Subject Guide

Block 1: Why Do We Need Management
1 Reading - essential and recommended

1.1 Reading - essential and recommended
Essential readings:
Boddy, Chapter 1: Managing in Organisations. A great introduction to why we need
managers.
Willman, P. Understanding management: social science foundations. (Oxford: Oxford
University Press, 2014). Theme 2: The Agency Problem - The Agency Problem in particular is
central to many of the concepts that we encounter, so it is important for you to have a good
understanding of it. These readings will help to develop your understanding.
Recommended readings:
University Press, 2014), Chapter 2: The Firm. Transaction Cost Econonmics is a topic that
students find tricky on this syllabus. This provides more detail of what it is and why it’s
relevant for managers.
Tim Harford podcast, 50 things that made the modern economy, episode on Management
Consultants. https://www.bbc.co.uk/sounds/play/w3csv3gr We don’t touch on this topic directly,
but it’s a nice thoughtpiece if you’re keen on understanding the world that managers
operate – isn’t it odd to have an occupation (manager) who has a consultant hired to
oversee their work (management consultant)?
Braverman, H. Labor and monopoly capital (New York: Monthly Review Press, 1974) [ISBN
9780853453406], Chapter 2: The Origins of Management. This is an important book
critiquing capitalism. This chapter describes (critically) the rapid rise of management during
early capitalism, bringing significant new opportunities but also challenges to society.
Coase, R. (1937). The Nature of the Firm, Economica, 4(16), pp.386-405. This is an incredibly
useful and remarkably easy to follow reading giving a clear account (from Coase’s
perspective) on where firms come from.
Jensen, M.C. and W.H. Meckling ‘The theory of the firm: managerial behaviour, agency costs and
ownership structure’, Journal of Financial Economics 3 1976, pp.305–60. This is a key text on
agency theory, although quite tricky to read in places.
https://hbr.org/2011/12/first-lets-fire-all-the-managers - an article looking at why MorningStar
chose to do away with managers. It’s useful because (a) it explains why firms need
managers and (b) how MorningStar are trying to do something different
https://hbr.org/2013/12/how-google-sold-its-engineers-on-management - this is useful because it
explains what happened when Google tried to do without managers, and how it showed the
importance of managers for Google.
2 Introducing the need for management
2.1 Why is there a need for management
A few years ago, Google realised that its workforce were cynical of managers. “We are a
company built by engineers for engineers,” according to one engineer, Eric Flatt (Garvin,
2013). Engineers struggled to see why they needed managers at all. People working in
Google wanted to spend their time writing code, debugging software, and designing. They
didn’t want to have to have a constant interaction with bosses, or to supervise other
people’s work. They wanted a totally flat structure. Page and Brin, Google’s founders,
decided to give them what they wanted. But when they experimented, in 2002, with a
totally flat organisation, where everyone reported straight into Page and Brin, the
experiment was short-lived because they were both bombarded with ‘questions about
expense reports, interpersonal conflicts, and other nitty-gritty issues.’ (Garvin, 2013).
3 Discussion: Why did Google Need Managers?
Why do you think Google needed more managers than just Page and Brin?
Discuss with your classmates, or provide an answer on the discussion forum.
Reminder of the context:

4 The Need for Management
4.1 The need for management
As companies grow – like Google did – the owners need people to help with a wide range of
tasks that they can no longer handle by themselves. Initially, they may recruit a handful of
people to deal with the work that needs doing. This number may continue to grow until the
owners find it hard to interact with all the new members of staff to provide them with
direction, monitor them, and help them to solve problems. This is a primary reason why
firms need managers.
But why do companies grow to the size that requires managers? Centuries ago, large
organisations were rarer. They existed in the form of armies, royal households, and the
government, but there were only a handful of commercial examples of large corporations
(Willman, 2014). Thus, those carrying out management roles for the purpose of profit-
making were rare.
But in the 19th century, large firms started to emerge as a more common feature of the
working world. The industrial revolution in the west began, and factories, mills and mines
became large, coordinated workplaces with a high number of workers.
In the UK context, to use this as an example, the textile industry was an early adopter of the
factory. Previously, cloth had been produced at home by individual workers, using simple
equipment (a small loom, a spinning wheel, sheep’s wool, and so forth). This would either
have been owned by them, or by an entrepreneur who provided the equipment for them,
and who would then buy the finished textiles (Willman, 2014).
However, entrepreneurs became frustrated that they had very little control over the
quantity of textiles that the weavers produced. If the entrepreneurs raised the rate that
they paid the home-weavers, the workers produced less as they were aiming for a ‘target’
income. If they lowered the rate that they paid the home-weavers, they would steal raw
goods (e.g., the wool) as compensation (Landes, 1969; Salaman, 1981, c.f. Willman, 2014).
By moving the workers into the factory setting, entrepreneurs could control the hours that
they worked and thus have a greater impact on production volume. By monitoring and
managing workers, much greater output was achieved, and the manager had more control
over the output quality itself. And thus, a big transition happens: away from workers
producing and selling the goods they have made themselves, and towards workers being
paid a wage for producing goods. They sell their labour to the factory owner in exchange for
their hard work. In the factory system, they are overseen by managers, on behalf of owners,
who make sure that the workers produce sufficient goods and do not step out of line.
John Knight & Sons Silvertown (London) soap factory, https://fold.cm/read/timknight/brief-
history-of-john-knight-soaps-TJHdq26M
Today, a large proportion of the workforce continues to work for companies that have more
than a handful of workers. And where this is the case, and their work needs coordinating
and monitoring, the need for management arises. And that is how the labour system
continues to work in companies today: workers work, managers manage and owners own.
Workers are controlled through a combination of monitoring, incentives, and the hierarchy,
all of which are instigated by managers and owners.
Managers work in a wider range of settings, too: charities, government, the military, the
health service, and so forth. Without layers of management in any of these settings, too
many problems are sent to the owners or controllers of the organisation.
In Core Management Concepts, we are particularly interested in these managers. We are
interested in what managers do, how they do it, and in examining tools and techniques that
may help them to do their work. We often use the expression ‘practising manager’ when we
talk about managers in this module. We use this expression because we are interested in
what it is that really matters to managers in practice. How can they apply the theories that
you’re learning about, and what does their working world look like in the context of the
workplace today?
We also recognise the problems that managers themselves can cause. By introducing
numerous layers of hierarchy in an organisation, management creates its own problems in
terms of controlling and coordinating efforts. The more layers, the more managers, which
means more hierarchy, and which in turn makes it harder for one area of the business to
know what another is doing. Core Management Concepts will also explore the challenges
that managers create for businesses, alongside the challenges that they solve.
4.2 Why are entrepreneurs motivated to create firms?
Large firms became commonplace during the industrial revolution, because entrepreneurs
could see a way of having greater control over production and output. But alongside this,
there was also the opportunity to lower the costs associated with transacting with each and
every home-weaver by bringing them into the factory system. By paying them a set salary
for a number of hours of work, the factory owner was reducing the costs of constantly
contracting and recontracting with the workers in terms of how much they would pay for
set products.
There are three broad categories of transaction costs:
Search and information costs: these are the costs associated with researching what goods
are available on the market, what the prices are, and so forth. For the entrepreneurs, this
would be the costs of finding the home-weavers and ascertaining how much they would
need to be paid to produce the required textiles.
Bargaining and decision costs: these are costs associated with coming to an agreement
about what is to be provided and for what price, that is acceptable to both parties. For the
entrepreneurs, this would mean the costs of reaching an agreement on what they will buy
from the home-weaver, as well as the cost of deciding.
Policing and enforcement costs: these are the costs of making sure that the other party
operates within the terms of the contract, and taking corrective action where they do not.
For the entrepreneurs, this would be the cost of making sure that the home-weavers
produce what they say they will produce within the agreed timeframe and to the agreed
quality.
We can see then, in the case of the entrepreneurs, that there were very good reasons for
them to want to move away from engaging with weavers on an ad hoc basis and to want to
bring them into a more organised mode of production within a factory.
By bringing them in to a factory setting, the entrepreneurs hoped to reduce the transaction
costs associated with buying textiles from the home-weavers.
This concept is central to an economic theory called Transaction Cost Economics (TCE). At
its most straightforward, TCE argues that it can be more efficient to bring transactions into a
firm if there are high costs associated with leaving them outside the firm (Williamson, 1979;
Coase, 1937). So, if the search, bargaining and enforcement costs are significant, it may
make sense to bring the transaction inside the firm. This, of course, grows the size of the
firm, and creates a further need for managers. Managers will need to coordinate the efforts
of the workforce, as well as monitoring the workforce for their compliance to their
employment contracts.
However, it is not always easy to work out what the transaction costs are and which
approach is most cost effective. Companies who continue to transact with others to buy and
sell products and services will incur transaction costs. But those who bring the creation of
products and services in house will face the costs related to monitoring, coordination and
control, but should reduce ‘search and information costs’ and ‘bargaining and decision
costs’.
5 Principal-Agent Theory
5.1 Principal-Agent Theory
There is another concept which is useful to introduce at this point, and which will prove to
be a significant theory throughout this module. It is the Principal-Agent Problem. And it
helps to provide another set of reasons why employing a full-time designer may not be the
right thing for Zooee Mama to do.
The principal-agent problem assumes that there are two types of actor (or person) in an
organisation: a principal, and an agent:
A principal is a business owner. That could be someone who owns a business outright, it
could be a group of people who co-own a business, or it could be shareholders who have
bought shares in a business that is listed on the stock-market.
An agent is someone who works for that business, but does not own it. This could be a
manager, or a worker with no management responsibility.
The principal-agent problem occurs when the two parties – principal and agent – have
different interests. A simple example would be an owner who wants staff to put in a 50+
hour week, versus an employee who would prefer to work less than 40 hours and to have
Friday afternoons off. Another example might be a manager taking a decision to recruit
someone who they got on really well with in the interview, rather than someone who was
more qualified and presents a better ‘value for money’ hire. The problem occurs when not
only do the two parties have different interests, but when the principal cannot monitor the
agent fully, and so they cannot know whether the agent is working in their best interests. It
is more likely to occur when activities that are useful to the principal are costly to the agent
(for example, the agent doesn’t want to give up their weekend to work, or they really don’t
feel like smiling at a customer today), and where it is costly for the principal to monitor
everything the agent does. The risk that the agent may not act in the best interest of the
principal is called moral hazard. You can remember this by thinking that it’s a risk that the
agent may act immorally. In this language, economics seems to take the side of the business
owner, assuming that the agent should act in their best interests at all times.
The costs of monitoring, and the costs of the agent deviating from what the principal would
like them to do are collectively called ‘Agency Costs’. You can remember this by thinking
that it is what the agent costs the business by having their own free will and it’s either the
costs of them choosing to exercise it, or the costs of monitoring them so they can’t. Part of
a manager’s salary would count as an agency cost as they are charged with monitoring
workers to make sure they act in the best interests of owners.
We can lay out the key tenets of the principal-agent problem as follows:
Assumption Explanation Example
There are two sets of actors in the They are called ‘actors’ in the In Deloitte, the
firm. Principals are model because they are both partners that own
able to take actions and the business are
the Principals. The
the shareholders in the firm and change organisational workers and
agents are the managers or workers. outcomes as a result. managers are the
agents.
Actors aim to maximise their This means that both the
individual utility. principals (shareholders) and
agents (managers) try to get
as close as they can to
meeting their individual
goals through their
decisions. Their goals could
be to earn money, feel
satisfied, experience
pleasure, forge better
relationships, or anything
else.
The agent may act against the Because the agent is looking The manager may
interests of the principal. to maximise their own utility, know a faster way
this will be their focus over of processing bills
helping the principal to but choose not to
maximise their own utility. tell the principal
because
implementing the
new system would
make more work
for the manager.
Because it is not possible in most Information asymmetries are A call centre
situations to monitor workers all the generated because one party worker may not
time, this generates information knows more than the other stick to the call
asymmetries, which are the basis party. script when talking
of moral hazard. to customers
Moral hazard is the
because they
possibility that either party
prefer doing it a
does not act in good faith,
different way,
bending or breaking the
despite there
terms of a contract.
having been much
research that the
script which must
be used is very
effective at
generating sales.
That there is a
situation here
which the call
centre worker can
exploit creates the
basis for moral
hazard.
The principal acts to prevent this, The purpose of monitoring is
through monitoring or incentives. to exercise control over the
agent by acquiring
information about the
agent’s actions.
The purpose of incentives is

to align the interests of the
agent with those of the
principal.
Monitoring is a control mechanism Monitoring acts as a control Monitoring can

that encourages agents to act in the mechanism for two major involve a whole
principals’ best interests. reasons: 1. Principals can range of different
punish agents who act out of initiatives,
turn and 2. Agents will be including extra
disinclined to act out in case layers of
they are caught. management,
regular appraisals,
a need for
managers to
report finances on
a regular basis,
phone calls to
check that the
manager is in the
office at a
particular time,
CCTV on the
factory floor or
recording
customer service
phone calls to
make sure that
everyone is
working as they
should.
Incentives are a control mechanism By providing a worker with a Offering a bonus
that aligns the interests of agents reason to act in the agent’s to a worker for
with those of the principal best interests – f0r example meeting sales
offering more pay, power, or targets, or share
a promotion for doing so – options to a
can act as a valid incentive manager can align
their interests with
that of the
principal.
Principals compare the benefits and The model has to assume (or In this
costs associated with each it doesn’t work) that hypothetical
outcome and in the model, there is principals have the ability to scenario,
the assumption that they are compare every single benefit principals would
unconstrained in their ability to and every single cost look at all possible
compute infinite amounts of associated with every single options for
information. monitoring combination and monitoring and
choose the optimal one. incentivising and
choose the
combination
which is going to
be the best for the
company.
Principals seek to achieve an optimal They can then use all the Companies
solution in which their utility is information to achieve the maximise their
maximised. perfect, optimal solution, utility by finding
where the agent’s the sweet spot
production is maximised. In between money
other words, the benefits of being spent on
production minus the costs monitoring and
of monitoring add up to the incentives versus
highest possible amount of benefits gained
any scenario. from doing so.
5.2 The principal-agent problem in practice
https://www.theguardian.com/world/2020/sep/27/shirking-from-home-staff-feel-the-heat-as-
bosses-ramp-up-remote-surveillance
https://www.theguardian.com/news/audio/2021/jan/06/is-your-boss-spying-on-you-podcast
When deciding how to monitor workers and managers, companies generally have two
choices: they can monitor input, or they can monitor output. If they monitor input, they are
monitoring how much work a worker or manager does. For example, they might measure
how many hours a worker spends at their desk, or how long each day a manager is online. If
they monitor output, they are monitoring what the worker produces. For example, are their
reports produced on time, and are of a good length and quality? Do they successfully
maintain good client relationships?
During the Covid-19 pandemic, homeworking became commonplace globally for those who
could. Even organisations which had previously rejected homeworking had to look at ways
to embrace it, if they were able to. This meant that plenty of companies found themselves
with workers who were remote, and thus it became harder to tell if they were doing what
they should. Some chose to focus on monitoring their outputs. But other companies,
concerned that this would not be a sufficient measure of performance, found ways to
monitor input. This ranged from facial recognition software, which showed when people
were away from their screens, to software which counted the number of keystrokes per
minute.
5.3 Reflection on surveillance monitoring (individual work)
Do you think that surveillance monitoring can solve the principal-agent problem?
What are the agency costs associated with this type of monitoring, do you think?
5.4 Feedback on surveillance monitoring question
Surveillance monitoring can, to some degree, act as a defence for companies who are
looking to check that employees are acting in the best interests of the company. Monitoring
acts as a control mechanism for two major reasons: 1. Principals (the company owners) can
punish agents who act out of turn and 2. Agents will be disinclined to act out in case they
are caught.
The costs of online monitoring can be significant, in terms of the cost of the technology to
monitor staff, but the tech is designed to bring costs down compared to, for example, a
manager employed full-time to walk an office floor, checking that people are back from
their lunchbreaks and aren’t internet shopping when they should be working.
There are also the human costs of being monitored, and how it may make staff feel
rebellious, feel watched, and ultimately choose to break the rules or leave. It may create an
organisational atmosphere that is negative and diminishes productivity. These costs can be
significant.
5.5 A manager’s role in the Principal-Agent Problem
If we return to the opening paragraphs of this unit, we can remind ourselves that a key
reason to have managers is so that owners do not have to do all of the workforce
management themselves:
Managers come in to help to take the workload off the owners, and having now looked at
the principal-agent problem we can see that having them helps to remove some of the
monitoring load from the principals. But in turn, managers need to be monitored too. In
sum, we can say: Managers can help principals to watch employees, and to make sure that
they are performing in line with the principal’s wants. However, managers also represent
a principal-agent problem themselves, as principals cannot be sure that managers are
always acting in the best interests of the principal.
A key mechanism that companies use, when they are trying to reduce the principal-agent
problem with senior management, is stock options. Stock options are the right to buy shares
in the company for which you work. The idea is that if you hold stock in a company, you are
more likely to want the company to do well and thus act in line with the principal’s wishes:
maximising your utility is now linked to maximising the company’s value and thus to
maximising the principal’s utility.
However, this is not a perfect system. Firstly, it makes the assumption that the manager’s
goal is to maximise their money when their goal may be something else entirely. Perhaps
they are interested in having an enjoyable life or engaging with interesting new projects.
Additionally, the impact of a manager’s actions on the price of a stock may be negligible, as
stock ownership is diluted between many people (Hall and Murphy, 2003), and a poor
manager can still be rewarded by a well-performing share price.
Listen to more about how Tim Harford (the undercover economist) believes stock options
have shaped the modern economy here: https://www.bbc.co.uk/programmes/w3csz2x6
5.6 Problems with principal-agent theory
Principal-agent theory is a key theory that we will return to repeatedly in Core Management
Concepts, so it is a good idea to work hard on understanding it. It is therefore also important
to understand its shortcomings.
The key shortcoming that is of interest to us is the idea that principals and agents are only
interested in maximising their own utility. This is an overly simplistic and often wrong
assumption about human behaviour. At future points in Core Management Concepts, we
will look at a number of theories and research which provide evidence that this is not true
(the Human Relations Approach and Behavioural Economics will be two notable examples).
For the moment, we can use common sense to argue that we are not always focused on
maximising our own utility. As human beings, we are simply not so rational.
Imagine you are a manager who has been sent an email by your business owner, asking you
to provide your opinion on whether the business should pitch for a new client. You don’t get
a bonus for bringing a new client in, and you’re already as senior as you can be without
taking the business over yourself. According to principal-agent theory, you don’t have any
very good reasons for saying yes. You can see the long evenings of working late, preparing
for the client pitch, stretching in front of you. You like your boss, and it appeals to you to
want to be nice to him, but it will also mean that you have less time to work on the side
project you’ve begun, outside of work, to launch your own consultancy practice. This really
is your goal at the moment: to be in a position to quit your job in the next year and move on
to running your own business. And yet, despite it not appearing to be an optimal use of your
time, or helping you to meet your goals, you say yes. You have not optimised your utility –
you have acted irrationally in line with what is important to you, and yet you have done it.
There are plenty of times when we all act in ways which do not optimise our utility.
Principal-agent theory also struggles to deal with the ideas of morality and selflessness. It
may be that, despite it not maximising one’s utility, a manager or worker chooses to help
out the company in some way. For example, they decide to stay late to help prepare for an
event the next day. It has a negative impact on their utility, but they feel compelled to help,
or believe it is the morally right thing to do. Economists may choose to argue that they are
maximising their utility as they feel good from helping, but it is up to you to decide where
you sit on this debate: does the good feeling that you get from helping or from acting
morally – despite what you might be giving up to help – fully explain what is happening
here?
A final assumption to consider is that principals are believed – in the model – to have
limitless capacity for processing which approach to monitoring and incentives out of
virtually limitless options is the optimal one. This is, of course, an unrealistic assumption.
And finally, as we have seen above, the assumption that incentives can successfully align the
interests of the agent with the principal is a big one, and one which research does not justify
by, for example, showing how it is hard to align the interests of agents and principals with a
stock ownership scheme that is so diluted by so many stockholders (Hall and Murphy, 2003).
6 Why Do We Need Managers Quiz
Please attempt the quiz on the VLE – You can find it on the course page here:
https://emfss.elearning.london.ac.uk/course/view.php?id=475#section-1
7 Unit Summary
In this unit, we have seen a range of reasons that we need managers:
-The rise of large corporations means it is not feasible for business owners to run everything
themselves.
-Managers thus help owners to run the business, monitoring, controlling, coordinating and
motivating staff on behalf of owners
-In particular, managers can help owners to reduce the principal-agent problem where it
affects the workforce by acting as a monitor on behalf of the principal.
We have also seen that, in introducing managers, owners create some additional problems
for businesses:
-Managers are agents who may not act in the principal’s best interests
-The principal-agent problem thus affects the relationship between the owner and the
manager at all levels: senior managers, middle managers and supervisors up and down the
hierarchy.
As such, this unit has provided a good introduction to why we have managers and begun to
introduce the topic of what managers do. In the next unit, we will be focusing on the range
of tasks and activities that managers.
Block 2: What Do Managers Do
Essential readings:
Boddy, Chapter 1: Managing in Organisations. A great introduction to why we need
managers.
University Press, 2014). Theme 2: The Agency Problem - The Agency Problem in particular is
central to many of the concepts that we encounter, so it is important for you to have a good
understanding of it. These readings will help to develop your understanding.
University Press, 2014), Chapter 2: The Firm. Transaction Cost Econonmics is a topic that
students find tricky on this syllabus. This provides more detail of what it is and why it’s
relevant for managers.
Tim Harford podcast, 50 things that made the modern economy, episode on Management
Consultants. https://www.bbc.co.uk/sounds/play/w3csv3gr We don’t touch on this topic directly,
but it’s a nice thoughtpiece if you’re keen on understanding the world that managers
operate – isn’t it odd to have an occupation (manager) who has a consultant hired to
oversee their work (management consultant)?
Braverman, H. Labor and monopoly capital (New York: Monthly Review Press, 1974) [ISBN
9780853453406], Chapter 2: The Origins of Management. This is an important book
critiquing capitalism. This chapter describes (critically) the rapid rise of management during
early capitalism, bringing significant new opportunities but also challenges to society.
Coase, R. (1937). The Nature of the Firm, Economica, 4(16), pp.386-405. This is an incredibly
useful and remarkably easy to follow reading giving a clear account (from Coase’s
perspective) on where firms come from.
Jensen, M.C. and W.H. Meckling ‘The theory of the firm: managerial behaviour, agency costs and
ownership structure’, Journal of Financial Economics 3 1976, pp.305–60. This is a key text on
agency theory, although quite tricky to read in places.
https://hbr.org/2011/12/first-lets-fire-all-the-managers - an article looking at why MorningStar
chose to do away with managers. It’s useful because (a) it explains why firms need
managers and (b) how MorningStar are trying to do something different
https://hbr.org/2013/12/how-google-sold-its-engineers-on-management - this is useful because it
explains what happened when Google tried to do without managers, and how it showed the
importance of managers for Google.
2 Introduction To This Unit
2.1 Introduction to this unit
In the previous unit, you have learnt that management is a necessary function of large
organisations, if they do not want the owners to have to do all the work of coordination and
control across the organisation. You have also learnt that managers have a role to play in
setting direction and motivating staff.
In this unit, we will give more structure to our understanding of what a manager does, using
a number of models and theories of management. We will begin by looking at different
perspectives of what management is. Then, we will compare compare and contrast work by
Drucker (1974) and Mintzberg (1975), considering two different perspectives on what
managers do. Later, we will look at how precisely what a manager does is likely to differ
dependent on the context they are working in, and in particular what level they are at in the
organisation.
By the end of this unit, you will be able to look at what a manager does from a number of
different perspectives, and be able to compare and contrast the values that these models
bring to your understanding.
3 The history of studying management
3.1 The history of studying management
Before we move on to look at specific models, it is useful to spend a moment looking at how
we came to see management as a subject worth studying. As you saw in the previous unit,
managers emerged as a response to the running of large, complex organisations and
became a common feature of workplaces in the 19th century as part of the transformation of
the workplace during the industrial revolution.
With the growth of large firms, there was unsurprisingly a growth of practitioners and
theorists with opinions on how to run firms most efficiently and profitably, and how to
manage within those firms. Early business schools were formed, to try to help business
owners and their managers to operate optimally. These early business schools set the
mould for how we still teach management today, in a way that is defined by borrowing
ideas from a range of other social sciences, including psychology, economics, mathematics,
engineering, anthropology and sociology. For example, you have already been introduced to
Transaction Cost Economics and the Agency Problem. These are taken from economics to
help us understand what managers and owners routinely do, and should do.
Contemporary studies of management continue to borrow from social sciences and

contribute to the wider field of social sciences.
This ‘eclecticism’ – working across the social sciences in order to answer questions that
matter to managers – means that one may find various answers to the same question by
consulting different areas of the management field. For example, you will form a very
different idea of what good management looks like dependent on if you as a classical
economist (e.g., good managers should optimise their resources) or a sociologist (e.g.,
managers should look to understand organisational culture if they want to be effective).
(Willman 2014).
4 What Managers Do
4.1 Who Does Management
There are two primary ways to think about what management is. The first is seeing
management as something that we all do, whether we are at work or not. As humans, we
‘manage’ many aspects of our lives, such as our personal finances, our families, our diaries,
and so forth. In our own lives, we are often focused on ‘getting things done’ with the aid of
other people and resources. (Boddy, 2014; Stewart, 1967). In this sense, we are managing
our lives.
In contrast, we can also see management as a distinct role, which happens when we
separate the ‘doing’ element of a task from the ‘managing’ of it. You saw this in the previous
unit, where we looked at the separation of ‘doing’ from ‘managing’ in the factory
environment. When we looked at the example of Google in the previous unit, and how the
engineers had to be persuaded of the value of management, this was an example of the
engineers not wanting managing to be separated from doing (Boddy, 2014; Levy, 2011).
Two ways of conceptualizing management (Boddy, 2014)
In a work context, people who are in charge of people, processes, projects, or work streams
are often referred to as ‘managers’. It is the work undertaken by these people that we are
interested in for this module, Core Management Concepts. However, often those who are
not in a formal managerial position are asked to pick up some of this workload. Therefore,
we are interested in the role of manager, and the sorts of tasks that are encompassed in
managerial work.
4.2 What managers do - according to Peter Drucker
We will now focus on the tasks that managers carry out, and look at two models which
attempt to describe what managers do.
The first is a simple list. There are plenty of these lists, but we are focusing on one created
by Drucker in the 1970s. He wanted to (a) summarise what he believed managers did with
their time and (b) also to provide a prescription of what they should do with their time.
Note that his list is based on his experience in the field, but not on a specific piece of
research. Rather than study what managers do directly, or ask them, he used his prior
experiences of working with managers to generate a list (Drucker, 1974).
This list reflects his belief that good managers undertake a set of tasks. All managers are
required to carry out the tasks on the list that he generated: setting objectives; organising;
motivating & communicating; developing self and others; and measuring performance. We
will look at each of these elements in more detail below, as a starting point for thinking
about what managers do.
As you read this list, you should think about whether you feel that this list successfully
encompasses the work that a manager in the 2020s does or if you would change anything.
• Setting objectives
An objective here is a goal or target. Managers are routinely required to decide what
needs to happen in the future and set the goals or targets to get there. These can be
objectives for their projects, teams, colleagues and/or themselves. This can range
from the sorts of large-scale strategy exercises which make plans years ahead (and
which you will be looking at towards the end of Core Management Concepts), to
more immediate goals for this month, this week, or even today. Short-term
objectives will often be based on longer-term objectives: if the plan in the next three
years is to win 500 new clients, then the plan for this month may be to win 15
clients, and to increase advertising.
• Organising
Organising moves abstract plans closer to reality by deciding how to allocate time
and effort. It includes creating a structure for the enterprise, developing policies for
HRM, deciding what technology people need, and how to encourage innovation.’
(Boddy, 2014: 21). Here, we are thinking about implementation, Drucker believed
that a key responsibility of a manager was to make optimum use of the resources
required to enable the successful carrying out of plans and objectives. We can see
that this is still a big focus for management today, with limitless advice across the
major business platforms (e.g., Harvard Business Review, TED talks, Forbes) and
social media outlets (e.g., Instagram, Medium, Twitter, LinkedIn) on how to be well-
organised at work.
• Motivating & Communicating
The focus here is on human interaction. Drucker sees managers as having an
important role in interacting with those around them. However, he combines two
very different types of interactive skill into one element of the managerial role.
Communicating is the exchange of information with another party to achieve a
mutual understanding. In the case of management, good communication can be
critical to the success of a project, making sure that everyone knows what is
expected of them, can set the direction, and can provide a way to check in on
performance and to speak up in case of problems.
To motivate is also about interaction, but it purposeful: it is focused on encouraging

people to commit to a course of action. In this case, Drucker believes a manager has
an important role to play in motivating staff to achieve objectives. Drucker said that
the manager ‘is uniquely expected to give others the vision and ability to perform.’
(cf:https://www.bl.uk/people/peter-drucker.) We will be focusing on motivation in
an upcoming unit.
• Developing people, including him/herself

