieces. It assumes that a provisional ‘Business Case’ exists. Unlike the business case. the output of which is a ‘Project Initiation Document’ (PID). The SU process is intended to be of short duration and is designed to ensure that all the necessary players. except for the background attachments such as the business case. The PID is intended to define all of the questions what. The Guide recognises neither business case nor project brief. shared. Executive. as noted earlier. And it provides the project manager with the authority to apply organisational resources to project activities. the project plan and information from the customer. 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. although if it does not. it is created during the SU process. the PID is a substantial and stable document. the change management issues. The project brief is a relatively simple document providing background. Concurrently with the preparation of the PID. when. and the how of the project. configuration librarians and even PRINCE2 consultants serving a number of projects. time and risk and the source of this information is the project mandate or the project brief. the first project stage is planned leading to the authorisation by the project board of the project’s first stage. The Guide defines project charter as ‘A document issued by senior management that formally authorises the existence of a project. instead preferring to define roles. who. Supported by the senior user and the senior supplier. In addition to the usual roles of project board. estimating. and the ongoing viability of the project. we would add other expertise such as planning and scheduling. and that the information they will need is contained in a project brief. For example: Project Support Office (PSO) is conceived as a central pool of skilled resources. The manual states that a PSO is not essential. project definition (i.e. acceptance criteria and any known risks. team manager and so on. It is the base document against which the project board will assess progress.’ Special project management roles PRINCE2 does not define management jobs. what the project needs to achieve). although it is ‘baselined’ during the subsequent ‘Initiating a project’ process. This documentation feeds into the ‘Initiating a project’ (IP) process. The output of the SU process is an ‘Initiation Stage Plan’ that ensures the required people are identified. and in that process is converted into a ‘project brief ’.258 THE PROCESS OF PROJECT MANAGEMENT READINGS E2 may come from anywhere. It must contain sufficient information to trigger the first ‘Starting up a Project’ (SU) process. that may be allocated. PRINCE2 introduces a number of other distinctive roles to facilitate its methodology. project manager. In fact. the customer’s quality expectations. but it can be useful to support managers with their administrative tasks and ensure proper use of PRINCE2 across all projects. benefits. executive is the single individual with ultimate . which is updated. the outline business case. To the above list. are in place prior to the real start of the project. 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. forecasting and project accounting. The business case justifies the undertaking of the project in terms of reasons. The business case is a dynamic document that is updated throughout the project to reflect changing conditions. cost. why. divided or combined according to the project’s needs. is the person who chairs the project board. and executive as described earlier. a number of other special responsibilities are suggested in the role description.

procuring. nonetheless it is not a trivial task on most projects. PRINCE2 requires that this service is independent of the project manager and therefore cannot be delegated there. Project assurance is a responsibility shared between the executive. as well as numbering. This is either provided by programme management. implementing and possibly operating and maintaining the project products. distributing and maintaining the project’s issues records. It includes controlling the receipt. control. Many of these documents are standard fare. Senior User. Document description outlines PRINCE2 includes descriptions of thirty-three standard management ‘products’ that are invoked through the PRINCE2 methodology. It also maintains the project’s issue log. represents the interests of those designing. [etc]. covering planning. certain unique documents are worthy of special mention in the context of managing projects successfully. defines in measurable terms what must be done for the final product to be acceptable to the customer and staff who will be affected. The role is part of project support. Configuration Item Record: Configuration management is defined as the discipline that gives management precise control over its assets (including the products of a project). Therefore. It seems to us that this is essential information often overlooked in many projects. also a member of the project board. However. functionality and ease of use. PRINCE2 does not discuss the ever-popular-in-North-America subject of people management. For example: Acceptance Criteria. He or she ensures that a project or programme meets its objectives and delivers the projected benefits. identification. in addition to those mentioned earlier. recording. Although this refers primarily to management documents and product documentation. including business. rather than physical objects. Note that both these roles may each be represented by more than one person. such as various plans and reports. storage and retrieval of all such documents.ENTERPRISE MANAGEMENT 259 THE PROCESS OF PROJECT MANAGEMENT responsibility for the project. and must have the authority to commit and acquire supplier resources required. user and supplier. for which it is most useful to have detailed listings of required contents. senior user and senior supplier. is responsible for the specification of the needs of all those who will use the product(s). 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 manage the project is not thereby undermined. developing. and that they liaise directly with the team members who are responsible for producing the project’s products. as does the Guide in its chapter ‘Project Human Resources Management’. identification. facilitating. a member of the project board. The senior supplier is accountable for the quality of products delivered by the supplier(s). for user liaison with the project team and for monitoring that the solution will meet those needs within the constraints of the Business Case in terms of quality. or is developed during the starting-up-a-project process. Configuration Librarian is a role responsible as a custodian and guardian of all master copies of the project’s products. However. Project Assurance covers all interests of a project. Senior Supplier. The configuration item record provides the required information about the status of each and every item and makes reference to the . PRINCE2 does describe in detail the responsibilities of ten project management team roles that are included in its methodology. providing information on the status of all projects.

both good and bad. It provides a product-based framework that can be applied to any project. The Lessons Learned Log is a repository of any lessons learned. and (3) Producing a Product Flow Diagram. 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. Captured during the project. their analysis. a deficiency) to a request for scope change. In the Guide. The corollary is.260 THE PROCESS OF PROJECT MANAGEMENT READINGS E2 product breakdown structure.g. Issues may range from a question or statement of concern. The converse is that no activity is necessary unless it contributes to the final outcome. such as a culture change or a different organisational structure. to give a logical sequence to the project’s work. problems and similar events in a consistent way before their proper disposition has been determined. A correctly formed product flow diagram. these documents are not discussed in the Guide. In step 2. planning generally is seen as part of key general management skills. 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. PRINCE2 recognises risk as a major component to be considered during the management of a project and is factored into all of the major processes. relevant work packages. a document or a piece of software. writing a clear. and so on that can be usefully applied to other projects.’ With the exception of lessons learned. (2) Writing Product Descriptions. therefore. of course. countermeasures and status. stage and team plans. not only identifies the activities involved but also leads to a network dependencybased schedule or Gantt chart. PRINCE2 describes three steps to the PL technique: (1) Producing a Product Breakdown Structure (PBS). is necessary to ferret out the necessary information. such as a machine. these items provide the basis for writing up a formal lessons learned report at the end of the project. A ‘product’ may be a tangible one. Each item can then be followed up until the required action has been taken and the item cleared. to an off-specification (e. Such issues may be raised by anyone associated by the project at any time. Similar to the issue log. In step 3. and every product must be included to capture every activity. complete and unambiguous description of products is a tremendous aid to their successful creation. We recognise this as an essential feature of the ‘Learning Organisation. PRINCE2 provides a good explanation of the technique and specifies the associated documentation to go with it. providing a focus on the products to be delivered and their quality. the products are re-ordered into their logical sequence to form a product flow diagram. that cover management experiences or use of specialist products and tools. Planning is discussed in the chapter ‘Project . such as network planning and Gantt charts. It forms an integral part of the Planning (PL) process and leads into the use of other generic techniques. or it may be intangible. or another iteration. Planning and scheduling Product-based planning is a key feature of PRINCE2. the quality log and change control. the Risk Log provides a repository for the identification of all project risks. Each step is described in detail and excellent examples are provided as illustration. at any level. 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. Project management must control and contain risks if it is to stand a chance of being successful. that if it is not possible to write the description. then more work. the issue log is an essential part of controlling project stages by capturing all queries. In PRINCE2.

resource and cost plans. For example. The individuals or teams report back to the project manager via checkpoint reports or other identified means such as triggers. which comes first. this straight forward and well-explained proposition should clearly lay to rest the controversies that we have seen in North America. 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. That is. coherent document that can be used to guide both project execution and a baseline against which changes will be controlled. The implication is that PRINCE2 is in the hands of the supplier . is to be found referenced in many of the other Guide chapters. In the Guide. Indeed. they really serve different purposes and are therefore not directly comparable. and. control of the technical work is exercised through the authorisation of work packages. The process is described in detail starting with project issue management. control is all about decision-making and is central to project management. It includes controls on quality. and how they are related. over whether a work breakdown structure should be product or activity based. time and cost and identifies reporting and hand-over requirements. which will only be invoked if a linked risk actually occurs. However. and the essence of which is to create a consistent. Contingency. Because of this fragmentation. PRINCE2 establishes a good distinction between ‘tolerance’. Of course. planning also appears in each knowledge area and t. ‘contingency’ and ‘change control’. as we discussed under planning and scheduling. including submission. also like planning. the manual has been written on the assumption that the project will be run for a customer with a single (prime) supplier involved throughout. We have some concern over this last item because the business case is a ‘dynamic’ document. is a plan including the time and money set aside to carry out the plan. In a life-cyclebased presentation like PRINCE2. Control In PRINCE2. Its purpose is to: Produce the required products. in PRINCE2 terms. The work package control is used to allocate work to individuals or teams. like planning. Change Control is discussed as part of Project Integration Management. an attempt is made for ease of reference to map the Guide’s various content to the planning process. While PRINCE2 is designed for a variety of customer/supplier situations. Change control is a procedure designed to ensure that the processing of all project issues is controlled. and by updating the quality log. but is not so affective when it comes to providing guidance for running a particular project. In the context of control. analysis and decision-making. the corollary is also true. This has a bearing on both the organisation and the details of control. PRINCE2’s approach is a single unified methodology starting from developing the initial product breakdown structure through to identifying the corresponding network schedule. There could therefore be a tendency to match the business case to the current reality rather than controlling the current reality to the business case justification. In our view.ENTERPRISE MANAGEMENT 261 THE PROCESS OF PROJECT MANAGEMENT Integration Management’. must be integrated across all of them. Summary PRINCE2 and the Guide take very different approaches to the presentation of their material. We believe that the Guide takes that best approach for purposes of teaching the subject content of each knowledge area. Carry out the work according to schedule. updated from time to time. According to the manual. and Maintain viability against the business case. it is difficult to do justice to each knowledge area. meeting the defined quality criteria.

an implementation plan can be formulated that covers the project’s scope and quality grade. the project then moves into its second major phase.’ The Guide is generally written from this perspective throughout. vision and benefit. Indeed. At the same time. that is where the objectives are clear and the deliverables are either well described. but if the final transfer is not handled with appropriate delicacy. custody and control of the customer or user. . The manual as such does not cover the situation of multiple prime contracts (i. In such cases.262 THE PROCESS OF PROJECT MANAGEMENT READINGS E2 rather than the sponsoring organisation. within its self-prescribed limitations.’ While on the subject of project life cycle. In this phase. ‘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. Following approval of the business case. it is surprising that more focus is not given to this part of the project life cycle by both the Guide and PRINCE2. is the opportunity to assemble the owning organisation’s needs that could be potential projects.e. It seems to us that both PRINCE2 and the Guide have chicken-and-egg problems in the area of documentation for project initiation. and the back end for better communication and training in the use of the project’s product. Such a life-cycle design represents a simple straight forward progression with only two major project documents as stage-gate controls. We use the term ‘delicacy’ advisedly. short or long. The whole can then be assembled into a formal project brief or project charter and presented to the management for approval of a major commitment of cash and resources. trade contracts) directly under the control of an owner as is the case. This phase. the issues of work coordination responsibility are much more complex. the Guide covers more ground than does PRINCE2. or capable of being so. If these aspects were properly recognised and documented in standard methodologies. the project’s concept is developed by studying and testing alternatives and conducting feasibility studies. In describing a project. and time and cost tolerances. PRINCE2 provides a robust easy-tofollow methodology for running most projects. Our strong preference is for the generic project example to start with a ‘conception’ phase. With the products defined. 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. 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. After all. that is to say. This is the time to articulate that best opportunity in terms of big picture. for example with a developer using construction management techniques. 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. The product resulting from the project may be excellent and fully up to specification. Considering that it is in the conception and definition phases that the most critical project decisions are made. the intended products are defined as far as possible through the necessary customer/user input. because this part of the project is often fraught with political overtones. and analyse and select the best opportunity for serious study. who wants to change the way they do things anyway? Clearly. as PRINCE2 observes. perhaps sponsors would be more willing to set aside the necessary funding to ensure higher chances of project success. It should result in a viable business case as the stage-gate measure. from the project owner’s perspective rather than from that of a supplier or seller. Nevertheless. Consequently. the reaction to it may still be negative and the project seen as a failure.

of which he is the past president and chairman. social and environmental projects. and the Canadian Society of Civil Engineering.com. and for whom he developed the 1987 version of the Project Management Body of Knowledge. Program and Portfolio Integration. Comprehensive coverage of project management theory and practice can be found on his website at http://www. He also enjoys Fellow status in the Institution of Civil Engineers (UK). as well as design and engineering projects. chapters. His latest book is A Management Framework for Project. the Engineering Institute of Canada. He is a Fellow of Project Management Institute.ENTERPRISE MANAGEMENT 263 THE PROCESS OF PROJECT MANAGEMENT Max Wideman is a retired Canadian professional engineer and project manager with experience in systems. He has lectured or presented papers in 11 countries and has contributed books. papers and articles on many project management topics. 2004. Trafford.maxwideman. BC. .

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has invested in a new technology system to improve the logistics of the movement of clothes between its warehouses and chain of 250 retail outlets. Requirements (a) Explain the term feasibility. Now. and how a SWOT analysis is used in project selection. Ensuring that the outlets have the right supply of clothes is a critical success factor for the company. should the lowest price proposals always be selected? Give reasons for your answer. as it helps the organisation focus upon projects that will facilitate the organisation’s achievement of its strategic objectives. The project ended up being well over budget and was also late in delivering the system. (5 marks) (Total marks 10) Question 3 R Company. Requirements (a) Explain the term SWOT analysis. (8 marks) (Total marks 10) Question 2 SWOT analysis is commonly used in project selection. (2 marks) (b) Discuss the aspects of feasibility that are typically considered in project selection.Revision Questions 5 Section A type questions Question 1 The term feasibility is often used when assessing the viability of projects. However. the warehousing stock control and logistics project set up to develop and deliver the new system has experienced numerous problems. only 3 months after the 265 . (5 marks) (b) When selecting a project. a manufacturer and retailer of fashion clothes.

it is apparent that the project has not delivered its objective. It is clear that they did not use a project management methodology and did not have adequate control systems in place so that the problems that have now transpired could have been identified and rectified earlier in the project life cycle. he feels that most of his time was spent in meetings that did not achieve anything. (10 marks) Question 4 R has taken on the responsibility for organising the annual conference for the local Society of Management Accountants. A meeting between the project team and project sponsor has ended up with everyone blaming each other. whereas the warehouses are full of clothing. construct a network diagram and explain how information from this could be useful to R in planning the conference. R has decided that critical path analysis may be helpful in planning the conference. (10 marks) Question 5 T has just returned to his job in the finance department of Z Company. with the project members going back to their functional jobs without any discussion or feedback on the project performance and outcomes. . Reflecting on his experiences whilst working on the project. but rather wasted his time. Even worse. Requirements Recommend to R Company a project management methodology/approach. As a start. Remembering the project management techniques she came across when studying for her professional qualification. He also feels that the final stages of the project were not dealt with effectively. saying it was not their responsibility.266 THE PROCESS OF PROJECT MANAGEMENT REVISION QUESTIONS E2 new system has been installed. having spent the last 6 months as a member of a project team working on the development of an educational visitors centre for the company. R has drawn up a list of the activities she must complete in preparation for the conference. explaining how it could have helped to prevent the failures of the warehousing. Activity Determine conference theme Research alternative venues Identify and book guest speakers Book venue Print conference papers Print and send out invitations Confirm final arrangements with venue and deliver documents A B C D E F G Dependency – – A B C D E. Instead. some stores are out of stock of key ranges. F Time (weeks) 3 6 4 2 8 4 2 Requirement Using the information from the scenario. stock control and logistics project. she has identified the dependency between the different activities and the time she thinks each will take. the company is facing a crisis with many store managers complaining that they are not receiving the correct stock.

and this question requires you to clearly explain why this is so. and therefore it is important to have the basic knowledge of project planning stages. (10 marks) Question 6 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 system Parallel run new and old systems Processing on new system only Commencement date – week number 1 4 3 5 5 4 6 7 9 Duration 3 1 2 1 1 3 1 2 As long as required! Requirement Prepare a Gantt chart to monitor the installation of the new software. the post completion review and audit of the project. you could be asked to put together a project plan for a given scenario. (10 marks) Question 7 Project planning is a critical stage of the project management process. The aim of the project manager is to combat the various hazards to which a project may be exposed. Requirements (a) Explain why project planning is vital to project management. and to clearly state what planning involves. Requirement Evaluate the contribution of the various activities that should be carried out as part of project closure. Project planning is considered to be one of the most important stages of the project management process. Requirement Explain the concept of risk and the ways in which risk can be managed in a project. In an exam question.ENTERPRISE MANAGEMENT 267 THE PROCESS OF PROJECT MANAGEMENT He has now been asked to take on the role as project manager for a new project and is determined that he will improve the experience for his project team. (10 marks) . (b) Describe the steps involved in a detailed planning process. (3 marks) (7 marks) (Total marks 10) Question 8 It is often claimed that all project management is risk management since risk is an inherent and inevitable characteristic of most projects.

Jane feels that she should have been informed about the possible delay at the earliest opportunity. This project. with disastrous cash flow impact. All the major structural work has been completed to schedule. 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. Jane appears to have become angry with the subcontractor and the project manager. the project manager resigned and left the site. Talking to colleagues. Jane. This question is designed to ensure that you understand the importance of control and how it is undertaken. These are coordinated by the head office through six regional general managers who take full responsibility for the performance of the stores in their region. Jane apparently disagreed. and you expect to gain valuable experience from it. (3 marks) (b) Briefly explain how control is carried out.) installed on time. 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. you have managed to establish the circumstances leading to the unexpected departure of the project manager. Requirements (a) Explain why it is important to control a project once it is under way. water. The project manager also suggested that the delay was ‘a minor detail’. not Jane’s. with a total budget in excess of US$8 million. Jane asked you to deputise as project manager until a replacement could be recruited. and the services (gas. Shortly afterwards. Jane had always experienced problems in persuading the project . Apparently. At some point during the meeting. At the meeting. electricity. 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. Jane has given you an extract from the Gantt chart for the original project plan (Figure 5. (7 marks) (Total marks 10) Section B type questions Question 10 Trend plc is a large fashion retail chain.2) and says that it ‘proves the point’. The building is now undergoing its ‘fit-out’ stage. Apparently. etc. control of the project tasks and activities is critical.268 THE PROCESS OF PROJECT MANAGEMENT REVISION QUESTIONS E2 Question 9 Once a project is under way. mostly in prime high street locations. and the subcontract supplier of the goods elevator which is being installed to carry stock from the basement stockroom to the retail floors. The subcontractor has refused to do further work until Jane apologises. where the interior is installed. The project manager apparently claimed (rather forcefully) that it was his responsibility to manage the project. there was a very heated meeting between the project manager. It currently has 48 stores throughout the country. This situation obviously provides you with a challenging opportunity. and that opening would not be delayed. Jane says she has been ‘left in the dark’ by the project manager and ‘doesn’t like surprises’. has been in progress for 9 months and is nearing completion. and that the project manager and subcontractor were trying to hide the delay from her.

● ● ● ● Systems analysts – the main contact with the client. 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.2 Gantt Chart manager to discuss progress. A large proportion of IDC’s work can be done via the Internet. although they do have to visit their clients’ sites for the initial systems analysis and sometimes to participate in presentations. which she wants you to attend. sales and marketing. 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. this has caused problems due to lack of adequate communication between the staff. (c) a prioritised action list based on the SWOT analysis.ENTERPRISE MANAGEMENT Now Week Week Week Week Week Week Week Week Week Week Week Week 44 45 46 47 40 41 42 43 36 37 38 39 Install gas services Install electricity services Install water and waste Test all services Commission all services Install goods elevator (GE) Connect and test GE Commission and hand over GE Install catering facilities Install heating and air conditioning δ >51 >53 δ 269 THE PROCESS OF PROJECT MANAGEMENT Figure 5. IDC employs 150 staff. Designers – IDC regularly uses specialist consultant graphic designers to design the graphics for the websites. (b) a SWOT analysis for the project as at today. with staff from the United Kingdom and the United States working together. senior systems analysts also act as project managers. Jane has called a ‘crisis meeting’ for tomorrow with the managing director and finance director of Trend. Programmers – create the code required to run the website. systems testing and implementation. this has been her only contact with the project manager. IDC Ltd is based in the United Kingdom with a branch office in the United States. . split evenly between the United Kingdom and the United States. In the past. Some projects are shared jointly between the two sites. The staff fall into the following categories. their clients are worldwide. Most of the staff are specialists and can only work on a small part of a project. Administrators. Other than occasional conversations when she visited the site. and has received only three written progress reports during the last 9 months. (4 marks) (8 marks) (13 marks) (Total marks 25) Question 11 IDC Ltd is a software development company that specialises in designing and implementing internet websites and e-commerce systems for their clients.

IDC has recently started talking to ABC Inc. The workload does not follow any particular cycle but does vary from time to time. starting with an initial idea. (5 marks) (Total marks 25) Question 12 IDC has a turnkey contract with AZ Ltd for the supply of hardware and software to run a completely new stock control system and a website allowing access to the stock database. IDC Ltd provides a full development and maintenance service for their clients. and purpose of.5 3 2. a feasibility study. ABC is considering the possibility of setting up a website and moving into e-commerce. IDC has many projects in progress at any one time. (15 marks) (c) Outline the contents of a feasibility report. You are working with IDC Ltd as a member of a systems development team. should consider in evaluating the feasibility of the e-commerce project. Each project has a project manager but can utilise any of the specialist staff as required.5 (continuing) 5 (continuing) 4 (continuing) . 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 Actual 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 Start of week 1 Start of week 1 Start of week 7 Middle of week 10 Start of week 7 Not started Start of week 8 Not started Planned duration 8 5 4. An analyst of your team at IDC has prepared the following schedule of events for the 16-week implementation phase of the project.5 5 3 9 6 4 1. (5 marks) (b) Explain the factors that ABC Inc.270 THE PROCESS OF PROJECT MANAGEMENT REVISION QUESTIONS E2 The staff work on projects in development teams. the membership of which can vary depending on the requirements of the projects. some of which are being held up as the specialist required is not available when needed. but is falling behind schedule. (a) Explain to ABC the need for.5 2. ABC has recently formed a steering committee to oversee the e-commerce project. The steering committee have asked IDC to justify setting up a feasibility study team to prepare a feasibility report on e-commerce in their company. The design stage has been completed and the project is progressing through the implementation stage. At present there are a lot of projects in progress. ‘I think we could do with setting up a Website’ through to the handover to the client’s staff.

