CIMA’S Official Study System

Managerial Level

Integrated Management
David Harris

AMSTERDAM BOSTON HEIDELBERG PARIS SAN DIEGO SAN FRANCISCO

LONDON NEW YORK SINGAPORE SYDNEY

OXFORD TOKYO

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

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

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

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

Contents

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

xv xv xv xvi xvii xviii xxii

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

1.2

1.3

1.4

1.5

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

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1.6

1.7

1.8

1.9

1.10

1.11

1.12

1.13

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

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

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

71 71 71 72 73 73 74

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2.3

2.4

2.5

2.6

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

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

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

137 137 137 137 139 139

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3.2

3.3

3.4 3.5

3.6

3.7

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

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

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

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4.4

4.5

4.6 4.7

4.8

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

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

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

5.4

5.5 5.6

5.7 5.8

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

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5.9

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

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

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

6.4

6.5

6.6

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

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7.6

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

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

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

8.5

8.6

8.7

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

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

9.3 9.4

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

9.5 9.6 9.7

9.8

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

10.2 10.3 10.4

10.5

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10.7

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

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

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

11.2 11.3

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11.4 11.5 11.6 11.7 11.8

Effective meetings The roles of team members in meetings Problems with meetings Post-project evaluation meeting Project reporting 11.8.1 Project initiation document (PID) 11.8.2 Progress reporting 11.8.3 The final report 11.9 Negotiation 11.9.1 The need for negotiation 11.9.2 Negotiation approaches 11.9.3 The aim of negotiation 11.10 Summary
Readings Revision Questions Solutions to Revision Questions

430 430 431 433 433 433 434 434 434 434 435 435 435 437 439 443

12 Control Systems in Organisations
12.1 12.2 12.3 Learning Outcomes Objectives of internal control systems Internal control systems Levels of control 12.3.1 Strategic control 12.3.2 Tactical control 12.3.3 Operational control Effective control systems An example of a control system in practice 12.5.1 Strategic level 12.5.2 Tactical level Health and safety 12.6.1 Safety, health and the environment 12.6.2 Safety committee and representatives 12.6.3 Managing safety 12.6.4 Working with contractors 12.6.5 Health and safety training 12.6.6 Managing health 12.6.7 Stress management Dismissal, redundancy and job insecurity 12.7.1 Dismissal Time management 12.8.1 Personal time management 12.8.2 Time management values 12.8.3 Time management action 12.8.4 Time scheduling

12.4 12.5

12.6

12.7 12.8

449 449 449 449 451 451 451 452 452 453 453 453 455 455 456 456 456 457 458 458 460 460 462 462 462 463 463

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12.9

Mentoring 12.9.1 Why mentoring? 12.9.2 Benefits of mentoring 12.10 Summary
Readings Revision Questions Solutions to Revision Questions

463 463 464 464 465 473 477

13 Conflict and Discipline
13.1 Learning Outcomes Conflict in organisations 13.1.1 The symptoms of conflict 13.1.2 Forms/sources of conflict 13.1.3 Handling conflict 13.1.4 Resolutions of industrial relations conflict 13.1.5 Managing conflict Discipline 13.2.1 The meaning of discipline 13.2.2 Self-discipline 13.2.3 Disciplinary situations 13.2.4 Taking disciplinary action 13.2.5 Immediacy: Douglas McGregor’s ‘hot stove rule’ 13.2.6 Disciplinary procedures 13.2.7 ACAS code of practice 13.2.8 Grievance procedures 13.2.9 Fairness and commitment in the work place 13.2.10 Diversity and equal opportunities Summary
Readings Revision Questions Solutions to Revision Questions

13.2

13.3

485 485 485 486 486 490 491 494 497 497 497 498 498 500 500 501 502 503 506 509 511 519 523

Preparing for the Examination
Revision technique Planning Getting down to work Tips for the final revision phase Format of the examination Structure of the paper Revision questions – mapping grid

529 529 529 530 530 531 531 531

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Section Section Section Section Section Section

A type questions B type questions C type questions A solutions B solutions C solutions

533 535 537 548 549 555 583

Index May 2005 Examination

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The CIMA Study System

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

How to use your CIMA Study System
This Integrated Management Study System has been devised as a resource for students attempting to pass their CIMA exams, and provides: 
  

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

This Study System has been designed with the needs of home-study and distance-learning candidates in mind. Such students require very full coverage of the syllabus topics, and also the facility to undertake extensive question practice. However, the Study System is also ideal for fully taught courses. The main body of the text is divided into a number of chapters, each of which is organised on the following pattern:   

Detailed learning outcomes expected after your studies of the chapter are complete. You should assimilate these before beginning detailed work on the chapter, so that you can appreciate where your studies are leading. Step-by-step topic coverage. This is the heart of each chapter, containing detailed explanatory text supported where appropriate by worked examples and exercises. You should work carefully through this section, ensuring that you understand the material being explained and can tackle the examples and exercises successfully. Remember that in many cases knowledge is cumulative: if you fail to digest earlier material thoroughly, you may struggle to understand later chapters. Readings and activities. Most chapters are illustrated by more practical elements, such as relevant journal articles or other readings, together with comments and questions designed to stimulate discussion.
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Question practice. The test of how well you have learned the material is your ability to tackle exam-standard questions. Make a serious attempt at producing your own answers, but at this stage do not be too concerned about attempting the questions in exam conditions. In particular, 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. Solutions. Avoid the temptation merely to ‘audit’ the solutions provided. It is an illusion to think that this provides the same benefits as you would gain from a serious attempt of your own. However, if you are struggling to get started on a question you should read the introductory guidance provided at the beginning of the solution, and then make your own attempt before referring back to the full solution.

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

  

A brief guide to revision technique. A note on the format of the examination. You should know what to expect when you tackle the real exam, and in particular the number of questions to attempt, which questions are compulsory and which optional, and so on. Guidance on how to tackle the examination itself. A table mapping revision questions to the syllabus learning outcomes allowing you to quickly identify questions by subject area. Revision questions. These are of exam standard and should be tackled in exam conditions, especially as regards the time allocation. Solutions to the revision questions. As before, these indicate the length and the quality of solution that would be expected of a well-prepared candidate.

If you work conscientiously through this CIMA Study System according to the guidelines above you will be giving yourself an excellent chance of exam success. 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

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Study technique
Passing exams is partly a matter of intellectual ability, but however accomplished you are in that respect you can improve your chances significantly by the use of appropriate study and revision techniques. In this section we briefly outline some tips for effective study during the earlier stages of your approach to the exam. Later in the text we mention some techniques that you will find useful at the revision stage.

Planning
To begin with, formal planning is essential to get the best return from the time you spend studying. Estimate how much time in total you are going to need for each subject that you face. Remember that you need to allow time for revision as well as for initial study of the material. The amount of notional study time for any subject is the minimum estimated time that students will need to achieve the specified learning outcomes set out earlier in this chapter. This time includes all appropriate learning activities, for example face-to-face tuition, private study, directed home study, learning in the workplace, revision time, etc. You may find it helpful to read Learning to Learn by Sam Malone, CIMA Publishing, ISBN: 1874784434. This book will provide you with proven study techniques. Chapter by chapter it covers the building blocks of successful learning and examination techniques. The notional study time for Managerial level Integrated Management is 200 hours. Note that the standard amount of notional learning hours attributed to one full-time academic year of approximately 30 weeks is 1200 hours. By way of example, the notional study time might be made up as follows:
Hours

Face-to-face study: up to Personal study: up to ‘Other’ study – e.g. learning in the workplace, revision, etc.: 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. The amount of time recommended for face-toface tuition, personal study and/or additional learning will vary according to the type of course undertaken, prior learning of the student, and the pace at which different students learn. Now split your total time requirement over the weeks between now and the examination. This will give you an idea of how much time you need to devote to study each week. Remember to allow for holidays or other periods during which you will not be able to study (e.g. because of seasonal workloads). With your study material before you, decide which chapters you are going to study in each week, and which weeks you will devote to revision and final question practice. Prepare a written schedule summarising the above – and stick to it! The amount of space allocated to a topic in the study material is not a very good guide as to how long it will take you. For example, ‘Summarising and Analysing Data’ has a weight of 25 per cent in the syllabus and this is the best guide as to how long you should spend on it. It occupies 45 per cent of the main body of the text because it includes many tables and charts.
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It is essential to know your syllabus. As your course progresses you will become more familiar with how long it takes to cover topics in sufficient depth. Your timetable may need to be adapted to allocate enough time for the whole syllabus.

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

The Integrated Management Syllabus
Syllabus outline
The syllabus comprises: Topic and Study Weighting A The Basis of Strategic Management 30% B Project Management 40% C The Management of Relationships 30%
A B

C

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Learning aims
Students should be able to: 
 

identify and apply management techniques necessary for decision-making that cuts across functional areas; analyse data in support of strategic decision-making; contribute to decision-making in these areas by advising management.

Assessment strategy
There will be a written examination paper of three hours, with the following sections. Section A – 20 marks A variety of compulsory objective test questions, each worth between 2 and 4 marks. Miniscenarios may be given, to which a group of questions relate. Section B – 30 marks Three compulsory medium answer questions, each worth 10 marks. Short scenarios may be given, to which some or all questions relate. Section C – 50 marks Two questions, from a choice of three, each worth 25 marks. Short scenarios may be given, to which questions relate. Learning Outcomes and Syllabus Content

A – The basis of strategic management – 30%
Learning outcomes On completion of their studies students should be able to: (i) (ii) (iii) (iv) (v) (vi) explain the process of strategy formulation; evaluate different organisational structures; discuss concepts in contemporary thinking on strategic management; apply tools for strategic analysis appropriately; explain the purpose and principles of good corporate governance; evaluate competitive situations and apply this knowledge to the organisation.

Syllabus content  The process of strategy formulation.  The relationship between strategy and organisational structure.  The reasons for conflict between the objectives of an organisation, or between the objectives of an organisation and its stakeholders, and the ways to manage this conflict.  Strategic decision-making processes.

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Approaches to strategy (e.g. rational, adaptive, emergent, evolutionary or system-based views based on Porter, Mintzberg, Bartlett and Ghoshal). Transaction cost view of the firm (e.g. Coase, Williamson) and its implications for organisational structure. Resource-based views of the firm and implications for strategy development. Ecological perspective on the firm. The determinants, importance and role of organisational cultures and ways to improve the effectiveness of an organisation. Introduction to corporate governance, including stakeholders and the role of government. Translating strategy into business (e.g. formation of strategic business units, encouragement of entrepreneurship inside organisations). Contemporary issues in business management (e.g. alliances, demergers, virtual organisations, corporate social responsibility and business ethics).

B – Project management – 40%
Learning outcomes On completion of their studies students should be able to: (i) identify a project and its attributes; (ii) apply suitable structures and frameworks to projects to identify common management issues; (iii) produce a basic outline of the process of project management; (iv) identify the characteristics of each phase in the project process; (v) demonstrate the role of key stakeholders in the project; (vi) distinguish the key tools and techniques that would need to be applied in the project process, including the evaluation of proposals; (vii) identify methodologies and systems used by professional project managers; (viii) identify the strategy and scope for a project; (ix) identify stakeholder groups and recommend basic strategies for the management of their perceptions and expectations; (x) produce a basic project plan, recognising the effects of uncertainty and recommending strategies for dealing with this uncertainty, in the context of a simple project; (xi) identify structural and leadership issues that will be faced in managing a project team; (xii) recommend appropriate project control systems; (xiii) evaluate through selected review and audit, the learning outcomes from a project; (xiv) evaluate the process of continuous improvement to projects. Syllabus content  The definition of a project, project management, and the contrast with repetitive operations and line management.  4-D and 7-S models to provide an overview of the project process, and the nine key process areas (PMI) to show what happens during each part of the process.  Stakeholders (both process and outcome) and their needs.  Roles of project sponsors, boards, champions, managers and clients.
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Key tools for project managers (e.g. Work Breakdown Structure, network diagrams (Critical Path Analysis), Gantt charts, resource histograms, establishment of gates and milestones). Evaluation of plans for projects. The key processes of PRINCE2 and their implications for project staff. The role of determining trade-offs between key project objectives of time, cost and quality. Managing scope at the outset of a project and providing systems for configuration management/change control. The production of basic plans for time, cost and quality. Scenario planning and buffering to make provision for uncertainty in projects, and the interface with the risk management process. Organisational structures, including the role of the project and matrix organisations, and their impact on project achievement. Teamwork, including recognising the life-cycle of teams, team/group behaviour and selection. Control of time, cost and quality through performance and conformance management systems. Project completion documentation, stakeholder marketing, completion reports and system close-down. The use of post-completion audit and review activities and the justification of their costs.

C – Management of relationships – 30%
Learning outcomes On completion of their studies students should be able to: (i) explain the concepts of power, bureaucracy, authority, responsibility, leadership and delegation; (ii) analyse the relationship between managers and their subordinates; (iii) discuss the roles of negotiation and communication in the management process, both within an organisation and with external bodies; (iv) explain how groups form within organisations and how this affects performance; (v) demonstrate personal time management skills; (vi) construct a set of tools for managing individuals, teams and networks, and for managing group conflict; (vii) recommend ways to deal effectively with discipline problems; (viii) explain the process of mentoring junior colleagues; (ix) discuss the importance of national cultures to management style; (x) explain the importance of business ethics and corporate governance to the organisation and its stakeholders; (xi) identify methods of conducting research and gathering data as part of the managerial process. Syllabus content  The concepts of power, authority, bureaucracy, leadership, responsibility and delegation and their application to relationship within an organisation and outside it.  The characteristics of leaders, managers and entrepreneurs.
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Management-style theories (e.g. Likert, Tannenbaurn and Schmidt, Blake and Mouton). The use of systems of control within the organisation (e.g. employment contracts, performance appraisal, reporting structures). Theories of control within firms and types of organisational structure (e.g. matrix, divisional, network). The advantages and disadvantages of different styles of management. Managing in different countries and cultures. Contingency approaches to management style (e.g. Adair, Fiedler). Theories of group development, behaviour and roles (e.g. Tuckman, Belbin). Disciplinary procedures and their operation, including the form and process of formal disciplinary action and dismissal (e.g. industrial tribunals, arbitration and conciliation). Personal time management. The nature and effect of legal issues affecting work and employment, including the principles of employment law (i.e. relating to health, safety, discrimination, fair treatment, childcare, contracts of employment and working time). The sources of conflict in organisations and the ways in which conflict can be managed to ensure that working relationships are productive and effective. Communication skills (i.e. types of communication tools and their use, as well as the utility and conduct of meetings) and ways of managing communication problems. Negotiation skills. Creativity and idea generation. Information gathering techniques (e.g. interviews, questionnaires). Introduction to corporate governance, including business ethics and the role, obligations and expectations of a manager.

Transitional arrangements
Students who have passed the Systems and Project Management paper under the Beyond 2000 syllabus will be given a credit for the Integrated Management paper under the new 2005 syllabus. For further details of transitional arrangements, please contact CIMA directly or visit their website at www.cimaglobal.com.

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The Nature of Strategic Management

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L EARNING O UTCOMES
By the end of this chapter you should be able to:
" " " "

explain the process of strategy formulation; discuss concepts in contemporary thinking on strategic management; apply tools for strategic analysis appropriately; explain the purpose and principles of good corporate governance.

1.1 What is strategy about?
1.1.1 Some initial definitions
Consider the following definitions of strategy: 1. Strategy: ‘A course of action, including the specification of resources required, to achieve a specific objective.’ CIMA: Management Accounting: Official Terminology, p. 50. 2. Strategic plan: ‘A statement of long-term goals along with a definition of the strategies and policies which will ensure achievement of these goals.’ CIMA: Management Accounting: Official Terminology, p. 50. 3. ‘The basic characteristics of the match an organisation achieves with its environment is called its strategy.’ Hofer and Schendel (1978, p. 4). 4. ‘Strategy is the direction and scope of an organisation over the long term: which achieves advantage for the organisation through its configuration of resources within a changing environment, to meet the needs of markets and to fulfil stakeholder expectations.’ Johnson and Scholes (1997, p. 10). 5. ‘Corporate strategy is the pattern of major objectives, purposes and goals and essential policies or plans for achieving those goals, 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.’ Andrews, cited in Lynch (2000, p. 8).
1
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6. ‘Corporate strategy is concerned with an organisation’s basic direction for the future: its purpose, its ambitions, its resources and how it interacts with the world in which it operates.’ Lynch (2000, p. 5).

1.1.2 Common themes in strategy
Strategy involves the following issues: 
  

It is about the purpose and long-term objectives of the business (definitions 2, 3, 4 and 6). It is concerned with meeting the challenges from the firm’s business environment such as competitors and the changing needs of customers (definitions 3, 4 and 6). It involves using the firm’s resources effectively and building on its strengths to meet environmental challenges (definitions 1, 4 and 6). It is ultimately about delivering value to the people who depend on the firm, its stakeholders, such as customers and shareholders (definition 4).

A case study of strategy The Readings section of this chapter contains an article about the strategy of Abbey National. You should turn to this now.

1.1.3 Three elements to strategy
It is possible to perceive of a firm’s strategy as consisting of several different elements (Figure 1.1). Competitive strategy This deals with how the firm competes for business and where its earnings come from. It will involve considerations such as: 
  

how it attracts customers; what it decides to produce or sell; which markets and countries it operates in; how it will win-out against rivals.

For example, Marks & Spencer plc (M&S) traditionally competes on quality, reliability and value. It sells clothes, food, cosmetics, furniture and financial services. Everything

Figure 1.1
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carries its own brand name that it hopes signifies these brand values to the customer. It operates predominantly in the United Kingdom by selling from shops in the high street and out-of-town malls but is also operating mail order and experimenting with internet shopping. It has attempted expansion into the United States and continental Europe. It seeks to beat rivals by achieving higher margins through using its supply-chain strategy to flexibly deliver the right products at competitive prices. It hopes its brand reputation and wide distribution will give it high volumes and also enable it to charge better prices than other volume outlets or to gain access to higher margin markets such as furniture and financial services. Financial strategy This deals with the firm’s relations with its investors and other providers of credit. Clearly management has a major responsibility to meet the wishes of the shareholders of the business. It must also bear in mind the banks and suppliers who are also sources of capital. These issues will be dealt with thoroughly at the Strategic Level, in your Financial Strategy studies. For present purposes we can note that financial strategy deals with considerations such as: 
  

providing an adequate return to shareholders; protecting the value of the shareholders’ investment through avoiding excessive risk; ensuring that the capital structure and range of foreign currency liabilities are appropriate for the needs of the business; obtaining funds in an amount and at a cost and for a duration that meet the needs of the business.

While M&S was pursuing successful competitive strategies its earnings were supportive of its financial strategy. Profits increased year-on-year and investors were prepared to pay a premium price for M&S shares. M&S was seen as a ‘safe bet’ by investors and professional fund managers. They recognised that although M&S was unlikely to deliver the sudden spectacular leaps in profits associated with some other businesses, neither was it likely to disappoint the investors either. This meant that the firm could raise additional capital relatively cheaply by issuing new shares and investors were happy to subscribe to them. Moreover, at dividend time investors were content to allow profits to be reinvested in the business to finance further growth. This again provided funds. Investment and resource strategy This area of strategy concerns how management uses funds retained from profits or otherwise borrowed from investors. Investment and resource strategy covers a wide area and includes: 
    

purchase of land, buildings and other fixed capital equipment; investments in research and development of new products or processes of production; investment in advertising and brand creation and support; the financing of human resource recruitment and development; acquisitions of other businesses; working capital management and inventory.

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

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

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

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

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

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

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

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

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

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

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

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

1.2.2 Corporate appraisal
During this stage, management assess the ability of the business, following its present strategy, to reach the objectives they have set. They will draw on two sets of information: (a) Information on the current performance and resources position of the business. This will have been gathered in a separate position audit exercise. (b) Information on the present business environment and how this is likely to change over the period of the strategy. This will have been collected by a process of environmental analysis and will include information on:  competitors;  tastes of customers;  state of the economy. This stage is also termed a SWOT analysis, standing for strengths, weaknesses, opportunities and threats.

1.2.3 Strategic option generation
Management seeks to identify alternative courses of action to ensure that the business reaches the objectives they have set. This will be largely a creative process of generating alternatives building on the strengths of the business and allowing it to tackle new products or markets to improve its competitive position.

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

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

Tactical programmes and decisions are medium-term policies designed to implement some of the key elements of the strategy such as developing new products, recruitment or downsising of staff or investing in new production capacity. Project appraisal and project management techniques are valuable at this level. Operational programmes and decisions cover routine day-to-day matters such as meeting particular production, cost and revenue targets. Conventional budgetary control is an important factor in controlling these matters.

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


Does performance of the strategy still put the business on course for reaching its strategic objectives? Are the forecasts of the environment on which the strategy was based still accurate, or have unforeseen threats or opportunities arisen subsequently that might necessitate a reconsideration of the strategy?

1.3 Approaches to formulating business strategy
1.3.1 A formal top-down strategy process
Large organisations will formalise the development of business strategies. The following are typical features of the process: 1. A designated team responsible for strategy development. There are several groups of actors in this process: (a) A permanent strategic planning unit reporting to top management and consisting of expert staff collecting business intelligence, advising divisions on formulating strategy and monitoring results. (b) Groups of managers, often the management teams of the SBUs, meeting periodically to monitor the success of the present strategies and to develop new ones. These are sometimes referred to as country weekends because they often take place away from the office to avoid the day-to-day interruptions.
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2.

3.

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(c) Business consultants acting as advisers and facilitators to the process by suggesting models and techniques to assist managers in understanding their business environments and the strategic possibilities open to them. You will be reading about many of these models and techniques later. Formal collection of information for strategy purposes. The management team will call upon data from within and outside the firm to understand the challenges they face and the resources at their disposal. This information can include: (a) Environmental scanning reports compiled by the business intelligence functions within the firm, including such matters as competitor behaviour, market trends and potential changes to laws. (b) Specially commissioned reports on particular markets, products or competitors. (c) Management accounting information on operating costs and performance together with financial forecasts. (d) Research reports from external consultancies on market opportunities and threats. Collective decision-taking by the senior management team. This involves the senior management team working together to develop and agree business strategies. Techniques such as brainstorming ideas on flip charts and using visual graphical models to summarise complex ideas will assist this process. Also, arriving at a decision will involve considerable conflict as particular managers are reluctant to see their favoured proposal rejected and a different strategy adopted. A process of communicating and implementing the business strategy. This can be accomplished using a combination of the following methods: (a) Writing a formal document summarising the main elements of the plan. This will be distributed on a confidential basis to other managers and key investors, but also perhaps to other key stakeholders such as labour representatives, regulatory bodies, major customers and key suppliers. (b) Briefing meetings and presentations to the stakeholders mentioned above. Frequently reporters from the business press will be invited to ensure that the information reaches a broader public. Naturally the fine detail will remain confidential. (c) The development of detailed policies, programmes and budgets based on achieving the goals laid out in the business strategy. (d) The development of performance targets for managers and staff. These ensure that everyone plays their part in the strategy (and perhaps receive financial rewards for doing so). Regular review and control of the strategy. Management will monitor the success of the strategy by receiving regular reports on performance and on environmental changes.

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

1.3.3 Drawbacks of formal business strategy
Some writers are critical of the formal process discussed above, because: 1. It is too infrequent to allow the business to be dynamic. This view emphasises the infrequency of the ‘strategy round’, say every 5 years, and the time it takes to achieve any change to the
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3.

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strategy. If the environment changes unexpectedly, the firm’s performance may deteriorate as it continues to follow a business strategy which has now become inappropriate to its business environment, for example by continuing to make a product no one wants. It forbids the development of radical or innovative strategies. The need to retain consensus among the management team means that radical ideas are too often rejected. Writers who advance this argument remind us of the inherent conservatism of committees and of the fact that some of the success stories of the past few decades such as Microsoft, Intel, Virgin and (at points) Apple and Body Shop have also been firms whose names are associated with radical and visionary entrepreneurs. These business leaders tend to follow the emergent strategy approach discussed in Section 1.4.2. It suffers from difficulties of implementation. The formal process is management-led and seeks to pursue the goals of the business. Successful implementation requires the participation, or at least acquiescence, of middle and junior management together with operative staff. There is a danger that the formal process will not build the support of these people and hence will be misunderstood or resisted. The result will be that the goals of the strategy are not realised. There is loss of entrepreneurial spirit. Entrepreneurs are persons who break rules and make changes to conventional ways of doing business. On the other hand a middle manager in a strategically managed firm will be rewarded for carrying out their allotted part in the strategy and for not breaking the rules. The effect will be to encourage conformity among managers. This will lose the firm potentially successful ventures and perhaps also the services of gifted entrepreneurial managers who may leave in frustration. It is impossible in uncertain business environments. Formal business strategy requires that the strategists are able to make reliable assumptions about the future and particularly about the opportunities and threats facing them. Critics argue that the business environment is now more uncertain than ever before. Because in their view the future cannot be forecast some writers argue that management efforts should be diverted from trying to plan strategies and instead should focus on improving the ability of their businesses to respond and adapt to change. It is too expensive and complicated for small businesses. The manager of a small business is unlikely to be skilled in the techniques needed for developing the kinds of business strategy described above. Moreover the opportunity cost in terms of the time away from direct management of the operational parts of the business are likely to be too great.

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

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

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

1.4 Alternatives to the rational approach to strategy
1.4.1 Criticisms of the rational model of strategy formulation
This is likely to be examined quite frequently. Many strategy writers would dispute the model advanced so far by questioning some of the implicit assumptions. They would argue that organisational rationality is merely a textbook assumption from economics, with little basis in the real world. 1. Organisations are incapable of having objectives. This argument is derived from the insight of organisational sociology that organisations are really just collections of people. According to Cyert and March (1963), an organisation does not have goals of its own but rather it is the people within it that have the goals. Notions of profit (or shareholder wealth) maximisation are merely artificially simplified assumptions left over from economics. This leaves us with a picture of the goals pursued by a strategy being in fact the outcome of a bargaining process between various factions around the boardroom table. The consequences of this view are: (a) Objectives may be in conflict with one another. (b) Objectives will change from time to time according to which management faction finds itself in the ascendancy. (c) Objectives are unlikely to be directly related to the economic benefit of the shareholder. (d) Management will inevitably find itself adjudicating between the claims of the various stakeholder groups such as investors, employees, customers and government.
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2.

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One consequence of this is their adoption of satisficing behaviour where they try to follow strategies aimed at pleasing ‘most of the people most of the time’. (If you consider the way you have to juggle between the elements of your daily life, job, study, home life, leisure, etc., you get the idea of what satisficing means.) A more sophisticated argument is that management will formulate strategy in the light of its beliefs about the status of the firm and the nature of the environment around it. These beliefs are inevitably partially irrational and so any strategy based on them is likewise not completely rational. This is sometimes called an interpretative view of strategy because any attempt to explain a given firm’s strategy must consider the beliefs (or paradigms) in the minds of its management. Senior management should not be the only people involved in setting strategy. Writers argue that by making a separation between strategy formulation and strategy implementation the rational approach is bound to lead to difficulties. In the first place, senior management are too detached and will lack the detailed understanding of the problems of a given business division and the requirements of the particular customers and technologies there. The result will be a strategy that is unlikely to address the division’s needs. Second, and more fundamentally, they will not consider the social processes, values and cultures of the staff in the division or, if considered, these ‘soft’ factors will be misinterpreted. The resulting strategy will have unanticipated harmful effects on the motivation and commitment of those required to implement it. This view favours wider participation in strategy formulation through encouraging emergent strategies to percolate up from below. We shall return to this view in more detail later. In reality, strategy formulation is not a simple step-by step process aimed at finding the best way to meet the firm’s objectives. The model described in Figure 1.3 presents the process as moving in one direction. In reality, strategy formulation is a much more jumbled-up process and can include considerable backtracking and revisiting of earlier stages in the model. Indeed some writers question whether objectives are ever set in advance and suggest that management may revise or set strategic objectives in the light of the corporate appraisal or to match the strategies developed during the strategic option generation stage. Furthermore the strategy formulation process is very political. The main influence on the information considered and the options generated and accepted will be the power of particular personalities and factions in the management team. The strategies that firms eventually follow are not the same as the ones they set out in their plans. At the time of strategy formulation, management suffer from bounded rationality. This means that they cannot have perfect knowledge of the future and so any strategies developed will fail to take into account all eventualities. Consequently, the actual strategy will need to be adapted to suit the circumstances as they unfold. Strategy is not something decided in advance by managers. This view is most famously associated with Mintzberg. He argues that strategy is often recounted by managers long after the event. In this post-rationalisation, they will tend to present all occurrences as intentional action and ignore all the things that happened by chance and those that did not work out. In this view, strategy emerges as a pattern from the piecemeal decisions of management. Another name for this view is adaptive because it sees the organisation as adapting to the circumstances around it. Strategy should not be a rational process. This view is held by writers who are keen to re-establish the role of the individual manager and leadership in determining a firm’s success. The doctrine of action rationality proposed by Brunsson (1985) is a good example of this. Brunsson argues that excessive rationality in decision-making will rob a
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manager of the motivation and commitment necessary to implement the strategy successfully. Instead they will be haunted by doubts that they may have chosen the wrong alternative, aware of some of the inconsistency between objectives and conscious of all the things that might go wrong and the fact that the members of management that disagreed with the strategy are secretly hoping it will go wrong. It is better that managers should select a course of action from a small number of alternatives, focus on just the positive consequences and then formulate objectives based on the likely outcomes of the strategy once it has become established. This is very similar to the ‘ready-fire-aim’ philosophy associated with some successful firms.

1.4.2 Emergent strategies
The research of Mintzberg (1987) suggests that few of the strategies followed by firms in the real world are as consciously planned as the rational model suggests. The real strategies of real firms are a long way from ‘mental maps’ designed by a rational process. Instead, they are a combination of the planned strategy and another unanticipated emergent strategy (Figure 1.4). Mintzberg describes emergent strategies as ‘patterns or consistencies realised despite, or in the absence of, intentions’. By this he means us to understand that they just ‘happen along the way’ with differing degrees of management involvement. The failure of intended strategies to be fully realised as deliberate strategies does not surprise Mintzberg. He regards it as unlikely that a firm’s environment can be as totally predictable or totally benign as it would need to be for all intended strategies to work out. The emergent strategy is often a response to unexpected contingencies and the resulting realised strategy may, in the circumstances, be superior to the intended strategy. Mintzberg considers management’s role in this process and suggests that some strategies may be deliberately emergent. By this he means that managers may create the conditions for new ideas to flourish and strategies to emerge. This has the effect of focusing attention on the role of the manager as at the heart of the strategy and reduces the importance of the rational process we have been discussing. According to Mintzberg, the manager should try to ‘craft a vision’ through moulding the organisation and its strategy in the same way as a potter works clay on the wheel, developing it gently and with regard for its own natural characteristics. To do this, a manager must exhibit the following skills: 

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

Figure 1.4
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Mintzberg’s types of strategy

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

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

Figure 1.5

Logical incrementalism
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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. Evaluation of approaches to strategy Much academic research devotes itself to understanding how a business came to pursue a given strategy in the same way as a historian might seek to account for the origins and conduct of a war. Although fascinating, this reflective approach is not the perspective of the syllabus you are following. 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 a basic framework. This said, we should still recognise what
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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.

1.5 Resource-based versus positioning view of strategy
This is likely to be examined quite frequently.

1.5.1 The source of competitive advantage
Theorists of business strategy disagree on the origins of competitive advantage. Until the 1990s, most writers took a positioning view; however, more recently, a resource-based perspective has become popular. They may be characterised as follows: 1. Positioning view. Competitive advantage stems from the firm’s position in relation to its competitors, customers or stakeholders. This has broadly been the approach so far of this Study System. It is sometimes called an outside-in view because it is concerned with adapting the organisation to fit its environment. It seems to have grown out of marketing theory. 2. Resource-based view. Competitive advantage stems 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. This perspective comes from Economics.

1.5.2 Economic profit
Both sets of strategy writers take an economic view of competitive advantage, seeing it as something enabling the firm to generate a superior return on shareholders’ investment through time. Economic profit is essentially the excess of the firm’s earnings over the opportunity costs of the capital it employs. In other words, for an economic profit to be recorded the returns to the shareholder must exceed the rate of return the shareholder could have obtained by investing the same funds in the next best alternative. For example, consider this simple investment situation: Marsh Hall plc has net assets of £520m. Its profits last year were £62.4m. Its direct rival Jevons plc has net assets of £780m and earnings of £70.2m.
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Advise the investors in Marsh Hall plc and Jevons plc on the economic performance of the firms. We need to calculate the economic profit earned by the two firms: 
  

Marsh Hall plc is making a return on net assets of 12 per cent (£62.4/£520). Jevons plc is making a return on net assets of 9 per cent (£70.2/£780). Investors in Marsh Hall are therefore enjoying a positive economic profit of £15.6m, calculated as (12 À 9%) Â £520m. In other words, they are £15.6m better off by investing in Marsh Hall than if they had invested in the next-best alternative, Jevons plc. Investors in Jevons are suffering a negative economic profit of £23.4m (i.e. 3 per cent of £780m) because they chose not to invest in Marsh Hall plc.

Investors should switch their investments from Jevons plc to Marsh Hall plc to gain a better return. The effect of this would be to reduce the share price of Jevons and raise the share price of Marsh Hall. The market value of Jevons would fall and the market value of Marsh Hall will rise. In a simple way this illustrates the link between economic profit and shareholder value.

1.5.3 Competitive advantage and economic theory
The concept of economic profit is the same as the ‘supernormal profit’ (or ‘economic rent’) enjoyed by the monopolies you studied in Economics for Business at Foundation Level. 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. 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.

1.5.4 The positioning approach
The positioning approach to strategy takes the view that supernormal profits result from the following factors: 
 

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

We will encounter here and in Paper P4 the positioning approach several time in the present text: 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 organization’s size, structure, culture, skills and products in response to them.

1.5.5 Resource-based theory (RBT)
Resource-based theorists 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, etc., 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. Hamel and Prahalad, 1994; Kay, 1997) are suspicious of the positioning school’s implied belief in a ‘rubber organisation’, i.e. 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.

1.5.6 Some RBT writers
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.

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4. Therefore the champion of capabilities-based strategy is the chief executive officer (CEO). 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: able to adapt on many fronts simultaneously. Innovativeness: able 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 logisitics of Encyclopedia 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
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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 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 life-cycle 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 extendability 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, Post-It-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 1.1). Close inspection of Table 1.1 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.

1.5.7 Comments on resource-based views of strategy
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
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Table 1.1

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

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

Value added by top management

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

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

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

1.6 Stakeholders
This is likely to be examined quite frequently.

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

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

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

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

1.6.3 The Mendelow matrix
Make sure that you can draw and apply this model. Mendelow (1991) proposed a diagram to help analyse stakeholders (Figure 1.6). Scholes (1998) suggests that this technique can be used in two situations: 1. To keep a track of changes in the potential influence of different stakeholder groups. By plotting the matrix periodically, management can be alerted to when a strategy may need to change to accommodate (or avoid a threat from) particular stakeholders. 2. To assess the impact of a particular strategic development on stakeholders. For example, managers proposing a factory closure could use mapping to identify where opposition to closure may come from and how it might be managed (e.g. by shifting redundant workers from quadrant D to C or B through generous pay-offs and thus reducing the votes for a strike).

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

Figure 1.6
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Mendelow’s power–interest matrix

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

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

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

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

the the the the

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

Illustration of Mendelow’s matrix applied to Dyson

Scholes (1998) suggests the following strategies to deal with each quadrant:    

Box A – direction. This means their lack of interest and power makes them malleable. They are more likely than others to accept what they are told and follow instructions. Factory management should not reappoint the casual staff but rather provide limited redundancy support. There is no need to tell the small shareholders or customers. Box B – education/communication. The positively disposed groups from this quadrant may lobby others to support the strategy. Also if the strategy is presented as rational or inevitable to the dissenters, or a show of consultation gone through, this may stop them joining forces with more powerful dissenters in C and D. Factory management should brief all groups here on the reasonableness of the case for closure and of the provisions being made for the redundant staff. Advance notice will give each more time for adjustment. Box C – intervention. The key here is to keep the occupants satisfied to avoid them gaining interest and shifting into D. Usually, this is done by reassuring them of the likely outcomes of the strategy well in advance. Factory managers should assure the government and suppliers that the closure will result in a more competitive firm that is able to compete worldwide. A similar message may reassure investors if it is backed up with a reassuring short-term dividend forecast. Box D – participation. These stakeholders can be major drivers of the change and major opponents of the strategy. Initially, there should be education/communication to assure them that the change is necessary, followed by discussion of how to implement it. The factory managers should involve the unions in determining the redundancy package or redundancy policy. Key managers should be involved in deciding the basis on which early retirements should be handled and how redeployment or outplacement should be managed. Key shareholders will be consulted throughout to reassure them that costs will not be excessive.

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

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

Term

Definition

Personal example

Mission

Vision or strategic intent Goal Strategies

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

Be healthy and fit

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

Objective

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

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

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

1.7.3 Roles of mission statements
Research conducted among companies by Hooley et al. (1992) revealed the following purposes of mission statements: 1. To provide a basis for consistent planning decisions. 2. To assist in translating purposes and direction into objectives suitable for assessment and control. 3. To provide a consistent purpose between different interest groups connected to the organisation. 4. To establish organisational goals and ethics. 5. To improve understanding and support from key groups outside the organisation. Mission statements help at four places in the rational model of strategy: 1. Mission and objectives. The mission sets the long-term framework and trajectory for the business. It is the job of the strategy to progress the firm towards this mission over the coming few years covered by the strategy. For example, whatever British Airways decides to do, it must be concerned with delivering customer and financial value in the global travel business. Discussing opportunities for opening a chain of burger bars in London would not be appropriate because it is not British Airways’ business.
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2. Corporate appraisal. Assessing the firm’s opportunities and threats, its strengths and its weaknesses must be related to its ability to compete in its chosen business domain. Factors are relevant only insofar as they affect its ability to follow its mission. 3. Strategic evaluation. When deciding between alternative strategic options, management can use the mission as a touchstone or benchmark against which to judge their suitability. The crucial question will be, ‘does the strategy help us along the road to being the kind of business we want to be?’ 4. Review and control. The key targets of the divisions and functions should be related to the mission, otherwise the mission will not be accomplished. For British Airways, this implies objectives for customer service and supplier relations in addition to budgetary control.

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

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

   

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

Table 1.2 Mission Growth

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

Quality

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

Innovation

Social responsibility

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

Figure 1.8
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1.9 Critical success factors
1.9.1 Defining critical success factors
This approach first emerged as an approach for linking information systems strategy to broader commercial goals by first identifying the crucial elements of the firm’s business strategy. More recently it has been appropriated by strategists in general as an alternative to the goal structure approach described above. According to its originators, critical success factors (CSFs) are: ‘The limited number of areas in which results, if they are satisfactory, will enable successful competitive performance’ (Rockart and Hoffman, 1992). More recently, Johnson and Scholes (1997) have defined CSFs as:
. . . those components of strategy where the organisation must excel to outperform competition. These are underpinned by competences which ensure this success. A critical success factor analysis can be used as a basis for preparing resource plans.

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

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

Figure 1.9 Critical success factors and key performance indicators

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3.

4.

5.

6.

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

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

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

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

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

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

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

1.11.2 Resolving competing objectives
There are various techniques available: 1. Prioritisation. Management can specify that any strategy considered must as a minimum satisfy one or more specific objectives before they are prepared to consider it. For example, management may set a minimum profitability threshold for any strategy (say 15 per cent return on investment). Once this is assured they turn their attention to achieving it in a more socially responsible way. 2. Weighting and scoring. Each objective is weighted according to its relative importance to the organisation (a high weight denoting high importance). Each strategic option is scored according to how well its satisfies the objective (a high score showing high attainment). A ranking is calculated for each option by multiplying its weighting by its score, and the strategic option with the highest overall ranking is accepted. 3. Creation of composite measures. These are used for strategy implementation and control rather than for strategy formulation and choice. Approaches include the use of balanced scorecard measures and techniques of data envelopment analysis (DEA). DEA is used to assess performance of a group of branches or divisions (e.g. a group of schools, hospitals or universities), where each has the same set of multiple objectives to achieve. Data is fed into a sophisticated computer program which identifies for each objective the best performer among the group. It calculates the comparative performance of the remaining branches against this ‘best in class’ branch. It can also give an overall performance metric for each branch, based on a composite index of its performance against a notional ‘best in class at everything’ branch. The above techniques are rational, mathematical ones. In their study A Behavioral Theory of the Firm (1963), management researchers Cyert and March identify some less obviously
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rational techniques by which competing objectives are resolved:    

Satisficing. Here the strategy selected is the one that keeps all, or at least the most powerful, stakeholders happy. It usually emerges as a result of negotiation between the competing stakeholders. Sequential attention. Stakeholders are kept happy by taking turns to get their objectives realised. Therefore staff may get a large pay rise every 3 years but, in between, pay remains static while dividends are paid. Side payments. Where particular stakeholders’ objectives cannot be addressed, they are compensated in another way. For example, a shareholder may be compensated for a low profit by a higher dividend, or a local community may have a new leisure centre built by a company whose new superstore will inevitably increase noise and traffic congestion in the area. Exercise of power. Where management are deadlocked due to competing objectives, this is often resolved by one or more powerful figures using their power to force through their preferred option.

1.12 Corporate governance
This section is based on extracts from the CIMA working party report, Corporate Governance: History, Practice and Future, published by CIMA Publishing and reproduced with permission.

1.12.1 What is corporate governance?
This is likely to be examined quite frequently. According to the Cadbury report: Corporate governance is the system by which companies are directed and controlled.

1.12.2 The history of corporate governance
Treadway and COSO Some of the earliest considerations of corporate governance come from the United States. The Treadway Commission issued a report on fraudulent financial reporting in 1987, which confirmed the role and status of audit committees. The Treadway Report prompted the Securities and Exchange Commission (SEC) to incorporate in its listing requirements, from 1988, that all SEC-regulated companies should have an audit committee with a majority of non-executive directors. Further work by a subgroup of the Treadway Commission, COSO, developed a framework for internal control, providing detailed criteria for management to assess internal control systems, and gave guidance for reporting publicly on internal control. In the United Kingdom, the corporate governance debate was stimulated by a series of corporate scandals and unexpected corporate collapses in the late 1980s and early 1990s. Press coverage of BCCI, Polly Peck and the pension funds of the Maxwell Communications Group caused much public questioning about how effective the boards
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of these companies had been in monitoring the actions of their executive management, and about the difficulties that non-executive directors and auditors faced in ‘standing up’ to dominant chairmen or chief executives. Cadbury The Cadbury Committee was set up in May 1991 by the Financial Reporting Council (FRC), the Stock Exchange and the accountancy profession in response to their concern about ‘the perceived low level of confidence both in financial reporting and in the ability of auditors to provide the safeguards which the users of company reports sought and expected’. The committee’s remit was to report on the financial aspects of corporate governance (particularly in relation to financial reporting and accountability), to consider the responsibilities of executive and non-executive directors, the case for audit committees, the principal responsibilities of auditors, the extent and value of the audit, and the links between shareholders, boards and auditors. At the heart of the Cadbury Committee’s recommendations was the Code of Best Practice, with which all listed companies were to comply. The Code was based on three principles: 
 

openness (subject to commercial confidentiality); integrity (honest, balanced and complete financial reporting); accountability (the requirement for directors to provide quality information, and for shareholders to exercise their powers as owners responsibly).

The argument for adhering to the Code was that it would strengthen both confidence and accountability. The board would find it easier to secure assent for its strategies, if its activities were more open and there was a clearer understanding of its responsibilities. And if the general level of confidence in financial reporting were improved, this would facilitate the efficient working of capital markets. One of the recommendations of the Cadbury Code was that ‘directors should explain their responsibility for preparing the accounts next to a statement by the auditors about their reporting responsibilities.’ It intended this requirement to ensure that companies have an appropriate control system in place, and apply it effectively. The committee placed great importance on internal control – both because it is essential to efficient management, and because failures in internal control were one of the reasons the committee was established. The Cadbury Report advised that companies would not be able to comply with their recommendations until further necessary guidance was developed. It felt that this was the responsibility of the accountancy profession, together with preparers of accounts. Specifically, it called upon them to take the lead in developing: 
 

a set of criteria for assessing effectiveness; guidance for companies on the form in which directors should report; and guidance for auditors on relevant audit procedures and the form in which auditors should report.

Rutteman The Rutteman working group published its guidance, Internal Control and FinancialReporting: Guidance for Directors of Listed Companies Registered in the UK, in December 1994. The
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guidance was addressed principally to listed companies, and those traded on the USM, but was felt to be relevant to all business organisations. It was to be applicable immediately – to accounting periods beginning on or after 1 January 1995. Rutteman did not prescribe the form of the internal controls statement, and advised that readers would expect it to be included within the corporate governance statement, although it might also be included in the operating and financial review, in the directors’ report, or the statement on directors’ responsibilities. The report advised that the statement should contain as a minimum: (a) acknowledgement by the directors that they are responsible for the company’s system of internal financial control; (b) explanation that such a system can provide only reasonable and not absolute assurance against material misstatement or loss; (c) description of the key procedures that the directors have established and which are designed to provide effective internal financial control; and (d) confirmation that the directors (or a board committee) have reviewed the effectiveness of the system of internal financial control. It did not develop from scratch the list of criteria for assessing the effectiveness of internal controls but based them on those set out in the US’ COSO report, Internal Control – Integrated Framework. This guidance has now been superseded by the Turnbull Report. Greenbury The Greenbury Committee was set up in January 1995, on the initiative of, but independent of, the Confederation of British Industry (CBI). Its terms of reference were to ascertain what was good practice in determining directors’ pay, and to prepare a code of practice based on its findings. The committee was not just responding to public and shareholder concern about pay increases and accountability, but also considered the relatively neglected issue of how to appropriately reward performance. The committee’s approach was to strengthen accountability, and encourage improved performance through transparency, the appropriate allocation of responsibilities for determining remuneration, and the proper reporting to shareholders. Specifically, it felt that determining directors’ pay needed to be delegated by the board to a suitably knowledgeable and independent group, non-executive directors, who would have no personal interest in the remuneration decisions they were taking. This group would report to shareholders, providing full disclosure of individuals’ remuneration and the underlying policy. The committee published its report in July 1995, and considered that implementation of its recommendations would improve corporate remuneration practices. Although their research focused on UK listed companies, the committee expected that non-listed and smaller companies would find their conclusions of merit. Hampel The Hampel Committee was established in November 1995, on the initiative of the chairman of the FRC, and followed the recommendations of both the Cadbury and Greenbury Reports for a successor committee. The Hampel Committee’s sponsors included the Stock Exchange, the CBI and the Consultative Committee of Accountancy

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Bodies (CCAB). It consulted widely, sending out a questionnaire to interested parties (including public companies, institutional investors and representative bodies such as CIMA), from which it received over 140 responses. Hampel’s remit was to: 
  

review the Cadbury Code and its implementation to ensure that its original purpose was being achieved, proposing amendments where necessary; keep under review the role of directors (executive and non-executive), recognising the need for board cohesion and the common legal responsibilities of all directors; review the Greenbury recommendations; and address the roles of shareholders and auditors in corporate governance.

The committee felt that it was ‘too soon to reach a considered assessment of the longterm impact of the Cadbury Code’ and ‘even more difficult to reach a definitive conclusion on Greenbury’. However, their report was not as short as these comments suggest. The committee felt that it was important to look at corporate governance from a fresh perspective, not as a ‘response to things which were perceived to have gone wrong’. It started from the beginning to consider what is meant by corporate governance, and to identify broad principles (some familiar from Cadbury and Greenbury) which it hoped would command general agreement. The committee decided to produce a Combined Code embracing Cadbury, Greenbury and its own work and to pass this to the Stock Exchange so that it could sit alongside the Listing Rules. The committee indicated that companies would be required to make a statement to show how they apply the principles and comply with the Combined Code, and to justify any significant variances.

1.12.3 The combined code principles of corporate governance
The Combined Code was published in June 1998 and comprised Principles of Good Governance and a Code of Best Practice, which set out Code Provisions for each of these principles. The principles are divided into the broad areas listed below.  

Directors: Listed companies should be led by an effective board, with a balance of executive and non-executive directors such that no individuals or small groups can dominate decision-making. There should be a clear division of responsibilities of the two key tasks of running the board and running the business so that no individual has unfettered powers. To enable it to discharge its duties the board should be supplied in a timely manner with good quality information. The procedure for appointing new directors should be formal and transparent and directors should stand for re-election at least every 3 years. Directors’ remuneration: Without paying more than is necessary, the level of remuneration should be that which is necessary to recruit and retain directors of the right calibre. Some element should be performance-related in such a way as to encourage the achievement of corporate objectives and to reward individual performance. Policy on executive remuneration should be clear, and no director should be involved in determining his/her own remuneration. Details of remuneration policy and the remuneration of each director should be stated in the annual report.

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Relations with shareholders: Companies should be prepared to enter into a dialogue with institutional investors, and communicate with private investors through the medium of the annual general meeting, encouraging their participation. Accountability and audit: The board is responsible for presenting a balanced and understandable assessment of the company’s financial position and prospects. It is also responsible for maintaining a sound system of internal controls to safeguard the company’s assets and the shareholders’ investments in the company. It should establish through an audit committee formal and transparent arrangements for considering how to apply the principles of financial reporting and internal control and for maintaining an effective relationship with external auditors.

The Combined Code also included Code Principles and Provisions for institutional shareholders, covering matters such as voting, communication between investor and company, and the investor organisation’s responsibilities to evaluate the company’s corporate governance arrangements. Because they were targeted not at the company itself but at organisations representing institutional shareholders, these recommendations were not included in the Listing Rules for companies. However, they were felt to be important by the Hampel Committee.

1.12.4 The benefits of corporate governance
Good corporate governance:    

 

Reduces risk. It helps to ensure that the personal objectives of the board and the company’s strategic objectives are brought into line with those of stakeholders. It can help to reduce the risk of fraud. It can provide a mechanism to review risk, and it can provide a framework for reviewing and assessing projects. Stimulates performance. It institutes clear accountability and effective links between performance and rewards, which can encourage the organisation to improve its performance. Improves access to capital markets. It reduces the level of risk as perceived by outsiders, including investors. In particular, corporate governance can be seen as protecting shareholders’ rights, and thus make it easier for companies to raise finance. Enhances the marketability of goods and services. It creates confidence among other stakeholders, including employees, customers, suppliers and partners in joint ventures. Improves leadership. It allows increased expertise to be brought to bear on strategic decision-making, through the influence of non-executive directors (NEDs), and because all board members are encouraged to examine board decisions critically. The wider pool of knowledge and experience available to the board, through the inclusion of external members, helps the board to identify opportunities more readily. Demonstrates transparency and social accountability. This in turn can foster political support for, and public confidence in, the organisation.

1.13 Summary
This chapter covered an introduction to strategy. The key points to remember are: 


at least one definition of strategy; the stages in the rational strategy model;
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the benefits and drawbacks of formal strategies; approaches to strategy, including positioning and RBT; the importance of stakeholders, and the Mendelow matrix; the possible conflicting objectives of the organisation; the principles of corporate governance.

References
Asch, D. and Bowman, C. (eds) (1989), Readings in Strategic Management. London: Macmillan. Barney, J. (1991), ‘Firm Resources and Sustained Competitive Advantage’, Journal of Management, Vol. 17, No. 1, pp. 99–120. Birley, S. (1982), ‘Corporate Strategy and the Small Firm’, Journal of General Management, Vol. 8, No. 2, Winter 1982–3. Reproduced in Asch, D. and Bowman, C. (eds) (1989), Ch. 6. Brunsson, N. (1985), The Irrational Organisation: Irrationality as a Basis for Organisational Action and Change. Chichester: John Wiley. CIMA (2000), Corporate Governance: History, Practice and Future. London: CIMA Publishing Cyert, R.M. and March, J.G. (1963), A Behavioural Theory of the Firm. Englewood Cliffs, NJ: Prentice-Hall. Hamel, G. and Prahalad, C.K. (1994), Competing for the Future: Breakthrough Strategies for Seising Control of Your Industry and Creating the Markets of Tomorrow. Boston, MA: Harvard Business School Press. Handy, C. and Handy, E. (1999), The New Alchemists. London: Hutchinson. Hofer, C.W. and Schendel, D. (1978), Strategy Formulation: Analytical Concepts. Minnesota: West Publishing. Hooley, G. J., Cox, A. J. and Adams, A. (1992), ‘Our Five Year Mission: To Boldly Go Where No Man Has Gone Before. . .’, Journal of Marketing Management, Vol. 8, pp. 35–48. Cited in Corporate Performance Evaluation in Multinationals (1993). London: CIMA. Johnson, G. and Scholes, K. (1997), Exploring Corporate Strategy (4th edn). Hemel Hempstead: Prentice-Hall. Kay, J. (1997), Foundations of Corporate Success: How Business Strategies Add Value (2nd edn). Oxford: Oxford University Press. Lindblom, C.E. (1959), ‘The Science of Muddling Through’, Public Administration Review, Spring, pp. 79–88. Lindblom, C.E. (1979), ‘Still Muddling, Not Yet Through’, Public Administration Review, November/December, pp. 517–26. Lynch, R. (2000), Corporate Strategy (2nd edn). London: Financial Times Management. Mintzberg, H. (1987), ‘Crafting Strategy’, Harvard Business Review, July–August. Reprinted in Mintzberg et al. (1998), op. cit., pp. 110–20. Mintzberg, H., Quinn, J.B. and Ghoshal, S. (1998), The Strategy Process (European edn). Hemel Hempstead: Prentice-Hall. Porter, M.E. (1980), Competitive Strategy: Techniques for Analysing Industries and Competitors. New York: The Free Press. Porter, M.E. (1985), Competitive Advantage: Creating and Sustaining Superior Performance. New York: The Free Press. Prahalad, C.K. and Hamel, G. (1990), ‘The Core Competence of the Corporation’, Harvard Business Review, May/June.

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Quinn, J.B. (1978), ‘Strategic Change: Logical Incrementalism’, Sloan Management Review, No. 20, Fall, pp. 7–21. Rockart, J.F. and Hoffman, J.D. (1992), ‘Systems Delivery: Evolving New Strategies’, Sloan Management Review, Summer, pp. 7–19. Stalk, G., Evans, P. and Shulman, L. (1992), ‘Competing on Capabilities’, Harvard Business Review March/April. Sternberg, E. (1994), Just Business: Business Ethics in Action. London: Little, Brown.

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Readings

1

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

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

Many readers of this magazine will associate strategic management with strategic planning. This approach to strategy generally involves a deliberate step-by-step approach. It 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; an internal audit is conducted to determine the organisation’s strengths and weaknesses; strategic alternatives are evaluated to determine which strategy will best ‘position’ the organisation so as to capitalise on opportunities and strengths while minimising threats and weaknesses and then a plan is prepared to assist in the implementation of the chosen strategy. The approach may be illustrated by a diagram such as Figure 1, which is taken from the Management Accounting Official Terminology (CIMA 1996).1

Development of the planning/positioning approach as the dominant framework

This approach to strategy has provided the dominant framework for textbooks on strategy from the time the subject emerged as a distinct specialism in the 1950s with the work of Igor Ansoff, Kenneth Andrews and others2 through to the early 1990s. Though the basic framework for analysis appears to have been formulated in the early 1950s it has been elaborated and developed by a number of writers. Among these, the most important contributor has been Michael Porter,3 with his development of the concept of the five
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Figure 1 Long-term plan

forces model used for industry analysis, the value chain as an instrument for assessing internal organisational strengths and weaknesses, and the generic strategies as a tool to assist in strategy evaluation. Though writers such as Philip Selznick,4 Ansoff, Porter and others discussed the importance of internal analysis and developed both the competencegrid and the value chain as aids to this, the major focus has tended to be on the environment. The common assumption underlying the approach is that the environment largely determines the organisation’s freedom to manoeuvre. Therefore, the structure of the environment is of overwhelming importance and a strategy for delivering competitive advantage will be one that positions the firm within the environment. The problem for the strategist then becomes one of finding a position that is defensible against the threats from existing and potential competitors and from the bargaining power of suppliers and buyers. One of the main purposes of corporate planning was, and is, that of the planning and management of growth. During the 1960s and 1970s diversification was very much in fashion as a means to corporate growth. It is perhaps not surprising, then, that during this period we find the development and use of portfolio planning matrices as frameworks for selecting strategies and allocating resources in the diversified corporations. The approach outlined was taken on board and used by planning departments in some of the world’s largest corporations. This was particularly true in the period of stability and economic growth that characterised the 1960s and early 1970s. A study in 19635 found that the majority of the largest US companies had set up corporate planning departments. The typical format used by these departments was a five-year corporate-planning document that set goals and objectives, forecast the main trends such as those for market demand, the company’s market share and its revenue and net income, established priorities for different products and business areas and allocated resources.
The demise of the planning approach

The enthusiasm for corporate planning, however, was not to last. One reason for its demise appears to have been the increasing rate of change and the associated
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macroeconomic instability with which companies had to cope from the mid-1970s onwards. Particularly damaging was the first oil price shock of 1974. This produced fuel shortages and inflation which few if any could have anticipated and this rendered the predictions of corporate planners virtually useless. Organisations were faced not only with fluctuations in the economy but also with technological change. One effect of this was that product life cycles became shorter and firms more frequently needed to update their production processes. Developments in transport and communications resulted in the development of global competition for many products and this intensified competition. Another factor adding to this competitive situation was the growth of Japan and other SE Asian countries as manufacturers and exporters of an increasing range of goods. This additional competition resulted in an ever more active search by competitors to secure competitive advantage. The product of all these changes for the organisation was a dynamic and unstable environment in which any long-term plans became quickly outdated. A secondary reason for the fall in popularity of strategic planning was the failure of 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. Research by R.T. Lenz and M. Lyles,6 for instance, 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. They found that several factors contributed to this lack of commitment including the professionalisation of planning, the excessive emphasis on quantifiable data, and the drive for administrative efficiency in the planning process and the unqualified acceptance and misapplication of various analytical techniques. The use of professional planners with their use of technical jargon tended to alienate some practising managers. The emphasis on quantifiable data led to the neglect of important qualitative changes in the environment because they were difficult to measure. The drive for efficiency tended to result in the growth of bureaucratic procedures and to be detrimental to creative thinking while the over-reliance on analytical tools like portfolio matrices often seemed to serve as a substitute for critical thought in the analytical process.
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. In many companies, corporate planning departments were dismantled and responsibility for strategy formulation passed to managers who had responsibility for its implementation. A more flexible less formal approach was adopted and the time horizon for long-term plans reduced. Academics charted these developments and conducted empirical research into how strategy was actually formulated in companies. The main findings of this research can perhaps most easily be summarised by the use of a diagram provided by Henry Mintzberg.7 He observed that while strategy is often thought of as a plan or a guide to a course of action into the future, it could also be regarded as a pattern of consistent behaviour over time. The difference between these is that a plan refers to intended future action, whereas strategy as a pattern refers to the observed decisions and actions after they have been taken. Mintzberg suggests that strategy as a plan
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Figure 2 Forms of strategy (Mintzberg, 1994)7

can be called intended strategy, while the pattern of actions which evolve from past decisions might be called realised strategies. The available research shows that few planned strategies work out exactly as expected. That is to say that few plans are realised in all their intended detail. This occurs for a number of reasons, such as an unexpected change in the environment like a sudden fall in demand, a switch in the strategy of a competitor, pressure from a stakeholder group or the fact that the original strategy may have been misconceived. As depicted in Figure 2, intentions that are fully realised can be called deliberate strategies, while those that are not realised at all can be called unrealised strategies. The strategic planning approach recognises both these possible outcomes but it does not account for a third possibility, which Mintzberg calls emergent strategy and which applies to a situation where a realised pattern evolves that was never intended. The most frequently quoted example of this type of strategy development comes from a description provided by Richard Pascale8 of Honda Motor Company’s entry into the US motorcycle industry. The ostensible reason for Honda’s success is that the company redefined the US motorcycle industry via a brilliantly conceived intended strategy. According to Pascale, however, Honda’s intended strategy was nearly a disaster. The strategy that emerged did so, not through planning, but through unplanned action taken in response to unforeseen circumstances. Pascale recounts how, when Honda executives arrived in Los Angeles in 1959, they did so with the intention of setting up a subsidiary to sell 250cc and 350cc machines to existing motorcycle enthusiasts. They had no intention of trying to sell smaller bikes such as the 50cc machines that were so popular in Japan because they could not envisage a market for these in a country where everything was bigger and better than back home. As things turned out, the sales of the 250cc and 350cc bikes were disappointing. One of the reasons was to do with mechanical failure of some of their machines. The intended strategy looked to be failing. In the course of their work, however, the Honda executives were using 50cc machines to run errands around Los Angeles and their presence attracted a lot of attention. One day the Honda team received a call from a Sears’ buyer who proposed selling the 50cc machines through the department chain outlets. For their part the Honda team were reluctant to sell the small bikes because they feared it would alienate serious bikers who
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might associate the Honda Company with ‘wimp’ machines. Eventually, however, their failure to sell the expected quota of larger machines pushed them into selling the small 50cc machines and to sell them not through specialist motor cycle distributors but through general retailers. Sales took off and a new strategy was born. By 1964 nearly one out of every two motor cycles sold in the USA was a Honda. By chance the Honda team had stumbled on a previously untouched market segment of consumers who were not motorcycle enthusiasts but simply wanted a small machine to nip around to the shops, the leisure centre and the park. The critical point demonstrated by this example is that not all strategies are planned, and also that successful strategy can emerge without prior planning and often in response to unforeseen circumstances. It also illustrates the fact that strategy need not originate in the minds of the CEO or the senior management teams but can arise from the observations and experience of the salesperson. The view that the realised strategies of an organisation depend on many processes in addition to systematic analysis and deliberate planning is supported by the work of other researchers like Gerry Johnson.9 In his examination of how strategy developed in Coopers, the retail clothing company, Johnson concluded that the strategy that emerged could be best explained in terms of the cognitive, political and cultural fabric of the organisation. The cognitive factors referred to consisted of the common sets of assumptions and beliefs that were taken for granted by managers in the retailing organisation studied. This tacit knowledge consisted of agreed notions about trading procedures, and methods of organisation and control that it was believed contributed to the effectiveness and efficiency of the organisation. This set of assumptions and beliefs may be regarded as a sort of paradigm, which influences the perceptions of managers, and therefore the decisions they make and the actions they take. The link between cognitive and political factors in the case of strategy development at Coopers derived from the fact that the buyers of merchandise in the company exercised a great deal of power. What’s more, the buyers shared the common assumption developed over years of experience in the industry that a ‘commodity’ merchandise policy (a ‘pile it high, sell it cheap’ policy) was the one most likely to deliver competitive advantage. Johnson describes how, despite clear signals of fashion changes in the market and continuous pressure from middle management, the buyers, supported by top management, resisted change. Even when sales fell, the response of senior management was not to adopt a new strategy to cope with a rapidly changing market but to pursue the low-price strategy even more vigorously by tightening controls and cutting controllable costs. Johnson explains the reluctance of Coopers’ management to change their strategy as arising from the mind-set produced by the prevailing paradigm. The set of beliefs, assumptions and way of doing things that had served the company well in the past were not easily abandoned. Evidence that the changing market required a change in strategy was dismissed as inconclusive or as temporary phenomena that would revert to its former pattern in the near future. In addition, because the prevailing paradigm was associated most strongly with senior executives in the company, any challenge to it constituted a political threat. Abandonment of the way of doing things, which they had continually defended, would result in a major loss of face. In the case of Coopers the situation was eventually resolved in an incremental fashion by many small adjustments over a period of time. In other organisations it is not uncommon for a failing company to be forced to adopt a new strategy almost overnight. Senior managers committed to a way of doing things, which bring a company to the brink of ruin, are frequently replaced by those with new ideas.
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What now for strategic planning?

The accumulated evidence suggests that the strategic planning approach to the development of strategy has a number of limitations. First, it is becoming more difficult to plan because of the accelerating rate of change. This does not mean that attempts to plan should not be undertaken. What it does mean is that the scanning and monitoring of the environment for trends and potential changes in these trends becomes even more important, and that additional resources have to be devoted to these by the organisation. It also means that organisations have to be flexible and to accept change as something that has to be managed rather than resisted. Second, research has shown that some of the problems experienced by organisations in their strategic planning have to do with the failings of those who use the approach, as the study by Lenz and Lyles has demonstrated. Here again, the problems are not such as to invalidate the approach but do require the effort and attention by managers concerned to avoid the pitfalls. Third, research by Mintzberg, Pascale, Johnson and others has found that in practice, strategies can emerge that derive not only from the systematic and rational analysis used by strategic planners but also from chance observations, trial and error and cognitive and political processes. It is hard to avoid the conclusion from these studies that useful strategies can and do emerge in other ways than via the strategic planning process. But again, these findings do not mean that the strategic planning approach should be abandoned. What these studies do is to inform us of the complex processes at work in the strategy-making process and, knowing of them, to take account of these when formulating plans.

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. As previously indicated, 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. Porter’s five forces model, in particular, suggests that an industry’s profitability potential is a function of the interactions among the five forces (suppliers, buyers, competitive rivalry among firms currently in the industry, product substitutes and potential entrants to the industry). In Porter’s words, ‘the collective strength of these five competitive forces determines the ability of firms in an industry to earn, on average, rates of return on investment in excess of the cost of capital’.10 Because the strength of the five forces varies from industry to industry, and can change as industry evolves, industries vary in their potential for profitability. In some industries, such as soft drinks and pharmaceuticals where the five forces are favourable, many competitors can earn attractive returns. But in industries like rubber, steel and video games the pressure from one or other of the five forces is so intense that few firms can sustain a high level of profit. Given these differences in industry profitability it follows that any entrepreneur seeking to invest in a profitable venture should seek to enter an industry in which the five forces are favourable and the chances of profit-making therefore greater than one in which competitive pressures are intense. Having selected the most favourable industry, 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
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return above the industry average. A firm that can position itself well can become very profitable even when the industry structure is unfavourable. The key to gaining a good position that will secure a competitive advantage and therefore a good rate of return depends on the strategy adopted by the organisation. The competitive forces operating in a particular industry determine the kind of strategy that will be effective for firms operating in the industry. For instance, producers of standardised silicon chips find themselves driven by competitive forces to adopt a low-cost strategy because price competition is fierce in an industry where the technology allows cheap mass-production. There is, however, a market for a small number of customised chips for specialised equipment. Manufacturers with the knowledge, 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. In some cases the competitive forces will be such that differentiation is the source of competitive advantage. If this is the case the company will seek to differentiate itself by improving quality, by innovation, advertising and superior after-sales service. This approach, which concerns itself with how companies might best position themselves in the market, the industry and the wider environment and so achieve a strategic fit with the environment, though still very popular among both theorists and practitioners, has come in for criticism in recent years. The main shortcomings of the approach are, first, that it relies on a static picture of competition and thus understates the role of innovation and, second, that it overemphasises the importance of industry structure and the wider environment while deemphasising the significance of individual company differences in the possession of resources, capabilities and competence. The fact that innovation can revolutionise industry structure is now widely recognised. The example of the development of the computer industry is one of the more dramatic recent examples. Where a few companies existed ten years ago, now companies like Compaq, Dell, Sun Microsystems and Silicon Valley have gained market share from the established producers like IBM, Digital Equipment and Wang Labs. Fifteen years ago the industry was dominated by the likes of IBM, but the revolution that Apple computers started when it introduced the first personal computer has transformed the structure of the computer industry. As a result, a five forces analysis conducted in 1980 would look completely different from one done today. Other recent examples are in banking, insurance and other financial services. In the UK, companies like Direct Line Insurance, which pioneered telephone sales in insurance, has sparked off a revolution in the way in which insurance, banking and other financial services can be sold and this is changing the structure of the industry. 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. Research by Richard Rumelt,11 for example, suggests that industry structure only explains about 10 per cent of the variance in profit rates across companies. The implication of this finding is that individual company differences explain much of the rest of the variance. Other studies suggest that the variance in performance arising from industry structure is really nearer to 20 per cent, but this still suggests a quite limited influence by the industry structure. These studies have been taken as evidence by a growing number of academics to mean that the individual resources and capabilities of a company are far more important determinants of its profitability than the industry in which it is located.
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The competence-based alternative

These problems with the positioning approach have been one reason for the search for an alternative. Another reason has been the observation that success for many companies appears to have little to do with positioning and much more to do with the exploitation of a company’s resources, competences and capabilities. Thus Prahalad and Hamel12 cite the core competence of miniaturisation as the basis for the success of the Sony Corporation. This competence, it is argued, has allowed Sony to make everything from the Walkman to video cameras to notebook computers. Similarly, Canon’s core competence in optics, imaging and microprocessor controls has enabled it to enter markets as diverse as copiers, laser printers, cameras and image scanners. Marks & Spencer’s competitive advantage has been based on its consistent ability to deliver high-quality clothing and food products at reasonable prices. These examples have led Hamel and Prahalad and other researchers to focus on the resources, capabilities and competences of the organisation as the source of competitive advantage rather than the environment as in the traditional approach. Because the new approach is still in the process of development, there is as yet limited agreement on the terminology to be employed. Similar terms – core competences, distinctive competences, capabilities, resources, strengths, intangible assets, skills – are used interchangeably by different authors. Currently a number of writers are trying to derive a vocabulary for discussing what they have called a ‘competence-based approach to strategic management’.13 Whether or not this attempt will provide a vocabulary on which all can agree remains to be seen. Despite the confusing use of terminology, however, it is possible to describe the main characteristics of what we shall call here the competencebased approach. The approach assumes that an organisation is a collection of resources, capabilities and competences that are relatively unique and that these provide a basis for its strategy and its ability to compete. It is also assumed that firms can acquire different resources, skills and capabilities in the process of their development. But because it takes time to acquire and develop such resources and capabilities it follows that firms that already possess a relevant set of these can gain competitive advantage over rivals. For example, the skills and capabilities required for miniaturisation and considered to be the basis of core competence for Sony take many years to hone to perfection and give Sony an advantage because they are not readily available to competitors. A diagram such as that in Figure 3 can be used to illustrate the competence-based approach. In contrast to the traditional planning model which takes the environment as the critical factor determining an organisation’s strategy, the competence-based approach assumes that the key factors for success lie within the firm itself in terms of its resources, capabilities and competences. 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. The resources of the firm in the competence-based approach are typically classified into two types: tangible and intangible resources. Tangible resources are inputs into a firm that can be seen, touched and/or quantified. They include assets like plant and equipment, access to raw materials and finance, a trained and skilled workforce and a firm’s organisational structure. Intangible resources range from intellectual property rights like patents, trade marks and copyrights to the knowhow of personnel, informal networks, organisational culture and a firm’s reputation for its products. The dividing line between the tangible and intangible is often unclear and how they are classified varies a little
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Figure 3 The competence-based approach (adapted from R.M. Grant, 1991)14

from one writer to another. Despite the problems with classification, proponents of the competence-based approach are agreed on the relative importance of the two types of resource. Although it is clear that both types of resource are required for any business to operate, competence-based theorists argue that intangible resources are the most likely source of competitive advantage. The reason for this, it is argued, is that, being less visible, they are more difficult to understand and imitate than tangible resources. As such they are therefore more likely to be a source of competitive advantage. A survey of managers by Aaker15 in 1989 appears to confirm this. Aaker found that a reputation for quality was rated as the most important basis for competitive advantage by the managers questioned. Resources alone, however, are not a basis for competitive advantage. It is the way in which resources are integrated with each other to perform a task or an activity that provides the capability for an organisation to compete successfully in the marketplace. This being the case, the most important resource for any organisation is the skill and knowledge possessed by the organisation’s employees. It is this skill and knowledge acquired over time and embedded in the firm’s culture that influences how it operates and determines its success. 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. When they are rare, difficult to imitate, non-substitutable and they allow a firm to exploit opportunities or neutralise threats, then they can be considered core competences and serve as the basis of an organisation’s sustained competitive advantage. As part of this new approach to strategy development a number of writers have incorporated the notion of strategic intent. This is a term coined by Hamel and Prahalad16 to mean the leveraging of a firm’s internal resources, capabilities and core competences to accomplish what initially appear to be impossible goals in the face of the competitive forces confronting it. Examples cited by various authors of strategic intent include the intention by Intel to become the number-one supplier to the computer industry, the belief and intention of Microsoft that it can provide the Yellow Pages for an electronic marketplace of on-line information systems and the intention of Komatsu to encircle
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Caterpillar, its main competitor. Strategic intent is said to exist in an organisation when managers and employees have a fervent belief in their organisation and its products and when they are completely focused on doing what they do better than the competition. Because the idea of strategic intent implies ambitions that at a particular moment in time outstrip the organisation’s resources and capabilities for their achievement, theorists have also concerned themselves with how competences might be best acquired. As in the rest of this developing field, a variety of perspectives exist. Thus, some writers such as Senge17 and Argyris18 stress the acquisition of competences through internal mechanisms of individual and collective learning, while others like Hamel and Prahalad19 put greater emphasis on strategic tools like alliances, licensing, mergers and acquisitions. Writers who favour internal means of acquiring competences do so because they claim that such means give the advantages of secrecy, exclusivity and surprise. Those who concentrate on external means of acquiring competences defend their approach on the grounds of flexibility and speed. As markets change, it is argued, old alliances can be discarded and new ones formed. As new resources, capabilities and competences become necessary for competitive advantage it is quicker to buy them than to spend years of trial and error in their development. Such is the diversity of approach to the acquisition and building of competences that a contingent approach has been recommended as a way of selecting the most appropriate means of competence acquisition. This approach assumes that the characteristics and direction of the competence building activity of a company are mainly contingent on its strategic objectives. Some of the claims for the competence-based approach are quite sweeping in nature. For example:
‘Like the ‘‘grand unified theory’’ that modern physicists are searching for to explain physical behaviour at both the subatomic level and that of the entire cosmos, the combination of core competence and capabilities may define the universal model for corporate strategy in the 1990s and beyond’ (Stalk et al.,20 p. 64).