Another people-based function, Drucker believed that managers had a responsibility
for learning and development. It is through development that people are given the
ability to perform and the skills to meet objectives that may otherwise be out of
their reach. A manager thus has a role in being aware of how development may be
needed in order to achieve targets and to meet those targets. For example, if an IT
manager is tasked with implementing a new IT system across the organisation, but
knows that her team are not skilled at using the new IT product themselves yet, then
developing their skill at using the system will be key to helping others to learn to use
it.
• Measuring
A manager will need to check progress against plans, taking corrective actions
(through the other functions) where necessary. We will be returning to the idea of
measuring and monitoring many times during Core Management Concepts, but most
notably in the unit on Performance Measurement. An example may be that if a
manager has set the objective for her team of achieving 10% growth in sales this
year, she will want to measure the ability to meet the target throughout the year,
taking corrective action if necessary to stay on target. Or, if the target is revealed
throughout measurement as being too easy or too difficult, due to market
conditions, she may want to adjust the target accordingly.
Despite being based on management in the 1970s, Drucker appears to have been describing
characteristics of managerial work which are still present today. In particular, the five
functions that he mentions are still common features of what today’s managers do: they
resonate with contemporary work. Nothing on the list has become obsolete or has been
shown to be wrong. We can also use it as a starting point for understanding the skills and
abilities that a manager needs to have and so help managers to diagnose where they need
help in improving their skillset as a manager. For example, if they read this list and realised
that their skills of measurement were weak, they could work to improve upon that. Or, if
they realised that they were not sufficiently focused on developing their staff, they could
spend more time and budget on doing so than they currently are.
However, Drucker’s list was not based on first-hand observation or research: it was based
on his experience of what he thought managers did, and also what he thought they should
do. As a result, he did not generate any evidence to say that this list was exhaustive, and nor
could he give us any insight on, for example, how long managers did or should spend on
each component of their role. Due to his lack of research, we have a list that feels
instinctively right and appears to relate to our own experiences of managing and being
managed, but it is not scientifically researched.
Also note that Drucker’s list does not speak to the agency problems that we identified in the
previous unit. As a reminder, the agency problem occurs because the agent does not have
the same interests as the owners. In Drucker’s theory, he makes little reference to the
control element of the manager’s job – in other words, to the role that they play in making
sure that workers enact the principal’s wishes. In talking about setting objectives, measuring
and motivating, Drucker is providing some indication that the manager may need to exercise
direct or indirect control. Through measuring, they can monitor for signs of trouble with the
intention of taking correct action if necessary. Through motivating, they can (if they choose)
encourage the worker to act in line with the principal’s interests. But according to agency
theory, monitoring and controlling need to be significant elements of the role.
Also, because Drucker is discussing what managers should do, as opposed to what they can
choose to do, he does not acknowledge that managers may choose not to act in the
principal’s best interests. So rather than setting objectives that benefit the principal, they
may focus instead on benefitting themselves.
4.3 What managers do - according to Henry Mintzberg
Drucker based his list on his own suppositions, as opposed to first hand research. This is not
good practice in the field of social science today, where there is an expectation that claims
made need to be backed up by solid data.
As a response to the lack of data on what managers actually do, Henry Mintzberg undertook
studies to find out (1973; 1990). (NB: Mintzberg is also a prominent management theorist
who you will meet a number of times in Core Management Concept in relation to other
theories, too.)
He analysed how managers spend their days, through observation as well as asking them to
keep a diary. He found the following:
• Managers’ work was varied: it comprises of lots of different tasks. Drucker created a
list of only five types, but Mintzberg identified ten task types, which he split into
three categories (see below).
• Managers’ work was fragmented: rather than spend hours on one task, they move
quickly between different, shorter tasks.
• Rather than being the sort of meticulous planners that Drucker categorised them as,
managers spend a lot of time undertaking ad hoc tasks and engaging more
spontaneously with those around them.
Category Role Activity Example from a workspace

redesign project
Informational Monitor Seek and receive Receive proposals from designers,

information, scan look at research on what good
reports, maintain office design looks like, find out
contacts on LinkedIn if anyone has
recommendations for office
designers
Disseminator Forward Share information with others to

information, send help them make decisions
memos, make
phone calls
Spokesperson Represent the unit Meet with designers to explore

to outsiders in possibilities and to clarify what
speeches and the department is looking for.
reports Seek budget and approval from
seniors
Interpersonal Figurehead Perform ceremonial Cut the ribbon when the new
and symbolic duties, building design is opened
receive visitors
Leader Direct and motivate Influence team to use new

subordinates, train, breakout spaces to hold meetings
advise, influence
Liaison Maintain links in Stay in touch with designers to

and beyond the deal with problems with new
organisation design
Decisional Entrepreneur Initiate new Offer tours to clients of the new

projects, spot office space to build up
business relationships
development
opportunities
Disturbance Deal with crises, Deal with delay in building plan

handler take corrective caused by global pandemic
action, resolve
conflicts, adapt to
changes
Resource Decide who gets Divide up budget for new

allocator resources, as well as equipment and furnishings
schedule, budget between teams, according to
and set priorities need
Negotiator Represent unit Work with senior managers to

during union ensure that they are happy with
negotiations, and the budget spend that the new
defend interests project involves
(Based on Mintzberg, 1973; 1990, and Boddy, 2014)
Note that Mintzberg creates another list of what managers do, but this time it is based on a
data set, which is comprised of his own observations of 5 CEOs alongside synthesis of
others’ data on what managers do (such as Stewart’s (1967) data set of 161 managerial
diaries). His list is more extensive than Drucker’s, and has this focus on tasks that are more
spontaneous and ‘in the moment’ in comparison to Drucker’s belief that managers are
persistent planners. He also shows that the managerial role has the potential to be far more
varied than Drucker’s list suggests. Despite Mintzberg’s research being relatively old, and
based on a management era that pre-dates digital working, its work in showing us that
managerial work is more ad hoc and fragmented is critical for our understanding of how
managers work and what they do.
What Mintzberg gives us is more of an insight into what managers spend their time doing,
and he lays the ground for more detailed studies of management which prioritise data,
another of which we will look at in a moment.
However, before we do, you now have the opportunity reflect on the value of Mintzberg’s
work.
4.4 What managers do - discussion group topic
What do managers do?
Write down 5 activities that you think managers most often do, discuss with your classmates
or add your thoughts to the discussion forum.
4.5 Feedback
Your answer may have included any of the following (and perhaps more categories besides):
Feedback
Answer:
Likely to include activities from Drucker or Mintzberg:
May include Garvin
From Drucker
Setting objectives
Organising
Motivating & Communicating
Developing people, including him/herself
Measuring
From Mintzberg
Managers’ work was varied: ten task types split into three categories
Informational
Monitor
Disseminator
Spokesperson
Interpersonal
Figurehead
Leader
Liaison
Decisional
Entrepreneur
Disturbance handler
Resource allocator
Negotiator
Garvin (2013):
A good manager:
1. Is a good coach
2. Empowers the team and does not micromanage (See the sidebar “How Google Defines
One Key Behavior”)
3. Expresses interest in and concern for team members’ success and personal well-being
4. Is productive and results-oriented
5. Is a good communicator—listens and shares information
6. Helps with career development
7. Has a clear vision and strategy for the team
8. Has key technical skills that help him or her advise the team
5 Applying Mintzberg's theory of what managers do
5.1 What do managers do ?

Think of a time when you were responsible for managing an activity. It could be at work, in
school, university, or even when you have just been organising a night out or a trip with
friends.
Give examples of what you did under one or two of Mintberg’s roles.
Category Role Activity
Informational Monitor Seek and receive information, scan reports, maintain

contacts
Disseminator Forward information, send memos, make phone calls
Spokesperson Represent the unit to outsiders in speeches and

reports
Interpersonal Figurehead Perform ceremonial and symbolic duties, receive

visitors
Leader Direct and motivate subordinates, train, advise,

influence
Liaison Maintain links in and beyond the organsiation
Decisional Entrepreneur Initiate new projects, spot business development

opportunities
Disturbance Deal with crises, take corrective action, resolve

handler conflicts, adapt to changes
Resource Decide who gets resources, as well as schedule,

allocator budget and set priorities
Negotiator Represent unit during union negotiations, and defend

interests
(Based on Mintzberg, 1973; 1990, and Boddy, 2014)
Do the ten roles that Mintzberg lists cover everything that you did when you were
managing? Is anything missing?
What are the limitations more generally of Mintzberg’s work in describing what managers
do?
6 Limitations with Mintzberg's research
6.1 Limitations of Mintzberg's research
Mintzberg’s work is valuable for categorising managerial work into set tasks, but it was
written prior to the digital age, and thus may be missing tasks that are critical today such as:
• Engaging with social media. This may be encapsulated under the general heading of
‘spokesperson’ but it is not just about representing the organsiation outside but
rather about engaging with stakeholders in this way.
• Dealing with information overload. A key challenge that the digital world presents is
that we are bombarded with far more information than Mintzberg and the managers
he studied would have experienced. Knowing how to deal with this can be a key part
of the role. It may be encapsulated under the heading of ‘monitor’, but the word
‘monitor’ doesn’t give a sense of how overwhelming this information can be for
managers.
• Role modelling. This has been an important topic in the managerial field in the last
few years. Managers are seen to be a reflection of the organisation and its culture,
and so need to show their affiliation to this by modelling the behaviours and
attitudes that are expected by the company.
• Supporting and/or safeguarding. As work becomes more pressured, managers have
an increasing responsibility to watch out for employees who are suffering, to flag any
problems, and perhaps even to help them find mechanisms to cope. Mintzberg’s
model does not spend much time dwelling on the supporting element of the
managerial role.
• Influencing upwards. We mentioned this in relation to Drucker, too – that it is
missing. A key part of the role of any manager who is not at the most senior level is
to ‘advise, influence and assist their boss – over whom they have no formal
authority.’ (Boddy, 2014: 19)
• Undertaking their own (non-managerial) work. Managers also have a role as workers
in most situations, meaning that they have to do the work of the organisation.
Mintzberg’s research on managerial roles also overlooks the agency problem. We discussed
this in relation to Drucker already, but the same argument holds:
• Managers do not always act in the best interests of principals, but the study does not
seem to pick up on, or highlight this. As Mintzberg’s studies are based on data, we
could argue that this is because the data did not show it. But it may also be because
it is not something that Mintzberg was looking for when he analysed the data and
that it was there but was (a) not spotted or (b) ignored.
• Workers do not always act in the best interests of principals, but the study does not
make much of the control and monitoring aspect of the manager’s role.
7 The importance of context for understanding managerial
work
7.1 Context is important
One additional limitation of Drucker and Mintzberg’s work is that they try to generalise
across all managers to ascertain what all managers do. Management work is hugely varied.
A senior production manager in a large pharmaceutical firm such as Roche will carry out a
very different set of tasks to the volunteer manager of a living history museum. Their work
will have commonalities, but will also be markedly different. It would not be easy for the
volunteer manager to step into the shoes of the senior production manager or vice versa.
Context is thus important. We will look here at two elements of context; level of seniority,
and organisational culture, to make the point. There are, however, other contextual factors
that will shape what is expected of managers, including industry norms, country culture, and
competitive pressures. For example, a company in the highly competitive US supermarket
space will require a very different type of manager to a high-end Swiss auction house.
7.2 Context of management seniority
Senior
managers
Middle managers
First-line managers
People doing the work
• People doing the work: these are people who do the work that is needed to deliver
the products and/or services which they sell. They can be directly involved in the
creation of products or services (e.g., working on the production line in a factory, or
flying the planes for British Airways), or they can be indirectly involved in a
supporting role (e.g., cleaning the offices, or providing legal counsel to the firm).
These people may be undertaking some aspects of management work, for example
managing their own projects or a small budget.
• First-line managers: also called supervisors, these are the employees who, litearlly,
supervise the work that is taking place by the people doing the work. They will have
a heavy focus on monitoring the work that is taking place, spotting problems and
helping the people doing the work to complete their tasks. They may ‘do the work’
themselves as well, for example being the Assistant Head Teacher at a school but still
teaching a class part-time themselves. Where first-line managers are managing
skilled professionals, it can be very difficult to perform their role as the skilled
professionals may not want to be managed (remember the example of Google’s
engineers not wanting to be managed?) (Boddy, 2014).
• Middle managers: these workers are responsible for supervising the first-line
managers. They are responsible for making sure that the first-line managers work in
line with company policy. Middle managers are thus responsible for ‘translating’ the
strategy that flows down from the top of the organisation into objectives and tasks
which the first-line managers can make use of or ‘operationalise’. Middle managers
are closer to what is going on ‘in the field’ with the first-line managers and the
people doing the work than the senior managers are, and so the middle managers
have a role to play in making sure that the senior managers stay in touch with what
is happening further down the organisation. Increasingly, even those at middle
management level are expected to do an element of the work of the organisation,
rather than ‘just’ managing (Best, 2021). In large organisations, there may be a
number of different levels of middle managers – perhaps 2 – 4. Those middle
management layers nearer the bottom of the organisation will have roles more
similar to the first-line managers; those layers close to the top will have roles with
more in common with the senior leadership team.
• Senior managers: Senior managers are responsible for managing the business. They
are usually a smaller group, and are responsible for enacting policy and strategy. In
an owner-operated business – where the owners work for the company – the senior
managers are acting on their own behalf. So, the lawyers in a partnership are the
senior managers AND the business owners. The owner-manager of a bakery is both a
senior manager and the business owner, too. Where senior managers do not own
the company they are paid to take action on the owners’ behalfs, in accordance with
their wishes. In a publicly listed company, for example, the senior managers will
usually receive a salary to work on behalf of the owners. More hybrid models are
possible, too, where senior managers own some, but not all of the business, or
where some senior managers are owners and others are not. The level of decision
making authority and the decision making structure at this most senior level will
differ dependent on the precise operating structure and the approach to corporate
governance that the company takes.
What you can see, from the descriptions of the different levels above, is how the role of a
manager changes as they climb the hierarchy. At the lower levels, At the lower managerial
levels, managers will be undertaking more operational management tasks and focusing on
worker productivity and performance. As managers climb the hierarchy, they spend more
time engaging with strategy and setting direction.
7.3 Context of organisational culture
Drucker and Mintzberg appeared to suggest that management was the same the world
over. However, as we have already seen in relation to the differing levels of management in
the organisation, there are likely to be local differences in what is expected.
Of particular interest to organisations in the intervening decades has been developing

workers and managers who fit the organisation’s culture. Therefore, developing managers
with skills and behaviours which fit a company’s culture can be important, and shows again
how what counts as (good) management depends on context. In order to make this point,
we will return one more time to our example of Google.
You will remember that Google had a difficult job initially, trying to persuade its engineers
that management had a value. They used their status as a ‘data organisation’ to track what
worked, and what didn’t, in terms of management in their organisation. They found that
good management practice had ten dimensions, which have been updated a number of
times since the initial research – again, based on data and showing good statistical
significance – to create this list of 10 behaviours of Google’s best managers:
• Is a good coach
• Empowers team and does not micromanage
• Creates an inclusive team environment, showing concern for success and well-being
• Is productive and results-oriented
• Is a good communicator — listens and shares information
• Supports career development and discusses performance
• Has a clear vision/strategy for the team
• Has key technical skills to help advise the team
• Collaborates across Google
• Is a strong decision maker
These characteristics of a good Google manager tell us much about Google’s culture: that it
values collaboration across the firm; that they straddle the detail and the big picture,
knowing when each approach is relevant; and that they are both decisive and visionary in
their actions. A question might be whether this is a useful model, not just for Google, but for
managers more generally. Is this combination of ‘winning’ attributes unique to Google or
would it help other companies looking to develop 21st century management approaches?
The study makes a useful contribution to Google. It firstly justifies the need for management
and provides direction in terms of how to be a good manager within Google’s culture. As a
result of this project (called ‘Project Oxygen’), Google has a clear language about what is
important for them from a manager, and can appraise its managers on these
characteristics, and can run laser-targeted training and development to help managers
improve on these dimensions.
It also makes a useful contribution to our understanding of management more generally,

potentially providing us with a list that updates Mintzberg’s approach for today’s manager.
However, despite a range of organisations and business schools now using this as the basis
for their own management education and training, we have to remember that we are
looking at a dataset which tells us about good management in Google. It was never intended
to be a recipe for good management everywhere (although it does have much in common
with studies of what makes a good leader that we will consider later in Core Management
Concepts).
Additionally, it is hard to make a link between these management skills and the bottom line:
Google can see that these management activities have a positive impact on teams, but it is
harder to track this all the way through to profit at the company level. Finally, it ignores the
aspects of what managers do that don’t fit neatly into being ‘managerial’. It doesn’t talk
about influencing upwards, or doing the work of the organisation.
However, its real value for us here is in that it shows that the way to understand what is
needed in a management role is to be highly contextual: look at the level of seniority, the
organisational culture and any other contextual elements that you feel may be important
before you decide what it is the job entails and what should be the focus of energy.
Management is, by its very nature, responsive to situations, problems, emerging work and
so forth. As such, we are best to understand management as a set of actions or activities
which are shaped by a particular operating context.
8 What Do Managers Do
Please attempt the quiz on the VLE:
9 What Do Managers Do Summary
9.1 Summary
In this unit, we have considered what managers do. We begun by defining what a manager
is, and then explored the theories of Drucker and Mintzberg to explicate the types of
activities that a manager might perform. We saw that these theories take us some way to
understanding the work of a manager, but they are not conclusive, and do not take context
into account. We then explored how the level of seniority, and the cultural context, can and
should shape what a manager does.
This unit should leave you with a sense that managers undertake a wide range of tasks, and
that this range is possibly growing as a result of digital transformation. Additionally, the
models tend to focus just on the ‘managerial’ components of the role, e.g., managing the
people and projects they have been tasked with. As such, there is a need for us to recognise
that managers also:
• Influence up
• Undertake their own work
Additionally, all the managerial models we have looked at are woefully quiet on the agency
problem – ignoring the idea that managers may choose to act against a principal’s best
interests, and not fully acknowledging the role of monitoring that managers may need to
play to reduce the agency problem that occurs between the workforce and the principal.
Block 3: Finding The Best Way To Manage
Essential readings:
Boddy, Chapter 1: Managing in Organisations. A useful introduction as to what managers
do.
https://hbr.org/2013/12/how-google-sold-its-engineers-on-management - explores
what happened when Google dispensed with management, and the subsequent research
they conducted to identify what value managers actually add at Google.
Recommended readings
Mintzberg, H. ‘The Manager’s Job: Folklore and Fact’, Harvard Business Review, March 1990,
pp.163–176. Browse the online library's A-Z of journals to find this article.
You may also want to read the British Library website biography of:
Peter Drucker: Father of Post-War Management Thinking. A clear summary of Drucker’s

work, showing him as a researcher with wide-ranging interests in management. He
theorized in many related areas and his work developed over time, as this summary shows.
Henry Mintzberg: Management Thinker. A clear summary of Mintzberg’s work, showing

him as a researcher with wide-ranging interests in management and related topics.
Robbins, S., and Coulter, M. (2021). Management Global Edition, 15th Edition. Harlow:
Pearson, Chapter 1 – a good summary of what management is
Pearson, ‘Management History Module’ (following on from Chapter 1. A great summary of
key stages in management history, so you can see the work of Drucker in the context of
other topics you will be learning about
2 Finding The Best Way To Manage
2.1 Optimising Performance
We learnt, in earlier units, that company owners need managers to help them optimise
performance in the firm. Without managers, company owners are responsible for too much
– having to coordinate and control the efforts of many workers, and unable to monitor
them closely to see if they are doing their work as they should. Managers help with this
process by providing monitoring, coordination and control.
They also have a role to play, as we have seen, in optimising the owner’s resources. This
means that managers should pay attention to extracting value from the employees, and the
equipment that the owners have bought to enable the workers to do their tasks.
In early industrial settings –a textile factory, for example – this would have meant making
sure that workers worked hard on the looms, putting in enough hours to more than cover
their salaries and the overheads of the machinery. The owners would want to extract a
hefty profit, and they would expect the managers to help them to do so. In work today, we
may not notice this is happening, but when we look around an office space, that is precisely
what is going on: company owners need workers to work hard enough to cover their
salaries and the costs of the equipment that they need to do their work. Owners will want
workers to put in higher value work than just the costs of employment, as the extra earnings
that the employee brings in will help the company to make a profit. The better workers
perform, the more profit the owners can hope to make.
This is one of the reasons why the early factory setting glorified the optimisation of
productivity. In so doing, they took an approach to managing staff taken from engineering
(Willman, 2014). Back then, there was a strong belief in the power of machines, which were
an increasingly dominant feature of the industrial workplace. There was a belief that
machines were key to progress. Optimising the performance of machines would increase
output. Why not extend this attitude to people? How could workers, equipment and so
forth be optimised to derive maximum value? Applying science and engineering to the
factory – machines and staff – in order to drive outputs was seen to be the ideal (Witzel,
2002).
This was not the first time that organisations had sought to optimise output. One historic
example of the same is from Venice’s Arsenale in the 1500s, producing ships and arms to
fight wars. They discovered that an optimal way to organise the work force was in an
‘assembly line’, where each worker carried out a little bit of the build, becoming highly
specialised (and therefore quick and accurate) before passing the object on to the next
expert to build the next part (Willman, 2014).
However, where the Arsenale was the exception in the 1500s, in the late 19th century, the
factory became standard place, and optimisation of labour and output became common
aims.
We are not just having this recap on history because it’s interesting (although hopefully you
find that it is). It’s because it paved the way for a scientific approach to management which
is still relevant to our understanding of workplaces today.
However, before we wind forward to the 21st century, we need to stay with the late
19th/early 20th century a little longer, so we can examine the work of possibly the most
influential management thinker ever: Frederick Taylor. The father of Scientific Management
3 An Engineering Approach To Management
3.1 Frederick Taylor & Scientific Management
Many management theorists emerged in the late 19th and early 20th centuries who were
convinced that applying scientific principles to the management of organisations would
bring higher productivity and more efficient workspaces. They were looking for the ‘one
best way’ to manage work and tended to create lists of ‘things to do’ as a result. F.W. Taylor,
the father of Scientific Management, is no exception.
Frederick Taylor watched men shovelling iron at the Bethlehem Steel Company, who were
at that point overloaded with iron and not able to move it at the speed desired by the
owners (and therefore the managers).
Through observation and controlled experiments, alongside a desire to find the ‘one best
way’ to perform the task, Taylor discovered that the optimal shovel for lifting carried 21.5lb
(just under 10kg) – any more and slowed down the work and tired the workers; any less and
it was an inefficient use of the worker’s shovelling). His analysis was peppered with
equations such as:
B = (p + [a + b + d + f + distancehauled/100 x (c + e)]27/L)(1 + P)
(Taylor, 1947, c.f. Stewart, 2009)
He was taking maths where it had not previously been, engaging in quantitative analysis to
measure and control human behaviour with the idea of improving output significantly. It
appeared to work; he claimed that with his approach, the men could lift nearly four times
their previous daily amount.
Perfecting this task was not enough for Taylor: he created the ‘principles’ of his approach,
which later formed the basis of his book ‘The Principles of Scientific Management’ (1910).
The principles are:
• Replace a ‘rule of thumb’ method with a scientific method for each element of a
man’s work
This is where Taylor’s method of observation and experimentation comes in, to create a
scientific basis for the choice of the ‘one best way’ to do the task. This usually meant that
the task was broken down into simple components which are quicker to learn and complete,
than cycling between a range of tasks. A narrowly defined repetitive role is easier to learn,
improve upon and deliver to a precise timing. Different workers perform different simple
tasks and thus share the workload between them in this way.
• Scientifically select and then train, teach, and develop the workman
In Taylor’s time, this meant that workers should be chosen based on having the right
physical characteristics to perform the sort of heavy labour that was expected of them.
According to Taylor, to shovel pig iron, a man (this was assumed) needed to have stamina, a
need to earn cash, and low intelligence. This sounds neither appropriate, nor scientifically
robust, in our knowledge today. But it is not so different to the idea that we do carry
forward of the ‘right person for the job’ based on their aptitude for it – whether it is a sales
role, a heart surgeon or a professional ballet dancer. We are unlikely, however, to insist
upon low intelligence as a requirement.
• Ensure cooperation between the workers and the men to ensure all work is done in
accordance with the principles
Taylor advocated the close supervision of employees. This ensured adherence to best
practice. As management students, we can see that here, Taylor is (perhaps unknowingly)
dealing at least in part with the agency problem that exists between the worker and the
owner. (It does not, however, acknowledge that there may still be an agency problem
between the manager and the owner that these principles do not account for). The workers
needed to be comfortable with being closely supervised for the system to work. There was
not the space for workers to make suggestions for process improvement, or to step away
from the ‘one best way’ that had been decided upon by management.
• The separation of conception from execution: The task of planning work (conceiving
it) and carrying it out (executing it) should be separated. As such, Taylor justified the
use of managers in an environment such as this, with the managers planning the
work in order to optimise its performance, and the workers carrying the work out in
precisely the way prescribed by the managers. This way, both parties are carrying
out the task they are best suited to.
A fifth element, not listed by Taylor as a principle, because he saw it as underpinning
everything else, was the use of incentives. Managers better for better work (in other words,
pay based on measurable performance) and the workers therefore give their best. He
recommended paying good workers well for a good day’s work, to motivate them to
perform their best. Linking performance with pay was seen by Taylor as the way to drive
maximum outputs from the workers.
The approach detailed above, originated by Taylor, is called both ‘Taylorism’ and ‘Scientific
Management’ and has been highly influential in the development of work.
3.2 Reflection (individual work)
If you were a worker in Bethlem steelworks, how would you have felt, do you think, when
Taylor’s methods were introduced? Would you have been pleased or upset? Why?
Post your thoughts on the discussion group, and then retain your notes, as we will return to
this topic later and you will want to be able to use what you put.
3.4 The legacy of scientific management
Thus, Scientific Management represents one of the early attempts to optimise performance
of workers by taking an engineering approach. The Gilbreths – Lilian (a psychologist) and her
husband, Frank (who worked in the construction industry) applied similar principles to their
time and motion studies. These studies detailed the motions of the body and focused on
how to improve workers’ body movements to improve efficiency in the workplace (1911).
Gilbreth in about 1916