(9 marks) (c) Explain the purpose of a Gantt chart and interpret the information shown on the chart prepared for AZ Ltd. All the major structural work has been completed to schedule. and has received only three written progress reports during the last 9 months. . Shortly afterwards the project manager resigned and left the site. mostly in prime high street locations. electricity. The project manager apparently claimed (rather forcefully) that it was his responsibility to manage the project. has been in progress for 9 months and is nearing completion. Jane feels that she should have been informed about the possible delay at the earliest opportunity. At the meeting. 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. The building is now undergoing its ‘fit-out’ stage. the site manager of the elevator supplier apparently mentioned that the installation was running late by 3 weeks. Jane had always experienced problems in persuading the project manager to discuss progress. water. 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. which she wants you to attend. This situation obviously provides you with a challenging opportunity. Jane appears to have become angry with the subcontractor and the project manager. The subcontractor has refused to do further work until Jane apologises. not Jane’s. Jane says she has been ‘left in the dark’ by the project manager and ‘doesn’t like surprises’. Apparently. and the services (gas. and that opening would not be delayed. Other than occasional conversations when she visited the site. (8 marks) (b) Prepare a Gantt chart for the AZ Ltd project. Apparently.) installed on time. At some point during the meeting. where the interior is installed. 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. These are coordinated by head office through six regional general managers who take full responsibility for the performance of the stores in their region. and you expect to gain valuable experience from it. this has been her only contact with the project manager. there was a very heated meeting between 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. It currently has 48 stores throughout the country. Today On arriving at work this morning. (8 marks) (Total marks 25) Question 13 Trend plc is a large fashion retail chain. with disastrous cash flow impact. with a total budget in excess of US$8 million. you have managed to establish the circumstances leading to the unexpected departure of the project manager. etc. Jane has called a ‘crisis meeting’ for tomorrow with the managing director and finance director of Trend. Talking to colleagues. The project manager also suggested that the delay was ‘a minor detail’.ENTERPRISE MANAGEMENT 271 THE PROCESS OF PROJECT MANAGEMENT Current date is start of week 12 (a) Explain the phases of project management. Jane pointed out that this situation would delay the opening of the store. Jane apparently disagreed. This project. Jane.

272 THE PROCESS OF PROJECT MANAGEMENT REVISION QUESTIONS E2 You then call Anne Martensen. Requirements (a) Describe the main controls used in formal approaches to project management (e. (10 marks) (b) Explain how such controls could be used in this and future projects. PRINCE2). the head of quality assurance at Trend’s head office.g. (15 marks) (Total marks 25) . as all her department’s time is taken up with designing and implementing control procedures for the retail activities of the organisation. Anne is surprised to hear about the problem with your project. She tells you that there are no standard procedures for the control of capital projects. but is unable to offer any help as she and her staff have little experience of managing major projects. Anne says that she is sure that other project managers would appreciate a set of procedures to improve the project management process.

introducing a computerised system). The technical features of a strategy that need to be considered are: ● ● development – that is. but examination questions will require you to consider all aspects of feasibility. the effect of constructing a new road or nuclear power plant on a community). (a) Feasibility is a term used to describe how achievable various project options are. is the technology suitable to satisfy the objective of the project effectively? Other technical considerations could be: ● ● the ease of use of the technology. This may include awareness of the social issues within a group or office (e.g. (b) Fasibility can be examined from a number of perspectives. technical and financial considerations (i.e.e. do not just concentrate on the financial aspects). the degree of disruption during the construction/installation phase. ecological. Social feasibility It is becoming increasingly necessary to assess social factors affecting feasibility. or larger social awareness regarding the effect of projects or products on workers. The second part of the question requires you to think about a range of aspects that affect project feasibility.Solutions to Revision Questions Section A solutions Solution 1 5 Guidance and common problems The first part of this question should be of no problem. The aim of the study is to decide which proposal to choose. 273 . Feasibility is normally established by means of a feasibility study. Technical feasibility There are a number of key aspects regarding technology. which may be carried out on a number of potential strategies. 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. employment (i.g. As accountants we may be primarily concerned with the financial feasibility. including social. will the introduction of computerised systems lead to redundancy) and the general public (e.

). 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. and. When evaluating a project proposal. . and the SWOT results may form part of your evidence in recommending a particular project option. Solution 2 Guidance and common problems SWOT analysis is a commonly used tool in strategic planning and project selection. the production processes and the disposal of the product at the end of its life. The answer above is mainly concerned with your ability to describe the technique and its uses. Weaknesses. consider a project proposal to implement a new marketing database. SWOT may also be examined in a very practical way. The strengths and weaknesses arise from the organisation’s internal environment. Opportunities and Threats). For every item of the project proposal. Therefore. building. Environmental considerations may be stimulated primarily by health and safety legislation. for any project proposal. Cost-benefit analysis helps to identify and evaluate the costs of the proposal over its anticipated life (such as purchase. (a) A common analytical tool used in assessing project proposals and their feasibility is SWOT analysis (Strengths. that is you may have to perform a SWOT analysis on the data provided in the scenario.274 THE PROCESS OF PROJECT MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 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. A SWOT analysis will also highlight the weaknesses and threats of particular proposals. or provides the organisation with sufficient opportunities to do so in the future. it is important that you consider the application of SWOT as well as being able to describe the technique. repair. therefore. maintenance. it is necessary to identify: ● ● ● ● its value: in monetary terms or in terms of benefits whether it is capital or revenue when it occurs whether it is an one-off cost or recurring. For example. Increasing market share could be one of the organisation’s long-term objectives. In this examination. it is important to establish whether the proposal helps to achieve the organisation’s long-term aims and objectives. Financial feasibility A technique often used in a feasibility study is cost-benefit analysis. etc. this would be an important factor in final project selection. whereas the opportunities and threats arise in the organisation’s external environment. Thus. a SWOT analysis can establish whether a particular proposal has sufficient strengths that are compatible with the achievement of the organisation’s objectives. The other side to cost-benefit is the identification and evaluation of the benefits of the project over its life. A SWOT analysis for this proposal may indicate a strength of improving customer relationships and an opportunity to increase market share. It is important for organisations to consider the raw material input.

for example project initiation documents. The key processes and documentation of PRINCE2 would have enforced the project team in R Company to have a clear structure of authority and responsibility between members in the project team. The implications on the whole project deliverables should . The methodology includes a series of ‘management products’. As part of this. identifies some of the potential problems that may arise and early resolution. Whilst it could be argued that aspects of PRINCE2 could be considered to be just good project management. for example variances in time. the level of quality and the level of technology being used. the control responsibilities of the various members of the project team would have been determined. The lowest priced proposals should not necessarily be chosen. project budget. this would have been reported to the project board. It includes bureaucratic controls on the planning and execution of projects. These include controls on quality. used by the UK government and private sector organisations. The exception plan concept in PRINCE2 would mean that if R’s project was going to exceed its tolerance. time and costs and identify reports and handover requirements. which can be defined as: ● ● ● ● Delivery of agreed outcomes On time Within budget Conforming to the required quality standards. Solution 3 A project management methodology that could have been used by R Company is PRINCE2. cost or quality. There are many other factors to consider when evaluating proposals. after-sales support and warranty terms are of more importance as deciding factors. The key processes of PRINCE2 methodology offer a number of features that would have benefited R Company including: ● ● ● ● A defined management structure A system of plans A set of control procedure A focus on product based planning. such as the reputation and experience of the project provider. the difference is in the level of structure and documentation required. but often other factors. expertise. such as quality.ENTERPRISE MANAGEMENT 275 THE PROCESS OF PROJECT MANAGEMENT (b) The answer to this question is no. The main purpose is to deliver a successful project. Cost is obviously an important factor in deciding who to choose to provide a project. which would have improved controls for R’s project. the materials used. the timescales being offered. This should mean that the different participants in the warehousing stock control and logistics project would have had a clearer understanding of the various tasks and the relationships between them and should have prevented the problems R Company is now facing. all of which are problems that have led to the failure of the project in R Company. so that each party has clear objectives. PRINCE2 has a set of progressive documents for a project and control is achieved through the authorisation of work packages. This is an acronym for Projects IN Controlled Environments and is a structured approach to project management. quality plan and various checkpoint and progress reports.

It will also identify the activities that are critical. C. In the case of the conference planning. 6 6 7 8 9 F. The purpose is to ensure benefits are gained in the final stages. 3 3 2 3 4 7 7 E. Undertaking the analysis should assist P to decide when she needs to start working on the arrangements for the conference. and to identify the start and finish times for each activity. the activities where any delay will lead to a delay in the project overall.276 THE PROCESS OF PROJECT MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 have been discussed and plans amended to reflect any changes needed to ensure the project delivered its objectives. 4 A. 2 7 3 5 D. A. on time and within budget? Did the project deliver according to the objectives set? . E & G and the project duration will be 17 weeks. 8 15 15 17 17 6 1 0 0 B. What activities can be done at the same time as this activity? The answers to these questions will help to determine the dependencies and the project duration between different activities. which is the latest time at which all previous activities must have been completed to prevent the whole project being delayed. 2 Critical path analysis is a technique that can be used to assist in the time planning for project management. It will help P to identify the sequential relationship between the various activities that need to be undertaken in planning the conference. This will involve calculating the earliest time event (EET). The questions that could be asked include: Was the project completed to quality. which is the earliest time at which any subsequent activity can start. Solution 4 Network diagram for conference planning C. and latest time event (LET). In other words. It is important to maintain commitment of the team until all the work is completed since people tend to be more motivated to move on to new projects rather than tying up the loose ends. In conducting the analysis. the critical path is between. and in this case the conference actually going ahead. P will need to answer the following questions for each activity: 1. 4 G. What can be done once this activity finishes? 3. Solution 5 Project closure is the final stage of the project life cycle and occurs once the project work has finished. It is also important to evaluate the conduct of the project in order to learn from experiences which will help the company improve on its performance in future projects. What must be done before this activity can start? 2.

The review will provide an opportunity to discuss the successes and failures of the project process. Together. Remember that some activities will overlap. the efficiency of the solution compared with the agreed performance standards. This might involve debriefing meetings which enable all parties involved in the project to assess their own performance. there should be a review of the project organisation and methods to recommend future improvements. the time taken to develop the solution compared with target dates and reasons for any variances. This will include an assessment of the extent to which: ● ● ● ● the required quality of the project has been achieved. This can be achieved through the post completion review and audit. providing a repository for the knowledge captured. An evaluation from the client’s perspective will establish if the project was successful in satisfying their requirements and has given them the opportunity to voice any concerns. In other words. In addition. The project manager should issue a report summarising project performance and advising on how it could be improved in the future.ENTERPRISE MANAGEMENT 277 THE PROCESS OF PROJECT MANAGEMENT Are there lessons to be learnt? Are there any follow up action on this project needed? Project closure activities would involve practical tasks such as organising and filing all project documentation and ensuring that members of the project team have jobs to return to. from the information given. It provides a forum to discuss with individual team members their role in the project and how they could improve their own performance for the future. It should also involve formally agreeing with the ‘client’ that all the agreed deliverables have been achieved. you will not be able to input the actual duration of the different activities. you can then allocate the necessary space across the page. the review and audit can provide a case history of the project. given the associated costs of review and audit. The post completion audit is the final stage and involves conducting a formal audit of the entire project against a checklist. the effectiveness of project management methodologies. Solution 6 Guidance and common problems Check how much time is required on the Gantt chart first. however. The reason that post project activities are not always undertaken is that it is often difficult to quantify in a tangible way the benefits derived. examining project performance by comparing achievement with the original project plan to show that the project has delivered the outputs. the actual cost of the project compared with budgets and reasons for over/under expenditure. The main purpose of the post completion review is to evaluate the overall project and to learn from the experiences gained before the project team is disbanded. . The feedback should provide reinforcement of good skills and behaviours and the identification of areas for improvement or change in practice for the smooth running of future projects. The business case should be reviewed to check that intended benefits are likely to be realised.

Attempting to begin a project without a plan would be like trying to assemble a set of cabinets without first reading the instructions. within budget and to schedule. 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. From these can be developed: ● Work packages ● Estimates of time and cost ● Graphic illustrations of the schedule: Gantt charts. which can be used to put together a sound project plan. 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. (a) Planning is a vital part of any project. Projects often go wrong at this early stage of the project life cycle. so if there are signs of projects going out of control. (b) 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.278 THE PROCESS OF PROJECT MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9 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 system Parallel run new and old systems Processing on new system only Solution 7 Guidance and common problems As stated in the question. Part (b) of this question should give you a clear structure. It is important to lay out a ‘road map’ that clearly shows how the project activities and tasks will be accomplished. ● Risk analysis and plans ● Project schedule and the budget ● Change management ● Acceptance process ● Post-project implementation audit. you may be able to explain these causes by analysing the planning stage. . etc. or trying to drive from Glasgow to Southampton without first reading a map. The risk of project failure is much greater without project planning.

Carry out risk management strategies. A number of stages are involved in the process of managing risk: ● ● ● ● ● ● Identification of risks. Reducing the risk – where the potential for the risk cannot be removed but analysis has enabled the identification of ways to reduce the incidence or consequences. perhaps having contingency plans should the risk occur. for example through insurance. The process of risk assessment involves obtaining a clear definition of the possible risks. Prioritise the risk according to exposure. schedule and quality. Transference of the risk to others. Absorption – this is when the potential risk is accepted in the hope or the expectation that the incidence and consequences can be coped with if necessary.ENTERPRISE MANAGEMENT 279 THE PROCESS OF PROJECT MANAGEMENT Then the plan is issued to all major stakeholders. deciding how to address each risk item. The first stage will require an assessment of the probability of risks occurring and their likely impact on the project. risk management which is what the project manager does to counteract or prepare for the risks. Analysis of the risks in terms of the impact of each risk item on project performance. producing lists of risk items in a risk register. excluding any sensitive information that would only be given to senior management. Estimate of the probability of the risk occurring during the execution of the project (project exposure). in other words its sensitivity. To gain full marks you would be expected to give some detail for each category. high) and the threat of likelihood (low. this should be determined in terms of the level of impact (e. In deciding what to do about the risk. Undertaking any project carries an element of risk and project management will be concerned with understanding what is risky about a particular project or activity within the project. either high or low) and the probability of the risk (high or low). medium. for instance determining how important the risk is to the project. It will then require plans to be put in place to reduce or eliminate them. which is where the risk is passed on to someone else. the likelihood of that risk occurring and what the severity of its occurrence would be. for example: ● ● ● ● Avoidance of risk – where the factors which give rise to the risk are removed totally from the work to be done. tracking the success of resolving the risk and the risk management approach. These steps will enable the project manager to monitor risk factors and take appropriate action during the execution of the project. . This can be achieved by some assessment of the likelihood and consequences of risks and then plotting the outcomes on a matrix which maps the potential impact of risk (low. effect and problems associated with the risks (sensitivity). high). in other words risk management. Solution 8 Risk can be defined as the probability of an adverse or undesirable event occurring. Review and monitor. Essentially this will involve identifying the different types of risk and then how to manage the risk.g. In other words. medium. There are different strategies for dealing with risk.

things to correct or improve. it is found that the project is not progressing as planned (i. cost or scope. opportunities and threats relating to the entity (project or organisation). Once changes are made to the budget or schedule. 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. If. things we do not do (that we should). It is a brief summary of the major strengths. . they must be incorporated into a revised project plan that must then be distributed to the team members and customer.e. weaknesses. Decisions must then be made as to how to revise the schedule or budget. Section B solutions Solution 10 Trend plc (a) SWOT analysis SWOT analysis is one of the most commonly used business and project management tools. Control involves measuring actual results and progress versus the planned progress. schedule or budget must first be agreed by the project team and the customer. Strengths are: things we do well. Threats are: events or changes that we should protect ourselves from or defend ourselves against. These change decisions may involve a trade-off of time. Opportunities are: events or changes that we can exploit to our advantage. Procedures are necessary to regularly review and reassess the risks documented in the risk register. it is important to keep an up-to-date record of which activities have begun. 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. Weaknesses are: things we do badly. reducing project costs to get the project back on budget may require the reduction of quality in materials or functionality of the technology. which are completed. Similarly. it is behind schedule or is over budget) then the project manager must 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. Solution 9 Guidance and common problems (a) and (b) together Once the project is under way. For example. In order to measure actual project progress. it is also important to record the actual costs of each activity. during this monitoring process. things to be proud of. and at what time they started or were completed. Changes to the project scope. things we do that others do not. it is necessary to monitor progress continually against the plan to ensure that it is proceeding as expected.280 THE PROCESS OF PROJECT MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 Risk management is a continuous process through the life of the project.

Each of the SWOT sections should consider: ● ● ● what has happened in the past what is the current situation what might happen in the future. I shall be producing a report for Jane on how we can improve relationship management in the project. Once work on the project has recommenced. This will require a meeting to air and resolve differences. It can be used by the project team. (c) Immediate actions The first priority for the project must be to get the elevator subcontractor back to work. ● Absence of project control procedures. ● Poor reporting of progress. the project programme must be examined for any possible slack. ● Recognition of the scale of the problem. Purpose A SWOT analysis is used. Opportunities ● Good relationship with subcontractor prior to this project. The real value of SWOT analysis is not in the analysis itself.ENTERPRISE MANAGEMENT 281 THE PROCESS OF PROJECT MANAGEMENT Strengths and weaknesses relate to the project itself. ● Relationships within project. ● Misunderstandings and communication breakdown. Weaknesses ● Resignation of project manager. Threats ● Relationship with elevator subcontractor. It appears that elevator installation is a critical activity. even if she feels she was right. Looking at the whole SWOT analysis. A number of actions are necessary to regain control of the project. to provide a critical analysis of the project in relation to its environment. opportunities and threats to the business environment in which the project is based. Successful completion of the project must be our first priority. it may be necessary for Jane to apologise to the subcontractor. it is in how we use it as a basis to discuss and agree future action. (b) Strengths ● Major structural work completed to schedule. ● Insufficient slack in project programme. rather than confrontational. it is clear that the current situation is critical. It is essential that this meeting is friendly and conciliatory. ● Potential impact on business cash flow. The on-time completion of the refit is seriously threatened by continuing delays on elevator installation. or as a communication document to report progress to project sponsors. but there . in order to help them to improve their performance. on a periodic basis. ● Potential impact on project completion.

(b) Factors that should be considered during the e-commerce feasibility study (i) The feasibility study provides the basis for the feasibility report. It is also important for the project that we identify or recruit a permanent project manager as soon as possible. Once the project programme has been studied (and hopefully amended). and should improve both the quality and consistency of project management. All projects need certainty and consistency. legal and economic feasibility of the proposed system. It is important that we adopt at least some aspects of these to improve project management in the future. and having a project manager in place for the remainder of the project will improve control and reduce risk.’s current hardware and software provision will need to be carefully examined. ABC Inc. The feasibility study is documented in a feasibility report which will make recommendations on the way to proceed. This will allow projects to learn from each other. A feasibility study examines the current operational systems and considers alternative ways of meeting the systems and organisation’s objectives. designed to improve control. The steering committee sets the terms of reference for the study team. Reporting of progress is an important part of managing the relationship between the project team and the project sponsors. I will be briefing you later on the different types of benchmarking and the likely benefits for future projects. A feasibility study is needed to establish the technical. Solution 11 (a) Feasibility study – need and purpose A feasibility study is a study that is carried out to assess the types of systems that are required by an organisation to meet its objectives. in . operational. There are a number of formal project management methodologies. (ii) Analyse existing system. Short-term actions In the short term.282 THE PROCESS OF PROJECT MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 may be some opportunity to reschedule subsequent activities or allocate more resource to them in order to ‘claw back’ the lost weeks. Anne Martensen should be asked to prepare a set of procedures for project management in Trend. It will therefore have to consider a range of topics in sufficient depth to allow a report to be prepared. the control and reporting procedures relating to the project must be reviewed and improved. The responsibility for replacing the project manager lies with Jane and Samantha. Jane and Samantha must be fully briefed. Anne may require additional resource or external help to produce these. as it is possible that a simple solution exists to rescue the project. The study will start by analysing the current systems. This should only happen after the programme has been re-evaluated. The feasibility study will be carried out by a team who have been appointed by the steering committee. Long-term actions We can learn a lot by comparing our project management process against models of best practice. who will then carry out the study and prepare a report based on the terms of reference.

● type. quantity and timing of payments from customers. The proposal with the greatest NPV is selected. The information requirements of the management will also need to be established. organisational and political aspects of ABC Inc. the timescale of their inflow or outflow established and discounted to present values. The feasibility report may therefore have to report an . The problem in organisations like ABC Inc. This means that a full cost-benefit analysis will be difficult to carry out. ● type.’s management to establish the objectives of the proposed e-commerce system and to discuss critical success factors for the project. The feasibility and advantages of each of the alternative systems can then be analysed. ● any current use made of the internet. An outline logical system can then be prepared and alternative outline physical specifications specified. quantity and source of sales orders currently processed. 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. – The consequent effects on status and promotional expectations of staff. ● Economic feasibility – the costs and benefits of each proposal need to be established. – The levels and types of changes proposed in the current jobs and possible changes to organisational structures.: – 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. ● Operational feasibility – the study will need to take account of the human. Establish objectives. ● type of processors used. while the benefits can be separated into those that are tangible and can be quantified and those that are intangible and unquantifiable. is that many of the benefits associated with e-commerce will be intangible and therefore very difficult if not impossible to calculate. Compare alternatives. The study team will also need to discuss the system requirements with users to establish the requirements of the system. The answer will determine the scale of change proposed for the new system. e-mail or EFT. 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. The analysis of the current system. The study team will need to interview ABC Inc. ● current structure of the stock and customer records. the operating system used. ● networking capabilities. Involve users. Prepare system specification.ENTERPRISE MANAGEMENT 283 THE PROCESS OF PROJECT MANAGEMENT (iii) (iv) (v) (vi) order to establish whether the current configuration could support an e-commerce operation. the requirements of users and the information requirements of the management will be combined to determine the new system requirements and a system specification prepared. ● communication technology available. The costs need to be separated into one-off costs and continuing costs. specification and age of the existing hardware.