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

A review of the literature, however, would suggest that a more cautious view of the so-called new paradigm should be adopted. The reasons for caution include the following. First, it is not a new approach because its key features are the same as those contained in a general framework for strategic management first formulated over 30 years ago. Second, it is partial and one-sided and thus in danger of neglecting the environment, which is still critical to the survival of organisations. Third, the case for its superiority is
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based on a few examples of successful companies that have been chosen because they appear to confirm the theory. Companies that are successful for other reasons have been neglected. Finally, even when the leading exponents conduct an analysis of the same case, they disagree about the basis of competitive advantage. Turning first to the claim that the competence-based approach represents a new paradigm. Over thirteen years ago Waterman21 noted that the focus on distinctive competence is not new. Under a heading ‘Distinctive competence the forgotten trail’, 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, institution, organisational character and distinctive competence all refer to the same basic process – the transformation of an engineered, technical arrangement of building blocks into a purposive social organisation.’ 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.22 and that the focus of strategy-making at that time was clearly on analysing and building distinctive competences. Since that time, Waterman argues, the concern with competences has been downgraded as ‘Analysis of strategic position within a competitive system has all but butted out concern with the boring details of execution (which sum up to that elusive competence).’ One of the important premises of the model is that strategies should be unique and built on distinctive (now called core) competences. In their work, both Andrews and Ansoff stressed the importance of internal analysis as part of the strategic planning process. Ansoff22 supplied perhaps the most detailed account. Adopting what students today will recognise as the strengths and weakness approach to the internal analysis of the business, Ansoff describes how to develop what he calls a grid of competences. He recommends that for such a grid to be widely applicable it must be constructed in terms of competence areas, which are common to most industries. To be applicable to a single firm, these areas must list specific skills and resources, which differentiate between success and failure in different types of business. Ansoff recommends taking the fully integrated manufacturing firm as the most comprehensive framework of capabilities and using this as a point of reference. Frameworks for analysis of firms in trade, finance and services can then be obtained through modification of the general model. The individual skills and resources can then be organised according to major functional areas. Functions such as R&D, operations, marketing and so on are listed together with the equipment, personnel skills, organisational capabilities and management capabilities for each function. The list of the major skills and competences identified in the competence profile, as Ansoff called it, can then be rated with respect to those found in other firms which have the same capabilities. This rating will produce a ranking for each skill or capability according to whether it is judged to be outstanding, average or weak. The result of this process of analysis and rating will be to provide a competence 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 seems to use the word competence and capability interchangeably, as many of his modern counterparts do. But whatever the merits of his approach it is evident that he and his contemporaries were very much aware of the need to assess a firm’s capabilities and resources as a basis for planning and strategy formulation. It is also clear that in all fundamental respects the approach adopted was similar to that being promoted by modern
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day competence-based theorists. There are, of course, some differences. Modern theorists have refined the terminology. In particular the importance of intangible resources is stressed and the concept of strategic intent emphasised by Hamel and Prahalad can be seen to have built on Ansoff’s work and added new insights. In brief then, there is nothing radically new in the competence-based approach; it is simply an elaboration of one part of the overall strategic management framework formulated over 30 years ago. The second problem with the competence-based approach is that in seeking to distance itself from the positioning approach it is in danger of overemphasising internal analysis to the extent of neglecting the problems which the accelerating rate of change in the environment poses for organisations. While fully accepting that organisations continually need to adapt to change by developing their core competences, it is also evident that the analysis of the environment is now even more vital in order to know how to adapt! The third concern with the new resource-based approach is a methodological one. In many respects the methodology reminds one of the Peters and Waterman23 study of excellent companies. Existing successful companies are selected and examined. The factors which appear to have contributed to their success are listed and put forward as the key characteristics which contribute to the success of these and other organisations and consultants go on to prescribe these as the basis for future success. Several of these excellent companies have since failed and critics such as Guest24 have pointed out that a major problem with the methodology adopted by Peters and Waterman was that no comparisons were made with companies not considered to be excellent. As a result it is difficult to know whether the characteristics contributing to excellence were evident to a greater extent in excellent companies than in other organisations. The same weaknesses appear to be evident in the approach adopted by the new resource-based theorists. Researchers spot some excellent companies – often Japanese high-tech consumerelectronics companies whose products are characterised by relatively short product life cycles – and abstract what appear to be those resources, capabilities and core competences which contribute to success. A fourth problem with the case made by the resource-based school is that they are unable to agree on what it is that contributes to the competitive advantage of the organisation even when they are conducting an analysis of the very same case. The disagreement between Stalk et al. and Prahalad and Hamel25 in respect of Honda’s success illustrates this point very well. According to Prahalad and Hamel Honda’s competitive advantage derives from core competences which they define as the combination of individual technologies and production skills that underline a company’s myriad product lines. 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. By contrast, Stalk et al. attribute organisational success to a capability that is defined as a set of business processes strategically understood. By business processes it is apparent from their Honda example that they are referring to what are usually thought of as business functions such as distribution, after-sales service, research and development and so on. But they also emphasise the effective weaving of business process together and the need for cross-functional integration as prerequisites for a capability to exist. In fact, the definition of capability by Stalk et al. includes so much as to invite confusion. In short, there are some problems with the competence-based approach. There is as yet a lack of agreement on terminology that results in a lack of clarity. Also, the claim
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that competences are the critical basis of competitive advantage has not been conclusively established because of the limitations of the methodology applied by some researchers. In fact, it is questionable whether or not it makes sense even to try to establish whether position in the industry/market place or the organisation’s competences are the key to critical advantage when the performance of any company is so evidently dependent on both. 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. These problems are not insurmountable. Some of them, such as the problem with terminology, is currently being addressed and the less extreme advocates of the competence-based model readily agree that the approach can complement rather than conflict with the positioning approach.

Conclusions

This review of developments in strategic management suggests the following state of play. The environment in which organisations operate is changing faster than ever and it is therefore necessary for it to be continuously monitored and the position of the organisation within it regularly assessed. Recent studies have re-established the importance of resources, capabilities and competences as critical sources of competitive advantage and concepts for use in their analysis are currently being developed. The planning process has been questioned partly because of its limited success in application but also because it fails to take account of cognitive, political and cultural processes which often influence both how the strategy is formulated as well as its content. The findings do not appear to challenge the need to conduct analysis or to plan, but it is useful for people involved in planning to have knowledge of the cognitive and political processes at work so that they can take account of them and avoid any negative effects.

References
1. Management Accounting Official Terminology, CIMA Publishing 1996, p. 38. 2. Andrews, K.R.: The Concept of Corporate Strategy. Holmwood, IL: Irwin, 1971. Ansoff, H.I.: Corporate Strategy. McGraw Hill, New York, 1965. Learned, E.P., Christensen, C.R., Andrews, K.R. and Guth, W.D.: Business Policy: Text and Cases. Holmwood, IL: Irwin, 1965. 3. Porter, M.E.: Competitive Strategy: Techniques for Analysing Industries and Competitors. New York: Free Press, 1980 and Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press, 1985. 4. Selznick, P.: Leadership in Administration: A Sociological Interpretation. Evanston, IL: Row, Peterson, 1957. 5. Gilmore, F.F.: Formulation and Advocacy of Business Policy (rev ed). Ithaca, NY: Cornel University Press, 1979. 6. Lenz, R.T. and Lyles, M.A.: ‘Paralysis by analysis: is your planning system becoming too rational?’, Long Range Planning, August 1985, pp. 64–72.
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7. Mintzberg, H.: The Rise and Fall of Strategic Planning. Pearson Education, 1994. Reprinted by permission of Pearson Education. Copyright (c) 1991, by the Regents of the University of California Managment Review Vol 33, No. 3, by permission of The Regents. 8. Pascale, R.T.: ‘Perspective on strategy: the real story behind Honda’s success’, California Management Review, 26, No. 3 (Spring 1984), pp. 47–72. 9. Johnson, G.: ‘Re-thinking incrementalism’, Strategic Management Journal, January/ February 1988, pp. 75–91. 10. Porter, M.E.: Competitive Strategy: Techniques for Analysing Industries and Competitors. New York: Free Press, 1980. 11. Rumelt, R.P.: ‘How much does industry matter?’, Strategic Management Journal, 12 (1991), pp. 167–185. 12. Pralahad, C.K. and Hamel, G.: ‘The core competence of the corporation’, Harvard Business Review, May/June 1990. 13. Sanchez, R., Heene, A. and Thomas, H.: ‘Towards the theory and practice of competence-based competition’ in Sanchez, R., Heene, A. and Thomas, H. (eds): Dynamics of Competence Based Competition: Theory and Practice in the New Strategic Management. Oxford: Elsevier, 1996. 14. Grant, R.M.: ‘The resource-based theory of competitive advantage: implications for strategy formulation’, California Management Review, 33 (Spring), 1991, pp. 114–135. 15. Aaker, D.A.: ‘Managing assets and skills: the key to sustainable competitive advantage’, California Management Review, 31, No. 2, 1989, pp. 91–106. 16. Hamel, G. and Pralahad, C.K.: ‘Strategic intent’, Harvard Business Review, 67, No. 3, 1989, pp. 63–76. 17. Senge, P.: ‘The leader’s new work: building learning organisations’. Sloan Management Review, Fall 1990, pp. 7–23. 18. Argyris, C.: ‘Good communication that blocks learning’, Harvard Business Review, 72, No. 4, 1994, pp. 77–85. 19. Hamel, G. and Pralahad, C.K.: ‘Collaborate with your competitors and win’, Harvard Business Review, 67, No. 1, 1989, pp. 133–9. 20. Stalk, G., Evans, P. and Scholman, L.E.: ‘Competing on capabilities: the new rules of corporate strategy’, Harvard Business Review, March/April 1992, pp. 57–69. 21. Thomas, P.J.: ‘Strategy follows structure: developing distinctive skills’, California Management Review, Spring 1984. 22. Ansoff, H.I.: Corporate Strategy. New York: McGraw Hill, 1965. 23. Peters, T. and Waterman, R.: In Search of Excellence. New York: Harper & Row, 1982. 24. Guest, D.: ‘Right enough to be dangerously wrong: an analysis of the In Search of Excellence phenomena’ in G. Salaman et al (eds): Human Resource Strategies. London: Sage, 1992. 25. Pralahad, C.K. and Hamel, G.: ‘The core competence of the corporation’, Harvard Business Review, May/June 1990.
Discussion questions 


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

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The following Annual Review by Abbey National Group for 2002 contains a useful example of a deliberate change in corporate strategy. Read the review and answer the question which follows.

A new strategy for growth
Reproduced with permission. # Abbey National Plc. All rights reserved.

We are acting quickly and decisively to address challenges, focusing on our strong personal financial services businesses.
Review of 2002

Abbey National’s results for 2002 reflect a resilient UK personal financial services (PFS) business, which was overshadowed by large write-offs and charges relating to Wholesale Banking, Life Assurance and goodwill. These charges reflect the harsh impact on Abbey National of extremely difficult markets. They also reflect recent actions by management to recognise the challenges we are facing, and to reduce risk in the business to protect against future volatility. The organisation has a strong financial base, as we move forward with our new strategy, offering security to our 16 million customers. The loss before tax for the Abbey National Group of £984 million is extremely unsatisfactory. On behalf of the whole Board, we would like to express our regret for the results and dividend cut that we have announced. We are acting quickly and decisively to address these challenges and details are outlined below.
Delivering a single-minded strategy

Following an intensive strategic review, the Company will be focused solely on providing a full range of personal financial services in the UK through direct and intermediary channels. This is a radical shift in strategy. The new strategy directs all our resources towards personal financial services – by delivering greater value to our customers, we will earn more value for shareholders. Our focus will make us unique and will enhance business performance and execution. We have a new structure for the Company in place, designed around the customer, which is expected to deliver enhanced performance as well as streamline operations. We are focusing all our energies where we have demonstrated strengths and where we have the greatest opportunity to succeed and distinguish ourselves.
Personal financial services

The core ongoing PFS businesses remain sound and have had a good year in terms of new business. Highlights include a 10.6% share of mortgage net lending in the second half of the year and £1.8 billion of deposit inflows, opening almost half a million bank accounts, and issuing a quarter of a million new credit cards in 2002. Credit quality in these businesses remains good. We are reducing the risks in our life assurance business and programmes are in place to protect against downward movements in equity markets.

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Portfolio Business Unit

As a result of the new strategic direction, various operations including those in France and Italy, and the remaining part of the First National business have been deemed non-core due to the lack of synergy with ongoing PFS business. These businesses will be managed for value as part of our newly established Portfolio Business Unit (PBU). It is important to stress that while we will exit these operations, many remain profitable and are open for business as usual. In addition, asset-based portfolios representing a majority of the Wholesale Bank’s risk have also been assigned to the new PBU. This reflects the desire to focus only where we have business advantage, and to align its risk appetite with that of our shareholders and customers. We have made significant progress in terms of managing and reducing the risks in these portfolios.
Capital and dividends

The Board is proposing a final dividend of 7.35 pence, to give a full year dividend for 2002 of 25 pence per share (2001: 50 pence). The 25 pence level represents an appropriate starting point based on the trading potential of the ongoing PFS businesses. It is Abbey National’s intention that from 2003 the Group will return to its historical split for dividend payments, between the interim and final dividend of approximately one third/two thirds. At all times we intend to be disciplined in managing the business for shareholder value. If surplus capital arises from our actions, we will favour shareholder distribution unless there is a compelling strategic and economic case for reinvestment.
Outlook

Despite the difficulties in 2002, we start this year with a strong base of around 16 million customers, a top five position in many relevant market segments, a distinctive, trusted and powerful brand, and strong product distribution through a variety of channels. Our goal is to deliver a compelling proposition to UK customers, who do not feel that they have been well served by the UK banking industry. Through the highest level of service and advice, we will aim to deliver more value to customers – to earn their trust and commitment. We have absolute conviction that this is the right strategy for Abbey National; for our shareholders, our customers and our employees. It will, however, be a long, hard process that we envisage will span the next three years. We know that our shareholders will want to see tangible progress along the way, and we will be reporting regularly, the first such opportunity being at the time of the pre-close statement in June. The events of 2002 have acted to focus minds, and this is already driving an increased sense of determination and delivery within the business. Our employees are key to our success and we would like to thank them for their continued hard work and commitment. We have aligned all our talent, investment and energies on a clear, single and unifying goal under a suitable organisational structure. We are now strongly focused on delivering.
Discussion question 

Describe the new corporate strategy of Abbey National Group.

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Revision Questions

1

Section A type questions
Question 1.1
The approach to strategy formulation that bases strategy on the assessment of core competences is known as the (A) (B) (C) (D) resource-based approach position-based approach rational approach emergent approach

Question 1.2
In the rational strategic planning model, SWOT analysis is normally carried out as part of (A) (B) (C) (D) mission and objective setting corporate appraisal strategy option generation strategy evaluation and choice

Question 1.3
A strategy that aims at pleasing ‘most of the people, most of the time’ is known as (A) (B) (C) (D) goal congruence stakeholders satisficing sub-optimisation

Question 1.4
In Mendelow’s stakeholder analysis matrix, what are the two axes of the matrix?

Question 1.5
In strategic management, for what does the acronym SBU stand ?
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Section B type questions
Question 2
Newco plc is a recently privatised company that supplies energy to the general public. One of the objectives underlying Newco plc’s change of ownership was that it would be enabled to set its own goals and targets without reference to third parties. The chief executive of Newco plc has publicly stated that the aim of the business will be ‘to supply the best possible service to the greatest number of consumers at the cheapest possible cost.’ It is believed, within Newco plc, that the cheapest possible cost will only be achieved by the introduction of a number of changes to improve operating efficiency. The holders of this view are, like the chief executive himself, people who have been brought into Newco plc within the last two or three years. This group is small in numbers but seems to be very influential. Requirement Discuss the extent to which the chief executive’s aim is compatible with the interests of the shareholders. (10 marks)

Question 3
Companies have an obligation to provide information to their stakeholders. The financial information provided tends to be of a historical nature. It has been argued that shareholders in particular should be entitled to receive forward-looking information. Some companies wishing to communicate selectively with a subgroup of shareholders are often prevented from doing so, as all shareholders should receive the same financial information. Requirement Explain why a company may wish to disclose forward-looking information to its stakeholders and in particular to its shareholders. (10 marks)

Section C type questions
Question 4
Tub plc was founded in the early 1980s by two brothers. As employees in their father’s home-decorating business they became aware of the opportunities available in the growing home improvement and DIY (‘do-it-yourself’) markets. Spotting a gap in the middle-price range of the market for bathroom and kitchen fittings, they set up a company to manufacture these items. The demand for their products outstripped their ability to supply, and they expanded rapidly. Most of this expansion was financed from retained profits but, as they happened to be located in an area of economic decline, they qualified for a state grant towards the cost of their new premises.
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By 1995 Tub plc had organised itself around eight operating companies covering the different products and sales activities of the group. Some of these sold directly to housing developers, some to major retail DIY multiples and one of the companies coordinated the group’s export operations. Each company had its own independent board of directors on which the brothers sat with one vote each. The brothers could be out-voted and in fact had been at various times in the past. The senior management believed in decentralisation, arguing that it promoted enterprise and that it was easier for small companies to grow than for larger ones to do so. Tub plc has invested heavily in new technology, automating processes wherever possible. It has developed good relationships with its suppliers and developed just-in-time purchasing and production systems. It is also able to deliver its products within 48 hours of orders being placed. It has progressive human resource management policies in place. At the present time the company has no new products coming onstream and its research and development function is tiny and confines itself to modifying existing products for what is a difficult overseas market. The environment in which the company operates is currently very difficult. Economic recession in the early 1990s and a housing market which continues to remain stagnant are causes for concern. Requirements (a) Identify the key issues involved in formulating the corporate strategy of a company such as Tub plc. (8 marks) (b) How would you go about setting the business strategy of the various operating companies within the Tub group? (10 marks) (c) In what ways might the strategies of the organisational functions within each of the operating companies contribute to the overall strategy? (7 marks) (Total marks = 25)

Question 5
BZ Ltd is a service company that was founded by L, its proprietor, investing his redundancy payment to establish the business. In addition to his own capital, L obtained a bank loan, and these were the only two sources of finance used to start the business. The company has achieved success by providing a very differentiated service. L has personally carried out the full range of planning and operational management activities required to develop the business ever since it began. It has become apparent to L that, in order to continue growing, further capital needs to be injected. Additionally, it is clear to L that he needs to appoint other senior managers to maintain the operational side of the business. He believes this will leave him free to pursue BZ Ltd’s strategic development. L’s strategic objective has been to exploit market opportunities, and he has achieved a high level of return on his investment. However, L now considers that in order to continue growing, BZ Ltd needs to raise more capital than he personally is able to introduce. L is actively considering raising the new capital by a public issue of shares.

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

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Solutions to Revision Questions
Section A solutions
Solution 1.1
(A)

1

Solution 1.2
(B)

Solution 1.3
(C)

Solution 1.4
Stakeholder power Stakeholder interest

Solution 1.5
Strategic Business Unit

Section B solutions
Solution 2
Common errors  Not comparing and stating the extent of differences; It is generally assumed that the fundamental objective of a profit-seeking company is to maximise the shareholders’ wealth. The chief executive of Newco plc did not include the
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shareholders’ interests in the statement of objectives, but expressed a view which suggests a strong marketing orientation. Stating the objectives of the firm as supplying ‘the best possible service to the greatest number of customers at the cheapest possible cost’, the interests of customers are stressed. This, then, is an intermediate objective which focuses on marketing. However, by emphasising an intermediate marketing objective, management may not focus sufficient attention on the maximisation of shareholders’ wealth. In a public utility company like Newco plc, many shareholders will also be customers and there will be a conflict of interest between these two groups. Expenses incurred to provide the ‘best possible service’, will result in lower levels of profit for shareholders. While this situation may please the customers, it is likely to create dissatisfaction among shareholders. On the other hand, excessive concern with cost-cutting will increase profits available for shareholders, but may cause customers to seek better service from competitors. This could be against the long-run interests of the shareholders as profitability is likely to decrease if sales decline. 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’. 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. 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 maximisation of shareholders’ wealth.

Solution 3
The management of a company is usually keen to show stakeholders that the company is being successful and, fundamentally, to publicise the fact that it is being managed efficiently and effectively. The published financial reports of the company are used by the directors and management of the company to disclose information to the stakeholders about the performance of the company. In particular, potential and existing shareholders, who own the company, would appreciate information about the future plans of the company to enable them to be aware of its strategic aims and objectives. Although information is shown in respect of the company’s past achievements, the management may wish to disclose strategically sensitive management accounting information if they believe that this will maximise the long-term wealth of the owners to whom the management are ultimately responsible. It is likely that the stakeholders will be interested in receiving information which will enable them to form better opinions of the future performance of the company, especially regarding the future prospects of the company. In particular, the shareholders, creditors and lenders, employees and customers will be interested in receiving forward-looking information about the company. 

Shareholders. As the providers of the long-term finance to the company, the shareholders would be interested in being provided with information relating to the mission and objectives of the company. In particular, the expected changes in the share price and dividends would be of interest to the existing and potential shareholders. In addition, they would be concerned with the investment plans that the management are considering. It is possible that shareholders would be prepared to reduce the rate of

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return expected, as this additional information would reduce the risks faced by investors in the company. Creditors and lenders. This group would appreciate being provided with forward-looking information as they are interested in assessing the ability of the company to repay the amounts owed to them. By having access to information which focuses on future rather than past performance, they would be able to judge the company’s prospects of repayment more effectively. This would benefit the company if it leads to a reduction in the cost of borrowing. Employees. Providing forward-looking information to the employees would enable them to assess their long-term employment prospects which will be linked to the survival of the firm. Although this is difficult to assess, the provision of future-oriented strategic information would aid them and may act as a motivating factor which would benefit the company. Customers. This group of stakeholders would be interested in the forward-looking information as they are concerned with the long-term survival of the company. If they are convinced that the company was being managed effectively, it is possible that they would prefer to place orders with the company and this would represent a competitive advantage as a result of publishing the forward-looking information.

In general terms, the management would be motivated to disclose strategic, forwardlooking management information, especially if it presents a favourable picture. However, it is not possible to direct the reports only to these interested parties because competitors, in particular, would be very interested in receiving the company’s future strategy. This would clearly represent a major threat to the successful implementation of the strategic information plan, as it would enable the competitors to develop tactics and strategies which would counteract the company’s plans. This means that the management accountant faces a dilemma in deciding the extent and nature of the strategic information to be disclosed by the company.

Section C 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. Hofer and Schendel distinguish between corporate strategy (what business to be in), business strategy (which market segments to serve and how), and functional strategy (detail by department). The corporate strategy of a company like Tub plc will convert its ‘mission’ – what it is all about as a business – into practical policies on markets to be served and how to generate and manage growth. Tub plc’s corporate strategy is to grow its businesses in particular markets in the kitchen and bathroom furnishings sector, building a stronger group by gradually and organically
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building up stronger individual companies through related diversification, and financing this growth internally. In formulating the corporate strategy of Tub plc, the directors need to consider Tub plc’s overall strengths and weaknesses in relation to competitors, customers and suppliers in each market served, and assess current trends so that opportunities can be maximised and threats minimised. Group corporate strategy will decide such questions as where to focus group resources (core businesses). Other group-level strategic choices cover such areas as: 
 

Degree of investment in automation – Tub plc has favoured automation as a source of competitive advantage. Culture and people strategies – Tub plc has adopted good HR policies, encouraging local empowerment of managers, and has built good relations with distributors. The business also uses a TQM approach. Management structure – Tub plc provides a minimalist superstructure with a coordination role, capable of using its scale advantages wherever useful – for example, buying power, HR standards, technology, marketing.

Within the overall corporate strategy – which appears to be as much a framework of goals as a formal plan – operating companies follow their own business strategies for growth. Thus, while overseas activities are coordinated in one group entity, the emphasis each business puts on overseas activity appears to be determined locally. At group level, Tub plc’s management may well balance ‘cash cows’ with ‘rising stars’ to ensure that the group remains in healthy balance as it goes forward. This is also a key issue in managing corporate strategy. Business strategy refers to how a business unit approaches its markets. For example, Marks & Spencer (a large UK retailer) has extended its presence in out-of-town shopping centres, extended its activities into financial services, and refined the standardisation of its product range and presentation style. As another example, McDonald’s has increased its range of non-beef products in the United Kingdom following a health scare surrounding British beef. I would determine the business strategy of Tub plc’s companies by reference to the group strategy and the capacity of the companies to benefit from collaboration, by reference to their individual competencies and local competitive conditions, and by matching resources to opportunities in each company. I would analyse the strategic position of each company (using techniques such as SWOT analysis, value chain analysis, and Porter’s five forces analysis) to explore the alternatives, and then choose a set of strategic moves that would be clear-cut and measurable in implementation. Each business strategy would be designed (‘crafted’) to build incrementally upon the emergent strategic themes in that business. I would then make sure that the feedback loop worked, so that information from the market on the impact of one strategic decision could be fully and promptly factored in the evolution of future strategic plans. I would not embark upon detailed large-scale planning, but rather seek to keep the entrepreneurial local opportunism that has characterised much of Tub plc’s past success. To support and focus the ongoing process, I would aim to formalise a strategic review exercise on a biennial basis. Porter has identified three generic business strategies (cost leadership, differentiated brand marketing, and niche focus) which a company might adopt in response to its
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analysis of its strengths, weaknesses, opportunities and threats. This is also the resourcebased approach to strategy formation – which tends to focus not so much on where we should be heading in relation to our markets, but on what tools we have to work with. Functional strategies are important as this is the level at which strategy is implemented in detail. The accumulated effect of the strategic steps taken in each function of a business (finance, marketing, production, etc.) determines the strategic development of that business. For example, a finance department strategy may be to buy a new computerised information system that will help control the business better, enabling value to be added in various ways across the company. Similarly, the functional strategy of the production department may be to automate the production of product X so that it can be made in volume around the clock and at lower cost, creating a strategic opportunity for the company to compete on price and a strategic pressure to increase its share of that market and skew its investment in that direction. Steps taken by functional departments need to be tied into the business unit strategy because otherwise departmental actions can thwart or counter the thrust of the overall business (or add too little value within the overall value chain of the business). Functional strategies within operating companies do accumulate upwards (like building blocks) into business unit development and hence into overall group strategy. Sometimes, one development in a corner of a large group can spread out and influence its whole direction, for example, one of the R&D units in a large pharmaceutical group developed a drug that was such a success that it dominated the development of the whole group. In developing functional strategies, there is both a top-down and a bottom-up communications exchange. This helps to ensure that the right strategic decisions are taken, that the detail will work, and that everyone is aware of the plan and personally engaged in its fulfilment. Functional strategies provide readily measurable implementation, are digestible elements of the overall plan, and convert theory into practice at the sharp end.

Solution 5  



Note the phrase ‘L’s strategic objective has been to exploit market opportunities’. This encapsulates the issues clearly: – presently the objectives are set by one man; – the objectives are not really objectives in the sense of targets – they are more like aims. This suggests a style akin to ‘freewheeling opportunism’. Try to visualise the firm. Would thinking of the Virgin Group with L in the role of Richard Branson help? By going to the market, BZ Ltd will need to respond to a wider group of stakeholders, notably its investors. These will require reliable financial returns and more formalised strategies. Keeping the share price high will require that the firm has longer-term strategies in place and shows an ability to achieve them. Also the prevailing rules of corporate governance will frown on an organisation so clearly controlled by one man and will demand that he shares power with a board of executive and non-executive directors.

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

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

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Strategy, Structure and Culture

2

L EARNING O UTCOMES
After completing this chapter you should be able to:
" "

evaluate different organisational structures; discuss concepts in contemporary thinking on strategic management.

2.1 Strategy and structure
This is likely to be examined quite frequently. There are two main views on the relationship between strategy and structure. The first, put forward by Alfred Chandler (1962), was based on a study of the development of large corporations in the United States, from which he concluded that ‘structure follows strategy’. The focus of the study was on the historical development of the corporations and strategy was defined simply in terms of changes in product and market areas. The key stages of development identified by Chandler are summarised below:

Key strategic issue Accumulating and controlling raw materials and resources Rationalising the use of resources to improve efficiency Diversification into new products and/or markets Rationalising the use of diversified resources

Structure Entrepreneurial Functional (Holding company) Divisional

Chandler observed that the transition from one form of structure to another usually did not take place as soon as the key strategic issue changed. He suggested that although the founders or entrepreneurs were typically very astute at strategy development and
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implementation, they tended to know very little about organisation structure. As a result the move to a more appropriate structure was often a slow and painful process, which sometimes involved the departure of the founder of the business. Recent research has questioned the view that ‘structure always follows strategy’, and argued instead that ‘strategy often follows structure’. This second view, that ‘strategy often follows structure’, is based on the idea that managers already working within a particular organisation structure will take the structure for granted and only consider strategies that will ‘fit’ with the existing structure. The reason for managerial reluctance to change structure is associated with the time-consuming effort involved in such a process and the fact that some managers will have vested interests in maintaining the structure as it is. Besides choosing a structure, an organisation must also establish appropriate organisational control systems. It must decide how best to assess the performance and control the actions of subunits. The options range from market and output controls to bureaucratic controls and control through organisational culture. An organisation also needs to decide what kind of reward and incentive systems to set up for employees. Finally, a company must achieve a fit, or congruence, between its strategy structure and controls. Since different strategies and environments place different demands on an organisation, they call for different structural responses and control systems. For example, a strategy of cost leadership demands that an organisation be kept simple (so as to reduce costs) and that operations and controls stress productive efficiency. On the other hand, a strategy of differentiating a company’s product by unique technical characteristics generates a need for integrating the company’s activities around its technological core and establishing control systems that reward technical creativity.

2.2 Organisational structure
Typically, the term ‘organisational structure’ has been used to describe the internal operational structure, including the structures described under the terms ‘functional, divisional or matrix’ which are discussed below. However, the financial structure of an organisation, not part of the syllabus for Integrated Management, nowadays plays an increasing role in determining the overall forms of an organisation, its boundary with its environment, and even the various environments (or domains) themselves. Organisations seem to be in conflict. There is a never-ending demand for everincreasing economies of scale, while simultaneously customer sophistication leads to the need for reactive and yet also proactive policies. The question is: How can these different forces be contained? We must start with the definition of an organisation and then make some attempt to widen this to include quasi-organisations (‘almost-organisations’) which are appearing today such as franchised firms (like Bodyshop, McDonald’s), integrated dealerships or resellers who are to allowed to sell other products (such as are found in the motor trade), and joint ventures (which involve a separate company usually with shareholdings being set up), partnerships and alliances. In this way it is possible to have a market penetration at lowest cost, and internally to reduce overheads by outsourcing activities considered ‘non-core’ into the market. Other external groupings include ‘bidding consortia’ in construction, purchasing groups in retailing, and employers’ and trade associations (negotiating and lobbying, respectively). With this background we can analyse the way internal structures have been developed to manage the external complexity and turbulence in the environment. We can see from our
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later discussion of chain of command, scalar principle, and line–staff relationships that a key problem for managers arises from the need to have people who specialise in different tasks and then coordinate their activities into a unified whole. Attempts by managers to resolve this problem have produced various forms of organisation. Some of the different forms of organisation are considered below.

2.2.1 Internal structure
All organisations have some form of structure, which should facilitate the implementation of strategy and the achievement of objectives. In simple terms, an organisation’s structure can be defined as ‘the established pattern of relationships among the individuals, groups and departments within it’ or more pragmatically as ‘the arrangements for the allocation and control of resources’. Clearly then there are two structures – a vertical structure of authority and responsibility where clear limits of financial authority exist, and a horizontal structure of groupings of activities designed to use the resources towards goal-attainment. Although the horizontal structures can be changed from time to time, the basic vertical structure of an organisation is a relatively static framework within which processes such as communication, leadership and decision-making take place. Organisation structure is concerned with the way in which work is divided up and allocated, and how coordination to achieve objectives is achieved. This can be described as an organisation’s basic structure, and in some organisations it will be illustrated in the form of a chart (simple organisation charts will be used to describe the main types of structure later in this chapter). Another part of the idea of structure is the process that goes on underneath the signified relationships: these are described more fully in a later chapter. Here, we need to emphasise that the operating mechanisms are used to reinforce the basic structure and to clarify what is expected of employees. Examples include written rules and regulations, job descriptions, reward systems, and so on. Classical management theory was preoccupied with trying to find the best form of organisation structure. Finding the right type of structure for an organisation involves trying to balance pressures for uniformity and standardisation with those pulling towards diversity and uniqueness. The basic types of structure represent some of the responses to these pressures as an organisation develops. In seeking the right balance for a particular set of circumstances, managers have to pay particular attention to the process of delegation and the resultant degree of decentralisation of decision-making in the organisation. Of course, the forms of organisation are not mutually exclusive and it is common to find hybrid forms in which two or more types are combined. For example, a matrix structure can be superimposed on a functional or divisional one. Similarly, a divisional structure could be primarily based on product divisions but have one international division.

2.2.2 Organisational design and contingency theory
The basic problem of organisational design is to formulate and establish a structure to facilitate the achievement of organisational goals. This requires two basic issues to be dealt with: 


How to divide the work to be performed into a number of distinct tasks. How to group the tasks together to achieve the overall goals in an efficient manner.
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Early contributions to organisation theory, such as the classical management approach, attempted to put forward general principles of management to guide the design of appropriate organisation structures. These principles tended to emphasise tightly organised, bureaucratic structures. At the time many of the principles were first put forward, large organisations were typically entering the strategic phase identified by Chandler as rationalising the use of resources to improve efficiency. Since this usually required a functional structure the classical approach proved quite useful. However, the development of more complex strategies and environments has rendered this approach less useful. In order to understand the requirements of effective organisational design it is useful to consider first of all the main dimensions of organisation structure.

2.2.3 Contingency theory
The research into administrative intensity and size illustrates how structural relationships are contingent or dependent on a number of factors. This has contributed to the emergence of contingency theories which stress the importance of finding the best structure for particular circumstances. The key factors to take into account are as follows: 
 

 

Size – as illustrated above in the discussion of administrative intensity. Technology – the techniques, equipment and specialised knowledge used to transform organisational inputs into outputs that can be returned to customers or clients with added value, will have some impact on the design of an appropriate organisation structure. People – the type of people employed and their skills, competencies and level of motivation. Past experience and pattern of ownership – organisational design rarely starts with a blank sheet of paper; the history of the organisation and whether the owners are directly involved in managing it will exert some influence on organisational design. Environment – the concept of organisations as open systems has been explained in an earlier chapter and this highlights the importance for organisational design of factors in the organisational environment, particularly Burns and Stalker’s studies.

2.2.4 Structural characteristics
Academic researchers have attempted to classify the dimensions of organisation structure. One way of doing this is to distinguish between the following structural characteristics: 
   

Specialisation – this reflects the extent of division of labour within the structure. Standardisation – the extent to which specific procedures exist to deal with the tasks to be carried out within the organisation. Formalisation – describes the extent to which procedures and rules are written down. Centralisation – the extent to which authority to make decisions is in the hands of a few senior managers. Configuration – the shape of the organisation as illustrated in a detailed organisation chart.

This type of approach is useful when making comparisons between different organisations as it permits profiles of each organisation to be drawn up using the various structural characteristics.

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Administrative intensity One of the most intensively researched aspects of organisation structure is the relationship between size and the number of employees in administrative or support roles. This particular personnel ratio is referred to as administrative intensity. Interest in this relationship was initially stimulated by Parkinson’s Law (Northcote Parkinson, 1955) which in its simplest form states that ‘work expands to fill the time available for its completion.’ The consequence of this for organisations is alleged to be that as they grow the proportion of administrative and staff personnel grows more than proportionally. The commonsense appeal of Parkinson’s Law has proved very difficult to verify by research. In fact, one study of a number of hospitals found that administrative intensity actually decreased with increasing size. The following tentative conclusions can be drawn about the impact of size on administrative intensity. 
  

The larger the organisation the lower the administrative intensity. Factors other than size also influence administrative intensity (e.g. the organisation’s environment, technology, etc). The rate at which size is changing is an important factor. Administrative intensity is a function of both the size and the complexity of an organisation.

2.2.5 Strategic choice and the issue of consistency
Strategic choice is the context within which an organisation exists; it will constrain choices about the most appropriate structure but will not determine them; an element of choice is open to strategic decision-makers both in terms of the environments they choose to operate in and the forms of structure they believe to be best. Certain groups will be better placed than others, because of their power in the organisation, to influence or resist structural changes. This, along with the difficulties of obtaining simple, unambiguous measures of effectiveness against which the appropriateness of different structures can be objectively judged, helps to explain why organisational politics often plays a significant part in decisions about reorganisation. One of the potential problems for managers attempting to adopt a contingency theory approach to organisational design is what to do when faced with contingent factors that pull in opposite directions; for example, large size requiring formalisation and competitive markets requiring flexibility. The danger is that each is taken into account in a way that leads to inconsistencies in organisational design. To avoid this danger managers must take into account the overall configuration of the organisation. In particular, they should attempt to ensure that the structures and systems adopted are consistent with the organisation’s culture and the philosophy of its management. John Child (1984) presents evidence from a study he conducted of four North American airlines and one European airline which lends some tentative support to the importance of consistency between various structural arrangements. In particular, he found that the more successful airlines employed different forms of organisation to each other despite facing the same contingencies: what distinguished them from the less successful ones was that they demonstrated a high degree of internal consistency in the approach to management and organisation they had adopted.
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Figure 2.1

Entrepreneurial structure

2.2.6 Entrepreneurial organisation (Figure 2.1)
A small organisation has the entrepreneur at its head, probably a technical manager rather than a financial manager, though this is increasingly possible. Can you think of an example of a technical and a non-technical entrepreneur? Microsoft’s Bill Gates is most people’s choice for the former, or Steve Jobs at Apple. Craig Pollock’s management of Formula One former world champion driver Jacques Villeneuve and the new Formula One BAR team would be an example of the latter – Pollock used to be a schoolteacher. The core of the entrepreneurial organisation tends to be technical, as such expertise is at the heart of the business. External technical advice may be sought from manufacturers of equipment or consultants. Support staff will be very few in number – perhaps a part-time secretary or the owner’s spouse or family or friends helping out with admin. Decisions will be centralised and the culture a mixture of task and power. The entrepreneur will coordinate everything and delegate where s/he feels it is necessary; this may not be on strictly rational grounds. The transition from an entrepreneurial to a functional structure occurs essentially because there are limits to the extent to which one person can personally supervise or carry out all of the organisation’s tasks. When this point is reached it is necessary to start to delegate formal authority to other people and to make them accountable for carrying out specific activities. Although this process is essential for efficient and effective management in all but the smallest of organisations, there is often considerable reluctance by managers to delegate and also for subordinates to accept it. The key reasons for this are probably fear and lack of trust as, although the manager can increase decentralisation by delegating the authority to make decisions to subordinates, the manager is still accountable for the consequences of these decisions. The manager fears losing control and may not trust the subordinate’s ability to carry out the activities. The subordinate on the other hand may be suspicious about the motives behind delegation and unclear about who is ultimately responsible for specific tasks.

2.2.7 Functional organisation
The most common form of structure adopted when an organisation has outgrown the entrepreneurial one is a functional structure (Figure 2.2). This divides the organisation up into its main activities or functions (production, sales, accounting and so on) in which all similar specialist activities are grouped together into interdependent departments. A manager is placed in charge of each function under the overall control of
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Figure 2.2

Functional structure

the owner or a senior manager. This form of organisation has a number of potential advantages: 
      

Specialised resources are used efficiently. Quality is enhanced by other specialists from the same functional area. Opportunities exist for extensive division of labour. A career structure enables people to advance within their functional specialism. It is easier to manage specialists if they are grouped together, especially when the manager has the same experience. It fosters communication between specialists and enhances the development of skill and knowledge. It does not duplicate specialist resources throughout the organisation and promotes economies of scale. It is suited to conditions which stress functional specialism, where the environment is stable, and when the technology is routine, requiring little interdependence between departments.

However, a functional structure promotes a narrow focus on specialist interests. The following problems might arise: 
     

increased need for interdepartmental coordination and scheduling; communication, coordination overload the vertical hierarchy; inefficient coordination of functional departments; responsibility for overall outcomes is unclear; interdepartmental conflicts; little creativity and innovation; difficulties in identifying profitable and unprofitable products.

These problems are likely to occur with professionalism and a role culture where job demarcations are felt to be important. When the organisation reaches a certain size, they are likely to be exacerbated especially if it has developed a wide range of products or services. They may be solved by adopting a holding company or a divisional structure in which profit centres based on particular products or geographical areas are created. Burns and Stalker (1961) devised the term ‘mechanistic’ for firms where the interconnections are strong as they are unsuited to changeable environments and non-routine technologies. A more flexible and responsive form is needed than the rigidly functional.

2.2.8 Holding companies: ‘federated firms’ and franchises
Full divisionalisation can solve some of the problems of a functional form but requires the development of new accounting information systems to implement the new systems of management control involved in operating such a structure. While these systems are being
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Figure 2.3 Simplified structure of Mobil Oil Corporation Inc. in the United Kingdom in the 1970s

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

2.2.9 Divisional organisation
A divisional structure (see Figure 2.4) can help to overcome the limitations of the holding company and/or a functional structure, as it contains within it functional specialists but groups its activities around products or regions.
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Figure 2.4

Divisional structures – product based

In particular, divisionalisation, with its emphasis on profit centres, should promote clear accountability, longer planning horizons, and the development of future senior executives with general management experience as divisional leaders. Alfred Sloan is widely accepted as developing a true divisional structure for the disparate firms owned by General Motors Corporation in the 1930s, bringing together a central function to garner expertise from the different firms such as Pontiac, Cadillac and Chevrolet. Eventually however, according to John De Lorean, the centre became so powerful that these divisions effectively reverted to becoming departments, with no real autonomy. This tension between the centre and divisions or departments is a crucial problem of control for all organisations. Too much control stifles innovation but too little is a recipe for wild excesses of spending on pet projects such as happened in Rolls-Royce where the RB211 engine project overruns nearly bankrupted the company. Two ways of grouping activities are supposed to ensure a closeness to the customer which is not really possible in a functional structure. These groupings are based on product or location. Product organisation People and resources are grouped according to an organisation’s products. General Motors (GM), for example, has plants combining a variety of specialist resources for specific products (Chevrolet, Cadillac, Pontiac, etc.) or projects (the new compact car, the Vega, was a centrally run project at GM). Divisional managers have considerable authority – in effect a small business (sometimes temporary) is created within a large one. This enables technical excellence and concentration on fewer product lines, and a liaison with a smaller set of customers, realising more creativity in marketing and sales through focus, teamwork and goal consensus. This format is used most successfully where there is a variety of products, each addressing different markets. Regional organisation Where organisations have few products, such as IBM, they may group activities according to sales area and be literally ‘closer to the customer’ (Figure 2.5). This enables regional differences to appear in marketing research and be directly translated into branch-level contact and projects based on local stakeholders. In this way IBM gets to know the details of the businesses in an area and its sales team focus on local chamber of commerce
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Figure 2.5

Divisional structures – geographically based

meetings and social contacts at the golf club or race track, meeting senior people from potential clients informally as well as formally who are decision-makers for IBM’s big customers. Advantages of divisionalisation  It provides excellent coordination across functional departments.  Since departmental units are often small, as well as self-contained, employees identify with the product or project rather than their own function.  Since each division can, for example, react to customer requirements, it is well suited to changeable environments. As such, a move to divisions is particularly useful for large organisations. Cellular manufacturing can even be considered a kind of internal divisionalisation with an emphasis on internal customers, just-in-time links between different ‘products’ and the dynamism created through teamwork. Disadvantages of divisionalisation  There may be a costly duplication of resources across departments.  Specialists may become isolated from both their colleagues and fail to further their specialist skills.  Competing demands on people may create stress.  Coordination across divisions is difficult. For many large entities, a divisional structure will be the most appropriate form of organisation, but in certain circumstances it may eventually have to be adapted to include formal mechanisms to promote closer interdivisional collaboration: the result will be a matrix structure in which vertical and horizontal formal relationships are recognised.

2.2.10 Matrix organisation
Allegedly this was introduced as the main structure by NASA when President John F Kennedy demanded ‘a man on the moon within ten years’. The achievement of this goal was apparently due to the new structure NASA adopted to link the functional
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specialists in the background departments intimately with the problem-solvers on the construction and research and development team for the Apollo mission. This mixture became known as a matrix. However, many organisations run with a matrix structure implicitly and always have done so. Big factories have zones where maintenance staff are assigned so that they know the equipment and can repair broken machinery quickly – but they report to the maintenance manager as functional head. Universities have courses within which functional staff teach various elements – statistics, law or management, for example – and who report to their functional heads. Such set-ups are not often referred to as matrix organisations because they are at a lower level than the NASA example. A matrix structure seeks to add flexibility and lateral coordination to the traditional vertical hierarchy. One way of doing this is to create project teams made up of members drawn from a variety of different functions or divisions: each individual then has a dual role, as he or she maintains functional/divisional responsibilities as well as membership of the project team. The matrix structure is sometimes appropriate for large multi-product companies which have significant interrelationships between their various operating units. Hence, both vertical and horizontal relationships are emphasised, and employees within a department will report to both a functional and a product manager, each of which has equal authority. There is a dual chain of command which violates classical principles. If implemented successfully this form of structure can: 
  

improve decision-making by bringing a wide range of expertise to problems that cut across departmental or divisional boundaries; replace formal control by direct contact; assist in the development of managers by exposing them to company-wide problems and decisions; improve lateral communication and cooperation between specialists.

A matrix structure (Figure 2.6) suits rapidly changing environments because the equal balance of power between functional and product management aids communication and

Figure 2.6

Matrix structure
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coordination. It is an organic structure which facilitates adaptation to unfamiliar and unexpected problems. People can be flexibly relocated across products or projects, aiding the speedy implementation of new ones. Employees have the opportunity to develop either functional or general management skills. Consequently, it is useful for medium-sized organisations with a medium number of products or for task-centred organisations where project work is a feature of life, such as in the ‘small batch/unit’ production grouping used by Joan Woodward. Of course there are disadvantages with such a complex structure. 
       

A lack of clear responsibility; Clashes of priority between product and function; Functions lose control of the psychological contract; Career development can often be stymied; Difficult for one specialist to appraise performance of another discipline in multi-skilled teams; Project managers are reluctant to impose authority as they may be subordinates in a later project; Employees may be confused by reporting to two bosses; Managers will need to be able to resolve interpersonal frictions and may need training in human relations skills; Managers spend a great deal of time in meetings to prioritise tasks.

The complexity of the matrix structure makes it difficult to implement successfully. Indeed some commentators are very critical of this form of organisation, and question whether it should be adopted at all. Thus, Peters and Waterman (1982, p. 307) state: ‘Our favourite candidate for the wrong kind of complex response, of course, is the matrix organisation structure. People aren’t sure to whom they should report for what the organisation gets paralysed because the structure not only does not make priorities clear, it automatically dilutes priorities. In effect, it says to people down the line ‘everything is important: pay equal attention to everything.’ How convinced are you by the criticisms of matrix structures put forward by Peters and Waterman? Do you think there are some types of situations when this form of organisation would work well? If the matrix structure is to avoid these problems, the key roles are those of the leaders of the units with cross-departmental or divisional responsibilities: they have to develop effective teams, but at the same time minimise the problems facing team members who also have other responsibilities in their department or division.

2.2.11 Flexible firms, networks and complex organisation forms
This is likely to be examined quite frequently. Complex forms of organisation are usually thought of as occupying the ground between pure forms of market transactions and hierarchical organisations. They are regarded as an alternative way of coordinating resources. The idea seems to have grown out of Oliver Williamson’s idea of ‘transaction costs’ – that market relations incur such costs, while in trying to avoid them by internalisation, hierarchical forms of organisation result (see later
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Figure 2.7

The flexible firm

(Source: After Atkinson, 1984) NB: The shaded segments are not under contracts of employment with the flexible firm.

in this chapter). Unfortunately, the lack of competition within hierarchical organisations itself results itself in a lack of control on costs, as mentioned above. The complex forms attempt to overcome the inadequacies of both market and hierarchical forms through collaboration between existing organisations. The drivers for cooperation are of two sorts – cost reduction and market penetration. The cutting of costs internally has resulted in a wave of outsourcing of non-core activities and research and development alliances. Market penetration is perhaps more common and allows economies of scale such as ShellMex and BP achieved in the 1950s with their joint distribution network, or more recently where construction consortia bid for motorway contracts. Such organisations would range from cooperatives between organisations and their suppliers, to all forms of partnerships and alliances in which coordination of resources was based on cooperation between the parties concerned. Increasingly, organisations are forming complicated vertical and horizontal relationships through demergers, downsising, delayering and margin retreat from product scope and geographical spread. These pressures are essentially economic and in response to Japanese and Pacific Rim penetration of Western markets. At the same time globalisation means that scale economies are necessary to maintain price differentials and so mergers of parts of businesses where there is strategic fit is becoming commonplace. Mass production and engineering industries have been swift to act, but commodity industries have in particular been slow to respond. Mergers, demergers, joint ventures and partnerships were typical of oil firms in their exploration and production activities and are now increasingly in their downstream operations. Chemicals firms have gone through a series of recent acquisitions and spin-offs; automotive manufacturers have acquired or merged to give scale economies. Examples are the Shell/Exxon 50–50 joint venture in the
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North Sea called ShellExpro; the acquisition of the ICI ‘cracker’ unit at Wilton works by BP Chemicals; the spin-off of Zeneca pharmaceuticals from ICI. Mergers are a form of complex organisation where, for example, automotive parts are shared across divisions or companies and recently include Daimler-Benz (Mercedes) and Chrysler, Renault taking 37 per cent of Nissan Motor, Ford acquiring Aston Martin and Jaguar and so on. Various partnerships also exist in the automotive industry – Renault engines in Volvo cars, for example. Joint ventures should mean that each sponsoring organisation has a degree of equity participation, while partnerships may not, and may or may not share assets. Consortia are short-term legal entities with sunk costs from each of the partners and which terminate at the end of the project. Alliance is a term used for a weaker non-legal entity kind of operation where firms simply contract to work together on a gain-share/pain-share basis. Termination clauses would vary with the nature of the cooperation, as would sharing of facilities and the purchase of equipment. We do not know the full extent of such complex structures but there is evidence that the gains stated at the outset have not been harvested, indeed that most outsourcing has increased costs and decreased reliability of supply. This may be due to the reluctance in the West to embrace relational contracting, or as it is known in Japan, obligatory contracting, where ‘sunk costs’ on both sides are considerable and the social norms mitigate against overt exploitation by either party. Networks have been described as a link between supplier and purchaser in the supply chain but a more accurate and useful division is between different suppliers, imitating the coordination methods employed within the firms. In Italy experiments have been made to introduce networks in technologically similar industries in areas called ‘business districts’. For example, in the textile industry, contractors are based in the same region as the knitwear firms and often do work for several different firms, sometimes in alliances or partnerships with other contracts, sometimes as sole contract-holder. There exists then a technology transfer opportunity for the major textile firms as contractors learn the businesses of other firms. This saving on learning curve and experience curve effects becomes a competitive advantage for all the firms, provided that they do not compete on goals centred on internal process or system resources. Were this the case, a conflict of interest would arise and textile majors would be reluctant to use the contractors who were not 100 per cent specific to them.

2.2.12 Mintzberg’s (1983) structural configurations
This is likely to be examined quite frequently. Mintzberg puts forward a different way of looking at what he calls ‘structural configurations’. He contends that each of these configurations is suitable for an organisation at different stages of its development. The difference between each one is that it achieves coordination and congruence between environment, resources and values in distinct ways. This is reflected in variations in the degree and type of decentralisation. The five configurations described by Mintzberg are as follows: 

Simple structure – this is essentially the same as the entrepreneurial structure (Figure 2.8) already described. All important decisions are made by the owner and there will probably be little formal planning or structure. Organisational effectiveness is almost

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Figure 2.8

The simple structure

Figure 2.9

The machine bureaucracy  

entirely dependent on the strategic vision of the owner. Specialist management accounting is unlikely to play a part within this form of highly centralised organisation. Machine bureaucracy – in this form, jobs are closely defined and work highly standardised. A functional structure (Figure 2.9) is likely to be adopted with limited decentralisation to functional managers. Strategic decisions will still be centralised. Typically, there will be a powerful group of analysts and specialists whose job is to search for cost savings and efficiency improvements (e.g. work study specialists, management accountants, specialist personnel staff, etc.). This type of structural configuration has been common among large mass-production businesses. The management accounting role and traditional management accounting techniques that have developed mainly in this form of organization are now being challenged by new philosophies such as total quality management. Professional bureaucracy – this form of configuration has developed in organisations such as hospitals and universities, but is being threatened in the United Kingdom by pressures towards greater commercialism and client focus. A professional bureaucracy (Figure 2.10) is much more decentralised than a machine bureaucracy. Power is in the hands of specialist, highly qualified professionals (doctors, professors, etc.), assisted by a group of support administrators. The main method of coordination is by standardising the skills and qualifications required for appointment to specialist positions. Traditionally, the budgeting process in this form of organisation has consisted of some of the key specialists proposing activities and related costs for the coming year; these are then coordinated by the accounting department into an overall budget. This process has, however, been fundamentally changed by the introduction of internal markets and/or new forms of legal organisation (e.g. National Health Service Trusts), which are requiring organisations that have traditionally relied upon professional bureaucracy to look for an alternative structural configuration.
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Figure 2.10 The professional bureaucracy

Figure 2.11 The divisionalised form

Figure 2.12 The adhocracy  

Divisional form – as indicated earlier when describing types of organisation structure, this is a method of organisation whereby autonomous units are created around products or markets (Figure 2.11). A great deal of decision-making is decentralised to these units, and the role of the senior managers at the strategic apex at head office is to monitor performance and maintain a strategic overview of the business as a whole. For the management accountant this raises new problems, such as measuring divisional profitability and dealing with issues such as internal transfer pricing. Adhocracy – this is an informal and innovative form of organisation (Figure 2.12) based on teams of specialists and extensive decentralisation. Groups of experts make up the basic operating units, and these are likely to be coordinated through some kind of matrix structure. Authority is based on expertise and the emphasis is on effective task performance. Adhocracy is particularly suited to complex and rapidly changing environments, as strategic changes can originate from any area within it. Businesses such as advertising agencies and management consultancies typically have this form of organisation and management. Adhocracy brings with it problems as well as benefits: the

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Figure 2.13 Five basic parts of the organisation

main problem may be the coordination of diverse interests in a situation likely to be conducive to organisational politics. For the management accountant, adhocracy poses a major challenge, both in terms of styles of operation and the applicability of traditional techniques; this is part of a wider and more general challenge facing managers as they seek new paradigms to guide organisations towards the twenty-first century. Mintzberg also suggests that it is useful to view organisations as being made up of five parts (Figure 2.13). The operating core consists of those people who perform the work of rendering the services or producing products. In a small organisation this operating core may represent nearly all of the organisation, but larger size will require more complex arrangements. There will be a requirement to formulate and implement strategy so that the organisation serves its mission in an effective way; this is the role of the strategic apex which may in some circumstances also be responsible for linking the organisation to the needs of those who own or control it. The middle line represents the hierarchy of authority from senior managers to first-line supervisors linking the strategic apex to the operating core. As an organisation continues to grow and develop it is likely to include within its structure specialist staff outside the central line positions (i.e. strategic apex, middle line and operating core). The specialist staff are placed into two categories by Mintzberg:  

The technostructure is concerned with coordinating work by standardising work processes, outputs and skills, and will be made up of people such as management accountants, work study engineers, personnel managers, etc. Support staff exist to provide assistance to the organisation outside its operating work flow. Examples would be catering services, legal advice and press relations.

Many organisations are now actively seeking flatter hierarchies, better quality and ways of contracting out of non-core activities. What are the implications of these developments for the five basic parts of the organisation identified by Mintzberg?
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2.3 Organisational culture
2.3.1 The importance of culture in organisations
An organisation’s culture will influence its strategy, its ways of doing business and the way it responds to change. A key factor in determining how effective the organisation is will be the appropriateness of its culture for its stakeholders, and particularly its customers. A strong culture will be beneficial if it focuses on these elements and highlights the need to change proactively. On the other hand, a strong culture that does not have these attributes is likely to be a major barrier to effectiveness. The main effects and characteristics of a strong culture will be as follows: 
  

It will strengthen behavioural regularities organisation. It will minimise some of the perceptual organisation. It will reflect the philosophy and values of group. The particular culture will have a significant ability to respond to change.

and norms among members of the differences among people within the the organisation’s founder or dominant effect on the organisation’s strategy and

Some aspects of an organisation’s culture will be visible and obvious, while many others will be both less tangible and more significant (Figure 2.14).

2.3.2 Determinants of culture
McKinsey, a large US management consultancy, produced a framework for understanding organisations (the McKinsey 7-S framework) similar to one used by Koontz since 1955. However, Koontz considers the framework lacking in both depth and precision. The 7-S name is clearly intended to stick in the memory rather than arising strictly from the data.

Figure 2.14 The organisational iceberg. From Organisational Behavior, Canadian Edition 1st edition by Hellriegel/Slocum/ Woodman Brun. # 1998. Reprinted with permission of Nelson, a division of Thomson Learning: www.thomsonrights.com. Fax 800 730-2215
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The seven factors referred to are: 
     

systems; structure; style; strategy; staff; skills; shared values.

This of course is the ‘soft’ side of enterprise and includes an early reference to the idea of shared values, which we now call ‘culture’. Organisational culture can be described as what the organisation ‘is’, a ground-up set of factors which employees can readily identify. Writers often distinguish this from ‘corporate culture’, which is the management’s view of what is needed to perform well in present competitive markets and something that an organisation ‘has’. This concept of culture is one that has been borrowed from the discipline of anthropology, where it has long been used to describe the way of life of a particular group of people. Other uses of the word involved ‘high-culture’ or ‘the arts’ and the first use of it to organisations was reportedly by American Marxists who reflected that the interests of the ruling elites were transferred downwards in society. The interweaving of laws, customs, press stories and published books reinforced the national culture.

2.3.3 Writers on culture
Edgar Schein (1984), in his analysis of different levels of organisational culture, described the more obvious symbols of an organisation’s culture (its ‘artefacts and creations’ ). These are things such as factory and/or office equipment, head office buildings, the way in which employees dress and the provision of information for customers. However, a real understanding of culture requires a deeper probing to reveal what the ‘values’ and ‘basic assumptions’ of organisational members are, which Schein explains as follows:
In stating that basic assumptions are unconscious, I am not arguing that this is a result of repression. On the contrary, I am arguing that as certain motivational and cognitive processes are repeated and continue to work, they become unconscious. They can be brought back to awareness only through a kind of focused inquiry, similar to that used by anthropologists. What is needed are the efforts of both an insider who makes the unconscious assumptions and an outsider who helps to uncover the assumptions by asking the right kinds of questions.

Gareth Morgan (1986, 1997) stresses the point that although managers can influence the evolution of culture they cannot control it. He also argues that our understanding of organisational culture is quite superficial, and there is a danger that some managers will see culture as a simple manipulative device for achieving more control over employees. More recently, Geert Hofstede studied the answers to survey questions by over 10 000 IBM employees in different countries, showing consistent international differences in how they view the world. These international cultures emerge above IBM’s own regional culture (its corporate and organisational cultures) as a consistent set of different ways in which managers acted (see Chapter 10 section 8). William Ouchi in 1980 popularised the idea of culture in his book Theory Z: How American Business can Meet the Japanese Challenge. He suggested that there are a number of characteristics that differentiate the typical American firm (Theory A) from the typical
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Japanese one (Theory J). Of course, Ouchi is generalising when he speaks of the typical American or Japanese organisation. Looked at more closely, organisations in any one country will have important differences and unique features: these differences represent the culture of the particular organisation. 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. Ouchi’s comparison of US and Japanese organisational cultures and the features of each type of culture are summarised as follows: Theory A (US): Employment: Usually short term, with lay-offs quite common. Evaluation and promotion: Very fast. If individuals are not promoted, they seek employment elsewhere. Career path: Very specialised; people tend to stay in one function for the whole of their career. Decision making: Carried out by individual managers. Control: Very explicit. People are aware of their control responsibilities. Responsibility: Assigned on an individual basis. Concern for personnel: The organisation is only concerned with the workers’ work life. Theory J (Japan): Employment: Usually for life, with lay-offs rare. Evaluation and promotion: Very slow. Career path: Very general. Staff are rotated around the organisation Decision making: Carried out by group or committee. Control: Very implicit and informal. People rely on trust. Responsibility: Shared collectively. Concern for personnel: The organisation is concerned with the workers’ whole life. Theory Z Employment: Fairly long term, to encourage a loyal, committed workforce. Evaluation and promotion: Slower, with an emphasis on development and training. Career path: More general, with elements of job rotation and broad training. Decision making: Carried out by individual managers, but seeking consensus from the group. Control: A balance between formal and informal. Responsibility: Assigned on an individual basis. Concern for personnel: The organisation’s concern is expanded to include aspects of the workers’ home life.

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2.3.4 Models for categorising culture
Corporate culture: culture-as-a-variable The task for owners and managers is to achieve the right blend of cultures for the organisation’s task and environment. However, managing culture is not a short-term or straightforward task, since it goes beyond slogans and new mission statements: real change requires modifications to values, basic assumptions and behaviour that are not easy to achieve, but which may be increasingly important for many organisations. Handy expanded this as:
deep-set beliefs about the way work should be organised, the way authority should be exercised, people rewarded, people controlled – these are all aspects of the culture of an organisation.

The term ‘culture’ can thus be applied to the study of organisations in several different ways, but interest in organisational culture can probably be traced back to Roger Harrison’s questionnaire for charting of four types of culture in 1972 in which he determined ‘corporate culture’ as ‘organisational ideologies’. This approach uses culture as something that the organisation ‘has’ as opposed to what it ‘is’. Corporate culture can be changed, arguably, whereas organisational culture cannot; it only emerges by dint of the shared experience of employees. People can usually articulate the organisation’s key values, and sometimes these are formally set out. For example, Hewlett Packard makes use of statements called the ‘HP Way’ to clarify corporate values to all employees, and in the area of ‘belief in our people’ the following appear: 
 

Confidence in, and respect for, our people as opposed to depending on extensive rules, procedures, etc. Depend on people to do their job right (individual freedom) without constant directives. Opportunity for meaningful participation ( job dignity).

So explicit an approach to the use of culture is still the exception rather than the rule, but organisations promote and act on values whether or not they are formally documented. Underpinning any set of values will be basic assumptions about things such as the relationship between the organisation and its environment, appropriate human relationships (e.g. individualistic and competitive or collective groups) and what motivates people. These will be very important, but largely unconscious. While culturally each organisation is unique, it is useful for purposes of analysis to attempt to identify the main types of organisation culture. Deal and Kennedy 1982/1988 Strong culture theory In their book Corporate Cultures, Deal and Kennedy state:
Companies with very strong cultures – the companies that intrigue us most of all – fit [into cultural types] hardly at all. These companies have cultures that artfully blend elements of all four types and blend them in ways that allow these companies to perform well when the environment around them changes as it inevitably does.

Strong refers to the degree to which members subscribe to the norms and values, in effect a kind of psychological ‘cloning’. These norms and values are importantly defined as those espoused by management, and the idea is to use this commitment in the absence of bureaucratic methods, to provide performance enhancement via improved self-motivation. In this way strong cultures link to work on job satisfaction and may overcome job-design
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failure associated with the types of technology identified by Joan Woodward. Organisations with strong cultures are supposed to perform better than those with weak ones but the link has not been proven: successful companies obtain the right blend of appropriate cultures, which has a good deal of support from the relevant research literature. The assertion, however, that companies with strong cultures are more interesting, and by implication more successful, is much more debatable. Cabals are especially strong cliques of self-supporting individuals who may derail the process by charisma or Machiavellian methods, such as the Dutch Admiral Paradigm where two recruits mutually praised each other in meetings and eventually became the two youngest Admirals in the Dutch Navy. In this way, a strong culture might begin to reflect the members’ values rather than the organisation’s. Additionally of course it may produce strong resistance to change, later being a victim of ‘groupthink’. Finally, a strong ‘masculine’ culture may not travel well, especially to areas of the world characterised by Hofstede’s ‘feminine’ dimension. The authors also suggested a typology which was not based on any scientific methodology though the types were categorised to an extent by two variables – risk-taking and feedback of results – and has passed almost unnoticed into the dustbin of history, not being referred to by any of the major texts on organisational behaviour. The four types were: 
  

tough-guy macho – high risk, quick feedback; work-hard–play-hard – few risks taken; bet-your-company – high risk but slow feedback; process – no feedback, bureaucratic.

Roger Harrison’s four types This is likely to be examined quite frequently. Organisational culture is sometimes explained as ‘the way we do things round here’. Culture, however, is represented by the shared values that hold together the other organisational systems; thus Harrison provided a definition as ‘organisational ideologies’. Harrison used a questionnaire method to produce four distinct types:    

Power cultures, based on one or a few powerful central individuals who motivate by a combination of patronage and fear, and make little use of written rules (this is likely to be the dominant type of culture in small, family-managed businesses). Role cultures, which are impersonal and rely on formalised rules and procedures to guide decision-making in a standardised, bureaucratic way (e.g. civil service and traditional, mechanistic mass-production organisations). Task or achievement cultures, which are typified by teamwork, flexibility and commitment to achieving objectives, rather than emphasis on a formal hierarchy of authority (perhaps typical of some advertising agencies and software development organisations, and the desired culture in large organisations seeking total quality management). People or support cultures, of two types. The first type is a constellation of stars, based on technical expertise of individual employees – architects’ and solicitors’ practices, IT and management consultants. The organisation is what these few people possess as skills. Other types of organisation exist for the benefit of the members rather than external stakeholders, and are based on friendship, belonging and consensus (e.g. some social clubs, informal aspects of many organisations).

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Peters and Waterman (1982) The cultural excellence school These former McKinsey consultants suggest that culture, as a form of control, is critical for corporate success. Their research into high-performing American corporations revealed that corporations with a clearly articulated tight culture were able to develop simple, decentralised, flexible and innovative forms of organisation based on trust and participation. These simplified forms of organisation reduced the number of managerial levels and central staff through the avoidance of bureaucracy and, by avoiding complicated matrix structures, lived in line with man’s limitations. The eight key characteristics of excellent organisations are as follows: 1. Bias for action. To facilitate decision-making and problem-solving they avoid selfperpetuating bureaucratic committees. Instead, they promote a ‘ready-fire-aim’ ethos through temporary ad hoc mechanisms. 2. Close to the customer. They listen and learn from customers so that they are market driven. Quality, reliability and service are valued as long-term growth is sought through customer loyalty. 3. Autonomy and entrepreneurship. They regularly reorganise to produce small basic units, like product divisions. 4. Productivity through people. They believe people respond to trust, that those at the frontier know best, and that innovation comes from ‘where the action is’. 5. Hands on value driven. They take ‘value-shaping’ seriously and inspire employees by ‘Management by walking about’ (MBWA) – regular visits to the workplace. 6. Stick to the knitting. They avoid diversification and concentrate on the things they do well. 7. Simple form, lean staff. Simple self-contained but competing structures, like product divisions, have few central ‘staffers’ and intermediate levels of management. Simple structures make reorganisation easier. 8. Simultaneous loose–tight properties. Since autonomy has been ‘pushed down the line’, while the corporate level retains control over a few core values, these organisations are both centralised and decentralised. Two main points can be made about the cultural excellence school.  

It reveals the limitations of the traditional ‘rationalist’ approach which only regards measurable and visible aspects of organisations worthy of consideration, the consequence of which has been a restrictive emphasis on rigorous organisational design, financial planning and analysis and information technologies, etc. Hence, insufficient attention has been given to the less quantifiable ingredients of organisational life. Culture has either been neglected or relegated to the ‘art of management’. The emphasis on simple forms of organisation using simultaneous loose–tight controls refocuses the traditional debate about whether or not organisations should operate tight centralised controls or looser decentralised ones which encourage selfregulation.

Whatever the merits of this approach, we need to recognise that it constitutes a resurgence of universalism and is therefore somewhat at odds with contingency theory. Several factors suggest, however, that it is unlikely to replace contingency theory because: 

the sample of organisations studied (all high performers) and the character of their employees (self-motivated and highly trained) is not representative;
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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; other research, while tending to confirm the relationship between performance and some of the key characteristics, has nevertheless found variations in the degree of centralisation of organisations according to the market operated within.