Scientific management in general and Taylor’s version in particular left a substantial legacy.
The engineering efficiency approach to the design of work generated huge returns. As such,
many large businesses adopted it – not always in full, but at least in part (Stewart, 2009;
Nelson, 1992). Much of the thinking was to become incorporated in the academic disciplines
of management science (which you will study in a later unit). In the 1920s, the ultimate
expression of the engineering approach to production came to be. It began in the car
industry, in the factories of Henry Ford, where he introduced a moving production line
where the cars went past the workers who were each responsible for a small part of the
required labour to construct the car. For example, one might attach the driver’s side door
whilst another attached the passenger’s side door; someone else might fit the steering
wheel and another might attach the headlights. (He had seen the meats moving to the
workers in the meatpacking industry, rather than the workers going to the meat. He decided
to apply that to his own production line).
Ford dominated the early history of the car industry. The Model T introduced in the 1920s
was based on a strategy of low price and simple design. This generated huge growth in car
ownership and thus market size. The production approach underpinning this was
standardised design, assembly line technology and mass production. Ford is reported to
have said that the customers could have ‘any car so long as it black’, and he also stuck to his
approach to use the Model T chassis on all their cars for 18 years, to enable them to develop
high levels of production and standardisation. This production at scale and to a consistent
design was very successful for a number of years, leading to car sales in their millions.
(However, ultimately this ‘one model’ approach created inflexibility; his early factories could
only produce Model T cars, and retooling for product innovation required long-term plant
closure that led to permanent loss of market leadership to General Motors (Lewchuk, 1983,
in Willman, 2014).
The key elements of the labour strategy that supported Ford’s optimisation were as follows:
The simplification of tasks
High assembly line speeds
Keep the production line moving at all costs
Use of high levels of hourly pay: Ford introduced the ‘$5 day’, worth a lot of money at the
time
Avoid bonuses
Close supervision of employees
Strict discipline
Avoidance of labour unions
There is a lot in common with Taylor’s early approaches, but the approach to compensation
is different. Because the production line moves at a steady speed, there is no need to
provide bonuses for extra work as extra work is not possible (Guillen, 1994). The hourly rate
would instead mean that people are encouraged to show up to work, want to work for Ford
(over its rivals or other industries) and reduce the chance of absenteeism.
3.5 Taylorism in practice: 1950s to today
My mum was born in 1940. She really wanted to be an artist or a teacher, but when she left
school at 15 in 1955, as far as her parents were concerned, the only real option was to be a
secretary. So, she started working at typing pool, which probably looked a bit like this
one.
She would have typed out letters, trying not to make too many mistakes and trying to get
through a certain amount of pages in an hour, so some target that would have been set by
the manager or the boss. At the end of each session, she'd have to write down how many
pages she'd managed, so that the head of the typing pool could keep a record, and make
sure that she was staying on target for the kind of amounts of documents that you'd need to
produce within an hour or within a shift. Even the qwerty keyboard, say the design of the
keyboard that you still use today was supposedly created to stop the letters clashing and to
keep the secretarial production line, if we might think the creation of bills, reports and
documents in that way, to try and keep it all moving. Some engineer wouldn't have to come
in men, the keyboard everyone could keep going with their work.
That wasn't the only way though the Taylor isn't impacted my mom's life at work. When she
got a promotion from the typing pool, so she wasn't sitting in a big grief of people like that
anymore, she was being a proper secretary in a proper office. She was showing a book that
made a note of how long each task should take. It said things like, “Folding paper to put
inside an envelope, 11 seconds,” and “Filing papers in the top drawer, nine seconds.”
Inspired by the Time and Motion studies of Gilbreth, someone had made a book of the
motions and how long they should take in my mum's company.
The book would then give her and her colleagues some instructions as to how you could
possibly manage to do a task this quickly. Say for example, how to lay the paper on the
table, where exactly you might fold it, how to hold the envelope and so forth. So, really very
specific details, they've been generated because someone had gone into a standard office
and studies in intense detail using stopwatches, cameras observing real people. The fastest
way to do a standard office tasks and how long that task should take. This is exactly what
Taylor had advocated with scientific management or be without the managers themselves
directly doing experimenting and measuring. You'll probably remember from what we
talked about earlier on in the module that normally it's the managers in Taylor's model who
do the stopwatch timing, and he worked out what to do, but here you've got experts
coming in and taking care of that.
My mom's experience is just one example of how the principles of scientific management
were born out of Taylor's factory environment, an internal office environment. I can
remember long before I had any interest in work management, long before I'd done my first
degree, or my PhD in workplace interaction, my mom sitting and telling me the story and
me finding it strangely fascinating.
That human activity could be planned to this degree to the second.
Following Taylor and for all the years after, that is exactly what has continued to happen.
Managers and company owners have realized that the principles of scientific management,
so Taylor's work and in particular finding the one best way to do repetitive work and then
getting people to do it could work anywhere, from typing pools, to offices, to Ray Kroc's
earliest incarnation of McDonald's.
You might even have been subjected to some Tayloristic work yourself if you've worked in a
coffee shop or fast food place and office.
About 15 years ago, my aunt was working for the tax department of the civil service in the
UK, and the time the motion experts came in there with their cameras, their research to
observe and their stop watches. They watched how my aunt and her colleagues answered
the phone, dealt with queries, categorize those queries and all that paperwork and two
records onto the computer, then when they were done with one person or one record
moved on to the next one. Those time and motion experts found the perfect way for my
aunt and her colleagues to have that desk laid out. From the type of phone they should use
and the position of the phone on the desk, all the way to the number of decks they should
have on their filing tray and what should be placed in each one. Now, as you can probably
imagine for me saying this, this met with quite a lot of resistance.
Some long standing workers decided that it was high time to take the early retirement
they've been offered. It felt to them as they someone had come in, he'd never seen this
work before was saying that, “they've been working inefficiently for years and that they
didn't know the best way to do their work.” In fact, that's exactly what the managers and
the timer motion experts were saying, because under these simple rules of tailorism, it's
going to be the manager’s job, or the people that the manager recruits to help them to
decide the best way to do something. It's the workers job to simply get on and do it.
Whether in the longterm, this leads to motivational happiness or the optimal outcome for
the organization, is another question. It's one that's much, much harder to answer.
3.6 Ford production line - video
In this short video, you will see footage of the early Ford production line, as well as hear
where the idea came from, and see the up-t0-date version of what a car production line
looks like today.
https://www.youtube.com/watch?v=qFbsDArAWj8
4 Discussion: Reflection On Taylorism In Today’s Workplace
4.1 Discussion
Is Taylorism present in the workplace today? Can you think of evidence of any of the
principles of scientific management or Fordism in any of the following workplaces? Discuss
this with your classmates or on the discussion forum.
• A modern car factory
• A fast food restaurant
• A call centre selling over the phone
5 Taylorism Continued
5.1 Taylorism Today
Despite many workplaces looking quite different to those of Taylor’s time, the principles of
scientific management are still present in today’s workplaces. For example, many of Ford’s
considerations still apply to the modern car industry, with fixed salaries, moving production
lines, and a focus on optimising production. Labour is cheap, but critical to the output, and
as such, there is a focus on enabling labour to produce cars to high safety and quality
standards, but quickly.
This principle – of optimising performance by designing work equipment and work practices
in a way which means you ‘cannot get it wrong’, and you can produce goods quickly is
visible in a number of other workspaces, too, such as:
Sales call centres: conversations are scripted by managers to try to achieve optimal sales.
Workers are rewarded financially for sales. Workers are chosen based on their ability to sell.
Managers listen in to calls to ensure the script is being followed.
Fast food kitchens: cooking processes are dictated by senior managers who ensure that
kitchens are fitted out to enable workers to cook the food. Tasks are divided down into
simple components (e.g., a ‘burger flipper’, a ‘French Fries fryer’, etc.) so that they can be
learnt quickly and it’s hard to make mistakes. Managers watch closely to check that
performance is achieved in the way required.
In neither environment is the work organised precisely to the principles of scientific
management, but research suggests that even in the days of Taylor, companies used to pick
and choose which elements they used, too (Hoxie, 1914). What is interesting from our point
of view is how this idea of finding an optimal way to organise and dictating what that is,
overseen by a manager, pervades.
5.2 Contributions of the engineering approach
Taylorism is an important perspective to consider, both in terms of how management
developed, and in terms of what concerns managers today.
It raised the question ‘what is the best way to complete this task?’ and placed optimisation
of machines and the workforce at the top of the management agenda.
It attempted to bring science to the work of the manager, and provided a way to talk about
work and management which paved the way for management science and operations
management (both of which you will encounter in a later unit).
Creating tasks that are very simple may also be a good way to reduce training, the time
taking to switch between tasks, and possibly also to reduce mistakes.
However, it was not without its flaws. When you were asked, earlier in this unit, to reflect
on how the introduction of scientific management in the Bethlehem Steelworks may have
made you feel, what did you answer? Did you recognise that, alongside the benefits it may
have brought to workers, it also brought some potential negative effects?
Let’s consider these now.
One of the biggest problems of the scientific management approach – both ethically and
practically –is that it casts the worker as a stupid participant in work who has no useful
contribution other than their labour. This is not only quite an obnoxious way to think about
a human being, but it also neglects to recognise that the worker, who is doing the work,
may have something useful to say about how to improve performance of that work. For
example, if you are a burger flipper in a fast food restaurant, you may realise that with the
current tool, you can only flip one burger at a time, but last weekend, you were at a
barbecue at a friend’s house and you saw a flipper that allows you, simply, to flip two
burgers at once. This would mean that you could have more burgers on the grill at any one
time because you would be able to prevent them burning by being able to flip more of them
more quickly.
In Taylor’s approach, this learning is ignored. The worker can’t possibly have the intelligence
to help production in this way.
Whilst simple tasks have benefits, they can also lead to workers feeling bored and
dissatisfied at work. This process of making tasks so simple is called ‘deskilling’, and leads to
a reduction in the autonomy and self-control of employees (Braverman, 1974). This may
ultimately lead to feelings of dissatisfaction, boredom, mental health problems and high
staff turnover (Willis, 2014, c.f. Moss, 2020). Deskilling also makes it easy for one worker
to be swapped in for another, reducing their power in the labour market (Braverman 1974).
One other possible consequence is that the necessary high supervision levels to make sure
workers stick rigidly to the ‘one best way’ may lead to high costs of management – with
more managers needed to oversee the production. Whilst financial incentives are supposed
to reduce this, according to Taylor (1911), it can lead to a calculative approach by the
employee, who only acts in accordance with the rules because they have to, not because
they want to – and so only acts in line with them when being directly appraised (Kohn,
1993), otherwise not working to the rules.
6 The Human Relations Approach
6.1 An alternative to treating people like machines
Taylor, the Gilbreths and Ford focused on optimisation by looking at humans from an
engineering approach, and in particular focusing on the design of work and workplaces.
Their focus was not on the human mind, but rather on the human body (Stewart, 2009)
A counter-approach emerged in the 1920s and 1930s, from the psychological interest in
how to optimise human performance. Wartime studies of soldiers in the UK to look at the
relationships between stress and fatigue, and for example how to reduce absenteeism and
avoid accidents through combinations of work and rest periods (Rose, 1988, c.f. Willman
2014).
There was a focus on how to mould the individual, through outside intervention (e.g., rest
periods, nice office spaces, social time) to perform to their optimal ability.
We can explore this approach (and its contrast to the engineering approach) further by
looking at its most famous set of studies: The Hawthorne Studies.
6.2 The Human Relations Approach
The Hawthorne studies took place in the USA in the eponymous plant of Western Electric
from 1924–1933. The studies were undertaken by Elton Mayo and a team of researchers
from the Harvard Business School.
It was a massive factory; by 1929, 40,000 men and women worked there. Western Electric
was one of the forerunners in applying scientific management to its production units and it
was regarded as a well-run plant. Numerous researchers using a variety of methods
performed a series of behavioural experiments and deployed interviewing and observation
techniques. The studies began with a concern for physical environment. The illumination
tests, 1924–1927, subjected groups to lighting variations and found little impact. Not an
auspicious start.
A second set of studies, the ‘relay’ tests (1927-29) involved experimental alteration of bonus
arrangements, rest periods and hours of work. Six female workers, self-selecting and drawn
from the workforce, were placed in a room for closer observation as they worked. Having
previously worked a 48-hour week with no rest periods, a researcher altered this, adding
breaks, taking them away again, changing rest periods, and so forth. Thirteen different
combinations were given, and ‘the results showed a nearly continuous increase in output
over those thirteen periods.’ (Huczynski and Buchanan, 2013: 332). The researchers
suggested this was because of the motivating effect achieved by allowing the women to
achieve a special status; being consulted; friendliness with the observer increasing morale; a
less intensive form of supervision reducing stress. This was labelled ‘the Hawthorne Effect’,
meaning that participants in research behave differently when observed than they would do
normally. As such, treating people as machinery which acts in logical ways is not
appropriate, and paying attention to their individual and social needs is important.
The researchers next conducted over 20,000 interviews with workers, which established
that there may be interesting materials to explore with regard to how groups work
together.
Thus, one final significant study, the Bank Wiring Observation Room Experiments, took
place. Researchers observed interactions in a group of fourteen, organised into three formal
subgroups, each of which contained three wirers and a supervisor, as well as there being
two inspectors who moved between the groups (Huczynski and Buchanan, 2013).
There were two major findings. First, the observation of interactions between them
revealed two ‘cliques’ across the three formal groups. These cliques developed informal
‘norms’ (rules of behaviour), as well as enforcement mechanisms. ‘The figure for the weeks
production would tally with total week’s output, but the daily reports showed a steady, level
output regardless of actual daily production.’ (Huczynski and Buchanan, 2013: 333).
This group operated below its abilities, and individual members weren’t earning as much as
they should be able to.
The group norms were found to be:
• You should not turn out too much work. If you do, you are a rate-buster.
• You should not turn out too little work. If you do, you are a chisler.
• You should not tell a supervisor anything that might get a colleague into trouble. If
you do, you are a squealer.
• You should not attempt to maintain social distance or act officiously. If you are an
inspector, for example, you should not act like one.
(Roethlisberger and Dickson, 1939: 522, in Huczynski and Buchanan, 2013: 333-4)
If workers did not comply with the rules above, they would be ridiculed, physically harmed
(through ‘binging’, or striking a norm-violator on the upper arm to cause pain), or excluded
from the group altogether.
Safety in numbers
As a result of these findings, Mayo concluded that:
• Work is an activity performed by groups, not individuals. Even if the work is
ostensibly individual work, it is undertaken by groups
• The social group at work is important for workers looking to fulfil their needs for
belonging, community and participation
• Managers need to collaborate with informal work groups to increase cohesion and
to benefit the company
6.3 The contribution of the Hawthorne Studies
Whilst the methods of the Hawthorne Studies might today be seen as less than reliable,
what cannot be changed is how their conclusions led to the development of the Human
Relations Approach to management. This held that, rather than treating workers like
machines, instead managers should understand that work is a social place for individuals
and a way to meet their needs for belonging and group membership, and also to establish
their social identity. (Huczynski and Buchanan, 2013).
In these studies we see the seeds of the organisational behaviour discipline – in its concern
with how the treatment of workers (e.g., how they are managed, led, rewarded or
controlled) shifts their behaviour at work (e.g., their motivation, output or satisfaction).
We can also see a logic which leads to the development of the modern human resource
function: there is a reason for workplaces to care about their workers and their treatment,
because it may have an impact on firm performance. The logic is that companies can, and
therefore should, act to influence workplace behaviour in order to positively influence firm
performance.
The impact of human relations thought on subsequent academic research agendas is
considerable, and the notion that the social, human, behavioural elements of work must be
considered is fundamental to the world of work we inhabit today. We will be seeing
evidence of the impact of their approach repeatedly in Core Management Concepts, for
example, when we look at how:
Leadership has an impact on follower behaviour and performance
How to motivate staff for optimal performance
The Human Resource Management function in the firm
Decision making behaviours
Approaches to risk
6.4 The value of combining approaches
We can see Taylorism and the Human Relations approach as two very different ways of
conceptualising management. Taylorism suggests that management is about control, one
best way and a mechanistic approach to work in order to optimise performance. Human
Relations suggests that management is about recognising individual and group needs in
order to optimise performance.
There is an argument to be made for an approach that is somewhere in the middle, and this
is what we commonly see in the workplace of today. Whilst there is a focus on efficiency
and process improvement, there is also a focus on an individual’s needs for belonging, group
membership and individual identity. If we look at McDonalds, whilst it is a highly Tayloristic
environment in many ways, workers are nonetheless encouraged to speak up with
concerns, to have friendly dialogue with their colleagues, and are given lots of opportunities
for training and self-development.
On the flipside, consider a creative company such as a social media marketing firm. They
may realise that treating their staff as individuals and focusing on social cohesion is critical
to their success. As such, they may have an approach that is heavily in line with the values of
the Human Relations approach and less Tayloristic. And yet, they will still be looking for
efficiency savings in work that they do and if they were to find a great piece of software that
enables them to clearly divide up a task into smaller chunks and to engage their most skilled
workers for each element. Moreover, the software may allow them to reuse elements of
‘best practice’ from previous projects (albeit adapted for new clients). They may even have
administrators who do highly routinised work, such as putting out social media posts to a
template for their clients everyday to a schedule.
It may also be that in one company, different jobs sit at different points on the spectrum.
Amazon, for example, has highly routinised jobs undertaken in its warehouses and by its
delivery drivers, with set ways of doing things dictated and monitored by technology (we
will talk more about Amazon in this regard in the later unit on operations management).
A final example of an approach which marries elements of Taylorism with that of the Human
Relations Approach to try to achieve the benefits of both is the approach begun in Toyota,
and now called alternatively Toyotaism or Lean Production.
The approach uses scientific management principles such as ‘minimum manning…pre-
defined work operations, repetitive short cycle work, powerful first line supervisors, and a
conventional managerial hierarchy’ (Buchanan, 1994: 219) to produce Toyota cars.
However, alongside these Tayloristic principles, there is a team approach, where the
workers are involved in a process of constant improvement through their engagement in
optimising work through their own experimentation and suggestions over process
improvement. For example, if a team responsible for putting the seats into a Toyota people
carrier realises that there is a better way of doing so, they can implement this improvement
and be responsible for an uplift in speed of production and/or quality.
As such, you can see how the Toyota approach to car manufacturing follows directly on
from Ford, and yet applies some of the principles of Human Relations to good effect, too.
6.5 Conclusion
This unit has illustrated two competing approaches to the managing of people, both with a
focus on optimising performance or, put another way, getting the most out of staff.
Taylorism is focused on optimising performance by treating people as machines. The
engineering approach of which he was a part was interested in improving production
through the rationalisation and optimisation of process.
In comparison, the human relations approach emphasises on optimising performance by
recognising what drives people to work hard and designing work around those factors.
You have been shown examples of a range of workplaces which adopt approaches which
apply Taylorism to a greater or lesser degree, as well as workplaces which spend more or
less time engaging with the social and individual needs of their staff.
When we think about companies trying to get the most out of their staff in the
contemporary workplace, we have another term for this: motivation. And that is what we
will look at in the next unit.
7 Finding The Best Way To Manage Quiz
Please attempt the quiz on the VLE:
Block 4: Motivation
Essential reading
Buchanan and Huczynski, Organizational Behaviour (Harlow; Pearson, 2013).
Chapter 10: Group Formation, from the section on Hawthorne Studies (p.331) to end of first
paragraph on page 336.’ to end of first paragraph on page 336 (partway through section
‘Group-oriented view of organisations’). A simple, textbook account of Hawthorne Studies
and their later significance, particularly focusing on their findings with regard to humans’
psychological desire to feel ‘a part of the team’.
Chapter 14: Work design, from the section ‘Birth of Scientific Management’ to the end of
page 481 (finish just before the section ‘After Ford: the Deskilling Debate’). Short, useful
textbook account of Taylorism and the many other approaches it spawned/was related to.
Most useful are the merits/demerits of Taylorism that it lists. If you are already logged into
OpenAthens, the links will take you directly to the correct sections
Taylor, F.W. The principles of scientific management, (New York, Harper, 1923) [ISBN
9781599866796] Chapter 1.
Recommended reading
Pearson. ‘Management History Module’ (following on from Chapter 1. A great summary of
key stages in management history, so you can see the work of Taylor, Mintzberg, Mayo and
beyond in conjunction with one another.
You may also want to read the British Library website biographies of
Elton Mayo: The Hawthorne Experiments Thinker A short and useful biography of Mayo, which
gives a clear account of the contribution of the Hawthorne Studies to management theory
(as well as their limitations).
Frederick Winslow Taylor: Father of Scientific Management Another pithy biography from the
British Library, with an excellent short account of the contemporary interpretation of his
work.
Tim Harford’s 50 things that made the modern economy, episode on
Factory: https://www.bbc.co.uk/programmes/w3csz2wj
https://journals.sagepub.com/doi/10.1177/001872679805100302 - the enduring legacy of Elton
Mayo, showing the continued use of his early theory of management
Braverman, H. Labor and monopoly capital. (New York: Monthly Review Press, 1974) [ISBN
0853453403]; 1988 edition [ISBN 9780853459408].
Chapter 4: Scientific Management. A classic text that is critical of the development of the
firm and its managers, but this chapter provides a slightly more ambivalent look at Taylor
and his key principles, full of useful quotes and examples.
Chapter 5: The Primary Effect of Scientific Management. This chapter has criticism of
Taylor's Scientific Management.
Taylor, F.W. The principles of scientific management (New York, Harper, 1923) [ISBN
9781599866796] Chapter 2. This is a second chapter from Taylor’s own work. This goes into
more detail with regards to The Principles, and helps to capture a sense of the era he was
writing in.
2 What is Motivation
2.1 Introduction
The Hawthorne Studies and the Human Relations approach moved the idea of optimising
performance to fit with individuals and their needs. They started to understand that getting
the best out of people was more complicated than just organising and monitoring their
work or throwing money at them. As such, as we have seen, they paved the way for an
interest in employees, and their needs and wants. Such an interest is seen as a valid focus
for organisations and their managers. We will look in this unit at one critical dimension of
individual behaviour and activity that companies and their managers have a pronounced
focus on: employee motivation. In particular, what it is, why it matters, and what companies
can do to engender it.
Whilst motivation is a perennially important topic to managers, it has been particularly
pertinent during the working-from-home period engendered by the Covid-19 pandemic.
Managers have struggled to work out whether working from home has had an impact on
employee engagement and motivation, and where it has had a negative impact, what to do
about it. We will return to this example a number of times in this unit, using it as a lens
through which to explore the topic of motivation.
We study motivation at this point in the syllabus because it follows on neatly from the
previous unit, as the Hawthorne studies and Taylor provided two early ways to think about
motivation. We can also link through to the principal-agent problem, exploring how
engaging and motivating staff in the service of the companies aims can be seen as a partial
solution to the agency problem.
So, what is staff motivation and how should a manager seek to achieve it?
2.2 What is Motivation
‘Motivation refers to the forces within or beyond a person that arouse and sustain their
commitment to a course of action.’ (Boddy, 2014: 464). What we are talking about, when
we talk about motivation at work, is the sense that workers are fired up to do their job.
When we say someone is motivated, confusingly it can either mean that they are motivated
to do their job as is required of them, or it can mean that they are motivated to go above
and beyond the requirements of their role.
Motivation is linked to performance, in that performance happens when someone has the
ability to perform a task, isn’t unduly affected by constraints against achieving that task, and
has the motivation to perform it (Campbell and Pritchard, 1976). By motivation here, we
mean that they choose to expend time and effort on performing to a standard.
A key question might be, why does someone choose to expend the effort and time to
perform a particular activity when they may choose to do something else?
In these various ways above, you get a little closer to understanding what motivation
encompasses, because it is not the easiest concept to define. We tend to talk, in common
language, about someone being motivated. But when we try to lay out exactly what that
means, a precise definition is hard.
It is even harder, therefore, to unpick precisely what it is that motivates us. We will now
look at a selection of theories of motivation, which each take a different lens on how to
motivate. As you learn about these theories, rather than trying to pick ‘the best’ one, you
should think about what they each add to our understanding of motivation.
We are interested in motivation in Core Management Concepts because a manager should
be aware of what motivates their staff and how they can help in achieving staff motivation.
If staff are motivated to perform their job, either because they enjoy it, or because they are
motivated by a reward available for performing it, then they will by association be working
more closely in line with the goals of the organisation. As such, the principal-agent problem
should be reduced. For example, if an accountant feels motivated to complete their work on
time and to a high standard, perhaps for reasons that we will explore in this unit, then their
interests are aligned with the organisation’s interests. One implication of this alignment is a
reduction in the work to be done by a manager with regard to monitoring and control.
There are business benefits of caring about employee motivation, too. Increased job
satisfaction, productivity and morale, and lower absenteeism and turnover are all positive
consequences of employee engagement, according to research by Gallup (2016).
Moreover, as a manager, understanding what motivates you will be a useful point of
reflection throughout your career. Are you driven by money, or challenging work, or a sense
of equity, or something else? It is also likely to shift through your career, with different
priorities in your twenties, thirties, forties and so forth being likely.
And finally, those who are reported to be good managers are routinely shown to have
concern for their staff’s success, personal wellbeing, career development and
empowerment, all of which emerge as key elements of motivation in various ways, as you
shall see (Garvin, 2013).
AS such, there are very good reasons for managers to take staff motivation seriously, and it
is for this reason that we will now spend this unit considering this topic.
In the theories we will discuss, it is useful to be aware of the distinction between intrinsic
and extrinsic motivation. Intrinsic motivation comes from characteristics of the job that
workers find motivating, for example because the job creates a sense of belonging, or self-
actualisation. Extrinsic motivation comes from the rewards offered for doing the job, such as
money or status.
Some of the theories we consider focus more on one than the other.
2.3 Intrinsic & Extrinsic motivation
The following diagram illustrates the key differences between extrinsic and intrinsic
motivation
3 Theories of Motivation
3.1 Maslow’s hierarchy of needs
Maslow was a clinical psychologist (1908 – 1970) who argued that we have innate needs,
and that we are motivated to satisfy them. These needs are stacked in order, and Maslow
identified nine levels. However, most contemporary versions of his model simplify this down
to around five. The theory posits that we must meet our most basic physiological needs (for
e.g., food, water, oxygen) to a reasonable extent before we become concerned with the
next level up (safety) and then the next level (belongingness) and so forth, all the way to
self-actualisation.
Hierarchy of Ways that Ways that they Implications for

needs work may may be satisfied managers
satisfy them outside work
Self- Opportunities Hobbies; Design work to
actualisation for personal community allow personal
growth; an activities; growth and
ability to new qualifications development
develop to full
potential
Esteem Recognition, Approval of Recognise

attention, community, workers and
appreciation, friends and family their
the respect of achievements;
others, help them to
company develop
awards confidence;
encourage
mutual respect
Belongingness Relations with Acceptance by Build strong

stakeholders social groups workplace
(colleagues, (including friends communities
customers, and family) and
etc.) relationships;
foster team
building
Safety Safe work, job Freedom from Create a work

security violence, pollution, environment
disturbance that is safe and
secure, and is
perceived to be
so
Physiological Basic salary, Food, oxygen, Ensure payment

warmth, body water on time, and
fuel (water, provision of
food) warm working
environments
with
opportunities to
refuel.
In Maslow’s hierarchy, money can be a motivator, but only in that it allows a person to meet
their needs – whether that is for a house, or to allow them to pay for an MBA programme to
advance their esteem. As such, it talks both about intrinsic and extrinsic motivation, seeing
both the qualities of the job, and the potential rewards it brings as potential motivating
factors.
Maslow’s hierarchy of needs is an example of a content theory of motivation. A content
theory focuses on what it is that motivates us – in that sense, the content. Here, Maslow is
talking about safety, self-actualisation, etc., as ‘content’ that motivates us. (You’ll be able to
compare this ‘content’ approach to other models that we are going to look at in this unit.)
A common misconception of Maslow’s Hierarchy of Needs model is that it is a fixed scheme
that is the same for everyone. In actual fact, whilst Maslow’s research suggested that most
people’s needs came about in this order, this was not rigid. For some people, self-
actualisation will be more important than a sense of belonging, for example. Managers
should be aware, if using Maslow’s hierarchy of needs, that there is the possibility that the
hierarchy is different for each staff member.
Note also that a need must only be met to a reasonable extent before the person becomes
focused on the next level that is important to them. People wrongly claim that Maslow
argued you needed to fully meet one need before moving onto the next. This is not true. He
recognised that we may not fully meet one before moving on to the next.
Maslow’s theory is criticised as a ‘statement of white American middle-class values in the
mid twentieth century.’ (Huczynski and Buchanan, 2014: 294). However, research
conducted in response to this criticism found that there are fairly consistent similarities
around the world in what is important to people and what motivates them. Tay and Diener
(2011), for example, analysed data from the Gallup World Poll – which covers 60,000 people
across 123 countries spread across the globe. They found that around 80% of people
surveyed were motivated to fulfil their needs, and that there is a general pattern that we
seek to fulfil our needs starting with the most basic (e.g., physiological and safety).
However, they did find that we sometimes do seek to meet social needs even when our
most basic needs have not been met, reinforcing the point once again (which we saw in the
Hawthorne studies) that we as human are highly influenced by the establishment and
maintenance of social bonds. The key finding is that human needs are universal,
independent of culture.
Maslow’s ideas remain relevant today, as we see jobs and workplaces designed around
ideas of safety, belongingness and self-actualisation. Managers who are looking to motivate
workers can make use of the ideas of Maslow’s hierarchy to shape the types of jobs and
rewards they design.
In the Covid-19 pandemic, when managers were struggling to work out what, if any impact,
working from home was going to have on employee motivation and what to do about it,
Maslow’s hierarchy of needs could have been a useful lens for explaining where their
concern was coming from. People may have been feeling one or more of the following,
inhibiting the meeting of their needs:
Need Examples Problems during the Possible solutions that
pandemic managers could explore
Self- Opportunities for Opportunities for Finding ways to provide

actualisation personal growth; personal growth may online training and
an ability to have been restricted, development opportunities
develop to full with a sense that which offer space for
potential things had been ‘put growth and development.
on hold’
Esteem Recognition, Hard to offer Actively look for

attention, recognition, give opportunities to recognise
appreciation, the attention and check and reward; create codes of
respect of others on others’ respect in conduct for how to engage
an online working online in a respectful way
environment
Belongingness Relations with Feeling dislocated Build in online coffee

stakeholders from social groups, breaks, random chat and
(colleagues, colleagues and the team building activities in
customers, etc.) organisation the online environment
Safety Safe work, job Job security Encourage people to talk

security diminished for many; about how they are feeling;
people felt provide reassurance for
threatened by the those who have secure jobs;
virus and a explore government support
perception of a less packages for workers
safe world
Physiological Basic salary, A fear that they may Reassure, where possible,
warmth, body fuel lose these due to job that this is not the case
(water, food) loss
3.2 Do your degree studies satisfy your needs as identified by
Maslow?
Section A
Do you think your hierarchy of needs is stacked in the same order as Maslow believed most
people’s were, or do you think your hierarchy is different?
Section B
Looking at the other comments on the discussion forum, what evidence can you gather of
the relative importance of each of Maslow’s needs to the other students?
Post your thoughts for both sections to the discussion group, or discuss with your
classmates.
Feedback
Your answers may have made reference to:
• Self-actualisation
• Esteem
• Belongingness
• Safety
• Physiological
You may also have re-ordered the levels compared to the traditional order that Maslow
stacks them in.
Your observations on other students are likely to have found some differences in
comparison to you.
3.3 Expectancy Theory
Maslow focused on what you need to be motivated. Expectancy theory, posited by Vroom
(1964), takes a different approach, looking at how you become motivated. As such, it is
called a process theory. Expectancy theory proposes that individual motivation depends on
whether you expect your efforts to result in good performance (Expectancy), whether you
believe you will receive the reward if you do perform well (Instrumentality), and whether
you value the reward (Valence). The extent to which each of the above is true will affect the
extent to which you will be motivated.
We can lay this out as follows:

Valence x Instrumentality x Expectancy = Force of motivation
Another way of explaining it is as follows:
Another way of saying it is that motivation depends on whether effort will lead to
desired performance, whether performance will lead to a given outcome, and whether
that outcome is attractive
As such, for work motivation to be high, there has to be a clear path between what you do
and meeting valued personal goals. If you would like to be promoted, and to do so you need
more recognition, you would need to find a way to achieve greater recognition through
individual effort and performance which leads to the rewards.
Expectancy theory thus shows how our behaviour at work can stem from a conscious
process weighing up what we expect, what the expectations are on us, and how to act in a
way that leads to rewards which we value. It also – very importantly – can explain why a
reward that motivates one person does not motivate another. Rewards could be intrinsic
(based on qualities of the job such as the purpose, growth or enjoyment it creates), or they
could be extrinsic (money or benefits). This ability to deal with a person’s individual values is
a significant advantage of this theory, and one that has large practical applications for
managers and organisations as it shows that if we wish to motivate a diverse group of
people, then we need to have ways to reward them that reflect what they value.
Expectancy theory does make a large, and problematic assumption: that we are rational and
are aware of this process as we work. This may remind you of the assumptions that are
made in principal-agency theory, where the assumption is that the owner is rational and can
calculate the value of all possible monitoring options. Here, it’s about the worker being
rational and we are aware of our motives. The assumption that humans are rational is
extremely problematic, as we routinely make sub-optimal, irrational decisions. We will
revisit this in the unit on decision making and biases.
For managers, expectancy theory has some significant implications:
• You should not assume that everyone is motivated by the same rewards (such as
money or recognition) and make sure that you are able to offer rewards that your
staff value. Some companies respond to this by offering flexible benefits packages,
where employees use ‘credits’ to choose between a range of benefits. Some of the
typical options that a company might include are buying/selling holiday allowance;
gym membership; pension contributions; childcare contributions; and health
insurance. You can read more here.
• The value of a reward for someone may change over time. Contributions towards
someone’s travel tickets may be valuable when everyone is going into the office, but
less so when everyone is working from home.
• What is expected, in terms of performance, should be clear. If people do not have
the skills to meet the level of performance required, training should be provided in
order to keep them motivated.
• Employees will focus on the activities they are rewarded for and ignore the others –
so you must be careful to reward the right things. An example from Tim Harford: “In
the US, “report cards” provide data on the performance of cardiac surgeons and
cardiac wards. David Dranove, Daniel Kessler, Mark McClellan and Mark
Satterthwaite, four economists who studied the report cards, found a most
unwelcome consequence: doctors resisted operating on the severely ill and favoured
surgery for patients who might not even need it. A healthy patient is a strong
candidate to thrive after heart surgery, no?” (Harford, 2014).
(c.f. Huczynski and Buchanan, 2014)
Again, we can relate Expectancy Theory back to the Covid-19 pandemic to show it in
practice.
The shift to working from home demotivated many and we may be able to use Expectancy
theory to explain why.
Some workers found it harder to believe that their efforts would result in good
performance, because they were not used to performing their work from home. They lost
confidence in their ability to meet their performance targets in this new working
environment. For example, a lawyer may be concerned that they would not build rapport
and trust through face-to-face meetings.
Workers were also unclear how managers would be able to spot good performance without
regular, informal access to their work, being able to see that they were working hard in the
office, or that they were having friendly conversations with clients on the phone.
And finally, workers became less convinced that their managers would be able to offer
rewards that they would value, because managers were losing touch with what was
important, and people’s priorities had perhaps changed. They no longer wanted rewards in
the form of bonuses; they wanted a guarantee that their job would still exist at the end of
the month and the ability to share the childcare responsibilities with the schools being
closed.
Many managers found that they had to work hard if they wanted to motivate their teams:
firstly, they needed to demonstrate that they believed that their team could still produce
good work from home, and provide support and training where necessary to help with this
process (Clark, 2020). Managers who are remote from their workforce also had to work
harder to spot good work, and to show workers that they were paying attention (Sull, Sull
and Bersin, 2020). And they had to check in with workers as to what rewards and incentives
they would now value – what was important to them in this new, working from home
environment? Was it afternoons off, or care packages in the post, or online socials, or public
recognition of their work in a way that is more difficult on Zoom?
3.4 Equity Theory
Another theory of motivation – also a process theory which looks at the process of how
motivation is achieved – is equity theory. Equity theory is concerned with perceptions of
fairness and unfairness. It argues that perceptions of unfairness lead to tension and possible
demotivation, which in turn drives the individual to resolve the perceived unfairness. It
introduces the idea of social comparison to the topic of motivation, showing how we are
driven to create situations which we perceive as fair.
Adams (1963), who proposed the theory, argued that we compare:
My rewards (minus my costs) = Your rewards (minus your costs)My efforts and
contributions Your efforts and contributions
Rewards include pay, benefits and recognition; contributions include time, effort and ideas
(Boddy, 2014).
We tend to treat a modest amount of ‘over-reward’ (where we are treated better than the
other) as a lucky happening and don’t do anything about it. But we will react to even a
modest amount of ‘under-reward’, not being prepared to tolerate it. Studies back up the
more general idea that people respond badly to inequity and change their behaviour in one
of the following ways as a result.
You have a range of choices available to you if you are looking to restore equity:
1. Alter your inputs (change your time/effort/ideas that you put in)
2. Alter own outcomes (seek better rewards)
3. Cognitively distort inputs or outcomes (rationalise the inequity so that you are more
comfortable with it, for example, recognising that someone works harder than you)
4. Leave the exchange relationship (get a different job; ask for a transfer)
5. Take actions to change the input or outcome of referent other (complain that
someone else has higher pay than you, or force them to work harder on a project
you’re both on by not doing so much)
6. Change the referent other (compare yourself to someone else where there is a more
equitable comparison to be made)
Research supports the idea that those who are overpaid tend to increase equity by working
harder, too (Buchanan and Huczynski, 2016).
Equity is also shown to improve job satisfaction and increase organisational commitment,
thus meaning that, from a management perspective, equity between workers is desirable
(Sweeney et al., 1990, c.f., Huczynski and Buchanan, 2014).
However, equity theory appears to require measurement of some fairly abstract notions,
such as effort, ideas, benefits, and recognition. Not only are these hard to measure, but they
are also abstract, and differ in relative importance and scale between different people. For
example, you may place a lot of emphasis on the benefit of gym membership and consider
that to be worth a great deal, but to a colleague, this may not feel like fair compensation for
the extra work they are putting in. Managers can find it very hard to unpick why staff are
feeling a lack of equity and to take action to level things up in a way that is acceptable to all
parties because these issues are so very subjective.It’s also highly individual who people see
as a relevant comparison. You may want to compare yourself with those in the same role
but in a different sector, but your manager may think it is more valid to compare you to
others in the same sector but in a slightly different role. This can be hard to resolve.
Moreover, some people are more comfortable with a degree of inequity than others; this
can be hard for managers to predict, discuss and manage.
Huczynski and Buchanan make an excellent summary of the implications of equity theory for
the manager:
‘Equity theory has implications for management practice. Employees compare pay (even in
organisations that insist on pay secrecy) and perceived inequity quickly generates
resentment. Comparisons are often subjective and imprecise, particularly where
information is lacking and employees rely on rumour. It is important to recognise that
perceptions of inequity generate tension, even when there is actually little inequity. The
circulation of accurate information about rewards, and the links between effort and
rewards, is thus crucial.’ (2013: 298)
We can again relate this theory to the Covid-19 pandemic and the context of home working
and perceptions of unfairness between staff. As schools closed in the UK and parents were
forced to juggle children and work, some managers will have found themselves leaning on
childless members of staff to fill in the workload that those with kids were struggling to
complete. Initially, this may have felt like helping out for the greater good, but for some
staff members who had no kids but were not being compensated for ‘extra work’, this may
have started to grate. You can read more here about the inequity that one childless member
of staff felt and wrote to Vice about. You may wish to reflect on the advice they were given
in the context of Equity theory.
For the managers, they had a difficult challenge to tackle, as they needed to create a sense
of equity between staff, whilst also needing to get the work done. Equity theory and related
research would say that they needed to resolve this as quickly as possible, before
resentments grow.
3.5 Goal setting theory
A final theory of motivation that we will consider, because it adds a final important
dimension, is another process theory. Goal setting theory is highly practical, looking at what
makes work motivating.
Locke (1968) argued for four propositions, that are well-supported by research:
• Challenging goals lead to better performance in comparison to unchallenging goals
• Specific goals lead to better performance than vague goals
• Participation in goal setting can increase commitment to the goals and thus increase
performance – but it’s fine for managers to set them, too, as long as they are well-
explained
• Feedback on past performance is necessary for goal achievement because it (a)
contains information and (b) is motivational
(sourced from Huczynski and Buchanan, 2013)
This approach underpins the idea that many managers use when setting objectives or goals
with team members, which is that goals should be ‘SMART’. The acronym typically stands
for:
Specific (What, why, who, where, which)
Measurable (How much; how will the result be measured)
Achievable (but challenging) (How)
Relevant (and agreed upon) (Is it worthwhile and appropriate right now for me/us)
Time-based (By when)
• May place too much focus on individual work as opposed to teamwork
• Could restrict spontaneous helping if the focus on goal achievement is too great
(Wright et al, 1993)
• Could inhibit initiative (Staw and Boettger, 1990)
• Leads to counterproductive behaviours if the wrong goals are rewarded, e.g., if you
are hoping for teamwork but reward the best team members (Kerr, 1995).
For a final time, let’s apply this to the Covid-19 homeworking context. In the initial weeks of
homeworking, goals that had previously been set were, in many cases, made irrelevant.
Sales targets were altered; what once would have been achievable in a shared office (e.g.,
coming up with ideas for a new product) became very difficult for staff who had never been
required to collaborate online before; and timescales were ripped up due to childcare
demands for parents, and changing client requirements. And so new SMART goals may have
been needed for many, when what had once been merely stretching became impossible.
Here, we can really see the value of such a simple theory as goal-setting theory, because it
shows us how to craft goals that work for the new setting, that are achievable and relevant
in what was for a time referred to as ‘the new normal’.
3.7 What motivates you? (Individual work)
Think about a job or task that you have been asked to do at work (or a study deadline).
What would best motivate you to complete the activity to a high standard?
Add your thoughts to the discussion group and see how different (or similar) other students
are in relation to what motivates them.
5 Managing Motivation
5.1 Job Design

Managers can use the advice of motivational theory when they are designing work, to make
sure that the job itself is intrinsically motivating.
Hackman and Oldham’s job characteristics model (1976) builds on the motivational theories
we have just looked at and suggests that jobs much have five key elements, which lead to
three critical psychological states, which in turn lead to positive personal and work
outcomes that include high motivation:
Core job dimension Description Example of a job Example of a job
that is typically that is typically low
high in the in the dimension
dimension
Skill variety Degree to which Management Burger flipper in a

different skills need to consultant; fast food
be used to complete Owner/worker in restaurant; call
the job small cafe centre operative
Task identity Degree to which the Social media Assembly line

job is comprised of campaign worker in a car
performing the whole manager; self- factory; fast food
of clearly identifiable employed cake worker
tasks maker; taxi driver;
psychotherapist
Task significance Degree to which the Nurse; teacher; Cleaner in a

task has an impact on fundraiser; CEO; warehouse;
stakeholders cleaner in an marketing leaflet
operating theatre distributor
Autonomy Degree to which the University lecturer; Waiter in a café;

job provides business owner; orchestra
discretion over when orchestra members
to work and how conductor
Feedback Degree to which you Building site It is possible to

obtain clear and apprentice; using provide feedback
direct feedback on customer feedback for most roles, if
performance becoming common employee
eg: shop assistants performance is
(how did we do reviewed regularly.
today?), lecturers Some roles are less
get student visible, so less
feedback available customer
feedback eg:
maintenance
crews on railways,
kitchen staff
It is worth noting that some roles encompass different types of work, some of which may be
high in, for example, significance and others not. Mintzberg (2009) gives the example of a
senior clinician (doctor at a hospital), who shows signs of boredom during the administrative
start to his day, drinking several cups of coffee and chain smoking, with short answers to
assistant and paperwork being quickly dealt with. By contrast, as soon as the clinician
started the 2-hour ward round, there was cheerful engagement with patients and staff and
no need for drinks or cigarettes.
If a job has high levels of the above five dimensions, it is more likely that workers will find
the work allows them to meet the critical psychological states of:
• Experienced meaningfulness – how meaningful employees find their work. Do they
see it as valuable and worthwhile? Or do they see it as trivial and pointless? The
more meaningful they find it, the better.
• Experienced responsibility – do employees feel responsible for the work performed,
both in terms of quality and quantity of what they produce?
• Knowledge of results – feedback that helps employees to see how well they are
doing. If they receive less feedback they will not care so much about the quality of
their performance.
However, extreme jobs can have positive and negative impacts:
• higher job satisfaction
• better career prospects
• higher salary
• higher stress levels
• lower satisfaction with family life
• poorer emotional health
(Burke and Fiksenbaum, 2009a, 2009b, c.f., Buchanan and Huczynski, 2016). The
motivational impact of extreme jobs for those who seek them needs to be balanced with
methods to reduce the long-term negative impacts at work and home. Companies where
these jobs are typical are coming under increasing scrutiny for encouraging such lifestyles.
Many of them are now trying to help workers deal with the side effects of these
environments, for example, helping them to work on their mental health, resilience, and
work-life balance. This article discusses what the Big 4 accountancy firms have been doing
to try to tackle the problem. You may wish to consider if you think it is enough and how you
would fare in such an environment.
As a manager, job design is important because it provides a vehicle through which you can
provide roles which motivate your workers by tapping in to what they value and the
activities that provide motivation for them.
You should be able to see echoes of the work of Maslow, Vroom, Adams and Locke. For
example, with experienced meaningfulness, we are reminded of Maslow’s focus on self-
actualisation as a state that workers are motivated to achieve. In terms of responsibility, this
has echoes of Expectancy theory and the notion that performance leads to achievement.
And with knowledge of results, this relates to the idea of feedback at the heart of goal-
setting theory. These are just examples and you will be able to find further reflections of the
theories of motivation in the model above if you continue to look. The purpose of this
section is to encourage you, as a future manager, to consider how job design impacts
motivation. High levels of meaningfulness, responsibility and knowledge of results will be
beneficial, but not to the degree that extreme jobs are created.
5.2 Pay and performance
Despite the research showing that money is just one of many motivating factors, companies
spend a large proportion of time debating how much people should be paid, and for what,
with the resounding belief that money motivates. We can reflect on what we have already
learnt about motivation to inform our advice to managers:
• We have seen how extreme jobs routinely use high salaries as a tool to motivate
workers to give more of themselves than might be considered healthy. Research on
equity theory shows us that, where people are significantly overpaid in relation to
comparison groups, they will work harder to redress the balance (Buchanan and
Huczynski, 2016).
• Equity theory sends a clear warning that if people feel that they are being paid less
than their colleagues, relative to their perceived effort, it could lead to demotivation
or underperformance to try to address the balance.
• Maslow shows that money can be a motivating factor, which allows workers to
achieve their needs such as safety, esteem or self-actualisation
• Expectancy theory leaves open the possibility that money could be a reward that
people value and as such they may choose to work hard to achieve financial rewards
Performance-related pay is a key way in which companies use money to motivate staff to
meet the organisation’s goals.
Staff in an organisation that uses ‘pay for performance’ will receive set ‘base pay’. This could
be very low in the case of, for example, a recruitment consultant’s base salary. Or, it could
be very high (e.g., in the case of a law firm partner, where the base salary of a lawyer in
even a small firm could be in excess of £300,000 per year). They will then also receive
‘variable pay’, based on performance. This might be in the form of a bonus, or commission,
and adds more money to that which is taken home by the staff member.
Pay for performance is often treated as a good way to manage the principal-agent problem.
By offering rewards for completing work in a way that meets the organisation’s goals, the
firm aligns its interests with those of the worker. Where this works, it can encourage
employees to increase their effort, as well as encouraging low performers (who fail to
achieve the bonuses or commission) to leave. It leads to a stronger match between
organisational goals and performance.
Such schemes have the advantage of being attractive to high performers, and aligning the
interests. However, aligning interests is not straight forward. If a company’s main goal is to
grow their market share, then you could argue that you should reward a manager for doing
so. But how? If they have grown market share by making unethical claims about the quality
of their product, then is that still worth rewarding? What about if they have changed the
way that they calculate market share so that their performance looks better than it is? And
how much of an impact have they, personally, had on that market share? If they realise their
minor impact in advance, will they work hard to alter the market share, or will the bonus
scheme not prove to be a motivator at all? Each of these problems highlights just how
difficult the creation of a successful pay for performance scheme is.
In addition, such schemes have the disadvantages of potentially reducing cooperation
between workers, discouraging people from sharing best practices (so that their
performance looks relatively better in comparsion to their colleagues), and they are less
likely to act as a team (as workers seek to meet their own goals rather than acting in the
best interests of the group they are a part of). For example, a team of sales staff, each has
their own client list, and sales from these clients will count towards their bonus. When one
member of the team is on holiday, there is no incentive for other team members to answer
the absent member’s phone, since they will receive no direct benefit for any sale made
(observed in a Print Factory 2011). It is interesting to note that the bonus system could have
been designed to prevent a different problem, the possibility of other sales staff poaching
sales (and getting the bonus) after a lot of work by the client sales representative. It is very
challenging to design effective reward schemes.
It can also be problematic to reward for complex, subjective work. Research shows that
managers are routinely unable to judge the quality of subjective work, for example a
presentation or the customer relationships (Buckingham & Goodall, 2019).
We can conclude that, whilst monetary rewards may have a role to play in reducing the
agency problem, as well as motivating staff to perform, there are a number of
disadvantages that also need to be carefully considered, and non-financial tools of
motivation should be considered by managers and their firms, too
5.3 Motivation at work – summary
This unit has shown why staff motivation is a key concern for managers. For managers, the
understanding and encouragement of motivation in their staff is a critical function of their
role. Being aware of how to elicit both intrinsic and extrinsic motivation through the design
of pay, jobs themselves, and the engagement of motivational theory, is critical.
This is in part because organisations and their managers need to be interested – just as the
human relations approach suggested they should be – in what it is that drives staff to
perform to their best. Treating their staff as a critical organisational resource is central to
quality performance. So much so that the Human Resource Management is focused on this
task. It is to the HRM function that we will turn in the next unit.
5.4 Five ways to support and motivate employees during the
pandemic
This article provides an insightful summary of some of the motivational issues that emerged
in the pandemic, written about nine months in. How can you see motivational theory in
practice
here? https://www.forbes.com/sites/forbesrealestatecouncil/2020/12/16/five-
ways-to-support-and-motivate-employees-during-the-pandemic/
Point 1 of the article says that managers should ‘demonstrate genuine recognition and
appreciation’. Which motivational theories does this remind you of?
Point 3 says that managers should communicate with transparency. Why do you think this
might be important from a motivational point of view?
Point 5 talks about assisting employees in the future. Where does this fit in relation to
motivational theories?
Is there any advice missing in this article that you would add, as a result of what you now
know of motivational theory?
Block 5: Human Resource Management
Essential readings
Pearson. Chapter 5. This chapter discusses Managing Diversity, which is a key theme of this
chapter.
Torrington, D., L. Hall, S. Taylor and C. Atkinson Human Resource Management (Harlow:
Pearson, 2017) Chapter 4: Strategic human resource management. Additional chapter from
respected HRM textbook, considering whether and if so, how, HRM can be seen as strategic.
Very clear on outlining these arguments and thus a good additional resource for anyone
struggling with this block.
Pearson. Chapter 12. This is the chapter that the first half of this unit is based on, and
provides more detail on the different functions if you would like more detail.
University Press, 2014), Chapter 4: The Search for Consummate Cooperation. This chapter
shows the link between Mayo and the Human Resource Management approach, and goes
into more detail on Ulrich’s research and the psychological contract
Boselie, P.,‘Human Resource Management and performance’, in S. Bach and M. Edwards (eds.),
Managing Human Resources (London: J. Wiley & Sons, 2013) pp. 268-288. Chapter from an
edited book, exploring the evidence for and against a link between HRM and business
performance.
Huselid, M. The impact of human resource management practices on turnover, productivity, and
corporate financial performance, Academy of Management Journal 38(3) 1995, pp.645–70. Journal
article giving a more detailed account of key themes of the chapter, in particular seeing if there are
good reasons for decent HRM practices.
Pfeffer, J. (1995). Producing sustainable competitive advantage through the effective management of
people, Academy of Management Executive, 9, pp.55-72. Well-argued journal article, making
a clear case for working with people, rather than just treating them as a resource.
Coyle-Shapiro, J.A–M. and L. Shore ‘The employee-organization relationship: where do we go
from here?’, Human Resource Management Review (17) 2007, pp.166–79. A well-known
paper by LSE academics, exploring the psychological contract, and a wider range of
relationship issues, now and considering future implications.
Guest, D. Is the psychological contract worth taking seriously?, Journal of Organizational
Behaviour 19 Special issue, 1998, pp.649–64. Clear journal article providing a very useful
great summary of the theory of the psychological contract, followed by clear criticisms of
some of the problems with it.
Pearson, 2017). Chapter 1: The nature of human resource management. Opening chapter
from respected HRM textbook, defining HRM, putting it into the wider business context, and
highlighting key practices, issues and activities within the HRM function.
2 What is Human Resource Management
2.1 Introduction
As we have established in previous units, the work of managers involves a significant
element of managing people. From the work of Taylor and Mayo all the way to today’s
organisations, managers continue to explore ways to harness workplace performance from
their staff. It is not just a managerial imperative: it is an organisational imperative, with a
recognition that an organisation that is staffed with the right people, trained and treated in
the right ways, will be much more able to complete its work and thus compete in the
industries in which it has a position.
When we talk about companies having the ‘right’ people, trained and treated in the ‘right’
ways, we are generally talking about having a good strategic fit. Recruiting and developing
people across the company who help the organisation to meet its strategy is seen as good
business sense. For example, Google has become well-known for wanting its people to have
‘Googleyness’, which means amongst other things ‘enjoying fun,’ having ‘intellectual
humility’ and ‘comfortable with ambiguity’. Google will thus have a concern with recruiting,
developing and rewarding people who have these attributes, enabling them to meet their
strategic aims which they feel rest on having people who have these qualities.
This aspect of the work that a company does is referred to as Human Resource
Management, and it is work that is usually shared between line managers and those who
work in the Human Resource Management function or department as specialists in the field
of HRM.
In this unit, we will look at what the HRM function includes, the debates about whether it
has a role to play in creating an organisation’s competitive advantage, and we will also
consider two topics of particular importance in the HR function that are of relevance to
contemporary managers more generally: Diversity and Inclusion, and the psychological
contract.
2.2 What does HRM entail?
The HRM department or function, often in close conjunction with the organisation’s line
managers (those managers to whom staff report), oversee a range of tasks, which build
towards four key organisational aims:
Aim One: to select and recruit the right employees
• Identify and select competent employees. Competency would be the minimum
viable level; employees who are more than competent and who operate in line with
the organisation’s aims and goals would be more appropriate and useful to the firm.
• Human resource planning identifies who is needed and when to fill the
organisation’s demand for labour
• Recruitment comprises the processes of finding suitable candidates
• Selection is when the choice is made as to who to ask to join the organisation
Aim Two: to develop employees to do the right work
• Provide employees with up-to-date skills and knowledge.
• Orientation is the process of bringing employees onboard and helping them to learn
and become familiarised (and where relevant, a part of) the organisations’ culture,
structure, processes and systems.
• Training is focused on skills and knowledge development throughout a person’s
employment. Training should be aimed at bridging gaps in skills and knowledge that
are needed for the organisation to meet its aims.
Aim Three: to reward and retain employees who do the right work
• Retain competent and performing employees. Organisations will want to make sure
that the best employees stay at the company, in particular those employees who
help the organisation to achieve its aims.
• Performance evaluation allows the firm to compare an employee’s current
performance to what is expected (training and development may be recommended
if there are gaps that the organisation believes can be filled)
• Compensation and benefits looks to reward employees for the efforts that they have
put in, and to motivate them for the future
• Career development looks at internal promotion and role changes, as well as looking
at how an individual may grow within their current role. Here, the focus is on
retaining good people throughout their career if they are deemed a good fit with the
organisation
Aim Four: to reduce labour where it is acting against the organisation's goals
• Manage labour supply. Where organisations find they have too many employees, or
an employee is not performing to the standards required, an intervention may be
required.
• Decruitment can take a variety of forms, including firing (permanent involuntary
termination of an employment contract), attrition (not filling openings created by
workers voluntarily leaving), and job sharing (asking employees to share a full-time
position instead of having a full position each).
Human
Performance Compensation Career
resource Recruitment Selection Orientation Training Decruitment
Evaluation and Benefits Development
planning
Provide employees
Manage
Identify and select competent with up-to-date Retain competent and
labour
employees skills and performing employees
supply
knowledge
2.4 Where did HRM come from?
In some large 19th century firms, ‘welfare’ departments were established that looked after
staff’s wellbeing in various ways. They were concerned with providing canteens, access to
medical services and housing. (Willman, 2014). In Germany, there was a strong emphasis
towards this sort of approach. In the UK it was associated with philanthropy by owners
whose concerns were religious or social, rather than economic, for example Cadbury, the
confectioner, and Wedgewood, in ceramics. In the USA, the earliest recorded such
department in the USA was the National Cash Register Company in 1897 (Wren, 2005,
p.186, cited in Willman, 2014).
Retrospective cynicism might see in these ventures the pursuit of business objectives – for
example, seeing the company doctor on premises might stop someone having to miss work
as a result of an appointment or illness. But there is reasonable evidence that it was
genuinely altruistic. For example, there is no systematic evidence of cost-benefit analysis in
the well-documented examples such as Cadbury (Willman, 2014).
Click here to read more about the history of Bournville, the town that Cadbury built to
house workers in its chocolate factories.
It is a useful summary if you are unfamiliar with the idea of the early philanthropic
companies.
Figure 4.2: Cadbury built a ‘model town’ where his workers lived were well treated
Figure 4.3: Bournville high street in recent times
Slightly later, more focused activities were driven by the performance optimisation needs of
scientific management and the human relations approach: selective hiring, pay to drive
performance and absence control were all central to the pursuit of efficiency. Where
disputes occurred between workers and the company, then the company also needed staff
to bargain and consult with the trade unions that were dominant at that time (and which
will shall see more of in our unit on Conflict Management).
In addition, countries have built up various employment laws around health and safety,
equality, welfare and pension systems, and collective bargaining (Gospel, 2007, cited in
Willman 2014). These needed housing in a centralised location.
From these different routes, the HR department – until recently called a personnel
department – was formed. You can see, from this genesis, why the HR function, in
conjunction with line managers, look after a range of concerns, including staff wellbeing and
welfare, performance optimisation, and legal issues. What a company may be particularly
interested in, however, is where the HR department can add value.
3 Mini-case study: TravelOG
3.1 Mini-case study: TravelOG
TravelOG is a company specialising in bespoke holidays to London, where guests are
accompanied at all times by an assistant who acts as a fixer, booker, and tour guide. They
have 125 employees, including the tour guides. They are looking to diversify into providing
bespoke holidays to other UK destinations, including Cornwall and Edinburgh. They are
currently deciding how many new staff to recruit, where they should be based, what
training to offer, and so forth. The only aspect that they are certain on is that guides for
each new destination will have their own line managers (e.g., one line manager for
Cornwall; one for Edinburgh). They have made the decision to expand because strategically,
the firm plans to be the biggest provider of high-end bespoke UK travel.
TravelOG have a very good HR team who can see ways that they can help and add value to
this initiative.
In what ways do you think the HR function believe they could add value to this initiative?
You should try to think of at least one way in which they could add value through each of
the following mechanisms:
Shared Services:
Centre of Expertise:
Business partnership:
Feedback:
You could have answered in a wide variety of ways, but here are some examples.
Shared services: TravelOG will be recruiting more staff, and so it makes sense for the
responsibility for tasks such as payroll and data collection to be handled by the central HR
team. The key value-add here is that HR adds value by saving the company the expense of
having to train all individual line managers on this aspect of work and them having to spend
their time undertaking this work.
Centre of expertise: TravelOG’s line managers will need help with recruiting and training
new staff members to make sure that they are picking the right people and training them
correctly. The HR function can help by using their knowledge and expertise in this area,
assisting the line managers to make well thought-out decisions on how to organise this
process.
Business partnership: the HR function could work closely with the senior team at TravelOG
to explore ways in which they can add to the strategic aim of the firm that this decision is
informed by. As the strategic aim is to become the biggest high-end provider of bespoke UK
travel, then the HR function could suggest a career development pathway which encourages
tour guides to stay at the firm for longer than is typical in the industry. This would retain
their expertise and allow the firm to expand with high quality staff who are able to provide
high-end travel services.
4 Does HRM add value
4.1 Does HRM add value and if so, how?
It is a common belief that having a great HR function adds value to an organisation, but is
this true? Adding value means that you put the company in a better financial position than it
would have been without the intervention.
HRM practices have been shown to be a significant source of value for firms, leading to
competitive advantage. In a study of more than 2000 global firms, the conclusion was
reached that people-centred HRM creates superior shareholder value (Lado and Wilson,
1994).
Individual HRM practices have been shown, in a wide range of ways to add value, directly or
indirectly. For example, here are some theories that will inform the work of HR practitioners
because they demonstrate a potential value-add for the firm:
• Training managers and employees to set SMART goals can help to improve employee
performance (Locke, 1968)
• Ensuring perceived equality between employees can increase motivation and
engagement (Adams, 1965)
• Jobs that are high in Skill Variety, Task Identity, Task Significance, Autonomy and
Feedback are more likely to lead to employee satisfaction, motivation, job
performance and retention (Hackman and Oldham, 1976)
• Desirable skills of managers which add value at Google and may be applied
elsewhere include being a good coach and a good communicator (Garvin, 2016)
Later in core management concepts, you will encounter further research that informs the
work of the HR function:
• What good leadership looks like
• How to manage conflict
• How to enact cultural and structural change in the organisation
However, where the real value appears to arise is in combining multiple HR practices
together, with their combination more valuable than their use alone (CIPD, 2021; Pfeffer,
1994):
“[I]ndividual HR practices alone do not drive better business performance. For example,
highly skilled individuals with valuable human capital can only generate value if they also
have positive relationships with their managers in a supportive environment with strong
values.” (CIPD, 2021)
4.2 Three core activities of HRM
Ulrich (2005) – a leading writer on HRM – advocates an HR function focusing on three core
activities in order to add value:
Providing shared services.