The system will then be commissioned and taken over by the customer. The project director and project manager have to be agreed. This will set out: ● what is to be carried out ● why it is being carried out ● who is going to do it ● how it is to be carried out ● when it is to be carried out. along with a detailed plan for the next stage. The AZ Ltd stock system has completed the first and second stages of the project and is now in the third stage. integration and test stages are included here. the extent of the survey carried out on the existing system and the range of interviews. It does this by presenting the work and conclusions of the feasibility study team. those rejected and the results of the evaluation of the remaining alternatives. (iii) Execution stage. . design. The organisational aspects of the project need to be setup. a clear recommendation for the steering committee to consider. This stage starts when live running begins. a timescale.284 THE PROCESS OF PROJECT MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 NPV for each proposal based on the quantifiable costs and benefits along with a list of un-quantified benefits. This starts when the system has been completed by the supplier and is delivered to the customer along with full documentation. a budget and a schedule of other resources required to implement the system if it is approved. (ii) Development stage. The report will set out: ● ● ● ● ● the feasibility study terms of reference. the alternative outline systems considered. In an IT project. the requirements definition. and so on performed to assess the system requirements. Staff training needs to be carried out and acceptance tests performed. The feasibility report can be used to prepare the project initiation document. Some time after the system has been implemented a post-implementation review should be carried out to establish whether the project’s objectives have been met. The recommendation could be to cancel the project. if the recommendation is to go forward it will recommend a preferred option. An overall plan for the whole project will also be prepared. (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. (iv) Completion stage. Solution 12 (a) Project management can be divided into four phases: (i) Start-up or initiation stage. This is where most of the supplier’s work is carried out.

5 weeks late. The information shown on the attached Gantt chart for the stock control implementation shows the following: ● ● ● ● ● ● The initial estimate for the time to write programs was 1 week less than the time needed. the original plan was for 3 weeks. This 1-week delay meant that the file conversion could not start until Week 10. Testing programs started a week late due to the delay in purchasing equipment.ENTERPRISE MANAGEMENT 285 THE PROCESS OF PROJECT MANAGEMENT (b) Gantt chart Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Write programs Purchase and install equipment Create databases Convert files Test programs Test system Select and train personnel Cutover Planned time Actual time Current point in time (c) The Gantt chart or bar chart’s purpose is to help with project planning by showing the duration and sequence of activities in a project. The chart is also able to show actual progress alongside planned progress but does not show dependencies. The creation of the database went very well and the team completed the task in 4 weeks instead of 4. it actually started in the middle of Week 10. neither of which is completed. but is still unfinished after 5 weeks. starting in Week 7 instead of Week 6. but has not started yet as it is dependent on the files being converted and the programs tested. Testing the system was meant to have started in the middle of Week 11. 1. although it was meant to be finished in the middle of Week 11.5 weeks. File conversion has not yet been completed. . which could be related to the delays in writing the programs. This suggests problems are arising during testing. possibly due to the lack of available staff. The purchase and installation of equipment took 1 week longer than planned. This delay caused the creation of the database and test programs to be delayed by 1 week.

● The Trend organisation (in the form of its directors) is responsible for project selection and the overall approval of the project plan and budget. System testing is planned to take 2. A series of review meetings (weekly) will take place between the project manager and sponsor. ● Each project should have a formal organisation structure. Any variations to the project must be recorded and agreed with the sponsor. Solution 13 (a) Types of control. This approval would be in overview only. ● The project sponsor (or. the project budget. The sponsor also reports progress and issues on a periodic basis (perhaps quarterly) to the organisation. ● The organisation structure of the project team under PRINCE2 enforces a clear structure of authority and responsibility on the participants. as the detailed breakdown of both plan and budget are operational issues. . 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. there are a series of ‘management products’ associated with the management and control of the project.5 weeks. as a minimum. These ensure that all the participants in the project have a clear understanding of the tasks to be completed and the relationships between them. These include. (b) Control framework. The control responsibilities of the various parties are outlined below. for example. in a complex project. including a project overview using SWOT analysis and a report of progress against plan using a Gantt chart. the project plan. the project initiation document. and provides advice and support downwards. then the PRINCE2 methodology (as do others) contains a wide number of control elements. If we take as our basis for discussion that a control is any mechanism designed to ensure that a project achieves its objectives.286 THE PROCESS OF PROJECT MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 ● The system cutover is likely to be delayed as file conversion and program testing are not yet finished and are holding up system testing. so even if it started today the cutover will be delayed by half a week. ● PRINCE2 contains many quality controls such as clearly defined technical and management procedures. These ensure that work is completed not just on time but also at an appropriate level of quality. the quality plan and various checkpoint and progress reports. the following aspects of project management should be covered by control procedures. ● In PRINCE2. and any issues or slippages reported upwards. 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. and these will be supported by periodic progress reports (monthly). the steering committee) is responsible for ensuring that project objectives are achieved. He/she will communicate objectives and monitor performance against the plan and budget. I would suggest that. The project sponsor agrees the detailed plan and budget with the project manager. The organisation should provide a clear set of objectives and constraints to the project. ● The project manager is responsible for the day-to-day management of the project team and subcontractors. ● The PRINCE2 methodology includes various different types of plans.

ENTERPRISE MANAGEMENT ● 287 THE PROCESS OF PROJECT MANAGEMENT ● ● The members of the project team. and the representatives of subcontractors. All participants will be briefed on the findings of the audit and encouraged to discuss the issues that arise. supported by weekly or monthly written progress reports. This will allow any of the project participants to check what has been agreed. Their suggestions for the improvement of future projects will be recorded and circulated widely throughout the organisation. This will take the form of daily briefings. will report to the project manager on a frequent basis. . an independent quality assurance inspector will carry out a full post-completion audit of the project. This will allow the participants in other projects to learn and improve. At the end of the project. Copies of all project documentation and reports will be kept in a well-referenced filing system.

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6 Management .

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considering their relevance and application for organisations today.Management 6 LEARNING OUTCOMES After completing this chapter. The first section examines the historical foundations of management and some of the different theoretical perspectives. explain the process and importance of mentoring junior colleagues. 6. authority. responsibility. along with some of the more contemporary thinking on transformational leadership and entrepreneurship. The concepts of power. leadership and delegation. bureaucracy. 6. The different approaches to leadership will be explored. A major challenge for managers arises from an increasingly global business environment in which many organisations now operate. you should be able to: discuss the concepts of power. Leadership can be a significant determinant on organisational performance since the effectiveness of the leader can impact on the nature of the relationship with subordinates.1 Introduction This chapter aims to explore the nature of management and the factors that influence the relationship between managers and subordinates.2 Classical and contemporary theories of management The study of management theory and development of ideas on effective management practice helps in providing an understanding of the principles underlying the process of management and which in turn influences management behaviour in organisations. demonstrate the importance of organisational culture. The management implications of globalisation will be considered with specific reference to managing across different national cultures. The main 291 . responsibility and delegation are then discussed. authority.

1 Main schools of management thinking 6. or to train the workers in the best methods. Classical – Scientific Management – Functions of Management – Bureaucracy Human Relations Systems Contingency Figure 6. He stated that the principal object of management should be to secure the maximum prosperity for both employer and employee. There are different approaches within the Classical School which can be identified as Scientific Management.1 illustrates the 4 main approaches. The principles of management. These ideas were developed in an era when mass production and economies of scale were viewed as central to business success.292 MANAGEMENT STUDY MATERIAL E2 schools of management thinking can be grouped according to their broad approaches. Administrative School and Bureaucracy. The foundation on which the various theories developed was that management could be learnt and codified. These discoveries stimulated his interest in the art of work study. He made many other important contributions to management . managers made very little effort to specify what made up a reasonable day’s work. The technical requirements of each job. Scientific management Frederick W. no effort was made either to identify the best methods. Figure 6. It assumed that behaviour in organisations was rational and logical. Taylor (1856–1917) is known as the father of the scientific management movement.1 The Classical School The classical approach to management emphasises the technical and economic aspects of organisations.2. Taylor spent some 30 years in the steel-and paper-making industries and identified that: ● ● ● workers varied their pace at work to suit the conditions. Although some of these theories were developed over a century ago they do continue to inform management practice today. There are some common interests that all these different perspectives focus on: ● ● ● The purpose and structure of organisations and planning of work.

This improved productivity and earnings. The development of a true science of work. The scientific selection and progressive development of workers.ENTERPRISE MANAGEMENT 293 MANAGEMENT thinking such as the ‘exception principle’ in management reporting. as well as a fair day’s pay.5 lbs (9. . (a) Statistical process control and computerisation requiring precise measurement and management by exception. from real facts. The constant and intimate cooperation between management and workers. 2. He calculated that 21. Taylor believed that it was only through the effective use of control by specialists that best use would be made of the resources available to increase the size of the incentive surplus to be shared between efficient staff.8 kg) was the optimum weight for efficiency. 4. Work was allocated by consultation and cooperation between management and workers. At Bethlehem Steel Corporation. there would be an improvement in productivity. this meant that as many as eight functional foremen were giving instructions to other workers. This was the assessment of what constituted a fair day’s work. Sometimes. Taylor’s method cut across traditional craft skills and organisational principles because it started from scratch. The method was: ● ● ● ● ● ● ● observe and collect data analyse data classify results develop hypotheses test these by experiment formulate laws use and apply the laws. as the workforce was encouraged to develop to their full potential. Exercise Which elements of Taylorism are evident today: (a) at the manufacturing level? (b) at the strategic level? Solution Scientific management has not gone away. The bringing together of the science of work and the scientifically selected and trained men. quite the reverse. he noticed that the same size shovel was being used to shovel different kinds of material. involving careful recruitment and training to ensure that the worker was capable of achieving output and quality targets. He laid down four principles: 1. Taylor recognised that if specialised knowledge and skills were concentrated in the hands of well-trained and able employees. and had shovels redesigned so that their size matched up to 21.5 lbs of the material being shovelled. and therefore different loads were being lifted by the workers. This was referred to as the mental revolution. He therefore broke jobs down into separate functions and then gave each function to an individual. 3.

Remuneration. Unity of direction relates to the organisation itself. Organising: allocation of resources. stressing that most management features had universal application. The effective manager is judged by the efficiency with which he applies these elements. Controlling: comparing actual performance with expected or budgeted. Managerial: various functions. He identified the common features as: ● ● ● ● ● Forecasting and planning. Discipline. The use of specialisation to achieve more efficient use of labour at all levels. energy and respect. A subordinate should receive orders from one superior only. Coordinating: working together to achieve company objectives. 7. Accounting: accounts. His approach was to view problems from the managerial aspects and to specifically analyse the work of management. Personal interest. 3. This should be fair. Fayol stated that ‘authority should always be commensurate with responsibility’. 6. The interests of one employee or group of employees should not take priority over that of the general interest and aims of the organisation. application. maintenance.294 MANAGEMENT STUDY MATERIAL E2 (b) The new fashion for concentrating customer service into ‘call-centres’ is a classic application of scientific management principles of division of labour and specialisation of function. unless duties and responsibilities were clearly defined. The administrative school Henri Fayol (1841–1925) was the manager of a group of mining and engineering companies in France. 5. with penalties judiciously applied by worthy superiors. Fayol concentrated on the managerial aspect of organisations and explored the role of managers. Financial: capital investments. 2. Unity of command. His best-known book was General and Industrial Management. Security: protection of goods and people. 4. balance sheets. and his personal authority derived from his experience. 1. This principle could give rise to problems concerning the role of ‘staff ’ and ‘line’ management. giving satisfaction to both employer and employees alike. marketing. purchasing. design. Authority and responsibility. intelligence and charisma. whereas unity of command relates to the personnel in the organisation. . Commercial: sales. Commanding: giving orders and instructions. Confusingly. and it will be seen that Fayol identified the need for managers to be trained for their new roles before promotion. Discipline should be maintained by a fair disciplinary system. Respect for agreements directed at achieving obedience. he supplemented these with thirteen general principles of management. stocktaking. Division of labour. He defined which operations give business control: ● ● ● ● ● ● Technical: production. There should be one head and one plan for each group of activities. duties and authority. Unity of direction. Fayol identified the existence of a manager’s official authority derived from his official position.

will also have to have a rational structure because they need to conform to regulatory bodies of one sort or another and to legislation. Strict rules and procedures govern decision-making and conduct of officials. Stability of tenure. German sociologist Max Weber (1864–1920) developed his model of the ‘ideal type’ bureaucracy. 5. will be bureaucratic. Equity. 2. These features were developed against a background of a society where money bought privilege. Scalar chain. Public/private division. Managers pursue their career within the bureaucracy and work within a defined salary structure. Professionalism requires commitment rather than dilettantes. 14. 3. Hierarchy. but Weber used it to describe what he believed to be potentially the most efficient form of organisation – ‘technically superior’. Rules. and positions of power were used to promote patronage. in which he explored the characteristics of a rational form of organisation. Even army generals like Sir Arthur Wellesley (later Duke of Wellington) bought their commissions! Nowadays. whether grouped according to the major types below (functional. Centralisation. 10. most large organisations. A hierarchy of authority. as opposed to other forms of organisation based on tradition or personal (charismatic) authority. Today. the model he put forward was deliberately idealised to highlight the key features of this form of organisation. A combination of kindness and justice in managers and employees. process or a form of organisation? Bureaucracy is not ‘red tape’. Esprit de corps. 11. 6. bureaucracy is not viewed as a specific form . there is strength. Material and social order. 12. These eight characteristics were as follows: 1.’ 13. Money is used in a limited liability framework to prevent family money being used. Many others. This is currently being debated in the United Kingdom as ‘red tape’ is snuffing out a nascent entrepreneurial spirit. Stable employment to enable goals to be achieved. 7. Career officials. so that each member has well-defined spheres of authority to carry out his or her duties. Specialisation. but a technically superior way of operating through the power vested in the office (French bureau. However. 8. as this creates conservatism because of personal risk. the term bureaucracy tends to have many negative connotations. German Biiero) rather than the person. Initiative. 9. People must be encouraged to work as a team. Bureaucracy: a culture. Appointed officials.ENTERPRISE MANAGEMENT 295 MANAGEMENT 8. divisional or matrix). Managers are selected by their qualifications. The scalar chain is the term used to describe the chain of superiors from the highest to the lowest rank. Full-time officials. This should be developed to the full within the bounds of authority and discipline. For this reason. The ideal type bureaucracy has a number of distinctive characteristics. 4. each of which contributed to the efficient functioning of the organisation. Impersonality. though smaller. Objective and rational decisions rather than personal preferences. Weber’s model of bureaucracy was based on authority derived from the law and written rules. especially in the employment field. education or training. ‘In union. Clear division of labour. in which offices are linked through a clear chain of command. This defined the existence of a place for everything and every-thing in a place. Control should be retained centrally for maximum efficiency.

Mock bureaucracy. so the experimenter effect was not contributing to extra motivation. He believed that human behaviour even at work is . consequently. their interest in the workers and their environment. Because of the formal nature of this type of organisation.296 MANAGEMENT STUDY MATERIAL E2 of organisation but rather as a process of formalisation and standardisation. The cultural aspect is based on position power. preventing development. where decisions are made by an external authority. there tends to be a high level of acceptance. Describes rules and procedures that are drawn up by one side. It was their presence. if cooperation was to be encouraged. their output. It is often a source of friction because of the lack of agreement and commitment from both sides. When they increased the lighting in one of the work areas. Alvin Gouldner’s Patterns of Industrial Bureaucracy identified three patterns of bureaucracy based on the nature of the management style and the workforce attitudes. 2. it was not the lights which were the cause. Here. rules stifle initiative and innovative ideas. together with several colleagues.2. At local level. output increased. Mayo’s team was concerned with fatigue and its effects on output. When the team of scientists took away the extra lights. however. This would have indicated that extra lights helped the workers see better and thus to suffer less from fatigue effects. the second male. lack of speedy communication owing to the segregated ‘offices’ and levels. little need for involving staff in decision-making. output increased again!! Clearly. Mayo and his colleagues had redressed the balance away from Taylor’s techniques and back towards people. 6. It may have been significant and Fiona Wilson argues that it was – (in her book Organisational Behaviour and Gender) that the first area was mainly female. and results in what Harrison termed the role culture. In the event. Mayo developed this finding into a detailed series of studies when the effects in the first area were not observed in another area. Whereas Weber had not considered the motivational needs of people at work. and. but imposed on the other side. 1. Gouldner clearly indicated the need for appreciating the feelings and opinions of the workforce. Mayo had hit on the ‘experimenter effect’ – the influence of the scientists on the workforce. carried out the famous Hawthorne investigations for the Western Electric Company at its Hawthorne Works in Chicago during the 1920s and 1930s. Often occurs under centralised systems.2 The human relations school Elton Mayo (1880–1949). and which Handy drew as a temple. no recognition of very important informal relationships. Punishment-centred bureaucracy. Representative bureaucracy. Frederick Herzberg carried forward Mayo’s emphasis on the identification of the motivational needs of individuals. these rules are often amended to suit the situation. 3. it was group attitudes – a micro social system – which effectively rejected the scientists. the main disadvantages are: ● ● ● ● ● slow response to change. Through maximum participation and involvement in the setting of the rules. which had increased their motivation. as many rules have to be changed.

job rotation and job enrichment. His major claim is that we like what we do at work and we dislike the circumstances of how we do it. Using Herzberg’s two-factor theory of motivation. which provides for the psychological development of the worker. Also. Even money. Trist and Bamforth diagnosed that although the new methods had been introduced ‘scientifically’: ● ● ● ● close-knit groups had been broken up. 6. new payment schemes caused jealousy among the workforce. Hygiene (or maintenance) factors ● Rules ● Environment ● Work breaks ● Supervision ● Wages and fringe benefits.ENTERPRISE MANAGEMENT 297 MANAGEMENT directed towards achieving certain desirable goals or incentives. communication was difficult because of the geographical spread of workers. Motivational factors ● Challenging tasks ● A feeling of achievement ● Responsibility ● Personal growth ● Advancement ● Recognition of ability. They can only prevent dissatisfaction. too much specialisation and individuality was built into the jobs. His two-factor theory of motivation describes motivational factors and hygiene (or maintenance) factors. Trist’s most famous research was into the structure and operation of the longwall’ method of mining in County Durham in the 1940s as it highlighted the interaction between social needs and technological activities.3 Systems theory Trist and Bamforth developed a socio-technical systems theory (Figure 6. He does admit that some jobs are ‘idiot-jobs’ and do not have motivational potential. for example. give some specific examples of hygiene factors and motivating factors that are used in the organisation that you work for.2. is not a motivator though we cannot do without it. . some people are driven more by hygiene factors than motivators – if they are in need of money. While he was working at the Tavistock Institute. or one that you are familiar with. Experiments in job enlargement. Herzberg believed that only motivators can move employees to action: the hygiene factors cannot. or towards avoiding the other undesirable negative consequences. The longwall method introduced new cutting equipment which widened the narrow coal ‘face’ into a ‘longwall’.2). have been derived from Herzberg’s findings. But very soon the low morale. high absenteeism and deteriorating relationships were so serious that the Tavistock Institute was invited to investigate causes and possible solutions to the problems. he claimed.

Managers should note that this interaction. competitor’s quality) will have an effect on structure.4 Contingency theory Managers. and Bamforth. The contingency view suggests that the effectiveness of various managerial practices.2 Trist and Bamforth: socio-technical systems theory. Mechanistic versus Organic Organisations Burns and Stalker (1961) distinguished between mechanistic and organic organisations. The problems arise when two such contingencies are in conflict – the theory does not describe how such conflicts can be resolved. combined with Stalker.2 indicates the interaction that will inevitably occur when changes are made to either the social or technical aspects of work. any stimulus (government policy. E. K. © The Tavistock Institute. if ignored. a psychologist. technology. Thus. industrial relations. from ‘Human Relations’ by Trist. showing an ignorance of individual and group needs at work. The idea of one approach being right – whether it be the school of scientific management.L. a mechanistic organisation is contingent upon a stable environment and so on. Reprinted by permission of Sage Publications Ltd. would inevitably bring problems. The difficulties . 1951 The mine owners had not considered the effects on the workforce. Figure 6.298 MANAGEMENT STUDY MATERIAL E2 Social systems W O R K Technical systems Figure 6. styles and techniques will vary according to the particular circumstances of the situation. especially in such a traditionally close-linked occupation as mining. The social and technological factors are interlinked and cannot be treated in isolation.. 6. researchers and consultants often found that the methods suggested by the classical management schools did not always work. a professor of sociology based in Scotland.2. in a study of the way in which high-technology industries were being introduced into Scotland.’ Burns. Burns is quoted as saying: ‘The beginning of administrative wisdom is the awareness that there is no one best way of designing a management system. Exercise What do you consider to be the main contingencies? Solution The main contingencies are related to the external and internal environments of the organisation – in other words. classical/universal human relations or systems – is rejected in favour of contingency.

● Selectivity in the release of top level information to subordinates. cement. Features of an organic organisation ● Skills. and food processing. vertical and diagonal communication channels. (The appropriateness of organisational structure to its environment is a cornerstone of contingency theory. ● Commitment to task achievement. Burns and Stalker’s studies led them to distinguish between two major types of organisations – mechanistic and organic. However. use of specialists. The mechanistic system was seen to be appropriate in fairly stable conditions where the management of change was not seen to be an important factor. or tasks. ● Leadership based on consultation and involvement in problem-solving. recruitment of graduates. ● Responsibilities and authority clearly defined. experience and specialist knowledge recognised as valuable resources. The organic system is seen to be more responsive to change. oil. ● Employees are often locally recruited. with various combinations in between. she identified ten types of technology which were condensed into three main groups. market orientation. The relationship with Weber’s bureaucracy is obvious. communication processes. . In her analysis of the 100 companies (which ranged in size from 100 to 1000 employees). the spans of control at different levels.) Technology has been defined as ‘the way work is carried out’ and from 1953 to 1957 Joan Woodward’s Essex Studies examined features of the various organisations with special emphasis on such factors as: ● ● ● ● ● ● number of levels of authority. ● Coordination and communication – a responsibility of each management level. ● Integration of efforts via lateral. use of management committees. survival and growth more important than loyalty and obedience. Features of a mechanistic organisation ● High degree of task specialisation. process production – for example. they considered these two systems to be located at opposite ends of a continuum. These are: ● ● ● unit and small batch production – typical of ‘craft’ industries. cars. ● Great emphasis on the organisational hierarchy’s ability to develop loyalty and obedience. ● Employees are recruited from a variety of sources.ENTERPRISE MANAGEMENT 299 MANAGEMENT experienced by low-technology companies in the conversion process to high technology highlighted many organisation structural problems. large batch and mass production – for example. and is therefore recommended for organisations moving into periods of rapid changes in technology.