While Peters and Waterman made an important contribution to the understanding of how large, successful organisations are managed, unfortunately, some of the organisations defined as excellent have subsequently experienced severe operating difficulties. Thus, for example, only two years after publication of the book, the magazine Business Week re-examined the companies against the original criteria used by Peters and Waterman and found that fourteen of the forty-three no longer matched up to the yardstick of ‘excellence’. This merely illustrates the temporary nature of organisational success. Peters (1987) Thriving on chaos Subtitled A Handbook for a Managerial Revolution, 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.

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’. This involves control systems, and the need to measure what is most important strategically. Too often management accounting systems are set up to link into financial reporting requirements, a theme pursued by Eli Goldratt in The Goal which he subtitled A Management Accounting Textbook. Peters wants measures of product quality and customer satisfaction and wants these simple. Control should be bottom-up with ‘conservative’ (i.e. achievable) goals. Trust and integrity come high on this list as without control, trust is a de facto requirement without which systems cannot work.

2.3.5 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; strong corporate cultures that are closely linked to corporate strategy may be critical for success.

Culture comprises values, which stress what is important for the corporation, and beliefs about how things should work. It is expressed through symbols, rituals, myths, stories and behaviour. It consists of taken-for-granted assumptions and norms about how people should behave, usually on the basis of learning from what has been successful in
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the past. It is this latter feature which makes corporate culture a double-edged ‘weapon’, because it is difficult to change. Yet many organisations are facing turbulent environments (technological developments, heightened international competition, unpredictable markets, recession, deregulation, etc.) and are attempting to change corporate strategy by, for example, moving into unfamiliar markets. This often proves difficult because the existing culture, which may have been a tower of strength in the past, is not suited to the new strategy. Hence, some corporations have developed an interest in cultural change, though experience suggests it is a difficult and lengthy process which should be undertaken as a last resort. These aspects of organisational culture are ‘taken for granted’ by long-established members of the organisation as representing the normal ways of doing things and behaving. However, new members of the organisation have to learn these norms and be socialised to accept them. Life is generally much more straightforward and easier once the basic ground rules are known; while some of these may be set out in formal documentation, most organisations have important cultural values that are not spelled out in this way. If an organisation has few shared values, and wide differences in ways of thinking and behaving in different departments, it has a ‘weak’ culture. Some organisations, however, have very ‘strong’ cultures, which are an important and systematic influence on employees.

2.4 Improving effectiveness
2.4.1 Balancing control with autonomy
This is likely to be examined quite frequently. To understand the tension or potential conflict between control and motivation it is useful to refer to a specific example. During the late 1990s Microsoft, despite its outstanding success as the world’s leading software company, ran into a number of management problems. Microsoft’s innovative and charismatic founder Bill Gates, and Steve Ballmer the company president, adopted a highly centralised approach to the running of the organisation. In particular, they tended to involve themselves in all important organisational decisions to the extent that managers lower down the organisation hierarchy felt themselves unable to influence matters or to contribute in a meaningful way to the company’s development. Some managers even complained that they were inhibited in their decision-making by the interventionist nature of Gates and Ballmer’s management style and others complained that the company was becoming increasingly bureaucratic. These difficulties arose at a critical time for Microsoft as it was faced with increasing competition from rivals in the development of the internet and e-commerce more generally. Quick decision-making was essential if Microsoft was to keep pace with its rivals, and the interventions of Gates and Ballmer often slowed the process down. In order to overcome these problems, the senior management changed the structure of the company. Within their two main product divisions, the Operating Systems division responsible for Windows development and the Product Development division responsible for applications like Word and Internet Explorer, the product teams were replaced by a number of customer-based groups. The newly organised Product Development division was subdivided into six groups based on the needs of different customers, including
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knowledge workers, home PC users, computer game buyers, Web surfers and cyber shoppers. In this new structure, each group is responsible for interfacing with its customer groups, researching customer needs and then developing state-of-the-art software applications to meet these needs. In order to further speed management decision-making and allow greater involvement and generation of necessary motivation among their staff, Gates and Ballmer also resolved to change their management style and to be less interventionist. As a means to this they decentralised control to the heads of the six market divisions and to the team leaders in each division. The intention of this change is to transfer authority down the line and accelerate the decision-making process. The case of Microsoft illustrates well the problems facing all large organisations at some time in their development: that of balancing the need to ensure adequate direction and control of staff and yet allowing sufficient freedom and discretion of middle managers and other employees to contribute their particular knowledge and expertise to the organisation. Too little direction and control can result in wasted effort as the departments and divisions into which an organisation is subdivided pursue their own particular goals: too much central control and lower level managers become frustrated by rules and procedures forced upon them from on high by those who are too far from the action to make informed decisions. In recent years, companies have become increasingly aware of this problem and like Microsoft have developed ways of dealing with it. Some of the better-known ways of organising to ensure a better balance between control and autonomy are as follows.

2.4.2 Decentralisation
One of the most common ways of seeking to balance control and autonomy is via a process of decentralisation. When authority is decentralised, it is delegated to divisions, functions, and the managers at lower levels in the organisation. By delegating authority in this fashion, managers can economise on bureaucratic costs and avoid communication and coordination problems because information does not have to be constantly sent to the top of the organisation for decisions to be made. There are a number of advantages to decentralisation. First, when managers in the bottom layers of the organisation become responsible for adapting the organisation to suit local conditions, their motivation and accountability increase. The result is that decentralisation promotes organisational flexibility and reduces bureaucratic costs because lower-level managers are authorised to make on-the-spot decisions. As AT&T has demonstrated, this can be an enormous advantage for business strategy. AT&T has a tall structure, but it is well known for the amount of authority it delegates to lower-level employees. Operational personnel can respond quickly to customers’ needs and so ensure superior service, which is a major source of AT&T’s competitive advantage. Second, when senior managers delegate operational decision-making responsibility to middle-level managers, they reduce information overload, enabling senior managers to spend more time on strategic decision-making. Consequently they can make more effective decisions. The third advantage of decentralisation is that when lower-level employees are given the right to make important decisions, fewer managers are needed to oversee their activities and tell them what to do. Fewer managers mean lower bureaucratic costs. If decentralisation is so effective, the question arises as to why it is that all companies are not decentralised. The answer is that centralisation also has advantages. Centralised decision-making allows easier coordination of the organisational activities needed to
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pursue a company’s strategy. If managers at all levels can make their own decisions, overall planning becomes extremely difficult, and the company may lose control of its decision-making. Centralisation also means that decisions fit broad organisation objectives. When its branch operations were getting out of hand, for example, Merrill Lynch increased centralisation by installing more information systems to give corporate managers greater control over branch activities. Furthermore, in times of crisis, centralisation of authority permits strong leadership because authority is focused on one person or group. This focus allows for speedy decision-making and a focused response by the whole organisation. While decentralisation is a long-established and traditional means of seeking to provide middle and lower level managers and employees with a significant decision-making role and thus to ensure their greater involvement and commitment, the idea of new venturing is relatively recent.

2.4.3 New venturing
Internal new venturing is a form of entrepreneurship. The idea is to design organisations to encourage creativity and give new-venture managers the opportunity and resources to develop new products or markets. One of the main design choices is the creation of new-venture divisions. To provide new-venture managers with the autonomy to experiment and take risks, the company sets up a new-venture division separate from other divisions and makes it a centre for new product or project development. Away from the day-today scrutiny of top management, divisional personnel pursue the creation of new business as though they were external entrepreneurs. The division is operated by controls that reinforce the entrepreneurial spirit. Thus, market and output controls are inappropriate because they can inhibit risktaking. Instead, the company develops a culture for entrepreneurship in this division to provide a climate for innovation. Care must be taken, however, to institute bureaucratic controls that put some limits on freedom of action. Otherwise, costly mistakes may be made, and resources wasted on frivolous ideas. In managing the new-venture division, it is important to use integrating mechanisms such as task forces and teams to screen new ideas. Managers from research and development, sales and marketing and product development are heavily involved in this screening process. Generally, the champions of new products must defend their projects before a formal evaluation committee, consisting of proven entrepreneurs and experienced managers from the other divisions, to secure the resources for developing them. Companies such as Texas Instruments, 3M and IBM are examples of successful companies that use this method for creating opportunities internally. Care must also be taken to preserve the autonomy of the new-venture division. As mentioned earlier, the costs of research and development are high, and the rewards uncertain. After spending millions of dollars, corporate managers often become concerned about the division’s performance and introduce tight output controls or strong budgets to increase accountability. These measures damage the entrepreneurial culture. Sometimes, however, after creating a new invention, the new venture division wants to reap the benefits by producing and marketing it. If this happens, the division becomes an ordinary operating division and entrepreneurship declines. Strategic managers must take steps to provide a structure that can sustain the entrepreneurial spirit.
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Hewlett Packard has a novel way of dealing with new venturing. In the operating divisions, as soon as a new, self-supporting product is developed, a new division is formed to produce and market the product. By spinning off the product in this fashion, the company keeps all its divisions small and entrepreneurial. The arrangement also provides a good climate for innovation. Internal new venturing is an important means by which large, established companies can maintain their momentum and grow from within. The alternative is to acquire small businesses that have already developed some technological competence and to invest in them.

2.4.4 Empowerment
Another recent management trend designed to combat the debilitating effects of overcontrol has been the use of empowerment. This is part of a move towards the development and acceptance of flatter hierarchies and greater devolved power and manifests itself in the use of self-managed teams, organic structures, reduced layers of hierarchy, devolved budgetary control and decision-making. Empowerment occurs where authority to make decisions and to resolve organisational problems is delegated to subordinates. It is believed that giving power to those doing the work of the organisation should improve flexibility, speed of decision-making and the motivation of staff. Research by Conger and Kanungo (1988) indicates that an individual’s need for self-efficacy (a desire to produce results or outcomes) is better satisfied as a result of empowerment. They argue that motivation is boosted as a result of improvements in the individual’s effectiveness and the individual’s ability to choose how to complete the task using his or her creative skills. The reward resulting from personal control and real or perceived effectiveness in turn improves motivation. A virtuous circle of involvement, effectiveness and motivation is apparent. Empowerment has taken different forms in different organisations. At Xerox, employees implement their own solutions to performance problems such as how better to meet deadlines and delivery schedules, and they set their own work hours. At Johnsonville Foods in Wisconsin, USA, teams of employees share the responsibilities for hiring their own team members and for determining which employees are offered permanent employee status. Team members also do their own taste tests to determine whether the product is ready for shipping to the customer. At each of these companies, employee empowerment resulted in increased levels of worker and organisational performance. Furthermore, Tannenbaum and Cooke (1981) argue that empowerment actually increases the total amount of power in an organisation. The suggestion is that power is not a zero-sum game, but that it grows through empowerment. Senior managers gain power because of the resultant increases in morale, flexibility and productivity, whereas subordinates gain the power and authority to make decisions and to act autonomously. According to a number of writers then, empowerment is a most useful way of balancing control and motivation. There is however reason for some caution. Like many other management panaceas, empowerment has not been successful everywhere. Some reports question whether empowerment promises more in terms of performance improvements than it can actually deliver. One study, for example, found that some companies employing empowerment strategies were actually less efficient than companies not using empowerment. Another suggested that empowerment works best only in companies that are already achieving high levels of performance. Lower-performing companies often lack the training resources to make empowerment work.
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This last point suggests that the problem may not be with the empowerment strategies themselves, but with implementing them. It is often difficult for managers to give up or even to share the authority and responsibility that have defined the nature of management for nearly a century. In addition, not all workers are eager to take on even part of the responsibility for the problems surrounding their work, especially when they do not feel they will be given the authority to make real changes or improvements.

2.4.5 Team working
Associated with empowerment and the need to balance motivation and control is the use of team working (see Chapter 11). Examples of team working include those groupings charged with new-product development, teams charged with the development of new processes or those given responsibility to see projects of various kinds through. Such teams are responsible for the choice, design and marketing of new products. Quite commonly, such teams have a cross-functional basis, the idea being that new ideas are more likely to come from the shared experience of people drawn from different disciplines and that such shared development and learning can help speed products to market. These teams assume the responsibility for all aspects of product development.

2.4.6 Innovation
Management gurus increasingly regard the role of innovation as the future basis for competitive advantage. Innovation is the introduction of new and improved ways of doing things at work. Innovation is closely related to creativity but most authors draw a distinction between the two processes. Creativity is widely regarded as the generation of ideas for new and improved ways of doing things, while innovation is defined as the implementation of those ideas in practice. Competition in global markets requires that organisations innovate and adapt if they are to survive and compete effectively. Innovation involves deliberate attempts to bring about benefits from new changes; these include increases in productivity and improvements in the design and quality of products. Innovations may include technological changes such as new products, but may also include new production processes, the introduction of advanced manufacturing technology or the introduction of new computer support services within an organisation. Innovations may also be found in administrative changes. New organisational policies, human resource management strategies, or the introduction of team work, are all examples of administrative innovations within organisations. Innovation does not imply completely new solutions. Change can be deemed an innovation if it is new for the person, group or organisation which is introducing it. If an intranet system is introduced into an organisation it can be considered to be an innovation for that organisation even though many other companies might already be using an intranet system. Innovations vary in their impact and significance, from those which are relatively minor to those which are of great significance. The development of the internet is obviously of great significance, while the improvement of a bottle opener is of relatively little importance in the order of things. It is also the case that some innovations are produced quickly while others take time.
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For example, it may take only a few months to reorganise the production line in a company but take many years for the same organisation to change its corporate culture. Innovation in organisations has been found to be related to a range of factors, including a challenging environment, an emphasis on quality, good interdepartmental and interdivisional communication, strong managerial support, team working, and an organisation culture that is tolerant of risk taking.

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

2.4.8 Rosabeth Moss Kanter and entrepreneurship
Moss Kanter, a Harvard professor, rose to prominence at the same time as Peters and Waterman with her 1983 book The Change Masters. This was subtitled ‘corporate entrepreneurs at work’ and stressed the need for ‘an American renaissance’. She complained about the ‘quiet suffocation of the entrepreneurial spirit’ in what she called ‘segmentalist companies’ – that is, functionally organised firms – particularly the indifference of managements to employee innovations and the stifling of innovation. To counteract this trend she produced various cases (as had Peters and Waterman) to show where and how change could be implemented. Again in concert with the ‘excellence school’ she emphasised culture – but also employee involvement and empowerment, together with a discussion of the managerial skills needed to change culture and strategy. In this context she described the ‘integrative’ approach to problems (as Lawrence and Lorsch had developed in their 1967 book Organisation and Environment). This was ‘moving beyond conventional wisdom’, using ‘ideas from unconnected sources’. Her later book, When Giants Learn to Dance, revisits these ideas but they tend to remain at a general level. Moss Kanter’s prescriptions for encouraging organisational creativity are as follows: 
   

Develop an acceptance of change. Encourage new ideas at all levels of the organisation. Permit more interaction between individuals and groups. Tolerate failure, as experimentation requires trying out new ideas, not all of which will work. Offer recognition and rewards for creative behaviour.

These prescriptions will be difficult to implement in a traditional, bureaucratic, role culture. Attempts at managing a change in culture may in these circumstances have to go side by side with attempts to improve innovation and creativity. In The Change Masters, Moss Kanter neatly summarises some typical managerial behaviours and policies that will effectively stifle innovative efforts. These are summarised below. Rules for stifling innovation 1. Regard any new idea from below with suspicion – because it is new and because it is from below. 2. Insist that people who need your approval to act first go through several other levels of management to get their signatures. 3. Ask departments or individuals to challenge and criticise each other’s proposals. ( That saves you the job of deciding; you just pick the survivor.) 4. Express your criticisms freely, and withhold your praise. ( That keeps people on their toes.) Let them know they can be fired at any time. 5. Treat identification of problems as signs of failure, to discourage people from letting you know when something in their area is not working.

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6. Control everything carefully. Make sure that people count anything that can be counted, frequently. 7. Make decisions to reorganise or change policies in secret, and then spring them on people unexpectedly. (That also keeps people on their toes.) 8. Make sure that requests for information are fully justified, and make sure that it is not given out to managers freely. (You do not want data to fall into the wrong hands.) 9. Assign to lower-level managers, in the name of delegation and participation, responsibility for figuring how to cut back, lay off, move people around, or otherwise implement threatening decisions you have made. And get them to do it quickly. 10. And above all, never forget that you, the higher ups, already know everything important about this business. Many of her ideas therefore seem recycled from earlier studies, but her populist appeal to American managers at a time of national crisis over entrepreneurship is indisputable. Perhaps the most original idea was to create a ‘vehicle’ for change, which can act as a Trojan horse and allow the infiltration of other ideas. Examples would be to go for a training accreditation such as a National Training Award or Investors in People certificate, either of which would force managers to consider their training and development expertise, and perhaps encourage a degree of self-analysis and a preparedness to go for other such changes. Rover cars used the possibility of employees learning anything, either on in-house adult education classes ( Japanese was taught to ease the partnership Rover had with Honda at the time) or at local colleges, supported by a grant from the company, only to get them started again down the road of learning after years away from school, thus in effect unfreezing their mind-sets.

2.5 The network organisation
2.5.1 An overview of network organisations
Externally, network organisations are organisations that rely on relationships with other organisations in order to carry out their work. A good example is the on-line bookseller Amazon.com. Amazon provides a customer website interface that enables the visitor to search and browse the catalogue of books (and other items such as CDs and collectibles). The customer can order the product on-line and expect to receive it by courier within a few days. Amazon sits in the middle of a network of other organisations. It has contract arrangements with book warehouses throughout the world to process and dispatch its orders so that it need keep only the 80 000 top-selling titles in stock. These warehouses keep Amazon notified of their stock position (which is automatically transferred to the customer web pages as approximate delivery times). It also has arrangements with couriers, credit card operators and publishers to provide it with the information and services it will need. From the customer’s point of view it ‘feels’ like one organisation: the books arrive in an Amazon carton and they have their own account with the company. The company also keep them informed about new books in areas similar to ones they have bought before. Yet in fact Amazon owns relatively few physical assets and staff to back up its service (an alternative term ‘virtual organisation’ perhaps expresses this).

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A similar analysis can be applied to the following industries: UK local government authorities (LGAs): The local taxpayer receives environmental health, library, leisure, law and order and education services. However, the LGA relies on a series of contracts with private and public sector contracting companies to provide this service. UK hospitals: A patient in the hospital will receive medical treatment, food and accommodation services. However, the hospital may use private contractors for cleaning, laundry and catering while at the same time relying on other hospitals for the use of specialist scanning and dialysis equipment. Many of its staff will be employed on a contract basis from agencies. Airlines: The customer of the airline will have the impression that everything is supplied by the airline itself. In fact it is likely that the telephone booking service, aircraft maintenance, on-board catering, check-in, luggage handling and departure lounges are provided under contracts from other firms. The passenger may also find that part of their journey is provided by another carrier under a similar arrangement. UK railways: A passenger will buy their ticket from a train-operating company and travel according to the timetable the company has laid down. The train itself may be owned by a separate leasing company, depart from a station and along lines operated by a third company yet maintained by a fourth. The on-board catering will be provided by a fifth firm and the train cleaned by a sixth firm. Ghoshal and Bartlett (1997) describe another form of network organisation which they term an individualised corporation. They argue that networks will take the place of formal organisational structures such as hierarchies and rigid divisions. Corporations will allow their individuals to form virtual teams in order to become more creative, inspiring them to use their initiative and knowledge to build organisational learning and competences.

2.5.2 Forms of network relationship
The examples in Section 2.5.1 demonstrate that network organisations can choose to ‘buy-in’ a range of value-creating activities: 1. Contract staffing. The use of contract staff (or ‘temps’ ) to cope with pressure points in the workload is a long-established practice. Network organisations will often take this as the norm and extend it beyond operative staff to include workers with considerable intellectual capital such as systems experts and lawyers while retaining only a very small cohort of core staff. This ‘shamrock organisation’ will be discussed below. 2. Use of specific capital assets. The leasing of assets has been common for many years in high capital cost industries like airlines and shipping. However, the network organisation frequently leases IT facilities, turnkey factories and specially built machines and highly customised office accommodation. 3. Outsourcing elements of production or service provision. Ancillary services such as office cleaning have often been outsourced by management who do not wish to be bothered with it. However, the network organisation goes considerably further by outsourcing the production of its products or the distribution of its products. For example, many processed food companies no longer make the food they brand and sell and fast-food restaurants do not operate their restaurants.
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4. Reliance on outside organisations for referral of business. Many network organisations have mutual customer-sharing arrangements and will cross-sell their products. For example: through-ticketing on airlines and railways; car-hire firms, airlines and hotel chains network for corporate travel and fly-drive holidays; finance houses network with car and electrical retailers to provide low-cost consumer credit and joint promotions. Writers refer to the ‘permeable organisation boundary’ because it becomes hard to see where one organisation ends and another begins. Staff from one organisation physically work at the other’s offices, customers are seemingly passed from organisation to organisation without realising it, and data about customers and products are passed around in order to coordinate activities.

2.5.3 Implications of network organisations
There are a number of issues posed by the development of network organisations: 1. How do firms decide which activities and assets to ‘buy-in’ and which to own and operate directly? 2. Why have network organisations become so important in recent years? 3. How can management develop systems to control operations in a network organisation?

2.5.4 Theoretical basis of network organisations
There are two sets of theoretical perspectives that help us to understand the development of and decisions surrounding network organisations: 1. Transactions cost theory (see below). 2. Resource-based views of strategy. (These were reviewed in Section 1.5.) To a great extent these overlap and you should not worry too much if you do not see them as being different.

2.5.5 Transactions cost theory
This approach is rooted in the institutional economics of Ronald Coase and Oliver Williamson. Williamson (1981) suggests that organisations choose between two mechanisms to control resources and carry out its operations – hierarchies or markets. 1. Hierarchy solutions. Here management decide to own the assets (or employ the staff directly) and use the policies and procedures of the firm to control their use and performance. Vertically integrated companies are ones which have a high reliance on the managerial hierarchy for control. 2. Market solutions. Management decide to buy-in the use of the assets or staff from outside companies under the terms of a contract. Outsourcing is a contemporary example of increased reliance on the market. Hierarchies will be used if the transactions costs of the market solution are too high. It may be helpful to think of Williamson’s theory as a more complex version of the familiar ‘make-or-buy’ decision from your management accounting studies. Management will make in-house the things that cost them more to buy from the market. However,
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Williamson looks beyond just the unit costs of the product or service under consideration. He is specifically interested in the costs of control that (together with the unit costs) make up transactions costs. Transaction costs are the organisational counterpart of friction in a physical system. They are costs arising at the interface between economic agents, particularly between stages in a production or supply process. Where the enterprise relies on outside suppliers for an input or service (a market solution), in addition to the price for the bought-in input, it will incur the following transaction costs: (a) Negotiating and drafting a legal contract with the supplier. (b) Monitoring the supplier’s compliance with the contract (quality, quantity, reliability, invoicing, etc.). (c) Pursuing legal actions for redress due to non-performance by the supplier. (d) Penalty payments and cancellation payments if the firm finds it later needs to change its side of the bargain and draft a new contract with the supplier. These costs arise because both the firm and its supplier wish to be protected against loss and use the contract to define the risks each mutually takes on. These risks are increased by two factors: 1. Bounded rationality. At the time the contract is negotiated neither party is able to perfectly anticipate the future and how the contract will unfold. For example, a firm seeking to buy components cannot know for sure the volumes they will need because they cannot perfectly forecast final product sales. Likewise, the innovations of a competitor may force them to vary the specification of their product that may require differently specified inputs. Similarly the supplier will not know their production costs with certainty. 2. Opportunistic behaviour. Each agent is seeking to pursue their own economic self-interest. This means they will take advantages of any loopholes in the contract to improve their position. For example, 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. The more that these two factors are present, the greater will be the transactions costs arising from a market solution. This is because: (a) Bounded rationality makes the parties quibble more over the drafting of the contract and over the interpretation of it ( particularly if circumstances have moved against them since the contract was drawn up). (b) Legal enforcement of the contract will become more expensive. (c) Opportunistic behaviour will lead to expensive variations in contract terms or damages claims for breach of contract. If these transaction costs become too high the organisation may reduce its costs by taking the supply in-house through development of its own upstream supply facility under the direct control of management (a hierarchy solution). The decision of which mechanism to use, markets or hierarchies, is (or should be) based on management’s desire to minimise transactions costs. Williamson considers the circumstances that lead one firm to trade with another and therefore to incur transaction costs. This he roots in the concept of asset specificity. Asset
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specificity is the extent to which particular assets are only of use in one specific range of operations. Consider the example of Eurotunnel plc. This company has a single asset, a tunnel under the English Channel linking the British Isles to the main European continent, which opened in 1994 having cost nearly £5bn to build. Apart from some telecommunications potential, this extremely expensive asset has no conceivable alternative use other than as a rail tunnel. In addition to operating its own shuttle services for passengers and freight, over 30 per cent of the company’s revenues come from other railway companies which pay Eurotunnel to use the tunnel. This includes the Eurostar consortium that operates specially built trains between London and various destinations in France and Belgium. This is a situation of high asset specificity. High asset specificity arises where a supplier must invest in expensive assets with no alternative use in order to supply a client. This poses a substantial risk to the supplier because if the contract is withdrawn it will not be able to recoup its investment. Few will take this risk without a guarantee of orders in the long term. Eurotunnel plc is locked into the train operators. At the same time the train operators are locked into Eurotunnel because their investment in rolling stock and stations would be useless without the tunnel. Williamson examines the effect of such high ‘asset specificity’ on transaction costs. Williamson predicts that such high asset specificity will therefore result in bilateral (or quasi-bilateral) contracts between the firm and its supplier. High asset specificity results in the buyer being denied the opportunity to periodically choose between rival producers on an external market, instead being forced to enter a long-term contract with the sole supplier. Eurotunnel has the exclusive right to operate the tunnel until 2086, but perhaps more significantly the rail operators signed Usage Contract agreements with Eurotunnel in 1994 until 2006 under which they are committed to certain minimum financial payments to Eurotunnel. In return they have the right to use up to 50 per cent of the tunnel capacity. It can be seen that the high asset specificity of Eurotunnel has led to high transactions costs in the form of the contracts and franchise agreements around it. Williamson’s conclusion is that high asset specificity will lead firms to bring supply inhouse rather than bear the high transactions costs of the market. Indeed he suggests that extremely high asset specificity may result in no suppliers coming forward on the market. In this connection it is significant to note that Eurotunnel began life as a political creation of the British and French governments rather than as a private business initiative. Williamson suggests that asset specificity can be of six types: 1. Site specificity: the assets are attached to a particular geographical location, for example: locating a components plant near the customer’s assembly plant; building hotels near a certain theme park or tourist attraction; building of pipelines and harbours to service an oilfield. 2. Physical asset specificity: this is a physical asset with unique properties, for example: reserves of high-quality ores; a unique work of art or building. 3. Human asset specificity: particular skills or knowledge, for example: specific technical skills relevant to only one product; knowledge of systems and procedures peculiar to one organisation. 4. Dedicated asset specificity: a man-made asset which has only one application, for example: Eurotunnel; military defence equipment; Sydney Harbour Bridge.
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5. Brand name capital specificity: a brand and associations that belong to one family of products and would lose value if spread wider, for example: Coca-Cola; McDonald’s. 6. Temporal specificity: the unique ability to provide service at a certain time, for example: the right to conduct radio broadcasts at an allotted time; rights to exploit an asset for only a limited number of years. Williamson admits that these categories often occur together. For example, Eurotunnel combines temporal (limited franchise till 2086), dedicated asset and site specificity. Transaction costs approaches to organisation theory are being enlisted in support of a number of ends by strategy writers and business consultants. 1. Identification of distinctive competences. According to the transactions cost approach this will be an operation or asset that cannot be provided by another organisation without increasing the transactions costs or risks of the firm. Any asset or operation that does not have these characteristics is not a suitable basis for a competitive strategy because a rival will be able to buy it in cheaper. 2. To support organisational restructuring. Organisations should sell-off upstream or downstream divisions that can be provided at lower transactions costs by the market. The same argument applies to particular business processes such as IT, logistics and human resource development which are increasingly outsourced. 3. To predict the impacts of developments in information technology. It is believed that the costs of searching the market for suppliers, maintaining the supplier/buyer relationship and monitoring fulfilment have been reduced by developments in information technology (IT). These are often put under the umbrella of e-commerce or e-business. Predicting the reduction in the costs available from the substitution of these virtual value chains is used to drive strategic initiatives and investments.

2.5.6 Transactions cost theory and network organisations
According to Williamson, corporations reduce transactions costs by vertically integrating and in doing so become more multi-divisionalised and more internally complex. This casts an interesting light on organisational behaviour; for example:    

Does Disney Corporation operate visitor and cast accommodation at its theme parks because it is cheaper than offering the financial safeguards necessary to encourage hotel operators to invest in such specific assets? Is the reason that Procter and Gamble develops its own brands for foods and detergents that the uncertainties about brand values and strategy make it very expensive to draft contracts to lease brands from brand owners? Did the same consideration lie behind Grand Metropolitan’s decision to buy Pillsbury rather than simply license the Burger King brand from it? Do large firms undertake in-house staff and management development programmes because colleges and potential recruits are unwilling to bear the costs of training themselves in such specific skills? Are some staff paid far more than they could otherwise get on the job market because they possess specific skills which the firm cannot buy from the labour market?
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The network organisation, however, seems to challenge Williamson’s theory because it represents a breakdown in hierarchies and features a much greater use of the market to provide inputs and customers. Several transaction costs based explanations may be offered for this phenomenon: 1. Organisations may have underestimated the costs of internal control. Firms undertake activities internally when the transactions costs of external provision are too great. However, this assumes that management can accurately quantify the costs of controlling the internal operation. These costs will include: – – – – – – – staff recruitment and training; provision of managerial supervision; production planning; payments and incentive schemes to motivate performance; the development of budgetary control systems to coordinate activity; divisional performance measurement and evaluation; provision and maintenance of fixed assets such as premises and capital equipment.

These costs of managerial control are traditionally regarded as overheads rather than something resulting from the decision to undertake production internally. A conventional absorption costing system may allocate overheads to products, but these overheads are not relevant costs for decision-making purposes such as ‘make or buy’. Hence the decision to produce internally overlooks many of the costs associated with it. More modern management accounting techniques recognise the costs of control and this may have led to increased recognition of the savings from outsourcing. 2. Transaction costs may have been reduced by the impact of information technology. Examples include: computer integrated manufacturing (CIM) enables ordering of components and coordination of suppliers to be streamlined by automatic triggering of electronic orders transmitted by electronic data interchange and, more recently, the internet. Common computer assisted design (CAD) systems allow collaboration in research and development with geographically remote suppliers. Communications technology such as teleconferencing, e-mail and intranets permit much lower cost and timely maintenance of supplier relationships than was possible using face-to-face methods. Firms now have access to global partners because the cost of searching for suitable suppliers or buyers is reduced by IT. One example provided by Hagel and Armstrong (1997) is the possibility of industry members forming virtual communities by using common websites to advertise their requirements and to invite tenders from suppliers. One influential theory adopting a transaction costs perspective is the Electronic Markets Hypothesis of Malone et al. (1987). 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, the buyer will have a choice of suppliers rather than a single monopoly supplier. 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. 3. Transaction costs may have been reduced by the development of trust in contractual relations. Williamson suggests that a major source of transactions costs is the potential for opportunistic behaviour by the contracting parties, and the legal and monitoring cost that arise from these. Nirmalya (1996) and others suggest that the mutual suspicions that give
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rise to these costs can be removed if a relationship of trust is developed between the contracting parties. This is also picked up by Ouchi (1980) who suggests that the high uncertainties and impossibility of measuring performance means that contract relations must be based on shared values, or clan control, rather than either of Williamson’s market or bureaucratic means. 4. The creation of hierarchies was not economically justifiable at any time. For Williamson to argue that organisations are structured in such a way that they minimise transactions costs, he depends on one of two propositions: (a) that management structure organisations in this way because they seek to improve shareholder value; or (b) only those firms that succeed in minimising costs will survive in the long run (i.e. firms that fail to do so are no longer around because market forces have eliminated them). Neither assumption can go unchallenged. First, many writers, including Williamson himself, have suggested that the lax framework of corporate governance allows the management of a firm to pursue personal goals rather than maximise the wealth of shareholders (e.g. Williamson, 1964). Therefore, it is quite possible that many hierarchies were created to enhance managers’ feelings of prestige and power rather than in an attempt to avoid transactions costs. Indeed the suspicion arises that many organisations developed as they did from reasons of history and circumstance rather than to serve any particular purpose. Second, the notion of market forces driving high-cost firms out of business overlooks the fact that vertically integrated firms have substantial market power and may avoid these competitive pressures. Transaction cost analysis may explain the trend to network organisations if it can be shown that external pressures are forcing firms to reduce costs. For example, it may be that increased shareholder pressure or market competition is forcing managers to break down their empires in order to gain the lower transaction costs available from external partnerships.

2.5.7 Network organisations and resource-based theory
Recurring questions raised by discussions of virtual organisations and network organisations are: 
 

What exactly does a firm do if it relies on others for carrying out most of its operations? Is the firm vulnerable to being cut out of the network if its partners decide to deal with each other directly? Will not the relationships eventually decline into conventional adversarial relations if the firm becomes too dependent on its partners?

According to resource-based theory (RBT) these problems do not need to trouble us. RBT argues that organisations are always just a ‘nexus of contracts’. If all activities are undertaken in-house then these contracts are principally employment contracts monitored by the apparatus of corporate governance. However, it is a poor and expensive use of management time to monitor such contracts and operations if they can be done better by a partner and diverts attention from leveraging the firm’s competences. A firm need not fear being cut out of a network, provided that it confines itself to excellence in the use of its core competences. This is because partners will incur higher costs if they try to carry out the activity themselves.
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Avoiding the decline of trust-based relationships into adversarial (or dyadic) relationships depends on the maintenance of the right atmosphere between the parties. Things that will encourage this include: 
 

Open-book accounts where each can see the other is not taking excessive profit from the relationship. Continued reciprocity in trading relations (i.e. we learn to trust as we experience the plain dealing of our partner). Deliberate policies to integrate the cultures and staffing of the organisations. This gives a leading role to human resources functions.

2.6 Summary
The key points to remember are: 
  

the relationship between strategy and structure; the features and advantages of the different organisation structures; the definition and classification of culture; approaches to improving organisational efficiency.

References
Atkinson, J. (1984), ‘Manpower Strategies for the Flexible Organisation’, Personnel Management, August. Burns, T. and Stalker, G.M. (1961), The Management of Innovation. London: Tavistock. Chandler, A. (1962), Strategy and Structure: Chapters in the History of the Industrial Enterprise. Cambridge, MA: MIT Press. Child, J. (1984), Organisation – A Guide to Problems and Practice. New York: Harper & Row. Coase, R. (1991), The Nature of the Firm. In O.E. Williamson and S.G. Winter (eds.). The Nature of the Firm. New York: Oxford University Press. Conger, J. and Kanungo, R.N. (1988), Charismatic Leadership: The Elusive Factor in Organisational Effectiveness. San Francisco, CA: Jossey-Bass. Deal, T.E. and Kennedy, A.A. (1982), Corporate Cultures (new edition, The New Corporate Cultures, 2000, Texere Publishing). New York: Perseus Books. Ghoshal, S. and Bartlett, C.A. (1997), The Individualised Corporation. London: Random House. Goldratt, E. and Cox, J. (1984), (2nd edn 1993), The Goal: A Management Accounting Textbook. Aldershot: Gower. Hagel, J. and Armstrong, A.G. (1997), Net Gain: Expanding Markets Through Virtual Communities. Boston, MA: Harvard Business School Press. Hellriegel, D., Slocum, J.W. and Woodman, R.W. (1992), Organisational Behaviour. New York: West. Hofstede, G. (1980), Motivation, Leadership, and Organisation: Do American Theories Apply Abroad?, Organisational Dynamics, Vol. 9, No. 1, Summer 1980, pp. 42–63. Lawrence, P.R. and Lorsch, J.W. (1967; rev edn 1986), Organisation and Environment: Managing Differentiation and Integration. Boston, MA: Harvard Business School Press. Mintzberg, H. (1975), ‘The Manager’s Job: Folklore and Fact’, Harvard Business Review, July–August.
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Mintzberg, H. (1982), Power in and around Organisations. Upper Saddle River, NJ: Prentice-Hall. Mintzberg, H. and Waters, J.A. (1985), ‘Of strategies deliberate and emergent.’ Strategic Management Journal, vol. 6, No. 3, pp. 257–72. Mintzberg, H. (1994), The Rise and Fall of Strategic Planning. Pearson Education. Reprinted by permission of Pearson Education. Morgan, G. (1986), Images of Organisation. London: Sage. Moss Kanter, R. (1983), The Change Masters. New York: Simon and Schuster. Moss Kanter, R. (1998), When Giants Learn to Dance. London: ITBP. Nirmalya, K. (1996), ‘The Power of Trust in Manufacturer–Retailer Relationships’, Harvard Business Review, November/December. Ouchi, W. (1981), Theory Z: How American Businesses can Meet the Japanese challenge. Reading, MA: Addison-Wesley Pub Co. Peters, T. (1987), Thriving on Chaos: A Handbook for a Managerial Revolution. London: Pan. Peters, T. and Waterman, R. (1982), In Search of Excellence. New York: Harper & Row. Schein, E. (1984), Organisational Culture and Leadership. (2nd. edn). San Francisco, CA: Jossey Bass. Senge, P.M. (1990), The Fifth Discipline: The Art and Practice of the Learning Organisation. New York: Doubleday. Tannenbaum, A.S., and Cooke, R.A., Control and participation. Journal of Contemporary Business, Vol. 3, (Autumn 1974), pp. 35–46. Weihrich, H. and Koontz, H. (1993), Management: A Global Perspective. New York: McGrawHill, Inc. Williamson, O.E. (1964), The Economics of Discretionary Behaviour, Englewood Cliffs, NJ: Prentice-Hall. Williamson, O.E. (1981), ‘The Economics of Organisation: The Transactions Cost Approach’, American Journal of Sociology, Vol. 87, No. 3, pp. 548–77. Williamson, O.E. and S.G. Winter (eds.). The Nature of the Firm. New York: Oxford University Press.

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Readings

2

The importance of having a structure that will facilitate the achievement of organisational objectives has long been recognised. The models of structure advocated by early classical management writers tended to be based on military command and control principles. This type of ‘bureaucratic’ organisation with clearly defined roles, responsibilities and rules can operate quite successfully in stable predictable conditions, but will be ineffective in more competitive and turbulent environments. All organisations face the basic problem of finding the right balance between centralisation and decentralisation; this is sometimes described as the ‘trust-control dilemma’. There is no one right answer to this dilemma for all organisations in all circumstances. Consequently a particular organisation will be likely to move from one form of structure to another as its strategy and circumstances change and develop. This process is examined in the following article based on the experience of Procter and Gamble.

In search of structural excellence
Aelita G B Martinsons and Maris G Martinsons, Leadership and Organisation Development Journal, 15(2), 1994. Reproduced by kind permission of the authors.

Even the most superficial scans of the management literature reveal scores of articles addressing the topic of organisational structure, and one can easily be led to believe that there must be an ideal structure for every organisation. By following well-documented prescriptions for success, managers should theoretically be able to easily identify and realise the ideal structure for their organisation. However, further consideration finds that theory does not necessarily lend itself effectively to practice (Mintzberg, 1991). Certain structures undoubtedly are more conducive to realising popular corporate goals and strategies. However, because of the complexity of an organisation’s situation, it is difficult to identify the single ideal structure. Dynamic changes in organisational goals and resources as well as its environment may preclude a static ideal structure. Recent literature tends to focus on after-the-fact cases, basing theories on descriptive analyses rather than prescription. Theorists look for critical factors in successful organisations and then try to generalise their findings to produce an ideal structure and success formula (Peters and Waterman, 1982). Unfortunately, what works in one company may not work in another owing to the slightest of differences. The contingency approach sees no one right structure for all organisations. Instead, the ‘right’ structure depends on contingency factors. By matching an organisation’s contingency factors with those prescribed by management theorists the ideal structure for an organisation could be found. Contingency or situational factors may include the
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Table 2.1 Common wisdom prescriptions for organisational structures BASED ON Strategy: Single business Vertical by-products Related business Linked business Size: Small Medium Large Level of technology: Low High Business environment: Stable Dynamic Industry type: Container Plastic Food Stage of organisational development: Birth Growth Maturity Decline Death Organisational fad 1970s 1990s STRUCTURE

Functional Functional Divisional Mixed structures Simple Functional Divisional Centralised Decentralised Mechanistic Organic Bureaucracy Decentralised bureaucracy Bureaucracy Entrepreneurial-dominated Functional management Dencentralised into profit or investment centres Structural surgery Dismemberment of structure Matrix Clustering

organisation’s strategy, size, technology and environment, type of industry, the organisation’s and industry’s stage of development, and the latest organisational fad. A detailed account of the common wisdom relating these factors to organisational structure is given in Table 1. The three most common generic organisational structures are the functional structure, the divisional structure and the matrix structure.
Functional structure

The functional structure is a direct descendant of the bureaucratic structure. It is based on a group’s function or dedicated activities in an organisation, such as sales and marketing, finance and operations. The structure’s effectiveness is based on this division of labour. Smaller to medium-sized organisations with limited product ranges tend to favour the functional structure. The structure allows for specialisation within the functional areas and facilitates coordination among its members. However, in reality, individuals become insulated in their functional groups and fail to see or understand the other functions’ jobs. This can lead to co-ordination problems. As Wilson (1986) explained: . . . operating efficiencies afforded by grouping specialists together in functional areas with a traditional chain of command becomes a barrier to cross-function communication and co-ordination needed effectively to implement multiple product – multiple marketing strategies. For such reasons, the divisional structure is appealing to some organisations.
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Divisional structure

This structure is used as companies become larger and begin to diversify their product line. The company is divided into separate units based on different products or markets. The company breaks up its operations into manageable units or little companies (Pascale, 1990) which then operate under a mechanistic structure. The units may share some corporate resources, such as research and development facilities, but overall, they are relatively autonomous. The units are guided by a corporate-level strategy which outlines the desired results. However, the units are free to realise corporate-level objectives of their own choosing. Hence, this structure is much more flexible and adaptable to market and product needs than the functional structure. Within the units a functional form is often adopted. However, corporate efficiency decreases as many functions are duplicated in different units. Also, as with the functional structure, it is difficult to generate an overall corporate identity as each unit is preoccupied with creating and maintaining its own. This could create difficulties in co-ordinating the different units.
The matrix structure

The matrix structure was the structure of the 1970s (Miller, 1986). It was seen as a way of bridging the advantages of the functional and divisional structures. The matrix structure is based on a dual chain of command. The functional departments are used to gain economies of specialisation while the project teams focus on particular products or markets. Each employee in the matrix structure is responsible to one functional department and one project manager, hence the dual chain of command. Although the matrix structure is usually a combination of functional and divisional groupings, it can also be a combination of product and market groupings. These matrix structures can be temporary or permanent, depending on the needs of the organisation. It was this flexibility that made the matrix structure very popular initially. However, many companies soon found the structure to be more burdensome than helpful (Peters, 1979). The biggest problem was the level of ambiguity inherent in the structure. The relationship between functional and project managers was not clearly specified by rules and procedures, creating power struggles and a blurred sense of accountability. This decreased both efficiency and effectiveness. Also, the staff in a matrix structure were unclear as to where their loyalties should lie – whether it is with their functional department or the project team. This led to lowered morale and job satisfaction. The quest for the ideal organisation structure should be seen as a means of increasing business efficiency and effectiveness. The evolutionary nature of the corporate structure at Procter & Gamble illustrates this thesis.
Organising Procter & Gamble

As the previous descriptions suggest, each structure has its own merits and drawbacks. Procter & Gamble (P&G), a large multinational manufacturer of consumer goods, has a rich history of structural change, and provides a useful illustration of the periodic decisions which senior management must make with respect to organisational structure. P&G was founded in 1837 as a soap company. After focusing solely on soap for the first century, P&G began to expand by vertically integrating back into manufacturing its own chemical processing and seed crushing in the 1930s. From these humble beginnings the company has diversified in various directions. Initially, P&G modified its basic product offering (adding flaked soap and beauty soap), then later it diversified its product line (into
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cleaners, shampoos, toothpaste). More recently, it has achieved industry diversification, entering the paper, food, beverage and pharmaceutical businesses. Even this latest move may be termed ‘related’ diversification, since all the businesses are built on the same ‘centre of gravity’ (Galbraith, 1991). Centre of gravity refers to a company’s starting supply stage in an industry chain. For a manufacturing firm, six such stages may be identified: raw materials, primary manufacturing, fabrication, product producer, market distributor, and retailer. The first three stages belong to the upstream segment which adds value by reducing raw materials into simpler components, while the last three stages belong to the downstream segment which add value by adding extras to the product to meet specific customer needs. Upstream and downstream companies are fundamentally different. It can be hypothesised that a company’s culture, strategy and structure are shaped by its initial focus in the industry chain. P&G has been classified as a downstream company, originating as a market distributor (Galbraith, 1991). Downstream companies, like P&G, have multiple products and multiple markets. They are also customer-oriented and concerned with tailoring their products to meet target market needs. Because of their diversity and need to be more flexible and adaptable than traditional manufacturing companies, downstream companies adopt a divisional structure based on vertical integration, geographic location and industry. Within P&G’s divisional structure, there are product-function matrices. The matrices are in the second phase of development whereby cross-functional task forces are permanent but there is not yet any dual authority. Products are looked after by brand managers. Each brand manager is responsible for a particular brand and its extensions. The brand manager oversees a brand group, reports to an associate advertising manager and interacts with functional departments such as research and development, and finance. Product management should be viewed as an addition to functional management. The use of brand managers fits P&G’s culture, which may be termed an Academy – a term coined by Jeffrey Sonnenfeld. Within the academy culture, the company guides its employees through a myriad of specialised jobs within a particular function.
Competitive advantages and co-ordinating liabilities

The matrix structure may be seen as one of P&G’s competitive advantages, the brand managers were product specialists, completely familiar and up-to-date with their products’ external and internal environments. Also, they were totally dedicated to co-ordinating the product’s marketing mix and the product’s profitability. The functional departments were again specialists in their own right, complementing the brand managers’ duties. Between 1930 and 1970, this structure proved to be very successful for the organisation. All of P&G’s strategic decisions are made at the top in the Cincinnati Head Office, while the operational ones are made by the brand managers (The Economist, 1989, p. 76). They practised a decentralised bureaucracy. Although this ‘loose-tight’ fit is seen as a mark of an ‘excellent’ or successful company (Peters and Waterman, 1982), it is sometimes difficult to strike the right balance. According to some sources, P&G’s decision-making power was skewed towards top management (Griffin and Ebert, 1993). Although some control is necessary at the top to co-ordinate the organisation’s activities and overall strategy, too much centralisation would be detrimental to its responsiveness. Part of the problem was that brand managers were given the responsibility but not necessarily the authority to manage their products, making them less responsive to environmental changes. This is a common problem in organisations which have
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brand managers. Brand managers occupy staff-like positions, with no formal authority over their resources or other functional departments. This creates conflict and frustration, lessening the brand managers’ effectiveness in quickly reacting to product problems. P&G’s strategic orientation is that of prospector and a market-leader, requiring it to be both innovative and responsive to the environment. Therefore a decentralised and minimum top-down control structure would seem more suitable. However, P&G’s structure no longer matched its growth strategy. Also the environment had changed considerably, making its structure less effective. The distribution channels had greater bargaining power and customers were less brand-loyal. Companies with structures like those of P&G often became inflexible and unresponsive. It may be for this reason that P&G lost considerable market share in the 1970s. The problem is inherent to the matrix structure. Peters and Waterman (1982, p. 76) comment that it ‘virtually always ceases to be innovative, often after just a short time. . . It also regularly degenerates into anarchy and rapidly becomes bureaucratic and non-creative’. P&G’s decline may also be discussed in terms of Miller’s (1986) Four Trajectories of Decline. P&G had moved from being a ‘salesman’ to that of a ‘drifter’, becoming oppressively bureaucratic and losing its ability to be innovative. Although P&G, which mass-produced standardised consumer goods, may find a mechanistic, bureaucratic system more efficient, it must also be responsive to its highly competitive market. Therefore, a more decentralised structure, or a decentralised bureaucracy, was better suited to their situation.
Integrating the organisation

Another contributing factor to the loss of market share was the harsh competition between the individual units. P&G encouraged this competition, believing it would motivate the managers to be more responsive to customer needs. Brand managers were not to compete head-on with one another. Instead, the individual brands were thought to be positioned differently in consumers’ minds so that the brand managers would compete against other companies’ brands, not their own company’s brands. However, the brand managers were not encouraged by the company to co-operate among themselves. This may have sent brand managers the wrong message, that they were to compete directly against other P&G brands. The units became insulated, focusing more on their own goals than on the larger corporate goals. Fierce competition ensued between the individual units, leading to cannibalisation. The units robbed customers from one another rather than trying to gain market share from other companies’ brands. Initially the strategic planners at P&G did nothing in response to this cannibalisation. However, in the mid-1980s, John Smale, P&G’s chairman, restructured the corporation. One of the first things he did was to add a category management system. He added what were called category managers, who were responsible for co-ordinating the efforts of brand managers in a particular product line and sharpening its strategic focus. The primary responsibility of this integrating manager was to allow for greater co-ordination and quicker decision making. The category managers were delegated enough authority to make decisions previously done at higher levels. Initially, there was some difficulty between category managers and brand managers as category managers focused on profit while brand managers focused on market share. However, P&G overcame this by defining work processes and designing new work systems.
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P&G extended this new matrix structure to its international divisions, giving them more autonomy and flexibility. It also increased individual units’ communication across different countries. In P&G’s European structure: Each local manager wears two hats – one for his product, one for his region. The French manager now reports both to his country manager and to a category manager who looks after a basket of related brands. The category manager is a mini-profit centre, reporting to one of P&G’s central division managers. So fewer layers separate the top of the (management) pyramid from the market. (The Economist, 1989, p. 77). Although P&G’s vice-chairman recognised the problems associated with their staff reporting to two managers, he felt the matrix structure would allow P&G to be more responsive to international market trends. P&G tried to reduce some of the matrix structure’s difficulties by making the category managers directly responsible for the profitability of their products. Also, by having the category managers report to P&G’s central division managers, they felt they could maintain sufficient control and coordination over them. However, the matrix structure can reduce organisational flexibility and generate conflicts between managers. P&G’s turn-around success in the short term has been promising. Much of it can be attributed to its restructuring. However, it is premature to declare this structure as ideal. There are other strategies it could have chosen which may have been still better. However, P&G’s management believed that this current structure was suitable, not necessarily ideal. It fitted P&G’s culture, supported its strategy and was flexible enough to adapt to the environment.
Where do we go from here?

The latest structural fad is clustering. Clustering evolved from the matrix structure but is believed to allow for more creativity, innovation, communication, and productivity than the former structure (Mills, 1991). The cluster is much looser and more autonomous than the matrix structure. A cluster is a group of 30 to 50 people of different specialities who work together on a semi-permanent basis. Within each cluster are smaller work teams of five to seven people. Upper levels of management are lean and there is little hierarchical control. Would this structure suit P&G? In terms of its environment, this structure would help P&G be more responsive to the global market. With globalisation, P&G has had to venture into unfamiliar and underdeveloped markets. In the 1970s and 1980s, P&G experienced some difficulties in responding to international demands (Peters, 1987). Its new structure alleviated the problem. However, this may be temporary. The clustering structure may allow it to be even more flexible and adaptable, helping it achieve its strategy better. However, clustering would require P&G to change its corporate culture to be less paternalistic. Culture is very difficult to change and requires strong commitment from upper management. As clustering removes a lot of the power from upper management, it may be reluctant to endorse the change. Management would have to be shown that by being top-heavy, the company would decline, creating more serious problems in the future. The demise of the hierarchical structure has been heralded (Peters, 1992). Organisations wanting to survive and thrive in the 1990s must change. To what and how are the questions strategists must answer.
The bottom line

Over the years a steady stream of structural models or frameworks have been conceived, each promising to be better than the previous ones. In theory, they may be ideal. In reality, an organisation faces an array of dynamic variables, including environmental factors
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beyond its control. This makes it difficult to find and especially maintain an ideal structure. Instead, organisations commonly settle for structures which satisfy their current needs (satisfices) and provides a reasonable degree of flexibility for its future. This then is a structure that may be termed suitable rather than ideal. The theorised ‘ideal structure’ acts as a guide, to help business managers to interpret their situation and to give them direction in organising their resources.
Discussion questions 
 

Why is it difficult to find and maintain an ideal organisation structure? What is the category management system and why was it introduced? Why would it be difficult to introduce clustering in P&G?

In the next article, John Storey looks at how the fragmentation of markets, shorter product life-cycles and greater variability in demand have precipitated changes in organisational structures. The large hierarchical multi-divisional structures of the midtwentieth century have been forced to give way to smaller enterprises, outsourcing, joint ventures and alliances. These structural forms allow a more rapid and flexible response to changes in the market place. Storey then considers the impact of these structural changes on the management of human resources.

Network structures
John Storey, The Financial Times, 19 November, 2001, p. 2 Full Text # 2001 Financial Times Information Ltd. Information may not be copied or redistributed. Reprinted with permission.

When internal boundaries become network relationships Structured companies are dissolving into fluid networks of alliances. John Storey contends that managers have much to learn about coping with these changes. (SURVEY – MASTERING PEOPLE MANAGEMENT) John Storey. Even a casual observer of international business cannot help but notice that organisations seem forever in the process of reorganising. Why should this be so? Does it reflect economic reality or a superficial rearranging of the corporate furniture? Might these reforms simply be part of a cyclical fluctuation between centralisation and decentralisation? Do new organisational forms require different HR capabilities? Certainly, in many cases reform disguises routine behaviour: some changes may simply correct the deficiencies of the last attempt at restructuring. However, it would be cynical to dismiss all restructuring in this way. One explanation is that there is no ‘‘best’’ structure. Economic and industrial changes have produced patterns of organisational restructuring. For example, after the second world war, growth in international markets based on mass production was accompanied by an expansion in the number of multinationals and led to the near-ubiquitous multi-divisional form (the ‘‘M-Form’’). This was associated with hierarchy, planned career structures and large, centralised personnel departments overseeing expatriates and home-based staff. However, with fragmenting markets, shorter product life cycles and greater variability of demand, the unwieldy nature of the multinationals became apparent. Since the 1990s, other forms have been ascendant, characterised by smaller enterprises, outsourcing, joint ventures and alliances. These require new capabilities among managers, which, in turn, require changes in people management. Figure 1 indicates the relationship between drivers, forms, capabilities and HR management.
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While the drivers create ‘‘needs’’ for forms and capabilities, there is also an interactive relationship between these forms and capability requirements. New methods of working and organising require new capabilities; likewise, the capabilities required by the external drivers constitute a pressure for experimenting with forms. It is worth reviewing the main elements in Figure 1.
Drivers

As mentioned, global markets have become more fragmented and turbulent. Product life cycles are shorter and customers require more options during the life cycle of a product. Meanwhile, technological change and the number of components in a product or service mean that few single businesses can fulfil customer demands on their own. Similar challenges face the public sector: many governments have outsourced public services to the private sector and reformed organisations that remain. These reforms are explained as attempts to make bureaucracies more responsive to the public’s needs. Nonetheless, they create pressure for new organisational forms and capabilities.
Forms

Over the past 15 years, when measured by employee numbers, the size of companies and workplaces has decreased. Further, companies no longer rely on hierarchy and command as prime sources of direction and control. They have responded to turbulence and fluctuations in demand by empowering employees, establishing cross-functional teams and taskforces, outsourcing non-core functions and focusing on processes rather than product lines. In the 1980s and 1990s, the ‘strategic business unit’ became the focus in divisionalised corporations. This period also saw dramatic growth in new enterprises funded by venture capital. These smaller, fragmented units, while more responsive, were severely limited in their access to resources and capabilities. The trend towards vertical integration, which characterised the corporations of the early to middle part of the 20th century, is being reversed. The value chain is becoming more clearly desegregated, as each component becomes the prime responsibility of a relatively independent unit or set of units.
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In consequence, new kinds of relationship between organisations are flourishing, including joint ventures and strategic alliances. The archetypal form is now the network organisation or ‘N-Form’, characterised by relationships that extend beyond market or contractual obligations. Companies in network relationships expect to share information, knowledge and learning. They expect to reduce risk by collaborating across the supply chain and thereby find mutually profitable solutions. Under these circumstances, competition is less between individual organisations and more between entire supply chains. But managing these new forms requires new capabilities.
Capabilities

Companies need to be more agile and flexible under these conditions. Standard operating procedures and long reporting lines are no longer suitable. Rapid changes in customer demand require knowledge, or access to knowledge, to be distributed around the company. In addition, since managers increasingly work across boundaries, their ability to manage a complex supply chain is at a premium. Separate units need ‘absorptive capacity’ – that is, the ability to make sense of, and internalise, information from partner organisations. They must be able to assimilate the knowledge they require and use it. Where outsourcing has been established, employees must become skilled managers of contracts. Beyond formal contractual skills, they must be good at managing relationships across unit boundaries, which is where appropriate human resource management policies can help. Organisations may no longer need to own certain resources, but they do need to be able to access and use them effectively. Examples of these trends can be found in many countries though it is important not to assume that large organisations have abandoned traditional structural characteristics. Forms are still evolving. In a survey of 458 companies in Europe by academic Andrew Pettigrew and colleagues, 74 per cent reported an increase in horizontal linkages such asjoint purchasing, sharing R&D across units and sharing marketing information. The survey also found extensive evidence of increased outsourcing (65 per cent) and formation of strategic alliances (65 per cent rise). Reinforcing these findings, an Open University Business School survey of 2,700 companies in the UK revealed that 61 per cent were sharing knowledge with suppliers and 41 per cent were sharing it ‘with other organisations in the network’. These developments were found to have implications for HR policies.
HR policies

As companies become more dependent on each other, managing relationships becomes critical. Responsiveness and flexibility are required. Trust becomes important, and the communication and sharing of knowledge. What are the people management implications? How, and by whom, is behaviour to be influenced? Conducting relationships through the supply chain or through a network makes hierarchical control impractical. Equally, relationships are more complex than market transactions. Organisational structures are only one part of design. Other aspects include measurement, norms, expectations, culture and power – and these are often crucial in affecting behaviour. Some organisational reforms may present problems for HR. For example, the shift from a product-based mode to a process-based one can provoke anxiety and resistance. Employees may fear that re-engineering will result in job losses and extensive change.
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Maintaining commitment to the job and organisation may be difficult during and after such reforms. Narrow job descriptions usually have to be abandoned. For example, re-engineering consultants sometimes recommend that ‘workers’ become ‘process performers’. If managed skilfully, this offers opportunities as well as threats; roles may be enlarged as well as changed, and employees given more autonomy, responsibility and decision-making power. In the modern company, claims Michael Hammer, there is no organisation chart, no departmental manager and virtually no hierarchy. The new psychological contract offers initiative in exchange for opportunity. In the long run, he maintains, ‘the quality of an organisation’s coaching is a key determinant of whether it succeeds or fails. Process design alone is not enough. As more companies learn how to create the art of processes, the advantage will belong to those with an institutionalised capacity for staffing these processes with well-selected and well-trained people.’ In place of hierarchy, the process-focused organisation will use cross-functional teams and taskforces. While some of Hammer’s claims exaggerate actual practice, there is substantial evidence of extensive take-up of these forms. Managers face important HR challenges as a result of these changes: how should they manage people who are not direct employees, and how can they maintain and develop relationships across traditional boundaries? Should outsourced workers on the premises be included in communications, invited to meetings and expected to be involved in commitment-building initiatives? Where activities are outsourced, a critical issue is the potential loss of expertise. Once lost, certain activities and their associated capabilities may be difficult to recover. There is danger of ‘hollowing-out’ the organisation. Innovation may be jeopardised if there is heavy reliance on strictly delineated services from external suppliers – even if service-level agreements are maintained and monitored. There is a major challenge for HR here if the organisation becomes dependent on consultants and contractors. The management writer Peter Drucker argues that companies will eventually outsource all functions that do not have a career ladder up to senior management. He contends that corporations once built like ‘pyramids’ will become more like ‘tents’ and managers will take responsibility for their own career development by exploring their competencies and making good deficiencies. Outsourcing has other implications for HR. For staff transferred from the original employer to a service provider, different countries present different legal regulations. These typically require that prevailing terms and conditions of employment are preserved. In some cases, a task may be outsourced and the employees nominally transferred for day-to-day management purposes, while retaining their employment contract with the original employer. Network organisations often grow out of the fact that resources and knowledge are difficult to locate within the boundaries of a single organisation. These capabilities are more likely to be found distributed across a network of different businesses and contractors. If this is so, HR managers have a major task to identify, retain and develop such resources. Part of a company’s know-how resides in being able to bring relevant people together and enabling them to work together. In the boundaryless organisation there are huge uncertainties surrounding who, if anyone, is managing these processes. In traditional organisations there were relatively clear boundaries between insiders and outsiders. Roles and lines of accountability were relatively clear. Under the network form, ‘contracts’ (formal and tacit) are hybrid, that is to say, part market-based and part relational. In this environment, neither the traditional notion of win-lose competition nor hierarchical command is appropriate.
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Instead of developing plans and strategies independently, planning in the network organisation has to be co-ordinated and shared with other participants in the network. Information must be shared to allow managers to solve problems jointly. For example, GE Appliances collaborates with major suppliers. Together they plan for, and respond more quickly to, changes in demand and production schedules. Design, production, scheduling and sales data can be co-ordinated. Monthly sales data are shared with 25 suppliers. Co-ordination of a value chain or network means employees need to be familiar with customer and supplier needs and preferences. One way in which this can be done is to invite suppliers and customers to meetings with employees, where outlines of goals, plans and problems can be explained and discussed. Workers can also be sent on customer and supplier field trips or seconded to these organisations. Further, companies may collaborate by giving taskforces specific aims across the value chain. A more ambitious step is to integrate information systems.
The HR function

To what extent do the new forms represent a threat or an opportunity for HR? In some respects these developments allow HR to adopt a more strategic role. Many failures in strategic alliances, mergers and joint ventures have been traced to a neglect of HR issues. This seems to present an opportunity. In addition, many of the challenges thrown up by the new forms put a premium on strategic thinking about human resources. On the other hand, new forms – with an emphasis on devolved authority, flexibility and variability – may be inimical to HRM policies and procedures. In the past, personnel departments grew to a size where systems were uniformly applied across corporations. The classic age of the personnel department was that of the procedure manual. Contractual relationships are less conducive to investment in training, for example. There is a paradoxical relationship between HRM as a relatively new movement and changing organisational forms. Old-fashioned personnel management flourished in bureaucratic structures with rigid job boundaries and detailed negotiations over minor contract variations; the HRM movement sought to overturn assumptions about its role in this environment. Yet, large corporations favoured notions of ‘the human resource’, career planning, commitment building and other tenets of HRM. A shift to small-scale enterprises interacting through short-term market transactions does not create a favourable climate for the exercise of HRM.
Conclusions

New organisational forms require new ways of influencing behaviour. The traditional reliance on consistent procedures and rules seems misplaced when corporations are increasingly fashioned around devolved, empowered and agile business units. Companies already face this dilemma. Following a period when many aspects of HR such as selection, development and career management have been devolved, downsised HR departments are often uncertain about intervening in operational units. Some establish call centres to deal with enquiries; other routine processes are being handled via corporate intranets. When activities such as recruitment, induction, relocation and payroll have been outsourced, what role will remain for the HR specialist? In a single organisation, the question is difficult enough. When it comes to a supply chain or a network, it is evident that HR specialists have a great deal yet to learn.

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Further reading

Chandler, A.D. (1986) ‘The evolution of modern global competition’. in Porter, M.E. (ed.) Competition in Global Industries, Boston, MA: Harvard Business School Press. Child, J. and Faulkner, D. (1998) Strategies of Co-operation: Managing Alliances, Networks and Joint Ventures. Oxford: Oxford University Press. Drucker, P. (1993) Post Capitalist Society. New York: HarperCollins. Hammer, M. (1996) Beyond Re-engineering. London: HarperCollins. Pettigrew, A.M. and Ferlie, E.M. (2000) The Innovating Organisation. London: Sage. Storey, J. (ed.) (2001) Human Resource Management: A Critical Text. London: Thomson Learning. Storey, J., Quintas, P., Taylor, P. and Fowle, W. ‘Flexible employment contracts and their implications for product and process innovation’. International Journal of Human Resource Management, 13, 1.

Discussion questions 


Describe the key drivers of organisational restructuring in recent years. Explain the implications of outsourcing and the development of network organisations for human resource management.

Give and take
Richard Smith, CIMA Insider, March 2002.

A learning outcome in the ‘evaluating strategic options’ section of the Business Strategy syllabus is ‘evaluate and recommend appropriate changes in organisational structure’. The syllabus content refers to ‘the basics of transaction cost analysis and the implications for the location of assets, knowledge, people and activities inside or outside the organisation’. So, what is the connection – what is transactions cost theory? The root of the theory is vested in market economics. In simple terms, markets operate where there are buyers and sellers. A market price is produced for a good or a service, but a contract must be established to ensure effective and efficient performance associated with the agreement or deal struck. These agreements can be regarded as transactions. There are costs associated with making a transaction and acting under its terms. Apart from the costs of ordering, there may be costs associated with negotiations resulting from changes or unforeseen events, or incremental variations to the contract. The Economics of Strategy (D Besanko, D Dranove and M Shanley, New York, John Wiley, 2000) defines an arm’s-length market transaction as ‘one in which autonomous parties exchange goods or services with no formal agreement that the relationship will continue into the future.’ Such arm’s-length transactions are regulated by contract law and this results in costs being incurred by the litigants. In any transaction, a contract protects the parties to the agreement. Contracts permit transactions to proceed in a sequential manner. A supplier provides goods or services and the purchaser then has a contractual obligation to pay, providing that the terms of the agreement have been met. the contract protects the supplier in case the buyer refuses to pay. A payment made on receipt of the goods or services, as in a shop, is a simultaneous contract rather than a sequential one. Establishing contracts for performance results in costs for both parties.
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Contract law reduces unforeseen problems, but it does not prevent them. If the contracting parties do not foresee all circumstances and contingencies, the contracts will be incomplete. Incomplete contracts lead to transactions costs. The Economics of Strategy states that a relationship-specific asset (R-SA) is ‘an investment made to support a given transaction’. It explains that such an asset cannot be employed on another transaction without some opportunity cost resulting from loss of productivity from the R-SA, or the need to incur further cost to change its use. Therefore an R-SA ties the parties together. The Economic Institutions of Capitalism (O Williamson, Free Press, New York, 1985) explains how a relationship changes from a ‘bidding situation’ where buyers select from a number of suppliers to a ‘small numbers’ bargaining situation after investment by one or both parties in R-SA as a ‘fundamental transformation’. The Economics of Strategy states that suppliers view this situation as a long-term arrangement and may reduce quotes to win a contract. Subsequently, they may use unforeseen events as a reason to increase the price. The buyer, reluctant to incur the costs of changing supplier, may agree. At the bidding stage, the buyer may share information with other suppliers in case the contract breaks down. This causes the supplier and the buyer to be suspicious of each other after the contract is established and may mean that they miss opportunities to improve efficiency. R-SAs may be in various forms: 
   



Site specificity: location of assets close together to cut transport and stock costs. Physical asset specificity: changing the construction or engineering of an asset to tailor it to the transaction. Dedicated assets: acquiring an asset in order to complete the contract. Human asset specificity: teaching employees skills to carry out the contract. These may be tangible, such as handling a new piece of equipment, or intangible, such as intellectual property. Brand name capital specificity: when a brand is associated with a specific family of products or services, such as the international goods courier DHL. Temporal specificity: providing services at a specific time – for example, airlines need to book landing slots at an airport.