Ulrich says that HR departments assist the functioning of a firm when they perform the
basic administrative tasks required in the management of a workforce. They help the firm
because they centralise HR tasks, such as payroll, absence control and employee
information keeping which would be a waste of the time and resources of the line managers
(who, as you will remember from Mintzberg’s work, routinely feel overstretched). Efficient
centralised processes can reduce transaction costs within the organisation.
An HR department is performing well in this regard if it is timely in its provision of the
services and is not overly expensive. Firms often outsource elements of these shared
services – for example, pay roll – because the economies of scale are even greater when
they are shared between firms than absorbed by just one firm. One example of such a
company is Moorepay, who at the time of writing claimed to provide payroll services for one
sixth of the UK population (Moorepay, 2021). Companies will want to ensure that if they do
outsource, they are using a provider that is reputable as they are sharing highly confidential
staff data.
Centres of expertise.
Ulrich’s research also advocates HR playing a role in supporting and advising line managers
in their people management roles. This is the area where line managers and HR managers
will have the most interaction. They may help with deciding on training programmes,
deciding how much bonus to award, and helping with performance review. In different
companies, HR departments will take on varying degrees of responsibility in this regard.
However, middle managers in a recent study routinely reported a sense that they were
being expected to take on more HR-type responsibilities, without as much support from the
HR function (Best, 2021).
When acting as centres of expertise, HR departments focus on areas of the business, such as
the work of line managers, which require specific HR knowledge. If we look at the topic of
motivation, for example, many line managers will not know much at all about this topic.
However, HR professionals often undertake training on issues such as motivation
themselves, as well as having experienced what works and what does not first hand. As
such, they will likely be familiar with the options that may be available for dealing with a
member of staff who appears demotivated, and so will be a useful source of knowledge and
advice for the line manager.
Other examples would be the selection of employees, designing and applying reward
systems (including pensions), employee relations (including dealing with unions), training
and termination of employees. Compliance with relevant law is often an issue in all such
areas. Performance measures here would include, in addition to those for shared services,
some line management evaluation of quality of advice.
Business partnership.
Finally, Ulrich recommends that HR departments should work with high-level line
management (e.g., the senior management team and the board of directors) to improve
firm performance through more strategic initiatives. The idea is to add value through
projects or programmes, driven by HR that contribute to the strategic aims of the
organisation. For example, if a strategic priority for a university is to run online programmes,
the HR function could help with significant levels of HR planning that recruit, train and retain
the right sort of staff to handle such work.
The HR function may also have suggestions of their own. During the recession of the early
2010s, Dr. Best (who is writing this section) worked on a project with a law firm, Simmons &
Simmons, whose HR team did not want to waste the money that they had spent on
recruiting graduates who would not be needed on jobs in the next year due to the
contraction of the market. The HR team suggested working with a business school to create
a bespoke MBA to occupy the graduates and to upskill them before they started work a year
later. This helped Simmons & Simmons strategically, as it established their position as a firm
at the forefront of knowledge development and with a good understanding of business
issues. The value for the firm was laid out in an article in the Law Gazette at the time:
“For City firm Simmons & Simmons, developing business and client awareness needs to start
as soon as possible, so it offered its 2009 intake of trainees the opportunity to do an MBA
before they started their training contract, with 27 out of 52 taking up the option.
Nigel Spencer, head of learning and development at the firm, says: ‘We brought forward our
plans for business training partly in response to the market situation but also because BPP,
which provides our LPC education, was opening a business school. And because we had this
strategy, we didn’t need to look at deferring any trainees.’”
(https://www.lawgazette.co.uk/analysis/latest-developments-in-business-education-for-
lawyers/54678.article accessed 06/05/2021)
In 2014, Dr Sharon Wheatley, who had worked on the Legal MBA, was approached by a
competitor of Simmons & Simmons to go for a coffee. The purpose of this social interchange
was for them to try to find out what the course covered. The firm had noted that after
completing the MBA, the trainees at Simmons were outperforming their own trainees. They
wanted to know how this had been achieved. You will be looking at the strategic value of
internal resources and competencies in the External & Internal Analyses unit later in this
course, and how difficult it can be to replicate these internal capabilities.
Performance measures here are challenging, if not impossible because it is very difficult to
isolate and measure the value of HR initiatives on this scale and the impact they have had
on the whole firm when there is not another firm to compare them to.
This model helps to clarify neatly what the HR function can do to add value to the firm. It
recognises HR’s important role within the firm in terms of cost savings, advice, and helping
with strategic direction. It is just one example of many that companies are increasingly
looking at how their management of people can impact the economic results that they
achieve (Pfeffer, 1994).
4.3 The need for 'fit' in strategic HRM
Additionally, for HR to add value, there needs to be a fit between organisational objectives
and HRM practices (CIPD, 2021). Wall and Wood (2005, p.431) identify three types of ‘fit’
between HRM practices and the firm.
1. Internal fit ‘posits synergy among the practices, meaning that their collective effect
will be greater than the sum of their individual parts’. This means that HRM practices
themselves need to be related to one another and work in conjunction. If you spend
time recruiting and selecting really good graduates, it would be sensible to make
sure that you offer them the learning and training you know that they need and
want.
2. Organisational fit ‘concerns the role of HRM in enhancing the effectiveness of other
organisational practices or technologies, and vice versa’. If your company has spent
lots of money developing a new piece of technology, you will want to make sure that
you recruit people who you think have the ability to learn how to use it.
3. Strategic fit ‘assumes that HRM practices need to be aligned with the organization’s
strategy to have their full effect on performance’. Starbucks’ mission is to ‘inspire
and nurture the human spirit – one person, one cup and one neighbourhood at a
time’ (2021). You may want to make sure that your appraisal system measures how
good your baristas are at making coffee, or making your customers feel happy, so
that customers have the highest chance of feeling nurtured and being inspired.
The first concept of fit suggests that some combinations of HRM practice may be better than
others and add more value.
The second implies that some combinations may optimise the performance of certain
technologies.
The third reaches to the heart of Ulrich’s idea about the organisation of the HRM department
and its relationship to line management: your HR approach needs to fit your organisation’s
strategy. For Ulrich, the essence of competitive advantage from HRM is the alignment of the
HRM practices, the organisation’s strategy, and the work of the line manager.
If Wall and Wood are correct, then adopting a practice or set of practices employed by a
successful competitor does not guarantee success. They may choose to benchmark their HR
practices against those of other firms, but this may only tell them what works in those firms,
and may simultaneously limit their aspirations to do better, or do different.
This paper looks at what HR could do to help strategy, but argues that it rarely does
it: https://www.forbes.com/sites/edwardlawler/2014/02/11/hr-should-own-organizational-
effectiveness/?sh=5deeca141e46
In sum, managers should pay attention to the important work that HR can do in terms of
managing people and adding value. However, it is difficult for HR to achieve strategic fit,
and to make a great impact on the firm’s ability to beat its competitors. Nonetheless,
spending effort on successful people management using the expertise of the HR function is a
critical element of the managerial role, and one which a considerable body of relevant theory
can help with.
5 Contemporary Human Resource Management
5.1 Contemporary HR issues
To give a sense of the wide variety of topics that are of concern to the HR function and
which have an impact on their work, we will now consider two topics, that are very different
to one another, which have impacts for the work that the HR function does.
The first topic is Diversity and Inclusion – a topic that has gained importance in wider society
and has a large impact on the contemporary firm. We will look at why companies are
focusing on diversity and the role that HR and line managers play in delivering on diversity
and inclusion aims.
The second topic is the psychological contract – a concept originating in academic research
and which explores the expectations that workers have of their companies and how this
impacts their relationship with the company.
We have intentionally chosen two very different topics that are of import to HR to show just
how varied their work is and the wide range of issues they ‘look after’ (with the support of
line managers) for the firm.
6 Diversity and Inclusion
6.1 The case for diversity and inclusion
A key concern of contemporary organisations which sits with the HR function and is worthy
of independent consideration is that of diversity and inclusion.
The workforce in advanced industrialized economies is diverse, and there are ethical
reasons, as well as a business case, and a legal imperative for organisations to match that
diversity within their staff.
The ethical reasons for encouraging diversity: The moral argument says that companies
have a moral responsibility to treat people fairly and well. In contrast, others argue that the
only moral obligation of a company is to make money for its owners (Friedman, 1976). This
has made it particularly important to make a legal and business case in order to encourage
diversity and inclusion in the workplace.
The legal imperative: legislation which focuses on ensuring that those in groups that have
been historically underrepresented in the workplace are protected. In the UK, for example,
anti-discrimination legislation (Equality Act 2010) prevents anyone discriminating against
another on the basis of any of the following characteristics:
• age
• disability
• gender reassignment
• marriage and civil partnership
• pregnancy and maternity
• race
• religion or belief
• sex
• sexual orientation
There are growing bodies of similar legislation globally. For example, the UN outlines on this
page all the countries that have some form of disability discrimination law in place. The
legislation will be more or less effective, but it shows that countries globally are increasingly
protecting workers with legislation. This reflects changes in social expectations of reduction
of inequality and discrimination.
The business case: the business case focuses on the argument that companies who embrace
diversity and inclusion are better off than those that don’t. The argument has been made
along five major strands:
Diversity creates a wider labour pool for recruitment
Managers who can see beyond demographic characteristics (either through upbringing or
training) are more likely to promote and develop the most talented employees
It provides more opportunities for innovation: "The greater the range of employees from
different backgrounds and with different perspectives, the greater the opportunity for the
development of new ideas about products, services, ways of working and problem-solving.
This might help place an organisation at the cutting edge within its industry and help
generate a creative and vibrant working environment/culture." (Beardwell, 2017: 189).
It leads to a wider customer base because the workforce is likely to understand and identify
with more potential target markets. For example, if you are trading in a country with a large
consumer group comprised of African American women (as in the US), then having
underrepresentation of African American women in your firm means you are less likely to
be able to understand and engage that client base with your products.
It leads to a positive organisational image: an organisation that makes it clear that it is
committed to equitable treatment of the workforce, and invests in diversity, it is a powerful
way of projecting a positive image to customers and potential employees. Within the firm, it
may also increase workforce satisfaction and commitment, and reduce staff turnover
(Tulshyan, 2020).
6.2 Managing diversity & inclusion
If companies aim to increase diversity and inclusion, then they will need to establish policies
for how they plan to change things. This can have a number of elements, but they might
include one or more the following (Beardwell, 2019). Many of these could be implemented
at the same time:
Creating equality of opportunity
Giving everyone equal access to job and promotion opportunities so that everything is then
based on an individual's skills and behaviours. This is a 'best person for the job' approach, as
long as everyone has been given an equal opportunity to try out for that job. In order for
this approach to work, companies need to focus on making sure that decisions around, for
example, how to advertise a role, how to select candidates, how to interview them, what
questions to ask at interview, and how to decide on the best person for the job are free
from bias, stereotyping and prejudice. Bias is a topic we will return to in the unit on Decision
Making, where you will have the opportunity to explore how bias can negatively impact the
HR process.
Creating equality of outcome
This would be making sure that everyone gets a 'fair share of the cake', because it would be
proposed that it's not possible to make the procedures fair. Educational backgrounds may
be different, ability to view job adverts may be different, and skill at presenting one's skills
at interview may be different. Quotas for having a certain proportion of women on a
company's board, are based on this approach. Some evidence suggests there are benefits
from increasing diversity on boards, whilst other evidence indicates no significant impact. It is
very difficult to isolate board composition from other factors that impact on performance
eg: level of automation or motivational strategies. However, such a 'quota' approach is not
always popular, with the feeling that people are not there based on merit, but just to make
up the numbers resurfacing repeatedly.
Discrimination proofing
Working hard to make sure that all HR procedures are free of discrimination by looking at
current ways of doing things and exploring areas in which improvements could be made. A
detailed audit of HR processes as they current stand is carried out, and any areas where
unfairness is blatant or could creep in are adjusted accordingly to make them fairer. Again,
this picks up on issues of bias which will be discussed in the decision making unit.
Positive action
Undertaking specific initiatives which encourage under-represented groups to apply for
jobs, or to go for promotion. Examples could include launching a recruitment campaign that
focuses on advertising on websites used by a demographic group that is currently under-
represented in the firm; introducing flexible working hours to make it easier for working
parents to take on more senior positions; altering uniform policies to take religious
requirements into account; or actively taking stance on anti-racism issues. Local police
forces in the UK are being encouraged to increase their diversity, running, for
example, advertising campaigns celebrating difference.
Equality monitoring
By systematically gathering and monitoring data on workforce composition (e.g., percentage
of people from different racial backgrounds; ratio of men to women; growth in number of
LGBTQ+ employees) organisations can be clear about where they could improve overall
balance in the workforce. Countries differ in what is legal, and how to approach this, so
global firms will need to abide by national practices in their regional offices where
appropriate.
Criticisms of equality and diversity policies
A key challenge, however, with equality and diversity, is that firms and managers introduce
policies to comply with what is expected legally and by their markets rather than believing
in what they are doing, or following through on what the process expects of them. If they
gather equality monitoring data, for example, to tick the box rather than to make
meaningful change, then it's worse than doing nothing - as to the outside world it may look
as though they are making an effort when actually they are purposively choosing to
disengage. Therefore, having a policy is not sufficient to guarantee that equality and
diversity is being taken seriously in the firm.
6.3 Which social justice approach is being espoused?
Look at the two examples below and then decide which social justice approach each law
firm is espousing.
Law firm A spends lots of time and effort making the recruitment process appear to be
really fair. They have clear metrics for checking on school and university grades; have
standardised interview questions; and a standardised metric. But this metric doesn't take
into account that it is harder to get a top grade in an state-funded comprehensive school in
a high poverty area than in a rural fee-paying school with a selective entry process. Despite
trying to be fair, one year it ends up recruiting 77% white males from fee-paying schools
because its processes inadvertantly favour this group.
Law firm B recognises that they have been falling into the same trap as Law firm A. To
counteract it, they use a piece of software which multiplies your school grades by a
'difficulty' factor, which tries to reflect that achieving a top grade in one type of school will
be much harder than in another type. Two years after introduction, they recruit only 31%
white males from fee-paying schools. It makes it much harder to be recruited into law firm B
if you are from a fee-paying school, and those white males who want to work in this law
firm feel as though they are being unfairly penalised for the school they have been to. There
are informal reports that a number of bright pupils in fee-paying schools are switching to
state-funded sixth forms to take their final school exams, so that they can get a higher
adjusted exam score.
Feedback:
Law Firm A is focusing on providing equal opportunities for everyone to apply for the role,
and to stand a chance of being successful. They have done this by removing the sense that
opportunities to see the job advert, apply, or be selected are being withheld from anyone.
They are looking for ways to remove bias from the recruitment process.
Law Firm B is focusing on the end result: how many types of people does it end up with in
each position? They have done this by looking at how to fairly reflect the difficulties with
taking part in the recruitment process for those who are from less priviledged backgrounds
and to find ways for them to participate as a result.
6.4 The role of line management in diversity and inclusion
Whilst the HR function may be the ‘centre of expertise’ with regard to diversity and
inclusion, as well as helping to drive forward strategic change at the company level,
responsibility will also sit with line managers in terms of recruitment decisions, promotion
decisions and the fair treatment of colleagues. For the successful implementation of
diversity and inclusion approaches, they need to be fully understood by line managers, and
require line managers to be prepared to change the way that they work to accommodate
them (Pedulla, 2020).
This is because having diversity and inclusion initiatives that recruit, retain and promote a
wider range of people is not enough for the business case to work. Firm managers at all
levels need to play a role in (Ely and Thomas, 2020):
• Creating a workplace where people feel free to express themselves and trust that
they will be supported when they do so.
• Actively combating systemic bias and any systems which oppress equality. For
example, having a higher proportion of working mothers in the workplace is
insufficient if their working hours needs are not supported in a way that allows them
to thrive.
• Embracing a variety of styles and voices inside the organisation, without being
wedded to such high levels of cultural fit that diversity is smothered.
• Using employees’ diversity knowledge and experiences to find ways to best-
accomplish the firm’s work.
As such, managers need to recognise their important role in working with the HR function,
and the diversity stance of the firm, to ensure that the company is delivering on its diversity
and inclusion agenda.
7 The Psychological Contract
7.1 The Psychological contract
When employees begin work at an organisation, they sign an employment contract which
states (amongst other things) where they are expected to work, when, and how – and what
they can expect of the company in terms of payments and benefits.
However, there will also be an unwritten set of expectations that a worker will have on a
firm, and that a firm will have on a worker. Some of these may be the same as what is
written in the employment contract, some may be different, and many will be altogether
new.
Rousseau, whose research elevated the matter to a topic that HR professionals might take
interest in, defines the psychological contract as:
“Individual beliefs, shaped by the organisation, regarding terms of an exchange agreement
between individuals and their organisation.” (Rousseau, 1995: 9)
Thus, the psychological contract is an unwritten set of expectations of the employment
relationship.
A written employment contract might say that a worker is expected to be in the office 9 – 5
Monday to Friday. However, in interview, a worker might be told informally that most
people actually work from home on a Friday and tend to finish around 4p.m. on that day.
The employment contract says one thing, the worker has been told another, and their
expectation becomes that they will usually be able to finish early on a Friday. Their
psychological contract with their employer on this aspect looks very different to their
employment contract. Having started the job, over time, the worker will build up more and
more expectations about what they can expect from the employer and what the employer
expects from them – in terms of quality and quantity of work and reward, as well as more
subjective matters such as what level of management support can be expected and what
sort of training can be expected. Both economic and social concerns are covered in the idea
of the psychological contract: alongside swapping rewards for labour (as the conventional
employment contract states), both parties make considerable idiosyncratic investments to
one another – and this recognition is why the idea of the psychological contract is so
powerful.
The psychological contract evolves ongoingly, based on communication, or lack of
communication, as well as assumptions, between the employer and the staff member.
Promises of a promotion, or of a salary increase, or of time off, or recognition in some other
way, for example, could form a part of the psychological contract.
Routine work patterns can influence the psychological contract, for example, one secretary
at company with 9-5 hours usually chooses to work until around 6pm. One evening she
leaves at 5pm, and a colleague asks, ‘Did Mary leave early today?’. The pattern of
behaviour has developed expectations of performance in her colleagues. The actual
contract requirements have been overridden by practice.
Managing expectations is a key task for HR managers, alongside line managers, so that they
don’t accidentally give employees the wrong perception of what they can expect from the
organisation. Because, if those expectations were then not to materialise, it could damage
the relationship (potentially severely) between the worker and the firm.
The same is true around the other way: workers need to manage the firm’s expectations of
them (usually via their line manager) so that if they cannot meet the expectations, this is
taken as a forgivable error as opposed to a severe breach of the psychological contract. For
example, if a worker realised that they were not going to be able to meet a deadline, they
may go to their line manager and apologise, give a reason, and give reassurances that this is
unusual and will not happen again.
The reason why workers, line managers, the HR function and firms need to take such care is
because perceived violations or breaches of the psychological contract can severely damage
the relationship between firm and employee.
Precisely what will happen will depend on circumstances and the seriousness of the breach
(or its perception). It can lead to demotivation, disengagement, reduced productivity and
even destructive behaviour. It can even lead to the employee choosing to exit (We will be
picking up on some of these themes of dissatisfaction and exit in the Conflict Management
unit). Repeated breach can also generate a shift back towards a transactional contract: an
employee will just fulfil what is expected of them in the written employment contract and
will expect no more than that from the firm in response.
Interestingly, an employer may successfully align psychological contracts, but can only
expect to achieve ‘business as usual’ outcomes (Rousseau, 2005). In other words, being
aligned is not a motivator – it just prevents dissatisfaction and problems. However, if they
are not aligned, the breaches caused by this misaligning of psychological contracts can
reduce levels of motivation, engagement and productivity.
Reflection: Individual work