Since technical expertise is important. people. ensure that all targets set are measurable and possible. and structure) were interrelated. they must be stated in behavioural or measurable terms. because of the high numbers of specialists involved. These studies contributed to the debate as to whether technology forced organisations to change their structure and culture. it was vital to recognise the effects this change would have on the other factors. Drucker emphasised that if objectives are to be effective.2. when setting objectives. Woodward’s studies indicated how four major factors in any company (task. Control was far easier in these organisations. However. so that any deviation can be highlighted at an early enough stage to permit corrections to be made and that managers.300 MANAGEMENT STUDY MATERIAL E2 Differences in production type accounted for many of the differences in organisation structure: ● ● ● In heavily mechanised process technologies taller hierarchies were found to exist. with no manager very far from production work. and this may create an environment where human and industrial relations are strained. Job satisfaction was lowest. Management by objectives can be defined as a type of control strategy: controlling outputs. Job satisfaction was middling. Unit and small batch production companies were found to have short hierarchies. discuss and agree targets for their staff that are achievable. There were a traditionally larger number of direct operatives. have a responsibility to: ● ● ● agree their own departmental targets with their superiors. people were highly skilled. managerial performance.5 Peter Drucker: management by objectives (MBO) Drucker popularised the process of defining organisational objectives (targets) and linking them to a timescale. create more paperwork and demand clearer cut definitions of duties. often graduates. The large number of semi-skilled workers required for mass production means that the span of control of supervisors is very wide. but with levels of committee rather than straight-line instruction. and a limited number of administrative controls. and that resources are made available together with some setting of priorities. with most of the organisation headcount being involved in administration. They tended to involve much smaller groups of more highly skilled workers and job satisfaction was higher. 6. . and that management needed to be aware that when one of these factors changed. public responsibility. They involved groups of more highly skilled workers and job satisfaction was highest. Large batch and mass production systems. worker performance. technology. Large batch and mass production companies have shorter lines of command and thus fewer managers and clerks. He stated that objectives should be agreed for areas where performance and results have a direct influence on the achievement of the basic company aims: ● ● ● ● profitability.

6. more sophisticated models which recognise the more complicated nature of the organisation. For example. 1986). These were taken further in the United Kingdom by John Humble. and by arriving very early in the morning you could get a photograph with unusual lighting and fewer people in it. It is not possible to go into all of those here. they fundamentally influence what we see and the explanations we put forward to make sense of it.ENTERPRISE MANAGEMENT ● 301 MANAGEMENT apply the control system and discuss progress with staff at regular intervals.6 Contemporary perspectives on organisations The more recent literature on organisations and management is vast and difficult to categorise in the simple ways used for early contributions to organisation theory. Exercise What are likely to be the limitations of viewing organisations as machines? Can you think of any other ways of looking at organisations that might be useful? Solution The view of organisations as machines provides some useful insights. the Parthenon can be approached from different directions. but also imposes limitations. The limitations of mechanistic perspectives on organisations are as follows: (a) They can create organisational forms that have great difficulty adapting to changed circumstances. We are rarely aware of the image of organisations we take for granted but. Different angles will give different perspectives. but two other perspectives he identifies are the view of organisations as organisms and organisations as cultures. Morgan goes on to argue that there are other ways of viewing organisations that lead to different insights. the use of basic costing techniques in large multi-product firms may result in misleading information for decisionmaking. Gareth Morgan has argued that we can view organisations in different ways as we try to understand them. However. Where staff jointly set objectives with their manager they achieve valuable feedback on performance. may be more appropriate. a motivating factor acknowledged by Herzberg. which in some circumstances can be severe. This is certainly the view implicit in early theories such as classical and scientific management. From one perspective it is helpful to think of organisations as machines. In this type of situation.2. (d) They can have dehumanising effects upon employees. though not all are equally easy. just like the photographs of the Parthenon from different perspectives. especially those at the lower levels of the organisational hierarchy (Morgan. (b) They can result in mindless and unquestioning bureaucracy. in which the various jobs and departments are carefully designed to work smoothly together to perform certain functions effectively. It is . The same is true of the way we look at organisations and the process of management. (c) They can have unanticipated and undesirable consequences as the interests of those working in the organisation take precedence over the goals the organisation was designed to achieve.

3. responsibility and delegation Individuals within the workplace have different relationships with each other. difficulties arise when he or she has to be replaced. Traditional authority This is derived from custom and practice or status such as aristocratic or middle-class power. Unless someone else is available. 6. responsibility and delegation. Even a big multinational like Ford has had a succession of Henry Fords running it! .3. This is most commonly seen in politics or religion. Weber used the term ‘charisma’ (literally ‘the gift of grace’) to describe that personal quality which sets the leader apart. it allows individuals within an organisation to issue instructions for others to follow. the organisation either decays or survives in one of the other two forms – traditional if the succession is made hereditary. A person’s position in an organisation gives them authority over others and comprises a legitimate power. or on family rather than ability and procedures depend on what has always been done. Because the charismatic power in the organisation is so dependent on the leader. especially when followers accept that the leader has the right to direct them. or rational-legal if a set of rules is drawn up to decide the succession. To be able to analyse the nature of management relationships it is necessary to understand the concepts of power.1 Power and authority At the most general level.2 Authority as legitimate power Authority is essentially the right to take actions and make decisions. who also possesses the necessary charisma. management and leadership are concerned with the process of influencing other people so as to bring about changes in their attitudes or behaviour. Hence. 6. The ability to exert influence depends on the type and amount of power and authority the manager possesses. Max Weber (1864– 1920) who studied power and how it was applied in society proposed that authority legitimises the exercise of power within the structure and rules of the organisation. but people like Tom Peters (of the Excellence literature).302 MANAGEMENT STUDY MATERIAL E2 important for managers to be able to examine organisational problems from more than one perspective in their search for effectiveness.3 Power. authority. The personality of the leader is irrelevant: he or she inherits the status of leader because of the long-standing belief in the natural right to ‘rule’ which is sometimes handed down. authority. Examples would be where the organisation is family owned and appointments. 6. Weber defined three bases for such authority as follows: Charismatic authority This is derived from the personality of the leader. Richard Branson of Virgin Airways and Anita Roddick of Body shop all provide examples in the industry.

Functional authority.3 Organisational power The management and leadership relationship with subordinates is about influencing the behaviour of others. and to issue a certain number of shares and so on. is more difficult to capture than that of line managers who have control authority. Staff with control authority have responsibility for controlling certain aspects of line performance. service. as this registration gives directors the authority to build a business in certain areas through their ‘articles of association’ which specify that area. The various tasks which it is designed to carry out are distributed among the officeholders. on which the responsible manager has the authority to issue instructions and. This is the authority given to staff for the conduct of activity that has been separated from line work as service to the line. for example health and safety. though both are difficult to work through at the borders of these limits. say. the legal rational authority will stem from the hierarchal position in the organisation and is typified in bureaucratic types of structures. it . This is essentially line management and direct authority. Control authority moderates line authority in important respects. Service authority. A chain of authority links each level of the organization. Banking arrangements under various Finance Acts describe the authority of various roles such as the signing of cheques up to certain limits. has service authority.ENTERPRISE MANAGEMENT 303 MANAGEMENT Rational-legal authority This is based on the legal occupancy of senior positions and is based on the acceptance of formal rules and procedures and on impersonal principles. Staff offer suggestions. complain about its quality. This is said to be the authority to make decisions that fall outside those made within the formal chain of command. Line managers are obliged to accept this service. Functional authority carries with it the right to both insert and enforce standards of performance and behaviour. whose authority is not personal but is vested. obliged to follow staff advice. which are based on technical qualifications and not personal ones. although they may. The relationship between specialised staff managers and line managers can be such that staff have advisory. The purchasing function. and functional departments laterally have authority to act over different issues. It is usually confined to specific areas of activity. give opinions and prepare plans or policies for their area of specialty for the consideration of line managers. To understand why subordinates comply and ‘obey’ leaders. Line managers are not. impersonally. 6. Weber called this type of organisation ‘bureaucratic’ because the organisation is based on a system of offices or bureaux arranged in a hierarchy. such as the management accountant. as is the case with quality control and inspection staff. control or functional authority in respect of line activities: ● ● ● ● Advisory authority. in the office. This clear separation of personal from business relationships is emphasised in the rules concerning appointment and advancement.3. Control authority. The authority of staff managers. So. of course. prohibit the use of unsafe equipment and machinery. of course. Authority is enshrined in the legal structure of companies who register under the various Acts of Parliament and with the appropriate Stock Exchanges. for example. It represents the ability to perform particular functions and their operations are based on following a set of written rules.

but a . Dependency creation. 2. the sales department enjoys a high level of power. General Motors produced some appalling cars (such as the sub-compact Vega) when it was controlled by the finance department which insisted on common parts. where the leader is able to directly influence the intrinsic and/or extrinsic rewards available to followers. Reward and Referent charismatic/personal. or has inspirational charisma. Power bases within organisations vary. based on the followers’ belief that the leader has certain expertise and knowledge relevant to a particular problem or issue. Though managers can delegate authority for tasks (in theory anyway) they cannot delegate responsibility: the ‘buck’ should stop with the responsible manager. Coercive power. Referent power. Perrow (1970) described the sales department as the ‘main gate between the organisation and the customer’ – the source of money. 6. Pfeffer and Salancik (1977) defined organisational power as the result of the interaction of five factors: 1. Expert power. 3.4 Responsibility Responsibility involves the obligation of an individual who occupies a particular position in the organisation to perform certain duties.e. French and Raven (1959) identified the following five possible bases of a leader’s power: 1. Centrality of activities. Uncertainty reduction. 2. Consequently. where the leader uses penalties or sometimes physical punishments to enforce compliance. 3. in a large organisation it is very difficult to work out exactly which layer of management is actually responsible. However. authority). 4. Expert legal/rational. 5. The Rolls-Royce RB211 engine nearly bankrupted the company in 1971 as it was controlled by engineers (hence they possessed the power) rather than finance staff.3. Reward power. 4. Exercise Can you see Weber’s three types within the French and Raven scheme? Solution Coercive and Legitimate historical/traditional. in which these departments are powerful. when followers believe that the leader has desirable characteristics that should be copied. It is sometimes supposed that what is delegated is responsibility. Financial resources.304 MANAGEMENT STUDY MATERIAL E2 is important to understand the nature of power and how an individual can gain power. when followers accept that the leader has the right to influence them in certain areas or aspects of behaviour. Non-substitution. 5. tasks or make certain decisions. Legitimate power (i. Other firms have cultures based on research and development or engineering.

but a general day-to-day activity. as are democratic styles in certain circumstances. he creates for himself the new responsibility of control. organising and monitoring. training becomes not a special process to be done at rare intervals. to do so would be to abrogate responsibility (though this is not too uncommon in practice). Other responsibilities are generally left to the discretion and judgment of the manager and his or her view of the capabilities and time available for his or her individual staff. by delegating part of his task to a subordinate. and increased motivation as people are given clear authority for more demanding activities. The barriers to delegation must be overcome because the process is not only inevitable. It is effective because it develops the staff gradually and allows the manager to spend more time on strategic issues. he even adds to his responsibility because. there will be continuous assessment of staff. By ensuring that the mix of delegation is appropriate. bearing in mind training and development needs and the time the manager has for supervision and on-the-job training. before being permanently promoted. some laissez-faire leadership styles are effective. If there was no delegation the chief executive would be responsible for everything. On the other hand.5 Delegation Without delegation formal organisations cannot exist. By regularly ensuring a free flow of delegation. Job satisfaction – The most valuable advantage of delegation is job satisfaction for subordinates. the manager has to give some of the work (tasks and decisions) for which he is responsible to subordinates. Management succession – ‘The King is dead. and delegation requires teamwork. What he. long live the King’. in fact. some of the interesting jobs will be delegated and not only the tedium. 6. Decision-making – Better decisions are made by people who are close to the customer or production process and also quicker decision-making. and by insisting on full briefing and consultation between managers and subordinates. Of necessity. Indeed. In many organizations. and the associated authority for planning. there is a definitive list of authority delegation – mostly to do with approval for monies spent or committed. By delegating more and more and further and further down the line. This is an important point because what the manager delegates is work and the necessary authority to do it. Training – Training by doing is acknowledged to be a very effective method. coordinating. Of course. is nothing more than a pious hope unless the new boy has a chance of acclimatisation: he not only needs to get to know the routine but also to accustom himself to the responsibilities of managing and the development of managerial skills among a wider group within the organisation. Both of these involve delegation to a point of allowing decisions to be made at a very low level. Development and self-evaluation – A subordinate can be tested under actual conditions.ENTERPRISE MANAGEMENT 305 MANAGEMENT manager in no way diminishes his own responsibility by delegating part of his task. but when carried out properly can result in a number of significant advantages: ● ● ● ● ● ● Effectiveness and efficiency – Getting more work done is the raison d’etre of all teamwork. accepted as a matter of routine. since subordinates do not always have to refer problems up the hierarchy for someone else to check them. management could not completely delegate the tasks. By increasing employees’ .3. does is to create a new responsibility for the subordinate to himself without in any way dividing his own responsibility. controlling.

Providing the resources to carry out the activities of the organisations and grouping tasks which need to be performed to achieve organisational goals. 6. Selecting objectives and the programmes and procedures for achieving the objectives of the organisation. However. by contributing or withholding their cooperation they make the task a success or failure. the overarching objective of management is the process by which the efforts of people in the organisation are co-ordinated and directed toward the achievement of organisational goals. The process of delegation is usually one or a combination of the following steps: ● ● ● ● Abdication – To leave issues without any formal delegation. Custom and practice – An age-old system whereby precedent rules. organising. At least. the point of view of the person nearest the scene of action is more likely to be relevant. gets the coffee and so on. if organised. planning. The question still remains though about the appropriate degree of delegation in any particular circumstance. Controlling. Management needs to reconcile any differences by making individuals aware of how their work is contributing to the goals of the overall organisation. It involves the clarification of objective. which is a very crude and usually ineffective method. employers can encourage better work. Explanation – Involves the manager in ‘briefing’ subordinates along the lines of how the task should be done (not too little and not too much – a fine balance that requires judgement). but nowadays prior consultation is considered to be important and very effective. This is obviously a matter of degree: no organisation exhibits complete centralisation or decentralisation. whereas if most decisions are made by a few people at the top of the organisation it will be highly centralised. The function of a manager. some managers now have the humility to admit that sometimes good ideas come from below. Unifying and harmonising the activities of individuals and groups to achieve organisational objectives. as determined by Fayol includes: ● ● ● ● ● Planning. Indeed.4 Management and the Role of Managers The various theories that have been discussed so far have identified a range of views on what constitutes management and the different roles for managers. Consultation – Prior consultation was once quite novel in manager/union relations and also between managers and subordinates. Coordination. Measuring activities to ensure performance is in accordance with plans and any deviations are identified and corrected. this is a matter of the extent to which authority and accountability should be passed down to lower levels in the hierarchy. are immensely powerful. Organising.306 MANAGEMENT STUDY MATERIAL E2 enjoyment in their jobs. Giving instructions to subordinates to carry out tasks over which the manager has authority for decisions and responsibility for performance. The most junior member of staff opens the mail. . If there is extensive delegation the organisation will operate on a decentralised basis. and seniority allows managers to slide out of various duties because ‘rank has its privileges’. directing and controlling other people’s work (Mullins 2004). Commanding. People.

Leaders arise naturally in groups. Interpersonal roles. as a negotiator the manager will participate in negotiating activities with other individuals to reach agreements. a leader role having the responsibility for motivating employees. the manager will seek to make changes and look for new ideas. In an entrepreneurial role. particularly where tasks are of a technical nature and an expert arises to solve a problem and then disappears when the task is finished. and a spokesperson role by communicating information to different parts of the organisation and outside the organisation. Bennis and Nanus (1985) make a helpful distinction between leading and managing summed up in the following quote: to manage means to bring about. not all leaders are managers. and then influencing others to share that vision and work towards the achievement of organisational goals. 3. Managers are people who do things right and leaders are people who do the right thing. allocating resources to others. solve work disputes and resolve arguments. This involves the manager in making strategic decisions about the future of the organisation. Leading is influencing. This will include a monitoring role. guiding in direction. He identifies three broad tasks: 1. the manager will respond to pressures and crises. which gives them power and authority (as outlined in the previous section). creating a vision. Satisfying the goals or mission of the organization. managing the budget and constructing timetables and schedules. to accomplish to have responsibility for.1 Managers or Leaders There are many different views on whether managers and leaders are one and the same. Leadership. It will also include a resource allocator role. These are divided into three groups: 1. 2. He classifies the activities which constitute the essential function of a managers’ job into a set of ten managerial roles. to conduct.4. . on the other hand. The distinction is crucial. Managing social responsibility. 6.ENTERPRISE MANAGEMENT 307 MANAGEMENT Other writers such as Drucker have tried to describe what managers do. These arise from the manager’s relations with others and include a figurehead role representing the organisation. often in an ‘emergent’ fashion. and unpredictable events. can be viewed as providing direction. course. However. a liaison role involving networking with others not only outside their own area of work but also outside the organisation. action and opinion. the stance taken in this text is that whilst the job of the manager will normally require some leadership competence. The manager has an important role to play by collecting and disseminating information. Enabling the worker to achieve and focus on productivity. a disseminator role where information is shared with employees by holding meetings or passing on information. Informational roles. The difference may be summarised as activities of vision and judgement – effectiveness (leading) – versus activities mastering routines – efficiency (managing). Individuals are often given the title of ‘manager’ based on their position in the organisation hierarchy. where the manager scans for information to help them develop an understanding of the organisation and its internal and external environment. Mintzberg has also contributed to the debate by identifying the roles which managers fulfil in the conduct of their job. 3. 2. Decisional role. as a disturbance handler.

It is also generally agreed that the process of leadership is inextricably intertwined with the concepts of power. it has proved very difficult to identify the elements of effective leadership. when making selection or promotion decisions to posts involving leadership.5 Different Perspectives of Leadership In the search to explain why some leaders are more effective than others. although there is widespread acceptance that leadership is important. 6. as researchers are unsure whether they are measuring leadership as distinct from measuring the ‘directing’ part of the role of management. In part. This assumes that individuals possess particular personal characteristics or traits that make them into effective leaders. trait or qualities theories. initiative and decisiveness. etc. This can be countered to some extent by technical leadership – intelligence and knowledge of the task so that judgements are right most of the time. Despite this lack of positive research evidence. are often in the role of appointed or nominated leaders and seldom if ever ‘elected’. Each of these different perspectives is explored below. it has in fact proved impossible. Style theories. Contingency or situational theories. This is perhaps why there is so much confusion in the management literature. to identify any consistent pattern of traits which characterise effective leaders. most people would still accept that effective leadership can make a significant difference in organisations. it has been suggested that there are almost as many different definitions of leadership as there are persons who have researched the subject. Unfortunately. Although the common sense assumption underlying trait theory appears sound to most people. the following perspectives can be identified ● ● ● Personality.308 MANAGEMENT STUDY MATERIAL E2 Managers.) from within groups of people without a formal organisation. which is the earliest attempt to explain why some people are more effective than others. The process of leadership has probably been the subject of more research than any other topic connected with organisations and management. Despite these problems of definition. is that leaders are born rather than made. Many managers lack the essential qualities of leadership as they are quite often concerned with achieving objectives in a bounded time frame and do not wish to become the focus of attention that true leadership really demands. some writers assert that to be successful the leader should have a number of key characteristics: ● The impulse to lead – this is a problem for many managers promoted on technical grounds. influence and authority. trait or qualities theories of leadership The basis of this perspective. . charismatic persons. Whatever the situation or group. this is because there is no one universally accepted definition of the word. however. Indeed. many managers continue to attach importance to personal factors such as judgement.5.1 Personality. Leadership studies in psychology have attempted to observe the emergence of ‘natural’ leaders (social facilitators or technical experts. despite many research studies. 6. though they might emerge and be promoted.