R-SAs may therefore relate to the buyer of goods and services as well as the supplier. Network organisations are defined in Management Accounting Business Strategy (A Sims and R Smith, CIMA Publications, 2001) as ‘those which rely on relationships with other organisations to carry out their work’. Such organisations may rely on others for core as well as ancillary services. Examples of such organisations include local government authorities and UK hospitals, airlines and railway. Many higher education establishments employ teachers on part-time contracts. Network organisations can involve contract staffing, using particular capital assests, outsourcing and relying on external organisations for referred business. This is nothing new. Networking relies on market forces to meet customer demands. If another supplier is cheaper than the in-house source at an adequate standard, it should be performing the activity. This will improve long-term shareholder value. Transactions cost analysis requires firms to assess supply costs and consider how they can improve shareholder value. Traditional organisational hierarchies must be broken down to establish network organisations. It would be interesting to know whether the development of transactions cost analysis has influenced this process.
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Revision Questions

2

Section A type questions
Question 1.1
Important contingency factors in the design of organisational structures include (A) (B) (C) (D) Rate of change in the market Size of organisation Strategy of organisation All of the above

Question 1.2
A business organisation with a functional structure has just increased its product lines from two to five. The senior management of the company is considering changing the structure to accommodate this increase. Which of the following structural types would be most appropriate? (A) (B) (C) (D) Network Divisional Global Virtual

Question 1.3
In a professional bureaucracy, co-ordination is achieved by (A) (B) (C) (D) Standardisation of skills Standardisation of work processes Direct supervision Standardisation of outputs

Question 1.4
Which of the following organisational structures violates the ‘unity of command’ principle as stated by Henry Fayol? (A) Functional (B) Matrix
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(C) Geographical (D) Divisional

Question 1.5
The division of an organisation into various departments such as purchasing, manufacturing, marketing, finance, research and development results in what kind of organisational structure? (A) (B) (C) (D) Network Functional Product Matrix

Section B type questions
Question 2
Handy lists four distinct cultural types: 
  

power culture role culture task culture person culture

How would you categorise the following organisations? Briefly explain your choice in each case: (a) a multinational insurance company (2 marks) (b) an advertising agency (2 marks) (c) a medium-sized computer company, selling highly tailored bespoke software to a diverse range of clients (2 marks) (d) a small ‘general store’ (corner shop) (2 marks) (e) a large national driving school (2 marks) (Total marks = 10)

Question 3
X is a small, owner-managed, family restaurant business which employs 10 people. Y is a university with 800 academic, 200 administrative and 100 ancillary staff. The academic staff teach a wide range of courses and conduct research. The administrative staff ensure that university policies and procedures are observed and provide administrative support for teaching and research functions. The ancillary staff provide other necessary services such as security, maintenance, catering and cleaning. Z is a large manufacturing company which produces a wide range of products and employs 30 000 people in its various business divisions. Each of its eight divisions produces a different product and serves a different market. The business divisions enjoy a fair degree of autonomy but are expected to operate within the overall umbrella of the company’s corporate strategy.
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Requirement Using Mintzberg’s typology of organisational configurations, identify the most appropriate configuration for the X business, Y University, and Z Company. Justify your choice in each case. (10 marks)

Section C type questions
Question 4
The Boffin shop (BS) Ltd is the creation of a brilliant electronics engineer by the name of John Goodworth. His particular interest is in the field of microelectronic control systems and he has successfully applied his knowledge to a range of products from washing machines and compact disc players to the programming of military hardware. The early success resulted from his development of a system for controlling gambling machines. The bulk of the initial capital to start the business came from Ron Smart. In return for a half-stake in the business, Smart provided financial backing for the development of a working prototype for the gambling machine control system and its subsequent manufacture. Goodworth and Smart exhibited their product at a trade exhibition and secured enough orders to begin manufacturing with confidence. From the beginning, BS Ltd manufactured only the electronic control system and some of the equipment required for interfacing with the variety of appliances or machines for which they were designed. The manufacturer of some parts required specialised equipment so this work was subcontracted mainly to local firms but sometimes to companies elsewhere in the country but increasingly also to countries in the Far East. John Goodworth acted as managing director taking responsibility for all aspects of the company’s activities from R&D through production to sales and marketing. His wife Annie acted as secretary and general administrator. Ron Smart had the title of nonexecutive director but played little active part in the business. The day-to-day financial transactions of the company were dealt with by a young geography graduate but the company hired a professional accountant for a few days each month to provide advice and to prepare the company’s accounts. The rest of the employees were employed in manufacturing except for a young engineer who worked closely with John Goodworth on the development of control systems for a wider range of applications. In 1997, two events triggered the start of a period of sustained growth for BS Ltd. The first of these was the receipt of a substantial order from South Africa for gambling machines incorporating BS’s electronic control system. The second was the securing of a contract with the Ministry of Defence to develop a control system for a new range of military hardware. The first of these events required a substantial expansion of the firm’s manufacturing capacity while the second led to the recruitment of 15 engineers to help in the development of the control electronics for the new military equipment. The newly recruited engineers made progress on the military hardware systems and developed control systems for programming washing machines, dryers, compact disc players and several other applications. The expansion also brought with it several management problems. The extra work brought in over the 3 years from 1997 required an increase in personnel from a mere twelve to nearly a hundred by the year 2000.
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Requirements (a) Describe the term ‘organisation structure’ and explain how a well-designed structure can assist in the efficient operation of an organisation. (12 marks) (b) Describe an entrepreneurial organisation structure. (4 marks) (c) Describe the type of organisational structure you would recommend for BS following its recent process of growth and provide reasons for your choice. (9 marks) (Total marks = 25)

Question 5
‘‘Asset specificity’’ is a term used within Transactions Cost Theory. It has been defined as the extent to which particular assets are only of use in one specific range of operations. It has further been suggested that asset specificity falls into six categories: site specificity, physical asset specificity, human asset specificity, dedicated asset specificity, brand name capital specificity and temporal specificity. Supporters of resource-based views of strategy contend that a firm’s sustainable competitive advantage is generated from its possession of unique assets that cannot be easily irritated by other firms. These unique assets have been called core competencies or distinctive capabilities. Network organisations have been defined as those which are reliant on relationships with other organisations to carry out their work. Requirements (a) Briefly explain what transaction costs are and how resource-based views of strategy can be used for competitive advantage. Interpret the six categories of asset specificity by explaining what they mean. (15 marks) (b) Discuss whether analysis of transactions cost has any influence on the increase in numbers of network organisations. (10 marks) (Total marks = 25)

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Solutions to Revision Questions
Section A solutions
Solution 1.1
(D)

2

Solution 1.2
(B)

Solution 1.3
(A)

Solution 1.4
(B)

Solution 1.5
(B)

Section B solutions
Solution 2
Common errors  Running out of time by spending too much on one sub-part;  inability to justify reasons for clarification;  inability to identify the main cultures in the five different situations. (a) The multinational insurance company is likely to have a role culture. The bureaucratic nature of the insurance company stems from its size; the sheer bulk of processing required for new insurance, renewals and claims implies a complex framework of written rules and regulations.
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(b) The advertising agency is a good example of ‘person culture’. Individuals will typically be striving to achieve their personal ambitions. The culture may be intense and aggressive, with office politics being an important cultural constituent. Alternatively, the agency could be described as a task culture, whereby obedience to particular accounts (i.e. clients) would take precedence over rules or procedures. (c) The computer company designs and sells software according to the highly specific requirements of each customer. Thus the overriding cultural influence is that of commitment to task (i.e. the prevailing culture is ‘task culture’). This project orientation allows flexibility, which is vital in meeting the various needs of different customers. (d) The ‘corner shop’ is likely to be managed by its owner (owner-entrepreneurial control). Because ownership and management are combined, there is likely to be limited formalisation, with most decision-making by the owner. The business will therefore have a power culture. (e) The large national driving school is a good example of role culture. Driving lessons are standardised, the cars will be bought in bulk (leading to operational savings), staff are trained in a standardised way, and advertising will be centrally controlled.

Solution 3
The configuration that would best describe X Company in Mintzberg’s terms is the ‘simple structure’ because it is a small organisation with an owner/manager who can be regarded as constituting the strategic apex. He is also likely to wish to retain control over decisionmaking given that it is a family business; a characteristic described by Mintzberg as a pull to centralise. With only 10 employees, little of the behaviour in the organisation will be formalised. Most of the 10 employees can be regarded as part of the operating core, with very little in the way of the techno-structure or support staff. Such division of labour as exists will probably be in terms of that between kitchen staff involved in food preparation and washing dishes and those waiting on table. In addition to the owner manager, who will probably be involved in all managerial activities, there may be one or two employees who occupy what Mintzberg calls the middle line such as the chef and the supervisor of the table waiting staff. The most likely configuration for Y University will be the ‘professional bureaucracy’ because the tasks of teaching and research that characterise the core tasks of the University rely on a body of trained professionals to undertake them. The key feature of this kind of configuration is that it has to rely on trained professionals in order to attain its objectives. This gives the professionals an unusual degree of power and so a common problem for professional bureaucracies like Y University is how to ensure control of the professionals who constitute the operating core of this kind of organisation. The professional bureaucracy arises in circumstances in which the environment is stable, yet complex. The complexity of the task requires reliance on trained professionals, but the relatively stable demand for teaching and research enables the application of standardised skills. There is little need for a large techno-structure since standardisation occurs as a result of training that takes place outside the organisation. Because the academics in Y University work independently, the operating core will be fairly large, but the middle line will be relatively small. The support staff in the way of administrative and ancillary staff, however, will be fairly large to provide support to the academic staff.
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The most likely configuration for Z Company will be the ‘divisional structure’, because it has probably found that the easiest way to cope with producing a number of different products aimed at different markets is best achieved by a degree of specialisation. In this case, specialisation is enabled by a division of labour into eight different divisions each charged with producing a different product or set of products for a particular market.

Section C solutions
Solution 4
(a) The term ‘organisation structure’ is defined as the established pattern of relationships within an organisation including those between job roles, sections and departments. It is a framework that facilitates processes such as communication, leadership and decision-making. Organisational structure also reflects the way in which work is divided up, in other words the division of labour. This enables specialisation to take place so that individuals and departments can become efficient by their concentration on particular tasks. This division of labour necessarily requires coordination of activities and so the structure also contains mechanisms such as liaison committees for ensuring this takes place. Particularly important to ensure direction and coordination is the existence of hierarchy in the structure so that those occupying superior positions have the authority and power to see that all activities are directed at ensuring the fulfilment of the organisation’s objectives. It is common to see organisation structure depicted in an organisation chart. This is a useful picture of the bare bones of the hierarchy and reporting relationships but such charts cannot of course capture the complexity of the relationships within the structure. It is also necessary to observe that what is often set out in company documents, as the organisation structure may not in fact reflect the true nature of actual power and reporting relationships. Organisations are dynamic entities containing people with their own motives and agendas for achieving personal objectives. Thus it is not unusual to find those individuals or groups exercising power in a way that is not set out on any company organisation chart. (b) An entrepreneurial structure is sometimes described as not having a structure at all. This is because the owners or managers like John and Annie Goodworth can deal with most issues on a face-to-face basis. In the early development of an organisation it is common for the founder of the firm to make all the decisions and to have every employee directly answerable to the owner-manager. Relationships tend to be informal and there tends be an absence of rules and procedures. (c) The most common form of organisational structure adopted when an organisation starts to outgrow the ability of the owner-manager to cope with the growing number of employees and issues facing him/her is the functional structure. Though the case scenario gives us limited information it looks as if this occurred in BS before the expansion of 1997. We are told that, although John Goodworth acted as MD for the company as a whole, Annie was taking responsibility for much of the general administration and that some semblance of a finance/account department was emerging as were separate R&D and manufacturing departments.
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The growth following the events of 1997 have led to a proliferation of products and a growth in business. The fact that the control systems produced have been for markets as diverse as the Ministry of Defence, the manufacturers of gambling machines and the manufacturers of washing machines and compact disc players, suggests the need for specialisation to cope with the very different demands of these diverse markets. It is difficult to say without further information but it does appear that BS is now reaching a point where a divisional structure may be more appropriate. Even a simple divisional structure with three divisions serving the Ministry of Defence, the manufacturers of gambling machines and miscellaneous control systems may be enough. The advantages of such a division would include clear responsibility based on profit centres, development of product-based expertise, clearer strategic focus and fewer co-ordination problems.

Solution 5
Requirement (a) Transactions Cost Analysis is concerned with more than just unit costs of products or services. It is also concerned with the costs of control specifically relating to the delivery of a product or provision of a service. Transaction costs come about between stages in a production or supply process and it may be both internal to, and external from, the firm itself. In respect of an external supply, such costs may include drafting legal contracts and monitoring supply and quality. Similarly, internal costs of quality control and human resource management may be included as transaction costs. Such costs exist because all parties want to have protection against loss, and contractual arrangements may be used by each to protect their position. Resource-based views of strategy take the view that unique assets which cannot be easily replicated by other firms can act as a defence. 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. Such unique assets may enable a firm to achieve supernormal profits, that is those which cover more than the normal opportunity cost of capital. The six categories of asset specificity may be interpreted as follows: 1 Site specificity relates to the assets which are connected to a particular geographical position, for example, locating a goods distribution organisation close to a motorway network; 2 Physical asset specificity is concerned with identifying particular physical assets or possessions with particular attributes such as valuable mineral deposits or natural ingredients with particular healing qualities; 3 Human asset specificity is associated with very specialist knowledge or skills such as that possessed by surgeons or an employee who has particular knowledge of a specialist process; 4 Dedicated asset specificity relates to an asset which was built for a single purpose or application, such as bridges or dedicated buildings; 5 Brand name capital specificity concentrates a brand name to one family of products or services such as might be employed by a food manufacturer, type of engine or air travel service provider; 6 Temporal specificity is concerned with providing a specialist product or service at a specific time as might be employed by a television broadcaster.

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

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

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Contemporary Thinking on Strategy

3

L EARNING O UTCOMES
After completing this chapter you should be able to:
" " "

discuss concepts in contemporary thinking on strategic management; evaluate competitive situations and apply this knowledge to the organisation; explain the importance of business ethics and corporate governance to the organisation and its stakeholders.

3.1 Trends in the general management and structure of organisations
The selection and interpretation of trends in the general management and structure of organisations varies from author to author but an examination of a number of accounts provides us with the following general picture.

3.1.1 Changes in the business environment
Most commentaries on such trends commence with observations about changes in the business environment. Changes in this environment are seen as the result of a number of developments. These include the drive by multinational companies for new markets as domestic markets become saturated, the liberalisation of trade and the deregulation and privatisation of industries and developments in the technology of communication and transportation. Such developments it is argued have helped to produce a global market. Geographical space, it is claimed, has been eliminated or at least reduced by such technical developments as the internet and jet-propelled aircraft. These developments mean that companies are able to compete more easily anywhere in the world, with the effect that competition becomes ever fiercer. Technological developments in the mass media, particularly in satellite television, spur the development of global markets by advertising the
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lifestyle of people in the more affluent countries. This image of a better life generates a desire for ever-more consumer goods, and with rising affluence comes increasing demand. Removal of protectionism and deregulation have eased access to foreign markets and again made for increases in competition between domestic producers and foreign suppliers. Presented with opportunities for greater and cheaper access to foreign markets on the one hand and with the threat of increasing competition on the other, companies have been forced to change the way they manage and operate their businesses and the way they structure their organisations. The kinds of changes that are taking place in organisations and in their management are elaborated upon in the later sections of the Study System, so it will suffice here to introduce and to outline the more important of these. One of the most frequently mentioned changes concerns developments in the structure of organisations. Increasing competition it is argued requires organisations to be more flexible so that they can be more responsive to changes in the market place. In particular, organisations need to be flatter, leaner, fitter, less bureaucratic and more organic in the way they operate than in past more settled times. The shift from mechanistic, tall, rigid, hierarchical forms of organisation to flatter, more task-orientated organic organisations has been achieved to some extent by downsising, delayering and outsourcing. These changes are discussed in Chapter 2. Also covered in Chapter 2 is the shift towards ‘network’ forms of organisation. Domestic organisations long ago found that it could be to their advantage to form collaborative relationships with suppliers and buyers but with the globalisation of markets the need for international strategic alliances has also increased. 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. The economic rationale for such developments therefore has to do with access to markets, with the sharing of knowledge and expertise and with economies of scale and scope. The increase in the number of these networks has been greatly facilitated by developments in communication technology. Such networks, sometimes called ‘virtual organisations’, consist of a number of partner organisations that collaborate with each other to produce, market and distribute goods and services. 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. The organisation is ‘virtual’, in the sense that an organisation with a corporate centre does not exist. Instead the ‘organisation’ as a set of cooperative linkages between partner companies operates in many ways as if it had an independent existence. The competitive forces (discussed later in this chapter) are also seen as influencing the way people are managed in organisations. The need for a rapid response to changes in competitor offerings and/or consumer tastes has led theorists to propose the notion of the ‘flexible firm’. In summary, the flexible firm is regarded as consisting of a core of key employees who possess the scarce skills and competences considered critical for the organisation’s survival. These individuals have high status, are well paid, have opportunities for promotion and a fair degree of security. The rest of the employees in the so-called flexible firm, often referred to as ‘peripheral workers’ enjoy none of these benefits. They are often temporary or part-time workers with limited skills, less chance of promotion and paid lower wages than the core employees. Such firms are said to be flexible because they are able to flex their workforce in a number of ways. Numerically they find it easy to reduce or increase their workforce in
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response to changes in market demand; functionally they have a core of skilled talent that can adapt to new task demands; temporally they can adapt by flexing the working hours of their employees to meet peaks and troughs in demand and they are financially flexible in the way they reward the workforce by using performance-related payment systems that enables wage costs to be related to output. The advantages and disadvantages of this method of managing people are elaborated upon in this chapter.

3.1.2 International structures
The globalisation of markets has also contributed to the emergence of the global corporation. The idea of the global corporation entails the notion that production is for the global market. Such global companies seek to gain competitive advantage by producing large volumes of standardised products at low cost. One means of gaining low unit costs derives from economies of scale; the other derives from producing in low-cost locations. Large corporations locate their manufacturing plants where labour and other costs are lowest and locate their headquarters, research and development, marketing and other functions in those parts of the world that enable their activities to be conducted most efficiently and effectively. Expressed rather more technically, 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. Organisations that are structured and operated on these lines are often called global corporations – especially if they operate in a large number of different countries. Recognition that differences in the history, culture, infrastructure and living standards of different countries and regions produces differences in requirements and tastes has led to the idea of the ‘transnational corporation’. This organisational form which seems more an aspiration than an achieved form seeks to reconcile the objective of operating globally to produce goods and services of a good standard at low cost with that of seeking to customise its product to meet the differing needs of customers in different countries at the same time.

3.1.3 Mergers and de-mergers
Much of the growth of global corporations was achieved by consolidating smaller, local organisations. This was achieved by merger or acquisition, with organisations often acquiring new subsidiaries at a rate of several each year. The arguments for acquisition often centre around the concept of ‘synergy’ – that the whole organisation has a greater value than the sum of its parts. Such synergies can arise from the sharing of resources or skills, or the exploitation of economies of scale. 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. By the 1990s, many strategists were beginning to question the logic of large conglomerate organisations. The more diverse the mix of business within an organisation, the fewer synergies are available to it. While a large organisation should be able to exist with a relatively simple management structure, for example, the reality is often greater complexity in the organisation structure, and large numbers of managers. Add to this the inevitable costs of control and compliance, such as time-consuming reporting procedures and the need to integrate information systems, and the cost of being part of a large organisation might outweigh any synergies. There is also a perception that smaller organisations can be more focused on customer needs, and more responsive to the
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changing business environment. Strategists were also familiar with the ‘excellence principles’ of Peters and Waterman, which included ‘stick to the knitting’ – find a ‘core competence’ and build a business model around it. All of the above factors led to an increase in demergers during the 1980s and 1990s, including some that were very large and high profile. An example of this is ICI which demerged into ICI (chemicals) and Xeneca (pharmaceuticals). The market capital of the two demerged organisations exceeded the pre-demerger value of ICI, suggesting that investors agreed that the demerger added value. Xeneca has since merged with Astra, another large pharmaceutical company. Similarly, Vodaphone (a telecommunications company) was demerged from the Racal group (an electronics conglomerate) as the board of Racal recognised that the risks and market conditions of Vodaphone did not ‘fit’ with the remainder of the business. Once again, the investors valued Vodaphone more highly as an independent business than as part of Racal.

3.2 New patterns of employment
3.2.1 The flexible firm
A recurring theme in ‘new management’ and in strategy is the need for the organisation to be flexible. This has arisen for four reasons: 1. The need to be competitive: through better use of assets. 2. The need to be adaptive: through being able to respond quickly to the need for change in highly turbulent business conditions. 3. The impacts of new technologies: which have changed the products demanded, the nature of competitors, the ways of working and the possibilities for organisational structures. 4. The development of new organisational structures: these network-form organisations feature loose and fluid workgroups and the breakdown of permanent structures. Atkinson (1984) identifies the implications of this for human resources as the requirement for three forms of flexibility: 1. Functional flexibility: employees can respond quickly to changes tasks through multi-skilling. 2. Numerical flexibility: the numbers of employees can be increased and reduced with the volume of demand for their services. 3. Financial flexibility: the ability of pay levels to reflect the external costs of labour and also the financial position of the business.

3.2.2 Implications of flexibility for employment
Armstrong (1992) outlines six sets of implications: 1. Contract-based flexibility: job contracts will be less closely defined in terms of the tasks and duties of the permanent employee. There will also be a significant increase in the use of contract staff, that is, staff employed either on a casual basis or to complete designated projects. 2. Time-based flexibility: staff will be required to work longer during peak times but may also receive the opportunity to vary their times of work from week to week. There may be a decline in the set minimum periods of work, for example, through controversial
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3.

4. 5. 6.

zero-time contracts in which the staff member is not promised any hours of employment at all. Job-based flexibility (or functional flexibility): staff can move from task to task and location to location as the requirements of the business demand. This presumes that staff are prepared to accept changing journey times and geographical locations and tends to lead to pressure for standard conditions of work across the firm. Skill-based flexibility: to switch jobs staff must also be multi-skilled and willing to undertake greater responsibility for what they do. Organisation-based flexibility: this means making greater use of part-time, contract and casual staff (the non-core) to supplement the permanent staff (the core). Pay-based flexibility: payments should vary with the economic circumstances of the employer. Effectively this means reducing the fixed element of the payroll through greater use of contract staff, payment by results, profit-related bonus schemes and merit-based payment schemes.

3.2.3 Flexible time arrangements
(a) Flexible working hours (FWH). ‘Flexi-time’ contracts for a given number of hours with a ‘bandwidth’ of hours during the day. (b) Compressed hours. Extending the time spent each day to obtain a lower number of days per week at work. (c) Job sharing. Two or more persons share between them the demands of a full-time job. Gives firm access to high-calibre staff who do not wish to commit to full-time employment or who cannot be afforded full-time.

3.2.4 Homeworking
Information systems facilitate homeworking by recreating the information resources available in the office at remote locations: (a) Provision of access to corporate database and communications through internet (or extranet) connections. (b) E-mail. (c) Video calls and videoconferencing. (d) Mobile telephones. Some firms operate hot-desks where staff do not have desks of their own but rather are assigned desks of standard design on each visit to the office.

3.2.5 Core and periphery workers
Many firms seek to cut fixed costs and increase flexibility by having several levels of workers: 1. Core workers. Conduct the key, company-specific activities. Usually full-time salaried staff of middle and senior management grade. 2. Peripheral workers. Low-skilled and non-company-specific jobs. Staff are poorly paid and the firm makes little effort to invest in them, for example, delivery drivers, systems analysts.
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Figure 3.1 Shamrock organisation. From The Age of Unreason by Charles Handy published by Random House Business Books. Used by permission of The Random House Group Limited

3. External workers. Contractors, temporary and self-employed staff with the general skills needed. Many are created by contracting-out: a process where the firm trims headcounts and then re-employs them as consultants on more flexible terms. Handy (1989) calls this the shamrock organisation (after the shape of the Irish plant) (Figure 3.1).

3.2.6 The knowledge worker
One aspect of the flexible organisation is the importance of knowledge workers. These are workers with the knowledge and, more importantly, intellectual skills, to make the business operate and innovate. In terms of a resource-based view of strategy the knowledge worker is the crucial strategic asset that must be retained and utilised to gain competitive advantage. They will inevitably be the core and indispensable staff in Handy’s shamrock organisation. The knowledge worker poses a number of interesting problems for management control: (a) Treat them as assets not expenses. The knowledge worker is effectively an asset to the firm, whereas the conventional view of staff is to see them as an expense. Assets should be retained, maintained and improved (e.g. through high pay, training and careful manmanagement), not treated as costs to be minimised and reduced. (b) Allow them sufficient scope without losing control. The knowledge worker needs the space to be creative and develop networks with other knowledge workers. This inevitably cuts across the rigid departmental demarcations of conventional business organisations. (c) Decide which staff are knowledge workers. Not all staff will have this role. This raises the problem of deciding which staff shall be treated as knowledge workers and which not.

3.2.7 Implications for management accounting
Flexible human resource management strategies pose the following issues for management accounting: 1. Potential breakdown in management control. A major form of control in an organisation is the collective skill and social culture of the staff cohort. By working together, groups are able to develop patterns of work and shared knowledge. These can be more effective than rules and procedures in ensuring the attainment of work goals. They are also more
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2.

3.

4.

5.

flexible, particularly in situations of crisis. Replacing permanent teams with an everchanging group of workers will lose this form of clan control. It may need to be replaced by additional layers of bureaucratic control. Need for additional performance-measurement systems. It was noted above that staff flexibility often requires the institution of payment by results systems. To operate these fairly there will need to be performance-measurement systems that can track the outputs of individual teams. Moreover, these teams will need such information to monitor their performance in order to control it. Greater participation in the business decision process. Where the rewards to staff are related to business performance and justified by concepts of participation, it will inevitably follow that these staff will seek to influence the performance of the business and monitor the decisions of senior management. This may result in management accounting information being directed to and used by staff below the level of senior management. Revision to budgetary control systems. Conventional budgetary control treats human resources as a cost which is divided into two classes: direct labour which is used in proportion to production and indirect and overhead labour which is effectively a fixed cost. More flexible human resource strategies will lead to less labour being a fixed cost. Furthermore the costs of the labour will be harder to forecast because pay rates will differ according to market conditions and whether it is permanent or contract staff that are being used. Flexible labour arrangements will also make it difficult to assign labour costs to particular departments or products because labour will be switching between them. Changes in the employment of management accountants. Management accountants will be subject to the same human resource strategies. Consequently the management accounting function may be staffed by a mixture of permanent and contract staff. Key functions may be outsourced and the individual accountant may need to exhibit greater flexibility in their skills and the tasks they undertake.

3.2.8 A critical perspective on flexible organisations
The discussion so far has suggested that flexible organisations are both inevitable and ultimately desirable. Concern has, however, been voiced about the flexible organisation due to its apparent similarity to the exploitative practices of nineteenth century capitalism. According to a writer of the times (Marx 1954, from Marx, 1867), the nineteenth century factory owner’s possession of the means of production gave them the upper hand in any negotiations with individual workers. The latter were frequently hired by the day, paid by piecework and lacked any job security, old-age benefits and even safe conditions of work. Others depended on ‘outwork’ arrangements, such as sewing and lace-making at home. An ‘iron law’ ensured that wages rarely rose above subsistence level. Factory owners (capitalists) were forced by commercial competition and falling prices to exploit workers further to extract their customary profit (or surplus value). The development of the factory system enabled trades unions to organise in the workplace and to influence the political system. Together, these led to legal protections for workers and the creation of the welfare state. Many of the theories that lead to a belief in the flexible organisation have the effect of justifying a return to the systems of the nineteenth century.
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Figure 3.2 Porter’s five forces model. Reprinted with the permission of The Free Press, a division of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. # 1980, 1998 by The Free Press. All rights reserved.

3.3 Competition – Porter’s five forces model
This is likely to be examined quite frequently.

3.3.1 Basic argument of the model
Porter argues that competition in an industry is determined by its basic underlying economic structure – the five competitive forces (Figure 3.2): 
   

rivalry among existing firms; bargaining power of buyers; bargaining power of suppliers; threat of new entrants; threat of substitute products or services.

The collective strength of these forces determines the profit potential, defined as long-run return on invested capital, of the industry. Some industries have inherently high profits due to the weakness of these forces. Others, where the collective force is strong, will exhibit low returns on investment.

3.3.2 Using the model
The Porter model can be used in several ways: 1. To help management decide whether to enter a particular industry. Presumably they would only wish to enter the ones where the forces are weak and potential returns high. 2. To influence whether to invest more in an industry. For a firm already in an industry and thinking of expanding capacity, it is important to know whether the investment costs will be recouped. The present strength of the forces will be evident in present profits, so management will wish to forecast how the forces may change through time. Alternatively, they may decide to sell up and leave the industry now if they perceive the forces are strengthening. 3. To identify what competitive strategy is needed. The model provides a way of establishing the factors driving profitability in the industry. These factors affect all the firms in the industry. For an individual firm to improve its profitability above that of its peers, it will need to deal with these forces better than they. If successful it will enjoy a stronger
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share price and may survive in the industry longer. Both increase shareholder wealth. Porter classifies these successful strategies into two groups: (a) cost leadership; (b) differentiation.

3.3.3 Threat of entry
Entrants can affect the profitability of the industry in two ways: 1. Through the impact of actual entry. 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. There is also the danger that a price war may break out as rivals try to recover share or push out the new rival. (b) Increasing costs of participation of incumbents through forcing product quality improvements, greater promotion or enhanced distribution. (c) Reducing economies of scale available to incumbents by forcing them to produce at lower volumes due to loss of market share. 2. By forcing firms to follow pre-emptive strategies to stop them entering. In view of the danger of the above, firms may take action to forestall entry by new rivals by: (a) Charging an entry-deterring price which is so low as to make the market unattractive to new, and possibly higher cost, rivals. (b) Maintenance of high capital barriers through deliberate investment in product or production technologies or in continuous promotion or research and development. New rivals would be unlikely to gain sufficient scale to recover these investments. Porter suggests that the strength of the threat of market entry depends on the availability of barriers to entry against the entrant. These are: 1. Economies of scale. Incumbent 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. This gives them the ability to charge prices below the unit costs of new entrants and hence render them unprofitable. 2. Product differentiation. If established firms have strong brands, unique product features or established good relations with customers it will be hard for an entrant to rival these by a price reduction, and expensive and time consuming to emulate them. 3. Capital requirements. If large financial resources will be needed by a rival to enter, the effect will be to exclude many potential entrants. Porter argues this will be particularly effective if the investment is needed in dedicated capital assets with no alternative use or in promotion. Few would-be entrants will want to take the risk. 4. Switching costs. These are one-off costs for a customer to switch to the new rival. If they are high enough they will eliminate any price advantage the new rival may have. Examples include connection charges, termination costs, special service equipment and operator training costs. 5. Access to distribution channels. If the established firms are vertically integrated this leaves the entrant needing either to bear the costs of setting up its own distribution or depending on its rivals for its sales. Both will reduce potential profits. 6. Cost advantages independent of scale. These make the established firm have lower costs. Examples are unique low-cost technologies, cheap resources, or experience effects
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(a fall in cost gained from having longer experience in the industry, usually influenced by cumulative production volume). 7. Government policy. Some national governments jealously guard their domestic industries by forbidding imports or using legal and bureaucratic techniques to stall import competition. Also, 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. Therefore, they try to restrict industry competition.

3.3.4 Rivalry among existing competitors
Some industries feature cut-throat competition, while others are more relaxed. The latter have the higher profitability. Porter suggests that the factors determining competition are: 1. Numerous rivals, such that any individual firm may suddenly reduce price and trigger a price war. If there are fewer firms of similar size they will tend to, formally or informally, recognise that it is not in their interest to cut prices. 2. Low industry growth rate. Where growth is slow the participants will be forced to compete against one another to increase their sales volumes. 3. High fixed or storage costs. The former, sometimes called operating gearing, put pressure on firms to increase volumes to take up capacity. Because variable costs are low, this is usually accomplished by cutting prices. This is common in transportation and telecommunications. Similarly, high storage costs are often the cause of a sudden dumping of stocks on to the market. 4. Low differentiation or switching costs mean that price competition will gain customers and so be commonplace. 5. High strategic stakes. This is where a lot depends on being successful in the market. Often this is because the firms are using the market as a springboard into other lines of business. For example, 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. 6. High exit barriers. These are economic or strategic factors making exit from unprofitable industries expensive. They can include the costs of redundancies and cancelled leases and contracts, the existence of dedicated assets with no other value or the stigma of failure.

3.3.5 Pressure from substitute products
Substitute products are ones that satisfy the same need despite being technically dissimilar. Examples include aeroplanes and trains, e-mail and postal services, and soft drinks and ice cream. Substitutes affect industry profitability in several ways: 1. They put an upper limit on the prices the industry can charge without experiencing large-scale loss of sales to the substitute. 2. They can force expensive product or service improvements on the industry. 3. Ultimately, they can render the industry technologically obsolete.

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The power of substitutes depends on: 1. Relative price/performance. A coach journey is cheaper than a rail journey that is in turn cheaper than a flight. However, a coach is slower than a train. The trade-off is far less clear between e-mail and postal services for simple messages, since e-mail is both quicker and cheaper! 2. The extent of switching costs.

3.3.6 Bargaining power of buyers
Buyers use their power to trade around the industry participants to gain lower prices and/ or improvements to product or service quality. This will impact on profitability. Their power will be greater if: 1. Buyer power is concentrated in a few hands. This denies the industry any alternative markets to sell to if the prices offered by buyers are low. 2. Products are undifferentiated. This enables the buyer to focus on price as the important buying criterion. 3. The buyer earns low profits. In this situation, they will try to extract low prices for their inputs. This effect is enhanced if the industry’s supplies constitute a large proportion of the buyer’s costs. 4. Buyers are aware of alternative producer prices. This enables them to trade round the market. Improvements in information technology have significantly increased this, by enabling a reduction in ‘search costs’. 5. Low switching costs. In this case the switching costs might include the need to change the final product specification to accept a different input, or the adoption of a new ordering and payments system.

3.3.7 Bargaining power of suppliers
The main power of suppliers is to raise their prices to the industry and hence take over some of its profits for themselves. Power will be increased by: 1. Supply industry dominated by a few firms. Provided that the buying industry does not have similar monopolistic firms, the supplier will be able to raise prices. For example, the ‘Wintel’ domination in personal computers developed because IBM did not insist on exclusive access to Microsoft’s operating systems or Intel’s processors. 2. The suppliers have proprietary product differences. These unique features of images make it impossible for the industry to buy elsewhere. For example, branded food suppliers rely on this to offset the buyer power of the large grocery chains.

3.3.8 Exercise on confectionery industry
The following data relates to the UK confectionery market 
 

Yearly spend is approximately £100 per head of population Overall (slight) growth of 2% p.a. Chocolate is the country’s no. 1 impulse buy

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The market is dominated by three major producers who share of 68% of the market (Nestle 20%; Mars 20%; Cadbury 28%) There are many smaller companies operating within the chocolate confectionery and sugar confectionery sectors. Using Porter’s five forces model, perform a structural analysis of the industry.

3.3.9 Solution  

  



The threat of entry: low. Main barriers to entry: – economies of scale, particularly chocolate to compete with the leaders, – advertising necessary for brand awareness, (the leaders jointly spend approaching £100 p.a.), – access to distribution channels: concentrated retail supermarket, – cost advantages independent of size, – experience in production and distribution of major operators. Threat of substitutes: moderate/high. Growth in light food snacks, introduces possibilities: healthier snacks; fun fruit packaging; savoury snacks. Supplier power: moderate – milk, sugar subject to EU prices, therefore inflated but stable, – cocoa subject to price fluctuation but larger manufacturers can hedge against this by backward integration. Buyer power: potentially high – as there is a concentration of buyers (the six largest retailers account for 60% of total UK food), – competition for shelf space is high, – there is a threat of backward integration especially with brand only products being introduced BUT, – only 30% of confectionery is sold through supermarkets, other outlets include petrol stations, off-licences, vending machines, etc., so the effect is offset a little. Competitive rivalry is high Substitutes threaten, competitors are in balance: – there is slow market growth, – there are high exit barriers (capital intensive), – major spending on advertising.

3.4 An ecological perspective
3.4.1 Environmental responsibilities
These are concerned with the relationship of the organisation with the natural environment in which it operates. One approach suggested by Bennett and James (1996) lays down six areas in which this might be monitored: 1. Production: primarily concerned with minimising the amount of materials and energy used to generate output.

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Table 3.1 Health and safety

Voluntary indicators adopted by the UK chemical industry Fatalities Non-fatal major accidents Diseases Accidents in relation to man hours Amount of ‘special waste’ Discharges of ‘red list’ substances Site-specific data expressed in an ‘environmental index’ Number of transport incidents in relation to million tonne/miles Energy consumption per tonne of product Number of complaints made by public and regulators

Environment

Distribution Energy Complaints

Source: Gray et al. (1993). Reproduced by permission of ACCA.

2. Environmental auditing: focuses on improving relationship with the ecological environment and will cover such things as compliance with legislation, treatment of waste, product and process hazard and emissions. 3. Ecological approach: this can be a life-cycle approach in which the product is traced from the extraction of the raw material through production and consumption of the product till disposal of the final exhausted product. At each point, the ecological impacts are noted and targets set for reducing them. Alternatively, a single site or project can be looked at and its impacts on its immediate locale considered. 4. Quality: this anticipates a continuous improvement in the environmental performance of the business. Therefore targets are constantly amended to achieve better performance. 5. Accounting: dummy shadow prices are attached to the social costs of projects to create a separate set of accounts showing the environmental consequences of the firm’s activities. These affect strategy through their inclusion in the investment appraisal and financial reporting process. 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 ’. 6. Economic: charges environmental costs to any process, usually through budgets, to encourage management to avoid causing the environmental damage. Table 3.1 shows the voluntary environmental indicators of the UK chemical industry. It should be noted that often these measures are suggested by the firm’s need to comply with legislation or the directives of regulators:

3.5 Social responsibility
3.5.1 Scope of social responsibility
Social responsibility can be defined as ‘taking more than just the immediate interests of the shareholders into account when making a business decision’. Issues commonly associated with social responsibility include: 


environmental pollution from production or consumption of products; standards of factory and product safety;
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non-discrimination in employment and marketing practices; avoidance of the use of non-renewable resources; non-production of socially undesirable goods; production of non-degradable packaging or products.

In business decisions, a conflict may be encountered between what furthers the firm’s interests and what satisfies society.

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

3.

4.

5.

armaments industry (e.g. landmines are now close to being outlawed worldwide);  mining and quarrying industry (finite resources, destroys habitat, poor safety record);  brewing and distilling industry (promotes anti-social behaviour and alcoholism). Attracts socially conscious investors. Ethical investment funds will be attracted to firms with a good social responsibility score. This will cause their shares to trade at a premium price. This represents a direct rise in shareholder wealth. Attracts socially conscious consumers. The consumer will pay a premium price for products they regard as ‘sound’. Examples include ethical cosmetics, organic foods, recycled paper products and ‘fair trade’ coffee. Improves relations with governments and other regulatory bodies. Many firms depend on the goodwill of governmental bodies for the granting of production licences, planning permission or convivial legislation. A good record in social responsibility may help convince the decision-maker to use discretion in the firm’s favour. Reduces stress on management and staff and permits improved morale. This argument points to the fact that feelings of ethics and social responsibility are not solely external to the firm. The management and staff of the firm are members of society too and have similar values. If business decisions force managers and staff to contradict their private ethics on a daily basis, the impact will be to reduce morale and increase staff turnover. This will harm financial performance. A socially responsible firm, on the other hand, may be able to attract these staff. 

3.6 Shareholder wealth and ethics
3.6.1 Nature of ethics
Ethics is concerned with issues of moral rightness and wrongness of decisions and actions. Ethical issues in business include: 
    

honesty in advertising of jobs or products; fairness in setting pay and working conditions; non-exploitation of countries or peoples; effects on customer of consuming product; dealing with oppressive governments; management of closures and redundancies.

Section 3.5.2 discussed whether social responsibility may be a more enlightened way to achieve sustainable competitive performance and hence shareholder wealth. Throughout, the assumption was made that shareholder wealth is the only proper objective of business. Let us consider that last statement again: ‘Shareholder wealth is the only proper objective of business.’ This seems to single out one group of society, the shareholder, for special attention. Whether you believe that profit should be king, or alternatively that firms should serve the whole society, is ultimately a moral judgement which is yours alone. It is not the job of this book to tell you what to believe. However, chartered management accountants are involved in decisions like the ones cited above, so it is important that you understand the ethical debates over shareholder wealth. Let us consider the implications of this further by using an example.

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3.6.2 Example of an ethical issue
Imagine that a chain of shops decides to close down a branch situated in the centre of town in favour of an out-of-town location where profits will be higher. Elderly and poorer shoppers who lack private transport are now without a shop. Some will suffer reduced quality of life by having to make a bus journey to the new store. Disabled persons will need shopping bought for them, so imposing a strain on social services or family members. Perhaps another local shop decides to exploit its monopoly position by raising prices, thereby forcing poorer families to forgo some of the things they need. It seems that pursuing the interests of the shareholder has harmed others. Can this be morally right?

3.6.3 Friedman: profit is the sole objective
The economist Milton Friedman (1963) supports the ethical argument in favour of shareholder supremacy with a dictum: ‘The business of business is business.’ His argument can be presented as following a number of steps of reasoning: 
 

   

All economic systems are mechanisms to serve the needs of the population of the system. History has shown the market economy to be superior to other forms of system such as feudalism and socialism in providing the greatest benefits to the greatest number of people. In a market economy, the needs of society are transmitted to firms by price signals emanating from the market. By following these signals, firms coordinate their activities to meet society’s needs. The search for profit is what incentivises firms to respond to market needs. Therefore, by being profit motivated, firms will produce the best outcomes for society. If management ignore the profit motive or the state tries to intervene in the market mechanism, say by laws or taxation, they merely change the identity of the winners and losers. They do not actually remove the problem (‘there’s no such thing as a free lunch’).

A follower of Friedman’s argument would respond to the ethical issues in the store closure example above in several ways: 
  

without a profit motive shoppers might not have any stores at all; the rising prices of the remaining store are an essential element if any stores are to remain in the town centre; although it is inevitable that there may be some individual losers, the greater efficiency of the out-of-town store will benefit society generally in the form of lower prices; 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.

3.6.4 Sternberg: shareholder wealth is natural purpose
A different pro-shareholder argument is advanced by Elaine Sternberg (1994). Friedman stresses the ethical superiority of profit-seeking behaviour by reference to its consequences (i.e. higher standard of living for all). Sternberg, on the other hand, approaches from a perspective of natural justice, i.e. that to do other than maximise shareholder wealth takes
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business outside of its proper place in society. Sternberg’s argument can be simplified as follows: 
   

Organisations are social institutions. We understand their nature and their place in society by considering what they do and how they are different from one another. Business organisations are distinguished from others by their pursuit of shareholder wealth. No other organisation, say governments, charities, trades unions or armies do this. The latter are different because they have other final purposes. If businesses start to become involved in social responsibility by considering other goals, they are changing their purposes and invading the domains of charities and government agencies. This would be a corruption of their essential nature and the natural order of things and would constitute the theft of assets or incomes from their rightful owners, the shareholders. Business cannot afford to ignore its impacts on customers and other stakeholders however, because in doing so it would forsake repeat business and alienate support. This would destroy its long-term value. The key principles of business ethics are therefore distributive justice (distributing 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).

For Sternberg, ‘good ethics is good business’ because just and decent behaviour will increase the value of the business to its shareholders. A follower of Sternberg would view the store closure example very simply. The store chain is maximising its shareholders’ wealth, while the problem of disadvantaged shoppers is being addressed by other social organisations (social services, family, alternative profit-seeking firms) which is a fulfilment of their essential nature. The natural order is preserved. Also, the closure of the store is consistent with the principles of ordinary decency despite being a regrettable necessity.

3.6.5 A stakeholder view of business ethics
Most arguments against the primacy of shareholder interests in business ethics have their roots in a branch of philosophy called social contract theory (e.g. Rawls, 1999). They impose on the business the duties of being a good corporate citizen. A simple version of this argument would proceed as follows:    

A business has a social contract with society. Under this contract it enjoys rights, such as to be able to carry on its business uninterrupted, make profits, enforce commercial contracts and be defended by the rule of law. 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, including business organisations, to follow its own selfish interests at the expense of the rest of society. Therefore, the enjoyment of rights under the social contract also imposes on business a duty to behave reasonably towards society and to be socially responsible in its decisions and actions. The precise scope of rights and obligations will change through time according to the prevailing morals in society at large. For example, attitudes to different social groups, the natural environment and animals have all changed markedly in the past 30 years and it is the job of business to keep up with these.
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Firms that breach this social contract may ultimately have their rights revoked or curtailed (e.g. anti-trust laws, nationalisation, fines or consumer and employee protection legislation). However, this is a last resort and shows that management have done something wrong. It demonstrates that management does have an ethical obligation to society.

Taking the store closure example, a follower of this social contract approach would argue that management has a moral duty to consider the impact of its decision on all groups of society and not just its shareholders. Management should realise that it is not just the future profits that are at issue here; there are the past profits to remember too. Its right to make profits in the past impose on it a duty to be reasonable and responsible now. The people it is disadvantaging are its past customers with whom it had a moral contract; it cannot just walk away. The least it should do would be to provide a free bus service to its store, whether or not it is profitable to do so, to maintain its obligations to its former customers.

3.6.6 An egoistical view
The stakeholder view would provoke strong reactions from a follower of the late Ayn Rand, an influential American novelist and founder of the objectivist school of ethics (Rand, 1989). 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. Therefore, the only rational (i.e. ethical) goal is the pursuit of individual survival through self-interest. If any person shows (or is compelled by law to show) consideration for the interests of others, this intrudes on achieving their own self-interest and they are effectively allowing themselves to become subordinate to other people’s needs. Taken to extremes this leads to slavery and oppression. Capitalism (stripped of any benevolent religious belief systems, which are themselves a form of oppression) is the only social and economic system which enables and rewards pursuit of unbridled self-interest. Owners of firms are therefore only ethical if they ruthlessly pursue economic self-interest.

The objectivist approach has no truck with a notion of social responsibility because it believes there is no such thing as society (other than as a concept invented by would-be oppressors). Rather we are a collection of egoists. Objectivism would advocate leaving to their fate the people in the store example, on the basis that to compel the store (or the families and state) to help them would be to deny the self-interest of the helpers.

3.6.7 Implications of ethics for the chartered management accountant
Clearly there is no simple solution to business problems once we start bringing ethics into it. It all depends on your viewpoint. Most of us end up taking a pragmatic view on these issues. We learn to accept that the business decisions we sometimes make are not always easy to square with our highest principles. We know that if we do not do it, someone else will, and so the followers of Friedman and Sternberg may sometimes have to use corporate funds to make a
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donation to charity because ‘it is what’s expected’. Similarly subscribers to social contract views may be forced to announce redundancies and price rises to ward off a falling share price. It is back to the issues of satisficing we discussed in Chapter 1. We also know that most people do not delve into ethics as we just have and hence do not come to decisions with consistent or well-formed ethical viewpoints. Some just work on gut feel and ‘common sense’ (itself a phrase derived from a particular theory of ethics). Others pick up and discard ethical arguments to suit their interests. Many lie to themselves and others about their ethical justifications for actions. The important messages to bear in mind with ethics are: 1. Not everyone makes the same ethical assumptions that you do. What may seem totally wrong to you is acceptable to them and vice versa. This can be a real problem for managers dealing with people  from other social cultures (e.g. in foreign trading and business relations);  from other types of organisation (e.g. businesses dealing with the voluntary or caring services);  of different ages (i.e. morals change through time but not everyone changes with them). It is important that we appreciate other people’s viewpoints if we are to conduct business effectively. 2. That different stakeholders may have different expectations of the firm’s behaviour. 3. That moral and ethical debates drive the actions of pressure groups and legislators:  objectivism enjoyed an influence over senior politicians in the United States, United Kingdom and Australia during the 1980s, before giving way to the ‘stakeholder society’ of the 1990s;  religious fundamentalism is a major factor in the political processes of the United States and Middle East. Ethical debates and fashions are therefore a major force in the firm’s environment.

3.7 Summary
This chapter has looked at modern perspectives on the strategy process. The key points to remember are: 
  

organisations are responding to dynamic environments by becoming smaller and more flexible; industries are becoming increasingly competitive, and organisations must react to this; Porter’s competitive forces model can be used to analyse the competitive nature of industries; concerns of social responsibility and business ethics also affect the mission and objectives of the firm and may dilute the importance of shareholder wealth as a primary objective.

References
Armstrong, M. (1992), Human Resource Management: Strategy and Action. London: Kogan Page. Bennett, M. and James, P. (1996), ‘Environment-related Performance Measurement in Business’. In Baynes, P. and Tilley, I. (eds), Contemporary Issues in Performance Measurement. London: Greenwich University Press.
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Friedman M. (1963), Capitalism and Freedom. Chicago: University of Chicago Press. Handy, C. (1989), The Age of Unreason. London: Business Books. Marx, K. (1954), Capital, Vol. 1. London: Lawrence and Wishart. (Original dated 1867.) Porter, M.E. (1980), Competitive Strategy: Techniques for Analysing Industries and Competitors. New York: The Free Press. Rand, A. (1989), The Virtue of Selfishness, Signet Books. Rawls, J. (1999), A Theory of Justice (revised edn). Oxford: Oxford University Press. Sternberg, E. (1994), Just Business: Business Ethics in Action. London: Little, Brown.

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Readings

3

Social responsibility – the changing business paradigm
Tim Hollins, The Financial Times, 15 November 2000. Copyright (c) Tim Hollins 2000. Reproduced by kind permission of the author.

Tim Hollins, a Corporate Social Responsibility consultant, and formerly Head of Group Social Investment for the Royal Dutch/Shell Group, gives a personal view of social responsibility in the new century. Corporate citizenship is nothing new, but the way we practise it is constantly evolving. That’s what makes it so exciting. For more than a century companies have prided themselves on thinking beyond the bottom line and contributing to society, not only by producing the goods and services that society needs, but also by acting as good corporate citizens. In the nineteenth and early twentieth centuries corporate citizenship was more often than not based on the religious or philanthropic principles of a company’s founder. In the seventies and eighties, a growing sense of the relationship between ‘community relations’ and corporate reputation led to an increasing professionalisation of corporate citizenship, and a recognition of it as ‘legitimate enlightened self-interest’. Typical phrases used at that time were that ‘you can’t have healthy high streets without healthy back-streets’, and that ‘good community relations offered ‘win, win, win’ opportunities – good for individuals, good for the community and good for the company. A new description of what corporate citizenship was about also began to be used: ‘Social Investment’ – The notion that by investing in society we all – business, not-for-profit organisations and communities were – looking for clear and measurable returns, similar to other forms of investment. The language of business has become increasingly prevalent in corporate social investments of all companies – ‘business planning’, ‘project management’, ‘leverage’, ‘measurement and evaluation’ are part and parcel of the language of both social investment managers and their not-for-profit partners. And, alongside this evolution of corporate citizenship, have emerged a number of parallel developments. Environmental management and reporting has made enormous strides forward in the last decade; an increasing number of companies are addressing issues of ‘social accountability’ and ‘social auditing’, and a small number are tinkering with notions of ‘economic added-value’, to get a better understanding of which parts of society, and which stakeholders, are benefiting from the company’s economic activity.
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Developments in corporate governance and ethics have added to a much wider perception of the totality of corporate social responsibility. The challenge for the 21st Century Company is to bring all these developments together, to integrate thinking about social and environmental management, about social investment and social accountability into a coherent framework of practice that makes good business sense as well as benefiting society. Here in Shell we are increasingly talking about ‘social performance’ as the allencompassing approach to these various elements, to sit alongside (but inextricably interwoven with) economic and environmental performance. For an oil and energy Group, operating in over 140 widely differing countries and cultures, this is a hugely complex challenge. At one level, it is clear there is a direct correlation between access to energy and a country or community’s economic and social development. 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. But, however essential energy is to development, nobody would deny that, both in the way it is produced and in the way it is used, it also presents many social and environmental challenges. It is also evident that while many countries and communities are benefiting from international economic development and energy provision, there are still many for whom opportunities are few and the disparities increasingly great. For Shell, all these challenges are intrinsic to the commitment it has made to contribute to Sustainable Development. It is more than three years since Shell committed itself in its Business Principles to contribute to sustainable development through its operations. Sustainable development – the responsible stewardship of resources today so that the needs of tomorrow can be met – is a concept which Shell believes is fundamental to broader development, as well as to Shell’s own long-term success. It encompasses not just concern for the environment, but also concern for the impact of change on societies and cultures, and concern to ensure that, underlying all development, is economic sustainability at a local level, enabling individuals and communities to better control and manage their own futures. As Sir Mark Moody-Stuart, the former Chairman of Shell’s Committee of Managing Directors says, ‘Building a sustainable future is the single most important challenge facing our society as we enter the 21st century’. For all companies this sort of approach means re-appraising and re-thinking many of the ways we have previously sought to contribute to society. It means seeking to bring together our understanding of the different facets of our interaction with society – our interaction with employees and contractors, with suppliers and customers, with communities and public authorities. Without detracting from our fundamental business competitiveness, it means looking for opportunities to add social value. And in our social investments it means looking at our ‘contributions’ much more directly in relation to the social impacts and opportunities our own businesses present. Shell has always been one of the world’s most significant corporate contributors. In the last 18 years Shell companies have contributed over $1 billion to an enormous range of community programmes and causes around the world. But while that is something to be proud of, the challenges in this new century are to relate what we contribute in this way to the social issues and opportunities presented by being one of the world’s largest international oil and energy providers, to contribute our knowledge and our breadth of experience as well, to look for synergies where we can share good ideas and practice and to partner with others who have common objectives, to make our contributions go further.
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As part of its response to these challenges, the Shell Group recently set up a new international Shell Foundation to complement and reinforce our business approach to sustainable development and social performance. The e Foundation focusus on two specific programme areas:  



Sustainable Energy – projects that encourage more sustainable and equitable energy use by reducing environmental impacts of energy use or increasing access of poor communities in developing countries to sustainable energy Sustainable Communities – projects that help disadvantaged communities to improve their livelihoods, and manage their own futures A seperate group social investment programme focuses on youth enterprise – projects that stimulate the entrepreneurship among young people on which healthy and sustainable economic and social development depends.

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. Shell is one among many companies that are tackling the undeniably complex challenges of social performance and sustainable development. We have come a long way from the beginnings of corporate citizenship in the nineteenth century; the road ahead should be a fascinating one! Websites: www.shell.com www.shellfoundation.org

Discussion 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 corporate scandals that beset US corporations like Enron, World com and Arthur Anderson at the start of the twenty-first century tend to be attributed to the unethical conduct of particular individuals but the following article suggests that organisational culture played an major role.

Who killed Arthur Andersen?
Simon London, The Financial Times, 11 March 2003, p. 13 Full Text # 2003 Financial Times Information Ltd. Information may not be copied or redistributed. Reprinted with permission.

When Arthur E. Andersen died in January 1947, it was after a long illness. When the accounting firm he founded passed away last year, the cause was anything but natural. Ambition, greed and foul play all featured in the demise of what had once been a pillar of the bean-counting community. But whodunnit? Suspects include David Duncan, the Andersen partner in charge of the firm’s fateful – and ultimately fatal – relationship with Enron; Joseph Berardino, Andersen chief executive at the time of its demise; and John Ashcroft, the US attorney-general, whose decision to press charges over Enron in effect finished off the wounded firm. It is a question that Barbara Ley Toffler, a former Harvard Business School professor turned consultant and one-time Andersen employee, tackles in her new book, Final Accounting. The book contains no breakthrough confessions. There is no attempt to piece
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together documents that passed through Andersen’s now-infamous shredders. There is no smoking gun. Instead, Ms Toffler draws on her unhappy experience at Arthur Andersen in the 1990s – when she was running, of all things, a business ethics consulting practice – to reach a verdict that is in many ways more disturbing: far from being murdered, the firm seemed hell-bent on committing organisational suicide over a period of many years. The picture she paints is of a culture gone rotten – a firm in which pursuit of fee income had become an end in itself, in which leadership was absent when it mattered most. Enron did not cause the downfall of Arthur Andersen; it was the last straw. This conclusion will not please former Androids, as Arthur Andersen’s notoriously strait-laced employees were known. Their preferred interpretation is that a fundamentally sound business was felled by the wrongdoing of a tiny minority of their colleagues, combined with the politically motivated determination of the US Justice Department to make an example of the firm. This point of view was expressed lucidly last year on T-shirts worn by angry Androids protesting their collective innocence: ‘I worked 0 hours at Enron’, ‘It wasn’t me’, and (a personal favourite) ‘It takes a real Jack-Ashcroft to put 28 000 people on the streets’. On one level, the protesters had a point. The kind of cultural malaise portrayed in Final Accounting in no way excuses unethical or criminal actions. Most Andersen employees remained on the right side of the law. But criminologists long ago recognised the limitations of simply locking up the bad guys without trying to understand the social forces at work. This is especially true in the case of serial offenders. Enron was hardly the first corporate scandal in which Arthur Andersen was implicated. Remember Waste Management International, or Sunbeam? Nor was it the last. The financial backsliding at WorldCom, the Andersen audit client that filed for bankruptcy last summer after improperly accounting for Dollars 9bn (Pounds 5.6bn) in expenses, was if anything even more shocking than that at Enron. Three of the five largest bankruptcies ever recorded involved Andersen clients with accounting problems. Faced by this record of persistently negligent behaviour, the ‘few rotten apples’ defence touted by Andersen apologists seems about as adequate as one of the firm’s audit opinions. The only sane conclusion is the one that Ms Toffler draws: there must have been something about the culture of the place that led basically honest people to cut corners, dissemble and turn a blind eye. The snag is that ‘organisational culture’ remains a slippery concept. What does it mean to say that the culture of any company encourages certain types of behaviour? The most widely accepted definition of ‘culture’ in this context is that offered by Edgar Schein, the Massachusetts Institute of Technology’s great student of organisational sickness and health. Prof Schein argues that an organisation’s culture is ‘a pattern of basic assumptions’ that develops as any group strives to deal with internal divisions and external threats. Over time, if these assumptions seem to work, they acquire the status of truths and are taught to new members of the group ‘as the correct way to perceive, think and feel’. But he has also said that most companies have at least three distinct cultures: an operational culture of day-to-day management; an executive culture, whose priorities revolve around capital and cash flow; and an engineering culture, dominated by technical specialists. Many problems within organisations can be understood in terms of clashes between these mindsets.
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Ms Toffler, wisely, does not try to fight her way through this theoretical thicket. But an informed reader might question whether it makes sense to argue that Arthur Andersen had a single, identifiable culture that led to its downfall. Surely this is as simple-minded as pinning the blame on Mr Duncan or any other individual? Maybe so. But if any organisation can be said to have had a single global culture it is Arthur Andersen. The firm worked very, very hard to teach its employees the ‘Andersen way’. It hired young, trained intensively and imposed standards in everything from dress code (hats were mandatory until the late 1960s) to audit processes. This ‘one firm’ notion was meant to ensure a McDonald’s-like quality control, no matter where in the world the Arthur Andersen product was consumed. Its people would always dress the same, act the same and conduct business in the same way. What was once a unique strength, however, seems to have become twisted. An account of how this happened makes up the backbone of Final Accounting. Ms Toffler draws on a rich store of experiences, anecdotes and corporate lore to show how the ‘pattern of basic assumptions’ changed for the worse. As Ms Toffler tells it, lack of effective leadership was a critical factor. Tensions between the old-line audit practice and the hyper-successful technology consultants at Anderson Consulting – now Accenture – preoccupied management through the 1990s and poisoned relationships within the firm. The acrimonious corporate divorce, finalised in 2000, left the auditors chasing hard to make up lost revenue and hastened the departure of powerful figures such as Jim Wadia, the chief executive who tried and failed to negotiate a billion-dollar payment from the consulting side. Into this power vacuum stepped Mr Berardino, adept at driving the organisation to win new business – and keep big clients happy at all costs – but hardly the last word in visionary leadership. All the while, a self-belief verging on arrogance, a sense that Arthur Andersen was a cut above the rest, continued to condition the firm’s response to adversity, even when it was painfully obvious to outsiders that it had nothing to be arrogant about. This failing was visible even in Mr Berardino’s post-Enron protestations that his firm had done nothing wrong. Murder or suicide? A few bad apples or a culture that was rotten to the core? The messy truth is that both played a part in the death of this once-great firm. While corporate culture cannot be arraigned or indicted, managers neglect it their peril.
Ecounters with Androids

Final Accounting: Ambition, Greed and the Fall of Arthur Andersen, by Barbara Ley Toffler and Jennifer Reingold, published by Broadway Books, Dollars 24.95. About 120 managers sat tightly packed in a conference room at the Parker Meridien Hotel. I began my presentation by putting a stakeholder ‘wheel’ up on the blackboard. At the centre of the wheel was ‘You, Arthur Andersen manager’ and at the end of each spoke I listed a different stakeholder: client, public investor, partner, firm, Securities and Exchange Commission, community, government, fellow employees, family. ‘As an Arthur Andersen manager,’ I said, ‘you have an obligation to every stakeholder.’ There was a general nodding of heads. ‘OK,’ I continued, ‘which one is most important?’ I waited patiently for someone to pipe up. But no one did. At last one young manager timidly raised his hand. Very quietly he said: ‘The partner.’ Hmmm, I thought. ‘Anyone else?’ Another hand went up: ‘The
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partner.’ And another one: ‘The partner.’ ‘Anyone disagree?’ Silence. ‘What about the public investor? What about the client?’ I asked. ‘They’re important,’ someone said, ‘but not as important as the partner. My career depends on the partner.’ ‘So what does that mean?’ I asked. ‘It means I do what my partner asks me to do,’ he said. ‘And what if your partner asks you to do something you think is wrong? What would you do?’ No one dared breathe. Finally a timid voice spoke up: ‘I guess I might ask a question. But if he insisted I do it, yes, I would. Partners don’t want to hear bad news.’ Realising something really strange was going on here, I followed up: ‘But would you tell anyone else?’ Again, very softly: ‘No. It could hurt my career.’ No one contradicted him. They just shifted in their seats and waited in misery for the session to end.
Discussion question

Using appropriate examples, explain the links between the culture of an organisation and the ethical behaviour of its members.

The danger signal
Comment column, Sunday Times, 10 October 1999 # News International Newspapers Limited, London (1999). Reprinted with permission.

As shock turns to anger after the Paddington rail crash, we have the chance to make sure that safety is never again taken for granted on our railways. We always accepted a tiny element of risk when we travelled by rail, but most people believed it was far safer than any other form of transport – and they were right. The rail industry had a good record. It notched up two years without a fatal accident before the Paddington disaster. Thousands were killed on the roads in that period. Rail passengers vented their frustrations, grumbling about cancellations, late-running services and dirty and crowded compartments – everything but safety. We were deluded. Worse, as our investigations reveal, Railtrack was content for us to be deluded. More than our cosy assumptions about safety ended at 8.11 am last Tuesday. Trust has been replaced by suspicion. The more we learn about the background to the carnage, the greater our disquiet becomes. Friday’s interim report contained vital clues to the years of neglect that led to the collision on the approach to Paddington between a London-bound express and a commuter service that crossed its path. It says it could have been avoided by a train protection warning system (TPWS). So why wasn’t it? Not, we discover, because the risk of an accident was not recognised. Railtrack knew more about the dangers of trains passing red lights than it has so far admitted. Railtrack documents list the high-risk blackspots where the danger is considered greater than it was on the London-bound approach to Paddington. Scandalously, passengers cross those areas every day, but their right to know the risk they are running is denied. So we look to Lord Cullen’s inquiry to unravel much more than the technical details of the disaster. It will need to investigate a whole catalogue of errors and misjudgements that led up to the crash. Signal 109’s lack of a failsafe TPWS is only part of the story. The whole culture of the rail companies’ attitude to safety needs exposing. Accelerated installation of failsafe equipment is now assured and John Prescott, the transport supremo, says that the £1 billion-plus price tag ‘isn’t a problem’. But that is no
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consolation to those who lost their lives or were maimed on the Paddington approach. Bereaved families and the injured have years ahead of them to come to terms with the knowledge that it could have been avoided. Other questions follow. Have Railtrack and the 25 operating companies that lease its 20 000 miles of track, signals and stations cut corners on safety since British Rail was privatised three years ago? Have they, in their pursuit of profits, downgraded the overriding importance of passenger safety? Have Railtrack’s directors been unduly influenced by political pressure to concentrate on completing the prestige projects, such as the £5 billion high-speed link between London and the Channel tunnel? Have the rail companies risked too much by overwhelming an old network with an unprecedented 25% rise in passenger traffic over the past four years? It looks that way. What happened at signal 109 did not come out of the blue. Signalling problems have led to calls for failsafe systems since the report into the 1988 Clapham crash made the case for the automatic train protection (ATP) system. Cost and different political priorities ruled that out at the time. But even ATP is no guarantee of safety, as the Southall crash proved. That collision led to Great Western, the operating company involved, being fined £1.5m for not activating ATP on the crashed train, with the loss of seven lives. Safety operations require rigorous operating procedures as well as sophisticated equipment. How strictly have the operating companies monitored existing safety procedures is one of the questions Lord Cullen’s inquiry will need to examine. The Health and Safety Executive sounded the alarm when it spent a year looking at the way rail companies handle the risk of trains passing red lights. Its investigations revealed ‘significant weaknesses’ in the way such dangers were tackled. Only last month, the HSE urged rail chiefs to do more to reduce the rising incidence of trains passing red lights and called for 22 specific actions. Its call for action left no doubt about the obvious seriousness of the danger caused by trains jumping the lights. ‘The most dangerous incidents, with potentially disastrous consequences, are when a train runs past the junction and gets on to a line being used by another train,’ says the deputy chief inspector of railways on September 3. His words were tragically borne out at signal 109. Rail bosses cannot claim they were not warned. The dangers were all too apparent. They were asked to produce an action plan by October 1, a call that Railtrack responded to by filing its response last Wednesday as the families grieved. Nor was last month the first time the railways inspectorate had warned of the need to make safety an overriding priority. Vic Coleman, the chief inspector who announced his interim findings into the Paddington crash last week, went out of his way in August to issue a formal warning to Railtrack to take proper account of safety. He was prompted by the order Railtrack received from the government’s rail regulator about its need to improve performance or face a hefty fine. ‘Targets must not be met at the expense of safety,’ said Mr Coleman. Why, we want to know, did he need to make what seems a statement of the obvious? Why did he formally ask Railtrack for ‘assurances that there will be no cutting of corners with respect to safety’. One of the problems bedevilling the issue of public safety standards, whether it applies to transport, the environment or health, is the difficulty of discovering the facts and making a balanced judgement. Officialdom would rather we did not know what really goes on, whether it is Railtrack’s safety record or Whitehall’s manoeuvres over genetically modified foods. We know, because Mr Coleman told us, that Railtrack sent a delayed response to the inspectorate’s call for specific measures to be taken to reduce the risk of trains passing red lights before the Paddington crash. But we are not allowed to know what its response was because it is considered confidential. Tell that to the crash victims and their families. Lord Cullen will not stand for that and will have no trouble overriding it.
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But the public’s right to know should not depend on a law lord chairing a public enquiry. The government must rethink its narrow view of freedom of information and change its proposed legislation to reduce the barriers to it. The government’s swift reaction to the tragedy showed is famed sensitivity to public opinion. It would be a mistake, however, to increase an already tangled web of operating and regulatory responsibilities by imposing another bureaucratic overlay. Sir Alistair Morton, chairman of the impending Strategic Rail Authority, diagnosed the basic problem as ‘a battered, historically underfunded’ rail network. Railtrack, he said, must invest more. More important still, a new culture of safety is needed. Only then will lasting good come from the disaster at signal 109.