Reflect on your experience in a work context, or an educational context:
• What was expected of you by the organisation? How well did you meet their
expectations? What was the consequence?
• What did you expect of the organisation? How well did the organisation meet your
expectations? What was the consequence?
(adapted from Boddy, 2014)
7.3 Evaluation of the psychological contract
A major limitation is that research on the psychological contract focuses almost unilaterally
on the employee – and so we have little understanding of whether a company experiences a
breach, what that would feel like, who would experience it, and what they might do as a
result. The difficulty perhaps is that we are discussing a psychological process that occurs
with an individual in relation to the abstract entity of the firm. We could not hope to
understand the ‘psychology’ of the firm. We could, however, look at how a manager
experiences a sense that an employee has violated the manager’s expectations of them.
Despite this criticism, what we have discovered through research on the psychological
contract is valuable: employees have a wide range of expectations on employers, and these
are not just economic. The implications of breaching these can be severe, and thus the HR
function, and line management, have important roles to play in engaging with employees to
shape the perceptions that they build up with regard to the psychological contract. For
example, they will want to find ways to use communication opportunities, such as
recruitment, appraisal, reward setting, and training, to communicate what is expected of an
employee and what they can expect in return.
Line managers have a further, important role to play in gaining insight into – and helping to
manage – employees’ expectations and perceptions on what the firm should be, and is,
doing with regard to aspects that may be important to their psychological contract.
From a firm perspective, some breaches will be unavoidable. For example, an economic
downturn may lead to a company having to reduce bonuses and training budgets.
Companies that handle this with perceived fairness can reduce impacts to the psychological
contract (CIPD, 2013).
7.4 Video: why the psychological contract is useful at work
This video is a 5 minute ‘inspiration session’ from the University of London’s MSc in
Organisational Psychology, focusing on the psychological contract. Watch the video to gain a
better understanding of what the psychological contract is and why it’s seen as ‘one of the
most useful and insightful ways of understanding behaviour at work.’
https://www.youtube.com/watch?v=iD9jLSWUlC8
8 HRM Quiz
Please attempt the quiz on the VLE, you can find it on this page here:
9 Discussion: Use of Quotas

9.1 Discussion: Use of quotas
The topic of quotas is controversial, with countries very split on whether they think they are
a good idea or a bad idea.
Read this article and share your thoughts on whether you think quotas are of benefit, or
harmful?
https://hbr.org/2016/11/what-board-directors-really-think-of-gender-quotas
Block 6: Managing Conflict
Essential readings
University Press, 2014), Chapter 3: Workers of the World ... - This chapter looks at the rise
of unions as a vehicle for collective action.
Whetten, D.A. and Cameron, K.S. (2016). Developing Management Skills. Harlow: Pearson.
Chapter 7: Managing Conflict. The models used in this unit are drawn from this chapter,
with the chapter going into more detail and therefore worth reading.
University Press, 2014), Theme 3: A Short History of Collective Action – This chapter widens
the analytic lens to look at the role that collective action plays in shaping frims and their
bheaviours.
Buchanan and Huczynski, Organizational Behaviour (Harlow; Pearson, 2013). Chapter 21,
Conflict. The content of this chapter is closely related to the unit and so is a useful reading
for deepening knowledge of key concepts and models.
Freeman, R. and Medoff, J. What do unions do? (New York: Basic Books, 1984) [ISBN
9780465091324] Chapter 11. – a key work, looking at the role that unions played in the
workplace of the twentieth century. If you choose to read this, you will need to think about
what is still true and what has changed. You will be able to use what you have read in the
unit to help you figure this out.
Pearson, 2017) Chapter 21: Employee Voice. Considering unions from the perspective of an
HRM textbook, thus with a slightly less complex outlook and making use of relevant theories
in an accessible way. A focus on voice (rather than just unions) helps to widen the
perspective. NB: it may be best to read this after completing Blocks 4 and 5 so that HRM
terms are more familiar.
Wilkinson, A., T. Dundon and M. Marchington ‘Employee Involvement and Voice’, in S. Bach
and M. Edwards (eds.), Managing Human Resources (London: J. Wiley & Sons, 2013) pp.
268-288. A relatively contemporary account, widening the discussion away from the general
idea of ‘voice’ and towards specific employee involvement mechanisms that can be used to
provide voice and participation in workplace management.
https://theconversation.com/why-attending-a-climate-strike-can-change-minds-most-importantly-
your-own-122862 - looking at the mechanisms behind collective social action, e.g., attending
climate change protests and why they work.
https://theconversation.com/forget-workers-going-out-on-strike-in-future-it-should-be-consumers-
81114 - opinion piece looking at how effective collective action may involve workers and
consumers together.
2 Conflict at Work
2.1 Introduction
Conflict can be defined as ‘a process that begins when one party perceives that another
party has negatively affected, or is about to negatively affect, something that the first party
cares about.’ (Huczynski and Buchanan, 2013: 721). If we view the topics you have learnt
about so far in Core Management Concepts through a conflict lens, we can see conflict
everywhere:
• The principal-agent problem has conflict between what the principal cares about and
what the agent cares about at its very heart.
• The engineering view of management – espoused by Taylor, for example – looks to
solve conflict between what workers and their managers care about, by rewarding
workers well for hard work as measured in high work outputs.
• The Hawthorne Studies identified conflict between members of teams when
someone worked too fast or too slow, and saw people reduce their possible
productivity to avoid conflict.
• Mintzberg’s model of management contains multiple roles that look, directly or
indirectly, at avoiding and dealing with conflict, including ‘disturbance handler’,
‘negotiator’ and ‘resource allocator’.
Thus, if we start to look for it, we begin to see that conflict is everywhere in the
management literature.
The Human Resource Management approach, which we looked at previously, is interested
in how best to manage staff, has considered the effects that conflict has on performance.
We have not looked directly at this body of research yet, but we will consider elements of it
in this unit. In particular, we will see how some types of conflict, at a low level, can be
beneficial for organisational function, but how most conflict is problematic and should be
reduced. Managers have a key role to play in this management and reduction of conflict.
We will also look at conflict through quite a different lens, to consider the role and impact of
collective action on firms and their managers. Collective action refers to action taken by a
group of people, working together, on an issue that they feel is important, usually to
enhance their condition (Willman, 2014). Collective action includes, but is not limited to,
workplace unions. Collective action emerges when a group of workers feeling negatively
affected by an action, or a possible future action, of their organisation. A typical collective
action may be a strike or a protest. Despite being perceived as more historical than
contemporary, collective action is still very much around today, albeit in different forms.
2.2 Is conflict beneficial?
As a manager, it is common to witness conflict within the team that you manage, or within
the leadership team of the organisation. It is tempting, particularly as a less experienced
manager, to perceive all conflict as bad. A desire for peace and harmony may sound very
reasonable. However, some conflict can be of benefit to an organisation, as research
increasingly shows (Bradley, Klotz, Brown & Postlethwaite, 2013).
In order for this idea to make sense, we need to recognise that there can be functional
conflict, and dysfunctional conflict. It views conflict as a potentially positive force within
organisations, that can help with optimising performance. In this view, managers have an
important role to play in achieving the optimum level of conflict (not too little, not too
much).
The problems with too little conflict can include apathy; ideas going unchallenged; and
extreme group cohesion leading to groupthink. We will focus on groupthink momentarily as
it's an interesting and useful concept.
Groupthink
Groupthink occurs when members are keener on ‘getting along’ than on challenging one
another or thinking critically about ideas or decisions that group members suggest (Janis,
1982). The research studied major and highly public failures of decision making, looking for
a common theme to explain why apparently able and intelligent people made bad decisions
(Boddy, 2012). The research identified eight symptoms of groupthink:
• Illusion of invulnerability – any decision they make will be successful
• Belief in the morality of the group – justification by reference to a higher standard
• Rationalisation – playing down negative consequences of a decision
• Stereotyping out-groups – referring to opponents in dismissive terms
• Self-censorship – suppressing legitimate doubts in the interests of group loyalty
• Direct pressure – members (or the leader) make it clear dissent is not welcome
• Mindguards – keeping uncomfortable facts or opinions out of the discussion
• Illusion of unanimity – minimising doubts to support appearance of unity
Groupthink has been cited as a contributory factor in the Challenger disaster in 1986, when
the space shuttle exploded shortly after take-off. Schedule was prioritised and suggestions
or evidence that would slow the programme down was not welcomed or solicited. You can
read more about this historical event and the role that groupthink may have played here.
(NB: Groupthink is an example of allowing bias to creep into decision making, which will be a
major theme of our unit on Decision Making).
The impact of groupthink can be significant, and structural arrangements in the organisation
can be used to include ‘independent’ members in meetings, with a role as ‘Devil’s
Advocate’, to ask the questions group members are reluctant to voice. For example, the
technocracy function identified in Mintzberg’s organisation types might include Quality
Assurance. Staff in this function are independent of production managers or the design
team, reporting to a different line manager for guidance and performance assessment. This
independence enables them to raise questions which may not have been put forward by
other meeting attendees. The internal structure means these questions need to be
addressed, in order to gain QA approval to proceed to the next stage of the project, for
example.
Using conflict to avoid apathy and groupthink

Seeing conflict as helping to avoid apathy and groupthink encourages managers to maintain
a level of conflict to encourage innovation, change and reflection. “Performance
improvements occur through conflict exposing weaknesses in organizational decision
making and design which prompts changes in the company.” (Huczynski and Buchanan,
730).
At optimal intensity, conflict has been shown to provide benefits including:
• Providing the motivation to deal with problems
• Encouraging issues to be discussed and made explicit
• Helping employees to understand problems, motivations, ideas and goals more
clearly
• Facilitating conversations that allow employees to understand one another more
readily
• Stimulating a sense of urgency
(Taffinder, 1998, in Huczynski and Buchanan, 2013).
Plenty of research backs up this perspective. For example:
“A conflict over issues is not only likely within top-management teams, but also
valuable. Such conflict provides executives with a more inclusive range of
information, a deeper understanding of the issues, and a richer set of possible
solutions. [In our 10-year study] we found that the alternative to conflict is usually
not agreement but apathy and disengagement. In fast paced markets, successful
strategic decisions are most likely to be made by teams that promote active and
broad conflict over issues without sacrificing speed. The key to doing so is to mitigate
interpersonal conflict.”
(Eisenhardt, Kahwajy & Bourgeois, 1997: 84-5, in Whetten and Cameron, 2016: 330)
According to this model, a manager’s starting point with conflict should not be to run away
from it, or to manage a team in a way that totally stifles all conflict. Rather, they should
ascertain whether the level of conflict is appropriate and only look to de-escalate where
relevant.
However, we may want to look more carefully at the source of conflict, too – as this can
shape whether the conflict is likely to be functional or dysfunctional.
2.3 Conflict statements: which do you agree with?
• ‘Conflict is an inescapable part of organisations.’
• ‘Having an argument with someone at work makes me feel terrible.’
• ‘Teams that always get on and never challenge each other are too safe, and not
productive as a result.’
Which of the statements above do you agree with? How might your views influence the way
you manage?
Discuss with your classmates, or post your thoughts to the discussion group on the VLE.
3 Reflection
3.1 Reflection: Conflict Statements
‘Conflict is an inescapable part of organisations.’

‘Having an argument with someone at work makes me feel terrible.’
‘Teams that always get on and never challenge each other are too safe, and not productive
as a result.’
Which of the statements above do you agree with?
4 Sources of Conflict
4.1 Discussion
Conflict within a group or team arises from one of three sources:
Task conflict:
Task conflict tends to emerge when there are disagreements among group members about
the content and outcomes of the task being performed. This is conflict over what should be
done and/or what the target of doing it is. For example, if a project team has been formed
in a breakfast cereal company to ‘make our cereal better’, and there is a nutritionist, a
marketer and a finance specialist on the team, they may all have very different perspectives
on the question. The nutritionist may see ‘better’ as making the cereal healthier; the
marketer may see it as creating a cereal that they can sell more units of, and the finance
specialist may see it as a cereal that costs less to make per box.
Relationship conflict:
Relationship conflict emerges when there are disagreements among group members about
interpersonal issues, such as personality differences, or differences in norms and values.
This is conflict over differences in who we are that make it hard to work together. Consider
the breakfast cereal team mentioned above. Imagine that the nutritionist belittles the ideas
and efforts of the other two team members. She flatly rejects her team members’
suggestions, making it clear that she thinks their perspectives are irrelevant or stupid, and
doesn’t show them due consideration. She is likely to trigger relationship conflict as a result.
Process conflict:
Process conflict emerges where there are disagreements among group members about the
logistics of task accomplishments, e.g. delegation of tasks and responsibilities. This is conflict
over how a task should be completed. Again, think of the same team above. They can’t
decide how to distribute administrative tasks amongst the team, can’t decide on the
deadline, and can’t come to a decision as to who will be reporting back to the Chief Product
Officer.
4.2 Impact of different sources of conflict
Impact of different types of conflict
Research to this date has not found any evidence that relationship conflict can have a
positive impact on work outcomes. It is nothing but a problem. As such, all relationship
conflict is dysfunctional from a work perspective.
Task and process conflict, however, at low levels, and in some circumstances, can be
functional.
One study shows that the more emotionally stable and open to new experiences team
members are, the more beneficial low levels of conflict are likely to be (Bradley, Klotz,
Brown & Postlethwaite, 2013). Another shows that teams with just a few members who
perceive task conflict work particularly well because those team members will raise issues
carefully and in a politically sensitive matter: they get dealt with, but not in a
confrontational way (Sinha et al., 2016).
Taken together, what this is saying is that, in some circumstances, disagreement over task
and process can be beneficial for organisational performance. It has a role to play in
improving processes, driving change, creating innovation and solving problems. However, it
must be emphasised once again that this is a very minimal level of conflict that we are
talking about, undertaken in a way that might be better described as open discussion, or
disagreement. And in order for it to work and not to ‘blow up’ into full-blown conflict,
research suggests that the following actions can help:
• Working with high levels of information (so that decisions and disagreements are
based on unarguable fact)
• Proactively develop multiple alternatives to encourage debate and enrich the
viewpoint
• Specify and focus on a set of commonly-agreed end goals
• Use humour to reduce tension and increase cohesion
• Resolve issues without forcing anyone to concede
(Eisenhardt et al., 1997, adapted in Whetten and Cameron, 2016).
External link
Amy Gallo, contributing editor at HBR, argues for the need for disagreement at work:
https://hbr.org/2018/01/why-we-should-be-disagreeing-more-at-work
What do you think? Do you agree with her?
Discuss with your classmates, or post your thoughts on the forum.
4.3 Reflection on a past conflict
Identify a recent conflict between you and a family member, a classmate, a friend, or a
colleague.
Describe the details of this conflict and how it began, how you managed or responded to it
and how it ended.
• Is it a task, relationship, or process focused conflict?
• Which management techniques did you apply?
• What, if anything, would you do differently if you were to encounter this type of
conflict again?
Post a summary of your evaluation of the situation to the forum. Read other students
accounts of conflict, can you suggest different ways their conflicts could have been handled?
Remember to be sensitive in your answers.
5 Types of Conflict (discussion)
‘Conflict is an inescapable part of organisations.’
‘Having an argument with someone at work makes me feel terrible.’
‘Teams that always get on and never challenge each other are too safe, and not productive
as a result.’
Which of the statements above do you agree with?
Discuss with your classmates, or post your thoughts on the forum
6 Conflict Themes
6.1 Resolving Conflict
Where conflict levels are too high, a manager may need to step in to redress the balance. By
ascertaining the levels of assertiveness and cooperation in each party, a ‘prescription’ of
what to do can be created (Thomas, 1976). The idea is that a manager should be capable
and flexible of switching between conflict management styles, in order to resolve conflicts
effectively. However, research suggests that managers tend to rely on just a couple of styles,
and this may be the reason why conflict management in organisations is routinely sub-
optimal.
Evaluation of different approaches

Approach Objective Point of When to use What’s the
view danger?
Competing (I Get your ‘I know When you Can leave
win, you lose) way what’s need results business
right. Don’t quickly. When relationships
question it’s a one -off in a bad way.
my relationship
judgement (as opposed to
or needing to If you win you
authority.’ maintain good feel
relationships) vindicated but
the other
When the
party may feel
other party is
very
conflictual defeated and
(but could humiliated
then lead to a
deadlock)
Avoiding (I lose, Avoid “I’m When it’s a Likely to build
you lose) having to neutral on trivial issue up
deal with that one” and the cost of resentment or
conflict “Let me resolving the long term
think about conflict frustration.
it” “That’s outweighs the
someone benefit. If
else’s you’re May force the
problem” dragged into a other party
meeting into a
unprepared, different
you may want action that
to use this you have no
temporarily control over
(e.g., leaving
the
relationship)
Compromising (I Reach an “Let’s When you are Can lead
win some/lose agreement search for a pushed for people to
some, you win quickly solution we time AND you adopt
some/lose can both are dealing extreme
some) live with so with someone positions
we can get you trust. initially and
on with our then haggle,
work.” which is a
When you waste of time
have nothing and causes
else left to bad feeling.
offer and it’s
the only way
to reach an Can lead you
agreement. to quick,
rather than
effective,
solutions
Accommodating Don’t “How can I When The other
(I lose, you win) upset the feel good you/your person may
other about company are take
person this?” “I at fault, you advantage of
don’t want have nothing you. There are
to risk bad else to give, better ways to
feelings and the maintain
between relationship is harmonious
us.” critical. relationship
where the
other party is
If you’re in a encouraged to
very weak respect you
position, the more.
best option
can be to give
in gracefully.
Collaborating (I Solve the “This is my Aim to use this If you are
win, you win) problem position. as often as committed to
together What’s possible, collaboration
yours?” particularly but the other
“I’m where lots is party is not,
committed at stake. Both they may take
to finding parties should advantage of
the best be committed you.
possible to the
solutions.” solution.
“What do
the facts
suggest?”
Adapted from Cameron and Whetton, 2016
and https://hms.harvard.edu/sites/default/files/assets/Sites/Ombuds/files/NegotiationConflictStyles.pdf
Here, we are looking at possible styles for managing a conflict, chosen based on the
combination of assertiveness and cooperativeness. The table above presents a summary of
the five positions, why you would use them and the dangers of doing so.
Whilst the collaborating style enables mutual benefit in a way that the other methods do
not, it is important to note that it is not always appropriate. If you are keen to collaborate
but you are engaging with another party who is keen to compete, you will need to be
careful that you are not exploited.
6.2 Conflict and resistance
In the earliest units of Core Management Concepts, you saw that at the heart of the working
relationship is the principal-agent dilemma: both owners and workers wish to maximise
their utility.
Even if we do not fully hold by this economic theory, there is still a strong current of profit
maximisation flowing from business owners. You learnt that the emergence of the factory
system made business owners the controllers of the means of production. Managers and
workers are put to work by the owners for a salary. it becomes possible to see why conflict
could be perceived endemic to the working relationships in the capitalist system. Where
owners look to make a profit from a workforce, and they control the means of production,
there is the possibility of conflict where workers are dissatisfied with what is being offered
to them in relation to performing their role.
If owners follow the path of profit maximisation, then they will look for ways to drive down
the costs of production. Measures could include job redesign, automation, monitoring, and
placing pressure on workers to go faster. Any changes may impinge on the psychological
contract from the perspective of the workers, too.
Worker resistance is a term used to cover worker behaviour that restricts owner and
manager attempts to exercise control over work and the workplace. It encompasses five
categories of actions:
• Sabotage – attempts to disrupt or destroy processes or products. This could include
breaking equipment or being rude to customers
• Escaping – removing oneself from work tasks. This could include absenteeism,
resignation, coming in late, going home early, or withdrawing mentally through
daydreaming or just ‘going through the motions’ of work without really thinking
about what you are doing
• Joking about – making fun of one another with a requirement not to take offence,
for example joke-telling, bantering, practical jokes, initiation rituals
• Fiddling – illegitimately acquiring company resources (time, equipment, services) for
personal use, such as stealing office supplies, messing around on the computer
instead of working
• Making out – finding ways to meet targets whilst achieving personal gain, for
example rubbish collectors searching bins for valuable items
(Noon and Blyton, 2007: 272; Huczynski and Buchanan, 2013: 743)
All of the above can be seen as wilful acts of bad behaviour. Or can they?
7 Discussion: Conflict at Work
7.1 Discussion: Conflict at Work
Identify a recent conflict between you and a family member, a classmate, a friend, or a
colleague that didn't end well. Describe the details of this conflict objectively. Discuss how
the conflict began, how you managed or responded to it, and finally how it ended. Identify
the sources of the conflict based on the facts you recorded. Is it a task, relationship, or
process focused conflict? Analyse the way you manage the conflict. Which management
techniques did you apply? What would you do differently if you were to encounter this type
of conflict again? Justify your answer.
(adapted from Cameron and Whetten, 2016)
8 Collective Action and Conflict
8.1 Union membership and collective resistance
Acts of resistance, as discussed previously, are very much on the individual level. However,
in early industrial society, where workers felt overly controlled, there were more organised
acts of resistance. Workers formed unions, which are still a feature of many workplaces
today, including the London School of Economics and the University of London, where many
lecturers belong to the University and College Union, and many administrative and support
services workers belong to UNITE (A wide range of sectors, including aerospace,
automotive, education, engineering and finance/legal) or UNISON (public services).
Unions represent a really important aspect of the development of firms and management.
They emerged as an initial response to the development of large workplaces, where workers
felt out of control of the workplace and means of production. Machinery fragmented work,
controlled workers and shifted power to owners; machinery was broken in riots, rioters
were imprisoned and sent to overseas colonies to prisons or labour camps (for an example
rather charmingly illustrated in Lego figures, see this article about the Merthyr Rising).
If they lived in a town dominated by one or two companies, then they would have little
choice over where to work, how, or what they would be paid for it. This was not a
comfortable or welcome process for many workers (Willman, 2014), and their resistance
took the form of unionisation and political action. This worked to a large degree, because
the companies could not afford for large swathes of their workforce to down tools – they
needed to find a way to cooperate, rather than conflict and coerce: ‘labour had to be
controlled, but it also had to be bought.’ (Willman, n.d.)
Unionisation emerged, primarily among skilled workers (usually the men, as opposed to the
women or children who were both usually unskilled). This meant that the men had
bargaining power. Textile unions consisting of male workers became among the largest in
Britain (Gospel, 2007).
Melbourne, 8-hour day march (around 1900)

Subsequently, as we have seen, large firms came to dominate Western economies. “In
terms of employment figures, the typical large employer in the early to mid-19th century
was a textile company; by the mid- to late 19th century, the biggest single group of major
firms in most economies were railway companies; by the mid-20th century, the main
groupings were manufacturers (steel, chemicals, automobiles, electrical) and by the end of
the 20th century, the biggest single group of large firms was to be found in retailing and
financial services.” (Gospel, 2007, p.424)
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_
data/file/616966/trade-union-membership-statistical-bulletin-2016-rev.pdf
Organisational size – for reasons we will see – had an impact on labour conflict. Unionisation
spread in Western countries. The example of the UK is shown in the diagram above. A
similar pattern existed in the USA, with the only difference being that the peak we see in the
UK around 1980 happened two decades earlier in the US, around 1960.
In the United Kingdom today, union membership sits at around 23% of total employees,
having dropped from 32% in 1995; in the US it is around 10%, having dropped from around
15% in 1995 (OECD, 2020).
But what made unions a valid way to express resistance?
8.2 Expressing resistance through union membership
Union membership provides members with three kinds of service (Pencavel, 1971):
• They represent them collectively in wage and benefit bargaining, and the monetary
benefit of union membership was significant until around 1950, with union
membership adding a significant wage differential for workers who belonged in
comparison to those who did not.
• They represent them individually in collectively agreed grievance and disciplinary
procedures. We have seen, in relation to the psychological contract, that an
employment contract does not cover all expectations that a worker has of an
employer or vice versa. There will be gaps which may need filling in through
discussion or negotiation.
• They offer personal insurance against misadventure such as unemployment or ill
health. The payment made to the union would provide some consolation that if you
lost your job or fell ill, the union may give you money to help you until you are able
to return to work. Early unions operated in the absence of a welfare state and thus
were often as much benefit societies as bargaining agents as they had the funds to
provide sickness benefit, unemployment benefit and funeral benefits (Willman et al.,
1993).
There were benefits of trade union membership for employees, but why would firms agree
to deal with the unions?
First, the economic benefits often outweighed the costs. Labour costs are, in a railroad or
steel mill, a very small proportion of overall costs. However, withdrawal of labour, through a
strike for example, is a substantial cost. It is therefore potentially cheaper to agree to a
wage differential than to risk strike action.
Second, paying higher wages should get you better workers. You should thus be able to
lower the need for management. Third, by giving workers a voice, you can try to solve the
problems before workers leave and thus remedy any defects you deem worthwhile. Thus,
you improve your company in the process (Freeman and Medoff, 1984). You shouldn’t need
a union to be able to provide a voice, or to pay higher wages, but it may have motivated
companies to do so, because the costs of engaging with the unions were less than the
benefits derived (Gomez et al., 2010).
It is perhaps for this reason that the unions declined – employers and workers found other
voice mechanisms. They could speak directly to staff (and staff directly to them) rather than
going through a union. The discussion of HR in the previous unit illustrates how some of the
benefits of joining a union were taken over by the roles of HRM, such as sick pay and
adherence to employment law, to protect workers rights. Additionally, employment
legislation grew, protecting workers from many of the disputes and grievance procedures
that unions would have traditionally helped with. And thirdly, the wage benefit of belonging
to a union eroded because, over time, the wage increase spilled over to non-union workers
so that they benefited, too.
Today, unions are less prevalent than they were, but they do still exist, and they represent
an important idea, which is that whilst conflict with individuals can be problematic for
managers, conflict with large numbers of workers at once through collective action can
create much bigger problems still.
In preparation for the live session this week, read the ‘Unions at Amazon & BAE Systems’
case study, which illustrates contrasting recent approaches to working with unions. BAE
Systems have adopted a conflict reduction approach in recent years (after a number of
years of conflict that didn’t help either side). The case outlines the benefits BAE expect from
working constructively with the unions, in contrast to a more adversarial approach in the
Amazon case. Just to pick on one element of this which makes it an interesting example,
Amazon has used social media accounts to ‘spy’ on workers, to prevent collective action, as
outlined in the following article.
https://www.forbes.com/sites/tomspiggle/2020/09/15/collective-action-on-social-
media-what-employees-should-know/.
In this case, the organisation is not aiming to collaborate and reduce conflict, but to win the
argument by preventing social media being used to facilitate collective action. You will be
able to contrast these two examples in the live session.
8.3 Collective action in non-business contexts
Social media has made it easier for collective action to be aimed at corporations,
governments or specific groups in society (eg: police force in the USA). Even where it is
aimed at government, it is still relevant to managers, since (a) governments are full of
managers, and (b) the actions of the government can enact legal change which can then
impact businesses and their managers.
One recent example of collective action can be seen the protests by Indian farmers against
government land reform legislation.
The BBC (15/04/21) reports that thousands of Indian farmers, many of them Sikhs, continue
to sit and protest on the outskirts of India’s capital Delhi. They are protesting against
government led reforms of the agriculture sector in India. The farmers say the new laws will
leave them at the mercy of large corporate companies and the free market and eventually
lead to many smaller farmers dying out. The Government say the reforms are needed to
modernise a languishing part of the economy where it’s estimated more than 10,000
farmers commit suicide every year due to low incomes.
https://commons.wikimedia.org/w/index.php?curid=97507126
Negotiations between the government and farmers have reached a deadlock and thousands
have continued to sit and blockade roads into India’s capital for many months. As the
protests spiral, sectarian tensions have begun to emerge between differing groups. Some
accuse Sikh separatists, largely supported by Sikhs living outside of India, of hijacking the
protest movement to cause chaos within India and further their agenda for a separate Sikh
state. Critics of the government say internet shutdowns, the arrests of journalists and
barricades preventing sustenance arriving for protesting farmers shows a continuing
degradation of democratic values overseen by the Hindu nationalist BJP.
(https://www.bbc.co.uk/programmes/w3ct2d32).
Watch the following video to see the background and how conflict between farmers and the
government has developed:
https://www.bbc.co.uk/news/topics/c23dw2xjpxrt/indian-farmers-protest-2020
Collective Action in other stakeholder relationships

Collective action does not just take place in firms and between workers and their staff.
Others who are unhappy with the actions of an organisation or social faction can take action
against them.
The growth of social networking has provided an opportunity for collective action that is not
reliant on unions to provide a collective voice. This process of collective action prompted by
online interaction has been termed ‘connective action’ (Bennett & Segerberg, 2012).
Connective action can be seen in key social media movements in the past few years,
including:
• #YesAllWomen, where users share examples of misogyny and violence against
women, causing uprising against those people and institutions whose behaviour is
considered sub-par in this regard.
• #BlackLivesMatter, which has become a ‘global network…to bring justice, healing

and freedom to black people across the globe.’ (Black Lives Matter, 2021). Again,
they have called out problematic behaviour by companies, individuals and
institutions and have successfully enacted a high level of change.
• #ExtinctionRebellion, at times a controversial but nonetheless effective example of
collective action, in which participants stage ‘actions’ to demand a response to the
climate and ecological emergency.
• You will be able to think of plenty of other examples from your own use of social
media and the communities you are engaged in.
Lundgaard & Razmerita (2016) suggest that the nature of social media ensures that personal
stories and the act of voluntary sharing, as well how this act is reciprocated, is important for
the potential reach and impact of the movements. At the same time, actors in these
movements are collectively forging a common cause and through joint efforts seeking to
achieve a better outcome or social change.
For managers, the impact is profound. Whilst unions are less of a feature of most
workplaces and political landscapes than in the past, the notion of voice or exit that is
available to employees and consumers is significant. If collective or connective action is
being taken, then that is evidence that the collective and individual ‘voice’ need to heard
and responded to. Collective bargaining power can be significant in relation to industrial
relations, or as illustrated by #BlackLivesMatter and the case of the Indian farmers, placing
significant pressure on organisations, companies and governments.
8.4 – Video on Collective action
https://www.youtube.com/watch?v=UawtT2ABfGk
This video explores why collective action is encouraged in non-business contexts by some,
and the power it can have. The video is created by the University of Gothenburg, which have
a research group focused on collective action.
8.5 Summary
You should now have an understanding of conflict management, and how important it is for
managers to be aware of at both the individual and collective levels. While some conflict
and dissent may be beneficial at the level of individuals in an organisation, it is more
problematic in the context of collective action.
The illustrations of different types of conflict reminds us why managers should take
employee voice – both individually and collectively – seriously. It is a tool for organisational
improvement, as well as a way of identifying what matters to workers and consumers and
keeping them engaged.
9 Managing Conflict Quiz
Please attempt the quiz for this block, you can find it on the VLE on the page at the link
below:
Block 7: MANAGEMENT SCIENCE

Essential reading
Slack, Nigel, and Brandon-Jones, Alistair. Operations Management. Ninth Edition / Nigel
Slack, Alistair Brandon-Jones. ed. 2019.