These great leaders were considered to have: ● ● ● ● ● above-average intelligence. Certain other writers selected other personal qualities which were thought to be desirable in leaders. Theory Y and which consists of the following sets of assumptions. The average person prefers to be directed. managers have been studied and differing styles emerge. Most managers. do not give much conscious thought to these things. especially as they cannot account for context. McGregor proposed a theory which would bring about ‘true innovation’ – an opposite view of Theory X. the capacity to perceive a need for action. the ‘helicopter factor’ – the ability to rise above the particulars of a situation and perceive it in relation to the surrounding context. Other ‘essential’ qualities that researchers apparently spotted included enthusiasm. courage. of course. initiative – independence and inventiveness. . what he thinks they want and what he considers their attitude towards their work to be. Self-awareness – the ability to evaluate the effect of the style being used on the group and the task. This approach poses questions that are not easy to answer: how does one identify and locate such qualities? Is the possession of such qualities necessary and a sufficient condition for effective leadership? Can one train for ‘courage’ or ‘faith’? The personality theories are not well developed. sometimes referred to as the carrot and stick approach. even virility. Human sympathy – authority is given by the group and is not a divine right. faith. to overcome opposition and also any personal disappointments. most people must be coerced. Tough-mindedness – to be single-minded and do what is required in a situation in spite of side effects. self-assurance – self-confidence. or examples such as war leaders who seem to possess not intelligence but belligerence. motivation – the urge to do it. In contrast. directed and threatened with punishment to get them to put in adequate effort towards the achievement of organisational objectives. and can be trusted. integrity. sociability. who are ‘born and not made’ based on the analysis of successful ‘great men [sic]’. Theory X. controlled.5. consists of the following assumptions: ● ● ● The average person has an inherent dislike of work and will avoid it if possible. The style chosen by a manager will depend very much upon the assumptions that he or she makes about subordinates. energy. wishes to avoid responsibility. which he called. 6. has relatively little ambition and wants security above everything else. A leader who regards people as a nuisance or as his or her only interest is doomed to fail. Because of this. determination. appropriately. imagination. but tend to act upon a set of assumptions that are largely implicit.ENTERPRISE MANAGEMENT ● 309 MANAGEMENT ● ● ● Integrity – a wholeness in all of the above so that the group feels the leader rings true. The implicit assumptions about the nature of human behaviour and the motivation behind a good deal of the thinking in economics have been assessed as ‘Theory X’ by Douglas McGregor.2 Management styles Independently of any leadership ability.

it was the democratic style that was the most productive and satisfying. Rensis Likert Likert examined different departments in an attempt to explain good or bad performance by identifying conditions for motivation. No attempt was made to find out if a better result could be obtained with better inputs into the job. not only to accept. His studies focused attention on the different effects created by three different leadership styles independent of personality: ● ● ● Democratic. The authoritarian style was the least productive and satisfying of all and carried with it lots of frustration and instances of aggression among group members. Laissez-faire. This is clearly a Taylorist approach. Kurt Lewin The first significant studies into leadership style were carried out in the 1930s by psychologist Kurt Lewin. the key ones are considered in the following sections. Lewin and his researchers were using experimental groups in these studies and the criteria they used were measures of productivity and task satisfaction. under proper conditions.310 MANAGEMENT STUDY MATERIAL E2 ● ● ● ● ● The expenditure of physical and mental effort in work is as natural as play or rest. In terms of productivity and satisfaction. and on building effective . The capacity to exercise a relatively high degree of imagination. ingenuity and creativity in the solution of organisational problems is widely. The laissez-faire style was next in productivity but not in satisfaction – group members were not at all satisfied with it. External control and the threat of punishment are not the only means for bringing about effort towards organisational objectives. doing the job well and obtaining this with the resources (including the operatives) at his disposal. Authoritarian. Best performance was under ‘employee-centred’ managers who tended to focus their attention on the human aspects of their subordinates’ problems. A style where the leader just tells the group what to do. These tended to concentrate on keeping their subordinates busily engaged in going through a specific work cycle in a prescribed way and at a satisfactory rate. A number of different authors have contributed to the management style perspective. breaking down the job into its component parts. Poor performing departments tended to be under the command of ‘job-centred’ managers. Commitment to objectives is a function of rewards and the satisfaction of ego. The average person learns. not narrowly distributed to the population. selecting and training people to do those tasks and exerting constant pressure to achieve a required output. People will exercise self direction and self control in the pursuit of objectives to which they committed. Personal achievement needs are perhaps the most significant of these rewards. but to seek responsibility. A style where the leader does not really do anything but leaves the group alone and lets them get on with it. The manager concentrates on getting the job completed. and can both direct result of effort directed towards organisational objectives. A participative style where all the decisions are made by the leader in consultation and participation with the group.

such as the Church. This is a step beyond system 1. Likert summarised his findings as four systems of management. is not tolerated and frequently is ruthlessly suppressed. There is a close psychological relationship between superiors and subordinates. rather than mere ‘pats on the head’. for procedural. even other viewpoints. emphasis on targets. whatever the consequences. 1. especially if reinforced by rigid control methods. high performance goals rather than methods. and involves teams in goal setting. Exercise While accepting that technically competent. but communication is restricted. but there is some restricted delegation within rigidly defined procedures. where there must be little room for questioning commands. Here rewards are used along with occasional punishment. and some involvement is sought. Scope is given for some local input. but upward communication remains rather limited. with the function of enabling them to work efficiently. Criticism or dissent. System 4: participative. However undesirable this may ostensibly appear. with the decision-making process concentrated at the top of the organisation. Communication is both up and down. Likert concluded that the key to high performance is an employee-centred environment with general supervision. utilises full group-participation. 3. and superiors and subordinates are psychologically far apart. there are certain organisations. improving work methods and communication flows up and down. doctrinal or strategic reasons. Civil Service and armed forces. This relies on fear and threats. There is a limited element of reward. possibly fanatically committed to an ideal and determined to see it through to the ultimate conclusion desired. Management gives economic rewards.ENTERPRISE MANAGEMENT 311 MANAGEMENT work groups which were set demanding goals. Policy is made at the top. irrespective of pay and conditions. Management tends to hear only what it wishes to hear. 2. tough job-centred management can achieve high productivity. This finding appears to comply with Elton Mayo’s findings that one of the components of success was the creation of an elite team with good communications. System 2: benevolent authoritative. and scope for input from the employee and a capacity to participate in the decisionmaking processes. System 1: exploitive authoritative. Where do you think this type of management can be essential? . 4. Such management regards its job as dealing with human beings rather than work. with high utilisation costs in waste and scrap. higher levels of conflict. an arrogant personality at the top. System 3: consultative. Communication is downward. Each group overlaps and is linked to the rest of the organisation by link pins who are members of more than one group. You should be able to envisage the resultant style of leadership. Likert suggested that such environments generate a latent rebellious attitude in subordinates. Decision-making is permitted at all levels and is integrated into the formal structure with reference to the organisation chart. The result is a leadership hierarchy supported by yes-men. stoppages and grievances and so on.

Production may mean the number of good research ideas generated or accounts processed. group. self-respect. To deal with this problem. ranging from ‘boss centred’ to ‘employee centred’. . So 9. The grid suggests that any combination of concern for production and concern for people may be present within an organisation. Likert identified the following factors that can influence success. concern for people embraces friendships and relationships. The outcomes of the continuum of styles are often summarised as: ● ● ● ● Tells – the leader makes all the decisions and ‘tells’ the subordinates. quality of service and possibly warranty claims. ● ● ● ● ● ● Loyalty to the organisation. Sensitivity to what people value and expect is essential. their ability and traditions. and sets guidelines for an approach to management.3). Credibility of communication. division. A high concern for production will score 9 and a high concern for people will also score 9. Joins – this is where the leader defines the problem but delegates and hands over the decision-making power to the group. Individual motivation. The continuum is based on the degree of authority used by a manager and the degree of freedom for the subordinates. company or corporation. Consults – the leader does not make the decision until he has presented the problem to the subordinates and hears their views and suggestions.312 MANAGEMENT STUDY MATERIAL E2 Solution Armed forces. equity and integrity. the two coordinates on the grid indicating the proportion of each concern present (Figure 6. Likewise. Their managerial grid provides a framework for understanding and applying effective management. The leader will indicate the limits within which the decision must be made. concern for production is not confined simply to the Taylor ideal of effective factory performance. Sells – the leader makes the decision. Adequate communication. but rather than just announcing or telling to the subordinates. then adopts the solutions that have been suggested. task commitment. as well as top policy decision-making and the number of successful decisions. dangerous occupations? To be successful requires consideration of the people being led. Developing this concept a little further. Goal congruence. Confidence and trust between different sub-units and between the hierarchy and lower echelons. Bosscentred is associated with an authoritarian approach and employee-centred suggests a democratic or participative approach. be it local. The grid derived from the precept that management is concerned with production and people. the volume of sales.9 gives a team management style. Blake and Mouton managerial grid Blake and Mouton (1994) argued that managerial competence could be taught and learned. tries to persuade them to accept it. Tannenbaum and Schmidt Tannenbaum and Schmidt came up with a continuum of leadership behaviours along which various styles were placed.

time-serving organisations. Many disputes.3 The managerial grid The task-orientated style (production 9. and any inadequacies are overlooked. This style may exist on the micro-scale. it advocates a high degree of concern for production which generates wealth and for people who in turn generate the production. and commitment to problems raised is almost nonexistent. the newspaper publishing industry and the coal industry. has certain drawbacks. . In certain environments. like machines. arising probably from a feeling that any improvement is idealistic and unachievable. passed over for promotion. Certainly. Subordinates can become indifferent and apathetic. however. and it is doubtful if any non-profit-making organisation could either. while this style can achieve high production. and coercion may not improve things substantially. possibly because of a lack of personal maturity. However. neither too lenient nor too coercive.1) is almost impossible to imagine. People are treated as a commodity.ENTERPRISE MANAGEMENT High 9 Country club management Team management 313 MANAGEMENT CONCERN FOR PEOPLE Middle-of-theroad management 1 Low Impoverished management Low 1 Authority-compliance management 9 High CONCERN FOR PRODUCTION Figure 6. there are noticeable deficiencies. The middle road (5.1) is in the best. This style is often present in inefficient. local government. no commercial organisation could survive with such impoverished management. The ‘country club’. shunted sideways. or even rebellious. The impoverished style (1. The manager will be responsible for planning. Typically. for example the supervisor who abdicates responsibility and leaves others to work as they see fit. This viewpoint pushes for productivity and considers people. or has been in a routine job for years. the health service. Taylor tradition. such as within the railways. have arisen largely from this style of management taking the easy option.9) may be idealistic. This style endeavours to discover the best and most effective solutions. as Blake calls it.5) is a happy medium. The country club style (1.9) emphasises people. Contact is frequently minimised. is always blamed down the line. The team style (9. for whatever reason. creative energy may be channelled into trying to beat the system. It is a style of ‘give and take’.1 supervisor or manager is a frustrated individual. quasi-monopolist. the 1. A failure. people 1 or 9. directing and controlling the work of those subordinate to him or her. People are encouraged and supported. aiming at the highest attainable level of production to which all involved contribute and in which everyone finds his own sense of accomplishment. on the basis that people are doing their best. but does not go ‘over the top’ either way.

The people within the group will vary in intelligence. severe threat to security and thus will drastically affect the successful style. education. This is obviously independent of the other variables. even when they attempt to reflect the multidimensional nature of leadership.9 style of leadership may be effective.g. Drive or motivation. The situation within the group (which can vary from cooperative to militant) will also affect the successful style. Represent the purpose of the group to the outside world. The commitment of the group to move forward. but this will include satisfying the intrinsic needs of group members. while at the same time satisfying the needs of the organisation.6 Contingency and Situational theories of leadership Following on from the discussion above concerning one best style. technology. although the 9. The manager has to provide the following factors: ● ● ● Direction. it should be apparent that there is no one best style of leadership that is equally effective for all circumstances.g. The best leadership style is the one that fulfils the needs of the group the most. in a crisis) when time constraints do not make it possible to use this style. From the discussions on the leadership styles theories. This helps to account for the fact that no one style of leadership has proved to be universally superior to others. The situation of the group can vary from calm to crisis. The elimination of uncertainty about what has to be done and the coordination of all effort to pull in one direction. but be successfully managed.3 One best style? The difficulty with style theories. . aggrieved. Conflict will occur.314 MANAGEMENT STUDY MATERIAL E2 The 9. To take one simple example. structure and environment in which the group is working will have similar marked effects. casual or troublemakers. Reputation. What is your preferred style of leadership? Give you reasons why. 6. there will sometimes be circumstances (e. a more recent view of effective leadership has developed from the notion that the most effective leaders have the ability to adapt their style depending on the situation. interest and motives. is that they ignore the important influence of the context in which the leader is operating.9 manager assumes that employees are committed to the organisations (e. simple to complex. businesses where the employees are all shareholders). The variables that define the successful style include: ● ● ● ● The personality of the leader is probably the most rigid of the variables that defines the most effective leadership style.5. The task. Do you think this style would be effective in all situations? Why/why not? 6. They may be loyal and long-serving.

which is based on the premise that effective leadership requires a bringing together of task.4 Action centred leadership 6.6. Fiedler’s hypothesis is that the situation is going to determine the most effective style of leadership. generate synergy out of the different skills and knowledge of individuals. Task structure. team and individual needs (Figure 6.2 Fiedler The development of the contingency approach marked the bringing together of the personality and situational approaches. but it also can be valuable for motivating people by creating a sense of achievement. Concern for Task Concern for Team Concern for Individuals Figure 6. The degree of formal authority/responsibility allocated to the position. Where individuals feel they have opportunities to satisfy their needs and develop. almost by definition effective teams.1 John Adair action-centred leadership Adair (1983). 3. put forward a model of ‘action centred leadership’. they are more likely to contribute to creativity and effectiveness. 2. He defines the situation as a combination of three factors: 1. Fiedler’s contingency model is the best example of an attempt to integrate individual characteristics with the structural and task properties of the situation. In terms of leadership style. Leader position power. Fiedler intimates that the leader can be high on only one aspect at a time – either people oriented or task oriented. . but not both.6. The extent to which the leader is able to define and control the group’s activities. Teams. Leader/member relations.4): ● ● ● Task achievement is obviously important for efficiency and effectiveness.ENTERPRISE MANAGEMENT 315 MANAGEMENT 6. after his military training at Sandhurst. The key task for the action-centred leader is to understand these processes and bond them together because otherwise there will be a tendency for the organisation to remain static. Based on the leader’s view of the favourableness or unfavourableness of his work group.

including subordinates’ expectations of leader behaviour. Hersey and Blanchard’s theory is based on a relationship between three factors: 1. innovative and capable of .6.7 Transformational leaders The dynamic nature of the environment facing many organisations today means that there is a constant need to innovate and change. Selling style – is appropriate where there is high task behaviour and moderate maturity of followers. relationship behaviour – this is the extent to which the leader engages in two-way communication with followers and provides encouragement and support. the willingness and ability to accept responsibility. task behaviour – this is the extent to which the leader provides direction for the followers and how they should get the job done. The appropriate leadership style used by a manager varies according to the maturity level of the followers (represented by M1–M4). 6. Maturity is not defined as age or psychological stability. It is suggested that to cope with this type of environment. 3. leaders need to have vision and be creative. He also overlooks a lot of other moderating variables. The personality dimensions are taken in terms of the leader’s view of the characteristics of his or her group. He fails to treat the characteristics of the leader as they are viewed by the group. 4. Delegating style – is appropriate where there is low relationship and low task behaviour but high maturity of the followers. based on the notion that the most effective leadership style varies according to the level of maturity of the followers and the demands of the situation. the manager should reduce task behaviour and increase relationship behaviour. either in terms of the situation itself or in terms of the subordinates’ definition of the situation. education and/or experience and skills relevant to the particular task. The maturity level of the followers is defined as: ● ● ● a desire for achievement (level of achievement motivation) based on the need to set hard but attainable goals. that is group effectiveness.3 Hersey and Blanchard The current trend in the study of leadership has been towards a situational approach. 6. 2. As the maturity level of followers increases.316 MANAGEMENT STUDY MATERIAL E2 Fiedler was also talking in terms of effectiveness. The level of task and relevant maturity that followers can provide to accomplish it. Supporting (participative) style – is appropriate where there is high relationship but low task behaviour and moderate maturity of followers. 3. The four styles are: 1. Telling (directing) style – is appropriate where there is low relationship but high task behaviour and low maturity of the followers. but he ignored the question of leader effectiveness which is also an important moderating variable on performance. 2. There are four distinct leadership styles that are appropriate given different levels of maturity. Nor does Fiedler define the situation adequately.

organisations must constantly innovate to establish themselves. Boyd believes that there is a need to develop such skills in organisations and to create the conditions in which this type of leadership can emerge.ENTERPRISE MANAGEMENT 317 MANAGEMENT inspiring others. physical and other important needs. in order to be able to engage them on the basis of shared understanding. not just to follow them personally but also to believe in a vision of organisational or political transformation. there is growing interest in enterprising behaviour. These new skills according to Boyd encompass: ● ● ● ● ● anticipatory skills providing foresight in a constantly changing environment. private and public organisations. These include that they: ● ● ● ● ● ● ● ● ● Are creative and innovative Spot and exploit opportunities Find the resource required to exploit opportunities Are good networkers Are determined in the face of adversity Are able to handle risk Have control of business Put the customer first Create capital. knowledge and attitudes that enable them to identify new opportunities. The new kind of transformational leader needs a different range of skills from those suggested by traditional management theories. self-understanding so that the leader understands his or her own needs and goals as well as those of the followers. and not for profit sectors. visioning skills whereby persuasion and example can be used to induce the group to act in accordance with the leader’s purpose or the shared purpose of a larger group. survive and grow. Wickham (2004) suggests that entrepreneurs are simply managers who manage in an entrepreneurial way. As such. The approach to leadership is referred to as ‘transformational leadership’ whose distinguishing feature is the ability to bring about significant change. Leaders do this by motivating followers. take a strategic view and learn as they go. and in the characteristics of entrepreneurs and their apparently special skills. not just new start-ups but small and large firms. psychological. Identify some examples of transformational leaders? Explain why you would define them as transformational leaders. empowerment skills involving the willingness to share power and to do so effectively. . They actively pursue opportunity and drive change to create new values. 6. Bolton and Thomson (2003) suggest that there are some key action factors that characterise entrepreneurs that enable them to make a significant difference. value-congruence skills which enable the leader to be in touch with individuals’ economic. This can be applied to different situations.8 Entrepreneurs In today’s competitive environment.

There are many different definitions proposed to explain culture. Handy (1993) simplifies this by suggesting that culture is ‘the way things are done around here’. norms of . values and does of practice that makes an organisation what it is. The part of the iceberg which is visible above water can be characterised as the goals and strategy of the organisation. It reflects the ways work is performed: and what is acceptable and not acceptable: and what actions are encouraged and discouraged’. Schein (1992) refers to culture as ‘the deeper level of basis assumptions and beliefs that are shared by members of the organisation. 6. but is increasingly important for many organisations. Some aspects of an organisation’s culture will be visible and obvious. This can be depicted using the analogy of the organisation as an iceberg (French and Bell. and is concerned with the values. From the above definitions. the structure. basic assumptions and behaviour that are not easy to achieve. However. people rewarded. while many others will be both less tangible and more significant. the way authority should be exercised. since it goes beyond slogans and new mission statements: real change requires modifications to values. systems and procedures and the products and services. The task for owners and managers is to achieve the right blend of cultures for the organisation’s task and environment. the way it responds to change and ultimately.318 MANAGEMENT STUDY MATERIAL E2 Casson (2003) goes on to propose the following qualities of entrepreneurial capacity: ● ● ● ● ● ● ● ● ● ● ● ● Foresight Imagination Communications Self-knowledge Autonomy Search skills Analytical ability Networking skills Manage risk Delegation Organisational skills Industry knowledge/expertise. often taken for granted that people in an organisation understand. The greater part of the iceberg is submerged. It represents a powerful force on an organisation’s strategies. attitudes and beliefs. how well the organisation performs. 1990). managing culture is not a short-term or straightforward task. Moorhead and Griffin (1992) define organisational culture as ‘a set of values. Handy expanded this as: deep-set beliefs about the way work should be organised. people controlled – these are all aspects of the culture of an organisation.9 Organisational culture Organisational culture is an important concept since it has a widespread influence on the behaviours and actions of employees. culture can be said to refer to the underlying beliefs. structures and systems. that operate unconsciously and define in a basic ‘taken for granted’ fashion an organisation’s view of itself and its environment’.

© 1998. Formal aspects (apparent) Goals. values and aspirations of the organisation that go beyond the formal statement of corporate objectives. all of which combine to make up the organisation’s culture. Shared values/super ordinate goals. The concept of the organisational iceberg is illustrated in Figure 6.5 below. 4.e. From Organisational Behavior.com. The key capabilities of the organisation. the overt or formal aspects of the organisational iceberg shown in Figure 6.ENTERPRISE MANAGEMENT 319 MANAGEMENT behaviour and leadership style. Fax 800 730–2215 McKinsey. The actions that are planned in response to environmental change in order that the organisation achieves its objectives. technology. Canadian Edition 1st edition by Hellriegel/Slocum/Woodman Brun. structure and strategy. A change in strategic focus may mean that new skills need to be acquired as other skills become redundant. The hard aspects of the 7-S framework refer to systems. The softer elements are style. Style. skills Behavioural aspects (hidden) Attitudes Communication patterns Group processes Personality Conflict Problem-solving style Figure 6. The issues of structure. Systems. Are the guiding concepts. budgetary systems information technology systems and so on. For example. 5.5 The organisational iceberg. Structure. Reprinted with permission of Nelson. also produced a framework for understanding organisations (the McKinsey 7-S framework) highlighting the ‘hard’ and ‘soft’ aspects of organisations which can influence the culture. a division of Thomson Learning: www. structure. finance. This includes formal and informal procedures that ensure the organisation operates. accounting systems. in other words. a US management consultancy. 6. A strong culture will be . the covert or hidden aspects of the organisation iceberg). The seven factors referred to are: 1. as discussed in the previous section. Skills. Strategy. A key factor in determining how effective the organisation is will be the appropriateness of its culture for its stakeholders. staff and skills (i.5. 2. 3. should not only be concerned with whether the organisation should be a functional/divisional or matrix form. and particularly its customers.thomsonrights. but should also consider the coordination between different areas. Relates to the management and leadership style which will be critical because this will convey what is important in the organisation. How the organisation gets things done.