Discussion question

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

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

In the time it takes to read this article, 20 year old Jackie Erswell, dressed in short-sleeved shirt and bell-bottomed jeans, will have assembled five desktop computers at Dell Computer’s factory in Limerick, Ireland. That fact goes some way to explaining how Dell has emerged as the victor in the brutal PC battle that has prompted a wave of upheaval in the industry. Gateway has racked up losses and sacked 16 per cent of its workforce, IBM has pulled out of the consumer market, and Compaq and Hewlett-Packard have sought protection in a merger. Dell, on the other hand, talks boldly about growing its PC market share from 15 per cent to 40 per cent. Last year the PC industry in the US declined 9 per cent year on year, but Dell’s shipments rose 10 per cent. It added five percentage points of market share in the US and two points worldwide, and snatched the crown of leading US consumer vendor from Compaq Computer. But how can this industry powerhouse maintain its momentum? In the mid-1990s, PC demand was growing at 20–30 per cent a year, helping drive Dell’s revenues from Dollars 2bn in 1993 to Dollars 31bn last year – but it is not expected to return to these levels. Having built its success on its low inventory, low cost model, passing on to customers falling component costs, Dell now faces the prospect of being one of the first PC makers to lift prices as component costs rise. The company is also contemplating acquisitions – which would be the first in its 17-year history – in order to meet its growth targets. As it prepares to set out its agenda to analysts in New York this week, 2002 is shaping up to be something of a turning point for Dell. It could determine whether it suffers the fate of many IT companies, in finding that its best years of growth are behind it.
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Over recent weeks, the Financial Times has gained extensive access to Dell’s operations and leading executives, including Michael Dell, its eponymous founder, Kevin Rollins, president, and others. It has also interviewed employees, customers and analysts about Dell and where it goes next. Dell’s biggest factory, the Round Rock plant in Texas, is a blur of primary colours, noise and speed. The conveyor belts moving parts across the factory run at 15 mph. Apart from whoops from workers changing shifts or completing a product, the sounds of machinery dominate. Buyers’ orders – more than half of them placed over the internet – emerge on the factory floor as a spool of white barcode stickers, which determine which parts are needed. Once each code is scanned, a green light flickers in front of a box of parts, identifying which to select. Most parts are clicked rather than screwed into place, made easier by colour coding. Ro Parra, senior vice-president Americas, says: ‘Eighteen months ago, we had 3m square feet of manufacturing space. Now we have 1.5m and are producing 30 per cent more.’ Such efficiencies helped Dell become the only big PC company to maintain profitability over the past year, when PC growth turned negative for the first time. ‘Basically Dell gained most of the share and made all of the profits among the top 10 vendors versus last year,’ analysts at Lehman Brothers concluded. That success has made Michael Dell, the company’s founder, a poster boy for the IT industry and elevated him to 18th in Forbes magazine’s ‘rich list’, with wealth estimated at Dollars 11bn. Though he is now aged 37, it is still easy to picture Mr Dell as the 19 year old student who came up with the idea of selling PCs direct to customers from his dorm at the University of Texas. The Dell legend is strong in Limerick, where Dell makes computers for the Europe, Middle East and Africa region, and is the dominant local employer, with 3500 workers. Joe, a burly former factory worker who repairs PCs, said: ‘There were rumours that he doesn’t have a chair in his office as he never sits down, and that he never takes lunch.’ Stephen Kiely, a technical co-ordinator, says: ‘I’ve only seen him drink iced water. When he visits, we have to have notebooks around the factory so he can check his mail whenever he stops at any location.’ Although Mr Dell, dressed in blue shirt and no tie, exudes a relaxed manner, his attention to his image is evident. Acutely conscious of a photographer’s presence, he sips water only when the camera is obscured. Even after 17 years in the industry, he remains focused and driven. Private about his personal life (a request to see his office is declined), he concedes his Texan roots have contributed to his entrepreneurialism. Sitting in his boardroom, called ‘Silver’, he points to his polished leather shoes and in a rare attempt at light-heartedness says ‘I left my boots at home today, little lady’, before adding soberly: ‘Just kidding – I don’t wear boots and I’m not a cowboy, that’s not my thing. But there is perhaps something in the Texan spirit. It’s big and bold, and maybe entrepreneurial.’ That growth has made Dell the biggest employer in central Texas, where it employs 18 000 workers (or ‘team members’, as they are known) from a total of 35 000 worldwide. Dell’s ambitious spirit is contagious. Even Kevin Rollins, the 48 year old president and chief operating officer who was poached from management consultants Bain in the early 1990s, claims Dell can treble its turnover from Dollars 30bn. ‘And when we get to Dollars 100bn, we’ll say we’d like to go to Dollars 200bn. There’s a lot of large companies out there and we have about 3 per cent market share within the
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total IT industry today and that’s pretty small. . . So we look at that and say ‘‘well, that’s a pretty nice playing field to run on to’’’. Dell’s dominance stems from its business model – a slick manufacturing and direct sales operation – rather than any technological breakthrough. It sees manufacturing as a core competence: unlike IBM and Compaq, which have outsourced production to areas such as Taiwan, Dell makes nearly all its own products. Brian Gammage, an analyst at Gartner, says: ‘Dell have simply applied good practice, and the techniques used in the car industry. They have done what others should have been doing, tying in suppliers into just- in-time relationships.’ Dell builds computers direct to order – about half its sales are made over the internet – and holds little inventory. It carries about one week of stock, compared with more than four weeks for rivals. At Round Rock, the area for inventory for the 1.5m square foot factory spans just 25 square metres. Parts are delivered every two hours from local warehouses, run by suppliers. The focus on squeezing cost is evident at head office. Posters urge employees to greater efficiency, such as one that asks: ‘Did you know that Dell could reduce its paper consumption by 20 per cent?’ In the fourth quarter, Dell reported its lowest ever level of operating expenses, at 10.2 per cent of revenues. That compares with 18.3 per cent at Compaq and 20.6 per cent at HP, according to Lehman. Dell focuses on standardised technologies suited to high volume production, rather than ‘blue sky’ product innovation. John Medica, Dell’s vice-president of client products, who spent 10 years at Apple Computer, says: ‘At Apple, demand is created through innovative products. At Dell, our innovation is around the business model. We are not positioned as a market maker.’ What marks Dell out is also its obsessive, targets-based approach. This regime was prompted by a near collapse in 1993, when sales grew too fast, doubling to Dollars 2bn. Mr Parra recalls that when he joined Dell that same year to run its small business operations in 1993, he thought he had made a mistake. ‘I asked for a profit and loss statement and was told they didn’t have them. . . I was told they did not have gross margins by product. They only tracked revenues and it was only at the end of the quarter that they knew if they made any money.’ The mistakes, says Mr Parra, forced Mr Dell to call in ‘scar tissue’, including Bain. The consultants helped impose a highly analytic approach on what had been a more entrepreuneurial kind of company. Everyone, down to factory floor workers, has to meet key targets. For workers, there are quality standards, workmanship issues and targets to hit – on an hourly basis. Every business review includes an assessment of cost and productivity per employee, per quarter. Such ‘metrics’ mean that the company claims to know exactly where is on a weekly, even hourly basis. It can adjust prices on its website according to demand and track when products – or people – are a flop. Last year, 6000 were sacked amid the IT spending slowdown. John Hamlin, head of the US consumer business and a former venture capitalist, says: ‘It is a fun place to work if you fit the mindset. . . The beauty is there are no shades of grey. That clarity flows through to financial incentives bonuses and stock options.’ But for others, the culture can be oppressive. At the Limerick plant, if a factory worker makes a mistake, such as scratching the PC, Terence Butler, 20, places a mouse mat inscribed with the words ‘100% inspection’ on the PC. It denotes that the next seven computers made by that worker are checked. The penalty for more serious failure is 20 mouse mats.
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Dave Cassidy, a former shop floor worker, says: ‘I worked there for five weeks before Christmas. We had very short notice to meet targets in a quarter and had to work impossible hours.’ Another former Dell engineer is less harsh, but adds: ‘There was an attitude that if you can’t measure it, you can’t improve. But things could get lost in translation from Austin to Limerick. . . we were often driven by a fear of failure, and worried Dell would pull out of Ireland. ‘You could see that in the stress of people. Sometimes you thought ‘‘we don’t have to crucify ourselves over some metric of 0.1 per cent’’. The image of the man always tended to be greater than the company itself. . . You couldn’t stay there for five years.’ Where does Dell go next? The company’s dilemma is summed up by Rebecca Runkle, an analyst at Morgan Stanley. ‘There is no question that Dell’s strategy and track record are top notch. But there is also no question that as Dell reaches the size it has, it is increasingly challenged to capture its historic growth rates. It has to look to new marketplaces and do that in a slower growth IT industry.’ Ms Runkle is forecasting earnings per share growth of 10 per cent over the next few years. That is a big fall on the 1990s, when she says Dells revenue growth ‘was about 40 per cent annually, with earnings north of that.’ Dell’s most basic challenge is that more than half of its revenues come from low-margin desktops – yet PC demand is unlikely ever to return to the growth of the mid-1990s. Worldwide PC growth is forecast to rebound to only about 3 per cent this year, and although consumer demand helped Dell over Christmas, corporate demand remains soft. One source of growth is market share gains and overseas expansion, as the US still accounts for 70 per cent of revenues. Asked whether the direct model is exportable, Mr Dell’s composure slips. ‘Go back and look at the press on Dell in 1987 at the UK launch. We had 22 journalists show up and 21 said it was a horrible idea. It wouldn’t work, it was some American concept. I’ve been underestimated, rejected, describe it any which way you want, but every time we opened new offices round the world, people said it wouldn’t work.’ However, in Europe, buying PCs from resellers remains the norm, with only about 30 per cent buying direct, says Francois Bornibus, a vice-president at Compaq Europe. Dell refuses to adapt its business model to local markets. But although it has enjoyed strong growth in Europe, and has done well in the UK, it has some way to go. It grew at 35 per cent in Germany last year, to take 7 per cent of the market, but lags Fujitsu-Siemens at 23 per cent market share. The immediate flash point for the PC business will be how Dell responds to rises in the cost of components, such as memory and flat screens. While it exploited falling component prices over the last few years, its low inventory model could now force it to buy parts in a rising market, pushing up costs. Analysts estimate the cost of parts for desktop PCs has risen about 11 per cent since the start of the year, and for notebooks by 17 per cent. Apple and NEC have recently said they will raise prices, and Dell is considering whether to follow suit. Nevertheless, Mr Gammage at Gartner argues the battle has not changed. ‘This is still a cost war. The difference is that this one will be about who can best constrain the cost of price rises.’ Dell says only about one-quarter of its cost advantage comes from passing on falling component prices; the remainder is from other efficiencies. It aims to take more absolute
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READINGS P5

cost out of the business this year than in 2001, but with operating expenses already at a record low it is hard to see how much more flab can be cut. A third source of growth is Dell’s move into servers and storage, and on to Cisco Systems’ turf as it offers low-end networking products. Servers and storage now account for about 20 per cent of its revenues. IDC data show Dell’s share of standard Intel architecture servers – the most basic commodity servers – rose from 13 per cent in 1999 to 19 per cent in 2001. Compaq fell from 30 to 26 per cent. But Mark Melenovsky, analyst at IDC, says: ‘Dell are more focused on SME growth, which is slow but solid. The enterprise space is where the major growth will be. IBM have renewed their focus on the Intel space and gained share, while Compaq has more of an installed base in enterprise. Dell will need to invest more in software and services.’ Even this shift into new products may not be enough to return Dell to former growth rates. For the first time in its history, it is contemplating acquisitions. Mr Rollins says: ‘There are not many Dollars 30bn companies that have grown to Dollars 60bn, Dollars 70bn, Dollars 80bn that have done it without acquisitions, so we have concluded this is going to have to be part of what we do going forward.’ Dell has recruited Jeff Lynn, a former vice-president in consulting at both IBM and Compaq, to lead this push. The focus is on widening its services offering from basic support to professional services. ‘We would like to consider acquisitions around the network services and ones that enhance our storage service capability,’ says Mr Rollins. Randall Groves, vice-president of enterprise systems, says: ‘We will want to acquire folks with experience in deploying Intel servers, and focus on applications. But I would be surprised if acquisitions become as central as (they are to) Cisco.’ The dangers are evident. Buying services companies could create conflicts with partners. Dell has no experience in managing acquisitions. Moreover, its business model does not give it competitive advantage in services. As Mr Parra acknowledges: ‘The challenge is to ensure we focus the organisation around two or three areas of expansion. . . there is an opportunity for confusion and lack of execution.’ This all suggests that growth will be far tougher for Dell than the last 10 years. But as the carnage in the PC sector shows, it would be a mistake to underestimate Dell. After all, it took the risk of starting a PC price war, and won. Mr Dell himself is in no mood to contemplate failure. He recalls that when he founded the business in 1987, ‘I wasn’t going around asking it it was going to work. I just saw the opportunity and went off and did it.’
Discussion question

Describe the basis of Dell’s competitive advantage.

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Revision Questions

3

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

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

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

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

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

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

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

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Section C type questions
Question 4
C plc, a quoted chemical manufacturing company, has until recently achieved a steady increase in profitability over a number of years. It faces stern competition and the directors are concerned about the disquiet expressed by major shareholders regarding performance over the last 2 years. During this period it has consistently increased dividends, but its share price has not grown at the same rate as it did previously. K plc, a direct competitor, is similarly experiencing a reduction in profitability. Its shareholders are diverse, with the majority being financial institutions. K plc has been criticised for under-investment and has achieved no product development over the last two years. Following a concerted media campaign, K plc is facing prosecution for discharging untreated pollutants into a river. C plc is seriously considering making a bid to acquire K plc. The directors of C plc, however, are divided as to whether K plc should be closed down or permitted to continue production post-acquisition if a bid is made. In either situation, significant staff redundancies would follow. Requirements (a) State the strategic factors which C plc would need to consider before making a bid to acquire K plc. (10 marks) (b) (i) Discuss the social and ethical implications for the managers and staff of both C plc and K plc if the acquisition goes ahead. (8 marks) (ii) Discuss the environmental issues which would face the directors of C plc if it proceeds with the acquisition of K plc. (7 marks) (Total marks = 25)

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

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

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Solutions to Revision Questions

3

Section A solutions
Solution 1.1
(A)

Solution 1.2
(B)

Solution 1.3
(C)

Solution 1.4
Core Peripheral External

Solution 1.5
(C)

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

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



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

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

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

Section C solutions
Solution 4
(a) Despite an increase in dividends, the rate of increase in the share price of C plc has decreased. This is an indication that the investing public are concerned about the future earning capacity of the company and the disquiet of the major shareholders also reflects these concerns. It seems likely that the ‘stern competition’ is responsible for this situation. One of the ways of achieving growth and, possibly, boosting earnings may be to acquire another firm. Management is considering acquiring K plc, which will mean that the combined businesses will have a much greater production capacity if the K plc plant is not closed. The crucial issue will be what C plc can do with the additional facilities and whether it is possible to benefit from the acquisition. Competition in the industry will be reduced by the acquisition of one of the companies and savings are likely to result from the rationalisations and the economies of scale which should occur. However, management must be aware of the effect on the management and staff of both companies involved in the acquisition. Although it is usual for acquisitions to be justified on the basis of the synergy which results from the combination of the organisations, there is often doubt regarding the extent of these benefits. This is particularly noticeable in markets in which there is excess capacity. It is also generally recognised that the management of the combined business poses a difficulty which reduces the synergistic effects of the acquisition. The cost of the acquisition will be very important in determining its ultimate success. It is possible that during the acquisition, another company may bid for K plc and this may raise the price to a level which makes it difficult for C plc to ensure the acquisition is financially successful. C plc’s expected cost of capital will be a major influence in determining the result of the acquisition. (b) (i) It is likely that fewer employees will be needed in the combined business. In particular, the providers of specialist expertise may be particularly vulnerable as duplication of this type of activity may not be required. It is likely, therefore, that a significant number of redundancies will occur. This will create a feeling of insecurity among staff. It is important that all staff are informed of the policy in respect of redundancies. This will be particularly important in the acquired company, especially if the bid is hostile. The rationalisation process will create uncertainty within both firms and it is important for the motivation of employees that the issue is handled with openness and honesty. Changes in employees’ working conditions within the combined firm is an important issue. If it is not handled well, it is likely that the overall synergy of the acquisition will be
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adversely affected. Uncertainty about employment will be a problem for the staff and a clear statement on the rationale for the acquisition and the employment policies to be adopted would appear essential. Remuneration, training programmes and assistance in finding alternative employment are topics which should be discussed to improve staff morale within the firm. It will demonstrate the attitude of the directors to the staff redundancies. It is important that employee motivation is retained if the acquisition is to reach its potential. Management must, therefore, handle the social and ethical implications of the acquisition sensitively, especially in respect of the staff redundancies which appear to be inevitable. (ii) After acquiring K plc, some environmental issues will need to be tackled by management. The pollution problem, in particular, will have to be addressed. It is clear that the matter of the untreated pollutants should be investigated immediately so that the level of pollution is brought under control. As a priority, the company should seek to establish acceptable levels of effluent pollution and the firm would be wise to participate in establishing these standards. At the same time, steps will have to be taken to reduce the adverse publicity that may arise through the prosecution pending against K plc. It would seem to be necessary for the company to adopt and publicise an environmental policy within the community to ensure that the negative effects of the pollution problem are minimised. It is likely that considerable expenditure will be needed to rectify the position. The continued success of the firm may depend on the way in which the pollution problem is handled. The projected success of the combined businesses will determine the amount of expenditure that might be incurred to reduce the pollution problems.

Solution 5 


This question tackles the problem of a mission statement with particular reference to the social responsibility of a firm if there is a conflict between profitability and pollution. In part (a), note that the mission statement uses the term ‘profit’, a short-term measure, rather than ‘shareholder wealth’, the presumed economic objective of businesses. This allows you to contrast the conflict of social responsibility with profit in the short run, while using the sustainable enterprise to indicate that in the long run the interests of shareholders and society may not be in conflict.

(a) The mission statement that Router plc has published states that the firm aims to make the ‘maximum possible profit’. It is quite common for objectives of this kind to be included in mission statements. In addition, the ‘wider responsibilities to society’ are recognised. 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’. The gold-mining project provides an example of such a conflict. It is expected to provide a profitable opportunity, but will result in ‘substantial lagoons full of poisonous water for at least 100 years’. In the short run this reveals a significant conflict between the interests of the shareholders and the public, particularly those living in the vicinity of the proposed mine. While it is often possible to reduce adverse environmental effects, these remedies will involve the business in costs that will reduce the profit available for distribution to the shareholders. However, theories of the sustainable enterprise suggest that in the long run the following of socially responsible policies may safeguard shareholder wealth. Router
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requires that the authorities grant it operating licences and that shareholders continue to hold its shares. If it develops a reputation as a ‘dirty firm’, both may change their minds. This would cause a fall in both profits and share price. This would of course be a fall in shareholder wealth. (b) There are various ways that social responsibility may be incorporated into the firm’s decisions: 1. Include costs of environmental restoration in project appraisals. It is essential that the economic costs of a project are incorporated into the project evaluation. It is usual for a firm to include all relevant financial costs in a project evaluation, but it is also important that the effect of the investment should be considered. In this example, Router must include the cost of reinstatement in its calculations. This will result in the rejection of the project, as it does not meet the profitability criterion. 2. Include social responsibility in the firm’s mission and objectives. 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. 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. 3. Employ outside consultants to advise on, or audit, decisions. 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. It is possible that managers could neglect the ‘wider responsibilities’, especially if they are under pressure to boost the results of the company. In this situation, there may be a temptation to understate the costs by omitting the cost of coping with the ‘wider responsibilities to society’. A procedure, therefore, should be introduced to ensure that the environmental effects are properly considered and this should include the regular use of outside ‘experts’ or impartial non-executive directors to assess the environmental effects before decisions are taken within the company. 4. Develop a social consultation panel. Router could convene a panel of stakeholder representatives to act as a consultative committee to discuss its decisions. In this case, the inclusion of local people and environmentalists on such a panel would point up the issues mentioned in the case. (c) It is usual for an organisation to have a number of objectives. It is common to 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. Furthermore such conflicts may arise from the fact that organisations are led by a group of managers and therefore the conflicting personal agendas of each must be considered. Methods of dealing with this include: 1. Establish a hierarchy of objectives. By prioritising objectives and scoring alternative projects against them, it becomes possible for management to choose the option with the highest weighted score. This one will best meet its overall objectives. 2. Satisficing. Where the conflict of objectives means that no single objective can be maximised, management may decide to adopt the course of action that is most acceptable to all by giving each stakeholder group something of what it wants. In this case perhaps to dig the mine but also provide some small amount of environmental restitution so that some of the damage is averted.
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3. Sequential attention. This involves giving each stakeholder group’s interests consideration over time, though not necessarily for every project. The effect is to keep them on board. In this case perhaps the mine will abandoned because the consequences are so great, but the next project, with lesser environmental damage, will be adopted. The environmentalists on the management team will feel that they have achieved something. 4. Side payments. These are compensatory payments to buy acquiescence. In this case perhaps quality housing might be provided for the labour force which would remain after the works had finished. This could be pointed to as some compensation for the environmental damage and population displacement. (d) In an article in the August 1992 edition of CIMA Student, the author identified common features and issues of ethical questions: 
  

different perceived long- and short-term advantages and disadvantages; advantages to one group compared with disadvantages for another; issues of public responsibility and the accountant’s duty as a professional; and difficult implementation problems. The principal ethical issues in mining are:

1. The use of non-renewable resources. The mining operation results in a non-replaceable asset being extracted from the mine. This deprives both present owners and future generations. It is, therefore, important to ensure that proper and equitable compensation is provided to the original owners of the resources. Moreover, the resources extracted should not be wasted or used for frivolous purposes out of consideration for future generations. 2. The use of power in the negotiations. The negotiations will raise a number of issues which will bring an ethical component to the negotiations. In the negotiations, it is important that the profit motive does not cause the developer to act improperly and exploit the present owner of the mining rights. Where the country is poor, it is too easy to give inadequate return for the value extracted. 3. The environmental damage that will remain. ‘Lagoons full of poisonous water for at least 100 years’ is clearly not an acceptable outcome for society. Router has an ethical responsibility to minimise the effect of this pollution. It would appear to be essential for the company to develop a plan to deal with the problem. It is likely to reduce the profitability of the project, as there are bound to be significant costs to treat the effluent, but to minimise the effect would appear to be the minimum responsibility of the company. 4. Impacts on the quality of life of local residents. The project must consider the effect of the mining operation on the local residents. Although they may benefit from the establishment of the mine in the area in which they live, it is likely that the pollution will also affect them. It is essential that Router explains the steps which will be introduced to minimise the effects on the local environment. This may reassure local residents that the company is adopting a responsible attitude towards the ethical aspects of the mining operation in their area. 5. Safety of processes. Mining is an industry noted for its poor safety record. Router must ensure that it conforms to best practice in the safety measures it follows, which may be more stringent than the legal minimums in the country of operation.

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Projects

4

L EARNING O UTCOMES
After completing this chapter you should be able to:
" "

identify a project and its attributes; apply suitable structures and frameworks to projects to identify common management issues; identify the characteristics of each phase in the project process; identify the strategy and scope for a project.

" "

4.1 Definition
If you study the literature on projects, you will see that there are certain similarities in the definitions of projects and their characteristics. 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’. If you look at a project in this way, you can see that you yourself may have undertaken one. Have you organised a ‘holiday of a lifetime’ or a special anniversary such as a Golden Wedding party, or at work helped with the implementation of a new way of working? Do they not meet the definitions given?

4.2 Characteristics of a project
This is likely to be examined quite frequently. Projects have: 

stakeholders – all those who are interested in the progress or the final outcome of the project including the users, the customers (if someone is buying the output of a project,
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e.g. a computer system, a building etc.), the shareholders of the customer (who want value-for-money) and those who provide the money for the project (sponsors); uniqueness – it may never have been undertaken before (the Tate Modern) or it may have innovative technology (The Eden Project); objectives – projects have to meet two sets of objectives: the one relating to accomplishing customer requirements of scope (the deliverables), quantity, quality and cost; and the other relating to the achievement of the organisation’s objectives (the business case): profitability, prestige, etc.; resources – people, finance (contained in budgets), information, materials, ideas, time; schedules – plans for events over time for resources and contingencies; quality – measured in terms of customer satisfaction and the organisation’s image; uncertainty – inevitably uniqueness leads to a context of risk in the deliverables, the activities, the contingencies associated with suppliers, subcontractors and with time/cost; finiteness – a fixed time scale; change – there is no practice or rehearsal and once the project is completed, the team will ideally move on to the next project.

4.3 The project life-cycle
4.3.1 The project life-cycle phases
This is likely to be examined quite frequently. Large-scale projects usually follow separate phases, which occur in sequence. 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. Sometimes a need may be identified very quickly, whereas in other cases it may take months to clearly identify the need, gather data about the problem or opportunity and ultimately define clear requirements. Figure 4.1 presents the four phases of the project life-cycle of large projects. Identification of a need The first phase of the project life-cycle involves identification of a need, opportunity or problem. Initially a feasibility study will be conducted to check the size of potential benefits and

Figure 4.1
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The project life-cycle (Gido and Clements, 1999)

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evaluate in broad outline potential alternative solutions and their lifetime costs. The feasibility study can be done by internal staff as a mini-project or by requesting proposals from contractors. If contractors are used, the project’s requirements will be presented by the company in a document called an invitation to tender (IT T ) or a request for proposal (RFP). The company as the customer will ask contractors with a proven history of success at similar projects to submit proposals on how they propose to solve the problem or satisfy the need, together with schedules of time and cost estimates. For example, a company that has decided to upgrade its computer system may send out an I T T to several consulting firms. This process will provide additional detail to the organisation’s fact-finding exercise, to develop its own requirements and exactly which requirements are achievable. It must be noted, however, that not all projects involve formal requests for proposals. At the end of this phase the company will decide whether to proceed with the project. If it does, then a project team is formed and a project initiation document is raised. This will include a statement of requirements (SOR or project brief ), a short-list of potential contractors, a vision and a business case for the project. The business case is an important guide to decision-making throughout the project, and the vision encourages motivation and congruent goals in the project team. Development of a proposed solution The second stage of the project life-cycle is the development of a proposed solution. All shortlisted contractors and/or internal design teams will submit final proposals to the company, which then evaluates them and chooses the most appropriate solution to satisfy the need. This option–evaluation process is first filtered on quality criteria for compliance with the statement of requirements. Then a choice will be made based on time and cost. Again, a milestone review will decide whether to proceed further with the project. If it does and an external contractor is chosen, a contract will be signed between the company and the contractor. Implementation The third stage of the project life-cycle is the implementation of the proposed solution. Once a proposed solution has been selected, the work can commence to build the required product or service. Even if the product is ‘off-the-shelf’, for example an accounting system, there is often build-work required to tailor it or customise it more specifically to the requirements, for example fitting a sun-roof in a new car. This phase is the actual performance of the project and will involve doing the detailed planning and then implementing that plan to accomplish the project objective. The overall solution is subdivided into separate deliverables to be achieved at fixed milestones through this stage of the project. Achievement of these deliverables may be linked to stage payments. The project’s objectives of functionality, quality, cost and time are monitored against each deliverable to ensure they are being met. Completion The fourth stage of the project life-cycle is the completion of the project. When a project closes, important tasks need to be carried out, such as confirmation that all deliverables have been provided and accepted, and all payments have been made and received. Project performance is evaluated and appraised in order to learn from the project for future reference. Obtaining customer feedback is important in improving the quality of future project provision. The business case is also revisited to check whether any subsequent actions are needed to ensure achievement of the anticipated benefits.
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4.3.2 An alternative project life-cycle – iteration
Project life-cycles may vary from a couple of weeks to several years, dependent on the complexity, size and content of the project. It is also important to recognise that not all projects will follow the exact phases of the project life-cycle as presented above. Phases may be simultaneous or less structured and formal. For smaller projects and those where requirements are uncertain, the life-cycle above may be too slow and involve customers too little during development. In these cases the project life-cycle may be repeated several times before a solution is agreed, rather than linearly as shown above. Approximate requirements, the best ideas from competitors and the best parts of previous projects may be built with customers into a model or prototype. Key features of the proposed system are implemented in a simulated operational environment that can be used as a ‘predictive model’. By trial use of the model, requirements are revised and the cycle is repeated until agreement is reached. This would reduce risk because team members can gain experience as this process evaluates complex processes, tests and validates design techniques and tools, designs test facilities, assesses aspects of system integration and can be used to persuade suppliers and users to accept the proposed solution. The feedback from this iterative process can identify risky parts of project design or problems of integration and operation. (Source: Field and Keller, 1998) In some cases the model then becomes the final solution with no further implementation.

4.3.3 Project approach
Whichever project life-cycle is used (linear or iterative), a project may adopt a particular method or approach to identify all the requirements (and hence project tasks) that will be needed to achieve the project objective. These methods effectively identify the starting point for the project, that is, what will be examined first. There are many different approaches that could be adopted. Here are some of the more well known:   

Functional decomposition. This involves determining a desired state and then determining all the components that would go into making that state possible. Then each of the components are analysed in turn to determine how to make those possible. This ‘decomposition’ continues until all the requirements are known. This approach is often used when a ‘back to the drawing board’ objective has been set. Gap analysis. By comparing the current system/process to the desired system/process, a set of ‘gaps’ can appear. The project can then be orientated to filling in those gaps and so ‘moving from A to B’. This is fundamentally an incremental approach, building on what has gone before. Reverse engineering. This is essentially taking an existing object apart to see how it works in order to duplicate it or enhance it.

In project terms, reverse engineering is going back to the basic design blocks to see how a thing works, to see where errors or weaknesses have occurred and to correct or improve them. It is especially useful in IT projects, where, for example, there is a constant need for updating and renovating business-critical software systems as business requirements change or technological infrastructure is modernised.
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4.3.4 Other frameworks: 4, 5, 7 or 9?
There are many other frameworks, some of which look at different aspects of project management, and others that take ‘life-cycle’ approaches, covered in different textbooks. Here is a selection to help you generate a few ideas. The 4-D model This model is often used for very creative projects, or for those that involve intervention in the culture of an organisation. The four stages of the project according to this model are as follows: 
  

Discover: What gives the current system or organisation life? Appreciate the good things about what we do. Dream: What might be? What is the organisation/world calling for? Envision the results of the project Design: What is the ideal solution? Construct the elements and assemble them. Deliver: How do we empower, learn and survive? Plan for continuous improvement.

The 5 project management process areas According to the Project Management Institute, the five process areas of project management (a life-cycle of sorts) can be shown in diagrammatic form, as shown in Figure 4.2. The 7-S model The 7-S model of culture proposed by McKinsey (see Section 2.3.2) is also sometimes used in project management. The 9 project management knowledge areas The Project Management Institute also proposes that there are nine key knowledge areas in project management, each of which is relevant in some or all of the five process areas: 


Integration management; plan development, plan execution and overall change control Scope management; initiation, scope definition, scope planning, scope verification and scope change control

Initiating

Planning

Controlling

Executing

Closing

Figure 4.2

The project process areas (based on the work of the Project Management Institute)
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Time management; activity definition, activity sequencing, activity duration estimating, schedule development and schedule control Cost management; resource planning, cost estimating, cost budgeting and cost control Quality management; quality planning, quality assurance and quality control Resource management; organisational planning, staff acquisition and team development Communications management; communications planning, information distribution, performance reporting and administrative closure Risk management; risk identification, risk quantification, risk response development and risk response control Procurement management; procurement planning, solicitation planning, solicitation, source selection, contract administration and contract close-out.

4.4 The project as a conversion process
An even more flexible view of a project is to use a systems approach; that is, the project can be viewed as a conversion of some resources (input) into a final product or objective (output), as described by Maylor (1996). The project will take place under a number of constraints, often outside the project boundary, and the conversion process is carried out by a number of mechanisms that transform the resources during processing (Figure 4.3).

4.4.1 Inputs
There will normally be a project brief, that is, a document that provides a statement of customer needs that is to be the foundation of the final project. There are likely to be explicit project requirements and also those that emerge during the course of the project as

Figure 4.3 The project as a conversion process from Project Management by H Maylor, published by Pearson Education. Reprinted by permission of Pearson Education.
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a result of the customer’s changing needs or perceptions. The initial project brief is often open to interpretation and the expert opinions of the organisation carrying out the project, and is likely to be negotiated with the customer.

4.4.2 Constraints
These may take any of the following forms: 
       

financial – the budget amount and timing of capital needed; legal – for example, planning permission requirements, health and safety regulations; ethical – behaving within ethical boundaries is becoming increasingly important as customers are becoming concerned about the ethical behaviour of organisations; quality – technical requirements specified and desired by the customer; environmental – organisations must consider environmental legislation and control; logic constraints – planning that certain activities take place before others can start; time and quality – discussed earlier in this chapter; indirect effects – the desire to minimise disruption to other areas of the business as a result of change in one area; politics – for example, crossing departmental boundaries may be beyond the scope of the project.

4.4.3 Outputs
The output is the satisfied need – achievement of the deliverables required. An output may be tangible or intangible, but it must satisfy the current customer project objectives, for example, a new computer system plus effective training for the staff.

4.4.4 Mechanisms
The mechanisms by which the output is achieved and processing carried out include the following: 
   

People – those involved directly and indirectly. Knowledge and expertise – brought to the project by the people participating. Capital – the money securing the resources. Tools and techniques – methods of organising resources. Technology – the physical assets performing the conversion process.

4.5 Examples of projects
4.5.1 One successful project: ongoing
This section will help you to become familiar with real projects. Use examples to support your answers. The Eden Project Imagine a large hole filled with water: an abandoned china clay pit at Bodelva in Cornwall, 5 km east of St Austell. The pit was 180 years old with an area of about 35 hectares and
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80 m in depth. There were 13 natural springs feeding in the water, some 700 000 m3 to be dealt with annually (22 litres per second.) It seems the most unlikely site for one of the most successful projects seen in the United Kingdom that linked the imagination of Tim Smit who saw the site and had the vision in 1994 and the skills of the principal project teams. The project was to construct a botanical garden and education centre within that china clay pit to be opened to the public as soon as possible. The mission statement was (and is) to:
promote the understanding and responsible management of the vital relationship between plants, people and resources . . . and to inspire positive initiatives that will lead to a sustainable future for us all.

To this end, a sheltered micro-climate was to be created below the surrounding ground level by the construction of enormous greenhouses (called biomes) to enable large numbers of the world’s tropical and Mediterranean species to be planted. The customer/employer of the project was Eden Project Ltd and the Financial Project Manager was Davis Langdon Management (DLM) which was involved in the project from early 1996. A crucial part of the project was the receipt of £25 000 from Restormel District Council. This was seed-corn money that enabled the development of the millennium funding bid to be financed. Tenders for the construction contract were advertised in early 1997. Eight tenderers were selected, including one Anglo-German joint venture. The contractors were interviewed and, after investigations, two were short-listed: Tarmac and McAlpine JV. The fundamental requirement contractually was to place a design and construct lump sum contract with a guaranteed maximum price, with the successful contractor investing equity into the project. During the final negotiations, both tenderers were invited to make final proposals including the form of contract they considered most appropriate. Both chose the New Engineering Contract (NEC) and savings/bonus provisions with an activity schedule. This means they chose an NEC target-cost contract, that is, a model contract based on best practice because it supported project management and provided a secure basis for partnering. 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, its offer of equity investment and its construction management proposals being the most favourable. This meant that it became responsible for the whole design, procurement, construction and commissioning of the total built form for a total cost of around £59.8m. The contract was under deed (i.e. legally enforceable) with a 12-year liability period. It was also agreed that McAlpines would have two executive directors join the Board of Directors of Eden Project Ltd: an essential realisation of the partnering concept that had underpinned the contractor’s appointment. In May 1997, £37.5m was granted by the Millennium Commission as one of its ‘landmark projects’, one of the largest funded by the National Lottery to celebrate the third millennium. In the next 18 months, Eden Project Ltd raised matching funds, obtained planning permission (including the new requirement to build a 4 km road from the project to the A390 south of Bugle linking the main A30 trunk road which ran the length of Cornwall), bought the clay pit, appointed the in-house development team and finalised the project brief. The site was not finally bought until October 1998, during which time the owner continued to extract china clay from it as the contract and project team struggled to develop the design. The design team, Nicholas Grimshaw and Partners Ltd, were taken on when the
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contract was agreed. Eden Project Ltd’s (the client’s) expectations were also valueengineered down to the budget (the residue of funding less the inescapable ex-contract costs), programmes and method statements were prepared, geophysical and geotechnical surveys and wind tunnel tests were commissioned and work was done towards the site start. In August 1998, the estimated construction costs had to be reduced by 25% (over £11m excluding the agreed £12.5m for the biome superstructures already negotiated) to achieve the inadequate budget. In October 1998, some site clearance work started, but the final construction contract was only signed at the end of January 1999 before work could start in earnest. Throughout the entire project, all parties worked at risk, with very small primer payments made by the Millennium Commission against rigid ‘schedules of delivery’. There were eventually 87 suppliers and subcontractors managed by McAlpine for the client. The contract was in two phases: Phase 1: The buildings (the Visitor Centre) and infrastructure (roads, car parking, drainage and so on). This was completed in five different stages to allow the customer to start fitting out individual rooms. Completed sections of topsoiling and associated works in the pit were also undertaken separately to enable the horticultural planting to start. Topsoil had to be created from china clay waste/sand, composted ‘green’ waste and composted bark, as there was none in the pit. Much innovation had been required as the pit was filled to a depth of 20 m below the water table, necessitating sophisticated water management and continual pumping of 100 litres per second off site. Starting in December 1998, 2 months of torrential and unceasing rain fell, and construction had to stop. Work did not recommence until March 1999, when diggers and bulldozers were used round the clock to make up the time lost. Phase 2: All the works within the pit, including the two biome structures and the temperate biome with supporting buildings on the rim such as the energy centre and the central production unit for on-site catering, with the final infrastructure. These biomes were covered with triple-layered ‘cling-film with attitude’ or ETFE (ethyl-tetra-fluoro-ethylene copolymer) foil. This is strong, lightweight, anti-static and highly transparent to ultraviolet light, has better insulation properties than glass and is recyclable. It should be maintenancefree for 25 years and last 30 years. The biomes were designed by Mero UK Ltd and achieved two world records: for the largest volume and the tallest free-standing scaffold ever erected for the temporary steelwork: a vast scaffolding birdcage! The weight of the steel framework was less than that of the moist air inside the humid zone biome. Part of these facilities, the humid tropics biome and some of the biome link with the main reception area, dining facilities, lavatories and similar facilities between the biomes, were taken over piecemeal to allow the employer to start work in those areas. Horticultural planting started in September 1999, with the first trees planted in the Humid Tropics Biome in October 2000. Phase 1 – The Gateway to Eden – was opened to the public in May 2000 while construction was still underway: 500 000 visitors came to watch the Big Build. Phase 1 closed in January 2001 so that the link building and modifications to the Visitor Centre could be completed. March 2001: The Eden Project was completely opened to the public. In June 2001, the one-millionth visitor had come to see the project. (The target had been 750 000 per annum.) The project has been successfully completed, though a month late. It came in on budget. The final cost was £86m. There was only one subcontract dispute, amicably settled. The absence of these disputes enabled the focus to remain on the considerable physical, technical and budgetary issues. The client and investors were satisfied. The
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revenue from the admissions, catering and retailing facilities has been 300 per cent over estimates made in the business plan for Phase 1. Harmonious relationships (required by contract clause 10.1: ‘the parties to act in a spirit of mutual trust and co-operation’) had underpinned activity and, for the most part, the reaction of project partners was that it had been exciting, harmonious and profitable. On 24 October 2001, McAlpine JV won the British Construction Industry Major Project Award for contracts above £50m. The judges said: ‘The Joint Venture partnership had enough faith in the project to work at risk for a long period: dealt with incidental problems including weather, geology and budget cuts with enthusiasm and skill, and produced a result which has become an instant legend in its own lifetime.’ The next development phase of the Eden Project commenced in 2002. Sources: Internet downloads: ‘Eden Project – a Landmark for the NEC’, by Tim Carter, Davis Langdon Management: NEC Users’ Group Newsletter, Issue No. 16, www. newengineeringcontract.com. Material reprinted by permission of Thomas Telford. McAlpine Joint Venture Eden Project St Austell: BCIA Awards 2001 – Major Project Award: The Eden Project The Architects’ Journal: Eden Project: www.ajplus.co.uk/eden/facts

4.5.2 One not so successful project
National Air Traffic Services (NATS) In 1987, the Civil Aviation Authority made a case to the government of the day for a new air traffic control system and centre. The deadline for operations was 1996, 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. The new centre had to have a 40 per cent increase in capacity. Between 1989 and 1990 the management strategy for the project was defined, but the project team estimated an operational start date of 1998: 2 years longer than agreed. An independent consultancy (the Mitre Corporation) was hired to help with the scoping of the project and its estimate of completion was 13 years to build a fully operational system as envisaged. The new deadline would be 2003. The project was authorised to go ahead on the basis of going live in 1996. Comment by an audit team revealed that the senior management at NATS were keen to show a ‘can-do’ mentality rather than admitting that the 1996 date was not feasible. At the end of 1991, IBM and Thompson CSF won the system contract that had been subject to competition. Their budget of £1m for the project definition phase was in the main used up by the next year. The contractors refused to invest large sums themselves. A systems implementation contract was let to IBM, with a large number of requirements still undefined. There were no firm offers from subcontractors at this time: firms such as Siemens Plessey, Logica and Frequentis were involved. The system, which was based on IBM’s RS/600 AIX-based architecture, on a token ring network, comprised 200 workstations showing both aircraft data and radar information. The requirements had been set by a small and unrepresentative group of air traffic controllers. In 1994, Loral bought IBM’s Air Traffic Division and conducted a secret audit of the NATS systems that showed 21 000 defects in nearly 2 m lines of code. The whole project, including the building at Swanwick, Hampshire, was said to cost £350m. (Having assumed that this was the total bill, MPs did not appreciate being told that this was only the capital funds draw-down.) In 1995, though the system was working well on 30 workstations, it proved impossible to scale it up on the whole operational configuration. By November, acceptance tests were
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halted. A quarterly progress report from NATS to the Department of Transport stated that the system would be on-line by the summer of 1997. This despite the knowledge of the contractors and NATS project team that there were potential delays in the schedule. These problems became public in 1996. The contractor submitted a plan that showed system acceptance in August 1997. NATS turned this down, insisting that the acceptance date should be June 1997, with the operational deadline 6 months later. However, Lockheed Martin bought out Loral and by the end of 1996 the operational date had shifted to March 1998. Despite the original fixed-price IT contract of £132m, the price that would eventually be paid to Lockheed was £337m. Of the 160 individual payments to the contractor, only 15 were originally specified for the software. The remainder was for additional options taken up by NATS after the award of the contract. The IT contract was nearly half the cost of Swanwick. A new operational deadline of October 1999 was approved by NATS in September 1997. There were calls for an independent audit of the NATS project to the House of Commons Select Committee on Transport chaired by Gwyneth Dunwoody. The new government agreed. By October 1998, the operational deadline was agreed as 2001–2. In June 1999, an audit by Arthur D Little into the finances and management of the project warned that the final cost would be £180m more than announced to date. The Swanwick costs were now £ 700m, though tens of millions of pounds had not been included in the costs. Reference was made by the auditors about the inhibiting nature of the culture at NATS that prevented open debate about project problems or the potential for problems. NATS, through its Private Finance Initiative partner EDS, installed well-written software releases that drastically reduced the number of bugs in the system from hundreds to zero, in 2001. The operational date for Swanwick was confirmed as January 2002. The New En Route Centre, as Swanwick is called, finally received the acceptance of its safety case by the Civil Aviation Authority and became operational on 27 January 2002. (This description was based on an article in Computer Weekly, 24 January 2002: ‘A Brief History of an Air Traffic Control System’, by Tony Collins, p. 14.) Afterword The Eden Project goes from strength to strength and their relationship with McAlpine JV continues. Eden Project Ltd has contracted McAlpine JV for the construction of Phase 4 due to start in late 2003 and finish in 2005. Phase 4 will include building another biome, an education centre and more visitor facilities. Success clearly breeds success. Meanwhile, NATS is still hitting the headlines with problems. EDS successfully sued NATS (May 2002) after NATS terminated the EDS contract after 3 years. It had been due to run for 14 years. NATS had accused EDS of failing to meet critical milestones. The settlement was for an undisclosed sum thought to be many millions. 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. Over a year after it became operational, the NATS system has been blamed for unreadable screens, a near-miss between a 747 and a 767, and the diversion of planes to other traffic control centres due to operator overload.

Exercise 4.1
Having read the descriptions of the two projects, can you identify six differences that were crucial to the success of one project and the relative lack of success of the other?
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Solution
Successful projects 1. A vision that was sold to all (communication) Unsuccessful projects 1. Contract let to IBM with many requirements still unclear/time estimates poor 2. Changed objectives after project start 3. Poor communication

2. Innovation: leading-edge engineering made the project exciting 3. Genuine partnership (McAlpine JV were willing to invest time and money in the project because they had belief in it) 4. Understanding the client’s needs (opening during construction to get revenues flowing) 5. Good management of the large number of third parties and suppliers 6. Small primer payments for rigid milestones

4. No consistent contractual ownership 5. Poor cost management seen in cost overruns 6. Not wanting to hear bad news

4.6 Why some projects fail
You have seen for yourself some of the factors that are crucial to projects. To continue with this theme: NSM Research carried out a survey of 867 IT professionals, asking them under five headings to identify which of the 60 factors could affect the success of an IT project. 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 an article entitled ‘The Project Killers’ on 28 February 2002. The results in Table 4.1 are taken from that article. Forrester, a research firm, informed the world that about two-thirds of major IT projects fail to deliver some of their original objectives (NATS?) and more than a quarter fail altogether. You can see from Table 4.1 that the technical or IT-specific factors were viewed as far less relevant to project success than the way people fail to work with each other. Factors such as communication, leadership and clarity of purpose can produce a desired result. Significant elements of the project management process, such as the defining of clear objectives, setting realistic estimates in terms of budgets and time, and identifying
Table 4.1 Survey results The 10 most common factors contributing to real IT project failures Time/resource estimates unrealistic: 75% Objectives not clearly defined or measurable: 71% Project manager: poor communication skills: 64% Objectives changed during project: 61% Project manager: poor leadership skills: 59% Senior management: not showing strong support: 56% Stakeholders: not taking ownership of the project: 56% Role and responsibilities of the project team not defined: 54% Resources not identified/made available at the start: 54% Project team: did not work as a team: 53%

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resources, will impact seriously on the success of projects: they can head in the wrong direction from the start. Steve Goodman, who works for Coverdale, is experienced in blue-chip IT companies’ major IT projects. He said: ‘With one project team we agreed a work breakdown structure and then asked them separately to estimate the time required for each task. For one task estimates ranged from half a day to two weeks.’ Imagine then that you are building the Jubilee Line that had 10 000 separate tasks! A huge impact on project success occurs when objectives are changed in the course of the project. The associated skill set contains the ability to communicate well and to lead. These skills should be used to communicate and to obtain agreement with clearly defined, measurable objectives, necessitating the understanding of the various stakeholders. Understanding the technology and technical competence are of far less importance to a project leader, though they are more important for the project team and essential in suppliers and third parties. Project teams have to have clear roles and responsibilities, team-working and motivation more than technical competence or formal training. The support and involvement of senior management was essential: without it, projects fail. Suppliers and other third parties have to be tightly managed and assurance about their technical competence given and checked by third-party references, for example.

4.7 Strategy and scope
You may find the terms ‘project strategy’ and ‘project scope’ used in textbooks or articles. These two may well be sections in a project initiation document, and you may be asked to produce them in your examination.

4.7.1 Strategy
In Chapter 1, strategy was defined as
‘A course of action, including the specification of resources required, to achieve a specific objective.’ CIMA: Management Accounting: Official Terminology, p. 50

This definition also applies equally to project management. A project should have a comprehensive high level definition of what it is to achieve, how that will happen, and the resources to be used.

4.7.2 Scope
The scope of a project is the extent of work needed to produce the project’s deliverables. It is generally expressed as a list of tasks, often a summary of the work breakdown structure.

4.8 Summary
In this chapter, you have looked at the various aspects of projects, defining them and examining their characteristics. The key points to remember are: 

the project life-cycle and how a project may be seen as a systematic conversion process;
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what constitutes a successful project; the difference between strategy and scope.

References
Field, M. and Keller, L. (1998), Project Management. The Open University. Gido, J. and Clements, J. (1996), Successful Project Management. International Thompson Publishing. Maylor, H (1996), Project Management. Ft Pitman Publishing.

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Lights, Camera, Project Management
Diane C. Cheklich

Copyright #PMI Publications. Reproduced with permission of PMI Publications via Copyright Clearance Center. The drama began in May 2001, as this newly ‘starving artist’ landed a job with Purple Rose Films in the role of transportation coordinator on the production crew of a $2 million feature film, Super Sucker. The transportation coordinator was charged with procuring all vehicles used in the film, both in front of the camera and behind the scenes. This entailed managing activity and working closely with the people who were responsible for managing the overall project schedule, budget and operation. As transportation coordinator, this project manager gained an insider’s view of motion picture set, seeing first hand how project management facilitates the creative process while maintaining tight business objectives. Film production is an incredibly intense effort, one that can only succeed with effective project management across all phases.

Opening credits

Super Sucker, a comedy written, directed by and starring Jeff Daniels, is about rival door-todoor vacuum cleaner sales-men and the lengths to which they will go to prevail in a winner-take-all sales contest. The film’s screenplay dictates how the end result will look, so it serves as the primary requirements document for the project. However, before the project can proceed, funding is a driving concern. The executive producer develops an initial budget (financing is secured against this budget), which includes a contingency amount. Although $2 million is considered a ‘low-budget’ film, it’s still a substantial amount. ‘We sat down and said, ‘‘The economy has slowed, the stock market [is down], and we didn’t pick up a national distribution deal for Escanaba [ Purple Rose Films’ previous movie],’’ so investors were supportive but not overly anxious to jump back in,’ says Bob Brown, managing partner at Purple Rose Films and Super Sucker’s executive producer. The project’s department heads are responsible for working within the limits of this budget. The scope of Super Sucker changed several times over the course of the project. Each round of script changes was printed on different colored paper (the affected pages only) and distributed to the crew. By the end of the film’s production, the crew had a rainbow script with eight different colors in it. The last script change was made four days before the project was scheduled to complete shooting.
193
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The producer and/or executive producer, however, review and approve or deny requests for variances from the budget. With his industry experience, daniels recognises that compromises are necessary on low-budget films. ‘When the money’s gone, the money’s gone,’ he says. ‘When the days are up, the days are up, and you better have it all in the can.’ Because film productions are temporary concerns, it doesn’t make sense to set up longterm accounts with vendors, and there isn’t time to create and execute a formal bidding process for selecting vendors. Primary resources for locating potential vendors are word of mouth, a state’s film production resource directory and the local telephone book. Most procurement work is done on the honor system, with some checks and balances to control expenses. This is tricky to maintain, especially on low-budget films where the money is tight.
Timing is everything

Creating a film work breakdown structure begins with a detailed analysis of the screenplay. Each page of the script is broken down into individual scenes. Within each scene, key required elements are physically highlighted on the paper through color-coding. The script breakdown information directly affects a film’s production schedule. Industry-standard scheduling software facilitates the scheduling process, which also must take external constraints into account. On Super Sucker, as on many other feature films, a software budgeting and scheduling product was used to interface with script-writing software to automatically set up a baseline schedule driven by the written scenes and their various elements. The first assistant director (first AD) assigns each scene or part of a scene to a specific day in the shooting schedule. Though the scheduling software assists in the process, the complex algorithms for making these assignments are mostly in first AD’s head. The algorithm is similar to that on a manufacturing assembly line, where the work-in-progress is block-processed to minimise the number of changeovers in tooling. In film, the blockprocessing concept applies to locations, where all scenes at a give site happen adjacent to each other, minimising the number of film changeovers required. As in the screenplay analysis and breakdown, color plays a big role in creating production schedules. The master film production schedule consists of a series of colored strips, one strip per scene, laid side-by-side on a long board and grouped by day and week. The final shooting schedule for Super Sucker was six weeks long (30 days), and it assumed 12-hour workdays.
Risky business

In any given shot, the acting, set, props, electricity, lighting and camera must be in precise harmony. To reduce the risk of problems, key crew members from each production department go on location tours called ‘tech scouts.’ Tech scouts present an opportunity for the film’s director to describe the vision for each scene on location. As a result, crew members can better visualise how their parts should work. On Super Sucker, Daniels and several other crew members drove around Jackson, Mich., USA, in a van for two days, visiting all 32 shooting locations. Although the Super Sucker project had an aggressive 12-hour-day, five-day-a-week schedule, there was room in each workday for overtime, and Saturdays were optional work-days. The team worked several 14- to 15-hour days and one Saturday to make up for some lost time.
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Weather also is a wild card on film projects. Whenever there is an exterior shot scheduled, the first AD always has an alternative interior location, known as a ‘cover set,’ that must be ready for shooting in case of inclement weather. Fortunately, an exterior funeral scene at a cemetery was scheduled the one day the Super Sucker crew experienced torrential rain. The dreary weather actually enhanced the impact of that scene.
A coordinated effort

While the first AD dictates which scenes are to be shot on which day, the second AD makes sure all the elements required to shoot those scenes are mobilised on schedule and that they are managed effectively in real time through the production process. Many of a film’s crew come together in a just-in-time fashion without ever having worked together before and disband just as quickly when they are done. They are expected to perform together as a finely tuned machine under grueling conditions. Figure 1 shows a typical organisation for a feature film. On any given day of Super Sucker there were at least 70 people (cast and crew) who participated in the production of the film. On one day there were more than 1000 people (mostly extras) required for a particular scene. With such a large crew, it’s crucial that the production schedule facilitates maximum efficiency while accommodating other constraints. Specific constraints on Super Sucker included: 
 

Five-day work weeks Actor’s schedule conflicts The potential strike on 30 June 2001 by the Screen Actors Guild.

A key report called a ‘call sheet’ (Figure 2) detailed instructions for the day. For example, the daily call sheet told the transportation coordinator (project manager) which vehicles were required to be in the film that day, where and when. A typical call sheet also

Figure 1 Shown is the chain of responsibility in a typical film production organisation
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Figure 2 The call sheet facilitates the film’s schedule for the day, detailing who is needed, when and where

details: which actors are required that day and when they should report for make-up/ wardrobe activity, when meals will be served, which props are required, what the day’s weather report is and the phone number of the nearest hospital. Calls sheets are distributed 24 hours in advance of the shooting day. There is a very small window for making changes to the next day’s plans, and contingencies do arise, such as changes to the script. In Super Sucker, a scene was added that required a 1970s convertible car with hydraulics. When this happened, an informal change control process took place – the producer considered the requested change’s impact on budget and schedule and its importance to the story before approving or denying the change. Communication is a constant challenge because of the logistics involved. People must be reachable anywhere, anytime. Walkie-talkies are standard fare on film sets, as are twoway wireless telephones. The call sheet also is an important communication tool, as is a daily production report that details hours worked, amount of film used and number of script pages that were covered during the day’s shoot.
And the award goes to …

In movie-making there is no ‘testing,’ per se. The whole goal of the production process is to translate the written word into an effective motion picture, and that is the primary determinant of quality. In defining film quality, Daniels says, ‘It’s all about,
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was it a good movie? Did the story work? Did you believe the people? Were the actors good?’ Tech scouts represent one form of quality assurance, by improving the crew’s understanding of the director’s vision. During actual shooting there are two opportunities to monitor quality. One is through real-time screening, where several wireless monitors broadcast the cameras’ signals so key crew members can watch the action as it happens. Another important quality manager is the script supervisor, who studies each shot to make sure continuity exists from one shot to the next. For example, if a character has his hand in his pocket on a close-up shot, the script supervisor watches to make sure that character has his same hand in the same pocket for a different-angles shot of the same scene. If a given shot is not satisfactory for whatever reason (creative, technical or continuity) another ‘take’ is necessary. The second opportunity for quality monitoring occurs the day after the film is shot and processed. Crew members watch the processed film, called ‘dailies,’ to ensure not only that the script is brought to life, but that the technical quality of the film is satisfactory.

A picture is worth …

Although there may not be many formally trained project managers in the motion picture industry, the key elements of project management come naturally to the industry professionals who make feature films. ‘It doesn’t matter if you’re in front of the camera or behind the camera, in the offices or on the set, all of us are problem-solvers, and creativity is needed whenever you’re going to manufacture a product in a relatively short period of time,’ Brown says. ‘If you’re going to make a 90-minute film and you’re going to do it in 30 days, you better have creative minds working, because that’s what it’s all about.’ The world premiere for Purple Rose Film’s Super Sucker was held in Jackson, Mich., USA, on 23 February 2002.
Tops and bottoms

A typical film includes three major project phases: preproduction ( planning and initiation), production (execution) and wrap (closeout) (Figure 3). Preproduction, which precedes the actual on-location shooting of the film, begins once the story concept exists and a commitment is made to turn it into a film. The executive producer builds the initial budget and raises the money necessary to make the film. Once enough money is raised to finance the film, other team members begin to join the project. These include the producer, who is in charge of the production’s overall operations, a unit production manager (UPM), who is the primary project manager, and the production coordinator, who is responsible for executing many of the project’s key tasks. Preproduction accelerates once a location is selected for shooting. A high-level schedule is established, including: 

The production office facility is set up on location and establishes an operational infra-structure. In this case, Super Sucker was shot in Jackson, Mich., USA; the film’s office took an entire floor of a local hotel where the cast and crew stayed during the shoot.
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Figure 3 Motion picture industry projects often fit the standard project definition and typical life cycle 

 

The initial project schedule is created. Super Sucker’s initial schedule was 28 shooting days. Contractual arrangements are made with actors and owners of locations to be used in the film. There were 53 actors and 32 different sites. Remaining production crew members are hired (as independent contractors), and they arrive at the shooting location. Super Sucker had more than 60 crew members.

That’s a wrap

Once shooting is complete, the project must wind down and close out. In the end, Super Sucker took 30 days to shoot, two days longer than the original 28-day schedule, but still before the targeted end date. The production coordinator, the UPM, and a few assistants were left to shut down the office, and they were finished within half a week. During post-production, which is technically not part of the production cycle, editing of raw footage occurs, music, additional sound and special effects are added, and arrangements are made for marketing and theatrical distribution of the film. This often takes several months.

The Life Cycle of Technical Projects
´ ´ Pierre Bonnal, Centre Europeen pour la Recherche Nucleaire ´ Didler Gourc, Ecole des Mines d’Albi-Carmaux ´ ´ Germain Lacoste, Ecole Nationale d’lngenieurs de Tarbes Project Management Journal. Copyright (c) 2002 by PMI Publications. 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, since this concept has gradually derived overtime. However, A Guide to the Project Management Body of Knowledge (PMBOK â Guide) (PMI Standards Committee, 1996) proposes some definitions or models; others can be found in the Project Management Handbook edited by Cleland and King (1988) and in many project management textbooks. As project life cycle also is handled daily by project management practitioners, additional or alternative
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models can be observed directly in real-world projects. While going through these model proposals, one can remark that each author in some way enforces what is specific to the particular context for which the model has been made. For instance, a well-known project life-cycle model proposed by the U.S. Department of Defense emphasises the aspects related to the demonstration of the feasibility and viability of the project (two phases), while the specification and the execution of the project consist of one phase each. Another project life-cycle model proposed by Muench for information systems projects (PMBOK â Guide) insists on taking into account the recursive processes often associated with these project contexts. The aim of this paper is to review project life-cycle models, specifically those presenting some interests in the field of technical projects. Reviewing all the models that have been proposed during these last two or three decades would be a cumbersome endeavor; hence, the authors limited this paper to an overview of the major project life-cycle proposals – before proposing additional models. The life-cycle models reviewed in this paper are organised around five broad approaches, in an attempt to appraise the benefits of each. These approaches are: 
   

Straightforward project life-cycle approach; Control-oriented project life-cycle approach; Quality-oriented life-cycle approach; Risk-oriented project life-cycle approach; Fractal project life-cycle approach;

The referenced papers and practices have been summarised, are believed to be appropriate, and may, therefore, not truly reflect the original authors’ aims. Reference to the information source is provided when available for more complete coverage.
Straightforward approach to technical project life cycle

Technical projects can be broken down into phases, also called stages or steps by some authors. In this paper, the authors will not differentiate between these three substantive; the term ‘phase’ is preferred. These phases can be divided into subphases, then subsubphases, and so on. The number and labels of these phases are deeply dependent on the field for which the model has been made. Obviously, the breakdown into phases of a small project is different from the ones used for large-scale projects. The phasing of engineering and construction projects also are different from those used for the development and industrialisation of commercial goods. In spite of such differences, projects in a broad sense – technical endeavors more specially – have two very basic phases in common: a preproject phase and the project itself. The preproject phases aim to identify possible projects, called project concepts, and to appraise them in terms of benefits for the organisation that intends to employ them. When such phases are completed, it is up to the decision-makers to decide whether or not to go ahead. Approved and funded projects then are implemented in the second phase, i.e., the project phase. Several characteristics make these two phases different. For instance, Chrisotofol, Aoussat, and Duchamp (1993) mention that a preproject phase requires creativity, while a project phase must be managed with rigor. This is typically a situation that can be observed on real-world projects. For instance, a designer arrives in the office of an engineer with several plant layout proposals, and the engineer notices that basic quality assurance principles have not been respected, e.g., no title blocks on the drawings, no more drawing
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numbers, and missing dimensions. One can argue that more rigor could be detrimental to the creativity of the designer. These two concepts, creativity and rigor, can be opposed because creativity is generally associated with disorder, while rigor and order are almost synonymous. One can derive from this that these two phases should be carried out by different people with different skills, i.e., by product engineers or managers, by architects in preproject phases, and by project managers in project phases. Although this statement seems obvious, it is not always the case, especially when projects are complex. Some project failures can be explained because this dichotomy of skills has not been respected or considered. The work loads and the duration of these two very basic phases also are different. Few people are generally involved in preproject phases over quite long and imprecise periods of time, while hundreds or thousands of people can be involved in project phases over the shortest possible time periods. This list of differences easily could be extended. This breakdown into two very basic phases is theoretic in the sense that it intends to embrace all kinds of endeavors. Real-world projects obviously follow more pragmatic schemes. The project life-cycle approach proposed hereafter has been derived from several models commonly presented in the literature (Kerzner, 1994; Meredith & Mantel, 1995; Morris, 1988) and additional observations informally made by the authors from real-world practices. Three phases are considered: an initiation phase, followed by a feasibility phase, and a project implementation phase. The inputs of the initiation phase, also called ‘concept phase’ or ‘identification phase,’ are the keeping pace with technological innovations, economical trends, requests from customers, distributions or sales people, new products put on the market by competitors, or brainstorming processes. The initial phase aims to sort all this information to identify some project concepts. This does not mean that all the concepts made out of this phase are to be carried out. A rational attitude towards such initiation phases is to identify as many project concepts as possible and to eliminate the discordant ones through a preselection procedure with respect to the objectives of the organisation. One can discuss whether or not this first phase belongs to the project in a broad meaning, but common sense leads the authors to think that the initiation phase is an endless process that continuously initiates new feasibility phases. Selected project concepts – outputs of initiation phases – then are used as inputs for the second phase, the feasibility phase. This phase aims to analytically appraise project concepts in the context of the organisation. This second phase can be understood as follows: on the one hand, there are the organisation’s needs, which in some cases can be expressed with the simple words of the strategic charter of the organisation to which the feasibility is carried out; on the other hand, there are the capabilities and the know-how of the organisation. With this information, the decision-makers should be able to decide whether or not to go ahead with each project concept proposed. For technical projects, Clifton and Fyffe (1977) proposed to split this feasibility phase into subphases separated by intermediate decision points. The first subphase consists of a market feasibility analysis to confirm the viability of the project concept from a pure marketing point of view. If the results suggest that there is nothing to earn, the feasibility analysis of the project concept shall be stopped at that point. Otherwise, a technical feasibility analysis, or feasibility study, is to be carried out. Such an analysis serves to demonstrate that the project is technically feasible. It also provides the information required for estimating the costs associated with the implementation of such project concepts and for identifying, quantifying, and mitigating technical risks. Very often,
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environmental analyses are appended to technical feasibility studies to ensure that the project does not go against external constraints related to ecological issues, social profitability, laws, and applicable regulations. Based on the results of these technical feasibility analyses, another go or no-go decision is made to determine whether or not to initiate a financial feasibility analysis. Its aim is to establish if a project concept, once materialised, will generate profits for the organisation. Basically, the outputs of such a feasibility analysis can be a single figure. If it is positive, one can go ahead, but if it is negative, the project concept can be abandoned and eliminated from the project concept portfolio. It is reasonable to think that this figure shall be balanced with the internal (technical) and external (environmental) risks, the range and the accuracy of the information used, and the size and the complexity of the project proposed. The feasibility phase is known to be terminated when a decision-maker decides not to transform the project concept into a project. Morris (1988) recalled that at that point, in the case of a plant, the capacity is decided, the locations are chosen, the financing is arranged, the overall budget and schedule are agreed, and a preliminary organisation is established. The way a project implementation phase, also called a ‘materialisation phase’ or ‘realisation phase,’ is conducted depends on the organisational context within which the project is implemented. It is initiated when the project has been appraised to be feasible and profitable. Once launched, nothing is supposed to interrupt the realisation of the project. For technical projects presenting low complexity, the processes associated with this phase are quite straightforward. For speculative or complex projects, this phase can be split into a few subphases separated by intermediate decision points at the end of which the future owners and/or the stakeholders of the final deliverable can decide whether or not to continue the implementation of the project. For instance, in the petroleum industry it is quite common to have this materialisation phase broken down into three subphases.   

A basic design phase carried out by an engineering company or an industrial architect, during which the documentation for tendering and contracting the physical construction or for procuring equipment is prepared. This phase is considered completed when engineering, procurement, and construction contracts are awarded, and when purchase orders for long-lead equipment are issued. A detailed design phase, immediately followed by a construction phase, carried out by one or more contractors during which the final deliverable (a plant, equipment, etc.) is made and commissioned; A post-project phase, turnover phase, or start-up phase during which the responsibility of the materialised deliverable is transferred from the engineers, the architects and/or the general contractors to the owners.

What makes the two design phases different is that, in a basic design phase, the final deliverable is seen as a set of functions to satisfy, while in the detailed design and construction phase, the final deliverable is handled as a breakdown or parts and pieces to procure or fabricate and to assemble. The outputs of the basic design phase are similar to that of a feasibility study, except that they are more detailed; schedule and budget are reappraised based on an expanded description of the product and of the project. The milestone associated with the completion of this basic design stage is important, because the project can be stopped at that point if the conclusions of the feasibility analyses are not confirmed. Even if this breakdown into subphases slightly differs when transposed into other technical project
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contexts, e.g., automotive industry, defense, or big-science projects, the whole philosophy remains.
Control-Oriented model

In the Project Management Handbook (op. cit.), Morris cites a project life-cycle approach attributed to Kelley (1982) (Figure 1). Kelley considers a project as a servomechanism with two levels of retroactivity: one using and acting on the product, i.e., the deliverable of the project, and another level using and acting on the project, i.e., the processes of making it deliverable. This model is interesting because it highlights one of the major duties of a project manager – checking that the product that is being made fulfills its specifications all along the implementation phase and that the project progresses satisfactorily to get the deliverable on time and on budget.
Quality-Oriented model

The project life-cycle approach shown in Figure 2 cannot be attributed to one author in particular. It is widely used in project management classes, especially in those devoted to the management of IT projects. It can be easily transposed to the fields of technical projects. In it, the time runs from left to right – the level of conceptualisation of the project at a given time is featured on an orthogonal axis. At the early stage of the project, this level is high. This is because the purpose of a basic design phase is to specify a set of functions that the final deliverable can satisfy. As the definition of the final product progresses, the level of conceptualisation gets lower. The lowest level is reached when parts and pieces are being manufactured or when individual equipment is installed. This level grows when manufactured parts and pieces are assembled to form subassemblies, then assemblies, or when installed equipment is networked. The highest level of conceptualisation is reached again when the project is terminated and the final deliverable is delivered. Considering the evolution of the quantity of objects handled, this quantity follows an opposite scheme. At the early stage of the project, few functions are sufficient to describe the final product. With the project implementation progress, these few functions can be transformed in some physical systems and subsystems, which are made of assemblies and

Figure 1
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Figure 2

Project Life-Cycle Model Highlighting Project/Product Quality Matters

subassemblies; the leaves of that hierarchical scheme are finally made up of the elementary parts and pieces of the final deliverable. The project assembly breakdown structure allows for reconstruction of the final product for delivery. According to a broadly known principle of quality management, ‘I say [and write] what I will do, she/he checks what I’ve said [and written], then I do what I’ve said, and I prove I’ve done it.’ The project life-cycle model shown in Figure 2 can be considered as qualityoriented, because it helps to understand the integration of this principle in the project management field. It has been said that the purpose of a basic design phase is to specify and endorse the final deliverable as a set of functions to satisfy; the project manager and his or her team are committed to making a product that fulfills these functions. The final acceptance of the deliverable should be conducted in such a way that the fulfillment of these functions can be demonstrated without ambiguity. For this to be objectively feasible, 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. At lower levels, the same principle applies. A system should be commissioned according to the technical specification that describes it and so on, down to the manufacture, the assembly, and the installation. This system should include procedures describing the basic actions to be handled and control reports demonstrating that these procedures have been followed and that performance and quality aims have been reached. This model is helpful to demonstrate that the documentation associated with a 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.
Risk-Oriented model

Risk management is another important issue associated with the project management body of knowledge. The model proposed by Lacoste (1999) (Figure 3) partially deals with this issue. This project life-cycle model is made of two very basic phases. The issues associated with the preproject phase remain the same: on the one hand, the requirements (what one needs) and, on the other hand, the know-how and the capabilities of the organisation (what one can). For instance, a project concept could consist in developing a new product to fill
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Figure 3 A Risk-Orientated Project Life-Cycle Model (Lacoste, 1999)

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. Typically, the following studies are to be carried out: a market feasibility study to confirm the opportunity of developing the new product, 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), a financial study to check if the organisation can financially afford the development to verify that this product does not go against external constraints. The project phase itself is divided into three subphases: a planning phase (Phase B in Figure 3), during which scenarii are elaborated, followed by an execution phase (Phase C) during which the final deliverable is made, and a closeout phase (Phase D), during which the experience acquired is recorded. 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 intermediate phase is concerned with three out of the four project risk management processes (as per the PMBOK â Guide): the identification of the risks (opportunities or threats) that are likely to affect the project’s execution and the conformance to the specification of the final deliverable, its evaluation, and its mitigation. The main aim of the scenario phase is to plan risk responses. During the execution phase, it is the duty of the project manager to make use of the risk response planning elaborated in the scenario phase to steer the execution of the project within acceptable limits. All along the realisation of this phase, it also is up to the project team to record the uncertain events that occur and the responses implemented to restrain in the case of threats or to enhance their outcomes for opportunities. This important information must feed the know-how repository of the organisation.
Fractal Approach to Project Life Cycles

In the closing talk of a workshop devoted to project management seen from a sociologist point of view (In French, the neologism ‘projectique’ was created to define this new field
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of knowledge; neologism could be translated into ‘projectics.’), French academician Joel de ¨ Rosnay (1993) scrutinises the evolution of project management from a linear motion – the emergence and development of project planning and scheduling techniques in the ’50s and ’60s – via a reticular countenance, the introduction of the management by projects in organisations in the ’80s and ’70s – to reach a fractal dimension. A fractal approach to project life cycles (henceforth, fractal life cycle) can explain situations that are difficult to model otherwise. Especially those concerned with the overlapping or fuzziness of interfaces between phases, the spreading of responsibilities, and decisions that are made complicated when OBSs deal with the matrix organisation of projects, and, more generally, the uncertainty and imprecision associated with the execution of any project. One of the dualities that distinguishes preproject and project phases can be heard from the mouths of many R&D project managers: ‘In a preproject phase, don’t plan too much if you intend to remain creative. Plan your project correctly if you intend to deliver it in conformance with specification, on time and on budget.’ When looking to an endeavor with this in mind, it seems that some of it goes against universal project management practices. However, once gazed through a fractal lens, endeavors can be seen as quite homogeneous mixture of creativity and of strictness, all along any project life cycle from an early feasibility stage to the completion of a project. For some examples, see Figure 4. Even if creative behaviors shall animate feasibility phases, in all the cases the deliverable of these phases are reports. These reports must be written and the actions of writing them are no more than projects. When the analysts in charge of carrying out such phases agreed on content, a more or less formal decision is made to go ahead. The quality of these feasibility analysis reports, including their issuing on time and on budget, depends on the level of elaboration of the plans. The feasibility of a technical product/project is sometimes appraised with conclusive results made out of tests and measurements using prototypes. In such contexts, prototypes are sub-projects of the feasibility study project. The issuing of a technical specification describing a prototype is a sub-sub-project of the prototype subproject and so on. This way of reasoning also is applicable to the writing of technical specifications of

Figure 4 A Fractal Approach to Project Life Cycles
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systems and subsystems, to the performing of calculations or to the drawing of some plant layouts in basic design phase. So is the design and fabrication of a special tooling in a construction phase or the treatment of noncomformities of equipment in a commissioning phase. Using such a model, one can note that decisions are spread in all dimensions: hierarchical or temporal. At project level, the go/no-go decisions are made by stakeholders or the future owner of the final deliverable. At subproject level, it is up to the project manager to make decisions. At lower levels, decisions are made by project engineers or work package managers. The activities of a project manager do not only consist of making decisions at the project level, but, in many cases, he or she has a role of stakeholder, expecting that the delivery of a document, an assembly, or whatever he or she is able to request will conform with what he or she asked and delivered on time and on budget. This model also shows that project managers contribute (by their creativity) to processes that are upstream decision points in appraising pre-subproject opportunities.
Down to Project Management Practices

Before presenting what a project practitioner can gain in being aware of few project lifecycle models, the authors will discuss feelings regarding a common statement that can become a serious pitfall if not appraised carefully. Accurately forecasting the work to be done, the duration, and the resources needed to complete a project is not sufficient to ensure its performance. It is obvious that this contributes to the success of a project; but it is not enough. Issues such as possible rework, change control, product and project quality, or project risks also shall be taken into account when planning and scheduling the project. Because project life cycles can be understood as ‘genric macro schedules,’ every schedule should be made according to project life cycles and, for technical projects in particular, to the four project life cycles presented earlier. However, commonly implemented planning and scheduling techniques are such – deterministic, nonrecusive (i.e., those that do not allow loops), nondiscursive (i.e., those that do not accept decision points) – that it is difficult to make schedules that can be consolidated at the life-style model levels. On the other hand, project life cycles – the ones presented in this paper, but also others – strongly use images as definitions. Even if the consolidation is difficult to make, the authors believe that having such images in mind when managing a project can contribute to the reality of the world. The four project life-cycle models presented in this paper enforce four important aspects of the project management process: control, product and project quality, risks, and something the authors have called the fractal aspect of a project process. Before concluding the authors present some key points a project practitioner can use to take into account these issues when planning and scheduling her or his project. Rare are the project activity networks that take into account the control issue. A tendency in technical project management practices, however, is to multiply reviews, such as preliminary design reviews, critical design reviews, production readiness reviews, progress reviews, closeout reviews. It is obvious that the purpose of these reviews is, through the reviewers’ recommendations, to make decisions. As a consequence of a review, an activity that was supposedly completed may be redone, an additional activity neither planned nor scheduled may be carried out, or simply to go ahead. It is up to the project managers to quantify these possible additional activities and to spread them as
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contingencies all along the project execution. 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. As for state-of-the-art practices, project managers are strongly invited to break down their projects in tree-like structures. One can not that there exists a wide taxonomy of such structures:  

  



Project/product breakdown structure (PBS) aims to split the final deliverable of the project into systems, then subsystems, assemblies, subassemblies – down to elementary parts; Functional breakdown structure (FBS) is similar to the PBS, but it is oriented to the functions the final deliverable should satisfy; Assembly breakdown structures (ABSs) aim to detail the sequence of operations to get an object assembled or a plant constructed. Organisational breakdown structure (OBS) describes the organisation of the project in terms of responsibility; the OBS is limited to decision-makers while the resource breakdown structure (RBS) takes into account all the resources involved in the project; Work breakdown structure (WBS) is a structured list of all the work packages and activities that have to be carried out to complete the project; Cost/contract breakdown structure (CBS) gives a breakdown of the project from a cost control and/or from a contract monitoring point of view.