Chapter 13: Inventory Management
Chapter 15 Lean Operations
Further reading
Slack, Nigel, and Brandon-Jones, Alistair. Operations Management. Ninth Edition / Nigel
Slack, Alistair Brandon-Jones. ed. 2019.

Chapter 1: Operations Management
Works cited
Erlang, Agner Krarup. "Solution of some problems in the theory of probabilities of
significance in automatic telephone exchanges." Elektrotkeknikeren 13 (1917): 5-13.
Luca, M., 2017. Designing online marketplaces: Trust and reputation

mechanisms. Innovation Policy and the Economy, 17(1), pp.77-93.
Morse, P.M. and G.E. Kimball Methods of operations research. (Cambridge, Mass.:
Technology Press of MIT, 1950).
Porter, M.E. and Millar, V.E., 1985. How information gives you competitive advantage.
Taylor, F.W., 1911. The principles of scientiﬁc management. New York, 202.
Wilson, H.J., 2013. Wearables in the workplace. Harvard Business Review, 91(11), pp.27-
27.
2 Introduction to the Discipline of Management
Science
2.1 Introduction to Management Science

Introduction to Management Science
Taylor’s aspiration (as discussed in the earlier unit which examined Scientific Management)
was to develop 'scientific management' based on the universal application of certain
principles. One significant outgrowth of scientific management was management science
(MS), which is often now encompassed within the field of operations management (OM).
MS can be defined as:

“a scientific method of providing executive departments with a quantitative basis for
decisions regarding the operations under their control.” (Morse and Kimball, 1950).
MS makes use of data, models and algorithms to produce information that is intended to
help managers to make better decisions. It is worth noting that MS frequently utilises non-
financial data as the quantitative basis for evaluating operations, for example “number of
customer complaints”.
Role of Models in Management Science
The figure below provides an overview of the role of models in MS. The inputs to the model
are our beliefs and assumptions about reality and the scenarios we wish to play out. The
outputs are insights on the way firms work and estimates about quantities.
Figure: The role of a model
Figure: The role of a model

If we apply this to the example we are going to discuss in the following section, the use of
Economic Order Quantity (EOQ) in inventory management, then we can identify the
relevant elements of the model:
Use of Algorithms
What is an algorithm? A predefined process of instructions, or rules (Slack & Brandon-Jones,
2019). The following article illustrates how an algorithm could be used to plan a safe return
to office for staff.
https://www.bbc.com/worklife/article/20201002-the-algorithm-tackling-the-
office-space-crunch
Algorithms can also be developed that are trained using known data, developing artificial
intelligence (AI). The algorithm learns to extrapolate new ideas from information provided.
The following article may seem a little complex, but illustrates the benefits that such
analysis can have for material selection in engineering firms.
https://phys.org/news/2020-10-ai-material.html
Managers should be competent to make use of spreadsheets and graphical tools to

illustrate data patterns, which can be a powerful method of informing and persuading
others of the need for action.
The role of the manager has shifted from gathering relevant data to enable MS models and
algorithms to evaluate key business processes, to having so much data that the challenge
now is to identify which data is useful and how it can best be analysed or used.
Outline of the topic
In this unit, we will illustrate a wide range of uses of management science. Firstly, by looking
at a classic example: inventory management. The section will contrast the traditional
planned approach using Economic Order Quantity and a key alternative which aims to
eliminate inventory: Lean Operations (Slack & Brandon Jones, 2019). In each case the use of
models and algorithms will be illustrated.
We will then turn to more recent developments, and the use of ‘Big Data’. We will discuss
innovative data sources, including workplace wearables, use of Radio Frequency
Identification (RFID) and AI and the impact of these changes on the manager’s role in the
expanding scope of management science in contemporary organisations.
3 Inventory Techniques
4.1 Inventory, EOQ and Lean

Inventory Management
Introduction
Inventory is the term used to describe the accumulation of materials, customers or
information as they flow through processes or networks (Slack & Brandon-Jones, 2019). It
can be applied to all manner of things, from breakfast cereal in the supermarket or rooms in
hotels, to people waiting in queues (where the cereal, the rooms, and the people, are the
inventory respectively). The most obvious conception of inventory, of course, is physical
inventory, which is sometimes called stock. Physical inventory includes components, parts,
finished goods or paper records. It is this type of inventory that requires orders for goods.
The question to be resolved through applying management science is ‘how much stock to
order?’.
Material inventories can represent a substantial proportion of cash tied up in working
capital. Reducing them can release cash, but this can lead to lack of stock to fulfil customer
orders.
Source: Slack, Nigel, and Brandon-Jones, Alistair. Operations Management. Ninth Edition
/ Nigel Slack, Alistair Brandon-Jones. ed. 2019
This is the dilemma that EOQ can assist with resolving. Inventory only exists because supply
and demand are not exactly in harmony with each other. Calculations can be used to define
the most economic order quantity (EOQ) for each item of inventory, with the aim of
minimising ordering costs and holding costs.
Calculating EOQ
To calculate EOQ, the costs need to be calculated or estimated and generally holding costs
will include working capital costs, storage costs and obsolescence risk costs. Order costs
take into account cost of placing the order (including any transportation) and price discount
costs.
Total costs = holding cost + order cost
The issue we wish to deal with here is as follows. A company (manufacturer, retailer) has to
place orders for some goods. How many of the goods should they order?
Worked example:
Assumptions:
· Demand (D) = 1,000 units per year
· Holding Costs (Ch) = £1 per item per year
· Order Costs (Co) = £20 per order
· Order batch size (Q) = 50 (Note: Q/2 = average inventory[sw1] )
Order Quantity Holding Costs Order Costs

(Q) (0.5QxCh) ((D/Q)xCO) Total costs
50 £25.00 £400.00 £425.00
100 £50.00 £200.00 £250.00
150 £75.00 £133.33 £208.33
200 £100.00 £100.00 £200.00
250 £125.00 £80.00 £205.00
300 £150.00 £66.67 £216.67
350 £175.00 £57.14 £232.14
400 £200.00 £50.00 £250.00
450 £225.00 £44.44 £269.44
500 £250.00 £40.00 £290.00
* = minimum total cost

Table x: EOQ calculation example (Adapted from Slack and Brandon-Jones, 2019)
The graph below illustrates how holding costs increase with more inventory, while order
costs decrease.
Figure x: Graphical representation of EOQ values
It is important to recognise that the use of EOQ makes assumptions (see Figure 6.1) and
these are frequently a source of criticism in relation to the use of models. In addition, the
calculation has a narrow focus, and omits other important factors. In this case, it is helpful
to be aware of the following potential weaknesses in the use of EOQ.
Examples of weaknesses in EOQ assumptions

· Steady demand (conforming to some known probability distribution) is untrue for a wide
range of inventory problems. For example, the demand for new products can be difficult to
forecast, with limited historical data available to predict how well customers will receive the
product. Apple provides examples of products that sold extremely well at their release
(iPhone, iPad), and others that did not meet expectations (Apple Newton, eMate).
· Holding costs can be accurately estimated, but there are costs to achieving this, so
estimates may not be accurate for each item. This is a similar problem to one encountered
in Management Accounting (Block 7), relating to how costs are best apportioned. Is it worth
time to estimate exact costs (similar to Activity Based Costing) or to apportion e.g.
warehouse costs, equally across all inventory items? A mixed approach may be taken, in
which goods requiring special storage conditions e.g. refrigeration, or are over a defined
size, will be apportioned more of the costs, and it will be averaged for the remainder of
stock.
Inventory and Lean operations

“Lean aims to meet demand for products and services instantaneously, with perfect quality,
no waste and at low cost” (Slack & Brandon-Jones, 2019). Waste is any activity that doesn’t
add value, raising the question, is inventory necessary?
The most fundamental criticism of the EOQ approach to managing inventory comes from
‘Lean’ and ‘Just in Time’ (JIT) philosophies. Lean approaches suggest that identifying the
optimum order quantity is the wrong focus, managers should be asking ‘How can I reduce
inventory?’. Ideally, Lean manufacturing would use batch sizes of one, with one of each item
needed as an input ready to use (JIT) when each batch starts. Minimal space is required to
store inventory on a factory floor, with the potential for significant cost savings.
There is no requirement to calculate least cost option for ordering stock, the focus is on
synchronising operations to enable ‘pull’ control. A required component will be produced
Just in Time (JIT) for the next operation in the process to use it. A good example of this
approach can be seen in high quality restaurants, where meals are prepared after the
customer has ordered, and only when it is ordered.
The following table outlines some of the reasons to reduce or eliminate inventory
Some reasons to avoid inventories:
Types of inventory
Physical Queues of Digital information

inventories customers in databases
Cost Ties up working Wastes Cost of set-up,

capital customers’ time access, update and
maintenance
There could be
high
administrative and
insurance costs
Space Requires storage Requires areas for Requires memory

space waiting (or phone capacity.
lines held for May require
calls)
secure and/or
special
environment.
Quality Over time, it may: May upset Data may become:

customers if they
Deteriorate Corrupted
have to wait too
Become damaged long Lost
Become obsolete Could lose Obsolete
customers as a
result
Operational/organisational May hide May put undue Databases need

problems with pressure on staff constant
process and thus reduce management,
quality such as:
Updating
Security
Access control
Adapted from: Slack, Nigel, and Brandon-Jones, Alistair. Operations Management. Ninth
Edition Nigel Slack, Alistair Brandon-Jones. ed. 2019
Managers need to balance the benefits of having inventory (stocks available, people
wanting services and having data to analyse) to use MS to help with decision making in
relation to inventories.
Comparison of EOQ and Lean models
Beliefs (inputs) Model Insights, estimates of quantities of

interest
Specified levels of inventory are necessary, EOQ Order stock outs avoided,
stocks enable the business to run minimum average inventory levels
efficiently. Costs associated with ordering held.
should be minimised Order and holding costs minimised
Inventory (waste) should be eliminated Throughput time can be used to

show inventory progress and target
Lean
reduction. Inventory costs
minimised
Assumptions (inputs) Model Impact on estimates of quantities of

interest
Holding costs and ordering costs can EOQ Estimates and forecasts may not be
be estimated. Demand can be accurate, reducing the value of the
forecasted model outputs
Synchronised flow will enable Lean External disruptions may disrupt flow,
processes to function efficiently having a major impact on production,
no in-house stock available to keep
working
Scenarios Model Insights, estimates of quantities of

interest
Increased/decreased demand EOQ Can be used to plan a change using a

‘what if’ scenario
Process changes, new supplier Lean Evaluate reduction of inventory for
partnerships planned and actual changes
This section has illustrated how different models can be used to evaluate decisions in
relation to physical inventory management. The following section will move on to discuss
the use of algorithms within queuing models
3.2 Queuing models
Service Inventory – Queuing
A.K. Erlang, a mathematician working for the Copenhagen Telephone Company, was
interested in applying probability to understanding lost calls in telephone networks. Erlang’s
work (1917) stimulated a general theory of queueing. Queueing theory is a broad general
theory with applications to:
• telecommunications
• manufacturing facilities
• passenger transportation
• supply chains
• retail outlets
• healthcare systems
• law courts
• back office functions
In addition, organisations need to reduce loss of business that results from people leaving
queues, both in physical situations (eg: shop, restaurant) and increasingly in the online
context. Queues can be managed to reduce the chance of people leaving (or balking). When
queues are long, it can help to let customers know how long their wait will be (eg: theme
park queuing). Research has found that in the online context users queuing to access a
website are less likely to leave the queue if a slightly pessimistic forecast is given for the
wait time, so they are not disappointed if the wait is longer than forecast (which may impact
on longer term customer loyalty), but if the forecast is too pessimistic then customers will
leave the queue. (Source: https://hbr.org/2020/10/when-providing-wait-times-it-pays-to-
underpromise-and-overdeliver).
Organisations need to find the balance between providing a service that keeps queues short
and having staff that are not always fully utilised.
The queuing model can be conceptualised as follows:
Beliefs/Assumptions (inputs) and Model Insights, estimates of quantities of

Scenarios interest
Beliefs: Queuing information is Queuing Peak traffic can be used to plan

needed to reduce lost calls, web staffing requirements, or
transactions or customers expand/reduce services
Assumptions: Queuing patterns can Queuing Estimates and forecasts may not be
be forecasted accurate, without accurate inputs
reducing the value of the model
outputs. Simple averages are not
useful for complex queuing forecasting
Scenarios: impact of variations in Queuing Planning for space, staff and
demand at different seasons, times infrastructure can be matched to
of day or holiday periods on queuing expected demand
can be evaluated
There is considerable complexity in queue modelling algorithms. There is potential

variability in the rate at which customers join a queue, and variability in how long it takes to
process each customer. Where such variation is present, the queue modelling cannot easily
be based on averages. As a consequence, many of the formulae that are used to understand
queuing are extremely complicated, especially for complex systems. The factors included in
these algorithms can illustrate some useful characteristics of the way the model uses input
data to generate outputs.
The following factors are utilised to model queue behaviour:
• average time between arrival
• arrival rate
• coefficient of variation of arrival times
• number of parallel servers at a station
• mean processing time
• processing rate
• coefficient of variation of process time
• utilisation of station
• average Work In Progress (WIP) (number of items) in queue
• expected WIP (number of times) in queue
• expected waiting time in queue
• expected waiting time in system (queue time + process time)
Queuing analysis requires a detailed understanding of the process, to enable values to be

assigned before analysis can take pace, linking back to ideas from Scientific Management
and ‘time and motion’ studies (Taylor, 1911) to capture process times and rate of arrivals.
Use of these variables demonstrates that queuing time will increase as variability, utilisation
or processing time increases.
3.3 Summary of Inventory and Queuing
Inventory Management Summary
Models are used to generate useful outputs for evaluating a wide range of business
applications.
Algorithms make use of available data to make forecasts and can be used for scenario
planning.
Inventory management provides an illustration of different applications of management

science to improve management decision making.
Managers will use models and algorithms to provide insights into how inventory can be
managed efficiently and effectively.
4 Inventory Management practice (Q)
Please attempt this question on the VLE.

5.1 Big data - what is it and why is it significant?
The impact of ‘Big Data’
This section provides some illustrative examples of significant developments since the early
use of data to assist in decision making, which developed in the context of a pre-computer
and pre-robot industrial landscape. The business world has changed significantly since then.
The following sections have been chosen to serve as examples of two different aspects: first
the Toyota Production System, outlining the philosophy of the approach and how it can be
linked in to earlier models. Secondly, the impact of the ‘information revolution’ will be
examined. The chapter will conclude with an overview of the role of the manager in the 21st
Century MS.
Post war MS models have much more data readily available to analyse and use to guide
management decisions. The following article provides a good overview:
https://www.businessmodelsinc.com/big-data-business-models/
In 1985, the information revolution was sweeping through the economy (Porter & Millar,
1985). Dramatic reductions in the cost of obtaining, processing and transmitting information
changed the way that organisations did business. Organisations began to utilise integrated
Management Information Systems (MIS) that provided information from activities across
the organisation. More and more data became available to provide inputs to a wide range of
MS models e.g. number of clicks on a web page; reviews on TripAdvisor; how many people
travelled through a station this morning; equipment utilisation percentages. It has improved
some processes dramatically, e.g. supermarkets swipe each item to give the customer a
receipt, but also to maintain inventory levels to match customer demand.
The scope of analysis that MS can undertake is growing as data sources become more
prolific, but the management problems that arise can take a familiar form, e.g., when
workers feel that job security is threatened.
The advent of the world-wide web (www) has made so much data available that it is termed
‘Big Data’. Slack & Brandon-Jones (2019) define Big Data as “a large volume of both
structured and unstructured data whose analysis can reveal hidden patterns, correlations
and other insights”.
The chart below illustrates the growth:

Global Information Storage Capacity
Figure: Global Information Storage Capacity (see source within figure)
Most managers’ jobs involve making predictions, and with large amounts of data to process
from customer interactions on the internet, more and more algorithms are being used to
‘mine’ big data. Analytical operations can be done at incredible speed and scale (Luca et al,
2016). The amount, type and speed of data have all grown.
Source: Wikipedia Commons
Figure: Changes in data volume, variety and velocity
It should be noted that another ‘V’ – Veracity is also important, how confident are we that
the data is correct? Managers will need to plan and manage all the data. Automated
methods for data collection will improve veracity, since there can be no typing errors. The
problem has shifted from finding or gathering data for inputs to MS, towards having too
much to choose from. The manager now has decide how best to make use the high volume
of data available to gain support the organisation's aims, for example, gaining competitive
advantage. This requires managers to be clear about which data is valuable to them and
how it can be used, for example:
• Real-time data can improve forecasts eg: when will a package be delivered? Making
this type of data available to customers can improve service
• Internal monitoring and improvement of key processes, a traditional role of MS, but
with access to more reliable and plentiful data, extending the role of MS. For
example, Tesco use of tracking wearables in the warehouse
• Customer data can aid organisations to understand their needs and preferences
from website interactions and Electronic Point of Sale data in stores
Algorithms focus on the data they are programmed to use for analysis. Such data often
pertains to short-term outcomes, and can ignore longer term aims, unless they are
specifically included within the algorithm. For example, website visits are short term
behaviour, whereas advertising aims to have longer term effects on brand image and repeat
business. An eBay advertising campaign with Google can lead to a spike in visits to
eBay.com, because Google’s algorithm is good at predicting who will click on an
advertisement. Clicks are not the same as making purchases. To separate correlation from
causation, eBay ran a large experiment (illustrating how MS can be applied to improve
understanding of consumer behaviour) in which it randomly advertised to some people and
not others. The results showed that the Google advertisements were not increasing sales,
because people who saw them already knew about eBay and would have shopped there
anyway (Luca et al, 2016).
Big Data includes the ‘Internet of Things’ (IOT) where physical devices (eg: heating controls)
transmit data to the internet and can be controlled remotely. Another example is use of
location data (eg: smartphone tracking can locate where you took the photo).
Internet of Things (IoT)
Source: Wikimedia Commons
The impact on organisations has been transformative, organisations such as Google and
Facebook illustrate the power of use of MS to analyse vast quantities of data and grow their
user base. Big Data has extended its range through a range of innovative data sources that
managers can utilise and three examples of these are discussed in the following section.
5.2 Big data business models
Read the "Exploring Big Data Business Models" article:
https://www.businessmodelsinc.com/big-data-business-models/
1) Identify 3 key service big data models.

2) Which of the service models would you consider to add most value as a user?
To explore the ethics of use of big data click on the link within the document or
here. https://www.businessmodelsinc.com/big-data-business-models/
3) Which of the key service models would you consider to pose the greatest ethical
concerns?
Feedback
1) Data as a Service (DaaS); Information as a Service; Answers as a Service (AaaS)
2) I would expect this to be AaaS, but not necessarily – the writer of this question (Dr.
Sharon Wheatley) says that she mostly relies on information, for example
3) All models require data cleansing to remove personal details before use of big data is
ethical. In IaaS, however, for items such as photos, customers may give permission for
certain personal information to be held. Note the emphasis in the article on transparency in
relation to data usage to build customer trust.
5.2 Toyota Question Set
J6.1
Review the infographic in the following link* and discuss ways in which management
science is used to facilitate Lean Manufacturing, as exemplified in the Toyota Production
System
http://www.strategosinc.com/toyota_corporate_culture.htm
Using the table 'The Unspoken Rules of Toyota'
1 Review the 'problem signals' column. Try to identify what kind of data would be useful
for each row.
2 Consider the data you have identified. What kind of models or analysis (algorithms)
should be considered?
Use the table below to prompt you to think through different stages, and then add your
thoughts to the forum about how Toyota make use of data and algorithms
Problem Signals Data/Algorithms
1 How People Work
2 How Work Connects
The Physical
3
Arrangement
4 How To Improve
5 Problem Alarms
*Courtesy of Strategos, Inc. www.strategosinc.com
The Unspoken Rules of Toyota
Implied
Rule Problem Signals Responses
Hypothesis
►The person or
Specifications machine can ►Improve training
►The work
document all work perform the work procedure varies ►Improve Process
How People processes and as specified
1 from specification Capability
Work include content, ►If the work is
sequence, timing done as specified, ►Defective ►Modify the work
and outcome. Products specification
the product is
defect-free.
►Customer
Connections with ►Responses do ►Determine true mix and
requests have
clear YES/NO not keep pace demand.
a known, specific
How Work signals directly with requests.
2 volume and mix. ►Determine true supplier
Connects link every ►Supplier is idle
►The supplier capability.
customer and waiting for
supplier. can respond to ►Retrain/improve/modify.
requests.
requests.
►Every supplier ►A person or ►Determine why supplier

Every product and in the flow path is machine is not was unnecessary; redesign
The Physical service travels a required and needed. flow.
3
Arrangement single, simple and suppliers not on ►Unspecified ►Determine reason for
direct flow path. the flow path are supplier performs unspecified supplier;
not required work. redesign flow.
►A specific
Workers at the change causes
lowest feasible a specific, ►Determine why the
��Actual result actual result differed from
How To level, guided by a predictable
4 varies from the prediction.
Improve teacher (Sensei), improvement in
expected result.
improve their own productivity, ►Redesign the change.
work processes. quality or other
parameter.
Integrated failure ►Defects are

tests ►Automatic passed through to
automatically alarms prevent the next
Problem ►Analyse and institute
5 signal deviations defects or sub- operation.
Alarms new or improved alarms.
for every activity, standard
connection & flow performance. ►Sub-Standard
path. Performance.
In this table, "Supplier" refers to an upstream operation, inside or outside the facility.
"Customer" is the downstream operation.
See the VLE for feedback.
6.1 Wearables in the workplace
Wearables in the workplace
The trend for more data availability and analysis has continued, and we now have increased
ability to collect data automatically, and remotely. Data errors are almost eliminated, and
real-time information is available. An updated approach to time and motion studies that is
becoming more widespread is the use of wearables in the workplace (Wilson, 2013). These
can be used to quantify movements within work environments, Tesco has been using
armbands to allot tasks, forecast completion time and quantify movements of workers in
warehouses since 2004. There were significant efficiency gains, from 2007-2012 the number
of full-time employees needed to run a 40,000 square foot store dropped by 18%.
Management and shareholders are happy with the way this use of MS has improved
outcomes, but not all workers were happy to be monitored, some of whom complained
about the focus being on speed, not quality (Wilson, 2013). This illustrates how new tools
can be used with older concepts from MS, such as Scientific Management (Taylor, 1911) and
similar objections may be raised by the workforce. Managers will need to be aware of
technical and social aspects when implementing changes to work practices. Some examples
of the development of wearable technology include:
• Telemetry Systems (1965) allowed remote observers access to an astronaut’s
physiological functions and how they linked to ability to undertake tasks, leading to
many applications in health care and business.
• Polar Heart Rate monitor (1982) wireless device bringing scientific measurement
onto sports fields.
• Vuman 1 (1991) head-up display of blueprints for architects and contractors,
reducing contract time.
• Xerox Forget-me-Not (1994) registers movement and interaction to help understand
where time is spent at work.
• Nike+ (2006) activity trackers, a shoe mounted accelerometer to record pace and
distance.
• Hitachi Business Microscope (2009) gauges movement to identify when workers are
most focused.
• Mindset EEG (2009) Electro-Encephalograph identifies patterns of brain waves
associated with creativity.
The following articles provide an overview of recent developments:
https://www.cmswire.com/digital-workplace/examining-the-role-of-
wearables-technology-in-the-workplace/
The article identifies 3 industries in which wearables are penetrating the workforce:
Warehousing and retail – Where wearables can enable efficient order picking and
safe lifting of heavy weights
Manufacturing – Where wearables reduce worker fatigue and strain, also improve
speed and quality of work
Field service activities across industries – Where wearables deliver expert advice and
information to the point of repair/servicing, even if remotely located
The following article provides a view onto what might develop in the future:
https://www.personneltoday.com/hr/recruitment-data-dawn-biometric-cv/
The use of wearables in the workplace enables managers to improve workplace layouts, to
identify ways to improve processes, and to monitor how hard workers are working. Remote
sensors can also be placed in vehicles and links to GPS are used by managers to improve
safety, for example, by monitoring how long drivers have been at the wheel of their vehicle,
and whether it is moving. This data is now commonly used to allow customers to track their
delivery. Managers can extend use of MS beyond the boundaries of the firm to improve
service to customers. Some suppliers can also monitor customer consumption patterns, for
example, energy suppliers and smart thermostats.
6.2 RFID - Part 1
RFID
RFID devices use radio waves to automatically identify objects, collect data about them and
communicate it to information systems (Slack & Brandon-Jones, 2019). Listen to the
following BBC World Service podcast explaining the development of RFID and how it works.
https://www.bbc.co.uk/programmes/w3csz2wn
6.3 RFID-Part 2
The costs of managing inventory have changed significantly in the past 30 years with
increasing use of automated systems. The use of Radio Frequency Identification (RFID)
enables managers to have access to real-time monitoring of parts and materials, reducing
retrieval and database administration costs . For example, the Marina Bay Sands Hotel in
Singapore has 6,000 employees each day, they each need a clean uniform. Utilising RFID,
each worker swipes their ID card, and the store of uniforms hanging on a revolving rail is
moved so that when the worker opens the door the correct uniform is presented for
collection. This would have been much more time and labour intensive prior to use of
computers and robot technology.
Additional elements of data analytics used at the hotel are outlined in the following article:
https://www.businesstimes.com.sg/hub/singapore-productivity-awards-
2017/doing-more-with-less
There is no longer a requirement for lengthy ‘stock taking’ processes, checks can be done of
whole sections of stores, using an electronic scanner and data is automatically transferred
to the database. It is usual for there to be some discrepancy between expected stock levels
and actual stock levels owing to damage, loss, theft or incorrect recording of stock, so the
process is still required despite Electronic Point of Sale (EPOS) data being available. Data is
available for analysis of stock movements and can aid management in reducing inventory
and is of relevance to both EOQ and Lean approaches to inventory management.
6.4 AI
Artificial Intelligence
Artificial Intelligence (AI) emphasises the creation of intelligent machines that work and
react like humans. Some examples include speech recognition, learning, planning and
problem solving (Slack & Brandon-Jones, 2019). This is a further development of algorithmic
decision making, which is illustrated well in the following link:
https://www.bbc.com/worklife/article/20201002-the-algorithm-tackling-the-
office-space-crunch
However, the ability of AI to develop in ways the developers had not foreseen can cause
problems when training is based on unstructured data from online users:
https://uk.pcmag.com/internet-3/76311/microsoft-puts-tay-chatbot-in-time-
out-after-racist-tweets
The following article provides some insight into the nature of machine learning and how
companies make use of it. “How to win with machine learning”(Agrawal, A., Gans, J.,
Goldfarb, A., Harvard Business Review. Sep/Oct2020, Vol. 98 Issue 5, p126-133),
illustrates the use of AI:
http://content.ebscohost.com/ContentServer.asp?T=P&P=AN&K=1449107
51&S=R&D=bth&EbscoContent=dGJyMNLe80SeqLQ4zOX0OLCmsEieprN
Srqi4SbSWxWXS&ContentCustomer=dGJyMPGrrk2zrLFKuePfgeyx44Dt6fI
Algorithms can be improved through use of feedback data. For example, using a thumb print
to access a phone requires training, using sufficient example thumb prints to enable the
algorithm to function robustly, for instance, when your thumb is in a slightly different
position. Businesses use machine learning to recognise patterns and make predictions about
what will appeal to customers, improve operations or help make a product or service better.
The following podcast extends AI into the role of robots in the workplace:
https://www.bbc.co.uk/programmes/p04tz7rg
AI highlights significant changes to the use of management science to not only analyse and
evaluate data, but extends to machines that can learn on the job, providing more data for
use by managers in day to day decision making.
Innovative Data Question Set
Wearables question: answer this questions in the style of the short-form questions in the
exam. If you need a reminder of how to approach these, you can find a mini-lecture on this
topic earlier in the course.
What is a workplace wearable? Identify two advantages and two disadvantages of using
wearables to monitor people. (spend 9 minutes answering this, with a maximum of 200 words
in your answer)
How is scientific management still being used today in the design and management of
supermarket checkout work?
Please see the VLE for feedback on these questions.