They tell people what they are supposed to do. our people as opposed to depending on extensive rules. appropriate human relationships (e. although this does not necessarily mean that the values are articulated in written form. So explicit an approach to the use of culture is still the exception rather than the rule. 3.g. and so on. Values are often taken for granted and tell individuals what is regarded as important in the organisation and what sort of behaviour is desirable. in his analysis of different levels of organisational culture. the more they are likely to be affected. think and feel about things. It will reflect the philosophy and values of the organisation’s founder or dominant group. procedures.9. but largely subconscious. These will be very important. the more strongly based the values. Edgar Schein (1992). and are passed on by word of mouth or behaviour. but organisations promote and act on values whether or not they are formally documented. 2. the importance attached by them to status and levels of formality. The particular culture will have a significant effect on the organisation’s strategy and ability to respond to change. Hewlett Packard makes use of statements called the ‘HP Way’ to clarify corporate values to all employees. It will minimise some of the perceptual differences among people within the organisation. These are things such as factory and/or office equipment. head office buildings. and in the area of ‘belief in our people’ the following appear: ● ● ● confidence in. opportunity for meaningful participation (job dignity). depend on people to do their job right (individual freedom) without constant directives. Artefacts are the more obvious and visible symbols of an organisation’s culture. the relationship between the organisation and its environment. how managers treat subordinates. Artefacts Norms Values Basic Assumptions.1 Different levels of culture Culture exists at a number of different levels from the core beliefs and values to the visible manifestation of artefacts. a strong culture that does not have these attributes is likely to be a major barrier to effectiveness. depicts culture as having four major levels: 1. determining how they should perceive. For example. the way in which they are reinforced is by the behaviours of management. the way in which employees dress and the provision of information for customers. 6. individualistic and competitive or collective groups) and what motivates people. For example.320 MANAGEMENT STUDY MATERIAL E2 beneficial if it focuses on these elements and highlights the need to change proactively. On the other hand. Underpinning any set of values will be the basic assumptions about things which represent the deepest level of cultural awareness and guide individuals’ behaviour. . and respect for. say and believe. Rather. The main effects and characteristics of a strong culture will be as follows: ● ● ● ● It will strengthen behavioural regularities and norms among members of the organisation. 4. Norms guide individuals on how they should behave in a particular situation and represent unwritten rules of behaviour.

who reports to whom. derived from the variables described above. Harrison’s/Handy’s four types of culture Handy (1993). 2. the special events the organisation emphasises in terms of what is particularly important. how members behave towards each other. influence of the leader. Power structures. what the symbols of the organisation are. The following section will consider some of the ways that culture can be classified.ENTERPRISE MANAGEMENT 321 MANAGEMENT The structure and culture of an organisation will develop over time and will be determined by a complex set of variables. innovation. travel arrangements (business class. including the: ● ● ● ● ● ● ● history and nature of the organisation’s business. 3. structure. the measurement and reward systems which denote what is important to monitor and focus activity on. Johnson et al. Symbols. first class. Routines. what people talk about in the organisation to each other and outsiders in terms of important events and personalities and the mavericks who deviate from the norm. which brings together the different aspects of organisational culture. titles. etc). what matters in the organisation and what constitutes success or failure. age. what the normal ways of doing things are. whether it is centralised or decentralised. maturity or decline. Control systems. for example logos. Power or club Role Task Person. what the organisation highlights and rewards. who makes the decisions. So although organisations are operating in the same industry sector and have the same corporate status. The main elements are: ● ● ● ● ● ● ● Stories. on an informal and formal basis. who the most powerful individuals or groups are. Rituals. there are a number of different ways of classifying organisation culture. company cars. quality. developing on the ideas of Harrison. what the procedures are. size of the business. These signal what is important and valued.2 Models for categorising culture Whilst every organisation will have its own unique culture. values of the first owners. Organisational structure. life stage of the organisation. nature of the management and staff in the organisation. . suggests that there are four different types of culture: 1. 6. which reflect the power structure. organisational goals and objectives. the reason the organisation was formed. (2005) developed the framework of the cultural web framework. In trying to explain how the culture of an organisation can be described and understood. nature of the business environment.9. who influences the decisions. it is their own unique culture that will differentiate them from each other. whether it is in its youth. 4. for example sales achievement.

who keep control of all activities and make all the decisions. civil service and traditional. A task culture can quickly respond to change and is appropriate where flexibility. some social clubs. The first type is a constellation of stars. Decisions tend to be controlled at the centre. People or support culture can be divided into two types. IT and management consultants. drawing strength from the pillars which represent functions such as marketing. This type of culture can be depicted as a Greek temple. based on technical expertise of individual employees – such as that found in architects’ and solicitors’ practices. Everything is based on a logical order and rationality. finance and human resource management that are joined at the top.322 MANAGEMENT STUDY MATERIAL E2 ● ● ● ● Power culture is based on one or a few powerful central individual. belonging and consensus (e. this type of culture is slow to respond and react to change. Creativity is encouraged and job satisfaction tends to be high because of the degree of individual participation and group identity. and the desired culture in large organisations seeking total quality management). this means that whilst suitable for a stable and predictable environment. Each of the different types of culture described has advantages and disadvantages and in reality. It can be depicted as a net with the culture drawing on resources from various parts of the organisational system and power resides at the intersections of the net. The power and influence tends to be based on specialist knowledge and expert power rather than on positions in the hierarchy. where the heads of the functions form management boards. should ensure an efficient operation. bureaucratic way (e. which must be followed. The form rule and procedures. Task or achievement culture is typified by teamwork. The organisation is not rigidly structured and has few rules and procedures. This type of culture can react well to change because it is adaptable. Role culture tends to be impersonal and rely on formalised rules and procedures to guide decision-making in a standardised. What are the problems an organisation will face if it has an inappropriate culture? . rather than an emphasis on a formal hierarchy of authority (perhaps typical of some advertising agencies and software development organisations. adaptability and problem solving is needed. informal and decision-making is quick.g. This is likely to be the dominant type of culture in small entrepreneurial organisations and family-managed businesses). flexibility and commitment to achieving objectives. The structure is perhaps best depicted as a web whereby power resides at the centre and all authority and power emanates from one individual. Each job is clearly defined and the power of individuals is based on their position in the hierarchy. informal aspects of many organisations).g. mechanistic mass-production organisations). Other types of organisation exist for the benefit of the members rather than external stakeholders. The organisation is what these few people possess as skills. There is a clear hierarchical structure with each stage having clearly visible status symbols attached to it. and are based on friendship. organisations often need a mix of cultures for their different activities and processes. often dynamic entrepreneurs.

this culture is where the team is all important and quick feedback from the customer is the key to success. Theory J and Theory Z William Ouchi in 1980 popularised the idea of culture in his book Theory Z: How American Business can Meet the Japanese Challenge. A number of researchers believe that culture plays a major role in determining an organisation’s ability to implement strategies and contributes to organisational effectiveness and excellence and ultimately. No feedback.ENTERPRISE MANAGEMENT 323 MANAGEMENT Deal and Kennedy 1982/1988 Strong culture theory Another categorisation of culture is presented by Deal and Kennedy. 2. they seek employment elsewhere. High risk. for example in pharmaceutical research. resulting in a high pressure environment. decisions are large scale and risks are high. Financial stakes are high and the focus is on speed.3 Culture and organisational effectiveness There are different views on the relationship between culture and organisational performance. Decision-making. This culture is characterised by slow feedback with decision cycles taking years. Tough-guy macho. 3. Ouchi is generalising when he speaks of the typical American or Japanese organisation.9. 6. 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. Very specialised. people tend to stay in one function for the whole of their career. this reflects tough individualistic and high risk-taking organisations. Four generic profiles resulting are: 1. Work-hard-play-hard. Usually short term. This profile is likely to be an entrepreneurial firm run by the owner. to overall competitive advantage. The organisation is made up of people working as individuals who take high risks and receive quick feedback on whether their actions were right. Ouchi – Theory A. quick feedback. High risk but slow feedback. Process. the extent of risk connected with the activities of the organisation. This type of culture is where technical performance is of critical importance and there is a need for order and predictability. Career path. the speed of feedback on the outcome of employees’ decisions. If individuals are not promoted. Few risks taken. 2. Carried out by individual managers. However. 4. 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. Evaluation and promotion. Very fast. They suggest that culture can be determined according to two factors: 1. . Bet-your-company. organisations in any one country will have important differences and unique features: these differences represent the culture of the particular organisation. He suggested that there are a number of characteristics that differentiate the typical American firm (Theory A) from the typical Japanese one (Theory J). bureaucratic. Looked at more closely. Some of the different researcher’s views are discussed below. with lay-offs quite common. Of course.

They listen and learn from customers so that they are market driven. 3. The organisation is only concerned with the workers’ work life. Usually for life. Shared collectively. They take ‘value-shaping’ seriously and inspire employees by ‘Management by walking about’ (MBWA) – regular visits to the workplace. Concern for personnel. Career path. They regularly reorganise to produce small basic units. Evaluation and promotion. that those at the frontier know best. they avoid selfperpetuating bureaucratic committees. Very slow. The eight key characteristics of excellent organisations are as follows: 1. Assigned on an individual basis. to encourage a loyal. with an emphasis on development and training. Productivity through people. Very general. committed workforce. flexible and innovative forms of organization. Very implicit and informal. These simplified forms of organisation reduced the number of managerial levels and central staff through the avoidance of bureaucracy and. reliability and service are valued as long-term growth is sought through customer loyalty. Career path. Concern for personnel. and that innovation comes from ‘where the action is’. as a form of control.324 MANAGEMENT STUDY MATERIAL E2 Control. Concern for personnel. Instead. Staff are rotated around the organisation. To facilitate decision-making and problem-solving. Carried out by group or committee. The organisation’s concern is expanded to include aspects of the workers’ home life. People are aware of their control responsibilities. Slower. Theory Z Employment. Peters and Waterman (1982) The cultural excellence school These former McKinsey consultants suggest that culture. lived in line with man’s limitations. Autonomy and entrepreneurship. is critical for corporate success. Carried out by individual managers. with lay-offs rare. 2. 6. like product divisions. Decision-making. Responsibility. Very explicit. Assigned on an individual basis. Decision-making. Control. Hands on value driven. The organisation is concerned with the workers’ whole life. Control. Evaluation and promotion. Close to the customer. Responsibility. Responsibility. Fairly long term. Stick to the knitting. Their research into high-performing American corporations revealed that corporations with a clearly articulated tight culture were able to develop simple. they promote a ‘ready-fire-aim’ ethos through temporary ad hoc mechanisms. 5. with elements of job rotation and broad training. They believe people respond to trust. People rely on trust. based on trust and participation. . They avoid diversification and concentrate on the things they do well. decentralised. 4. Bias for action. Theory J (Japan) Employment. Quality. but seeking consensus from the group. by avoiding complicated matrix structures. A balance between formal and informal. More general.

only 2 years after publication of the book. Simple structures make reorganisation easier. has nevertheless found variations in the degree of centralisation of organisations according to the market operated within. however. Peters produced an amazing 45 prescriptions (his term) under five headings for ‘managing change innovation and survival’. Most of these contain a lot of common sense and are self-evident and revisit previous attempts to define ‘best practice’ or ‘excellence’: ● ● ● ● ● creating total customer responsiveness using fast-paced innovation achieving flexibility by empowering people learning to love change building systems for a world turned upside down. Culture has either been neglected or relegated to the ‘art of management’. It reveals the limitations of the traditional ‘rationalist’ approach which only regards measurable and visible aspects of organisations worthy of consideration. successful organisations are managed. insufficient attention has been given to the less quantifiable ingredients of organisational life. have few central ‘staffers’ and intermediate levels of management. 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. Simple form. 1. unfortunately. Hence. Whatever the merits of this approach. 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’. financial planning and analysis and information technologies.ENTERPRISE MANAGEMENT 325 MANAGEMENT 7. Peters (1987) Thriving on chaos Subtitled A Handbook for a Managerial Revolution. the consequence of which has been a restrictive emphasis on rigorous organisational design. Since autonomy has been ‘pushed down the line’. . like product divisions. some of the organisations defined as excellent have subsequently experienced severe operating difficulties. This merely illustrates the temporary nature of organisational success. these organisations are both centralised and decentralised. Several factors suggest. While Peters and Waterman made an important contribution to the understanding of how large. 8. 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. Simultaneous loose-tight properties. for example. other research. Two main points can be made about the cultural excellence school. while the corporate level retains control over a few core values. 2. lean staff. and so on. Thus. Simple self-contained but competing structures. we need to recognise that it constitutes a resurgence of universalism and is therefore somewhat at odds with contingency theory. while tending to confirm the relationship between performance and some of the key characteristics. The emphasis on simple forms of organisation using simultaneous loose – tight controls refocuses the traditional debate about whether or not organisations should operate tight centralised controls or looser decentralised ones which encourage self-regulation.

e.326 MANAGEMENT STUDY MATERIAL E2 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’. The national culture is just of one of these influences. say France or China. (Hofstede’s work will be returned to later in the study system). an understanding of national culture has become increasingly important. power distance. it is what makes the United Kingdom different from.4 Culture – The International Dimension As many organisations operate at a global level and face international competition.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. usually on the basis of learning from what has been successful in . It consists of taken-for-granted assumptions and norms about how people should behave. Trust and integrity come high on this list as without control. 1945). it is import-ant to remember that cultures in society are not permanent and as mentioned earlier. Peters wants measures of product quality and customer satisfaction and wants these simple. 6. The different dispositions of countries will impact on how they do business and manage employees. achievable) goals. Culture comprises values. Cultural practices vary between different countries and will impact on how organisations operate. These include. Too often. The implications of this are that managers must be sensitive to the dimensions of national culture. individualism/collectivism and masculinity/femininity. This view is captured in one of the early definitions of culture which is ‘the configuration of learned behaviour and result of behaviour whose component elements are shared and transmitted to the members of a particular society (Linton. management accounting systems are set up to link into financial reporting requirements. rituals. for example. where problems can arise because of the different ways companies are run as a result of cultural differences. a theme pursued by Eli Goldratt in The Goal which he subtitled A Management Accounting Textbook. which stress what is important for the corporation. and the need to measure what is most important strategic-ally. myths.9. This involves control systems. values and expectations that put it apart from others – so. However. Hofstede (1990) developed a model to explain national differences by identifying ‘key dimensions’ of common culture in the value systems of all countries. trust is a de facto requirement without which systems cannot work.9. The features of a country’s culture have important implications for managing cross border mergers. Control should be bottom-up with ‘conservative’ (i. 6. and beliefs about how things should work. experiences. strong corporate cultures that are closely linked to corporate strategy may be critical for success. This point is very relevant to organisations who seek to grow through mergers and acquisitions with foreign companies. uncertainty avoidance. It is expressed through symbols. all cultures have sub-cultures and a range of complex and interrelated factors influence organisational culture. stories and behaviour. Bloisi (2004) develops this stating that culture is a commonality of beliefs.

Hofstede’s research has attempted to establish the essence of work related difference across the work and relate these to preferred management styles. Hence. moving into unfamiliar markets. though experience suggests it is a difficult and lengthy process which should be undertaken as a last resort. some corporations have developed an interest in cultural change. unpredictable markets. Austria and Israel. . and people. 5. which are an important and systematic influence on employees. etc. This kind of culture was found. 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. China. Low power distance means people expect equality in power.) and are attempting to change corporate strategy by. Power distance Power distance is the extent to which a society accepts that power in organisations is distributed unequally. deregulation. If an organisation has few shared values. It is this latter feature which makes corporate culture a double-edged ‘weapon’. This highlights the need for a cross cultural approach to understand the nature of the management/employee relationship.ENTERPRISE MANAGEMENT 327 MANAGEMENT the past. is not suited to the new strategy. such as in Denmark. 2. This often proves difficult because the existing culture. by Hofstede. Power distance Uncertainty avoidance Individualism/collectivism Masculinity/femininity Time orientation.10. most organisations have important cultural values that are not spelled out in this way. for example. High power distance means people accept inequality in power among institutions. In countries with high power distance. however. while some of these may be set out in formal documentation. new members of the organisation have to learn these norms and be socialised to accept them. to be particularly strong in Malaysia. Some organisations. it has a ‘weak’ culture. Yet many organisations are facing turbulent environments (techno-logical developments. because it is difficult to change. which may have been a tower of strength in the past. 6. 3. Life is generally much more straightforward and easier once the basic ground rules are known. heightened international competition. However.10 Managing in different cultures A challenge facing managers who are working in an increasingly global business environment is the impact of national cultures on the way people behave at work. 4. organisations. 6. Philippines. recession. and Russia.1 National cultures Hofstede suggests that the national culture of different countries can be classified according to five ‘Dimensions of Culture’: 1. and wide differences in ways of thinking and behaving in different departments. have very ‘strong’ cultures. managers tend to make autocratic decisions and subordinates do what they are told rather than being involved in decision-making.

Japan. 6. Low uncertainty avoidance means people have high tolerance for the unstructured and unpredictable (Singapore.10. Canada. Britain and Australia. Norway. Time orientation Short-term orientation means that people expect fairly rapid feedback from decisions. Masculine values are strong in Japan. do not be in a hurry. Chile. there are a number of guidelines that you should follow: ● ● Always show respect and listen.328 MANAGEMENT STUDY MATERIAL E2 Uncertainty avoidance Uncertainty avoidance is the degree to which members of society feel uncomfortable with risk. Masculinity/femininity Masculinity relates to the degree to which masculine values predominate. Taiwan and Thailand). and so on. expect quick profits. Collectivism is a preference for a tightly knit social framework in which individuals look after one another and organisations protect their members’ interests. and feel threatened by unusual situations. High uncertainty avoidance will mean risk taking is discouraged and organisations will tend to rely heavily on rules and regulations so that people know what they are doing. Mexico. uncertainty and ambiguity. and Russia. For example. Individualism and collectivism Individualism is the extent to which people are supposed to take care of themselves and be emotionally independent from others and reflects the values for a loosely knit social framework. Try to gain an appreciation for the differences between Hofsede’s ‘masculine’ and ‘feminine’ cultures.3 Changing behaviour In any situation.10. Italy and Germany. This was found to be particularly the case in China. . Both men and women subscribe to the dominant value in masculine and feminine cultures. 6. Feminine cultural values were found in Sweden. and Peru. Finland and Denmark. assertiveness. sensitivity and concern for others. a focus on power. Austria. achievement. This type of attitude is found in Greece. frequent job evaluations and promotions. and material success as opposed to the stereo-typical feminine values of relationships. where you are required to manage in a cross-cultural or multi-cultural environment. This tends to be true for the United States. modesty.2 Other cultural characteristics Other issues that may require a manager to modify their approach would include the following: ● ● ● ● ● ● Language Religion Attitudes Social organisation Education Ethnocentrism (a tendency to regard one’s own culture as superior to others).

Discern the perceived definitions of words. 6. where Mentor was the human form of Athena who acted as a guide to Telemachus. Mentors often discuss such issues as training. usually more experienced employees who can guide and support younger less experienced employees in any aspect of their development and socialise them into the culture of the organisation. and is intended to provide the employee with a forum to discuss development issues that are relaxed and supportive. Understand that leadership may mean different things to different countries. Know or take someone who knows the culture. The mentor could also act as a sounding board for ideas. otherwise there is the danger for conflict given the development versus line management nature of mentoring. The name comes from Greek literature. A mentoring system has both career-enhancing and psychological functions. Mentors are often in senior positions within the organisation. Save face as well as giving face.11 Mentoring A mentor is essentially a guide. such as appraisal. Leave your own ‘domestic’ management style at home. having already achieved a status (and possibly qualification) to which the subordinate aspires. Do not embarrass anyone in front of others. Eliminate stereotypes. counsellor. relationships should not be based on authority but rather a genuine wish by the mentors to share knowledge. The mentor should give honest but supportive feedback and guidance on how weaknesses can be eliminated or neutralised. tutor or trainer.e. visibility and sponsorship. The career function is concerned primarily with enhancing career advancement through exposure. The role of a mentor is to encourage and assist junior members of staff to analyse their performance in order to identify their strengths and weaknesses. the choice of qualification. Emphasise points of agreement. The process should help junior staff to question and reflect on their experiences. Always show respect. Whilst it is normal for the mentor to be from the same function (i. The psychological function is more concerned with aspects of the relationship that primarily enhance competence and effectiveness in management roles. interpersonal problems and career goals. Avoid clique-building. Do not lose your temper. Mentoring works alongside more formal control mechanisms.ENTERPRISE MANAGEMENT ● ● ● ● ● ● ● ● ● ● ● ● ● 329 MANAGEMENT Do not feel your way is the best way. A mentoring system should help junior staff in expanding their network of contacts and gain greater exposure in the organisation. it is unusual for the mentor to be a direct or indirect line manager of the subordinate. Learn to tolerate a high degree of unpredictability. . finance). advice and experience and should be one of mutual trust. The mentor is normally a role model. The fact that the mentor is not the direct line manager means that he/she can act as an independent arbiter. For a mentoring system to be successful.

6. Thriving on Chaos: A Handbook for a Managerial Revolution. authority. Studies of Social Power. (1951). (1993).). 42–63. Images of Organisation. (1980). MA: Addison-Wesley Pub Co. R. Harlow: Pearson Education. W.R. ‘Motivation. London: Sage. In summary. J. Houston: Gulf. and Salancik G.M. The key points to remember are: ● ● ● ● the concepts of power. and nurtures learning. Reading. Management and Organisational Behaviour. and Organisation: Do American Theories Apply Abroad?’ Organisational Dynamics. management. The Entrepreneur is Focus: Achieve Potential. guides. responsibility and delegation. Trist. (1992). (1982). the process of mentoring. MI: University of Michigan. The Management of Innovation. No. Theory Z: How American Businesses can Meet the Japanese Challenge. The External Control of Organisations: A Resource Dependency Perspective. Mullins. acting as a role models. French. 1. Summer 1980 pp. Organisational Culture and Leadership.H. New York: Harper & Row.P. Lower levels of staff turnover. C. W. (2003). and the implications for management style. Human Relations. Pfeffer. and Mouton. and Thomson. Blake. J.R. In D. Effective Leadership. Hofstede. and Waterman. T. References Adair. C. bureaucracy. encourages. London: Thomson. the mentor stimulates. Institute for Social Research. Vol. Cheltenham UK: Edward Elgar Publishing Inc. K. (1981). The Entrepreneur – An Economic Theory (2nd edn). C. Wickham. (1961). New York: Harper & Row. Salancik (eds). Handy. (1994). Organisational Development: Behavioural Science Interventions for Organisational Improvement (3rd edn). (1983). (2003). Schein. G. (1959). (1970). A. Cartwright (ed. Ouchi. (1987). The Managerial Grid. supports and cautions. Understanding Organisations. In Search of Excellence. Leadership. ‘Departmental Power and Perspectives in Industrial Firms’. 4. G. UK: Oxford University Press. London: Tavistock. No.H. T. J. the different perspectives of leadership. (2004). E. B. Casson. Jr (1987). E. M. T.: FT Prentice Hall. (2004). 9. 1. Bolton. New York: Harper & Row.L.12 Summary This chapter has looked at the basic concepts of. R. and Raven. ‘The Bases of Social Power’. . Strategic Entrepreneurship (3rd edn). J. and approaches to.L. French.R. and Stalker. Burns. ‘Some Social and Psychological Consequences of the Longwall Method of Goal-getting’. Jossey Bass: San Francisco. (1986). Peters. J. Pfeffer and G.330 MANAGEMENT STUDY MATERIAL E2 The main benefits of mentoring include the following: ● ● ● Improved motivation among employees. Harlow. (eds) (1977). and Bamforth. Ann Arbor.J. London: Pan. Morgan. Faster career progress. P. Peters. Vol. G. Prentice Hall. L. The External Control of Organisations: A Resource Dependency Perspective. the importance of organisational culture. Basingstoke: Macmillan. and Bell. In J. Perrow. B.