The quality-oriented project life-cycle model is useful to the project practitioners because it helps them to understand the links that exist between all these structures and hence, to use the right ones at the right time over the project execution period. During the design and the commissioning phase of the project, i.e., at the early and late stages of the project, the FBS is very helpful to identify and list all the design documents (calculation notes, specifications, drawings) and the commissioning procedures to issue. The ABSs are mostly used during the materialisation of the project. They are prepared as the design progresses. The WBS and the OBS/RBS, which are the inputs to the schedule, are made and updated according to the PBS, FBS, and ABSs. If all these structures are correctly interlocked, and the quality-oriented project life cycle model is helpful for that purpose, the quality of the project plans and schedules is increased. The project risk management is one of the knowledge areas of the PMBOK â Guide. The risk-oriented project life-cycle model presented is helpful to understand how the six phases of the risk management process are articulated. Phase A (at a macro level) and phase B (at a micro level) aim to prepare scenarii, i.e., to identify and quantify risks, develop plans to respond to these risks, and set up limits not to overstep. Phase C then is conducted in such a way that the limits previously defined are not exceeded. Last but not least, phase D shows that a continuous feedback mechanism is fundamental to fill up the know-how repository of the organisation. The risk-oriented project life-cycle model enforces the fact that planning and scheduling on the one hand and risk estimating and monitoring on the other hand are deeply interlocked all along the project. This approach seals the breakdown of a project into sub-projects and so on down to ‘elementary projects.’ Then all these projects, whatever their level of complexity, comply with a very simple life-cycle model made of two phases: a preproject (feasibility) Phase and a project (execution) phase separated by a go/no-go decision point.

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This fractal view very often is implemented on technical projects, especially on largescale industrial projects. Practically, a time management system is made of two or more levels. Three levels can be beneficial for understanding what follows. The first level of such a planning and scheduling system deals with strategic issues, and the master schedule aims to reflect the strategy of the project. This schedule is issued prior to the go decision. It covers the long term, i.e., the whole duration of the project from the go decision to the closeout. It is the tool the project manager uses to communicate with the external world. The intermediate level of planning and scheduling deals with tactic issues. For instance, in the case of a large-scale project it is difficult for someone to have a precise and detailed view of the installation and commissioning phases when the project is just launched. Hence, this intermediate level is made of several overlapped coordination schedules covering the midterm. The first coordination schedule to be issued covers the design phase of the project. It is followed by a procurement coordination schedule, a construction and installation coordination schedule, and finally a commissioning coordination schedule. 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. The way the work packages are consolidated at the top level is obviously a prerequisite to the issue of the corresponding coordination schedule. Still within the scheme, the bottom level of planning and scheduling deals with operational issues. Generally, detailed schedules cover short-term periods, from a few weeks to a few months; they are made of the elementary activities. As for work packages, the way elementary activities are consolidated at the corresponding coordination level constitutes a prerequisite to the issue of the detailed schedule. Many project practitioners are familiar with such practices. In some domains, for instance in the offshore oil platform or nuclear waste reprocessing plant construction industries, four or five levels of schedules are common practices. Real-world schedules, whatever their level, seldom do take ‘preproject activities’ into account, if ever. One can argue that ‘creativity’ is something difficult to estimate and, therefore, to schedule. Nevertheless, the time spent in dealing with these preproject activities must be considered in the project overall work load. The consequence is that project work breakdown structure viewed through this fractal lens is much more exhaustive and closer to reality. The project shall benefit from that.
Conclusions

Projects are characterised by their specificity: an endeavor that has a start and a finish, a precise and unique aim that is carried out by a team set up for the purpose of the project. The purpose of a project life cycle is to find something commong to all projects among all these differences. Project life-cycle models, whatever they are, are located on a continuum going from the simplest project life cycle, which is made of two very basic phases and applicable to all types of projects, to project schedules that are precise and detailed but only applicable to oen specific project. Because project life cycles are models, their purpose is to explain the real world in a simpler and understandable way. Because the world of projects does not consist of a very small number of variables, it is difficult to imagine – and perhaps impossible to make – a model that could integrate all the variables that make all projects specific. In order to understand the projects they are involved in, project managers and team members must share a common view of their projects and
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especially on the way a project progresses. It is the purpose of project life-cycle models to illustrate simply the ‘progress philosophy’ of the projects to promote a better understanding and a better communication within the projects.

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

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Revision Questions

4

Section A type questions
Question 1.1
For what, in connection to procurement, does the acronym ITT stand?

Question 1.2
In the ‘4-D’ model of the project life-cycle, the four stages are Dream, Deliver, Discover and Design. Place these stages in the correct order.

Question 1.3
Activity definition, activity sequencing, activity duration estimating, schedule development and schedule control are all components of which of the nine project management knowledge areas? (A) (B) (C) (D) Integration Scope Time Risk

Question 1.4
Complete the following sentence with the most appropriate word or phrase: The extent of work needed to produce the project’s deliverables is known as the project’s ________.

Question 1.5
In the project life-cycle, at which stage is a feasibility study normally performed? (A) (B) (C) (D) Identification Development Implementation Completion
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Section B type questions
Question 2
The board of the ZM company are discussing a report that they commissioned concerning the company’s computer systems. In the report, 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. However, there are insufficient resources in-house either to propose new systems or to perform any upgrade. Requirement Briefly explain the phases of the project life-cycle showing, where possible, how each phase relates to the ZM company. (10 marks)

Question 3
Many organisational events and activities, be they a small-scale undertaking such as organising an office move, or a large-scale construction effort such as the Channel Tunnel, can be classified as projects. Requirements Define the terms ‘project’ and ‘project objective’. Provide examples of project objectives.

(4 marks) (6 marks) (Total marks = 10)

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Section A solutions
Solution 1.1
Invitation to tender

Solution 1.2
Discover, Dream, Design, Deliver.

Solution 1.3
(C)

Solution 1.4
Scope

Solution 1.5
(A)

Section B solutions
Solution 2
Project planning. The initial phase of any project involves the identification of a need or a problem that needs to be resolved. In this situation, the board of ZM have recognised that a new computer system is required. However, the lack of in-house resources means that the organisation must either hire new staff or outsource some or all of the systems development work. Given the lack of in-house expertise, the latter option appears to be more favourable. Development of a proposed solution. If the ZM company decides to use external contractors, then proposals will be required to address the needs within ZM and propose solutions to those needs. An Invitation to Tender (ITT) will be issued to obtain quotes for this work.
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Responses to the ITT will include details of the work to be done, along with time and cost summaries for that work. On receipt of this information, the board of ZM will have a greater understanding of amendments required to the company’s systems, as well as ideas concerning the costs and benefits of those changes. These proposals can now be reviewed and the possible solutions discussed. It is likely that the solutions will be analysed by a small working group with the responsibility of suggesting one solution to the board. When a choice of solution has been made, a contract will be drawn up between ZM and the contractor containing details of the proposed work, timescale and cost to be incurred. The stage is completed when the contract is signed. Implementation. In this situation, the contractor will 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. There is a lot of detailed work involved in this stage. The stage is complete when the board of ZM is satisfied that the new system has been implemented, on an appropriate timescale and to the expected level of quality. Completion. The last stage of the project life-cycle is completion of the project. There are various activities that must be carried out before a project can be termed ‘complete’. These activities include: 
  

confirmation that all deliverables have been provided; checking that all payments have been made; ensuring that performance has been evaluated and is satisfactory; and checking that a list of learning points has been made for reference for future projects.

The length of project life cycles will vary from project to project. However, in the case of ZM the life-cycle is unlikely to be less than six months. Given the significance of the systems changes, individual projects may last well in excess of one year.

Solution 3
A project is an undertaking to accomplish a specific objective/goal, through a unique set of interrelated tasks and activities while utilising resources effectively. The project objective is the anticipated result or final outcome. The project objective is usually defined in terms of scope, schedule and cost. It is also hoped that the project will be completed to the customers’ satisfaction and quality expectations. Examples of objectives could include the following: 1. Designing and implementing a computer system; improving management decisionmaking information and providing quality management reports in a timely and costefficient manner, completing the project by a certain date, meeting the plan in terms of cost–benefit. 2. Reorganising an office layout; improving office productivity and team communication, minimising disruption to staff. 3. Organising the relocation of the company; acquiring more efficient premises due to its location and facilities, not losing furniture or other assets, reducing rent costs.

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People and Projects

5

L EARNING O UTCOMES
After completing this chapter you should be able to:
" "

demonstrate the role of key stakeholders in the project; identify stakeholder groups and recommend basic strategies for the management of their perceptions and expectations; identify structural and leadership issues that will be faced in managing a project team.

"

5.1 Introduction
As you have already seen in Chapter 4, it is the people carrying out the project who determine the overall success or failure. Obviously, using the correct procedures is important, but those procedures are only the tools people use to carry out their job. The skills, attributes and knowledge that the project members and especially project managers bring to the project are critical to its success; therefore it is important to understand: 
 

the roles of the project manager; the responsibilities of the project manager; the skills of the project manager.

5.2 The roles of the project manager
This is likely to be examined quite frequently. The key role must be to ensure the success of the project objective. As projects are interdisciplinary and cross organisational reporting lines, the project manager has a complex task in managing, coordinating, controlling and communicating project tasks. Norris et al. (1993) see the role of the project manager as one of managing people (the project team, customers and suppliers), carrying out processes (the work/tasks being done) and producing the product (the final deliverable). This is illustrated in Figure 5.1.
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Figure 5.1

One view of project management (Norris et al. 1993)

5.3 The responsibilities of the project manager
The ultimate responsibility of the project manager is to ensure the successful completion of the project objectives to the satisfaction of the final customer. In essence, the project manager takes responsibility for providing leadership to the project team who carry out the project tasks in order to achieve the project objectives. The project manager will lead and coordinate the activities of the project team to ensure that activities are performed on time, within cost and to the quality standards set by the customer. An important aspect of project management is to ensure that the team members are organised, coordinated and working together. The specific responsibilities of the project manager are discussed in more detail in the following sections.

5.3.1 Organisation
The project manager is responsible for ensuring that the necessary resources are available to carry out the project. This will involve those tasks that can be carried out internally and those that may need to be subcontracted externally. For tasks to be carried out internally, the project manager is responsible for assigning particular people within the organisation to carry out the work. The project manager will delegate responsibility for performing project tasks to team members, who will then be accountable to the project manager for the accomplishment of the task within budget and on time. In complex projects, this may often involve the project manager delegating responsibility to team leaders responsible for a group of specific tasks. For example, in projects to implement information systems, the project manager may delegate authority to a senior programmer to ensure that all programming tasks are carried out across the whole of the system development.

Exercise 5.1
List the activities that the project manager must do in order to perform the organising function.

Solution 
  

Secure project resources. Assign tasks to internal/external providers. Assign responsibility. Organise team.

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5.3.2 Planning
It is important to understand the responsibilities of the project manager within the planning stage. The primary responsibility is to define the project objective clearly with the customer, then to communicate this objective to the rest of the project team, making it clear what constitutes a successful project outcome. The project manager must engender participation of the team members in the planning process, in order to instil involvement, commitment and ownership of the project. This may involve setting up a project-reporting information system, to record and monitor the progress of the project against the plan and then communicate the plan and actual comparisons to team members on a regular basis. Responsibility structures may be used (i.e. ensuring that team members receive information on their own area of influence), but this must be carefully weighed against ensuring that project team members do not forget that their particular area of control is likely to affect other areas and will ultimately affect the overall achievement of the whole project objective.

Exercise 5.2
List the activities that the project manager must do in order to perform the planning function.

Solution 
  

Define the project objective. Agree the objective with the customer. Communicate the objective to the team. Set up a system to compare actual results with the plan.

5.3.3 Controlling
Following the planning stage of the project, the project manager is responsible for monitoring and controlling its progress towards successful completion. Along with the project team members carrying out the particular tasks, the project manager will collect and analyse actual project data on costs, schedule and progress. If the project manager considers that corrective action needs to be taken in order to get the project back on target, then action must be instigated at this level. It is important that the project manager takes the advice of team members before deciding on a particular course of corrective action, because participation in the decision-making process will help to foster commitment of team members to the successful completion of the project objective. Control activities, when required, must be carried out as quickly as possible.

Exercise 5.3
List the activities that the project manager must do in order to perform the controlling function.

Solution 

Implement and monitor the project information system.
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Take action if variations occur. Communicate with the team on the progress of the project.

5.4 The skills of the project manager
This is likely to be examined quite frequently. The project manager requires a set of skills that will encourage and lead the project team to succeed and to create customer confidence in the project team. The 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.

5.4.1 Leadership skills
Leadership is the ability to obtain results from others through personal direction and influence. Leadership in projects involves influencing others through the personality or actions of the project manager. The project manager cannot achieve the project objectives alone; results are achieved by the whole project team. The project manager must have the ability to motivate the project team in order to create a team objective that they want to be part of. Good project management requires both participation and consultation. The project manager should provide overall direction but should not be autocratic or prescriptive in leading the team. As project managers are responsible for bringing together a team of experts, it would be inappropriate in most cases to tell them how to do their jobs! Project managers require the skills to empower the project team members. With empowerment comes ownership of and responsibility for their part of the project, and this will encourage team members to also feel part of the overall project achievement. The project manager should encourage open communication between team members in order to encourage team spirit and support. Another important attribute of leadership is recognition. Motivation will be enhanced if the project manager continually recognises the achievements of the team members via encouragement, praise or formal monetary rewards. Recognition must be carried out throughout the life of the project so as to maintain motivation of the team. In an article in Computer Weekly, ‘IT Projects Need Leaders’ (26 October, 2001) David Taylor, President of the IT directors’ association Certus, discussed how sad he was to receive an advertising flyer from a training organisation because the contents of the twoday course ( Methodologies, Process, Prince 2, Bar Charts, Project Management Meetings, Software Skills), though important, did not seem to cover the aspects of successful project delivery that he had identified. These were communication, leadership, persistence, inspiration, motivation, focus and action. The course was about project management (important in its own right) and not project leadership which he considered to be essential.
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He wrote: ‘Too many companies advertise for project leaders with specific technical experience, who have consistently delivered quality systems, and who really understand processes.’ He went on to indicate that he looked for scars, communication and radical thinkers:  



Scars: he asks about the biggest mistake the applicant has ever made on a project. If none, then he is not interested. The deeper the scars the better, because learning has occurred. Communication: do they look you in the eyes when speaking to you, are they confident, are their heads high? Forget the project when considering this essential skill. Radical thinkers: ‘If we do what we have always done, we will get exactly what we have always got.’ He looks for people who can think outside the planet not just outside the box.

The last point can certainly be evidenced in the innovative approach to many aspects of the Eden Project discussed in the previous chapter. Taylor wrote that you can turn projects around if leaders are appointed who are given the freedom to do what they have to do to get the project delivered.

5.4.2 Communication skills
As indicated by Taylor in the section above, project managers must be effective communicators. They must communicate regularly with a variety of people, including the customer, suppliers, subcontractors, project team and senior management. Communication is vital for the progression of the project, identification of potential problems, generation of solutions and keeping up to date with the customer’s requirements and the perceptions of the team. Project managers should communicate by using a variety of methods: 
   

regular team meetings; regular meetings face-to-face with the customer; informal meetings with individual team members; written reports to senior management and the customer; listening to all the stakeholders involved in the project.

It is important for the project manager to have regular and open communication with both the customer and the team members. The customer needs to be kept regularly informed of the progress of the project and needs to let the project manager know as soon as possible when changes are required. The project team members must have a formal forum on a regular basis when the whole teams gets together to discuss project issues. Team members will also require less formal communication methods in order to bring individual concerns to the attention of the project manager. The project manager must therefore be available for open informal discussions with team members when required. The project manager must also provide timely feedback to both the team and the customer. The number and range of the communications required can be seen in Table 5.1. These were surpassed by the communications required from McAlpine JV, the main contractor. (Source: ‘Eden Project – a Landmark for the NEC’: Tim Carter, Davis Langdon Management: NEC Users’ Group Newsletter, No. 16, p. 3. Reproduced by permission of Thomas Tetford.)
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Table 5.1 Project manager documentation/communications on the Eden Project Instructions/notifications issued Communications to contractors Communications to client/quantity surveyor/ supervisor/direct contractors, etc. Assessments issued Certificates issued Meetings chaired/minuted 1140 1100 750 27 8 130

5.4.3 Negotiation skills
Project managers will have to negotiate on a variety of project issues, such as availability and level of resources, schedules, priorities, standards, procedures, costs, quality and people issues. Negotiation is a process of satisfying a project’s needs by reaching an agreement with others. The project manager may have to negotiate with someone over whom he or she has no direct authority (e.g. consultants), or who has no direct authority over him or her (e.g. the customer). Project managers need to be able to manage the outcome of a negotiation so that the differences in what each side gets are kept to an absolute minimum and conflict is avoided. Table 5.2 highlights the kind of negotiations a project manager is likely to be involved in. To help ensure successful negotiation, a logical process can be followed: 1. 2. 3. 4. Identify and define the problem. Generate a number of possible solutions that could be accepted. Evaluate these alternatives and their outcomes to the project. Reach agreement by compromise or by selecting the alternative proposal most suitable to both parties. 5. Implement the results of the negotiation. It is likely that throughout the project’s life the project manager will be involved in many negotiation processes and the main objective must bring in a successful project, i.e. one achieving the project objective(s). Negotiation skills are covered in more detail in Chapter 11.

5.4.4 Delegation skills
A further key skill required for a project manager is that of delegation. A project manager will communicate and clarify the overall project objective to the team members, and will then further clarify the individual team member’s role in achieving that objective by a process of delegation. Delegation is about empowering the project team and each team member to accomplish the expected tasks for his or her area of responsibility. The project manager has neither the time nor the skills to carry out all the project tasks, so he or she must delegate responsibility to those who do have the skills. Delegation is also partly about allowing team members to learn from their mistakes and, if they are able, to correct them by themselves, without fear of blame. Delegation ensures effective performance by the project team and fosters conditions necessary for teamwork and coordination. There may
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Table 5.2

Negotiations of the project manager (adapted from Field and Keller, 1998) Possible issues Funding Staff Equipment Time scale Order of activities Duration of activities Timing of activities Deadlines Over other projects or work Between cost, quality and time Of team members’ activities Methods Roles and responsibilities Reporting Relationships Assurance checks Performance measures Fitness for purpose Estimates Budgets Expenditure Getting team to work together Getting required skills Work allocations Effort needed Negotiate with Senior management Line managers Purchasing/estates departments Customer/senior management Customer/teams Line managers/team members Line managers/team members Customer/line managers Senior management Customer/team members Team members Team members Team members/customer Senior management/customer Team members Customer/teams Customer/teams Customer/team members Accountants/team members Customer/senior management Customer/accountants Team Team Team Team members members/line managers members/line managers members/line managers

Negotiation point Resource

Schedules

Priorities

Procedures

Quality

Costs

People

be times during a project’s life when the project manager needs to step in to stop serious errors occurring, but a good project manager will be able to spot potentially dangerous situations quickly and take control of the decision-making process.

5.4.5 Problem-solving skills
Project managers will inevitably face numerous problems throughout the project’s life. It is important that the project manager gathers information about the problem in order to understand the issues as clearly as possible. The project manager should encourage team members to identify problems within their own tasks and try to solve them on their own initially. Delegation should foster this approach. However, where tasks are large or critical to the overall achievement of the project, it is important that team members communicate with the project manager as soon as possible so that they can lead the problem-solving effort. Appropriate team members should be involved to analyse and present information in order to generate a solution. Again, an important attribute of project management is communication, in particular listening skills, as various opinions and possible solutions are being generated. As the project manager is the person who retains the ‘big picture’, he
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or she is in the optimum position to consider how the decision will affect the overall project.

5.4.6 Change-management skills
One thing is certain in projects, and that is change. Changes may be: 
  

requested by the customer; requested by the project team; caused by unexpected events during the project performance; required by the users of the final project outcome.

Therefore it is important that the project manager has the skills to manage and control change. The impact that change has on accomplishing the project objective must be kept to a minimum and may be affected by the time in the project’s life-cycle when the change is identified. Generally, the later the change is identified in the project life-cycle, the greater its likely impact on achieving the overall project objective successfully. Most likely to be affected by change is the project budget and its timescale. At the start of a project, procedures need to be put in place regarding how changes are to be documented and approved. If a customer requires a change, the project manager must request the appropriate team member to estimate the effect on project schedule and cost. The project manager should then present these estimates to the customer for approval prior to implementing the change. Only after agreement by the customer should project schedules and budgets be updated to include the additional costs or activities. If change is initiated by the project team or the project manager, then the project manager must present a proposal to the customer for approval. Some changes are necessary as a result of unexpected events such as the loss of a key member of staff or materials shortage. These will have an impact on the project schedule and/or cost and will require modifications to the plan. Project changes may also occur as a result of user requirements of the final project. In many projects, such as the introduction of computerised information systems, the project manager is not only responsible for designing, developing and implementing the new system, but also for ensuring that the users accept the final product. This will involve the project manager in regular communication throughout the development, design and implementation stage with the users in order to overcome fears and resistance to change. Again, good communication skills are vital in this situation as the users are likely to be suspicious and fearful of the change process, and this requires the project manager to listen carefully to those concerns and to communicate regularly to the users the objectives and benefits of the project undertaken. Discussion groups, open meetings and one-to-one meetings provide a good opportunity for users to express their concerns and fears. The project manager must listen carefully and considerately to these fears and concerns and must attempt to involve the users in the process of implementation as much as possible.

5.5 Project teams
The issues relating to the formation and development of teams are covered in the sections on groups and conflict in Chapters 11 and 13. You should think about the issues raised there in relation to project teams.
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5.6 Problems of team-working
There may be barriers that hinder the achievement of the team objectives. The following section highlights some of these potential issues and makes suggestions for overcoming them.

5.6.1 Unclear team goals and objectives
It is the responsibility of the project manager to explain the project objective to the team. He or she must demonstrate the importance of the project and the benefits its success will have for the organisation and the team members. 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. The project manager needs to review the project objectives on a regular basis, with the team and with individual team members, to ensure that the objective remains an important target and that the team remains focused. Being vague about the goals of the project or not reinforcing the importance of the achievement of the goal on a regular basis is likely to lead to a lack of team focus and a failure to meet the project objective.

5.6.2 Lack of team structure
Team members may not know or understand what roles or activities the other team members are contributing, or may feel that there are no established procedures. Therefore, it is important for the project manager to involve the team members in project planning at an early stage. The project manager must also determine and communicate team-operating procedures, such as communication, reporting, approvals, etc. Using tools such as critical path analysis (see Chapter 9) and the project budget and baseline plan, the project manager can demonstrate to the team how everyone’s work fits together to achieve the project objective. All project procedures should be documented and kept in one location for reference by all team members.

5.6.3 Lack of definition of roles
Team members may not clearly understand their roles in the project or may feel that their lines of responsibility and duty overlap with those of another team member. The project manager must meet with each team member early on in the life of the project to describe and discuss individual roles, duties and responsibilities, and to explain how they interact with other team members. When the project plan is formulated by the team, each team member must be given a plan of work, normally a work breakdown structure (WBS), which identifies individual tasks and when they need to be carried out. This plan must be given to each team member by the project manager, so that all the team can understand clearly what they have to do, and what the other team members are also doing. Also, as stated earlier, all team members should be issued with a critical path analysis of the project and the baseline plan so that they can view all tasks together and see how their activities fit into the overall plan.

5.6.4 Poor leadership
The project manager must create an environment in which the team members can feel free to contribute and provide feedback. It is important for the project manager to set
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guidelines for team operations, but he or she must be able to balance the requirements of many individuals within this framework of project rules. The project manager must be flexible enough to listen and take advice from his or her team, but must also be strong enough to enforce his or her own suggestions and decisions when necessary. Fairness and objectivity when dealing with team members is critical.

5.6.5 Poor team communication
It is important that the project manager holds regular team meetings and status reviews, to communicate progress and to provide a forum for team discussion and airing of views. Participation in team meetings should be encouraged, and certain team members should be required to report on the status of their activities. Project documents, such as plans and budgets, must be kept up to date and circulated to the team regularly. The project manager should encourage open and frank discussion among the team members, both formally and informally. Physical location of team members can often be an important factor in helping or hindering communication.

5.6.6 Lack of commitment
Team members may not be committed to the overall project objective, perhaps as a result of poor communication. The project manager must speak to each team member in order to communicate his or her importance to the achievement of the project. The project manager needs to determine the motivating factors important to each individual and should ensure that the project environment is a motivating one. The project manager must continually encourage individuals and support progress. Effective team members need to be committed and want to feel accountable for their individual activities. Commitment may also be lacking where an individual is being split between work on the project and a full-time job. The project manager should recognise and deal with the situation by clarifying priorities and, if necessary, bidding for the individual to join the team on a full-time basis.

5.7 Project management and team-building
Team-building should be an ongoing process throughout the life of the project, and should be the responsibility of all the team members. Team-building should foster honesty, open communication and trust and also a strong commitment to the achievement of the project objective. Possible methods of team-building could be as follows: 
 

Physically locate the team in one place. Periodically call team meetings (rather than project meetings). Socialise outside the work environment.

5.8 Project stakeholders
We have already discussed at some length the project managers and their relationship with the team members. However, there are a number of other stakeholders who need to be
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Figure 5.2

Project stakeholder hierarchy (adapted from Gido and Clements, 1999)

considered (Figure 5.2). Different textbooks have different lists of stakeholders, and there are often different names for the same stakeholder. The following is a selection of the most common, you should make sure that you are aware of the needs of each stakeholder, in respect of the project, and the conflicts between those needs.   

Project sponsor. The sponsor is the person or organisation providing the resources for the project, that is, the person responsible for ensuring that the project is successful at the business level. They often authorise the project, and are responsible for its budget. They must also be satisfied that a business case exists to justify the project. They will also be particularly concerned that the project does not go over budget. The sponsor may also chair the steering committee (or project board) to which the project manager reports progress. If we take the example of the development of a new accounting system, the sponsor might be the Head of IT, simply because they control the budget for IT capital investments. Project owner. The project owner is the person for whom the project is being carried out. They are interested in the end-result being achieved and their needs being met. They are more interested in scope and functionality than in budget. They would normally sit on the steering committee, and may also represent the users. In the case of the new accounting system, the owner would be the Finance Director or Financial Controller. Customers/users. The customer/user is the person or group of people whose needs the project should satisfy. The fact that this stakeholder is a ‘group’ leads to its own problems. It may be difficult to get agreement from the customers as to what their needs
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are, indeed there may be conflicts within the customer group. Conventional logic dictates that users should be, if possible, invited to participate in the project. This may simply mean representation on the steering committee, or may involve being part of the project team. Users, like the project owner, are primarily interested in the scope of a project. However, they may try to ‘hijack’ the project to satisfy their own personal objectives, rather than those of the organisation. This may bring them into conflict with the project owner, despite theoretically being ‘on the same side’. In the case of the new finance system, the users would come from the different parts of the finance function. Suppliers/subcontractors/specialists. The project will often require inputs from other parties, such as material suppliers or possibly specialist labour such as consultants. Each of them will have their own objectives, some of which conflict with those of the project. For example, suppliers will seek to maximise the price of the supply, and reduce its scope and quality, in order to reduce cost. This conflicts directly with the objectives of the sponsor and customers. In the case of the new finance system, suppliers may provide hardware and software, and specialists might include members of the organisation’s IT, purchasing or internal audit departments.

5.8.1 Managing stakeholder expectations
Even the simplest project is likely to have a large range of potential stakeholders, as you have seen in the example of the Eden Project or the NATS project in the previous chapter. Identifying stakeholders, assessing their interests in the project and then using that information to manage the relationships with such groups is a vital project management activity. Once these have been identified, it is useful to draw up a systematic plan to secure and maintain their support or to foresee and react to any problems. This will allow the project manager to concentrate on those critical stakeholder relationships and thus reduce the vulnerability of the project when unexpected events arise. Once the project manager has established the key stakeholder groups, a table can be drawn up listing each stakeholder’s goals, past behaviour towards the projects, what can be expected of their future behaviour and how they may react to future changes. You may choose to use the Mendelow matrix, outlined in Chapter 1. This will allow the project manager to assess the risks associated with various stakeholder groups, and indicate where attention needs to be focused.

5.9 Projects and organisation structure
This chapter has covered a number of issues relating to project organisation structures. However, we need to consider the relationship of the project to the organisation within which it exists. In conventional (functional or divisional) structures, there is often a lack of clarity as to how authority is divided between line managers and project managers. If a project is relatively small or short term, for example an information system redevelopment, this may not be a major issue. However, if the project forms a major part of the business of the organisation, such as in a construction company, this may necessitate an organisation structure such as a matrix, where lines of authority are clearer.
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5.9.1 Matrix organisations
The details of matrix organisation structures are covered in Section 2.2.10 of Chapter 2. There you saw that this form of structure has been widely criticised, but it is still used by many organisations in industries such as engineering, construction, consultancy, audit and even education. The characteristics of the organisation that lead to a matrix being the most suitable organisation structure are as follows: 
   

The business of the organisation consists of a series of projects, each requiring staff and resources from a number of technical functions. The projects have different start and end dates, so the organisation is continually reassigning resources from project to project. The projects are complex, so staff benefit from also being assigned to a technical function (such as finance of logistics) where they can share knowledge with colleagues. The projects are expensive, so having resources controlled by functional heads should lead to improved utilisation and reduced duplication across projects. The projects are customer-facing, so the customer requires a single point of contact (the project manager) to deal with their needs and problems.

Thus it can be seen that, in the right circumstances, a matrix structure can be the most appropriate.

5.10 Summary
In this chapter, you have looked at the various stakeholders in a project. The key points to remember are: 
  

the project manager’s role, skills and attributes; the membership, role and issues relating to project teams; the responsibility of the project manager to engender a feeling of commitment and honesty within the project team; the stakeholders within a project, and how to manage them.

References
Field, M. and Keller, L. (1998), Project Management. International Thompson Publishing. Gido, J. and Clements, J. (1999), Successful Project Management with Microsoft Project CD, A Practical Guide for Managers 1st edition. Reprinted with permission of SouthWestern a division of Thomson Learning. www.thomsonrights.com. Fax: 800 730 2215. Norris, M., Rigby, P. and Payne, M. (1993), The Healthy Software Project: A Guide to Successful Development and Management. John Wiley & Sons Ltd. Reprinted with permission of John Willey, UK.

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Readings

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In this section there are three Readings on the skills of project management, the aspects of teamwork and the importance of communication with project stakeholders. Each is followed by discussion points with suggested outline solutions.
The skills of project management

The scenario below analyses the importance of project leadership skills and of project team management. The case discusses the transformation of Boeing, as led by the new chief executive, Philip Condit. The article specifically highlights the importance of interdisciplinary teamwork and the need for a more flexible approach to project management, all of this being achieved by strong, charismatic leadership. This case study should aid you in understanding: 


the importance of teamwork; the importance of strong leadership and the need for effective interpersonal skills.

Destroying the old hierarchies
Seth Lubove, Forbes, June 1996. Reprinted by permission of Forbes Magazine # 2002 Forbes Inc.

At a recent charity event, Boeing Co’s new chief executive officer, Philip Condit, donned a cowboy hat and belted out a rendition of the country and western classic ‘Could I Have This Dance?’ A karaoke machine provided the accompaniment. No one could imagine Condit’s predecessor, Frank Shrontz, 64, a lawyer by training and a former Pentagon deputy, singing in the shower much less in front of strangers. The change in personalities at the top of the world’s largest aircraft manufacturer is rich in symbolism. The seventh man to run Boeing since its founding by timberman William Boeing in 1916, fiftyfour-year-old Condit is a Boeing lifer who faces the tough task of redefining Boeing’s often confrontational relationship with its 108 000-employee workforce, tightly unionised by the militant International Association of Machinists and Aerospace Workers. Nobody states the problem better than Ronald Woodard, the blunt-spoken president of Boeing’s Commercial Airplane Group: ‘We have to understand that we are a manufacturing enterprise. We aren’t an engineering, technology-development enterprise.’ There’s a world of meaning in that seemingly bland statement. Booming on the surface, Boeing is in fact a company in transition. Much as they are technological marvels, today’s passenger jets are basically commodities to Boeing’s customers, the world’s airlines. Their job is to move people and goods from point A to
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point B at minimum cost consistent with safety. Boeing makes great airplanes, but so do Airbus and McDonnell Douglas. Who gets the sale depends to a large degree on price, terms and availability. That’s what Boeing’s Woodard means when he talks about making people understand that Boeing is a manufacturing company, not a high-technology company. Boeing jets represented two-thirds of the dollar value of all commercial airplanes ordered in 1995. Boeing’s defence division, already the prime contractor on NASA’s space station, is competing on the Joint Strike Fighter jet project, a potential $160 billion contract. Wall Street expects per share earnings to rise by 20 per cent this year (before charges in 1995) to $2.75 on sales of $22 billion. The Street expects earnings to go on rising through the decade. But that will happen in what is now a commodity business only if Boeing can do what companies like General Electric do so successfully: take costs out of the product and continue to take out. Condit made his mark when he oversaw development of Boeing’s latest generation airplane, the 777, known internally as the ‘triple seven’. Smaller than Boeing’s humpback 747, the 777 is more distinctive for what you don’t see than for its profile. It’s a pilotfriendly and airline-friendly product. For the first time, the pilot’s commands to the rudder and flaps are communicated electronically, rather than by cables and levers. Airlines can internally reconfigure such areas as galleys and lavatories within as few as seventy-two hours, compared with two to three weeks on older aircraft. No marketing detail was too small; even the toilet seats gently sink on to the toilet bowls, instead of loudly smacking. First put into service by United Airlines last June, the 777 is Boeing’s first plane designed entirely on computers. But for Boeing, Condit’s biggest change was in the organisation of the program. Adopting the theme of ‘Working Together’, Condit broke down the old-fashioned procedural walls within the company. In the past, design engineers worked independently of the production and operations people who actually built the plane. Here it is, the designers would say; now go build it. Condit instead organised hundreds of integrated ‘design-build’ teams, composed of members of all these groups. Each consults the other, so that the production teams aren’t stuck with overly costly, hard-to-build design specifications, for example. This sort of reform, common now in manufacturing, came late to Boeing. ‘None of us is as smart as all of us,’ Condit says, explaining his new integrated design strategy. He wants to reorganise the whole company along these lines. Explains Ron Woodard: ‘We’re trying to destroy all the old functional hierarchies.’ This is where the job gets tough. Any significant changes involving the workforce still have to get past the Machinists’ Local, Boeing’s largest union, with about 33 000 members. (Boeing’s engineers are represented by another, less combative union, the Seattle Professional Engineering Employees Association.) Say what you may about the shrinking clout of private-sector unions in this country, the fact is that the Machinists can still bring Boeing to its knees, as they proved during last fall’s sixty-nine-day strike. ‘The thing that’s different is ten years ago we could have had a strike and delivered airplanes late to customers, and they didn’t care,’ says Woodard. But today a strike means lost sales. Frank Shrontz hammered at reducing cycle times and cutting costs, to the point when Boeing now delivers an airplane within ten months of the order, compared with eighteen

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

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

Discuss these with your study group before reading the outline suggested solutions: 1. The article states that the previous CEO Frank Shrontz considered interpersonal skills to be one of the most important characteristics of his successor. Discuss some of the key management skills needed to run a project or enterprise, as shown in the article. 2. The biggest change made by Condit on the 777 project was the organisational design. ‘Working Together’ challenged all previous ways of operating and brought together the design and production areas of Boeing. This structure was supported by teams. Does this management approach resemble the work organisation used in project management?
Outline solutions

1. The key management skills required for the effective management of projects will be discussed in the light of the case study.  

Leading. Philip Condit demonstrated his leading from the front when overseeing the development of the ‘triple seven’, the Boeing 777, by breaking down the procedural walls within the company under the slogan ‘Working Together’. He did this by organising hundreds of integrated design-build teams, which removed the barriers between the design and production units. His predecessor had driven down the costs in the organisation so Condit had to focus on people. He was an excellent motivator as he adopted a policy of being viewed as facilitating the project. So he was seen popping up at the plants unannounced, dressed in a way that did not set him apart from the workforce. He asked supervisors to leave so that he could hear the ‘real story’ from the final assembly workers. He saw workers genuinely as partners in the project. He altered selection processes so that he got promotees or new entrants with commitment and with the right interpersonal skills. He had an impact on the culture of the organisation by setting an example of inclusivity and concern for the teams on the project to his other managers. This concern he translated into better pay and conditions, that is, putting his money where his mouth was. Communicating. Condit communicated his vision for cooperative working on the project in a variety of ways. By talking directly to the workforce, he demonstrated his concern for the successful outcome of the 777 project. He turned up and did not appear as a ‘suit’, that is, alienating the people he wanted to talk to by appearing as a remote figure from Head Office. His non-verbal communication (the way he dressed) reinforced his aim of collaborative working. He added to this impression by his karaoke activities at a charity event. He effectively listened to what he was told, even to the extent of discussing a disputed contract face to face with striking pickets. He signed a picket sign with the words ‘We all need to work together’, again communicating his desire for the common goals of the project. He gave out a consistent message of collaborative work. His removal of the model planes at Head Office replaced by pictures of the world’s children, again sent out a message that conformed to the idea that people mattered. Annual reports were sent out to all employees and 75 000 employees were put on a training programme so that they could grasp the market problems that Boeing was (and is) affected by. They were seeing in their daily lives that changes were being made, though the reality was that the planes had to be smarter. The concessions on
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outsourcing showed that there was a determination to listen to what the company was being told and they would act on it. Negotiating. In the final analysis, Boeing is in business. There was the acceptance by the counsel to the union that Boeing had to get the best product out on time, and if it did not produce planes to customers’ delivery requirements and at reasonable cost, no amount of people management would keep people at work. The negotiations over outsourcing revealed that though this was seen as an effective way of reducing costs ($600m was quoted in this article), Boeing compromised about it. It would give the recognised union warning about any large outsourcing deal but would re-deploy any surplus workers. In the past, it would have sacked them. There were attempts to increase the flexibility of the workforce by cross-training but there was a need for time to do it effectively. It was not available. The union was cautiously starting to relax job specifications to allow this process to happen. The time pressure of reducing schedules was constant and an important performance indicator was the speed of delivery. Teams had to work overtime to make up the time. This was an issue to be negotiated in the future. Employee relations were not always excellent, as seen in the number of strikes there were. Strikes meant lost sales and Boeing had to change its people management to deal with issues such as lack of respect and the treatment of the workers as a commodity. Condit led the way on this, as may be seen in the changes to recruitment and reward policies. Delegation. Delegation may be defined as the handing over of authority for a piece of a boss’s work to a subordinate while retaining responsibility for it. In the article there are examples of delegation and of non-delegation. Condit did not delegate the face-to-face communication with employees because he clearly felt that he had to lead from the front on people issues. He had to set his own managers the example. However, he would have delegated the everyday activities of management because of the size of the organisation. An example of delegation was seen in the way Tony Russell, a tool-builder, could talk directly to the designers when there was a problem with his engineering plans. This empowerment from his supervisor meant that problems, such as the sizing of the metal deck, could be sorted out very quickly. A reinforcement of the delegation of responsibility could be seen in the new criteria for hiring new staff and for promotion. Technical expertise was no longer sufficient in itself: the interpersonal skills and commitment had to be consonant with the new culture of empowerment. Change management. Condit found himself in a situation where much change had been imposed on the organisation by his predecessor, Frank Schrontz. This had been based on radical cost-cutting by standardising parts, reducing delivery times and reducing staff from 161 700 in 1990 to 108 000 in 1996. Condit could not stop the process of change, as customers felt that the planes were still too costly and took too long to be delivered. His way of change management was to educate the workforce in the realities of the market, and by giving them annual reports so that they could see the figures for themselves. He involved the workforce by communicating with them directly and by effectively listening. He discussed the situation with them in detail (the discussion about the new contract with the strikers, for example). He changed the 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. Boeing negotiated the new deal on outsourcing with the retention of the surplus workers.

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It facilitated cross-training, though the time constraints had themselves proved a constraint. The new reward and incentives package was being negotiated to support the acceptance of greater responsibility and tighter delivery schedules. The old methods of change management under the military style of management would have included coercion (there are no jobs in this section, you’re sacked) or manipulation (if you do what we ask, you’ll be rewarded: if you don’t, you’ll be sacked). Note that the desired information that the Examiner wants from you, the student, is expressed by reference to the evidence in the article or case study. 2. Teams are a critical feature of projects which help organisations achieve future objectives and ensure the future life of the business. The process of dealing with and managing organisational change will require input from diverse areas such as design, marketing, production, finance and sales to get a holistic view of the organisational objectives. Without this, organisations may make incorrect decisions about itself and its projects. Using the Boeing example, in the early stages of the organisation, there was great synergy between the designers and production staff because of attitude and close proximity. If Boeing could not get back to that ideal as a large organisation, it managed the empowerment of staff so that they saw themselves as teams with goal congruence. The proselytisation of this team spirit by Condit under the slogan ‘Working Together’ emphasised the need to focus on the superordinate objective: To deliver fast to customer requirement. The creation of the design-build teams set up synergies that helped save time and money. This was supported by empowerment of individuals within teams such as when Tony Russell visited the designer about his metal deck which was bigger than that on this blueprints. The problem was fixed between them. There were no artificial barriers to the solution of the problem because they both had the same objectives: swift delivery of the best product. This approach would save time and thus money, enabling Boeing’s attractiveness to its customers.
Further thoughts

Although this case primarily concerns reorganisation and team structures, another important factor to come out of the case is the importance of strong leadership. Consider projects you have been involved in, or your own organisation, and think about the leadership styles used. Were/are they effective?
The characteristics of team members

The case in the article below concerns the fateful Apollo 13 mission and analyses the key factors that ensured the successful completion of the project, and how these factors relate to project management. The factors highlighted include the following: 
 

the importance of clear objectives; having the right team members; constant training.

This case also sets out general guidelines for a project, and should aid you in understanding the importance of the following factors in project management: 


The quality of team members. The individual personalities and characteristics of team members.
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The importance of project planning. The need for a positive attitude. Project risk management.

Learning the lessons of Apollo 13
Michael S Lines, PMI Network, 1996 Copyright #1996 by PMI Publications. Reproduced with permission of PMI Publications via Copyright Clearance Center.

Ron Howard’s epic movie Apollo 13 recounts the ill-fated Apollo 13 mission to the moon, a mission that came close to causing the first loss of life in space for a United States astronaut. The astronauts were only a third of the way into the mission when one of the oxygen tanks in the command ship Odyssey exploded, crippling the spacecraft, and endangering the lives of the crew. The story of Apollo 13 is one of hope, inspiration, and perseverance, and one that holds many useful parallels for those in the field of information systems (IS) project management. What are these parallels? Consider the factors that contributed to the success of the Apollo program. Have a clear objective. More than anything else, having a clear objective helps to ensure a successful project. With the Apollo program that objective was to land a man on the moon and return him safely to earth, a goal that was achieved just seven short years after President Kennedy first issued the challenge to the nation and the world. To be successful, IS projects must also have clear goals and objectives. A complete statement of project’s objectives, milestones, and requirements, embodied in a statement of work or similar contractual document, helps to ensure that everyone agrees on the purpose and deliverables of the project. This also keeps everyone focused on the business reason for doing the project in the first place. Pick the best people. The Apollo astronauts were the best of the best. Selected from the top test and military pilots, they were the most highly qualified and capable people available. That level of excellence showed when it came to overcoming obstacles and achieving the impossible, as was often required to complete the Apollo missions. To achieve success in IS projects, we must also seek to employ the best people available, especially for the project manager and lead technical staff. We should seek to hire industry specialists with broad experience drawn from diverse assignments – people who can overcome the unexpected problems that occur in even the best-planned project. By hiring the best, you acquire people who have already been tempered by the fires of adversity and have overcome them. Support them with the best team. No matter how good the astronauts were, they would never have been successful without the team that supported them and their mission. From the scientists and engineers who built the rockets, to the programmers who wrote the navigation programs, to the seamstress who sewed the spacesuits, the success of the Apollo missions resulted from thousands of people pulling together to achieve something that once seemed impossible. In IS projects, it’s not the project manager but the project team that achieves the project objectives. Team leaders, programmers, testers, tech writers: the typical large IS project needs all these people and more to pull together diverse technology to meet a customer’s
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business objectives. The project manager melds this diverse group of people into the effective team needed to meet the project objectives. Support them with the best equipment and technology. The Apollo program achieved its objective by employing the best technology available at the time. In many cases, that technology was created specifically for the Apollo program and in turn led to advances in commercial industry. IS projects don’t have the luxury of the ‘blank chequebook’ that the managers of the Apollo program did. Nevertheless, technology can be used in numerous ways to boost the productivity of the project team and help to ensure its success. From personal development systems, to CASE and design tools, to project management software and even e-mail to facilitate communication, the improvements in productivity and quality that technology brings are well worth the initial capital costs to the project. Train constantly. The Apollo astronauts trained constantly and kept training until the last moment. A backup crew trained beside them so that someone would be available to carry out the mission if for any reason the primary team was unable to. For IS project teams, training is also essential. Whether it is training to understand and use the technology being deployed (such as client server), training in the use of tools, or training in project management or some other facet of project implementation, training is better done beforehand rather than in the heat of project implementation. All too often team members are expected to just ‘read the manual’ to bring themselves up to speed with a new system or tool, and management expresses surprise when the quality and productivity gains expected are not realised. This attitude toward training would have been unacceptable for the Apollo program and should be unacceptable for IS projects as well. Prepare for the unexpected. For the astronauts and mission planners, preparing for the unexpected was a crucial part of the program. They knew they were exploring unknown territory and, therefore, had to prepare contingencies for situations they might encounter. Their training for the unexpected, along with the redundancies and engineering of their spacecraft for those contingencies, enabled the Apollo 13 astronauts to survive. For IS projects, preparing for the unknown starts with the initial project planning, when allowances should be built into the plan to account for both known and unknown possibilities. An active risk management program should be in place from the beginning of the project and updated throughout the project life cycle to ensure that the project is as prepared as possible for whatever problems, either technological or otherwise, may arise. For the Apollo astronauts, these factors were not only instrumental in their success, they were also integral to ensuring their survival. However, even when all precautions are taken and all the planning, training and engineering has been done to the best of everyone’s ability, ‘Murphy’ can still strike. Never consider defeat. When this disaster struck, the mission controllers, mission team, and crew of Apollo 13 never allowed themselves to consider the possibility that the crew would not make it back. Whether it was the initial objective of getting to the moon, or the revised objective of bringing the astronauts home safely, they knew they could not fail, and therefore they made sure they didn’t. While human lives are not at stake for most IS projects, the principle remains the same. When disaster strikes on a project, as long as you proceed from the standpoint that the project can succeed and must succeed, you’ll find you have the drive to see that it will succeed.

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Improvise. When the Apollo 13 ship was crippled, the mission team members had to use their ingenuity to solve their problems. Hundreds of thousands of miles from Earth, with no way to replace the failed CO2 scrubbers, they had to make new ones from what they had available. Likewise, when the oxygen and power on the command ship Odyssey failed, the team improvised and made use of the lunar lander Aquarius. For IS projects, when disaster strikes – the project is late, over budget, or delivering poor-quality products – improvising with what you have available can provide a solution. This often means redefining the parameters of the project, whether the schedule, budget or deliverables, so that you can turn certain failure for the entire project back into success for a modified project that still meets the fundamental business objectives. Take risks. The crew and mission team of Apollo 13 knew that they had to cut corners and take chances if the astronauts were going to survive. From piloting the spacecraft manually to cutting checklists to a minimum, with certain death the alternative, the mission team took calculated risks to ensure survival. When an IS project is in trouble, the project manager must also take calculated risks to help ensure its survival – a gamble with new technologies, new people, or new processes. When faced with a choice between certain failure or possible success, the project manager must have the guts to take the risks and to face the consequences if failures occur. Turn failure into success. Success can be found even in failure. For the Apollo 13 mission, that success was the achievement of bringing the crew back safely against all odds. The interest this generated revived the flagging public support for the Apollo program (for a time) and helped renew the commitment to safety within the space program (until it flagged again, leading to the Challenger disaster). In IS projects, even when we fail and the project is cancelled there is always a lesson to be learned. Whatever the reason for the failure or cancellation, it should be looked on as an opportunity to learn and improve so that future failures can be prevented. The adage ‘unless we learn from history, we are doomed to repeat it’ is as true for IS projects as it is for missions to the moon.
Discussion points

Discuss these with your study group before reading the outline suggested solutions. 1. List and discuss four examples from the Apollo 13 mission where project management elements were evident. 2. Think about a project or an everyday activity in which the unexpected happened. How did you handle it, and did it work out? Discuss the need to deal with the unexpected as an important part of project management. 3. What characteristics of effective teamwork were demonstrated by the Apollo 13 project when disaster struck?

Outline solutions

1. The following points are raised by the author when analysing Apollo 13’s project management: (a) The need for a clear objective. A project cannot have a clear focus on its final outcome if the objectives are not clearly defined up front. The objective of the Apollo mission was to land a man on the moon and get him safely back to earth.
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(b) Choose the best people. If the project does not have the best or most appropriate people, the project may not achieve its objectives at the level of quality and success expected. A high-quality project team is necessary to achieve project objectives successfully. Apollo’s astronauts were the best military and test pilots, assessed as highly qualified and capable. (c) Support the team with the best equipment and technology. This can help to improve the productivity and quality of output of the project team. The support teams included the best engineers, rocket scientists and navigation programmers. Even the seamstresses of the spacesuits were considered the best they could get. (d) Train constantly. Training prior to and throughout a project ensures a knowledgeable and well-prepared team, again helping to ensure successful completion of the project objectives. Not only did the Apollo crew train constantly but also did a back-up crew, to ensure that if there were problems the launch could still also go ahead. The technical nature of their tasks was such that they had to train so that the work became second nature to them. The use of checklists was an aid to this training. 2. Risk management is a critical aspect of project management and must be an important consideration point for all projects. Project teams are responsible for developing contingency plans throughout the life of the project. The Project Management Body of Knowledge (PMBOK) lays down the steps required for dealing with unplanned outcomes, as follows: 
  

Risk Risk Risk Risk

identification. quantification. response development. response control.

When answering a question like this, you must give specific examples from your experience in the same way that the Examiner will expect you to refer to the evidence in a case study. 3. The mission controllers, mission team and Apollo crew had to work together effectively and efficiently because of the time-critical nature of the problems they faced. In doing so, they demonstrated the following characteristics of an effective project team:  

  

The primary objective of getting to the moon to land a man on it was unanimously abandoned by all concerned: the objective now was to get the crew back home safely. Everyone was committed and involved in the delivery of the objective. Everyone believed that this was achievable. To this end, everyone contributed to the solutions. Everyone felt that they belonged and could contribute and that their involvement would be valued. The crew trusted the solutions that the mission specialists came up with, including the making of new CO2 scrubbers and using Aquarius when the oxygen and power systems failed on Odyssey, the command ship. They assumed that these would be the best solutions in the circumstances because of the high performance expected of the earth-bound team. The mission crew did not query the origin of the ideas. The crew trusted the advice concerning the manual piloting of the ship and the reduction of checklists which the mission team recommended. Because of the time-critical nature of the problems, the synergy achieved in the team interactions meant that solutions were devised in time.
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When the solutions worked, everyone felt enormous pride in bringing the crew home because it showed what they had achieved under pressure. Everyone felt that they had achieved a great success because not only was the crew back safely, but also the space programme received great interest after a period of flagging public support, and the increasing focus on safety in the space programme was enhanced after some concern.

The next case describes the processes used to gain project acceptance in two Illinois, USA, transportation projects. The author describes five elements of a project that has a high impact on the community. The case study stresses the need to involve the stakeholders in the project and to address their concerns early in the project development phase in order to avoid resistance and changes in the future. This case study should aid your understanding of: 
 

the power of stakeholders; how to deal with multiple project stakeholders; the challenges of the above to project management.

Gaining project acceptance
Larry Martin and Paula Green, Civil Engineering, Vol 65, No 8, August 1995, pp 51–53. Reproduced by permission of the publisher, ASCE.

Involving every constituency early in the development of public-works projects can build acceptance even when parties don’t get exactly what they want. Two Illinois transportation projects illustrate the five essential elements of a public/agency involvement process. First there was public education, then public participation. The last stage in the evolving process of gaining approval of a public-works project is public/agency involvement – a comprehensive program that provides avenues for receiving and responding to input from all project stakeholders, including the general public; organised community groups; business interests; historical societies; environmental groups; and local, state and federal agencies. Hearing and addressing all stakeholder concerns early in project development can avoid many pitfalls and adversities in the long run, even when the final plan contains aspects that some stakeholders find disagreeable. Comprehensive public/agency involvement programs cleared the way for unimpeded approval of two recent transportation projects in Illinois: a feasibility study for improvement of Interstate 74 through Peoria, one of the oldest freeways in Illinois, with parts designed in the mid-1950s before design standards were established for interstate highways; and a feasibility study of a new highway connection between Peoria and Chicago, known as the Heart of Illinois Project. CH2M Hill, Chicago, was consultant to Illinois DOT on both projects. Public/agency involvement programs include five essential elements: identification of stakeholders; tiered approach to involvement; active investigation to identify issues of concern or conflict; resolution of concerns and conflict to an acceptable solution; and formal approval.
Identifying stakeholders

Some stakeholders in a public-works project are obvious: city and county councils, chambers of commerce and agencies that have regulatory oversight. Others, such as some
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environmental interest groups, neighbourhood and historical associations, and business organisations, are vocal and visible enough to be quickly identified. However, nearly any project will affect groups that are unknown at the beginning of the process. Efforts to identify these stakeholders might include drives through the area; visits to adjacent businesses, institutions and residences; and consultations with local representatives. The questions to ask are, ‘Who cares about this project?’ and ‘What groups represent the interests of those individuals?’ The most significant challenge in identifying Heart of Illinois stakeholders was the size of the potentially affected region – a 3000-square-mile area encompassing ten counties with a population of 700 000. Besides identifying as many stakeholders as possible, the project team put extra effort into publicity efforts and paid special attention to the formation of a technical group to ensure representation of geographic and special interest. Remaining flexible as the project unfolds may be the most important aspect of stakeholder identification. Seven months after start-up of I-74/Peoria project development, some neighbourhood groups surfaced that felt they weren’t being involved. We added representatives from these groups to the technical group and held meetings with them. These neighbourhood groups could have proved more contentious had we not veered from the original membership or meeting schedule.
Tiering approach

It would be impossible to conduct an input meeting that allows every stakeholder to speak. Tiering can make the input/reporting process less daunting. One method is to solicit input approval from various categories of stakeholders at different times. In I-74/Peoria project, we conducted meetings with various tiers of participants, including:  

   

executive briefing for senior Illinois DOT officials, Federal Highway Association ( FHWA) representatives, and key technical support staff (an on-site briefing and field trip was also provided for FHWA and Illinois DOT representatives); presentations and working sessions for Illinois DOT technical leads; meetings of the technical groups, which consisted of technical representatives of the local governments, institutions, industries, and various other agencies; presentations for city councils and the regional planning agency; more than twenty meetings with representatives of two area hospitals affected by the project, the local chamber of commerce, the Salvation Army, the region’s largest employer (Caterpillar, Inc.), organised neighbourhood and business area groups, and others; one formal public information hearing and one local public hearing.

All told, about sixty-five meetings were held with all tiers of project stakeholders. By meeting individually with the various tiers, the study team was able to address the specific concerns of each group. We used another method of tiering, in which various constituencies are reached through an advisory or other representative group. In the Heart of Illinois project, a technical group composed of representatives from every stakeholder group in a 3000-square-mile area would have been unwieldy. Instead, the technical group was limited to about thirty members, composed to ensure representation of each geographic region and special interest. The group included elected officials from each geographic region (selection so
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that the group did not weigh too heavily with representatives from the Peoria area), agricultural and rural quality-of-life concerns, industrial/economic interests, and natureconservancy groups. The technical group was supplemented by a mailing list of several hundred interested parties who received regular newsletters and project update. Technical group members arranged, publicised, and co-hosted project meetings in their communities, helping to ensure that all stakeholders had an opportunity to have their say about the project. Also the group members were already informed about the project. Having familiar faces at public meetings to discuss the project significantly increased the comfort levels of local participants and decreased the workload for project team members. Heavy reliance on technical-group members does have drawbacks. The project team assumed, incorrectly in a few cases, members were getting information back to their local government bodies. We recommend confirming important communications to avoid such potential failures.
Identifying issues

By seeking out potentially contentious issues and addressing them promptly, the study team will not be blind-sided at the formal hearings. For the Heart of Illinois project, instead of trying to gather stakeholders from far and wide to voice their concerns, the project team developed a ‘road show’. We set up a series of local drop-in centres to present basic project information and solicit comments. They were most successful when a technical-group member made the arrangements and took responsibility for involving local constituents. We also responded to requests from service groups, city councils, and other organisations by arranging additional meetings, again through local technical-group members. An important aspect of issue identification for the Heart of Illinois project was to define clearly the scope of the project to the stakeholders. Nearly all of the public information about the project emphasised that the study would not ‘select a preferred corridor, but only determine if any corridors are physically, environmentally and economically feasible’. Because the project established only finalist corridors, the remaining steps in the public/ agency involvement process – resolution and approval – were relatively small parts of the process. Issue identification did not lead to conflicts to be resolved; instead, it added to the list of corridor candidates and considerations. Through public/agency input, the project team learned of proposed developments and recreational areas that it had not previously known about and found out about an underground natural-gas storage area within one proposed corridor. In contrast, issue identification for the I-74 Peoria project led directly to points of contention that required resolution. One divisive issue that could have seriously impeded project approval involved I-74 through-trips. Many stakeholders believed that existing traffic problems resulted from through-trips (particularly trucks) clogging the freeway at peak periods. If through traffic used the I-474 bypass, they contended, traffic congestion would disappear. Illinois DOT authorised a survey that showed about 75 per cent of all through-trips (and 98 per cent of through-truck trips) already use I-474. In fact, through-trips account for only 2 per cent of peak period traffic on I-74 at the Illinois River. These statistics were exceptionally valuable in dispelling further doubts about the need for the project as final recommendations were developed. In addition to identifying contentious issues, we also used meetings to revisit stakeholders once the issues were resolved. Even if the solutions ran contrary to their
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position, stakeholders’ antagonism toward the final plan was tempered by the knowledge that their concerns were heard and addressed.
Resolution

Resolution involves: (1) an effort to refine project plans to address stakeholders’ concerns; and (2) a commitment to meet with stakeholder groups as needed to assure them that their concerns have been addressed in the plans. Just west of the Peoria central business district, two large, prestigious health-care institutions, St Francis and Methodist hospitals, border I-74 on the north and south sides of the freeway, respectively. Two historic neighbourhoods are also in the area: the West Bluff Historic District and the East Bluff Neighborhood Improvement Association. At present I-74 access to and from the medical centres needs to be improved. Master planning projects undertaken by two hospitals also had to be integrated with any I-74 modifications in the area. CH2M Hill brought in the consultants working on the hospital plans, and the hospitals formed a subcommittee to address the I-74 study. Based on input from about twenty special meetings with the hospitals and interest groups, the preliminary improvement alternatives were modified. In the recommended plan, left-hand ramps will be eliminated, hospital access will improve with a half-diamond interchange, and access ramps and turn restrictions will direct traffic away from the West Bluff Historic District. Input from West Bluff residents led to a proposed bike/pedestrian path across I-74 for local access through neighbourhoods split by the highway. In downtown Peoria, the existing I-74 runs through the North Side Historic District and abuts various structures and properties of historical significance. Again through a series of meetings, we were able to develop an acceptable alternative in which ramps are located outside the historic district, preserving its character while enhancing access to the downtown business district.
Formal approval

The first four steps in the public/agency involvement programme benefit the final stage, formal approval, in several ways. The project team is not likely to be taken by surprise by any new issues or concerns, nor will the public be surprised about any project elements. The process also helps to dispel any feelings that a project is being forced on the community. The fact that agencies have had the opportunity to provide feedback on the project along the way also aids the formal agency approval process. The I-74/Peoria corridor study results in adoption of $180 million in highway improvements with almost complete acceptance by the affected agencies and the general public. The project has now moved into preliminary engineering. As a subcontractor to Alfred Benesch & Company, Chicago, CH2M Hill will reconstitute the technical group to provide continuity of public/agency involvement during this phase. Funding has been earmarked in the stage highway program for the next phase of the Heart of Illinois Highway. A decision on corridor feasibility is expected soon. The feasibility study had laid the groundwork for public communication and involvement in future phases of the work.
Afterword

The I-74 project is now underway. Initial work to Summer 2004 is improving access routes to and from the planned I-74 route. The major upgrade is expected to commence in
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2004 through to 2006. True to its earlier promise, the I-74 project is continuing to communicate with its major stakeholders. A dedicated website, www.upgrade74.com, keeps the public informed of all work, planned disruptions and alternative routes. Regular press packs are provided to all local media and individuals can request email updates.
Discussion points

Discuss these with your study group before reading the outline suggested solutions. 1. Explain the term ‘stakeholder’. All projects will have a variety of stakeholders. Put together a list of the most common stakeholders on any project. 2. Think about projects in which you have been involved, or cases already discussed in this text. Identify the internal and external stakeholders for each project and discuss their stakes in the project. 3. The method used by the Heart of Illinois Project to gain project acceptance has five key elements. Discuss each of those elements.
Outline solutions

1. A definition provided by Kharbanda and Pinto (Successful Project Management, John Wiley & Sons Inc, 1997, Chapter 2) states: ‘An organisational ‘‘stakeholder’’ refers to any individual or group that has an active stake in the activities of the organisation.’ The Project Management Body of Knowledge (PMBOK), states: ‘Project stakeholders are individuals and organisations who are actively involved in the project, or whose interests may be positively or negatively affected as a result of project execution or successful project completion.’ Regardless of the size of the endeavour, every project has to deal with stakeholders. A list of the most common stakeholders on any project is as follows:
Internal stakeholders 
  

Top management. Project manager and project team. Functional managers. Employees.

External stakeholders 
    

Clients. Competitors. Suppliers. Government. Interest groups. Society.

2. Discuss this question with your group members. 3. The five elements and their definitions are as follows: 

Identifying stakeholders: this process involves the identification of groups or individuals with a stake in the project. This may involve visiting the area, local businesses and local representatives. With their help the project manager should be able to identify who has a stake in this project. In some projects it is also useful to identify the relative power of each of the stakeholder groups to influence the success of the project.

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

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Revision Questions

5

Section A type questions
Question 1.1
Complete the following sentence with the most appropriate word or phrase: The person or organisation providing the resources for the project is known as the project ____.

Question 1.2
Which type of organisation structure is most likely to contain a series of projects as one of its formal elements? (A) (B) (C) (D) Entrepreneurial Functional Divisional Matrix

Question 1.3
In any project, what term is used to describe all those individuals and organisations that are interested in the progress of the project? (A) (B) (C) (D) Project Project Project Project team customers stakeholders managers

Question 1.4
In a typical project, who is responsible for ensuring that the project meets its objectives? (A) (B) (C) (D) The The The The project team project manager steering committee project sponsor

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Question 1.5
Identify four project management skills.

Section B type questions
Question 2
Requirement The project manager does not and cannot complete a project on his or her own. It requires effective teamwork and team motivation. Explain what the project manager can do to help foster a motivated project team environment. (10 marks)

Question 3
Requirement Explain the role of the project manager in respect of the: 
 

people; process; and product (10 marks)

involved in a project.

Section C type questions
Question 4
Introduction Five firms from four countries are playing major roles in a large project devoted to the development and implementation of an extensive communications network. Figure 5.3 shows the firms, together with the roles they play in the project and their countries of origin. The client The client, Comnet, is one of the major telecommunication providers in Germany. It has recently gone through a process of reorganisation (1996) and has since been investigating the potential of a new telecommunications network. Christian Rueber, head of telecoms development, spent last year leading a team of engineers, programmers and software analysts from Comnet in selecting a contractor who would supply the telecoms network. After several months of tendering from numerous suppliers, Comnet selected a UK company called Dantec to service the project. ( The selection was based on numerous financial selection techniques and cost–benefit analysis.) The final contract was signed between the two parties in October 1997.

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Figure 5.3

The prime contractor Dantec is a telecommunications development and installation company based in the north of England. It has several years of experience in installing small- to medium-scale telecommunications networks throughout Europe, and has worked with Comnet previously on a successful small-scale network installation. Richard Norton, the project manager, has been in charge of the project throughout the tendering process, although this is his first role in charge of a full network installation. Richard’s background is as a telecoms engineer, and he has only very recently moved into a managerial role. Many of the project team at Dantec consider Richard to be lacking in managerial experience to handle such a large project. However, the management team at Dantec are more than happy with his progress – after all, he successfully won the contract! Having signed the contract, Richard gets together his project team for the first project coordination meeting, where they begin to draw up a schedule of events and key milestone activities. Each member of the team is made aware of their individual team’s responsibilities in the overall project. One of the key aspects of the project is the need for Dantec to subcontract some of the major hardware and software supply to another company. By the end of October, after several further planning meetings, the final master project plan is complete, including the delivery dates for the subcontracted work. Dantec entered into a contract with Solar, a computer manufacturer in the United States, for the required computer hardware as well as the operating systems needed to implement and control the network. Dantec have many years’ experience of working with Solar on several previous successful projects. Phil Rogers, the general manager of networks coordination division, is placed in charge of the Comnet project requirements.
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In November, Phil Rogers agrees the dates and targets set for Solar, proposed in the master plan drawn up by Dantec the previous month. Solar’s role Solar, with the approval of Comnet, entered into negotiations with Yotamo and Exactest. Yotamo was given the responsibility for the development of major elements of the software that could meet the functional requirements of the overall communications system. Exactest was obligated for additional ancillary software for some specific components of the overall system as well as for the development and implementation of a testing strategy for all functional software developed under contracts with Solar, irrespective of which firm wrote the software. Responsibility for integrating the hardware and software components developed by Solar, Yotamo and Exactest also rested with Exactest, well renowned for its high-level skills in integration. Dantec, as prime contractor, was responsible for integrating all project deliverables to the final client in Germany. Requirements Critically assess the role of Richard Norton of Dantec in the overall telecommunications project. Your answer should include: (a) an assessment of his main tasks internally as the project manager at Dantec; (8 marks) (b) an assessment of main responsibilities in relation to both the main client Comnet, and the major supplier Solar. (5 marks) (c) an assessment of the potential managerial problems likely to be encountered by Richard Norton as a result of his particular background and previous experience. (12 marks) (Total marks = 25)

Question 5
GPConnect (GPC) is the name given to a project being undertaken by the Southern Regional Health Authority (SRHA) to connect all medical centres and hospitals within the region to a national information network, called the ‘Healthweb’. You are a senior management accountant working for one of the southern region hospitals, and, as part of the project team, it is your responsibility to communicate with all SRHA medical centres and hospitals on the progress of the project, as of today, 23 May 2002. The SRHA is one of four regional government-controlled authorities, responsible to the central government Department of Health. Each regional health authority manages and controls the provision of medical care to the public within its local area. The SRHA is responsible for fifty medical centres and ten hospitals within the region, all of which are publicly funded (that is, the SRHA is not responsible for private medical centres and hospitals). The SRHA has been set a target by the central government to have 80 per cent of all medical centers and 90 per cent of all hospitals within the region connected to the Healthweb by July 2003. Prior to the project commencement, most information within the hospitals and medical centres was kept by a manual, paper-based system, and all data
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exchange was done by means of telephone or by post. The senior management team of the SRHA set up a project board in January 2002 to oversee the progress of the project and to specify the project objectives. Requirements You have been asked by the executives of your own hospital to prepare a memorandum to the other senior managers in the hospital which should discuss the relationship of the project manager to: (i) the project sponsor (that is, the central government); (ii) the project board; (iii) the medical and administrative users (in medical centres and hospitals). Include in your answer a discussion of the potential conflicting project objectives of the above stakeholders. (25 marks)

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Solutions to Revision Questions
Section A solutions
Solution 1.1
Sponsor

5

Solution 1.2
(D)

Solution 1.3
(C)

Solution 1.4
(B)

Solution 1.5
Any four of the following:  Leadership skills.  Communication skills.  Negotiation skills.  Delegation skills.  Problem-solving skills.  Change-management skills.

Section B solutions
Solution 2
Guidance and common problems This question again provides you with an opportunity to demonstrate your basic project management knowledge. A straightforward question such as this could appear in this examination, but again, you must be prepared to apply this knowledge to a scenario. The project manager needs to understand his or her team members first in order to understand what motivates them. The project manager should attempt to create a project environment that is supportive and where team members feel enthusiastic and want to work towards the overall project goal. How does the project manager create such an environment? By encouraging participation in project decision-making and by delegating decisions to the team members, thus encouraging involvement and ownership. Project management techniques for motivation may include regular project meetings whereby team members can participate and air
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their views and put forward their experience. Also, the project manager should have regular contact individually with team members, encouraging them to put forward their own ideas and suggestions for project improvement. The project manager needs to demonstrate that he/she values the contribution made by team members and that their contribution is important to the overall project.

Solution 3
Guidance and common problems The question provides a useful guide for remembering some of the key roles of the project manager. It is therefore a useful memory jogger, just in case an examination question is not so helpful! The overall role of the project manager is to ensure the success of the project. This objective implies that the manager will have significant project management skills and be able to manage the three ‘Ps’ outlined below. People. The manager needs to manage the people involved with the project. ‘People’ in this sense means not only the project team, but also the client staff who will be working with the project team. The manager will therefore need to delegate and monitor the work of the more junior members of the team, and also provide strategic progress reports for the decisionmakers at the client. This split of jobs is likely to be quite difficult and time-consuming. Process. The project process itself will have to be managed. The project manager must therefore be involved with setting the objectives for the project and then have systems in place to monitor the progress of the project. The use of Gantt charts or network diagrams will help in this respect. Product. The outcome from the project will (hopefully) be the completed installation of a new or revised system. Part of the ongoing monitoring of the project is therefore directed at ensuring the project does provide the finished project. The manager will therefore be involved in checking that the specification has been met, and appropriate sign-offs and review meetings are held to confirm project completion.

Section C solutions
Solution 4
Role of Richard Norton As the main contractor, Dantec has the major responsibility for coordination of all parties involved in the project, that is Richard Norton is the link point to all parties, both internal and external. He should be the focus of the negotiation process, setting time scales and milestones (and ensuring that all parties agree and achieve these project targets). (a) Internally the responsibilities of Richard Norton are as follows:  Coordinate complex internal team, including: technicians, programmers, installation, network experts, marketing, finance, etc.  Project planning and scheduling.  Control of coordinating internal deadlines.  Preparation of the project master plan.  The formulation of internal resource needs: people, materials, finance, time.  Control of the financial budget.  Internal negotiator and arbitrator.  Team motivation.
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(b) Responsibilities to Comnet and Solar. Externally, Richard Norton also has a number of key roles.  The primary communication link between the complex supply chain within this project and the final customer.  The coordination of internal and external activities and milestones, to ensure agreement and consensus.  Ensuring that technical negotiations take place between the various contracted parties and that, again, agreement on technical issues is reached.  Contractual negotiations for all parties. (c) It is apparent that Richard Norton is likely to face problems as a result of his lack of managerial experience in a complex project. His technical skills are strong as a result of his previous background. This will be of importance when in negotiations and discussions regarding technical issues. However, good project managers must be able to balance this technical ability with a strong managerial ability. There are potential team leadership problems as a result of his inexperience in a senior management position. Key skills required in project management include leadership and inspiration, which may be difficult to foster when the project manager has little prior experience at this level. Communication with some team members may be difficult, particularly those with experience who may resent a project manager with less experience than themselves. This could lead to lack of motivation, particularly in a multi-disciplined team (in fact, the team is already slightly dubious about the choice of project manager). He may also have a lack of contractual negotiation experience, particularly in such a large and complex project as this. It will be important for Richard Norton to foster and build on management support as early as possible in the project’s life. Technical knowledge will obviously be important in this type of project, therefore Richard Norton could build support by proving his technical ability; this should help to gain team confidence (but may be insufficient to build the confidence of nontechnical members). 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.