has worked for L for over twenty years and has a sound knowledge and understanding of the different activities of the firm’s business. He is also well liked and respected for his enthusiastic approach. (10 marks) Question 2 Briefly describe the concepts of accountability. The Board of X Company has given the business development team the task of undertaking a feasibility study to explore the viability of the proposed strategy. The feasibility study also needs to assess the cultural compatibility of the ways of doing business in country Y compared to how X Company currently operates in country Z. The business development team are evaluating this option and are currently working on proposals to sell their range of drinks in country Y. with the market reaching saturation. 331 . the senior partner of L. As part of the feasibility study there needs to be some assessment of industry competition and the attractiveness of the market in country Y.Revision Questions 6 Section A type questions Question 1 X Company is a manufacturer of non-alcoholic soft drinks and has a well-established position and brand recognition in country Z. Over the years. The potential for future growth in country Z is however limited. One possible method of achieving market entry development that the team is investigating is through a joint venture with a company that is already established in country Y and is in the drinks distribution business. (10 marks) Question 3 G. a medium sized accountancy firm. G has become known for his fairness in how he manages staff. authority and responsibility. He always has time to encourage and mentor younger members of staff. One option for expansion is to move into new markets in other countries offering their existing product range. Requirement Discuss how Hofestede’s research on national cultures could be used to assess the cultural compatibility of X Company’s market development strategy to form a joint venture with a company in country Y.

often to lower level jobs which pay just as well as in Moon’s. which has been built up by him and his sons and daughters over the period following the Second World War. safety. (Total for Question Two 10 marks) Section B type questions Question 4 Moon Co is a family shipbuilding company owned by a technical expert in shipping engineering. Things outside the yard are changing. none of the family members have any qualifications or experience in management. Andy Moon. however. Also. combined with unfair treatment of the workforce. punishing them by suspensions without pay and so on. is poor at delegating. dismissals or new hires. has taken on the unenviable role of leading the project to introduce the technology and new working practices. may lead him to resign. nor are they required to. health and environment legislation and some aspects of equal opportunities such as equal pay for work of equal value. change people’s jobs by sideways moves. They do not regard employees as assets but as liabilities who get in the way of how the family wants to do things. new employment opportunities have led many staff to leave. He knows that the project will be met with resistance from some members of staff and he will need to draw on various sources of power to ensure the changes are successfully implemented. and the board.332 MANAGEMENT REVISION QUESTIONS E2 The firm has recently invested in new technology which will improve the effectiveness of its office systems. but will mean the roles and responsibilities of the support staff will change. The situation is no better in the offices and on the shop floor of the shipyard. and where the atmosphere is not so threatening. Unfortunately. The owner and his family can change their minds at a moment’s notice. and the government has introduced measures to avoid the kind of exploitation of employees that Moon has been using. he thinks these can be solved by stricter discipline and punishment. wants. so new people who have ideas from elsewhere or qualifications are threatening. which consists entirely of family members except for the finance director. There is poor morale in the yard and employees have begun to join trade unions. such as paid holidays and sick pay. Moon himself. by promoting them or demoting them. though the owner and family are dead against any third-party intervention in what they regard as their own private affairs. Everyone tries to guess what the owner. as there are few rules and regulations in this ‘power culture’. . The finance director has had enough of the family arguing at each board meeting and has told the owner that this. Requirement Describe the different sources of power that G has and which will help him in introducing the changes. now in his 80s. Mr Moon. These include protection from unfair dismissal for long-serving employees. is a place for heated argument and frequent clashes of personality. hire and fire staff immediately. so Moon is keen to make changes if only to keep the finance director happy – though he is also aware of quality problems in the yard causing delays and re-work costs due to poor morale. G. and so often do not last long before being sacked. The human resources department tries to keep up with all the changes by filling in the relevant paperwork to inform payroll and the tax authorities of changes to wages. and where fringe benefits are often available. If he does there will be a lot of trade and financial secrets going with him. The staff in HR have no time to plan ahead.

Under further pressure. to become more flexible and to be able to respond more quickly to changes in the environment and initiatives by its competitors.ENTERPRISE MANAGEMENT 333 MANAGEMENT Requirements (a) clearly distinguish between power and authority. (10 marks) (Total marks 25) Question 6 Up until two years ago. Bob was also persuaded by Sheila to show an increase in sales and respectable earnings per share figures. A year-end audit exposed the misconduct of the two executives. Sheila ordered the Finance Director. but eventually complied with Sheila’s order. In 2000. by understating expenses and by generating several hundred false invoices. however. As Marketing Manager in the late 1990s. (10 marks) (Total marks 25) Question 5 Until October 2002. Sheila had been responsible for adding new products to the company range that boosted company profits. E Company has developed a strong culture over the years which can be typified as a role culture. Bob was imprisoned for 1 year and was struck off from membership of his professional body. However. in order to boost sales by bringing products to the market sooner. and Sheila. a success that had been largely responsible for Sheila’s promotion to CEO. X Company was overwhelmed with returned merchandise. to omit the recording of returned products. The consequences were disastrous. The company now finds itself facing severe difficulties. Sheila was sent to prison for 2 years. a manufacturer of washing machines and similar products. Bob. Requirements (a) Describe the sources of power and authority that would enable someone in Sheila’s position to persuade Bob to behave as he did in the above scenario. In an effort to keep the share price high. a change in government policy has meant that new competition has been encouraged to move into the industry with E Company losing its monopoly. the company suffered a number of setbacks. (15 marks) (b) evaluate the type of power and control Moon had had. Bob initially protested that this would be unethical accounting. Sheila was the Chief Executive Officer (CEO) of X Company. Bob managed to do this by adjusting the way the company reported sales. (15 marks) (b) Discuss the measures the Board of Directors of X Company might take to ensure that the abuse of power and authority that occurred in X Company does not occur again. . and suggest reasons why this is being eroded. E Company enjoyed a monopoly position in the energy industry. ordered that all testing of new products should stop. This is now acting as a barrier to the organisation’s ability to change.

(5 marks) (b) Recommend. However. with reasons.334 MANAGEMENT REVISION QUESTIONS E2 E Company is falling behind its competitors when it comes to innovations in energy services. the type of culture to which the company now needs to move to. this is unheard of in E Company where people fiercely protect their functional specialism and will only work on the tasks specified in their job descriptions. Developments in new services require staff to work together across functional boundaries. (5 marks) (Total for Question Two 10 marks) . Requirements (a) Discuss why the characteristics of a role culture may no longer be appropriate for E Company.

Uncertainty avoidance is the degree to which members of a society feel uncomfortable with risk. The implication of this is that Japanese methods of management may not work well in these countries and vice versa. cautious. Individualism versus collectivism is the extent to which people are supposed to take care of themselves and be emotionally independent from others (individualism). The effect of different environments is a key factor in determining the cultural compatibility of organisations moving into new territories. Masculinity relates to the degree to which masculine values predominate. A mutual understanding of the different cultures will influence the effectiveness of working relationships and the management styles adopted. countries show international differences in how they view the world and develop their own cultures in terms of values and basic assumptions. In countries with high power distance. These factors need to be considered when developing strategies in a cross cultural context since Hofstede argues that countries differ significantly in their ‘score’ on these dimensions. uncertainty avoidance. and authoritarian than Anglo Saxon countries. on the basis of Hofstede’s work it has been argued that the Japanese are more collective. Hofstede’s research was developed to explain national culture by mapping different cultural characteristics. managers tend to make autocratic decisions and subordinates do what they are told rather than being involved in decision making. assertiveness. For instance. achievement. 335 . sensitivity and concern for others. to one where people prefer a tight-knit social framework based on involvement (collectivism). Power distance is the extent to which a society accepts that power in organisations is distributed unequally. uncertainty and ambiguity and feel threatened by unusual situations. The dimensions are power distance. individualism. High uncertainty avoidance will mean risk taking is discouraged and organisations will tend to rely heavily on rules and regulations so that people know what they are doing. For example.Solutions to Revision Questions 6 Section A solutions Solution 1 Just as an organisation develops its own corporate culture which will influence its strategy and its way of doing business. The outcomes from the research suggest that countries can be classified according to the four dimensions in which national culture varies and that might influence business behaviour. and material success as opposed to the stereotypical feminine values of relationships. A country can be classified on these dimensions on a continuum from high to low. and masculinity. modesty. focus on power. This is an important concept since it will impact on the ways in which people behave at work and the way things are done in organisations.

The comparison should not only take account of the two organisations but also the cultural differences between consumers in Company X’s existing markets and the consumers in Country Y. Market development strategies often fail because whilst financial assessments are sound. Authority refers to the scope and amount of discretion given to a person to make decisions. Thus. Solution 2 Common errors ● The question is straightforward in calling for a description of the concepts. and an employer will have legal authority over employees as defined by the Health and Safety at Work laws. the joint venture might not be an attractive proposition. this is by virtue of that person’s position or standing in an organisation.336 MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 X Company could use Hofstede’s work to help in the appraisal of cultural compatibility of the proposed strategy to enter country Y through joint venture. If the two countries have significant cultural differences along all four dimensions. Usually. Responsibility relates to the liability a person has when called to account. insufficient attention has been placed on cultural factors. For example. the ability to provide incentives for individuals to behave in a particular manner and has control over the organisation’s resources such as salary. This is gained by the personal qualities of the individual and when followers believe that the leader has desirable characteristics that should be copied. Authority may also be implied as opposed to being directly stated. Usually. ● ● Referent power is sometimes termed charismatic power and is derived from one’s admiration or respect for an individual that can inspire followers. The management accountant would be responsible for management accounts staff and accountable to the finance director. if a person is responsible for a certain area of work. Authority may also be divided into expert and legal authority. As the names imply. or his/her immediate superior. a parent will have legal authority over a child under 16 years of age. The concept of accountability relates to one person having to report to another for actions and results in the former’s area of activity. This type of power is usually used in a positive . for example management accounts. or has inspiration charisma. It is therefore likely that he will have referent power which will help him in implementing the changes to working practices. whereas legal authority is conferred by statute or common law. then he/she is also accountable for its actions. bonuses or promotion. reward. A person’s responsibilities refer to the functions that that person is under a duty to perform on behalf of his/her organisation. Reward power is where the leader is able to directly influence the intrinsic or extrinsic rewards available to followers. Solution 3 A useful framework that can be used to discuss the different sources of power is that proposed by French and Raven and includes referent. expert and legitimate power. The scenario mentions that G is known for his fairness and is well liked and respected for his enthusiastic approach. expert authority derives from a person’s position as an expert on certain matters or doctrines. coercive.

merit or ability appeared as a variable. favouritism such as Napoleon’s use of his family as heads of conquered states in the 1800s in Europe. sometimes referred to as position power. As senior partner. unless there is strong resistance to the changes. 3. where the leader is able to directly influence the intrinsic and/or extrinsic rewards available to followers.ENTERPRISE MANAGEMENT 337 MANAGEMENT ● ● ● manner. G will have reward power that he could use to encourage people to adopt the new working practices. Since G is a senior partner and leader of the project he will be deemed to have legitimate power in managing the changes and hence the right to issue instructions to staff. Max Weber (1864–1920) defined three bases for such authority as follows: 1. is the ability to punish or deprive people of things that they value and where the leader uses penalties or sometimes physical punishments to enforce compliance. Coercive power. physical power and negative power. Power French and Raven identified five possible bases of power: 1. is the power which is associated with a particular job. It is when followers accept that the leader has the right to influence them in certain areas or aspects of behaviour. making life unpleasant for people. This is often based on the individual’s formal position in the organisation. It will only work if others acknowledge that expertise. . Traditional/historical authority such as aristocratic or middle-class power based on status. G will probably have this power given the time he has worked for the organisation and his sound knowledge and understanding of the firm’s different business activities. in which case he may have no choice. As well as financial rewards. Whilst the immediate response might be compliance. Section B solutions Solution 4 (a) Power and authority. Reward power. Rational/legal authority increasingly in an era of burgeoning scientific management. A person’s position in an organisation gives them authority over others and comprises a legitimate power. Expert power is based on the followers’ belief that the leader has certain expertise and knowledge relevant to a particular problem or issue. Charismatic/personal authority based on personal standing. G could use intrinsic rewards such as verbal praise and recommendation for promotion. especially when followers accept that the leader has the right to direct them. such as resource power. Legitimate power. It is doubtful that G would want to resort to using this type of power. The list proposed by French and Raven is not exhaustive and there are other sources of power. Informational power is derived from the ability to control access to information. 2. The receiver is unlikely to respond to this type of power. This experience will be of great help in the drive to introduce new technology and working practices into the organisation and should encourage respect from staff. nepotism. as the term implies. it is unlikely to result in long term commitment. although it can be used in a negative way through the threat of removal of rewards. It is based on fears and the use of the ‘stick’ or sanction.

but Sheila can be said to have access to coercive power because as the senior manager in the organisation she is in a position to dismiss personnel from their job. where the leader uses penalties or sometimes physical punishments to enforce compliance. it is difficult to know from the scenario whether or not she possessed the charisma that would persuade .e. it is useful to make use of a typology such as that by French and Raven (1958). coercive power is defined as that dependent on fear. In the organisational context. Expert power. authority). referent. Solution 5 (a) Taking the sources of power first. which has introduced measures to avoid the kind of exploitation of employees that Moon has been using. this derives from the capacity of the CEO to reward subordinates for their contribution to the performance of the organisation. socially people are no longer putting up with ‘traditional’ authority. but there seem to be no technological changes. the potential for its use is still there and subordinates can feel threatened by this potential. These were supplemented by reward power over both the intrinsic and extrinsic rewards available to employees. Even when this power is not exercised. In French and Raven’s typology. some managers are able to persuade subordinates to make extraordinary efforts because subordinates wish to please the manager. more interesting work. This admiration often includes a desire to be like that individual because he or she has qualities that mark them out from the mass of people. (b) Moon as both owner and manager had various types of authority and power. Expert power. Political influence comes from the government. 3. 5. Economically. These rewards may take many forms from simple praise in recognition for a job well done. and coercive power in his use of penalties like sacking to enforce compliance ‘pour encourager les autres’. A second source is that of reward power. Referent power arises out of the admiration which people have for certain individuals. it is the fear that one is likely to feel if threatened by a gun or knife. salary increases. His charismatic/personal authority was based on nepotism and his employer status gave him rational/legal authority. based on the followers’ belief that the leader has certain expertise and knowledge relevant to a particular problem or issue. reward.338 MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 2. when followers accept that the leader has the right to influence them in certain areas or aspects of behaviour. The authors identify five major sources of power. 4. In its extreme form. Legitimate power (i. power of this extreme kind is rarely used. Taking each of these sources in turn. and resigning and going to other employers. These include protection from unfair dismissal for longserving employees safety. In the case of organisations. In the particular case of Sheila. as this helps us to consider the different sources of power in a systematic manner. health and environment legislation and some aspects of equal opportunities such as equal pay for work of equal value. The power base is changing because of PEST factors. or has inspirational charisma. additional holidays and so on. These are coercive. when followers’ belief that the leader has certain expertise that should be copied. Coercive power. through to more material rewards like promotion. the yard is going to need better management to survive. expert and legitimate power.

was exercising her power of position illegitimately. to give instructions. the same as authority. She demonstrated her marketing and management skills in her previous role as marketing manager. however. a policeman is accorded certain powers to arrest people if they break the law. It is the power accorded in the constitution of the organisation to anyone who fills a particular position. Chief executive officers like Sheila have the responsibility of getting things done through others and with others. Examiner’s Note: Any alternative framework on power is acceptable. and managers generally may be granted powers to hire and fire personnel. in order to meet corporate objectives. in pressurising Bob to change the figures. but these can affect any company irrespective of the skills of the CEO. the exercise of authority implies the right to influence the actions of others through agreed legitimate means. it is difficult for any selection body to know in advance that the person chosen as CEO will always use the power granted to them in a responsible manner. We do know that X Company suffered market setbacks. The concept of legitimate power in fact is very similar to the concept of authority to which we now turn. To accomplish this leadership role. In the case under review. Legitimate power represents the power a person receives as a result of his or her position in the formal hierarchy of an organisation. they are given wide-ranging powers such as that of strategy formulation and the power to implement it. So. Power may be exercised without legitimacy. unless we are in a war situation. monitoring and supervising top management so that the business is run according to legal requirements and in the interests of shareholders and other stakeholders. These include the setting up of .ENTERPRISE MANAGEMENT 339 MANAGEMENT subordinates to act to please her. We do not know how competent she was in the role. they are accorded a degree of authority to enable them to run the business. to reward personnel and so on. who. it is evident that Sheila. For example. a number of investigations and reports such as the Cadbury Committee Report (1992) recommended Codes of Best Practice to try to ensure better corporate governance. What we do know is that she exhibited qualities in a crises situation that would be unlikely to enhance her referent power in the world of legitimate business. In appointing the chief executive officer. Expert power is something that Sheila does possess. when any one individual forces another individual to do something which he or she would not otherwise do by a threat of physical violence. X Company could usefully adopt some of the recommendations of the Cadbury Report. Unfortunately. Power is not. By contrast. in addition to possessing the required leadership skills and experience are also assumed to possess integrity. (b) It is probably impossible to ensure that the abuse of power and authority will not occur again in X Company or any other company for that matter. It may be however. In the case of CEO. The responsibilities of a board of directors therefore include those of controlling. the board of directors selects individuals. Following a succession of corporate scandals in the 1980s. then this is not legitimate. that she does not possess the general management skills to perform effectively as CEO.

Employees who ‘blow the whistle’ on senior people in an organisation risk losing their job and this will remain a threat until such time as legal measures are put into place to protect them. The situation of the group can vary from calm to crisis. Unfortunately. the appointment of more no executive directors would also be useful in strengthening this monitoring process. The best leadership style is the one that fulfils the needs of the group the most. ‘ethics advisers’ have been appointed to assist staff on what action to take in case of observed unethical practices and abuses of power. This is obviously independent of the other variables. a practice in which persons in a company expose the misdeeds of others to prevent the misuse of power and to preserve ethical standards is one possible measure. Currently. severe threat to security and thus will drastically affect the successful style. it should be apparent that there is no one best style of leadership that is equally effective for all circumstances. The manager has to provide the following factors: ● ● ● Direction – The elimination of uncertainty about what has to be done and the coordination of all effort to pull in one direction. but this will include satisfying the intrinsic needs of group members. casual or troublemakers. Reputation – Represent the purpose of the group to the outside world. The variables that define the successful style include: ● ● ● ● The personality of the leader’s probably the most rigid of the variables that define the most effective leadership style. The situation within the group (which can vary from cooperative to militant) will also affect the successful style. simple to complex. interest and motives. The encouragement of whistle-blowing. often by maintaining . A second recommendation of the Cadbury Committee. structure and environment in which the group is working will have similar marked effects. There are different types of culture which are determined by an organisation’s structures. E Company is typified as having a role culture which can be very efficient and successful in a stable environment when work is predictable and the organisation can control its own environment. even these measures have limited effectiveness because of a lack of legal safeguards for whistle blowers. Solution 6 (a) The concept of organisational culture is an important one for E Company because it can exert a strong influence on business performance. These seek to ensure financial accountability through the monitoring of a company’s annual and interim results. technology. education. In some US companies. The task. however. To date. Drive or motivation – The commitment of the group to move forward. From the discussions on the several leadership theories. aggrieved. while at the same time satisfying the needs of the organisation. They may be loyal and long-serving. It can shape the behaviours and actions of individuals in the workplace and is often referred to as the ‘glue’ that holds the organisation together. processes and management methods. The people within the group will vary in intelligence.340 MANAGEMENT SOLUTIONS TO REVISION QUESTIONS E2 Audit Committees to safeguard the interests of shareholders. even these measures cannot guarantee responsible use of power and good ethical practices because Audit Committees and the like depend for their information on executives involved in running the company.

with a preoccupation on day to day administration rather than longer term issues. rather than the achievement of individuals. responsive and able to change very quickly. By nature a task culture fosters creativity and is adaptable. Role culture works by rationality and logic. Rather. responsiveness and problem solving capability. Within a role culture the organisation is dependent upon various functions. a task culture tends to encourage greater flexibility. This type of culture is typified by teamwork. acting as a barrier to the developments needed in E Company.ENTERPRISE MANAGEMENT 341 MANAGEMENT a monopoly position. Hence. each of which has their own areas of strength and influence. where the focus is on completing a job or project. Decisions are made at senior level with little involvement from other members of the organisation. In fact new ideas from below may be regarded with suspicion from above. Staff become loyal towards the work rather than towards formal rules. The reasons for this can be explained by examining the characteristics of a role culture. . Skill and expertise are more important than length of service and position in the organisation. The principal concern is to get the job done. these characteristics of a role culture can mean that it is more resistant or very slow to adapt to change and getting people to work together across boundaries is difficult. People are not hindered in terms of their contribution by tight job descriptions associated with the role culture. Therefore. This type of culture is also impersonal. (b) It is apparent that the culture of E Company needs to change and it is recommended that a task culture would be more appropriate given the changes in business conditions. breaking down rigid hierarchies and functions. since the culture is one which insists people go through layers in the hierarchy to gain approval. and is usually associated with a formal structure with well established rules and procedures. Relations between staff are dominated by hierarchy and authority with formal and rigid control systems. However. Innovation can be stifled. Individuals are selected for particular roles on the basis of their ability to complete a particular task to the required level: over achievement is not actively pursued. The result is that influence is spread throughout the organisation. with an emphasis on internal processes. as is currently the case in E Company. Individuals are required to perform their job and not to overstep the boundaries of authority. this type of culture now appears to be having an adverse effect on E Company’s performance as the company now faces very different operating conditions since losing its monopoly position. Team work is fundamental to a task culture. This leads to a strict division of labour with people often reluctant to take on wider responsibilities. Job descriptions are clearly defined. and would seem to be partly responsible for the lack of flexibility. This is occurring in the case of E Company. However. they are obsessed by fulfilling narrow job duties. tightly describing the tasks of an individual’s job. flexibility and commitment to achieving objectives rather than emphasising a formal hierarchy of authority. The task culture is often reflected in a matrix structure or project teams. with people working together across functional boundaries to achieve organisational objectives. These characteristics would make it difficult for the organisation to be flexible and adapt to the more competitive operating environment. relying on formalised rules and procedures for work routines and communication and to guide decision making in a standardised and bureaucratic way. the individuals who are important are those with the skills and ability to accomplish a particular task.

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7 Management of Relationships in the Working Environment .

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since most activities need some coordination through groups of people. The final part of the chapter will discuss some of the important skills managers need in managing relationships including effective communication and negotiation. Whilst there are some positive outcomes of group work. teams and networks and for managing group conflict discuss the effectiveness of relationships between the finance function and other parts of the organisation and external stakeholders. starting with an explanation of the meaning of groups and the different types of groups that exist in organisations. for example it can lead to increased productivity. 7. and poor group work can have a negative impact on organisational performance.2 The meaning of groups and teams The reasons that groups are formed in organisations are as a consequence of the formal organisational structure and arrangements of work tasks. identify tools for managing and controlling individuals. working with others is not always easy. you should be able to: discuss the roles of negotiation and communication in the management process. both within an organisation and with external bodies. morale and encourage greater innovation and creativity in the workplace. Some of the problems that can occur in groups will be identified. This chapter will provide an understanding of the theory and practice of group working. People rarely work in isolation at work. 7.Management of Relationships in the Working Environment 7 LEARNING OUTCOMES After completing this chapter.1 Introduction Success within organisations is to a large extent dependent on the way in which people as both individuals and in groups are managed. hence reasons relating to the 345 . This will be followed by an investigation into the factors that can lead to effective group working.

They are not explicitly set up by . The membership of this group is more likely to be formal. all groups are not teams. and perceive themselves to be a group. Schein (1988) suggests that a group is any number of people who: ● ● ● interact with one another. 1994) as ‘a small number of people with complementary skills who are committed to a common purpose. and soon. affiliation and recognition. 7. discussed in the previous chapter. Greater creativity and quality. The main potential benefits of groups for individuals and organisations include the following: ● ● ● ● ● ● Teamwork and improved problem-solving. 7. 7. However. These reasons can all be identified in the Human Relations approach to management. giving a sense of belonging to individuals. performance and goals and approach for which they hold themselves mutually accountable’. job satisfaction and motivation. The economic concept of team production (Alchian and Demsetz. Working in groups should also increase people’s skills. Teams can be defined (Katzenbach and Smith. into shop-floor operatives or into departments or divisions). What is clear is that groups are a key force on the behaviour of individuals at work.2 Informal groups Informal groups develop from individual relationships based on common interests and to satisfy the needs of staff beyond that of doing the job. 1972) would stress the interdependency of skills rather than the human resource element of commitment. perhaps nominated or at least constrained by that organisation (e. support.g.3. Improved information flows and more effective communication through participation. Whereas teams are a kind of group. but it is important that the team contains the right mixture of individuals and skills. Support and facilitation for individual training and development. There are many different definitions available to explain what constitutes a group. Providing a forum for constructive conflict resolution.3. role identity. they are also formed with a view to making boring work and routine work more palatable and interesting in order to enhance job satisfaction. Group work can fulfil social needs.346 MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT STUDY MATERIAL E2 fulfilment of organisational functions and division of tasks. Surely all team members must have different goals from their roles or a team would be a group of clones? Can you think of teams in this situation? A football team – goalies save goals not score them.3 Types of groups There are many different classifications of the types of groups that exist in organisations. Satisfaction of social needs and a means of sharing and helping in a common activity. are psychologically aware of one another.1 Formal groups Formal groups are created by management to fulfil the specific goals and tasks related to the needs of the organisation. One distinction that can be made is between formal and informal groups. and can be formed to provide an outlet for companionship.

7. 7. The criteria of group effectiveness can be viewed in terms of the extent to which the tasks and organisational goals are achieved and the satisfaction of team members. almost like a division of a firm. For example. He argues that it will depend on: ● ● ● the ‘givens’ which include the group. These types of group membership are likely to be voluntary and informal.3 Reference groups A reference group is a group the individual does not currently belong to but wants to join (e. Under cellular manufacturing methods.4 Effective group performance There are many interrelated variables that influence and constrain the behaviour of groups and contribute to the effectiveness of the group. Such teams must have a balance of technical skills. and can have a positive or negative effect on organisational performance. and usually a team leader is elected or more often appointed after a selection centre using psychometric instruments. 7. senior manager group. The potential problems of informal groups arise from them serving a counter-organisational function. or a shop stewards group. such as for safety.4 Self directed and autonomous groups Self-directed work teams have evolved from the autonomous working groups and group technology developed by Volvo. typically teams are where the cell makes a larger part of the end-product than previously. . the ‘intervening factors’ such as motivation of the group. These were based on a socio-technical systems theory that the interaction of task with an individual is often best served by a group process. the task. and the environment. The Volvo experiment however was based on difficulties in recruitment to a boring job rather than a change in technology of work per se.3. if he or she is only a trade union member). The influence of informal groups over individual members’ behaviour can be more powerful than that of formal groups.3. and obtain materials and create output by following their own internal processes. friendship and a sense of belonging. Individuals join groups in order to satisfy some important needs.g. leadership style and processes and procedure. and these are empowered with tasks. if he or she is a junior member. Identify the different types of groups that you belong to. It was later abandoned as not being effective. by resisting change or when their norms are inconsistent with those of the management.ENTERPRISE MANAGEMENT 347 MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT management and do not figure in the organisation’s hierarchy. the ‘outcomes’ which includes factors such as the productivity of the group and the satisfaction of group members. conflict can occur (the nature of conflict will be examined in Chapter 9). One approach to identifying the various dimensions of group effectiveness was developed by Handy (1993).

dropping out is likely and this could ultimately lead to the collapse of the group. The importance of this factor depends on the nature of the particular task. there is less opportunity to participate. deliberately keep changing the membership of awkward groups. Again. that is he or she can leave the group easily. resulting in conflict and hostility which can disturb the impressions gained at the forming stage. The stage can be characterised as a period of internal conflict and high emotion. A variety of skills and knowledge is more effective for complex tasks. Homogeneity of status. the average productivity of the members goes down. It is at this stage that as conflict is resolved. Members are attempting to create their identity within the group.4. 2. it leads to easier working but less creative problem-solving. 4. and hence the cohesiveness of the group. Storming. ● Alternatives. leads to a more cohesive group. new guidelines and standards of behaviour will be established. Group cohesion develops and norms of what is acceptable behaviour are set and roles allocated (norms are standards of behaviour to which members will conform and are unique to each group). and possibly dropping out of the group. but one should also consider cost-effectiveness. Similarly. ● Size of group. his or her dependence on the group is reduced. As the size of the group goes up.1 Formation and development The level of group performance is affected by the manner in which groups come together. cliques or factions may form.348 MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT STUDY MATERIAL E2 7. They include: Membership factors ● Homogeneity. This may detract from cohesion and effectiveness. Individual’s test what is acceptable behaviour and codes of conduct begin to emerge. of course. This stage involves the initial formation of the group. and ‘social loafing’ or ‘social noise’ may increase. Management may. 3. Performing. Similarity of members is preferred for simple tasks. Bargaining over goals. they start to present their view to the group and disagreements and arguments begin to occur. if turnover of membership is high. the group will tend to lack cohesion. ● Membership in other groups.4. it will have created the cohesiveness to operate effectively as a team. If the individual has alternatives. although their goals or standards may well not accord exactly with the organisation’s goals.2 Group cohesiveness There are a number of factors which affect the integration of organisational and individual objectives in groups. less work is done. The group should now begin to work smoothly. Groups solve problems more quickly and effectively than individuals. The emphasis is on making a personal impression. When the group has successfully progressed through the earlier stages. As people begin to know each other. Forming. 7. getting to know the others. . both internally and externally. Norming. individuals’ contributions are less discernible. According to Tuckman’s (1965) analysis. groups typically pass through four stages of development: 1.

Marital status produces the roles of husband and wife. consultative committee or quality circle. each associated with different sets of personality traits that are important in an effective management team: ● ● ● ● ● ● Coordinator – who clarifies the group’s objectives and helps to identify the issues to be addressed. there is a tendency to persist in failure. Dynamic factors ● Groups are continually changing. the key traits here are those of an anxious. as we have seen before. Resource investigator – this is the person who goes outside the group to obtain useful information and resources. such as a group of police constables. another to collect monies for the lottery. though social roles might arise as one person volunteers to make the tea. but these roles need not emerge among groups of same-status individuals (called ‘peers’ in sociology). dominant extroverts. not just in membership but also in understanding each other and of the task. then nine. controlled individual. occupation). A popular categorisation of team roles has been developed by Belbin (1981). a joker. a stable. ● The climate of management and leadership: a Theory X type of organisation tends to lead to anti-management groups forming. and so on. even if only informally. ● Success and failure. From there he realised that the personalities of the individuals mitigated against them acting together and he developed eight. a safety committee. dominant extrovert. individuals who prefer this role tend to be stable. Shaper – needs results for reassurance and has a compulsive drive to get things done. Implementer – who turns decisions into manageable tasks. ● Isolation of the group: external threat and incentives. and so on). These are very often implicit and develop spontaneously.ENTERPRISE MANAGEMENT 349 MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT Environmental factors ● Task: the nature of the task and its organisation must be compatible. stable. These roles are learned implicitly from the expectations of others.3 Team roles A role is a social predisposition to certain ways of behaviour related to the perception of an individual to his or her status (position. Group roles are those functions which a group needs for it to survive (someone to organise social events.4. typically they are dominant introverts with a very high IQ. Belbin found that ‘the Apollo team’ – the brightest individuals at the management college – was the worst performing in business games. Plant – this is the person who is very good at coming up with original ideas and suggestions. Monitor evaluator – is good at dispassionate analysis of suggestions and options. the status of being a mother carries with it the role of ‘mother’ and attendant behaviours. From his own personality research. 7. Leadership style should be appropriate to the task. Hence. . key roles (these do not all have to be played by different individuals). using Cattell’s 16PF scale. stable extrovert usually performs this role well. a serious adviser. a dominant. introverted type of individual with a high IQ.

and often sequential. A complementary model applies where the task can be divided into separate parts and different skills are needed for each. Group size should therefore be as small as possible. Though interaction losses will still occur. Performance of simple. well-learned routines improves in the presence of an audience. Several classic experiments illustrate these forces. rather differently from the way they would behave on their own. there is a high level of mutual interaction and awareness which are responsible for powerful forces. where the group performance should be close to that of the most competent member. A collaboration or disjunctive model applies to things like problem-solving. Performance of complex or new tasks. a stable extrovert who is low in dominance.350 MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT STUDY MATERIAL E2 ● ● ● Team worker – who keeps the team together by supporting other members and helping to promote unity. An additive model in which every individual contributes but no one is dependent on anyone else. This loss of efficiency increases with the size of the group and may be either motivational or intersectional. on the other hand. Overall performance of the team is here dependent on the weakest member. The smaller and more homogeneous the team. rapidly changing environments. because there is less opportunity for interaction in a linear model. The total output in theory depends on the average skill or ability. sometimes. If there is not the right balance of team roles. 7. Completer-finisher – is impatient and very concerned with meeting deadlines. A coordination or conjunctive model in which there is a high. More stable groups may be able to operate without a fully balanced set of roles. Steiner has identified four basic models of group functioning: 1. Expert/specialist – technical person. that is better than that of the average member. 4. A well-established or homogeneous group may tend to work towards agreement rather than towards an optimum solution. or in co-action or in competition with others. in order to reduce interaction losses. if needed. is poorer in the presence of an audience. Groups should be heterogeneous to provide these skills and to reduce any tendency towards unproductive group norms. dependence between members. This balance is particularly important for groups operating in ill-defined. Variations and combinations of the above may be appropriate to meet different circumstances. as in assembly lines or highly differentiated forms of office work. who provides knowledge and skills to solve technically based problems. but in practice it is found to fall short.5 Group dynamics and team performance In a group. consistent with having all the necessary range of skills available. they will be less than in the additive case. work will not be performed effectively. which cause the individual to behave. such that audiences can induce over-arousal and hence anxiety in complex tasks. Zajonc has suggested that this can be explained in terms of the relationship between arousal and performance. typically an anxious introvert. It is important to the organisation that these forces work for the organisation and not against it. 3. the more efficient the team performance. for example small conjunctive teams working in parallel to feed a key worker or . 2.

and what they did before. interpersonal. This approach to work design improved productivity.6 Problems with groups Unfortunately groups can also have negative as well as positive effects. 1989). They achieve results with fewer resources than are assumed necessary. Team members were expected to share their skills with each other to become multiskilled. These teams were responsible for the manufacture of the company’s range of small business computers. high-performance teams exhibit the following characteristics: ● ● ● ● ● They perform excellently against a known external standard. and had the following features: ● ● ● ● ● ● ● Autonomous teams of six to twelve employees were self-managing and self-organising. The physical layout of the factory floor was open to facilitate communications. and had no job titles. Also. leading in many instances to significant career opportunities and development (based on David Buchanan and James McCalman. both for the individuals and for the organisation. materials and equipment. Each team had full ‘front to back’ responsibility for a whole section of the manufacturing process. functioning without first-line supervision. and led to more effective problem-solving and decision-making. They perform beyond what is assumed to be their potential best. 7. reduced the time required to introduce new products.1 High-performance teams According to Vaill (1989). They are seen to be exemplars. pro-cess design and group management skills through this approach. on the west coast of Scotland. They are judged by informed observers to be substantially better than comparable groups. but a small homogeneous subgroup more appropriate for actioning the solution. Shop-floor personnel developed a range of analytic. 7. such as assembling a complete printed circuit board. Subsequent research has identified a number of these negative effects. This theory considers the size of a group in relation to the number of tasks it needs to carry out. High-performance teams at Digital Equipment in Scotland Digital Equipment Corporation (DEC) started to develop high-performance work systems around empowered teams at its manufacturing plant in Ayr. Team members were paid according to their skill level and not according to the particular job on which they were working at any one time. rather than the absolute size of the group. so a large committee of many diverse skills may be appropriate to solving a problem (disjunctive). Teams negotiated their production targets with their product manager. Some degree of ‘under-manning’ is found to be desirable and beneficial. technical support staff had their ‘offices’ and desks on the shop-floor too. in the early 1980s. different structures may be appropriate at different stages. achieving the ideals of the culture.ENTERPRISE MANAGEMENT 351 MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT function such as inspection or packing. problem-solving. based on available staff. Team members were involved in the performance appraisal of colleagues and in the selection procedure for new recruits. . some of which are discussed below.5.

the leader to avoid domination of the group (which can be unconscious). After the initial ‘Bay of Pigs’ disaster. The story was written up as a case by a sociologist whose family all ended up in Abilene. The combination of wrongness and unanimity takes members by surprise. and the average level of conformity was 32 per cent. The attitude is well summarised in the more recent example of the space-shuttle disaster. Groupthink could be described simply as the homogeneity of objectives and thinking carried to the ultimate.’ ‘Risky shift’ or group polarisation This is the tendency for groups to take decisions which are riskier than any that the individual members would take on their own. the avoidance of stereotypes of the opposition. independent sub-groups to work on solutions. The Abilene paradox This is a famous case. They all thought each other wanted to go. Victims of Groupthink) to describe a common situation which he observed to have occurred within tightly-knit political groups. Groupthink This is a word coined by Irving Janis (1972. In the Asch experiment. and no one wanted to disturb the ‘consensus’. under certain circumstances. and which the person must know to be wrong. Overall. for groups to take excessively cautious decisions. and often disastrous. the proportion of subjects obeying the experimenter. Milgram. . this was demonstrated if one confederate was briefed to break ranks. when average conformity dropped from 32 to 6 per cent. extreme. driving 100 miles through desert heat. external testing of proposed solutions. when the United States encouraged an abortive ‘invasion’ of Cuba via the Bay of Pigs. exemplifying the stultification of individuals through implicit and unconscious group processes. a tendency in certain situations to make more risky decisions than individuals because no one can be held responsible (risky shift). we can see: ● ● pressures on individuals to conform to group norms. Texas. then the spell is broken and normal judgement largely restored. In summary. can-do” ethic which guided the space agency made it difficult to raise concern about the safety of the O-ring seals. shakes confidence and disorients judgement.352 MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT STUDY MATERIAL E2 Conformity Individuals can be persuaded by group pressures to agree with decisions which are demonstrably and obviously wrong. some 74 per cent of his subjects conformed to an incorrect decision at least once. If the group is not unanimous. To quote The Guardian: ‘NASA argued that the ‘‘gung-ho. Milgram (1965) observed a similar effect in his famous ‘electrocution’ experiments determining obedience to authority. if a co-acting confederate rebelled. John F Kennedy saw clearly how to try to avoid ‘groupthink’ and planned his leadership accordingly by insisting on: ● ● ● ● ● critical evaluation of alternatives. It now appears that there is also a tendency. though none of them actually wanted to go. fell from 65 per cent under the standard conditions to only 10 per cent.

e-mail. Communication can take many forms. it is important: ● ● ● to let employees know that managers understand and accept them while discouraging dysfunctional behaviour in such groups. a focus on political manipulation and conflict rather than organisational objectives. not only with team members but also with the other stakeholders. Clearly. videoconferencing. for instance face-to-face discussions. since people with good communication skills have been found to make better decisions and tend to be promoted more frequently. to try to anticipate how decisions will influence informal groups. It is particularly important for the managers to be proactive in oral communication.1 Oral and written communication Effective and regular personal communications are vital to ensure coordination and to identify problems quickly.7 Communication An important aspect in the relationship between managers and subordinates is communication. 7. Managers need to pay attention to the formation of. telephone or internal memoranda. teleconferencing. a tendency to become inward looking. ignoring external events and conflicting views (groupthink). such as: ● ● ● face-to-face meetings. formal groups and also realise that they cannot ignore or suppress informal groups. mean that effective groups are even more critical for organisational effectiveness. Can you identify a situation when you were involved in a group that was ineffective. This is not easy but recent approaches. telephone conversations. particularly at times of crisis. What created the problems? How could they have been resolved to improve the effectiveness of the group. In relation to informal groups. reports. and the management function involves both direct and indirect communication.ENTERPRISE MANAGEMENT ● 353 MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT ● ● poor communication and lack of trust can lead groups to take decisions that none of the individual members actually prefers (the Abilene paradox). Good communication skills are often included as an essential management competence. . 7.7. Most organisations will depend to some extent on the speed and accuracy of communication to maintain their competitive edge. and to keep formal decisions from unnecessarily threatening informal groups. such as TQM and the concept of a learning organisation. Oral communication provides immediate feedback and is important in engendering team spirit and relationships. and support for. managers must attempt to minimise these potential problems while harnessing the benefits of groups and teams. Oral communication can take many forms.

The first stage in the communication process is initiated by the sender.2 The communication process The process of communication involves the transmission of some idea. meeting. Problems can occur here. and they will act according to their interpretation. The output of the encoding is the message. memos etc) – the different types of media will be considered in more detail later in this chapter. NOISE Coded Message Medium Channel Decoded Message SENDER RECEIVER Figure 7. There are a variety of media that can be used to communicate messages (e. before the receiver can access the message it has to be decoded. Similarly. gestures or non-verbal cues such as images or body language. Whilst this diagram above may suggest that the process of communication is straightforward. and/or choosing words that intended recipients cannot understand.g. omitting information. transmission and decoding are instantaneous and therefore there is the possibility of ‘interference’ – often referred to as ‘noise’ – which can distort the message. choosing words in coding the message that do not accurately reflect the idea/concept. Figure 7. conversations. Just because communication has been sent it does not necessarily mean that it is effective. This might include using words. Written communication is normally achieved by internal memos and e-mails to team members. barriers can arise at each stage of the communication process: The sender may distort the communication by: ● ● ● not being clear as to what has to be communicated. this is often not the case because before the medium of transmission can be accessed the message has to be translated – or encoded – into an acceptable form (for example ‘words’). in that the receiver’s interpretation of the message may differ from that originally intended by the receiver.354 MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT STUDY MATERIAL E2 It is important during oral communication for the manager to check that understanding has occurred to encourage feedback.1 Stages in the communication process . external letters and regular reports.7. Decoding the message is the receiver’s version of encoding and consists of translating a verbal or visual aspect of a message into a form that can be interpreted. concept or thought from one person (the sender) to another (the receiver). 7. e-mail.1 illustrates the different stages in the process of communication. A further complication arises because it is improbable that the process of encoding. The sender must encode the mental thoughts so that they can be understood by the receiver. An important point to consider is that the message needs to match the medium used to transmit it. numbers. group or organisation that attempts to communicate with a particular receiver. who can be an individual.

arising not only from social and educational backgrounds but also age. to whom it is to be communicated and how it is to be communicated. difficulties can arise in the work situation.g. for example text messaging instructions that are complex. sending mixed messages simultaneously. for example where there is conflict between individuals or departments. The above points illustrate some of the many difficulties that can hinder accurate communication.ENTERPRISE MANAGEMENT ● 355 MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT ● ● ● ● choosing words that provoke – wholly or partly – an emotional response in the recipient[s]. disruption of a telephone network or system downtime). physical distance between the receiver and sender. ‘Noise’ refers to any distractions or interference in the environment in which the communication is taking place and affects all linkages in the communication process. choosing an inappropriate medium. clear objective: others will have a far greater chance of understanding the communication if the sender has articulated – at least internally – what he or she wants to achieve by the communication. The sender should: ● ● have a definite. both of which are available to the receiver. It implies that both sender and recipient should take steps to overcome these barriers. The receiver may contribute to communication difficulties by: ● ● ● ● not being in an appropriate state to receive the message (e. Also. sending too much information for a person to digest – creating overload.g. . having a mindset that does not admit the substance of the message – and therefore prevents the receiver from appreciating the sender’s standpoint. personality and status. filtering out elements of the message he or she does not wish to deal with. using technical jargon. plan the communication: it is better if. physical failure of the medium of transmission (e. One of the main barriers to communication in organisations is information overload – people feel overwhelmed by the high volume of information which has been transmitted. at the outset. this is partly as a result of the increased use of electronic communications. limiting the encoding/decoding capabilities of the sender and receiver. illegible handwriting. not wishing to receive a message from that sender – or being selective in what they choose to hear. the sender has thought about what is to be communicated.g. for example there is incongruence between the verbal message and non-verbal signals. Noise may interfere with communication by: ● ● ● ● physically impairing the receiver’s ability to receive the message – or the sender’s capacity to receive feedback. There are a number of ways to overcome the barriers outlined in the section above. having to deal with a very large number of voice mail and e-mail messages following the return from holiday). Examples of noise are poor telephone connections. obscuring the message within a mass of other communications (e. distractions in the environment during the communication process. because of concentrating on some other task). Other reasons that can create barriers to good communication are concerned with differences in the backgrounds of the people involved.

smiling and showing animation. Listening involves more than just hearing the message. he or she brings to the receipt of the message. think about the receiver[s] and the situation in which they will be in when the message is received. medium. Establish who needs to attend.356 MANAGEMENT OF RELATIONSHIPS IN THE WORKING ENVIRONMENT STUDY MATERIAL E2 ● ● ● ● ● en