Solution 5
Project management relationships and conflicts ( i) Project manager and project sponsor T, as the company responsible for carrying out the GPC project, is contracted directly by the central government (the project sponsor). Therefore, the project manager will need to work through the project sponsor for any contractual dealings with T. The project sponsor is usually the party responsible for payment of projects, but in this case the amount of funding from the central government is not clear, neither in the initial funding nor the on-going running costs. Therefore, the project manager will need to work with the sponsor to resolve potential conflict over project costs. The role of the central government in this project as a fund provider may cause conflict between central government and the SRHA.

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

6

L EARNING O UTCOMES
After completing this chapter you should be able to:
" "

produce a basic outline of the process of project management; identify the characteristics of each phase in the project process.

6.1 Introduction
We have already examined projects, the people who are crucial to their success and project communication. Let us look now at the process of project management. Mention the term ‘project management’ to most people and they will think of images of large-scale construction projects – the Channel Tunnel or the Millennium Dome, for example. Whereas these are obvious examples, business managers every day will tackle equally important but smaller-scale projects. Obviously, the level of complexity differs but the underlying requirements of achieving deliverable results to a customer within given constraints remain the same. This chapter presents an overview of project management concepts.

6.2 A definition of project management
‘The integration of all aspects of a project, ensuring that the proper knowledge and resources are available when and where needed, and above all to ensure that the expected outcome is produced in a timely, cost-effective manner.’ (CIMA: Official Terminology: 2000 edition, p. 117) There are other definitions that refer to a group of loosely connected techniques, some of which are useful in bringing projects to a successful conclusion. Others refer specifically to the coordination of resources necessary to complete projects as required. In Chapter 4 we discussed different life-cycles whereby projects are completed. All have a common ground of planning, meeting standards and communication. These can be seen in the processes involved in project management.
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6.3 The project management process
The project management process requires five different managerial stages and can be represented by a five-step process.

6.3.1 Initiation
This phase sets out the development of a vision for a project and the establishment of goals and objectives. At this stage, the key individuals will be brought together to form the project team, to determine the needs, scope, objectives and customer expectations of the project. Feasibility analysis will be undertaken at this stage (see Chapter 7).

6.3.2 Planning
Planning involves defining the resources required to complete the project, devising a schedule, developing a budget and planning how the project team will achieve the constraints of time, budget, performance specifications and resources (this is further discussed below).

6.3.3 Executing leadership
Providing leadership and coordination to project team members, subordinates and others (e.g. subcontractors or consultants) that will result in achieving project objectives. This stage stresses the need to keep resources and team members focused upon the project tasks. Executing the project is discussed in more detail in Chapter 8.

6.3.4 Controlling
Measuring the project’s progress and assessing whether it differs from the plan. If it differs, corrective action needs to be taken; this may lead to re-planning, which may in turn lead to a goal change. At this stage, the project manager must decide among alternatives for solving problems. Controlling the project is discussed in more detail in Chapter 8.

6.3.5 Completing
Ensuring that the project is finally completed and conforms to the latest definition of what was to be achieved. Post-completion review is discussed in Chapter 8.

6.4 Project planning
A major responsibility for the project manager is the initial planning of the project. 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, to budget and using available resources. A project plan comprises separate plans for: 
  

project initiation/authorisation; time; cost; quality.

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Larger projects will also include plans for: 
 

resources; contingency; communication. The content of each of these plans is as follows: 

 

   

A project initiation document defines the roles and responsibilities, scope and deliverables required (see below). The time plan lists all the activities, who will do what and how long each is planned to take. This includes the milestone finish dates of each stage of the project life-cycle, and the estimated completion date of the whole project. The resource plan checks peaks and troughs of workload to ensure the plan is feasible and lists purchases to be bought. Contingency planning includes assessment of risk and decides what additional activities and buffer of cost and time need to be added to the plan to ensure a reliable budget and completion date. A risk register will identify contingency plans for each of the key risks and allocate responsibility for monitoring each. The quality plan includes identification of the customers, the key outcomes each expects, acceptance criteria that has been agreed with them, a test plan for how each outcome will be tested, and responsibility for each test. This may include safety and security planning. It will also include an audit plan for the project management process. The cost plan uses a rate per hour for each activity in the time plan, plus cost of purchases from the resource plan, plus contingency costs to create a budget for the project. This will be time phased to provide a cash flow forecast. The communication plan identifies the key people in the project, their likely concerns, message needed, planned method of communication and who will be responsible. Creating this plan involves the following stages:   



Divide the project into work packages. Dividing a project into work packages with defined deliverables and responsibilities for each allows the project manager to delegate. A work breakdown structure (WBS) is a hierarchical tree of these work elements that need to be accomplished by the project team during the project. Work packages can be further divided by defining the tasks and activities that comprise them, but only where this is essential to allow delegation and control, otherwise motivation and creativity is reduced and monitoring becomes costly. Estimate times and resources. Those responsible for each work package are asked to estimate the time and resources needed for their work package and the tasks and activities that comprise it. Evidence from past similar projects is used wherever possible to improve the accuracy of time estimates. Make a cost estimate. Using rates per hour and costs of purchased resources needed, the WBS is used to calculate a total of how much the project will cost. Portray the activities graphically using a network diagram. Because some work packages occur in parallel, you cannot add together all the times of the WBS to estimate how long the project will take. Therefore, to calculate total time, a network diagram is created showing the required sequence and interdependencies of work packages to achieve the project objectives (see Chapter 9 for some examples of network diagrams).

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The above plan assumes infinite resource availability and no risks. Larger projects therefore create a resource plan to check that workloads are achievable. Risk analysis is also done to estimate what additional contingency allowance is needed for time and cost. Also the time and cost are built into the plan for communications. Calculate a project schedule and budget. A realistic project plan is then issued.

Exercise 6.1
What aspects of project management are likely to involve some degree of uncertainty?

Solution
Most aspects of project management are open to some degree of uncertainty! For example, the schedule and costs are open to uncertainty, owing to unforeseen events such as adverse weather conditions, a shortage of resources or increase in costs of raw materials.

6.4.1 Initiation
At the beginning of a project, a Project Initiation Document (PID) should be produced. There are two primary reasons for having a PID: 


for authorisation by the project steering committee or project board; to act as a base document against which progress and changes can be assessed. A typical PID will contain the following: 

           

the background to the project, explaining why the project is necessary; the project objectives; the approach to be taken to the project, for example, whether it is primarily to be carried out in-house, or by suppliers; the project scope (i.e. the range of tasks included in it); the project deliverables and desired outcomes; any areas excluded from the project; any constraints, such as budget or available resources; any interfaces between this project and others, or with other organisations or parts of the organisation; any assumptions on which the PID is based; the project organisation structure; the project manager and team; the communication plan (reports, meetings, etc.); the controls in place in the project (that is, any mechanisms to ensure that the project objectives are achieved, such as a steering committee, reports, meetings, etc.).

6.4.2 Detailed project planning
Detailed planning involves the same steps as the front-end planning previously discussed in Chapter 4, and is briefly described again below.
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Dividing the project into work packages Breaking the project into work packages requires the identification of individuals responsible for elements of work. A work breakdown structure (WBS) must be created, and the tasks therein completed by the project team during the project. This then involves further definition of all the specific activities that must be carried out for each work package. The work breakdown structure clearly identifies the person or people responsible for each activity or work package. This is described in detail in Chapter 9. Define the activities graphically By using a network diagram (often referred to as critical path analysis – see Chapter 9) the required sequence and interdependencies of activities to achieve the project objective can be displayed in a more ‘user-friendly’ format. Estimation of resources 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. Determine the project schedule and budget A baseline budget needs to be produced that presents a realistic assessment of the time and funding required, and the available resources to complete the project objective. This forms the baseline plan for the whole project – a complete guide for accomplishing the project scope on time and within cost. An example of a project management plan in outline The plan below would be issued to stakeholders such as corporate management, the contracting company, customers and the project team. There may be ‘commercial-inconfidence’ elements in it that would only be shown to senior management. There are no set layouts or contents of management plans. Some illustrative examples have been used. Section title Overview or summary Contents Overview of the plan: project objectives, organisation of the project team, schedule of work, especially the milestones, resources required including the budget and an assessment of significant risks For example, project for the upgrade of a computer system for the Exam Company The project authorisation document will identify roles and responsibilities such as the project board, the project manager, and the project team. For example: Henry Smith, Project Manager.

Project name Project players and responsibility

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Section title

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

Project objectives

Project scope and contract

Methodology

Assumptions

Technical plan

Quality and management

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Section title Communication plan

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

Organisation and personnel

Project schedule

Resources and facilities including budget breakdown

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Section title Risk assessment and risk management

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

Acceptance

Change management

Post-implementation audit

Think about a project you have worked on or are currently involved in. List the planning activities you carried out before starting the project.

6.4.3 The baseline plan
This should include a number of details: 


the start and end date of the whole project; the start and end date of each activity;

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the resources needed for each activity (this may be shown as resources needed per activity per month); the cost estimate (budget) for each period; the final cost estimate for the project.

6.5 Project objective constraints
This is likely to be examined quite frequently. The successful accomplishment of the project objective is usually constrained by four factors: scope/functionality, schedule/time, cost and customer satisfaction/quality.

6.5.1 Project scope/functionality
The scope of the project is all of the work that must be carried out to satisfy the project’s objective. The customer will expect the work to be carried out to completion and that there is nothing expected which is missing. For example, when building a house the project scope will include clearing the land, building the house and landscaping, all within the agreed quality standards expected by the customer. Leaving windows or walls unfinished, a hole in the roof, or a garden full of rubble, will be unlikely to satisfy the customer! In computer systems, the scope is often defined by all the functions that the system is expected to fulfil.

6.5.2 Project schedule/time
The schedule is the timetable for activities involved in achieving the project objective. The project will have a finite date for completion, either set by the customer or negotiated and agreed upon with the customer. For example, planning a wedding will require organisation of all activities to occur at a specific time and on a specific wedding date.

6.5.3 Project cost
The cost is the amount the customer agrees to pay for the final project or product. The project cost is based on the budget, which includes a cost estimate of the resources that will be used in the project. This will include salaries of the people working on the project, project materials, equipment purchase or hire, subcontractors’ or consultants’ costs and facilities costs.

6.5.4 Customer satisfaction/quality
The objective of any project is to complete the scope within budget and by the agreed date to the customers’ satisfaction and quality requirements. It is important to ensure that prior to the project planning the project team has a clear understanding of the customer specifications and requirements, that the customer is kept informed of project progress throughout the project life and that the plan includes progressive testing to ensure that quality requirements are fully met. Quality in computer systems can be measured in the number and type of errors (‘bugs’) it still contains, response times, fitness for purpose (i.e. matches the business process it is intended to support) etc.
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Take a few moments to think about a project that you have been involved in. Consider the constraints involved in the project and how you carried out the planning process to achieve the final objective of the project.

6.6 Summary
This chapter has looked at the project management process. The key points to remember are: 


the five project management stages (try using the acronym IPECC). the constraints acting on a project.

The following chapters will further discuss the project management stages.

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Readings

6

Project scope and an introduction to the complexities of project management

The article in this section describes the potential scope of project management and focuses upon the complex nature of one particular project – the construction of the Channel Tunnel. This real-life, high-profile case study introduces some of the concepts and ideas fundamental to understanding the importance of successful project management. This case study should provide you with a better understanding of: 
 

project scope management; conflict and complexities in managing project stakeholders; the importance of balancing planning and implementation activities.

The Channel Tunnel: larger than life, and late
Virginia Fairweather, Civil Engineering, Vol 64, No 5, May 1994, pp. 42–46. Reproduced by permission of the publisher, ASCE.

The Channel Tunnel linking Great Britain and France is an engineering achievement and a symbol of man’s imagination and daring. But it is also the world’s largest privatised project with implications for other such financial arrangements. Along with engineers and contractors, bankers and the governments of France and England were trying something unprecedented and there are lessons to be learned from their experiences. As one project executive says with some irony, the project of the century had the ‘claim of the century’. (This claim for $2.25 billion was resolved in early April with the final contract value fixed at approximately $1.7 billion. Under the settlement, project owner Eurotunnel will pay the contracting organisation, Transmanche Link (TML), approximately $105 million– $127 million, in addition to payments already made under an earlier agreement.) The privatisation payback will come long after the ribbons have been cut and the champagne has been drunk. About 600 000 shareholders as well as banks and other governments looking at privatisation will wait until the next century for the promised returns. The list of obstacles to that payback is a long one. The final cost of the system is $149 billion, about double the original estimate. The high-speed rail link on the United Kingdom (UK) side to London is only on the drawing board, the fares for the Channel crossing are higher than hoped ($325 to $465), and ticket sales are lower than expected. The existing ferries cost less. Some of the payback pressure was eased when the two governments agreed to extend the concession to Eurotunnel for another ten years, until the middle of the next century.
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The extension is conditional on Eurotunnel’s next public offering (summer 94) raising about $750 million. But even with the delays, cost overruns, and the bureaucracy, many of those involved look back at the job as an adventure of a lifetime. If its lessons are heeded, the Channel Tunnel will point the way for the future international privatisation projects. Some participants look back at the project and touch on a few of the problems. John Noulton, a Eurotunnel executive, has been with the project since the mid-1980s and helped draft the concession documents the French and British governments signed off on in 1986. He says the original government White Paper relied on tried, and tested, technology, but that costs had ‘ratcheted up’ nonetheless. Noulton describes just one hitch in the original plans. In a classic underground construction scenario, the tunnel-boring machine with its sophisticated computer controls was designed for compact chalk, he says, as was the tunnel lining system. The pre-cast concrete lining segments were supposed to lock together by compression. When they hit the bad patch, water affected the electronic system, says Noulton, and worse, the designed-for compression could not take place in the hollows in the outside ground. At one point, he recalls, men were standing on the lining segments trying to hold them together with a belt. ‘We had to inject grout to solidify the ground, a costly endeavour,’ he says, but ‘once you’ve got the machinery down there your main cost is manpower’. Noulton says these costs were encountered in the service tunnel, the first of the three running tunnels. By the time they proceeded to the rail tunnels, engineers knew what to expect. In the end, the tunneling was finished on schedule, he says. As to claim, Noulton joins a general chorus second-guessing whether the project’s equipment should have been contracted on a lump-sum basis. The fixed equipment, in this case, means the mechanical and electrical work, catenaries, signalling, and telecommunications. That contract resulted in the $2.25 billion claim against Eurotunnel by the contracting organisation, TML. The claim wound its way through the project appeals system until a protocol was reached in July 1993. Under that arrangement, Eurotunnel advanced $75 million each month to TML to complete the job. Nonetheless, this was an ‘unstoppable project’ says Noulton, ticking off what he sees as the high points. First was the ‘tremendous elation and momentum’ created when both nations signed the treaty approving the project in 1987. Raising the money was the next high point. The public offering of shares in the project was made right after the United States stock market’s Black Friday, in October 1987. Even under those inauspicious circumstances, ‘overnight we had more than 100 000 shareholders,’ says Noulton, which he calls ‘a miracle’. The third phase was construction. In spite of delays, the job was ‘pretty well’ on time, he says. Now the project is in the ‘make it work, make it pay’ phase. That task looks daunting, but payoff wasn’t expected until the next century, he says. John Neerhout Jr was project executive at Eurotunnel from early 1990 to 1993. Neerhout came from the Bechtel Co., San Francisco, to which he has since returned. Neerhout made some sharp comments on the $2.25 billion claims and its origin in a speech to the Project Management Institute last autumn, and a portion of that speech follows: Managing the construction contract was complicated by numerous factors, but perhaps the central problem was the banks’ early involvement in the renegotiation of the contract, and multiple methods of compensation for different parts of the work. Tunnelling was done on a cost-plus-fixed-fee basis with a target cost above or below which there would be
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a sharing difference. Rolling stock was procured on a cost-plus-percentage-fee basis. The bank insisted on the least defined portions, the terminals and the mechanical and electrical (M&E) equipment, to be done on a lump-sum turnkey basis. As difficult as some of the earlier technical and commercial problems were, it was fixed equipment that caused the most intractable problems. . . As fitting for the project of the century, TML made the claim of the century demanding an additional amount equal to 150 per cent of the original lump-sum price for M&E (i.e. from $930 million to $2.25 billion at 1985 prices!). They maintained that all of the cost overruns were due to Eurotunnel’s interference and disruption. From our perspective this was nonsense. Their organisation was not adequately set up for M&E work. They sub-contracted designs to 46 contractors. TML’s attention had been devoted primarily to tunnelling in the early years. So when subcontractors’ bids came in and commitments were made, TML’s cost forecasts kept increasing. Their reaction was to make a claim for recovery of all costs on the basis that Eurotunnel had caused such delay and disruption, that the contract lump sum was no longer valid, and did this without any substantiation of their claim, as required by the contract. That was in July 1991. Eurotunnel referred this claim immediately to the disputes panel as per the contract. In March 1992, to Eurotunnel’s and the banks’ horror, the panel ruled in TML’s favour, ordering Eurotunnel to pay $75 million per month until a negotiated settlement was reached. Eurotunnel had to pay, but filed for arbitration with the International Chamber of Commerce, asking for an urgent award to stop the interim payments. The arbitrators made two interim awards, both in Eurotunnel’s favour. In September 1992 they ruled that the payments were incorrect. In March 1993 they ruled TML had to reformulate its claim into individual claims for variations and/or breach of contract. Several high-level negotiations resulted in agreements and contract amendments while others got nowhere. The first of these agreements was made in late 1988 and again in late 1989. The major tunnelling claims were settled, and the rolling stock fee was capped. But on fixed equipment, TML rejected offers to settle made in December 1992 and in May 1992. We tried again for a settlement in the second half of 1992, going through very detailed and lengthy negotiations, but could not reach agreement. Parallel negotiations during mid-1992 did settle new claims for the tunnels and old claims for the terminals. No serious negotiations were held in the first half of 1993 as TML adopted an ‘economic’ slowdown. Several overtures were made through various channels and finally, again under the auspices of the Bank of England, agreement was reached on a protocol to secure the transfer of control (from TML) and phased opening. It was signed by Eurotunnel, TML, the Agent Banks and the Bank of England on 27 July 1993. Under the protocol, Eurotunnel took early control of the sites and conducted the final testing with TML’s assistance. That’s the good news. The bad news is that Eurotunnel has to advance additional money against the fixed equipment claims not settled. TML must still substantiate their entitlement [This was done in December 1993.] We estimate the process to resolution will last well into 1995! ˆ Peter Middleton is an executive with the Maıtre D’Oeuvre (MDO). This oversight group was, like just about everything on the project, a scrupulously even combination of French and British firms, SETEC and Atkins, respectively. Every three months, Middleton says the group prepared a ‘hefty’ status for the owners, the contractors, and the banks.
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Looking back to the beginning of the project, Middleton says the banks and the contractors who put the deal together in the mid-1980s were a daring lot, but ‘had no idea how to be owners’. As a result, they went ahead with what is regarded by many as a ‘disastrous’ lump-sum contract for the fixed equipment. While there have been delays and unanticipated costs elsewhere, this aspect of the entire project possibly caused the greatest cost overruns and resulted in the claim. Middleton says the civil work contract definitions and the contract terms were ‘reasonable’, and the scope familiar to the parties. This part of the contract was written on a cost-plus-fixed-fee basis, with overruns to be shared by the owner and the contractor. The lump-sum contract was inappropriate for work, ‘imperfectly understood’ by the banks and the contractors, says Middleton. But there was a lot of pressure to go forward, he says. The contractors wanted the work, the bankers wanted certainty, says Middleton, and so the lump sum prevailed. Frank Cain, senior vice-president Bechtel Power, Europe, Africa, and the Middle East, spent a year as Eurotunnel’s project chief executive, succeeding colleague Neerhout. On the claim on the fixed equipment, Cain thinks the lump-sum contract was inevitable: ‘Banks always want lump sums and certainty’. Cain has tried to ‘particularise’ the claim – break it down. ‘It’s easier to pick up pieces to agree on,’ he says. ‘Parties came close to an agreement in early 1993, but the banks would not buy in,’ he says. At this point the current protocol took effect, in which Eurotunnel paid TML every month against a final settlement. The Intergovernmental Commission (IGC), the oversight body made up of civil servants from France and the UK, mandated that where there were differences in the two countries’ standards, the higher of the two should prevail. In theory this was a great idea, he says, but contractors couldn’t easily interpret this when differences related to items such as a concrete pour. Cain takes the construction veteran’s view that ‘delays and cost overruns are not unusual in a large project’. Nonetheless, he faults IGC for both. Under its safety charge, it instituted an ‘arbitrary’ and last-minute requirement for Euroscan at both terminals. This first of its kind electronic anti-terrorist device will check trucks at random before they enter the tunnel. Design and installation of the Euroscan caused delays and higher costs, says Cain. Jack Lemley is another American asked to help salvage the troubled project on the contractor side as chief executive for TML. Lemley, a heavy-construction veteran who had set up his own niche consulting firm out of Boise, Idaho, was troubleshooting in Nepal when he was asked to take charge for TML. Reluctant at first, Lemley decided to take on his ‘European adventure’. He talks about the organisational challenge and government interference, with quite a different point of view from that of John Neerhout. Lemley says his greatest initial challenge was to meld what were two operations: Translink (the five English contractors who were part of the original proposal in the mid1980s) and Transmanche (the five French counterpart contractors). Each had its own managing director. The Translink director had responsibility for commercial and business affairs, the Transmanche director for coordination of all engineering. Lemley changed these two managing directors, one for all engineering and one for all construction. Lemley thinks this and other changes made for a more efficient operation and got the project back on schedule. Safety on this project was ‘far ahead of the rest of the industry,’ says Lemley, and this is the other achievement he likes to point to. The safety record improved during his tenure,
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Lemley adds. ‘We all were running half the national average of accidents for the French or the British.’

Afterword

As at December 2002, Eurotunnel still had a debt of £5.9 billion left over from the construction of the Channel Tunnel. However, that is a reduction from the £9 billion it owed when the tunnel was opened in 1994. In early 2003, as a result of re-structuring its debt, Eurotunnel moved into a cash-flow profit for the first time despite spending £4 million on asylum seeker measures.
Discussion points

Discuss these with your study group before reading the outline suggested solutions: 1. Despite encountering numerous operational and managerial difficulties and management failures, the Channel Tunnel is one of the most spectacular engineering projects ever undertaken. One of the critical aspects of this project was the continuing conflict between the contracting organisation, Transmanche Link ( TML) and the project owner, Eurotunnel. Suggest possible actions that could have been taken to prevent or reduce this conflict. 2. In an interview in the article above, one executive, in referring to the banks and the contractor who put the project together, said that they ‘had no idea how to be owners’. Explain where you think the owners of the Channel Tunnel project failed. What do you think the role of the owner should be?

Outline solutions

1. First, we need to consider why the conflict arose. The primary reason was a contractual misunderstanding regarding the lump-sum payments between the two organisations. The original contract resulted in a protracted claim by TML for over $2 billion dollars. A protocol was not agreed until July 1993, hugely delaying the project. Possible ways to avoid this kind of problem include the following:  Allocation of sufficient time to the planning and contractual negotiation stage of the project.  The use of proper project scope, cost and procurement management techniques. 2. In explaining where the owners of the Channel Tunnel project failed, there are a number of areas we can consider here:  Lack of understanding of the technical details.  Agreeing to an inappropriate contractual agreement for this type of project (i.e. allowing a lump-sum contract for the fixed equipment). Apparently the owners were pressured into agreeing to it. In considering the role of the owners, it could be argued that project owners have three main roles: 
 

ensuring that the project, as originally conceived and achieved, ultimately meets its objectives; ensuring that the project will perform successfully once handed over by the contractors; ensuring that the project is achieved effectively and efficiently.
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Revision Questions

6

Section A type questions
Question 1.1
What type of project plan determines what additional activities and buffer of cost and time need to be added to the plan to ensure a reliable budget and completion date? (A) Quality plan (B) Activity plan (C) Resource plan (D) Contingency plan

Question 1.2
In project management, what is meant by the acronym WBS?

Section B type questions
Questions 2 and 3
Read the following scenario, and answer the two questions (2 and 3) based on it. Introduction Five firms from four countries are playing major roles in a large project devoted to the development and implementation of an extensive communications network. Figure 6.1 shows the firms, together with the roles they play in the project and their countries of origin. The client The client, Comnet, is one of the major telecommunication providers in Germany. It has recently gone through a process of reorganisation (1996) and has since been investigating the potential of a new telecommunications network. Christian Rueber, head of telecoms development, spent last year leading a team of engineers, programmers and software analysts from Comnet in selecting a contractor who would supply the telecoms network. After several months of tendering from numerous suppliers, Comnet selected a UK company called Dantec to service the project. (The selection was based on numerous
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Figure 6.1

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

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

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Solutions to Revision Questions
Section A solutions
Solution 1.1
D

6

Solution 1.2
Work Breakdown Structure

Section B solutions
Solution 2
Internally, the responsibilities of Richard Norton are as follows: 
      

Coordinate complex internal team, including: technicians, programmers, installation, network experts, marketing, finance, etc. Project planning and scheduling. Control of coordinating internal deadlines. Preparation of the project master plan. The formulation of internal resource needs: people, materials, finance, time. Control of the financial budget. Internal negotiator and arbitrator. Team motivation.

Externally, Richard Norton also has a number of key responsibilities. 
  

The primary communication link between the complex supply chain within this project and the final customer. The coordination of internal and external activities and milestones, to ensure agreement and consensus. Ensuring that technical negotiations take place between the various contracted parties and that, again, agreement on technical issues is reached. Contractual negotiations for all parties.
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Solution 3
It is apparent that Richard Norton is likely to face problems as a result of his lack of managerial experience in a complex project. His technical skills are strong as a result of his previous background. This will be of importance when in negotiations and discussions regarding technical issues. However, good project managers must be able to balance this technical ability with a strong managerial ability. There are potential team leadership problems as a result of his inexperience in a senior management position. Key skills required in project management include leadership and inspiration, which may be difficult to foster when the project manager has little prior experience at this level. Communication with some team members may be difficult, particularly those with experience who may resent a project manager with less experience than themselves. This could lead to lack of motivation, particularly in a multi-disciplined team (in fact, the team is already slightly dubious about the choice of project manager). He may also have a lack of contractual negotiation experience, particularly in such a large and complex project as this. It will be important for Richard Norton to foster and build on management support as early as possible in the project’s life. Technical knowledge will obviously be important in this type of project, therefore Richard Norton could build support by proving his technical ability; this should help to gain team confidence (but may be insufficient to build the confidence of non-technical members). 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.

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Identifying and Selecting Projects

7

L EARNING O UTCOME
After completing this chapter you should be able to:
"

produce a basic project plan, recognising the effects of uncertainty and recommending strategies for dealing with this uncertainty, in the context of a simple project.

7.1 Setting project objectives
Projects are initiated when a need or an objective is identified. Objectives are those things that the organisation wants to achieve. Typically, top-level objectives are profit-oriented, or in non-profit-making organisations, objectives will be to improve the standard of living or education, etc., of members. It is usually a function of the board of directors to determine the high-level organisational objectives. These objectives are then converted from ‘whats’ into ‘hows’ by undertaking projects.

7.2 Identifying project proposals
Turning objectives into realizable projects can be difficult for organisations for a number of reasons: 
 

Prioritising objectives is not always straightforward, as different members of the organisation will have different priorities. There is likely to be more than one way to achieve any objective. Not all objectives can be attained within the same time frame because of limited resources.

At a strategic level a project manager may have very little or no input at all in the process of identifying projects. However, as the key organisational strategies are identified and increasingly defined by discussions, brainstorming and negotiation, strategies will become programmes of change. A project becomes a strategy to achieve an objective. For example, if a
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corporate objective for a pharmaceutical company is to expand its Asian markets, a research project into an endemic disease might achieve this. This process of identifying objectives, refining and classifying them, rating them according to need and organisational importance, and finally establishing the links between objectives and strategies, leads to the final formulation of a project.

7.3 Formation of project proposals
As the organisation determines its objectives and the strategies to achieve these objectives, gradually a set of priorities will emerge, that is, those strategies that are considered the most effective to realise objectives. It is likely at this point that the organisation will have a number of strategic options. As yet, no attempt will have been made to determine the benefits of achieving a particular objective, nor whether it is feasible. This will be considered later in this chapter. Obviously this must be done before a project can be carried out, that is, a project cannot exist without an objective to achieve. As organisations are unlikely to have the resources to carry out all strategies, it is important to identify those strategies that provide the most benefit and achieve the organisation’s most important objectives. Also, as the organisation identifies its key objectives more clearly, the proposals for action become more detailed and more accurate judgement can be made on costs and benefits.

7.4 Setting project requirements
A requirement is a statement of what is expected of a project or product; it must be clearly defined, and appropriate to meet the organisation’s objectives. If a project requirement is set out clearly from the outset, the project has a greater chance of success, and less chance of escalation of costs due to rework, continual changes and customer dissatisfaction. A requirement is different from a specification, in that the requirement is the statement of the reason for what is being done or developed, whereas a specification is the statement of the detailed characteristics of the project or product such as size or performance criteria. It is important that the customer and project team agree that the requirement is appropriate and meets the organisational needs and objectives (Field and Keller, 1998).

7.5 The feasibility study
This is likely to be examined quite frequently. Once objectives and strategies have been identified and ranked and requirements and specifications have been identified, the next stage is to identify those strategies that should be investigated, in order to examine their feasibility (i.e. how achievable they are). Feasibility studies may be carried out on a number of potential strategies and the aim of the study is to decide on which proposal to choose.

7.5.1 Assessing project feasibility
Sometimes the potential project manager is involved in the feasibility study stage, but not always. However, it is important for project managers to understand the process of
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feasibility assessment. Feasibility studies compare the ‘no change’ option of achieving objectives, with two or three alternative proposals for change. Criteria used are technical capability, fit with business goals, financial benefit, social impact and risk sensitivities.

7.5.2 Technical feasibility
There are a number of key aspects regarding technology. The technical features of a strategy that need to be considered are as follows:  

Development, that is, will it require further testing prior to usage or are we confident that the material, technology and processes have been thoroughly tested and are readily usable and available? Applicability, that is, is the technology suitable to satisfy the objective and the project effectively?

It is also important to assess a variety of technical aspects of the proposals. These are likely to vary greatly and may require numerous experts to evaluate them. For example, when building the London Eye, a number of technical, engineering, environmental and safety issues needed to be evaluated by a number of experts. (The delay in opening was caused by safety concerns which was not good for the image of the project, however good the concept and design. These were resolved.) A software developer will need advice from hardware manufacturers before developing programs for a particular computer system configuration. Marketing campaigns must take account of specific market, customer and economic conditions. Other technical considerations could include the following: 


The ease of use of the technology. The degree of disruption during the construction and installation phase.

Features analysis is a further method used to gather information regarding different products in order to aid comparison and evaluation. Features are those elements of the project that are considered to be important or necessary requirements, focusing attention on the features of any requirements that are going to be important in the achievement of satisfying a need. Features analysis identifies those features in the requirements likely to be vital to the final outcome of the proposal. When important features have been identified, they can be assigned a weighting indicating the relative importance of one feature to all others.

7.5.3 Social and ecological feasibility
It is becoming increasingly necessary to assess social factors affecting feasibility. These may include awareness of the social issues within a group or office (e.g. introducing a computerised system), or larger social awareness regarding the effect of projects or products on workers or employment. Relevant considerations might include questions such as: Will the introduction of computerised systems lead to redundancy? How will the general public be affected or what position would people take about a project such as constructing a new road or nuclear power plant on a community? Ecological considerations may be driven by the understanding that customers would prefer to purchase alternative products or services as they are more ecologically sound and less harmful to the environment. Environmental considerations may be stimulated primarily
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by health and safety legislation. It is important for organisations to consider the raw material input, the production processes and the disposal of the product at the end of its life.

7.5.4 Fit with business goals
Some great project proposals, with high potential financial gain, may divert the company from its primary goals.

Exercise 7.1
Make a brief list of technical, ecological and social questions you would need to ask to assess a proposal to collect and recycle household waste (such as bottles, cans, newspapers, etc.) within a local town by building a recycling plant.

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, 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, 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.

7.5.5 Financial feasibility
This is likely to be examined quite frequently. A technique often used in a feasibility study is the cost–benefit analysis. Cost–benefit analysis helps to identify and evaluate the costs of the proposal over its anticipated life (such as purchase, building, maintenance, repair, etc.). The other side to cost–benefit is the identification and evaluation of the benefits of the project over its life.
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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. For every item of the project proposal, 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 a one-off cost or recurring.

7.6 Types of cost
7.6.1 Capital costs
These are incurred in the acquisition of assets. Capital costs will include the purchase price of an asset (e.g. land and building, equipment, plant) plus any additional costs of installation and maintenance. Capital expenditure usually occurs at the beginning of the project.

7.6.2 Revenue costs
Any cost incurred by the project other than for the purchase of assets. These costs are those incurred on a regular basis and include repair and running costs of the assets, but also the general overheads not necessarily directly incurred by the project. Examples are costs such as rent and rates, general management salaries and depreciation. The project itself will also incur direct revenue costs such as materials and the salaries and wages of the direct workers.

7.6.3 Finance costs
Finance for projects is required to pay for the original assets and may also be required to cover the recurring running expenses of the project. Financing costs are usually incurred as interest charges that have to be paid on the balance of funds outstanding. Therefore, if a project proposal requires funding it is important to know exactly how much it requires, when payments would be due and how much interest would be paid. Sources of finance include the following: 
  

Finance borrowed from a lending institution (bank). Capital invested by shareholders. Retained profit from the business. Grants or subsidies from government (for specified projects only).

7.7 Risk sensitivity
The assumptions upon which the financial feasibility is made need to be made clear. Also any political sensitivities need to be identified, since these are the most common reason for project failure.
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Exercise 7.2
List the types of capital, revenue and finance costs associated with building a factory.

Solution
Capital costs Land purchase Building costs Equipment purchase Revenue costs Rent and rates Staff costs Utility expenses Finance Bank loans for land, buildings, equipment.

7.8 Financial evaluation techniques
A detailed analysis of financial evaluation techniques is beyond the scope of this syllabus, but here is a brief reminder of the main financial appraisal techniques using definitions from CIMA’s Official Terminology (2000 edition): 
  

The payback method: a ‘quick and dirty’ way of assessing the time required for the cash inflows from a capital investment project to equal the cash outflows. Discounted cash flow: the discounting of the projected net cash flows of a capital project to ascertain its present value. Accounting rate of return: based on profits not cash flows, this is a form of return on capital employed. Return on investment: a form of return on capital employed comparing income with operational assets used to generate that income.

Although it is unlikely that you will be asked to carry out detailed calculations of the above financial techniques, you may be required to discuss their relevance to a project decision. Remember, you would not rely on a single measure to determine the financial feasibility of a project.

7.9 Risk and uncertainty
This is likely to be examined quite frequently. Identifying different types of risk will allow us to plan to reduce them or avoid them. The following sections provide an overview of risk terminology and the various approaches to its management.
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Risk can be defined as the probability of an undesirable event. Risk identification means recognising that a hazard exists and trying to define its characteristics. Risks can be classified under three headings.

7.9.1 Quantitative risk
This is a risk that can be expressed as a financial amount. Estimation of risk is usually based on the probability of the event occurring, multiplied by the financial or non-financial consequence of the event. It can be considered to be the product of three values: 
 

the likelihood of an event occurring – p(E ); the likelihood that the event will lead to a loss – p(L); the monetary cost of the worst possible potential loss associated with that accident – M The value of the quantitative risk is therefore p(E ) Â p(L) Â M.

7.9.2 Socially constructed risk
People often believe some things to be risks, even when statistics indicate they are not (and vice versa). We are all ‘risk illiterate’, in that we do not think logically about risk. Socially constructed risk may well exceed quantitative risk, so when seeking to put people’s minds at rest, qualitative risk assessment may not be enough. We must also manage people’s perceptions of risk. An example of this can be seen on commercial airlines. Most evidence suggests that, in the event of a serious accident, wearing a ‘lap strap’ beat belt on a plane does nothing to reduce the risk of injury. It does, however, make people feel a lot more secure, so it reduces the socially constructed risk.

7.9.3 Qualitative risk
Since risks cannot always be quantified accurately, but some way of categorising risks is useful, we need a pragmatic solution. If we look at a subjective assessment of the scale and likelihood of risk, we can generate a table such as the following:
High Potential scale or significance of loss Medium Low C D E Low B C D Medium Likelihood A B C High

Having done this, in our risk management programme we should address the category A risks first, then the Bs and so on. Do not worry too much about the Es.

7.9.4 Managing risk
Risk management (RM) comprises risk assessment (identifying and analyzing risk) and risk control (taking steps to reduce risk, provide contingency and monitor improvements).
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Risk management can be seen as a series of steps: 
    

Risk identification – producing lists of risk items; Risk analysis – assessing the loss probability and magnitude for each item; Risk prioritisation – producing a ranked ordering of risk items; Risk management – deciding how to address each risk item, perhaps by avoiding, transferring or reducing the risk; Risk resolution – producing a situation in which risk items are avoided or reduced; Risk monitoring – tracking progress toward resolving risk items and taking corrective action. Examples of risk management approaches would include the following:

Avoidance 
 

Abort the plan; Escape the specific clause in the contract; Leave the risk with the customer or supplier.

Transference 

Subcontract the risk to those more able to handle it, such as a specialist supplier or insurer.

Reduction 


Take an alternative course of action with a lower risk exposure. Invest in additional capital equipment or security devices to reduce the risk or limit its consequences.

7.9.5 Uncertainty
Unlike risk, uncertainty is impossible to evaluate because it is impossible to assign a probability to an uncertain event. If the event is uncertain, we cannot put in place management controls to reduce the probability of its occurrence, simply because we do not know that probability. Instead, we must use contingency planning to construct a series of action plans, each to be implemented if an uncertain event occurs. An example of a contingency plan is given after the following SWOT analysis.

7.10 SWOT analysis
SWOT is an analytical tool that can be used in two ways: 


applied to a whole company, it can be used to identify strategies needed by the business; applied to a specific project, it can be used to check the feasibility of a project.

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SWOT actually stands for Strengths, Weaknesses, Opportunities and Threats. The strengths and weaknesses normally result from the organisation or project’s internal factors, and the opportunities and threats relate to the external environment. The four categories of SWOT can be explained in more detail as follows:    

Strengths. These are the things that are going well (or work well) in the organisation or project, such as its competitive advantage or the skills and competencies and morale of the individuals within it, and major successes. Weaknesses. These are the things that are going badly (or work badly) in the organisation or project. They include skills that are lacking within the organisation as a whole or the project team. Opportunities. These relate to events or changes outside the organisation or project, for example, in its external business environment. The events or changes can be exploited to the advantage of the organisation and will therefore provide some strategic focus to the decision-making of the managers within the organisation. Threats. Threats relate to events or changes outside the organisation or project (in its business environment) that must be defended against. The company will need to provide some strategies to overcome these threats in some way or it may start to lose market share to its competitors.

Checklist for project proposal selection Prioritising potential projects List potential projects. Determine the need or opportunity for each project. Establish rough delivery dates. Establish preliminary costings and budget schedule. Establish the overall feasibility of each project. Establish the risk associated with each project. Review project list, objectives, feasibilities and risks with project team and senior management. 8. Eliminate unfeasible or inappropriate projects (based on issues such as cost, lack of technology, skill, conflict with long-term organisational objectives, conflict with other projects). 9. Prioritise the rest. 10. Select the most important project. 1. 2. 3. 4. 5. 6. 7.

7.10.1 An example of a SWOT analysis
Let’s assume that we are part way through a project to renovate a house. The project SWOT analysis might look as follows: Strengths:  relationships with key sub-contractors are good;  the project is on schedule, and the current forecast is for completion on time. Weaknesses:  the project is over budget in the areas of plumbing, construction of the fireplace and re-wiring the lounge.
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Opportunities:  the local furniture store is having a sale;  a decorator has been identified, as a result of recommendation by a satisfied customer. Threats:  the builder is concerned that the cost and time estimates for the bathroom may be too low. He says he won’t know for sure until he is part way through the work,  the supplier says that the paint we have ordered is not in stock at the supplier – it may take six weeks to arrive.

7.10.2 A contingency plan
The SWOT analysis for our project (see above) has identified two threats. These are uncertainties, rather than risks, as we are unable to assign probabilities to them. What we have to do is to plan for action to be taken if these threats materialise. Actions to be planned in case the bathroom estimate is too low would include; contacting lenders to discuss possible additional finance, re-planning the remaining project with a longer duration for the bathroom works to see what the effect would be. The contingency plan for paint supply might include; identifying other possible paint suppliers, investigating other manufacturers’ product ranges to see if a close alternative can be identified, discussing an alternative design to allow the use of a paint that is easier to obtain. You will note that the purpose of contingency planning is to speed up the planning process in the event that the uncertain event occurs. The contingency plans may never be used, but we can do our contingency planning when it suits us. If we wait for the uncertain event before doing any planning, this may further delay the project.

7.11 Summary
This chapter has looked at the initiation of a project. The key points to remember are: 
  

the different aspects of feasibility; the different costs incurred in a project; the difference between risk and uncertainty, and the ways to manage risk; SWOT analysis when used in project management.

Reference
Field, M. and Keller, L. (1998), Project Management, International Thompson Publishing.

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Readings

7

Identification of project proposals and setting project requirements

The first article covered in this section reinforces the need for sound project management techniques and processes in large-scale, complex projects. The case discusses the Sydney Olympic Games from a project management viewpoint, focusing attention on strict constraints of time, and the increasing problems of managing the two other major project factors of cost and quality. This case study should aid you in understanding: 
 

the importance of project identification and definition; the critical relationships between cost, quality and time; the need to break complex projects into a number of smaller, more feasible project actions.

The Sydney 2000 Olympic Games: a project management perspective
David Eager, Proceedings of the PMI Annual Seminar. Copyright #1996 by PMI Publications. 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. Given the nature and vast scale of this project, sound and exemplary project management techniques and principles are essential for its success. The strict time constraints set for the project increase the difficulties of managing cost and quality. The project will be regarded as successful if it is finished to time, on budget, and to the required quality. Good quality means meeting the needs specified by the organiser, to the standard and specification laid down, with a predictable degree of reliability and uniformity, at a price consistent with the organiser’s budget and to the satisfaction of the end-users. This review discusses issues that need to be addressed to make this project a success.
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. It enjoyed broad public support with 90 per cent of the people across
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Australia supporting the bid. More than 100 000 volunteers offered their services. The bid was centred on the theme Share the Spirit and called on the people of Sydney to join in the excitement of the bid, and invited the world to come and share the spirit of Sydney at the Olympic Games in the year 2000. The bid also included a comprehensive set of environmental guidelines recognising the principle of ecologically sustainable development. The guidelines promote energy conservation; water conservation; waste avoidance and minimisation; protection of air, water and soil from pollution; and protection of significant natural and cultural environments.
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. It also provides support services, particularly in the areas of transport, security and healthcare. The construction of new sporting facilities and refurbishment of existing facilities for the games is being undertaken by the State Government’s Olympic Co-ordination Authority, namely: Sydney Organising Committee for the Olympic Games (SOCOG). The staging of the 2000 Games is the responsibility of SOCOG, which was established in November 1993 by legislation in the New South Wales Parliament. Except for some football preliminaries, all Olympic events are planned to be held in metropolitan Sydney in venues within thirty minutes’ travel from the Olympic Village. No training facility will be more than forty-five minutes away from the village. The focus is mainly on two Olympic zones, namely: the Sydney Olympic Park, situated at Homebush Bay about 14 km west of the Sydney city centre, and the Sydney Harbor zone located near the Sydney city centre and accessible by road, rail and ferry from Sydney Olympic Park. A series of test events in the years preceding the Olympic Games is planned with the aim of trialling the Olympic venues, training the technical officials and volunteers who will help conduct the events at the Olympic Games, and selectively trialling arrangements for accreditation, transport, security, broadcasting, media and other services.
Infrastructure – preparation work for the games

A significant number of Sydney’s Olympic venues already exist. Most of the remaining facilities required for the games will be constructed as part of the redevelopment programme being undertaken at Homebush Bay. Key elements of the Homebush Bay area include the construction of new sporting facilities, establishment of a new showground and major exhibition centre, development of residential and retail areas, and the establishment of a commercial centre for hightechnology industries. A main press centre and the Olympic village with accommodation for 10 000 athletes and team officials also comes under the umbrella of the Olympic Park. Recently completed major transport projects such as Sydney Harbor Tunnel, M4 and M5 Motorways, and Glebe Island bridge, together with the major projects currently in progress, such as City West Development, Ultimo-Pyrmont light rail system, Airport City Link and the railway loop line to link the Olympic Park with the Sydney rail network’s main western rail line, will ensure that an effective transport system will be available for the Olympic Games. During Sydney’s bid, a campaign to register volunteers was conducted by the St George Bank which attracted more than 100 000 people. Sydney will require 35 000 people from

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all walks of life to form a volunteer workforce essential for the smooth running of the games. Revenue for the games is expected primarily from television rights fees, sponsorships, coin marketing royalties, licensing fees, and ticket sales. It is estimated that during the period 1994–2004 the Olympics could add A$7.3 billion to Australia’s gross domestic product, create 150,000 full- and part-time jobs, and bring an extra 1.3 million visitors to Australia. In order to safeguard sponsorship fees and sponsors’ and licensees’ benefits from ambush marketing, the New South Wales Government has legislated the Sydney 2000 Games (Indicia and Images) Protection Bill 1996.
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. Although the New South Wales Government is underwriting the project activities, there is no clearly defined client for the programme. There are many stakeholders and customers, including the citizens of New South Wales, the New South Wales Government, the Australian people, the International Olympic Organisation, the international community as a whole, the athletes, and Australian and international business communities. The scope of the project comprises organising all the games and ceremonies, putting in place technology and resources required to stage the games, public relations, and fundraising. Criteria for the success of the project include trouble-free performance of the games, the level of public enthusiasm and enjoyment generated by the activities and resultant sustained economic activity generated within New South Wales and Australia, and continued interest in the Olympic Games for the future. SOCOG was appointed to manage the project by legislation. In addition to SOCOG there are other organisations that directly contribute to the success of the games. International Olympic Committee, Australian Olympic Committee, Sydney City Council and Olympic Co-ordination Authority (New South Wales Government) have been made party to the host city contract. Olympic Co-ordination Authority is responsible for all the infrastructure projects, almost all of which are not being built specifically for the Olympic Games. These projects are either already under way or are being re-programmed to accommodate the games. Completion of these projects on time is vital to the success of the Olympic Games. The general rule of thumb used by the Government has been to relocate infrastructure projects initially external to the games under the games umbrella. The infrastructure construction is the responsibility of the government and is overseen by the Olympic Co-ordination Authority. To make matters more complicated, the scope of work of SOCOG is restricted to organisation of the events. The games budget in nominal terms is A$1.847 billion (US$1.4 billion). There is an explicit need to control the cost of all its activities very carefully. Any major cost overruns will alienate the public and will have adverse effects on the success of the games. The project can be broken into the following major areas of work (as a work breakdown structure): 
  

events; venues and facilities, including accommodation; transport; media facilities and co-ordination;
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telecommunications; security arrangements; medical care; human resources, including volunteers; 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.

Each of these items could be treated as a project in its own right. Further, an enormous co-ordination effort will be required to ensure these, and therefore the entire games project, are delivered on time.
Critical project dimensions

Time is the most critical dimension of the Sydney 2000 Olympic Games project. As the project must be completed and ready for staging the Olympic Games on the stipulated dates, any shortcomings in the time dimension will have to be offset by sacrificing the other two dimensions, namely: cost and quality. However, performance on all three dimensions is vital for the success of the project.
Time dimension

Sydney is fortunate in having sufficient infrastructure capacity either existing or under construction to cater for an event of this magnitude. It is anticipated that the infrastructure projects under construction will be completed well in advance of the commencement of the Olympic Games. Any delays in the completion dates could be accommodated without much difficulty. The criticality of the time dimension applies mainly to other activities and timing of individual activities such as events, opening and closing ceremonies, and so on. To ensure that the time dimension is achieved, the Sydney Organising Committee for the Olympic Games has adopted strategies such as: holding frequent co-ordination meetings with the organisations and parties responsible for delivering the required items, setting target dates well in advance of the main event, designing test events, and trialling events as milestones for the critical items. For the construction projects, estimation of the time dimension should be relatively straightforward. Expertise is available within the construction industry to produce reasonable estimates. Critical path methods, precedence block diagrams and programme evaluation and review are employed to control the uncertainties in the time dimension. Proper plans must be prepared for these construction activities. All persons who may be affected by these programmes should have an opportunity to comment on the plan. Instruments should be put in place to monitor the progress against the programme continually. The programme should include enough leeway or float to allow minor problems to be accommodated without causing major changes to the timing of the overall programme. Elements which are expected to have most impact on the programme must be identified and defined as early as possible, and an adequate series of milestones must be established to allow monitoring of the progress of the programme.
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At this early stage of the programme or project life cycle the time required to complete tasks for particular events introduces uncertainties. These uncertainties are related to the nature of the tasks involved. Some non-construction projects – such as developing software to monitor the games’ progress, establishing the games’ database and systems to disseminate the information to general public – have larger uncertainties inherent in the system. Some new technologies may have to be developed to adapt to the advances in the way the information is distributed to the public and media. For example, the Atlanta 1996 Olympic Games had a dedicated Internet facility to give the public access to games information. Since Internet technologies are changing very rapidly, the way information is given out to the public may also change in line with advances in technology. It is difficult to predict what these advances may involve until much closer to the actual event.
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. Sydney’s games’ budget is based on conservative assumptions and estimates of games’ receipts and payments. Receipts are mainly from television rights and international and local participation. The financial planning process included: 
   

consultations with both national and international experts in the fields relevant to both receipts and payments; consultations with the Barcelona Organising Committee, the International Olympic Committee, and the Australian Olympic Committee; review and analysis of results and budgets from previous games and bid candidature; independent analysis of construction costs by quantity surveyors Rider Hunt; independent review of the estimates by auditors Price Waterhouse.

The NSW Audit Office cost estimates appear to have been produced using appropriate methodologies. However, even though the cost estimates were prepared using appropriate methodologies it is necessary to develop strict cost control mechanisms in order to keep the overall project costs to the minimum. It is worth noting that the major portion of the games’ budget is for the events and ceremonies, and the nature of these programmes is such that there are considerable uncertainties inherent in these items. Further, the time and cost dimensions of these events are tightly interrelated. Consequently, any slippage in timing of the programming, training and testing of these activities could lead to large cost escalations. Due to the predicted rapid change in technology it is highly likely that there will be variations in requirements or design. As a general rule, it is undesirable to allow too many such changes, since they are a major source of cost escalation in any project and especially in projects such as this. Some variations may be to a cost advantage, but this is the exception rather than the norm. Cost escalations would lead to disillusionment among the public and would diminish the public appeal of the games, thus affecting public support and a vital source of volunteer games staff. Any cost overrun will have to be met by the taxpayer, as the New South Wales Government has underwritten the host city contract. This could also become a major political issue. Maintaining the costs within budget is vital to the games’ success.
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Quality dimension

This is the most difficult dimension of the project to define. The quality is threefold: 
 

good quality versus high quality; fit for purpose; conforming to the customer requirement.

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

Good communications are vital to the success of the project and to effective control of all three dimensions. Trial games and test programmes will serve to control all three dimensions and should be treated seriously. The planned trials in the coming years will be an excellent opportunity to monitor, control or correct any deficiencies in the project.
Afterword

The preparations of SOCOG appear to have paid off handsomely. Not only were the games and associated events eminently successful, but Sydney now benefits from greater levels of international investment as a result of its higher and more prestigious profile. SOCOG raised A$2.3 billion to pay for the games whose total bill only came to A$1.9 billion. The infrastructure changes to airport terminals, transport networks and the sports facilities have all added to the effect on the economy: six to seven billion tourist dollars in 2000 (the year of the games) alone.
Discussion points

Discuss these with your study group before reading the outline suggested solutions: 1. Explain why project scope management was critical to the Sydney 2000 project. Try to illustrate your answer with other projects you may know about or have worked on yourself and draw parallels. 2. Discuss the concept of quality, with reference to what you consider the meaning of quality to be for the Sydney 2000 project. 3. Explain why time management was critical to the Sydney 2000 project.
Outline solutions

1. As evidenced by the above narrative, the scope of the Sydney 2000 project was very large and complex. As a public project, the management and control of all aspects is critical to the overall success of the project. Recent large-scale public projects have had a history of overrunning on time and cost (for example, the Channel Tunnel, as discussed in the previous chapter). Effective project scope management should safeguard or at least reduce these problems. Importantly, project scope management ensures that only the work required to complete the project successfully is carried out and that the overall project does not become overburdened with unnecessary activities and costs. Project scope verification and acceptance will be essential to ensure that quality requirements are achieved. This kind of project will be open to constant and detailed public scrutiny; clarifying scope in the early stages of the project management process is vital for project success.
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2. For the Sydney 2000 games, quality means satisfying the needs of the organising committees, to a predefined standard and set of specifications required for a large-scale sporting event. Quality will also mean reliability and, to a certain extent, uniformity. It is important to consider quality in the context of each project. This may involve:  Balancing high quality with desired quality. Desired quality is defined by the purpose of the project. Different aspects of the games project will have different quality requirements;  Fitness for purpose. This again will depend upon each individual element of the project, for example the security measures, transport arrangements for the athletes, or the location and adequacy of the sporting facilities. If any element of the project is not considered to be fit for purpose then it cannot be used and is therefore poor quality;  Achieving the customer requirements. The notion of fitness for purpose must also consider customer requirements. Therefore any aspect of the project can only be of sufficient quality if it meets customer requirements. 3. Time management is a critical aspect of the Sydney 2000 project, because as of September 2000 the eyes of the world will be focused upon the Sydney Olympic Games. If the games are not ready on time, the project will quite obviously be considered a failure. This will include both political embarrassment, and financial implications for the organisers and commercial sponsors relying on financial profits. The Sydney 2000 project will only be completed when all of the various systems and subsystems have been tested and retested prior to the games commencing.

Closing the Circuit
Ken Silverstein, PM Network, 2003 August; 17(8): 40–44 Copyright # 2003 by PMI Publications. Reproduced with permission of PMI Publications via Copyright Clearance Center.

Integral to a project’s success, sound risk management practices are crucial where complex infrastructures such as transmission lines, power plants and gas pipelines are concerned. As companies assess their scopes and strategies, they must simultaneously evaluate the probability of their risks. If market demand necessitates the building of new infrastructure, utilities must then estimate their external exposure. Too much risk may obviate the need to go forward. But, if the risks are manageable, utilities will likely decide to plan accordingly to mitigate their effects. To get it done, project managers have to be able to tacitly influence others, as well as always have a handle on costs and timetables. It’s about directing traffic, or understanding resources and availability and keeping a cross-section of participants in tune with the process. ‘‘Project managers have to be results-oriented and have a strong commitment,’’ says Brian Larson, lead project manager for Georgia Power, the largest power operating subsidiary of Atlanta-based Southern Company. ‘‘They have to be able to control the highs and lows.’’ Given the current state of the utility industry, project managers have plenty of opportunity to learn how to manage projects at these low points. Facing a glut of aging infrastructure, rapidly growing customer demands and recent security breaches, utility projects have become intrinsically linked with high risk. However, whether due to
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shortsightedness or community rejection, many projects do not fully account for the high degree of risk. ‘Projects are set up with too narrow a focus and from a somewhat reactive standpoint, which in turn may cause a lot of problems down the line,’ says Wilhelm Kross, risk manager for Bad Homburg, Germany-based Value & Risk.
Estimating Exposure

Transmission, specifically, is aging, and if new technologically superior systems are not built, congestion will occur and reliability will suffer. However, communities are saying, ‘Not in my back yard,’ making it increasingly difficult to get such projects sited. Altogether, the Edison Electric Institute says that 27 000 gigawatt-miles are required in the United States but only 6000 such miles are planned. Unfortunately, these strained resources are all too apparent. When one of Con Edison’s transformers blew up in 2002, it cut off electricity in the New York City area for about 63 000 customers. Immediately, officials said it was symptomatic of a larger problem – an aging transmission system that desperately needed upgrading. Mayor Michael Bloomberg has said that if the issues are not addressed now, the city can expect more outages. Similar problems have arisen across the United States. As local governments and residents reject locating utility projects nearby, the easy solution is to wait until power outages become the norm and consumers start bellowing for reliable forms of electricity. That’s partly what happened during the California energy crisis of 2000 to 2001 when rolling blackouts occurred. Now the state is scrambling to get more generators, pipelines and power lines operational, and the permitting process has been cut from years to a matter of months. To be sure, some failures have been linked to improper planning, whether in forecasting a need, dealing with regulators or projecting cost schedules. Consider the recent fall of the ‘merchant generation’ sector, which builds plants and sells that power on the open market through trading organisations: Rosy forecasts in the late 1990s led to a boom in the power generation business that has not been sustainable. The resulting glut of power plants has led to diminishing wholesale prices. Coupled with the fact that the underlying cost of natural gas has risen substantially, some merchant utilities are struggling to survive. Credit ratings have fallen into the ‘junk’ category, and stock values have plummeted.
Safety First

Furthermore, recent violent episodes such as the bombing of a power station on Mindanao Island in the Philippines have raised fears that wanton acts of terrorism could disrupt critical infrastructures. That attack left parts of the island without power for several hours. But project managers could help mitigate the effects of such attacks. Most utilities in the United States, for instance, already have developed robust systems that can continue to generate and deliver power if attacked. That so-called redundancy rate would make the results of such incidences far less severe. Meanwhile, the North American Electric Reliability Council has developed guidelines to help companies protect their plants and transmission systems from the effects of an attack. Most of the details are secret for security reasons, but project managers are advised to prioritise their facilities and assets as well as characterise potential risks based on historical accounts. Once a threat level is determined, project managers should consider barricading those assets behind gates and limiting access by using ‘smart cards.’ Cameras and alarms should
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pervade plants. In the event of a serious threat, project managers must be able to spearhead communications efforts. This includes notifying policy and medical teams as well as accounting for all personnel.
Going Public

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

7

Section A type questions
Question 1.1
Identify four aspects of project feasibility.

Question 1.2
In less than ten words, define risk.

Question 1.3
In risk analysis, what type of risk could be defined as ‘a risk that is perceived, contrary to statistical evidence’. (A) (B) (C) (D) Qualitative risk Virtual risk Human risk Socially constructed risk

Question 1.4
In the formula for calculating quantitative risk, R = p(E ) Â p(L) Â M, what does p(L) represent? (A) (B) (C) (D) The The The The probability probability probability probability of of of of an event leading to a loss a lower cost arising the project resulting in a loss a lower level of performance

Question 1.5
When assessing the economic feasibility of a project, what type of costs can be described as ‘those incurred on a regular basis and include repair and running costs of the assets, but also the general overheads not necessarily directly incurred by the project’? (A) Capital costs (B) Revenue costs
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(C) Finance costs (D) Opportunity costs

Section B type questions
Question 2
The term feasibility is often used when assessing the viability of projects. Requirements (i) Explain the term feasibility. (2 marks) (ii) Discuss the aspects of feasibility that are typically considered in project selection. (8 marks) (Total marks = 10)

Question 3
SWOT analysis is commonly used in project selection, as it helps the organisation focus upon projects that will facilitate the organisation’s achievement of its strategic objectives. Requirements (i) Explain the term SWOT analysis, and how a SWOT analysis is used in project selection. (5 marks) (ii) When selecting a project, should the lowest price proposals always be selected? Give reasons for your answer. (5 marks) (Total marks = 10)

Section C type questions
Question 4
Trend plc is a large fashion retail chain. It currently has 48 stores throughout the country, mostly in prime high street locations. These are coordinated by head office through six regional general managers who take full responsibility for the performance of the stores in their region. You are currently employed by Trend as project finance manager on a major capital investment – the full refurbishment of a newly acquired city centre store. This project, with a total budget in excess of US$8 million, has been in progress for nine months and is nearing completion. All the major structural work has been completed to schedule, and the services (gas, electricity, water, etc.) installed on time. The building is now undergoing its ‘fit-out’ stage, where the interior is installed.

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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 asked you to deputise as project manager until a replacement could be recruited. This situation obviously provides you with a challenging opportunity, and you expect to gain valuable experience from it. Talking to colleagues, you have managed to establish the circumstances leading to the unexpected departure of the project manager. Apparently there was a very heated meeting between the project manager, Jane, and the subcontract supplier of the goods elevator which is being installed to carry stock from the basement stockroom to the retail floors. At the meeting, the site manager of the elevator supplier apparently mentioned that the installation was running late by 3 weeks. Jane pointed out that this situation would delay the opening of the store, with disastrous cash flow impact. At some point during the meeting Jane appears to have become angry with the subcontractor and the project manager. Jane feels that she should have been informed about the possible delay at the earliest opportunity, and that the project manager and subcontractor were trying to hide the delay from her. The project manager apparently claimed (rather forcefully) that it was his responsibility to manage the project, not Jane’s. The project manager also suggested that the delay was ‘a minor detail’, and that opening would not be delayed. Jane apparently disagreed. Shortly afterwards, the project manager resigned and left the site. The subcontractor has refused to do further work until Jane apologises. Jane has given you an extract from the Gantt chart for the original project plan (Figure 7.1) and says that it ‘proves the point’. Jane says she has been ‘left in the dark’ by the project manager and ‘doesn’t like surprises’. Apparently Jane had always experienced problems in persuading the project manager to discuss progress, and has received only three written progress reports during the last 9 months. Other than occasional conversations when she visited the site, this has been her only contact with the project manager. Jane has called a ‘crisis meeting’ for

Figure 7.1 Gantt Chart

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tomorrow with the managing director and finance director of Trend, which she wants you to attend. Produce notes for tomorrow’s steering committee meeting that include: (a) a brief explanation of the nature and purpose of SWOT analysis in project management; (4 marks) (b) a SWOT analysis for the project as at today; (8 marks) (c) a prioritised action list based on the SWOT analysis. (13 marks) (Total marks = 25)

Question 5
IDC Ltd is a software development company that specialises in designing and implementing internet websites and e-commerce systems for their clients. IDC Ltd are based in the United Kingdom with a branch office in the United States; their clients are worldwide. A large proportion of IDC’s work can be done via the Internet, although they do have to visit their clients’ sites for the initial systems analysis and sometimes to participate in presentations, systems testing and implementation. IDC employ 150 staff split evenly between the United Kingdom and the United States. Some projects are shared jointly between the two sites, with staff from the UK and the USA working together. In the past this has caused problems due to lack of adequate communication between the staff. Most of the staff are specialists and can only work on a small part of a project. The staff fall into the following categories. 
 



Systems analysts – the main contact with the client, senior systems analysts also act as project managers. Designers – IDC regularly use specialist consultant graphic designers to design the graphics for the websites. The designers are commissioned to create an appropriate graphic design for the site that will attract and hold the attention of ‘surfers’ and regular clients. Programmers – create the code required to run the website. Administrators, sales and marketing.

The staff work on projects in development teams, the membership of which can vary depending on the requirements of the projects. IDC Ltd provides a full development and maintenance service for their clients, starting with an initial idea, ‘I think we could do with setting up a Website’ through to the handover to the client’s staff. IDC has many projects in progress at any one time. Each project has a project manager but can utilise any of the specialist staff as required. The workload does not follow any particular cycle but does vary from time to time. At present there are a lot of projects in progress, some of which are being held up as the specialist required is not available when needed. You are working with IDC Ltd as a member of a systems development team. IDC have recently started talking to ABC Inc. ABC is considering the possibility of setting up a website and moving into e-commerce. ABC has recently formed a steering committee to oversee the e-commerce project. The steering committee have asked IDC to justify setting up a feasibility study team to prepare a feasibility report on e-commerce in their company.
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(a) Explain to ABC the need for, and purpose of, a feasibility study. (5 marks) (b) Explain the factors that ABC Inc. should consider in evaluating the feasibility of the e-commerce project. (15 marks) (c) Outline the contents of a feasibility report. (5 marks) (Total marks = 25)

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Solutions to Revision Questions

7

Section A solutions
Solution 1.1 
  

Technical Financial Business/commercial Social/ecological

Solution 1.2
The probability of an undesirable event

Solution 1.3
(D)

Solution 1.4
(A)

Solution 1.5
(B)

Section B solutions
Solution 2
Guidance and common problems The first part of this question should be no problem. The second part of the question requires you to think about a range of aspects that affect project feasibility. As accountants
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we may be primarily concerned with the financial feasibility, but examination questions will require you to consider all aspects of feasibility, including social, ecological, technical and financial considerations (i.e. do not just concentrate on the financial aspects). (i) Feasibility is a term used to describe how achievable various project options are. Feasibility is normally established by means of a feasibility study, which may be carried out on a number of potential strategies. The aim of the study is to decide which proposal to choose. (ii) Feasibility can be examined from a number of perspectives. Technical feasibility There are a number of key aspects regarding technology. The technical features of a strategy that need to be considered are:  

development – that is, 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, is the technology suitable to satisfy the objective of the project effectively? Other technical considerations could be: 



the ease of use of the technology; the degree of disruption during the construction/installation phase.

Social feasibility It is becoming increasingly necessary to assess social factors affecting feasibility. This may include awareness of the social issues within a group or office (e.g. introducing a computerised system), or larger social awareness regarding the effect of projects or products on workers, employment (i.e. will the introduction of computerised systems lead to redundancy) and the general public (e.g. the effect of constructing a new road or nuclear power plant on a community). 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. Environmental considerations may be stimulated primarily by health and safety legislation. It is important for organisations to consider the raw material input, the production processes and the disposal of the product at the end of its life. Financial feasibility A technique often used in a feasibility study is cost–benefit analysis. Cost–benefit analysis helps to identify and evaluate the costs of the proposal over its anticipated life (such as purchase, building, maintenance, repair, etc.). The other side to cost–benefit is the identification and evaluation of the benefits of the project over its life. 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.
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For every item of the project proposal, 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.

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

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Section C solutions
Solution 4
Trend plc (a) SWOT analysis SWOT analysis is one of the most commonly used business and project management tools. It is a brief summary of the major strengths, weaknesses, opportunities and threats relating to the entity (project or organisation). Strengths are: things we do well, things we do that others do not, things to be proud of. Weaknesses are: things we do badly, things we do not do (that we should), things to correct or improve. Opportunities are: events or changes that we can exploit to our advantage. Threats are: events or changes that we should protect ourselves from or defend ourselves against. Strengths and weaknesses relate to the project itself, opportunities and threats to the business environment in which the project is based. Purpose A SWOT analysis is used, on a periodic basis, to provide a critical analysis of the project in relation to its environment. It can be used by the project team, in order to help them to improve their performance, or as a communication document to report progress to project sponsors. Each of the SWOT sections should consider: 
 

what has happened in the past; what is the current situation; what might happen in the future.

The real value of SWOT analysis is not in the analysis itself, it is in how we use it as a basis to discuss and agree future action. (b) Strengths  Major structural work completed to schedule.  Recognition of the scale of the problem.

Weaknesses  Resignation of project manager.  Relationships within project.  Misunderstandings and communication breakdown.  Poor reporting of progress.  Insufficient slack in project programme.  Absence of project control procedures.

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Opportunities  Good relationship with subcontractor prior to this project. Threats  Relationship with elevator subcontractor.  Potential impact on project completion.  Potential impact on business cash flow. Looking at the whole SWOT analysis it is clear that the current situation is critical. The on-time completion of the refit is seriously threatened by continuing delays on elevator installation. A number of actions are necessary to regain control of the project. (c) Immediate actions The first priority for the project must be to get the elevator subcontractor back to work. This will require a meeting to air and resolve differences. It is essential that this meeting is friendly and conciliatory, rather than confrontational; it may be necessary for Jane to apologise to the subcontractor, even if she feels she was right. Successful completion of the project must be our first priority. I shall be producing a report for Jane on how we can improve relationship management in the project. Once work on the project has recommenced, the project programme must be examined for any possible slack. It appears that elevator installation is a critical activity, but there may be some opportunity to reschedule subsequent activities or allocate more resource to them in order to ‘claw back’ the lost weeks. Once the project programme has been studied (and hopefully amended), Jane and Samantha must be fully briefed. This should only happen after the programme has been re-evaluated, as it is possible that a simple solution exists to rescue the project. Short-term actions In the short term, the control and reporting procedures relating to the project must be reviewed and improved. Reporting of progress is an important part of managing the relationship between the project team and the project sponsors. There are a number of formal project management methodologies, designed to improve control. It is important that we adopt at least some aspects of these to improve project management in the future. It is also important for the project that we identify or recruit a permanent project manager as soon as possible. All projects need certainty and consistency, and having a project manager in place for the remainder of the project will improve control and reduce risk. The responsibility for replacing the project manager lies with Jane and Samantha. Long-term actions We can learn a lot by comparing our project management process against models of best practice. I will be briefing you later on the different types of benchmarking and the likely benefits for future projects. Anne Martensen should be asked to prepare a set of procedures for project management in Trend. This will allow projects to learn from each other, and should improve both the quality and consistency of project management. Anne may require additional resource or external help to produce these.
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SOLUTIONS TO REVISION QUESTIONS P5

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

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operational feasibility – the study will need to take account of the human, organisational and political aspects of ABC Inc.: – The levels and types of skills required to operate the new system will need to be considered and compared with the levels and types of skills currently possessed by the staff. – The levels and types of changes proposed in the current jobs and possible changes to organisational structures. – The consequent effects on status and promotional expectations of staff. economic feasibility – the costs and benefits of each proposal need to be established, the timescale of their inflow or outflow established and discounted to present values. The costs need to be separated into one-off costs and continuing costs, while the benefits can be quantified into those that are tangible and can be quantified and those that are intangible and unquantifiable. The proposal with the greatest NPV is selected. The problem in organisations like ABC Inc. is that many of the benefits associated with e-commerce will be intangible and therefore very difficult if not impossible to calculate. This means that a full cost–benefit analysis will be difficult to carry out. The feasibility report may therefore have to report an NPV for each proposal based on the quantifiable costs and benefits along with a list of unquantified benefits.

(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. It does this by presenting the work and conclusions of the feasibility study team. The report will set out: 
   

the feasibility study terms of reference; the extent of the survey carried out on the existing system and the range of interviews, etc., performed to assess the system requirements; the alternative outline systems considered, those rejected and the results of the evaluation of the remaining alternatives; a clear recommendation for the steering committee to consider. The recommendation could be to cancel the project; if the recommendation is to go forward it will recommend a preferred option. a timescale, a budget and a schedule of other resources required to implement the system if it is approved.

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Performing the Project

8

L EARNING O UTCOMES
After completing this chapter you should be able to:
" " " "

identify methodologies and systems used by professional project managers; recommend appropriate project control systems; evaluate, through selected review and audit, the learning outcomes of a project; evaluate the process of continuous improvement to projects.

8.1 Introduction
Having completed the first two stages of the project life-cycle, the next step is to perform the project (the third stage of the project life-cycle). This stage begins when a contract is agreed between the customer and the project organisation. The project ends with the completion of the project objectives. This chapter will introduce the final three stages of the project life-cycle and will include discussions on: 
 

the elements involved in project planning; steps needed to control and monitor progress of the project; actions required to complete the project.

8.2 Planning the project
The importance of planning prior to the commencement of a project cannot be stressed enough. It is vital to provide a thorough plan of action that demonstrates how project tasks will be accomplished, at what time, using which resources and at what cost. The planning phase involves taking the plan of activities, the schedule (time plan) and the budget (cost plan), and breaking it down into greater detail. Planning determines: 
  

what needs to be done; who will do it; how long it will take; how much it will cost.
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This detailed planning is critical to the success of any project. It is important that the people who will be involved in performing the project also participate in the planning process. Participation is a key aspect in getting team members’ commitment to the project’s goals and success.

8.3 Performing the project
Once a baseline plan has been developed and agreed by the customer and project team, the project can commence. The project team will perform the tasks they are responsible for, as and when scheduled in the plan.

8.3.1 An example – development of an information system
The activities involved in design, development and installation of an organisational information system could include the following work elements (Gido and Clements, 1999, p. 66): 1. Undertaking detailed design work, including systems specifications, flow charts, programmes and a list of required hardware. 2. Carrying out design reviews on a continual basis, which may result in modifications and design changes. This may result in a change in project scope, price or schedule. It may also involve re-planning the original schedule. 3. There will also be a plan prepared for systems testing once the system has been designed. This may involve the customers who may wish to participate in testing or at least review the test procedures. 4. Carrying out the writing and construction of the software. 5. Testing the software. 6. Purchasing, assembling and testing the hardware, including detailed testing of sub-assemblies of hardware, and then a final test of the entire hardware system interface. 7. Integrating hardware and software and testing the whole system. 8. Planning installation, for example, selecting the optimum changeover method and the time that is least disruptive to the organisation’s operations. 9. Preparation of training materials to enable users to understand, operate and maintain the system. 10. Carrying out the installation and changeover procedure. 11. Carrying out training. 12. Conducting final acceptance testing of the new system to demonstrate that the system meets the original objectives. Think of a project such as organising a conference or planning a relocation. Determine: 
 

the major work elements; the resources required; a time estimate.

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8.4 Monitoring and controlling the project
As the project evolves, it is important to monitor it continually in order to ensure that it is progressing as expected, towards the final objective. This requires a continual measurement of actual activities, including monitoring activities started and completed, how long it has taken so far (and how long it is estimated to take up to completion), and how much money has been spent on that activity. This measurement of actual resources committed at any time or to date must be compared against the plan of activities to assess progress and monitor any deviations. If, after comparison of actual versus plan, a deviation is discovered (such as overspending or taking longer than anticipated), the project manager must report the deviation and, following authorisation if necessary, take corrective action to get the project back on target. The most important aspect of project control is ensuring that monitoring progress is carried out on a regular basis and that corrective action is considered and implemented immediately. Effective project control will involve a system to regularly gather project data on actual project progress and performance and carrying out corrective action where necessary as soon as possible. A regular project reporting period should be set up (e.g. daily, weekly or monthly), depending on the complexity or duration of the project. More complex projects are likely to require more frequent progress assessment. In most projects, the project manager reports to a steering committee or project board. A system of reports and meetings should form part of the project plan:  

Reports from the project manager to the project board should be made on a regular and frequent basis. In most projects, written reports are made monthly, with a major summary report quarterly (or on completion of a life cycle stage). These reports should have a standard format, both within and between projects, so the recipients become familiar with their content. Areas covered by the report would obviously focus on progress in terms of cost, scope and time, with any anticipated variances from plan highlighted. There should also be provision for exception reports, should a major contingency arise. The project manager should meet with the project board to discuss progress. In many projects such a meeting might take place quarterly, and the project manager would present their summary report. This will allow the project board to ask questions that are not covered by the written report. It should also be possible for the Project Manager to meet with the project board in exceptional circumstances.

Corrective action requires consideration of alternatives before implementation. For instance, adding extra resources in order to get a project back on time will incur extra costs and may therefore overrun the project budget. The project manager needs to consider very carefully the implications of any corrective action upon the project scope, budget and schedule. Figure 8.1 demonstrates the control process.

8.4.1 Making effective control decisions
It is vitally important that the data collected about the actual progress of the project are reported on a regular, timely basis. Making decisions about changing the project plan or adding more resources can only be effective if the project manager is using the most

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Figure 8.1 Project control process (Gido and Clements, 1999, p. 68)

up-to-date, accurate project information. The project manager should not gather actual data at the beginning of the month and then wait until the end of the month before using it to update the schedule or budget. It is also important for the project manager to agree any changes in the plan with the customer, as changes are likely to affect cost, schedule or scope of the original baseline plan. When the updated schedule and budget have been calculated, a comparison must be made against baseline budget and schedule in order to determine if any variances have occurred. If it is considered that the project is satisfactorily on target, then no corrective action is required. If corrective action is required, the next decision is to determine how to revise the schedule or budget. These decisions may be very difficult, as they will often require a trade-off of cost, time and scope. For example, getting the project back on time may require extra resources and therefore additional costs or a compromise on the original scope. Reducing excess expenditure may mean using less or lower-quality resources, which again may affect the overall scope and performance of the final project.
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Once a decision is taken, the changes must be incorporated into the schedule and budget. This project control process will be carried out continually throughout the duration of the project. If it is considered that the project is likely to have a high control risk, the monitoring progress should be carried out more frequently. Project control processes cannot be overemphasised in their importance to the success of the project. The project manager must take a continually proactive approach in controlling a project. If this is carried out successfully, the third phase of the project lifecycle will end when the project objective has been met and the customer requirements have been achieved.

8.4.2 PRINCE 2 methodology
Control in this context is any mechanism designed to ensure that a project achieves its objectives. The PRINCE 2 (PRojects IN Controlled Environments version 2) methodology contains a large number of control elements and, although initially intended for the management of IS projects, it can be applied to projects of all kinds. The main purpose of PRINCE 2 is to deliver a successful project, which is defined as: 
  

delivery of the agreed outcomes; on time; within budget; conforming to the required quality standards.

Features of PRINCE 2  Enforces a clear structure of authority and responsibility on the project team. The structure of supervision and reporting ensures that each party has clear objectives and that they are supported in achieving these objectives.  Ensures the production of a number of ‘management products’ associated with the management and control of the project: for example, the project initiation document, the project budget, the project plan and various progress reports.  Includes a number of different types of plan, ensuring that all the participants in the project (both internal and external to the organisation) have a clear understanding of the tasks to be completed, the relationships between them and their roles in the tasks’ completion.  Contains several quality controls, such as clearly defined and documented technical and management procedures. These ensure that work is completed both on time and at the appropriate level of quality. The PRINCE 2 methodology is discussed in detail in the second reading later in this chapter. You should study this reading now.

8.4.3 Other project management methodologies
A number of other methodologies have emerged in the project management marketplace. Whereas PRINCE 2 is largely in the public domain (due to sponsorship by the UK Government), other methodologies have been developed by proprietary interests often with accompanying consultancy and software services. They are, however, gaining in popularity in various industry sectors and hence are worth inclusion.
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Here is a list of some of the more popular alternatives to PRINCE 2:   

IDEAL/INTRo – IDEAL is a process-improvement and defect-reduction methodology from the Carnegie Mellon Software Engineering Institute (SEI). INTRo is a particular application of the methodology for rolling out technology, for example, a new computer system. The institute has a reputation for researching and improving the project management process (particularly in the software development and deployment arena). 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. It describes nine key areas in terms of inputs, outputs, tools, techniques and how they fit together. A number of vendors encapsulate PMBoK into their own service and software offerings. SixSigma – another process-improvement and defect methodology that has its roots in improving manufacturing and product development processes. However, there are now extensions to apply the statistical measurements (upon which SixSigma is based) and corrective measures to more generic project management processes.

Exercise 8.1
Explain the features of a well-defined reporting period. Solution  It ensures that all team members are aware of the importance of regular monitoring and control.  It is necessary to compare actual performance with plan.  It must be done regularly to ensure progress is maintained.  Reporting can be daily, weekly or monthly, depending on the complexity and timescales involved.

8.5 Project closure
The final stage of the project life-cycle is the closure of the project once the project work is finished. The main purpose of closure procedures is to evaluate the overall project and to learn from the experiences gained. This should help the project organisation improve its performance on future projects. Project termination activities would include the following: 
    

organising and filing all project documentation; receiving and making final payments to suppliers of resources; agreeing formally with the customer that all agreed deliverables have been provided successfully, so that full payment can be received; reviewing project organisation and methods to recommend future improvements; rewarding the project team and ensuring they have jobs to move on to; reviewing the business case to check that intended benefits are likely to be achieved.

8.5.1 Organising project documentation
The project organisation must ensure that all appropriate and related project documentation is collected, organised and stored efficiently for future reference. It is also necessary to keep information for future audit purposes.
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8.5.2 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. In some contracts, this may be a significant proportion of the total contract price – as much as 20 per cent. This is an obvious incentive to ensure that the project organisation carries out the project successfully. Likewise, the project organisation must ensure that it has paid for its materials or contractors at the end of the project. Once payments and receipts have all been recorded, final contract accounts can be analysed and the contract profitability established.

8.6 Post-completion review and audit
8.6.1 Post-project review meetings
Evaluation meetings should be carried out both internally with the project team members, and externally with the customer. The internal review is an opportunity for the 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. It is also an opportunity for the project manager to discuss with individual team members their role in the project and the means by which they could improve their own individual performance on future projects. An evaluation of the project from the customer’s perspective is also a crucial aspect of project closure. It is important to establish whether the project succeeded in satisfying the customer’s requirements and to obtain feedback that could be helpful to improve future project processes. It also allows the customer the opportunity to voice any concerns regarding how the project was carried out and provides a framework for open dialogue and improved customer relationships. An evaluation of the project from the business perspective is essential. Are the benefits intended in the feasibility study likely to be realised? If not, what ongoing actions need to be taken?

8.6.2 Post-completion audit
When the project solution has been delivered, the final phase – an audit of the entire project – is conducted. Assessment of the following should take place: 
    

the extent to which the required quality has been achieved; the efficiency of the solution during operation compared with the agreed performance standards; the actual cost of the project compared with the budgeted expenditure and the reasons for over- or under-expenditure identified; the time taken to develop the solution compared with the targeted date for completion, and reasons for a variance identified; the effectiveness of the management process and structures in managing the project; the significance of any problems encountered, and the effectiveness of the solutions generated to deal with them.
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If the project objectives have been stated in terms of learning outcomes, the extent to which these have been achieved would also be investigated. The audit would lead to the production of a report to management, structured around the above points.

8.6.3 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. Although this benefit may be difficult to quantify, it may be necessary to justify the cost of a post-completion audit by carrying out a cost-benefit analysis. In this case, the expected savings to future projects should be offset against the cost of the audit.

8.6.4 Continuous improvement
Many organisations view project management as a strategic competence, from which they can gain a competitive advantage. This is particularly true of organisations in project-based industries, such as engineering and consultancy. Such organisations have begun to see that using project management without continuous improvement to the methodology allows for the repetition of mistakes and poor practices. Excellence in project management requires the development of a methodology, a culture that believes in the methodology, and continues improvements to the methodology. One such approach is the Project Management Maturity Model (PMMM), proposed by Kerzner, which provides guidance on how to become excellent in project management. The PMMM consists of five levels, and each level represents a different degree of maturity in project management. Level 1 – Common knowledge In this level, the organisation recognises the importance of project management and the need for a good understanding of the basic knowledge of project management, along with the accompanying language/terminology. The emphasis here is on training and education. Level 2 – Common processes In this level, the organisation recognises that common processes need to be defined and developed such that successes on one project can be repeated on other projects. Also included in this level is the recognition that project management principles can be applied to and support other methodologies employed by the company, such as total quality management and time-to-market. Level 3 – Singular methodology In this level, the organisation recognises the synergistic effect of combining all corporate methodologies into a singular methodology, the centre of which is project management. The synergistic effects also make process control easier with a single methodology than with multiple methodologies. However, in some firms the information systems personnel may still have a separate methodology.
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Level 4 – Benchmarking This level contains the recognition that process improvement is necessary to maintain a competitive advantage. Benchmarking must be performed on a continuous basis. The company must decide whom to benchmark and what to benchmark. Level 5 – Continuous improvement In this level, the organisation evaluates the information obtained through benchmarking, and must then decide whether or not this information will enhance the singular methodology. When the levels of maturity (and even life-cycle phases) are discussed, there exists a common misbelieve that all work must be accomplished sequentially (i.e. in series). This is not necessarily true. Certain levels can and do overlap. The magnitude of the overlap is based upon the amount of risk the organisation is willing to tolerate. For example, the company can create a centre for excellence in project management before benchmarking is undertaken. Project management maturity models allow companies to more easily identify corporate-wide training initiatives for each level, as well as the establishment a professional development career path for project managers. As companies begin recognising the importance of strategic planning for excellence in project management, the market place may see several more maturity models similar to the one described above. Like strategic planning, these models should be generic such that they can be applied and custom-designed to individual companies.

8.7 Summary
This chapter has looked at the performance and completion of a project. The key points to remember are: 
 

the content of a project plan; the features of PRINCE 2; the process and justification of post-completion review and audit.

References
Gido, J. and Clements, J. (1999), Successful Project Management with Microsoft Project CD, A Practical Guide for Managers, 1st edition. Reprinted with permission of SouthWestern, a division of Thomson Learning: www.thomsonrights.com. fax: 800 730 2215. Kerzner, H. (2001), Strategic Planning for Project Management Using a Project Management Maturity Model. John Wiley & Sons, Digital Download.

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Readings

8

The importance of project planning and approaches to implementation

The first article below analyses an initially failed project management approach, and the methods applied to ensure that the final project was successfully implemented. The case considers a government agency’s attempt to introduce a competitive intelligence system (CIS), illustrating how the project management process and procedures can be used in situations where the original project objectives are uncertain. The case describes what was done, why it failed and the methods used to ensure final project success. This case study should aid you in understanding: 
 

the importance of planning, in particular the need to evaluate all key assumptions, when trying to successfully complete a project; the need to establish clear milestones for the attainment of goals; the problems associated with an informal implementation strategy.

Goal definition and performance indicators in soft projects: building a competitive intelligence system
Francois Lacasse, PMI Canada Proceedings, 1986 ¸ Copyright # 1986 by PMI Publications. Reproduced with permission of PMI Publications via copyright Clearance Center.

Introduction

This paper describes a ‘soft’ project: the setting up of a competitive intelligence system (CIS) in an agency of government. This case serves to illustrate: 
 

how project management methods can be successfully applied to situations where the objectives are, at the outset, relatively unclear; how success requirements were determined and subsequently used to keep the project on track and how, even in nebulous areas such as ‘managerial technology,’ such indicators can be selected and applied; how performance indicators need to be tackled early on for purposes of control and, more importantly, for sharpening the planning and implementation processes.

After describing the context of the project, we review the project itself. The conclusion draws some lessons on the specifics of managing soft projects.
The context and the project

The government agency where the project took place is concerned with tourism, its mandate is similar to other governmental tourism bodies throughout the world, that is,
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marketing and promotion, assistance to private-sector industries related to tourism (grants, technical support, standards, etc). The organisation is structured into three divisions: marketing, product development and research, and policy (including most data collection and analysis). The rivalry between divisions is relatively high, and co-ordination requires substantial resources. The competitive intelligence system project idea flowed from a complete review and strategic reorientation launched in 1984. This reorientation called for a clearer role definition and a more commercially aggressive stance for the organisation (i.e. concentrate all efforts first on expanding Canadian exports, limit its domestic role to helping a small set of Canadian destinations compete directly with foreign destinations). In this context, the need was felt by management for a competitive intelligence system to generate high-quality information for itself and the various line managers. As with all such systems, this CIS was to inform management about the actions and the intentions of Canada’s chief competitors for tourist dollars in markets identified as among the most promising (e.g. Pacific Rim countries). This intelligence was to focus on other countries’ marketing strategies and on trends in new tourist products. When arrayed against information on the evolving state of Canadian attractions, such intelligence was intended to prove (1) a continual monitoring of how Canadian destinations were likely to fare in the competition for tourist dollars, and (2) early identification of threats and opportunities in this sector.

Initial goals, assumptions and structures

In its original formulation, the goal of the project was: ‘to have in place, fully operational, within two years a complete CIS which would be at least as good as the best ones existing in the private sector’. The first project plan, described below, made the following assumptions, albeit implicitly: 
 

A clear set of rules or a dominant model for setting up and successfully running a CIS existed in large corporations. This ‘proven technology’ could be imported without extensive modification. The key feature of a CIS was the collection, storage, and retrieval of information (i.e. line managers and top management were its relatively passive consumers rather than active participants/producers).

The product management structure was under the responsibility of the head of research and planning. Two teams were set up, one internal to the organisation, the other made up of consultants. The internal team was to proceed immediately with reorganising the datagathering and analysis function (from the library to EDP). As well as laying the groundwork for the system, the internal team was also given the task of preaching the new gospel to the rest of the organisation. The external team was responsible for the overall design of the system, for ensuring that it met the quality and completeness standard of ‘best business practices’ in the field, for defining the final implementation strategy, and for providing technical assistance during the last implementation phases, at which time it would merge with the internal team. The very existence of an external team was seen as an expression of top management’s commitment to the project: this team was totally insulated from ‘crises’ and emergencies.
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The co-ordination structure was both simple and rigid: at least every other week, the two teams would meet to assess progress and report to the overall project co-ordinator. The key feature for this project structure was that implementation and planning were, in practice, to proceed simultaneously. For instance, the internal team would busy itself with reorganising the library, part of the EDP and research function, and with pre-marketing potential CIS clients, while the external team was working on refining knowledge of the exact structure of private CIS to be borrowed, establishing performance criteria, project and system and designing the system’s implementation primarily for participants (functions) other than those reached by the internal team. The success of the project itself was predicated on (1) rigorous determination of the CIS features to be copied, (2) precision in formulating instructions to personnel, (3) good choice of computers, and (4) fast and efficient training/recruitment.
On the brink of disaster

Within a matter of weeks it became obvious that the project was heading for serious trouble if its structure and purposes were not modified. The assumed clarity of goals, as summarised above in four assumptions, evaporated as soon as they were confronted with reality. Serious organisational resistance was encountered in all implementation aspects: unrealistic budgetary requests; demand for highly detailed instructions (not forthcoming) on what to collect, how and why; drift into turf battles (‘Research power grab has to be resisted’); apparent lack of interest from potential CIS clients, both internal and external; etc. The situation was no better within the external team. The ‘easy’ job of establishing the fine points of what constituted a good private CIS proved quite difficult. Getting on with the ‘real’ job of designing its integration into the organisation was consequently stalled. Contrary to initial expectations, no single dominant private sector model of a CIS existed. Indeed, a bewildering array of techniques, managerial practices and structures existed, all loosely terms ‘CIS’. The project had clearly been under-planned. The goal, which in fact was a rather delicate change in a strategic management process, had been treated as if it were the purchase and installation of a well-known machine. The hasty partial implementation attempts had forgotten that ‘building blocks’ cannot be put together before consensus is reached on plans for the whole structure. Even more importantly, the realisation had come too late that CIS constituted not only an addition to the organisation, but also a change in its modus operandi. Competitive intelligence systems were differently organised in various companies essentially because, wherever they had been successful, they had become embedded into existing strategic decision processes and so had been moulded by a particular company’s culture and environment. Consequently, the management of the project had to be guided as much by determinants for successfully effecting organisational changes as by technical indicators. In practice, to be successful as a project, the setting up of a CIS had to: 
 

meet needs felt at lower levels (specially those of middle line management); be designed for and perceived as allowing improvement in job performance, with the appropriate rewards; be inspired by ‘best business practices’ (to give it legitimacy), and fit into the organisation’s culture and mandate (congruence);
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be part ‘owned’ by the people who would have to run and use it; that is, they must have a say in its design and implementation.

The project: second wind and preliminary results

The above considerations for a successful project led to a drastic reorganisation in terms of goals, progress (success) indicators, and distribution of tasks. Deadlines and budget were only slightly modified, since the problems had been detected early. Briefly, the revamped project focused on: 


distinguishing those best business practices which were essential to implement within the organisation (external team); defining options for the rest of the system, specifically, practices which might be useful but were not essential; the basis for selecting these options was to be their ‘fit’ within the organisation (external team).

As the work progressed on those two aspects, the internal team was to float the various options, obtain informal reactions to the fit between them and the interested parties within the organisation, and transmit feedback to the other project team. The partial implementation measures envisaged at the outset were dropped. First and foremost, in terms of goal definition, a classification of ‘best business practices’ emerged, clearly separating the necessary characteristics of a CIS from those which were really options. The criterion used for this classification was simple: only practices which were observed in all or virtually all companies running successful CISs, despite variations in company size, business environment, and industry, were considered to be compulsory features of a CIS. The criteria were equally straightforward for deciding whether a CIS was successful: survival for more than five years and top-management satisfaction with it. No less important results were that in virtually all observed instances:  

The key element in a successful CIS was that rather ill-defined step called analysis; i.e. the crucial link in the system was the quality of the analysis of the information not, as was believed at the outset, the collection stage. This confirmed the key role of line involvement as a requirement for success. To keep costs under tight control in information-gathering and to minimise the risks of flooding the organisation with papers and meetings, the dominant requirement was that the quest for information be very carefully targeted. This meant that small-scale competitive assessments had to be conducted to define the identity of competitors and the threats and opportunities they represented; that is to say, the system involves a series of mini-projects. This requirement for what otherwise would be an ongoing activity provided the most practical avenue for building feedback mechanisms right into the CIS. For instance, the users (line and top management) would be involved in requesting such assessments and line personnel in providing them.

Implementation

The original intent, at least implicitly, had been to proceed in standard mechanical fashion according to the following sequence: define techniques, explain them to selected personnel (training), review budgets and make adjustments, assign tasks and responsibilities, and
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introduce control a few months later. Given the now more precise goals and awareness of key organisational/behavioural constraints, the sequence and the approach had to be altered. The following sequence emerges:  



Formulate and present options to the management team (costs, structures) both for the ultimate design of a CIS adapted to the organisation and for the implementation strategy. Test the feasibility of the options selected on personnel involved and adjust accordingly (involves extensive information dissemination). Provide support services and follow-up mechanisms for the people initially involved in the CIS.

In practice, the implementation was quite different from what had been envisaged: the approach selected relied on imitation and competition inside the organisation via a series of mini-projects carried out by small teams of volunteers drawn from all three divisions within the organisation. Essentially to ensure relevant collection and analysis of information, in a setting where employees had no direct commercial contact with tourists, it was decided to keep specialised CIS staff to a minimum. The bulk of the work would be done by line personnel, involving the three divisions. This choice meant feedback and integration would be maximised. The implementation consisted essentially of providing guidelines, money and technical support, and an evaluation framework for these mini-projects. For instance, the following was communicated to the staff: 
   



CIS was a high priority and its concrete input was needed. Teams of volunteers were needed of no more than three to four people, which had to include personnel from each division. Each team would submit a short project proposal to the CIS team (e.g. to analyse the competition facing Canadian western ski resorts and to design and implement a costefficient system for subsequent monitoring of this segment); they would assume the responsibility – initially at least – for running this monitoring system. Within one week management would select a few proposals/teams and negotiate budgets, rewards (trips, good evaluations, etc.), deadlines (no longer than three months), time allocation with respect to ‘normal’ line duties, and the amount of support required from the original external and internal teams. At least two other rounds of such mini-projects would be called for, each time with more precise criteria for selecting and judging the success of the mini-projects. By the end of the first year the entire CIS was to be in place (i.e. it should spread like wildfire, it was hoped). This implication strategy provided: 

 

solid control of costs, since each mini-project was controlled separately; a sense of ‘ownership’ throughout the organisation of this CIS by various individuals whose diligence and commitment could not be commanded but who would respond favourably to incentives, competition and technical support; a gradual transition from what some had seen as a power grab by one division under the guise of a ‘newfangled system’ to a standard operating procedure for deciding what information to use (and how) in the normal course of managerial decision-making.
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The project was a success insofar as the CIS became a reality, gained acceptance, and met the basic criteria of adapting proven private-sector techniques and exhibiting good control of costs and deadlines – by the standards of organisational changes.
Conclusion: the lessons

1. First and foremost, this experiment showed how useful a systematic project management framework can be even in relatively unstructured situations. For instance, the original intent of management could have been carried out by decree: change in unit and job descriptions, purchases of new data-gathering and processing equipment, etc. Those moves would have been costly and would have required very extensive (and protracted) changes and soul-searching within the newly established structures and responsibilities. The attendant risks of low morale and of line managers dismissing the whole idea as hare-brained were very high. Furthermore, the approach allowed for early detection and use of relevant performance indicators. 2. When applying project management methods to organisational and strategic changes, the approach must devote more resources and time to what is usually termed ‘the planning phase’. Defining in operational terms the goal of the project becomes a rather detailed first implementation step. This flexibility leads to a sequential approach to both goal definition and implementation. In most soft projects, it has to be accepted that initial formulation of the objective cannot be much more than a general direction, that the indicators of success have to be systematically devised early on by the project team. 3. Lastly, it should always be remembered that all projects are ‘business change’ projects. Projects which centre around the development/purchase and implementation of IT systems actually involve more business change not less. Focussing on the actual software system to the detriment of how it changes the organisation will often take a project to the brink of a disaster. Luckily, in this case, the project was saved by acknowledging the fundamental ‘people issues’ and addressing them as an important part of the overall solution.
Discussion points

Discuss these with your study group before reading the outline suggested solutions: 1. Define scope management. Discuss some of the scope management problems encountered by using one goal statement as the only guidance in this case. 2. What do you think were the keys to project success as discussed in the case? Discuss other factors that may influence project success or failure. 3. Analyse the final implementation strategy used on the project. Can you see any potential problems with this implementation approach?
Outline solutions

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

Comparing PRINCE2â with PMBoKâ
R. Max Wideman, # R. Max Wideman http://www.maxwideman.com. Published with permission. This material is offered to individual readers freely in connection with their project work. It may not be used by commercial or non-commercial organisations without permission.

Introduction

From time to time we are asked to recommend project management systems and methodologies, or to compare them as part of some selection process. We have been taking an in-depth look at PRINCE2, a widely recognised de facto standard used extensively by the UK government and in the private sector. As a basis for comparison, and because we are located in North America, we will refer to the Project Management Institute’s ‘PMBOK’ which actually refers to their publication ‘A Guide to the Project Management Body of Knowledge’ (2000 Edition). ‘PRINCE’ stands for Projects IN Controlled Environments and is described as a structured method for effective project management for all types of project, not just for information systems, although the influence of that industry is very clear in the methodology. The 2002 version has been through a number of incarnations in the past and is now the result of the ‘experience of scores of projects, project managers and project teams.’ The 408-page document, like the Guide (216 pages) is copyright, but the content is clearly generic common sense. The PRINCE2 Introduction lists a significant set of reasons why projects fail, and the methodology sets out to remove these causes. It must be borne in mind that both sets of documentation must be tailored to suit the occasion. For example, PMBOK is not intended to tell people how to do any of the techniques or use any of the tools described. It only lays out the processes, how they link together and the tools and techniques that can be invoked. Somewhat similarly, the application of PRINCE2 must be scaled for the size and needs of the project. Indeed, scalability is a topic specifically included in the description of each process.
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 remaining two, ‘Planning’ and ‘Directing a project’ are continuous processes supporting the other six. Each of these have their respective sub-process totaling 45 in all. Then, feeding into the system, are six ‘Components’ some of which are documents and others that are themselves processes. Finally, PRINCE2 describes three techniques namely: ‘Product Based Planning’, ‘Quality Review’ and ‘Change Control’. The whole document is presented as an easy-to-follow narrative, bulleted checklists, process diagrams and timely ‘Hints and Tips’. By comparison, the Guide consists of twelve chapters describing function-based knowledge areas with illustrations of their respective project management processes and narrative descriptions in the form of inputs, tools-and-techniques, and outputs. There are a number of interesting differences between the Guide and PRINCE2 philosophies. PRINCE2 speaks of ‘stages’ rather than ‘phases’ and states that while the use of stages is mandatory, their number is flexible according to the management requirements of the project. PRINCE2 also differentiates between technical stages and
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management stages. Technical stages are typified by a particular set of specialist skills, while management stages equate to commitment of resources and authority to spend. The two may or may not coincide. The Guide defines a project phase as: ‘A collection of logically related project activities, usually culminating in the completion of a major deliverable.’ It does not distinguish between phases and stages and in the text uses either indiscriminately. The PRINCE2 project life cycle does not start with original need, solution generating and feasibility studies – these are considered as inputs to the project life cycle, perhaps as separate projects in their own right. For example, PRINCE2 describes a product’s life span as having five phases: Conception, Feasibility, Implementation (or realisation), Operation and Termination but, of these, only implementation is covered by PRINCE2. Indeed, the manual states ‘Most of what in PRINCE2 terms will be stages will be divisions of ‘‘implementation’’ in the product life span.’ management, rather than a whole project management methodology. Indeed, PRINCE2 assumes that the project is run within the context of a contract and does not include this activity within the method itself. However, it suggests that since contracting and procurement are specialist activities these can be managed separately using the methods. The Guide, on the other hand, recognises that the project needs assessment or feasibility study may be the first phase of the project, although it also defers to other life cycles used in various industries. The presumption in the Guide is that Project Procurement Management, where required, is part of the overall project management process and is viewed from the perspective of the buyer in the buyer-seller relationship.
Management levels and responsibilities

PRINCE2 recognises four parallel levels of management: ‘Corporate or Programme Management’, ‘Directing a Project’ (i.e. the Project Board, chaired by the ‘Executive’, more often called ‘Project Director’ in North America), ‘Managing a Project’ (i.e. the project manager’s level) and ‘Managing Product Delivery’ (i.e. team-level technology management.) In this way, the corporate business or program management interests are closely integrated with both project management at the project level as well as with the management of the project’s technology at the team level. Another interesting feature is the responsibility of the project manager. The Guide defines project manager simply as ‘An individual responsible for managing a project.’ The Software Engineering Institute goes further and calls it ‘The role with total business responsibility for an entire project; the individual who directs, controls, administers, and regulates a project . . . [and] is the individual ultimately responsible to the end user.’ In sharp contrast, under PRINCE2 the project manager is ‘The person given the authority and responsibility to manage the project on a day-to-day basis to deliver the required products within the constraints agreed with the Project Board.’ These constraints are referred to as ‘tolerances’ and prescribe the ranges of acceptability of each of scope, quality, time and cost within which the project manager must manage. Any trend beyond these limits becomes an ‘issue’ and must be brought to the attention of the project board. The project board is chaired by a person referred to as ‘executive’ and it is this person who has the real responsibility for the project. This individual ensures that the project or programme maintains its business focus, that it has clear authority and that the work, including risks, is actively managed. The chairperson of the project board, represent[s] the customer and [is] owner of the business case.’
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Figure 1 Overview of Project Management Knowledge Areas and Project Management Processes

To us, this sounds very much like a project director, who provides the leadership on the project, while the project manager provides the managership. By comparison, the Guide does not recognise either ‘executive’ or ‘project director’ but uses the term ‘sponsor’. The sponsor is one of the project’s stakeholders and is defined as ‘The individual or group within or external to the performing organisation that provides the financial resources, in cash or in kind for the project.’ So, one can conclude that under the Guide, it is the project manager who is firmly in charge.
Authority documentation

PRINCE2 tends to be heavy on documentation. A project has a set of progressive governing documents in its series of processes, a sequence that we had a little difficulty in following. The very first document is the ‘Project Mandate’. As PRINCE2 states, this document may come from anywhere, but should at least come from some level of management that can authorise the cost and resource usage commensurate with the size and type of project. It must contain sufficient information to trigger the first ‘Starting up a Project’ (SU) process and in that process is converted into a ‘project brief ’. The Guide recognises neither business case nor project brief.
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Figure 2 Use of PRINCE2 components and techniques in the processes

The SU process is intended to be of short duration and is designed to ensure that all the necessary players, and pieces, are in place prior to the real start of the project. It assumes that a provisional ‘Business Case’ exists, although if it does not, it is created during the SU process. The business case justifies the undertaking of the project in terms of reasons, benefits, cost, time and risk and the source of this information is the project mandate or the project brief, the project plan and information from the customer. The business case is
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a dynamic document that is updated throughout the project to reflect changing conditions, although it is ‘baselined’ during the subsequent ‘Initiating a project’ process. The output of the SU process is an ‘Initiation Stage Plan’ that ensures the required people are identified, and that the information they will need is contained in a project brief. The project brief is a relatively simple document providing background, project definition (i.e. what the project needs to achieve), the outline business case, the customer’s quality expectations, acceptance criteria and any known risks. This documentation feeds into the ‘Initiating a project’ (IP) process, the output of which is a ‘Project Initiation Document’ (PID). Unlike the business case, which is updated, the PID is a substantial and stable document, except for the background attachments such as the business case. The PID is intended to define all of the questions what, why, who, when, and the how of the project. It is the base document against which the project board will assess progress, the change management issues, and the ongoing viability of the project. Concurrently with the preparation of the PID, the first project stage is planned leading to the authorisation by the project board of the project’s first stage. The Guide’s equivalent of the PID is the ‘Project Charter’ which is an output from the Initiation process under the knowledge area of Project Scope Management. The Guide defines project charter as ‘A document issued by senior management that formally authorises the existence of a project. And it provides the project manager with the authority to apply organisational resources to project activities.’
Special project management roles

PRINCE2 does not define management jobs, instead preferring to define roles, that may be allocated, shared, divided or combined according to the project’s needs. In addition to the usual roles of project board, project manager, team manager and so on, and executive as described earlier, PRINCE2 introduces a number of other distinctive roles to facilitate its methodology. For example: Project Support Office (PSO) is conceived as a central pool of skilled resources, such as clerical, configuration librarians and even PRINCE2 consultants serving a number of projects. The manual states that a PSO is not essential, but it can be useful to support managers with their administrative tasks and ensure proper use of PRINCE2 across all projects. To the above list we would add other expertise such as planning and scheduling, estimating, forecasting and project accounting. In fact a number of other special responsibilities are suggested in the role description. Executive, as noted earlier, is the person who chairs the project board. Supported by the senior user and the senior supplier, executive is the single individual with ultimate responsibility for the project. He or she ensures that a project or programme meets its objectives and delivers the projected benefits. Senior User, a member of the project board, is responsible for the specification of the needs of all those who will use the product(s), for user liaison with the project team and for monitoring that the solution will meet those needs within the constraints of the Business Case in terms of quality, functionality and ease of use. Senior Supplier, also a member of the project board, represents the interests of those designing, developing, facilitating, procuring, implementing and possibly operating and maintaining the project products. The senior supplier is accountable for the quality of products delivered by the supplier(s) and must have the authority to commit o acquire supplier resources required.
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Note that both these roles may each be represented by more than one person, and that they liaise directly with the team members who are responsible for producing the project’s products. Therefore, great care must obviously be taken to ensure that the project manager’s authority on the project is not circumvented and that his or her ability to manager the project is not thereby undermined. Project Assurance covers all interests of a project, including business, user and supplier. PRINCE2 requires that this service is independent of the project manager and therefore cannot be delegated there. Project assurance is a responsibility shared between the executive, senior user and senior supplier. Configuration Librarian is a role responsible as custodian and guardian of all master copies of the project’s products. It also maintains the project’s issue log. Although this refers primarily to management documents and product documentation, rather than physical objects, nonetheless it is not a trivial task on most projects. It includes controlling the receipt, identification, storage and retrieval of all such documents, providing information on the status of all projects, as well as numbering, recording, distributing and maintaining the project’s issues records. The role is part of project support. PRINCE2 does not discuss the ever-popular-in-North-America subject of people management, as does the Guide in its chapter ‘Project Human Resources Management’. However, PRINCE2 does describes in detail the responsibilities of ten project management team roles that are included in its methodology.
Document description outlines

PRINCE2 includes descriptions of thirty-three standard management ‘products’ that are invoked through the PRINCE2 methodology. Many of these documents are standard fare, such as various plans and reports, for which it is most useful to have detailed listings of required contents. However, in addition to those mentioned earlier, certain unique documents are worthy of special mention in the context of managing projects successfully. For example: Acceptance Criteria, defines in measurable terms what must be done for the final product to be acceptable to the customer and staff who will be affected. This is either provided by program management, or is developed during the starting-up-a-project process. It seems to us that this is essential information often overlooked in many projects. Configuration Item Record: Configuration management is defined as the discipline that gives management precise control over its assets (including the products of a project), covering planning, identification, control, [etc]. The configuration item record provides the required information about the status of each and every item and makes reference to the product breakdown structure, stage and team plans, relevant work packages, the quality log and change control. The Issue Log is the repository of a summary of all issues raised on the project that need to be brought to the attention of the project and that require an answer. Issues may range from a question or statement of concern, to an off-specification (e.g. a deficiency) to a request for scope change. Such issues may be raised by anyone associated by the project at any time. In PRINCE2 the issue log is an essential part of controlling project stages by capturing all queries, problems and similar events in a consistent way before their proper disposition has been determined. Each item can then be followed up until the required action has been taken and the item cleared. Similar to the issue log, the Risk Log provides a repository for the identification of all project risks, their analysis, countermeasures and status. PRINCE2 recognises risk as a
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major component to be considered during the management of a project and is factored into all of the major processes. Project management must control and contain risks if it is to stand a chance of being successful. The Lessons Learned Log is a repository of any lessons learned, both good and bad, that cover management experiences or use of specialist products and tools, and so on that can be usefully applied to other projects. Captured during the project, these items provide the basis for writing up a formal lessons learned report at the end of the project. We recognise this as an essential feature of the ‘Learning Organisation.’ With the exception of lessons learned, these documents are not discussed in the Guide.
Planning and scheduling

Product-based planning is a key feature of PRINCE2, providing a focus on the products to be delivered and their quality. It forms an integral part of the Planning (PL) process and leads into the use of other generic techniques such as network planning and Gantt charts. It provides a product-based framework that can be applied to any project, at any level, to give a logical sequence to the project’s work. A ‘product’ may be a tangible one, such as a machine, a document or a piece of software, or it may be intangible, such as a culture change or a different organisational structure. PRINCE2 describes three steps to the PL technique: (1) Producing a Product Breakdown Structure (PBS); (2) Writing Product Descriptions; and (3) Producing a Product Flow Diagram. Each step is described in detail and excellent examples are provided as illustration. In step 2, writing a clear, complete and unambiguous description of products is a tremendous aid to their successful creation. The corollary is, of course, that if it is not possible to write the description, then more work, or another iteration, is necessary to ferret out the necessary information. In step 3, the products are re-ordered into their logical sequence to form a product flow diagram. 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, and every product must be included to capture every activity. The converse is that no activity is necessary unless it contributes to the final outcome. A correctly formed product flow diagram, therefore, not only identifies the activities involved but also leads to a network dependency-based schedule or Gantt chart. PRINCE2 provides a good explanation of the technique and specifies the associated documentation to go with it. In the Guide, planning generally is seen as part of key general management skills, is one of the five process groups applied to each phase and is therefore recognised as an ongoing effort throughout the life of the project. Planning is discussed in the chapter Project Integration Management, and the essence of which is to create a consistent, coherent document that can be used to guide both project execution and a baseline against which changes will be controlled. However, planning also appears in each knowledge area and must be integrated across all of them. Because of this fragmentation, an attempt is made for ease of reference to map the Guide’s various content to the planning process.
Control

In PRINCE2, control of the technical work is exercised through the authorisation of work packages. According to the manual, control is all about decision making and is central to project management. Its purpose is to: Produce the required products, meeting the defined quality criteria; Carry out the work according to schedule, resource and cost plans; and Maintain viability against the business case. We have some concern over this last item
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because the business case is a ‘dynamic’ document, updated from time to time. There could, therefore be a tendency to match the business case to the current reality rather than controlling the current reality to the business case justification. The work package control is used to allocate work to individuals or teams. It includes controls on quality, time and cost and identifies reporting and hand-over requirements. The individuals or teams report back to the project manager via checkpoint reports or other identified means such as triggers, and by updating the quality log. In the context of control, PRINCE2 establishes a good distinction between ‘tolerance’, ‘contingency’ and ‘change control’. Tolerance is the permissible deviation from plan allowed to the project manager without having to bring the deviation to the attention of the project board. Contingency, in PRINCE2 terms, is a plan including the time and money set aside to carry out the plan, which will only be invoked if a linked risk actually occurs. Change control is a procedure designed to ensure that the processing of all project issues is controlled, including submission, analysis and decision making. The process is described in detail starting with project issue management. In the Guide, like planning, Change Control is discussed as part of Project Integration Management, and, also like planning, is to be found referenced in many of the other Guide chapters.
Summary

PRINCE2 and the Guide take very different approaches to the presentation of their material. Indeed, they really serve different purposes and are therefore not directly comparable. We believe that the Guide takes that best approach for purposes of teaching the subject content of each knowledge area, but is not so affective when it comes to providing guidance for running a particular project. Of course the corollary is also true. In a life-cycle-based presentation like PRINCE2, it is difficult to do justice to each knowledge area. For example, as we discussed under planning and scheduling, PRINCE2’s approach is a single unified methodology starting from developing the initial product breakdown structure through to identifying the corresponding network schedule. In our view, this straight forward and well-explained proposition should clearly lay to rest the controversies that we have seen in North America. That is, over whether a work breakdown structure should be product or activity based, which comes first, and how they are related. While PRINCE2 is designed for a variety of customer/supplier situations, the manual has been written on the assumption that the project will be run for a customer with a single (prime) supplier involved throughout. This has a bearing on both the organisation and the details of control. The implication is that PRINCE2 is in the hands of the supplier rather than the sponsoring organisation. The manual as such does not cover the situation of multiple prime contracts (i.e. trade contracts) directly under the control of an owner as is the case, for example, with a developer using construction management techniques. In such cases, the issues of work coordination responsibility is much more complex. In describing a project, the Guide explains that ‘Projects are often implemented as a means of achieving an organisation’s strategic plan’ and ‘Projects are undertaken at all levels of the organisation.’ The Guide is generally written from this perspective throughout, that is to say, from the project owner’s perspective rather than from that of a supplier or seller. Consequently, the Guide covers more ground than does PRINCE2. Nevertheless, within its self-prescribed limitations, PRINCE2 provides a robust easy-to-follow methodology for running most projects, that is, where the objectives are clear and the deliverables are either well described, or capable of being so.
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It seems to us that both PRINCE2 and the Guide have chicken-and-egg problems in the area of documentation for project initiation. Our strong preference is for the generic project example to start with a ‘conception’ phase. This phase, short or long, is the opportunity to assemble the owning orgnaisation’s needs that could be potential projects, and analyse and select the best opportunity for serious study. This is the time to articulate that best opportunity in terms of big picture, vision and benefit. It should result in a viable business case as the stage-gate meassure. Following approval of the business case, the project then moves into its second major phase. In this phase the project’s concept is developed by studying and testing alternatives and conducting feasibility studies. At the same time, the intended products are defined as far as possible through the necessary customer/user input. With the products defined, an implementation plan can be formulated that covers the project’s scope and quality grade, and time and cost tolerances. The whole can then be assembled into a formal project brief or project charter and presented to management for approval of a major commitment of cash and resources. Such a life cycle design represents a simple straight forward progression with only two major project documents as stage-gate controls. Considering that it is in the conception and definition phases that the most critical project decisions are made, it is surprising that more focus is not given to this part of the project life cycle by both the Guide and PRINCE2. Indeed, as PRINCE2 observes, ‘A lot of time can be wasted in producing a very good plan to achieve the wrong objective’ and ‘Finding out that a product doesn’t meet requirements during its acceptance trials is expensively late.’ While on the subect of project life cycle, 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, custody and control of the customer or user. The product resulting from the project may be excellent and fully up to specification, but if the final transfer is not handled with appropriate delicacy, the reaction to it may still be negative and the project seen as a failure. We use the term ‘delicacy’ advisedly, because this part of the project is often fraught with political overtones. After all, who wants to change the way they do things anyway? Clearly, both the front and back ends of the project are fruitful territories for academic research and improved best practices: the front end for better project identification and selection, and the back end for better communication and training in the use of the project’s product. If these aspects were properly recognised and documented in standard methodologies, perhaps sponsors would be more willing to set aside the necessary funding to ensure higher chances of project success. Max Wideman is a retired canadian professional engineer and project manager with experience in systems, social and environmental projects, as well as design and engineering projects. He is a Fellow of Project Management Institute, of which he is past president and chairman, and for whom he developed the 1987 version of the Project mangement Body Knowledge. He also enjoys Fellow status in the institution of Civil Engineers (UK), the Engineering institute if Canada, and the Canadian Society of Civil Engineering. He has lectures or presented papers in 11 countries and has contributed books, chapters, papers and articles on many project management topics. His latest book is A Management Framework for Project, Program and Portfolio Integration, Trafford, BC, 2004. Comprehensive coverage of project mangement theory and practice can be found on his web site at http://www,maxwideman.com

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Section A type questions
Question 1.1
At which stage in a project is the actual cost of the project compared with the budgeted expenditure and the reasons for over- or under-expenditure identified? (A) (B) (C) (D) Feasibility study Planning Implementation Post-completion audit

Question 1.2
In the project management methodology PRINCE 2, for what does the acronym PRINCE stand?

Question 1.3
In the Project Management Maturity Model (PMMM), proposed by Kerzner, the first four levels are; common knowledge, common processes, singular methodology and benchmarking. What is level five?

Question 1.4
In the PRINCE 2 methodology, the project initiation document, the project budget, and the project plan are all examples of (A) (B) (C) (D) progress reports management products work packages customer requirements

Question 1.5
In less than ten words, complete the following sentence: The primary benefit derived from the post-completion audit is. . .
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Section B type questions
Question 2
Project planning is a critical stage of the project management process, and this question requires you to clearly explain why this is so, and to clearly state what planning involves. In an exam question, you could be asked to put together a project plan for a given scenario, and therefore it is important to have the basic knowledge of project planning stages. Project planning is considered to be one of the most important stages of the project management process. Requirements (i) Explain why project planning is vital to project management. (ii) Describe the steps involved in a detailed planning process.

(3 marks) (7 marks) (Total marks = 10)

Question 3
Once a project is under way, control of the project tasks and activities is critical. This question is designed to ensure that you understand the importance of control and how it is undertaken. Requirements (i) Explain why it is important to control a project once it is under way. (3 marks) (ii) Briefly explain how control is carried out. (7 marks) (Total marks = 10)

Section C type question
Question 4
Trend plc is a large fashion retail chain. It currently has 48 stores throughout the country, mostly in prime high street locations. These are coordinated by head office through six regional general managers who take full responsibility for the performance of the stores in their region. You are currently employed by Trend as project finance manager on a major capital investment – the full refurbishment of a newly acquired city centre store. This project, with a total budget in excess of US$8 million, has been in progress for nine months and is nearing completion. All the major structural work has been completed to schedule, and the services (gas, electricity, water, etc.) installed on time. The building is now undergoing its ‘fit-out’ stage, where the interior is installed. 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
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the refurbishment project has resigned. Jane asked you to deputise as project manager until a replacement could be recruited. This situation obviously provides you with a challenging opportunity, and you expect to gain valuable experience from it. Talking to colleagues, you have managed to establish the circumstances leading to the unexpected departure of the project manager. Apparently there was a very heated meeting between the project manager, Jane, and the subcontract supplier of the goods elevator which is being installed to carry stock from the basement stockroom to the retail floors. At the meeting, the site manager of the elevator supplier apparently mentioned that the installation was running late by three weeks. Jane pointed out that this situation would delay the opening of the store, with disastrous cash flow impact. At some point during the meeting Jane appears to have become angry with the subcontractor and the project manager. Jane feels that she should have been informed about the possible delay at the earliest opportunity, and that the project manager and subcontractor were trying to hide the delay from her. The project manager apparently claimed (rather forcefully) that it was his responsibility to manage the project, not Jane’s. The project manager also suggested that the delay was ‘a minor detail’, and that opening would not be delayed. Jane apparently disagreed. Shortly afterwards the project manager resigned and left the site. The subcontractor has refused to do further work until Jane apologises. Jane says she has been ‘left in the dark’ by the project manager and ‘doesn’t like surprises’. Apparently Jane had always experienced problems in persuading the project manager to discuss progress, and has received only three written progress reports during the last nine months. Other than occasional conversations when she visited the site, this has been her only contact with the project manager. Jane has called a ‘crisis meeting’ for tomorrow with the managing director and finance director of Trend, which she wants you to attend. You then call Anne Martensen, the head of quality assurance at Trend’s head office. She tells you that there are no standard procedures for the control of capital projects, as all her department’s time is taken up with designing and implementing control procedures for the retail activities of the organisation. Anne is surprised to hear about the problem with your project, but is unable to offer any help as she and her staff have little experience of 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. Requirements (a) Describe the main controls used in formal approaches to project management (e.g. PRINCE2). (10 marks) (b) Explain how such controls could be used in this and future projects. (15 marks) (Total marks = 25)

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Solutions to Revision Questions

8

Section A solutions
Solution 1.1
(D)

Solution 1.2
PRojects IN Controlled Environments

Solution 1.3
Continuous improvement

Solution 1.4
(B)

Solution 1.5
. . . to augment the organisation’s experience and knowledge.

Section B solutions
Solution 2
Guidance and common problems As stated in the question, planning is a key aspect of the project management process and students need to analyse the scenario data provided in the exam to ascertain the planning procedures undertaken by the scenario organisation. Projects often go wrong at this early stage of the project life-cycle, so if there are signs of projects going out of control, you may be able to explain these causes by analysing the planning stage. Part (ii) of this
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question should give you a clear structure, which can be used to put together a sound project plan. (i) Planning is a vital part of any project. It is important to lay out a ‘road map’ that clearly shows how the project activities and tasks will be accomplished, within budget and to schedule. Attempting to begin a project without a plan would be like trying to assemble a set of cabinets without first reading the instructions, or trying to drive from Glasgow to Southampton without first reading a map. 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. The risk of project failure is much greater without project planning. (ii) Detailed planning involves the following stages:  Obtaining project authorisation  Time plan  Resources plan including staffing  Contingency plan  Quality plan  Cost plan  Communication plan  Audit plan. From these can be developed:  Work packages  Estimates of time and cost  Graphic illustrations of the schedule: Gantt charts, etc.  Risk analysis and plans  Project schedule and the budget  Change management  Acceptance process  Post-project implementation audit. Then the plan is issued to all major stakeholders, excluding any sensitive information that would only be given to senior management. To gain full marks you would be expected to give some detail for each category.

Solution 3
Guidance and common problems (i) and (ii) together Once the project is under way, it is necessary to monitor progress continually against the plan to ensure that it is proceeding as expected. Control involves measuring actual results and progress versus the planned progress. In order to measure actual project progress, it is important to keep an up-to-date record of which activities have begun, which are completed, and at what time they started or were completed; it is also important to record the actual costs of each activity. If, during this monitoring process, it is found that the project is not progressing as planned (i.e. it is behind schedule or is over budget) then the project manager must
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instigate some form of corrective action. Changes to the project scope, schedule or budget must first be agreed by the project team and the customer. Decisions must then be made as to how to revise the schedule or budget. These change decisions may involve a trade-off of time, cost or scope. For example, reducing the time taken on an activity to bring the project back on schedule may involve increasing the costs by employing more staff to get the work done quicker, or it may involve reducing the scope of the project by not carrying out a particular part of the project. Similarly, reducing project costs to get the project back on budget may require the reduction of quality in materials or functionality of the technology. It will depend very much upon the customer’s final project needs as to which elements of the project will be forgone or reduced to achieve the project target. Once changes are made to the budget or schedule, they must be incorporated into a revised project plan that must then be distributed to the team members and customer.

Section C solution
Solution 4
(a) Types of control. If we take as our basis for discussion that a control is any mechanism designed to ensure that a project achieves its objectives, then the PRINCE2 methodology (as do others) contains a wide number of control elements.  The organisation structure of the project team under PRINCE2 enforces a clear structure of authority and responsibility on the participants. The structure of 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.  In PRINCE2 there are a series of ‘management products’ associated with the management and control of the project. These include, for example, the project initiation document, the project budget, the project plan, the quality plan and various checkpoint and progress reports.  The PRINCE2 methodology includes various different types of plans. These ensure that all the participants in the project have a clear understanding of the tasks to be completed and the relationships between them.  PRINCE2 contains many quality controls such as clearly defined technical and management procedures. These ensure that work is completed not just on time but also at an appropriate level of quality. (b) Control framework. We can take some of the most appropriate control elements from the PRINCE2 methodology and use them to improve the management of major projects within Trend. I would suggest that, as a minimum, the following aspects of project management should be covered by control procedures.  Each project should have a formal organisation structure. The control responsibilities of the various parties are outlined below.  The Trend organisation (in the form of its directors) is responsible for project selection and the overall approval of the project plan and budget. This approval would be in overview only, as the detailed breakdown of both plan and budget are operational issues. The organisation should provide a clear set of objectives and constraints to the project.
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The project sponsor (or, in a complex project, the steering committee) is responsible for ensuring that project objectives are achieved. The sponsor also reports progress and issues on a periodic basis (perhaps quarterly) to the organisation. The project sponsor agrees the detailed plan and budget with the project manager, and provides advice and support downwards. The project manager is responsible for the day-to-day management of the project team and subcontractors. He/she will communicate objectives and monitor performance against the plan and budget. Any variations to the project must be recorded and agreed with the sponsor, and any issues or slippages reported upwards. A series of review meetings (weekly) will take place between project manager and sponsor, and these will be supported by periodic progress reports (monthly), including a project overview using SWOT analysis and a report of progress against plan using a Gantt chart. The members of the project team, and the representatives of subcontractors, will report to the project manager on a frequent basis. This will take the form of daily briefings, supported by weekly or monthly written progress reports. Copies of all project documentation and reports will be kept in a well-referenced filing system. This will allow any of the project participants to check what has been agreed. At the end of the project, an independent quality assurance inspector will carry out a full post-completion audit of the project. All participants will be briefed on the findings of the audit and encouraged to discuss the issues that arise. Their suggestions for the improvement of future projects will be recorded and circulated widely throughout the organisation. This will allow the participants in other projects to learn and improve.

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Project Management Tools

9

L EARNING O UTCOME
After completing this chapter you should be able to:
"

distinguish the key tools and techniques that would need to be applied in the project process, including the evaluation of proposals.

9.1 Introduction
This chapter demonstrates the tools and techniques used by project managers in planning and controlling the activities to achieve the project objective. Planning is the first step in achieving the objective. The plan will be the statement of intended timing of project activities and the basis for estimating the resource requirements. The plan will also become the benchmark against which the progress of the project will be compared. The comparison against plan and any subsequent corrective action is the control element of the project management process. A project planning and control model is given in Figure 9.1 (Maylor, 1996).

Figure 9.1 A project planning and control model (Maylor, 1996). # Pearson Education Limited, reprinted by permission

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9.2 The planning process
As already discussed in Chapter 7, 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. The work breakdown structure (WBS) provides a systematic approach for breaking projects into manageable units in order to ensure that all of the activities required to complete the project are included and carried out.

9.2.1 Benefits of planning methods 
    

Breaks complex tasks into manageable pieces. Sets out the logical sequence of project events. Provides a logical framework for making decisions. Provides an input into subsequent project processes, such as estimating time and resources. Provides a framework for continuous assessment of the project progression. Provides a communication tool.

9.2.2 Communication of project planning
Because of the complexity of tasks involved in many projects, communication of responsibility for those tasks is often facilitated by means of graphical planning techniques. By converting complex projects and their constituent tasks into a graphical and therefore more understandable picture, the project manager can more easily communicate the project activities to the project team and the project sponsors. The following sections will introduce a number of these planning techniques used by project managers. We begin by looking at Gantt charts, named after Henry Gantt, a pioneer of scientific work study.

9.3 Gantt charts

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This is likely to be examined quite frequently. Gantt charts are a simple representation of a project from the view of the time taken for each activity and the resources required for each activity at any point in time. They are often used to monitor actual progress against plan on a week-by-week or possibly day-byday basis. Gantt charts can be produced separately for each person to show their total workload. Arrows can be added to show the interrelationship between different activities, and slack time shown on each activity, as discussed below. However, the main advantage of Gantt charts is that they are a useful communication tool, being easy to understand and providing a compact overview of responsibilities and progress on the project. To calculate the start and finish times of each activity on a Gantt chart, a further technique known as network analysis (or critical path analysis, CPA) must be used.

9.4 Network analysis
This is likely to be examined quite frequently. The main aim of network analysis (critical path analysis) is to analyse activities that occur in parallel, in order to identify start and finish times for each activity, and the project as a whole. One of the key features of critical path analysis is the identification of activities that are critical, i.e. activities where any delay will lead to a delay in the project overall. Critical path analysis can also be used as an aid to allocating resources by identifying those activities that are critical and therefore require additional resources to ensure they are completed on time. We shall now consider the main elements of constructing a critical path analysis, beginning with some definitions. Each activity in the network is designated by a symbol of the following type: 



Earliest event time (EET). This is the earliest time at which any subsequent activity can start; this will be determined by the time taken by preceding activities. Latest event time (LET). This occurs at the same time or later than the EET. It is the latest time at which all previous activities must have been completed to prevent the whole project being delayed.

We illustrate these definitions by looking now at a simple example. Consider a project comprising eight activities, labelled A, B, . . ., H. Some activities are dependent on others; for
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example, the table below indicates that Activity B cannot begin until Activity A is complete, and similarly Activity H cannot begin until Activities, E, F and G are all complete. Activity A B C D E F G H Preceding activity – A A A B C D E, F, G Expected time taken 5 4 5 3 5 6 7 7

The first event is assumed to start at time 0 (i.e. the start of Activity A). The network is then constructed by building the activities from left to right, making sure that activities follow only after any preceding activities have been completed. First, the EET is calculated.

9.4.1 Calculation of the EET
The EET for Event 3 (i.e. the completion of Activity B) is:

¼ (EET at Event 2, i.e. the completion of Activity A) + (Duration of Activity B) ¼5þ4 ¼9 The EETs for the completion of Activities C and D are calculated in exactly the same way. The first complication occurs at Event 6, that is, the start of Activity H, which cannot begin until E, F and G are completed. In this case, there are three possible EETs: EET at Event 3 + Activity E ¼ 9 þ 5 ¼ 14 EET at Event 4 + Activity F ¼ 10 þ 6 ¼ 16 EET at Event 5 + Activity G ¼ 8 þ 7 ¼ 15

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In this instance, the earliest time that all preceding activities will have been completed is 16 days (i.e. H cannot start until all of E, F and G are fully complete). Therefore Event 6, the start of Activity H, has an EET of 16. The EET for the last event (i.e. the completion of Activity H) is the earliest time that the project can be completed, given the duration of the preceding events. The earliest time that this project can be completed is 16 days + 7 days for Activity H = 23 days.

9.4.2 Calculation of the LET
The calculation of the LET begins at the right-hand side of the network diagram. The LET of the final event is always the same at the EET (assuming that the project is to be completed in the shortest possible time). For the worked example above this would be 23 days, as indicated on the network diagram. Moving from right to left, the next event is number 6 (the start of Activity H), and the LET is calculated as follows: LET at 6 ¼ (LET at Event 7) À (Activity H duration) ¼ 23 À 7 ¼ 16 The same calculations can be carried out for events 3, 4 and 5: LET at Event 3 ¼ 16 À 5 ¼ 11 LET at Event 4 ¼ 16 À 6 ¼ 10 LET at Event 5 ¼ 16 À 7 ¼ 9 Note that for Events 3 and 5 the EET and LET are different. This will be explained later.

A complication arises when trying to establish the LET for Event 2 as there are three possible LETs: LET at Event 3 À Activity B duration ¼ 11 À 4 ¼ 7 LET at Event 4 À Activity C duration ¼ 10 À 5 ¼ 5 LET at Event 5 À Activity D duration ¼ 9 À 3 ¼ 6

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In this case, the LET will be 5; if it occurs later than this the whole network will be delayed. This can be input into the network diagram at Event 2.

Above is the completed network diagram, and at this point it is now possible to identify the critical path. This is the sequence of activities that begin and end in events where the EET = LET. In this case, the critical path is Activity A – C – F – H = 23 days. This is shown on the diagram by the bold lines.

9.4.3 Slack or float
This can be calculated by taking the difference between LET and EET. Obviously the critical path has no slack (because activities on the critical path, by definition, have EET = LET), but if activities do not occur on the critical path, slack may occur. For example, Activity E has an earliest start date of day 9, but it could in fact start on day 11 (or start on day 9 and take 2 days longer) and the project would still be completed on time, that is, there are 2 days of slack.

9.5 An alternative method for constructing network diagrams: activity on node
This method is based on project software such as Microsoft Project. Each activity is shown in a rectangular box or node. Activity flows from left to right as for the activity on arrow diagrams you have previously studied. Each node is subdivided in the following way:

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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. Proceed through the whole diagram from left to right, completing all the EST boxes. Should there be two preceding activities, take the higher figure. To calculate the latest start time (LST): this is worked out right to left. Start with the final duration figure and subtract the next duration figure from it, working backwards throughout the diagram until all boxes are completed. Should there be two previous activities (working backwards remember), take the lower figure.

Exercise 9.1
Activity A B C D E F G H ID number* 1037 1038 1039 1040 1041 1042 1043 1044 Preceding activity – – A B B E C, D F Duration in weeks 5 4 2 1 5 5 4 3

*The ID number would come from the computerised listing of activities.

Once you have worked out the first logical precedence, you can then calculate the duration of the various paths:

ACG ¼ 5 þ 2 þ 4 ¼ 11 weeks BDG ¼ 4 þ 1 þ 4 ¼ 9 weeks BEFH ¼ 4 þ 5 þ 5 þ 3 ¼ 17 weeks These durations will be the starting points for working out your backwards pass to calculate your latest start times. So H; final duration 17 weeksÀ3 weeks’ duration means the latest possible start time for this activity is 14 weeks. Similarly G: total duration is 17 weeksÀ4: the latest start time for G is 13 weeks. To calculate the latest start times from right to left to identify the critical path, the duration of the previous activity needs to be deducted from the latest start time at the following activity. For example, the latest start time for activity C is given by: (Activity C duration) À (Latest start at Event G) ¼ Latest start at C 2 À 13 ¼ 11

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As you can see from the precedence diagram below, the critical path is BEFH.

9.6 Project evaluation and review technique (PERT)
The issues of risk and uncertainty in project management were covered in Section 7.9. You should re-read that section now. Network analysis is often complicated by uncertainty of events so that a single time given for an event is likely to have a degree of error. To overcome this uncertainty PERT uses three time estimates for each activity in the network: 
 

An optimistic estimate (denoted by the letter o) – the duration it would take if conditions were ideal. A probable estimate (denoted by the letter m) – the duration it would take if conditions were normal, or as expected. A pessimistic estimate (p) – the duration it would take if a number of things went wrong.

The expected duration is then calculated (using expected values) and the network drawn. The degree of risk in each activity can be estimated using standard deviations. This would allow calculation of any necessary contingency to be added to the plan, in order to reduce the risk of overrun.

9.7 Project management (PM) software
It is clear that many project management techniques are complicated and involve large amounts of constantly changing data. It is not surprising, therefore, to learn that all of these techniques can now be carried out quickly and effectively using project management software applications. Today, numerous PC-based PM software packages exist, with features such as easy access to graphical user interface, planning activities, work-scheduling facilities, ability to view relationships among tasks and other projects, resource management and project progress monitoring and control.

9.7.1 PM software functions
The following is a list of functions that would commonly be found within a standard project management software package, such as Microsoft Project: 

Budgeting and cost control. At any time during the project, actual costs can be compared with budgeted costs for individual resources or activities, or for the whole project.

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Calendars. Calendars can be used for reporting purposes and to define working periods. Graphics. The ability to create and modify graphics, such as Gantt charts, is a useful feature of PM software. It will allow the tasks in Gantt charts to be linked so that preceding activities can be shown. Multiple project handling. Large projects often have to be broken down into smaller projects to make them more manageable. Alternatively, project managers may be responsible for more than one project at a time. Most PM software packages will store numerous projects quite easily. Planning. All PM software allows the user to define the activities that need to be performed. It will maintain detailed task lists and create critical path analyses. It will allow the project manager to plan several thousand activities, by allocating resources, setting start and completion dates and calculating expected time to complete. Scheduling. Most systems will build Gantt charts and network diagrams based on the task and resource list and all of their associated information. Any changes to those lists will automatically create a new schedule for the project. It is also possible to schedule recurring tasks, to set priorities for tasks, to schedule tasks to start as late as possible, and to specify ‘must end by’ and ‘no later than’ dates. Resource planning. A critical issue in project planning is resource management, that is, ensuring the project has the correct level of manpower, equipment and material at the right place at the right time and in the right quantities. Resource histograms. These provide the project manager with a visual display showing the usage and availability of resources over the project’s life. This allows the project manager to see quickly and easily where there are either too few resources or where there are surplus resources to carry out a particular activity. The project manager then has the ability to reallocate resources or to obtain additional resources to ensure that critical activities are achieved on time and therefore the critical path is achieved. An example of a resource histogram is shown below:
5 Number of technicians required 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Week Number 29 30 4 H O L I D A Y H O L I D A Y Maximum 

Reporting. The project manager has to report on the progress of the project to the stakeholders. PM software provides the facility to generate standard reports, such as progress to date, budget reports, allocation of resources reports, individual task or WBS reports and financial reports.

9.7.2 Advantages of using PM software 

Accuracy. Particularly in large projects, manually drawing network diagrams can be prone to error. PM software has inbuilt error checks and automatic calculation facilities.
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Affordability. Most PC-based software costs between £200 and £400, which for businesses is an affordable investment. Costs of maintaining the data need to be added to this. Ease of use. Windows-based packages with graphical user interfaces make the use of PM software easy and quick. A 3-day training course is usually needed. Ability to handle complexity. For large, complex projects, PM software is indispensable in managing and controlling large volumes of activities. Speed. ‘What if ’ analysis. The software allows the user to see the effect of different scenarios by altering elements of the project data. This enables the project manager to plan for contingencies and to assess consequences. Timesheet recording. In order to ease the project manager’s burden of recording the actual effort and revised estimates to complete a task, a number of PM software packages allow this data to be captured from individual team members. Typically, project team members will capture the time already spent and the time expected to complete a task on a timesheet. They can input this on a daily or weekly basis that is then plotted directly against the plan and can show project managers where variances exist and whether the critical path is in jeopardy.

9.7.3 PM software pitfalls
Despite the extensive use of project management software, projects can still go spectacularly wrong – over schedule and over budget. It is important to realise that PM software is a tool and can be used wisely or unwisely. Here are some common pitfalls:    

Emphasis on maintaining the plan rather than managing the project. In a large project, maintaining the detail estimates against actuals of a plan can be a full-time task. This leaves little time for issue-management and man-management. Hence, it is often better for project managers to delegate the input/maintenance responsibility to a project administrator and receive regular reports as a basis for managing the project. Mythical man-month. Peter Drucker’s book (of the same name) highlighted the problem of assuming that if a task takes 10 days then ten men applied to the task can do it in a day. It is important to manage resources realistically. This especially applies when tasks are over-budget. Adding new people into a project at a late stage can make it later since the new team members will be slower at grasping what is required and actually divert the attention of other team members. Estimates. For planning purposes, the accuracy of estimates is vital to the identification of the critical path and the key milestones of the project. However, estimates can vary wildly. They are subjective, based on the estimator’s experience or inexperience (or even mood) and subject to company politics (e.g. the paying customer does not want to hear bad news). Also estimates have been made at a fixed point in time with a particular set of assumptions. A task that was thought simple can prove anything but. Estimating is receiving more and more attention and there are several estimating techniques which can be used (which are beyond the scope of this section). Needless to say, a comprehensive plan built on incorrect estimates may look impressive but is fatally flawed: garbage in; garbage out. Skill levels. Plans tend to talk about resources when actually they are referring to human beings with all the uncertainty that that brings. Human beings are not interchangeable items like nails or screws. Where one individual may find a task within his/her skillset,

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another person may struggle. It matters which person does which task. If the most competent person has given all the task estimates then it is unlikely that the overall schedule reflects the true performance capacity of the team. Further, people have careers and home-lives and can leave a project. A project manager must be aware of the effect that the departure of a key person would have on the plan. Work breakdown. Some plans fail because the work breakdown into tasks does not match how people work. Work breakdown assumes discrete units of work that someone will spend a fixed amount of time on before moving to the next task. Quite often real-world tasks merge into several tasks, e.g. making tea may mean making coffee while the kettle has boiled etc. People see additional required tasks while they are working and tackle them simultaneously. A static plan (with PM software) cannot keep up with all these changes. Hence recording time against the plan as opposed to what people are actually doing can make managing the plan (as opposed to managing the project) a nightmare task to the extent that the PM software is abandoned in favour of a simpler monitoring system.

9.8 Summary
This chapter has looked at tools used in planning and controlling projects. The key points to remember are: 


the common techniques used by project managers – Gantt charts, critical path analysis (CPA) and project evaluation and review technique (PERT); the use of PM software, which may contain facilities such as planning, budgeting, reporting and scheduling.

Reference
Maylor, H. (1996), Project Management. Pearson Education.

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Readings

9

The relevance of project planning techniques to the modern project environment

The following article critically assesses the relevance of PM scheduling techniques, in particular those used in PM software. The author challenges the practical use of project software based upon techniques that were designed over 50 years ago, and which may not be completely relevant in the fast-moving, time-constrained project environment of today.

Critical path not so critical?
Chris Vandersluis, Computing Canada, 1998. # Computing Canada, Transcontinental Media, ITBusiness Group, Toronto, Ontario.

A couple of years ago there was a brief flurry of product announcements of new software systems which would seamlessly (don’t you love that word?) marry the functionality of traditional project management systems with every employee’s to-do-list. The products (including one from Microsoft itself) were short-lived and we’ve not seen their like since. Recently, however, I’ve noticed a number of requests for such functionality returning and thought it might be worthwhile to take a moment to give the idea of such systems a reality check. First of all, let’s get a basic definition sorted out. When people refer to ‘project management systems’ they are typically referring to project scheduling systems such as Microsoft Project, Primavera, etc. It’s true that these products are in the project management category but it’s a little unfair to consider the functionality they deliver to be a complete answer to all project management issues. After all, there are many other elements to project management than just the schedule. Contract management, for example, is a huge component of any project management environment, as is team management, communications, client meetings and so on. Still, the first software ever delivered for project managers was scheduling software and so long as we keep straight what it can and can’t do, it’s not too harmful to call it project management software. Virtually all of the scheduling software on the market today is based on a type of calculation designed about 5