7 The Case of Zara
8.1 Example case study evaluation – Zara (Individual Work)
Case Study – Zara
Zara is a Spanish clothing retailer. They base their designs on the latest fashions, and focus
on getting their clothes in-store as soon as possible. About 50% of their manufacturing is
done in-house – the more complex and time sensitive products.
It takes two to three weeks before a new garment designed by the Zara team is available for
sale in retail stores. There is a team of designers who are constantly designing new items,
which are then manufactured at Zara’s factories in Spain.
Nurturing a highly intimate relationship with its customers, Zara’s designers respond
instinctively to their changing needs, reacting to the latest trends and constant feedback
received across its Woman, Man and Kids collections, to deliver new ideas in the right place
and at the right moment.
To enhance customer service, Zara stores also include Radio Frequency Identification
Technology (RFID), using cutting-edge systems to track the location of garments instantly
and making those most in demand rapidly available to customers. This technology has
allowed Zara to complete the implementation of its integrated stock management system in
the 64 markets in which it operates its integrated store and online platform.
There are several activities in this process that must be coordinated to ensure that the latest
fashion items are available for purchase before consumers move on to something else. It is
therefore in Zara’s best interest to vertically integrate these activities to maximise use of
data analysis and ensure that items meet required specifications and are delivered on time.
(Lu, 2014; The Economist, 2001; Inditex website (accessed November 2020)
Inditex website, November 2020, Zara Brand home page. Available:
https://www.inditex.com/about-us/our-brands/zara [2020, November 24]
Lu, C., 2014. Zara supply chain analysis-the secret behind Zara's retail success. Trade
Gecko. Accessed September, 15, p.2016.
The Economist. 2001. Floating on
air, Available: http://www.economist.com/node/627426 [2017, August 30]
............................
Using this case study, think about how the organisation makes use of management science
in different parts of their operation. Feel free to also use your personal experience and on-
line research into the firm (if you would like to find out more about the company).
Use the attached table to prompt you to think about different parts of the Zara ‘value chain’
and how data provides insight at each of these stages.
You might want to ask yourself:

What kind of data is available?
How can it be used?
How can data be used to link the stages?
Note your ideas in the table provided. There is no perfect answer here. There is a lot of
data available, and no response is likely to cover every aspect, so examples are what is
needed to illustrate how management science can be used in a contemporary organisation.
zara_case_-_table_for
_activity.docx
Block 8: Management Accounting
Essential Reading
Drury, Colin Management Accounting for Business (Hampshire: Cengage, 2013) Chapter 2:
Introduction to Cost Terms and Concepts. This reading offers an ideal introduction to cost
terms and concepts.
Collier, P. M., Accounting for Managers: Interpreting Accounting information for decision
making (New Jersey: John Wiley & Sons, 2003) Chapter 1: Introduction to accounting.
chapter. Introduces the functions of accounting and compares MA and FA, thus helpful for
all accounting and finance units.
Recommended reading
Fontinelle, A. (2021) ‘What Management Accountants Do’ Investopedia [Online] Available
from:https://www.investopedia.com/articles/professionals/041713/what-management-
accountants-
do.asp#:~:text=Key%20Takeaways,%2C%20strategizing%2C%20and%20decision%20making.
This short article from Investopedia provides a clear summary of what management
accountants do
University Press, 2014), Theme 1: Accounting for Capitalism
Johnson, H., T., and Kaplan, R., S., 'The Rise and Fall of Management Accounting'
Management Accounting Jan 1987 68:7 pp. 22-30. This accessible journal article highlights
why management accounting efforts often fail. It’s old, but the arguments often still hold.
Guthrie, C.P *, Nicholls, C.M. (2015). ‘The Personal Budget Project: A practical introduction
to financial literacy’ Journal of Accounting Education Vol 33, pp 138-163
http://dx.doi.org/10.1016/j.jaccedu.2015.04.002
This resource offers a really good introduction to the personal budget, it can also be applied
to the workplace as we do in the Budget section of this Unit.
Cafferky, M. E, Management Accounting Quarterly; Estimating Retail Breakeven Using
Markup Pricing
Montvale Vol. 18, Iss. 2, (Winter 2017): 1-11
This reading discusses the Breakeven point for retailers, which is useful since we use M&S, a
clothing retailer when we discuss ratios
Rahman, M. and Chin, H.C., 2011. Sustainable urban transport in Singapore: a Balanced
Scorecard. OIDA International Journal of Sustainable Development, 2(10), pp.19-42.
This reading is useful for students who are interested in the detail of the summary data
presented in this week's content. It is an academic paper, so may be less easy to read than
other sources, but provides a good discussion of the application of the Balanced Scorecard.
https://foodstrategy.co.uk/tesco-ditches-balanced-scorecard/
This article discusses the changes Tesco made to simplify their scorecard
2 The Purpose of Management Accountants
2.1 Why we need management accountants (Q)
You have just opened a pizza shop on a busy city street. You sell five types of pizza. The
ingredients for each pizza cost £3.20 and you sell each pizza for £6.50. Despite it looking on
paper as though you should be making a good profit, you are making a loss. You are
consistently finding that, at the end of each month, your pizza shop has made a loss.
There's no fraud happening.
What could be going on?
2.2 Feedback: Why We Need Management Accountants
Although on paper it seems as though the business should be making just over a 50% profit,
based on the difference between the production price and the selling price of the pizza,
there are other costs that need to be taken into account.
Each business has fixed and variable costs such as:
• Rent (fixed)
• Salaries and wages (fixed for regular members of staff, variable for temporary
staff)
• Telephone/internet (fixed for line rental, may be variable in relation to usage)
• Electricity (variable, unless averaged over the year in a payment scheme)
• Delivery vehicles and fuel (variable)
• Ingredients for pizzas (variable)
Management accountants help us to understand exactly where the business’s money is
going every month.
You can no doubt think of other costs, too.
It can be hard to keep a track of these costs and to attribute them to the products or
services that a business makes. A management accountant, employed by a company to
gather and analyse financial data, can help a business to understand exactly where it is
spending money. Information generated by management accountants can help a business
to run more effectively and efficiently. They can help to identify costs which can then be
controlled. This pizza company may be able to bring down its costs and make a profit on its
pizza, with the help of management accounting information.
In this unit, you will learn more about management accounting and how it can help a
business to understand and control its costs.
2.3 What do management accountants do?
In this unit and the next, you will be learning about accounting.
The topic of accounting has two key strands:
• Financial accounting, which has a retrospective perspective, focusing primarily on
preparing and analysing financial statements.
• Management accounting, which has a forward-looking perspective and carries out a
range of activities that are used to aid financial decision making, a topic which we
will consider more in-depth herein.
Management accountant Financial accountant

Primary Use for Internal External
the Data
Purpose Assist management and Assist management and shareholders in
shareholders in analysing the analysing the position and performance
position and performance of the of the organisation
organisation
Law No legal requirements Compliance with accounting standard
and Companies Act
Format Management discretion In accordance with accounting
produced standards
Scope Flexible, includes historical, current, Dictated by accounting standards
and future information which can focusing on profits, assets, liabilities,
focus on specific parts of the and cash flows
business
Information Financial and non-financial key Financial position and performance
performance indicators (KPIs) (eg, focused
number of customers per hour)
Management accounting is typically concerned with the gathering and analysis of financial
information that management can use to analyse current performance (as in the case of the
pizza restaurant earlier) and to inform decisions about the future.
Management accounting information can, for example, be used to make decisions about
how much to charge for products, whether to continue with certain business activities, or to
choose between two different investment opportunities.
In firms that employ management accountants (typically medium firms and upwards), there
should be a close link between the work of the management accountant and managers
across the business. This is because management accountants generate financial insights
that are critical to the ongoing work of managers. For example, are we charging the right
amount for a pizza? Is this business line profitable? How much can we afford to pay our new
Chief Marketing Officer relative to how much money they are likely to generate?
Thus, in many ways, the information that management accountants generate should be
critical to the work of managers across a business. The bigger and more complex the
business, the greater the need for management accountants, meaning that they tend to be
employed mainly in medium firms and upwards. This is not to say that they wouldn't be
valuable in smaller organisations, but there is not necessarily enough work for them and the
analysis of simple finances could be done by an accounting app or by the general
accountant.
As we saw in the previous exercise on why a pizza business was running at a loss, despite a
seemingly high margin, there was no understanding or management of costs. This is the role
that a management accountant can and should fulfil.
We can build a strong case for employing a management accountant when we look at what
they are employed to do. One of their major roles will be to help a business with cost
management. Cost management involves calculating the costs related to carrying out a
business process (making a product, such as the pizza, or delivering a service) and analysing
this in comparison with the revenues earned from that business process.
Any business process, be it for a product or a service, involves some type of transformation
and successful business means carrying out that transformation profitably. Whether it is
transforming oil into plastic, or human labour into a sales call - an organisation is
transforming one resource into something else. Doing this profitably is the difference
between success or failure. Can you cover the costs of the staff working in your sales centre
with the amount of sales they are making every day on the phone? Can you cover the costs
of transforming oil into plastic when you are making the oil into computer keyboards? Or do
you need to find another product to make and sell?
Cost management is therefore a critical part of any business operation. It is also a difficult
process. We have used simple examples here, but the real business world is not nearly so
straightforward. Many businesses fail to do it well. Engaging a management accountant, if a
business can afford it, can assist with cost management and healthy financial decision
making.
2.4 What do management accountants do?
This short article from Investopedia provides a clear summary of what management
accountants do.
Investopedia is an excellent external resource that provides very helpful guidance and
information on accounting and finance topics that you may wish to bookmark for future use.
https://www.investopedia.com/articles/professionals/041713/what-management-
accountants-
do.asp#:~:text=Key%20Takeaways,%2C%20strategizing%2C%20and%20decision%20making.
3 Costing
3.1 Classifying costs
As has already been established, one of management accounting's major concerns is
costing. Knowing where costs are coming from and how much those costs are will help
managers to:
• Ascertain how many units the company must sell to make a profit, and how many
units must be sold to make a specific amount of profit (think back to our pizza
business).
• Explore the impact of cost changes on the number of units that must be produced to
make a profit. With information on the costs associated with the production of
goods and services, managers can make informed decisions.
• Control costs with the aim of making the business more profitable. For example, if
costs (such as rental cost of space per square metre) are understood they can be
targeted by managers to increase the profit margin (i.e., by renting a smaller factory)
• Develop a competitive strategy: for example deciding whether to compete on price
by driving costs low, or on quality by providing what customers perceive as good
value for money.
Types of costs
In order to understand costs, we classify them in two major ways:
• Fixed vs. Variable costs

• Direct vs. Indirect costs
We will start with fixed versus variable costs. Fixed costs (also known as overheads) and
variable costs (costs associated with the actual production or service delivery).
Fixed costs
Fixed costs are costs that remain the same over the short term, regardless of the volume of
products produced. However, once full production capacity has been achieved, fixed costs
start increasing. Examples of fixed costs include rent, salaries paid to administrative staff
members, and insurance premiums. Fixed costs are illustrated graphically in Figure 1.
Figure 1: Fixed costs
Fixed costs may change over time, such as salaries that increase due to inflation and
promotions. However, in the short term, these costs are not dependent on the number of
units produced.
However, over the long term, fixed costs may change to keep up with production needs. If
production increases significantly, manager may need to hire more staff members, or
request for an additional building to be rented (which will also result in higher insurance
costs). Therefore, over the long term, the fixed cost curve looks like the one in Figure 2.
Figure 2: Fixed costs over the long term
For the purposes of conducting cost-volume-profit analysis in this unit, only short-term fixed
costs are considered. The assumption is therefore that the fixed cost curve is a straight
horizontal line, i.e. it remains unchanged regardless of the volume of a business’s
production.
Variable costs
Variable costs change with the number of products produced. Examples of variable costs
include the raw materials used in production and the wages of the employees who get paid
per unit produced. The variable cost curve is illustrated in Figure 3. Variable cost is zero
when no activity takes place, and increases as the number of units produced increases.
Figure 3: Variable cost curve
Total cost
The fixed cost and variable cost curves are combined to give the total cost curve as
illustrated in Figure 4. You will note that this curve does not start at zero, since fixed costs
are still incurred even if no products are produced, so the total cost at that point will be
equal to fixed costs. As the number of units increases, variable cost increases, which is why
the total cost curve has a positive slope.
Figure 4: Total costs (sum of fixed and variable costs)
Watch this video on Fixed and Variable Costs: https://vimeo.com/97007177

Another way to classify costs
It is also important for managers to know who or what processes, business units or products
a cost is attributable to. This is critical for understanding whether a cost is 'worth it'. A
management accountant helps by ascertaining who or what is driving the existence of a cost
and how the cost impacts the revenue or profitability of the business. It is not always as
straight forward as 'cut the costs and our profit will go up.' A reduced budget can reduce
staff motivation and make it hard to carry out work. Initial classification will require dividing
costs into direct costs and indirect costs.
Direct costs are directly attributable to a particular department, process, product or
service. Indirect costs are costs that are attached to multiple departments, processes,
products or services.
Direct costs
Direct costs are those that can be directly traced in full to a cost unit (e.g. a table that the
company is producing).
There are 3 elements of direct costs
Direct material costs. Direct material costs are costs of material used to make and sell a cost
unit (e.g. wood being used to make the table).
Note: materials used in negligible amounts are indirect material costs (e.g. glue to hold the
table together).
Direct labour costs. Direct labour costs are costs of labour used to make a cost unit (e.g.
wages paid to the carpenter who will make the table).
Direct expenses. Direct expenses are other costs incurred in full as a direct consequence of
making a table (e.g. licence fee paid to the designer per table made).
Indirect Costs (or overheads)

Overheads are costs incurred that cannot be traced directly and in full to a cost unit (e.g.
glue for tables, supervisor’s salary, depreciation of factory building, insurance etc.)
Such indirect costs are often referred to as 'overheads', and can take various forms,
including administrative costs, production costs, distribution costs and selling costs.
If operating on a medium scale or above, managers will need management accountants to
allocate these indirect costs. This will create a better picture of how much products and
services are actually costing. This information can be critical because it shapes the
manager's view of how profitable and successful a department is, as well as how much value
they are adding. It also provides information that is of value to investors, who would like to
know that their money is being spent wisely.
Through classification and allocation, the manager can then better control the organisation.
It is important to understand that costs can hold a myriad of combinations, for example.
Material Costs are direct costs (wood for making tables), but also a variable cost (linked to
the number of tables produced).
Fixed Variable
Direct Equipment solely used for Material costs
the product/service
Labour
Indirect Management labour Temporary labour
Through Better cost control, Costs can be attributed to a source and thus and understanding
is gained as to why they are created. With this understanding a manager can undertake an
exercise of making the source more efficient, thus reducing costs and potentially helping to
make their product, service or department more competitive.
If we successfully control costs, there are numerous advantages, including: a transparent

and fair appraisal system (a key strategic tool of Human Resources as you will have seen
earlier); deriving the external selling price (as you will explore in Marketing); and clear
stakeholder communication (for example, through the annual report which you will learn
more about in Financial Accounting). It is of particular importance in divisionalised
organisations (which is where there are multiple quasi-autonomous units in a firm, and
which you will learn about in Decentralisation, and in Structural Forms).
However, just because this information is desirable, it does not mean that it is easy to
create: dividing up indirect costs so that they can be attached to particular departments,
processes, products or services can be extremely challenging.
Often, indirect costs are located in departments that work for the business as a whole: HR,
Marketing, IT, sales, etc. They do not produce goods or services directly, but they do have
expenses (salaries, office space, etc.) which are an indirect cost attributed to producing a
company's goods or services. These indirect costs can be substantial and need dividing up in
some way. The challenge here is two-fold: (1) the costs need to be split between different
products, services, departments or functions, and (2) there are lots of options on how to do
this that require discretion and which are subjective.
3.2 Match things to their cost type (Quiz)
Please attempt this quiz on the VLE.
3.4 Cost Classification (Q)
In the context of a service organisation such as DHL, which provides warehousing, transport
and distribution and logistics provide an example of:
-Direct cost
-Indirect cost
-Variable cost
-Fixed cost
3.5 Feedback: Cost Classification
In a logistics company:
- Warehouse rental space (rent) is an example of a fixed cost.
• If they own the warehouse, there will still be fixed costs in the form of tax or rates to
pay annually for the facility
- Wages for overtime workers at peak periods, such as Christmas, is an example of
a variable cost
• Wages for salaried workers could have been used as an example of fixed cost
- Costs of transport, such as fuel, is an example of direct cost, for parcels or documents that
are delivered individually. However, usually parcels will be grouped and transported
together to reduce costs, so fuel costs would become indirect and need to be shared on the
basis of weight and size.
• Other direct costs could include customs fees
- Costs attributed to marketing their services are indirect costs.
• Other indirect costs may include aircraft and vehicle purchase or lease
4 Breaking Even
4.1 The break-even point and the margin of safety
Calculating the break-even point
Break-even is another term that many of us will be familiar with. For example, a gambler
might say that they have “broken even” if the amount of money they have spent is equal to
the amount of money that they have won over a period of time. At this point in time, they
have made back any losses, but also lost any gains: they have broken even.
In a business context, the same principle applies, with the term 'break-even' defining a
point in time at which the overall costs equals the overall income. The break-even point is
where the business neither makes a profit nor a loss; it earns just enough revenue to cover
its costs.
The profit of a business is calculated by deducting costs from revenue earned:
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 − 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 = 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
Break-even occurs when the total revenue and the total costs are the same, for example:
£10𝑚𝑚 − £10𝑚𝑚 = £0𝑚𝑚
The break-even point is where the business neither makes a profit nor a loss; it earns just
enough revenue to cover its costs. This means that profit is zero.
To show this graphically, you can draw the total revenue curve and total cost curve on a
graph which measures quantity sold and costs incurred. See Figure 1.
At the point where the two lines meet, it means that total revenue and total cost are the
same. This is therefore the break-even point.
The shaded area below the break-even point shows where total costs are greater than total
revenue, and the company is therefore making a loss. The shaded area above the break-
even point shows where total revenue is greater than total costs, and the company is
therefore making a profit.
Figure 1. Break-even point
A manager in charge of costs and revenue will want the profit to be be greater than the
costs at the end of the accounting period. They will want a decent buffer between their
company or product line, and making a loss. This buffer is called a margin of safety.
The margin of safety is the amount that sales can fall before the break-even point (BEP) is
reached and the business fails to make a profit.
It shows how much sales will have to decrease before profit turns to loss. If, for example, a
business expects to sell 1,000 units of a product and the break-even point is 875 units, the
margin of safety is 125 units. (It is sometimes expressed as a ratio, calculated by dividing the
margin of safety of 125 units by the expected sales volume of 1,000, which equals 12.5%.)
The higher the margin of safety, the less exposed to risk the business is. Should a manager
discover that the margin of safety is too low – i.e. the number of units expected to be sold is
too close to its break-even point – the manager can take steps to either increase the
revenue earned per unit or lower the incurred costs. These steps both result in a lower
break-even point that is easier to achieve, resulting in a higher margin of safety.
Calculating break-even is useful when making managerial decisions, as it shows you how
many units of a product need to be sold to make a profit. Thus, if it's not possible to sell that
number of products, the venture is not worth undertaking. It also shows if the volume of
products which are likely to be sold is very close to the break-even point – i.e. when the
margin of safety is low – which would mean that your business is exposed to more risk.
5 Budgeting
5.1 Budgeting
Introduction
The term budget is probably the most well-understood of finance terms to someone who
does not have an accounting background. We are all familiar with the term, and its
importance in keeping expenses under control.
Imagine you work at a business where no benchmarks are set. The production department
does not know how many units of a product should be produced to meet the demand of
customers. The sales department is not sure how many units they should sell to ensure a
positive cash flow. Department managers do not know how much money is available in their
budgets to spend on training staff members, and it is unclear whether money spent by the
business is allocated to the correct resources. The business will likely not go very far in
achieving its goals if it operates in this way.
It is very important that the different activities within a business are coordinated with the
goals the business aims to achieve, ensuring that everyone knows what they are working
towards. One way of doing this is by making use of budgets. Budgets not only assist with
meeting goals, but also motivate staff members to perform better, encourage business
managers to plan for the future, and serve as a benchmark for performance.
This set of notes explores the process that should be followed when setting budgets, and
looks at the different types of budgets a business can compile.
Strategic budgeting
For budgets to be effective, they should align with a business’s strategic plans. For example,
if a business is planning on expanding into a different market, enough money should be
allocated in the budget to allow for new skills to be acquired, new equipment to be bought,
etc.
Atrill and McLaney (2011) suggest the following steps for creating a strategic plan. As their
focus is accountancy, they are interested particularly in the relationship between the
creation of a strategic plan and the creation of budgets.
1. Establish the mission and objectives, i.e. what the business aims to achieve in the
long run (NB: this is undertaken at the most senior levels in the organisation,
including but not limited to the senior finance managers and directors).
2. Analyse where the business currently is relative to where it wants to be (again, led
by the most senior levels in the organisation, including but not limited to the finance
department).
3. Evaluate the different options available to close the gap between where the business
is and where it wants to be.
4. Select the best option and formulate long-term plans.
5. Implement short-term plans that work towards achieving the long-term plans. This is
where budgets come in. A budget is one of the short-term tools that is used to work
towards achieving long-term objectives.
6. Monitor the situation. Goals that must be met by a division or business are included
in budgets, allowing managers to compare actual performance against planned
performance.
7. If performance did not go as planned, the cause of the deviations should be
investigated, and plans should be implemented to correct it going forward.
As you can thus see, the management accountant has an important role to play in creating
business budgets that align with the strategy.
Budgets are usually set for a period of one year, with monthly budgets derived from the
annual budget. A sales department, for example, may have to achieve a certain amount of
sales during the year. Monthly targets that must be achieved to meet the annual target are
set accordingly.
It is important to distinguish between a budget and a forecast. Forecasts predict what might
happen in the future; budgets set targets for the future. A food producer, for instance,
might forecast that the cost of fresh produce will increase in the next year due to a severe
drought experienced by the farms that serve as suppliers. The business can then use this
information to inform the budgeted figures for the required input supplies.
Bases for budget setting:
There are many different techniques that can be used to set budgets, but we will compare
two very common ones: incremental budgeting and zero-based budgeting.
Incremental budgeting
With this method, the previous year’s budget or actual results are used as a starting point.
Adjustments are then made to the amounts if necessary. For example, if it is expected that
sales will increase by 10%, 10% will be added to the previous year’s budgeted sales figure to
reach the new figure. If salary expenses are expected to decrease by 5%, this percentage
amount will be deducted from the previous year’s budgeted salary figure to get the new
figure. Adjustments are also made to take inflation into account. Example 1 shows how
incremental budgeting is used in practice.
Example 1:
The budget for salary expenses for a specific department in a business amounted to £2.5
million in the last year. The business manager expects to appoint three new staff members
in this year, at salaries of £30,000 per year each. An increase of 6% will also have to be paid
to all employees (including the three new employees).
The business manager will calculate the amount to be included in this year’s budget as
follows:
(£2.5 million + £90,000) × 1.06 = £2,745,400
This method is usually less time-consuming and cheaper than zero-based budgeting
(explored in the next section). However, it may result in a budget that is not as
comprehensive or thoroughly considered as one compiled using the zero-based budgeting
technique.
Zero-based budgeting
With this method, all activities within the business start with a budget of zero, and
managers must justify why money should be allocated to that activity. For example, if an
amount was budgeted for staff training in the previous year’s budget, the business does not
assume that a similar amount must be budgeted for training again this year, or that a
budget for training is required at all. Instead, managers must present their training plans
each year, and then the amount necessary for training is derived from these new plans.
Resources are allocated to activities that require it, instead of all activities being allocated
funds simply because funds were allocated to it in the previous year.
Watch this short video which explains Zero Based Budgeting in a little more detail.
https://vimeo.com/23388161 [5mins]
The possible downsides of zero-based budgeting include that it requires more time and
effort from managers, and that it is therefore usually more costly than the incremental
budgeting method. However, many business managers recognise the value of the method,
resulting in an increasing number of businesses using it.
After the budget-setting method is chosen, the following process is usually followed to
ensure that the budgets are in line with the strategic plans of the business:
1. - Allocate responsibility to specific individuals for setting budgets. Depending on the
size of the business, a budget committee could be formed to take responsibility.
Alternatively, managers could be tasked with drafting the budgets for the
departments or functions they oversee.
2. - Ensure that managers have all the information they need to set the budgets for
their departments. The most important thing they must know is the business’s
strategic plan for the next year. Trend forecasts or any other information relating to
the industry may also come in handy.
3. - Give managers enough time to prepare draft budgets for their departments or
functions, based on their needs.
4. - Review all the budgets and ensure that they align not only with the strategic plan of
the business, but also with the budgets of the other departments. The production
budget, for example, is informed by the sales budget.
5. - Compile the master budgets based on the information included in the individual
departmental budgets. The master budgets comprise a budgeted income statement,
a budgeted statement of financial position, and a cash budget.
6. - Distribute the budgets to all relevant parties, ensuring that they are aware of the
targets they are expected to achieve.
7. - Monitor actual performance by comparing it against budgeted figures. If controls to
ensure that budgeted figures are met are not put in place, budgeting becomes a
senseless exercise, as the business will likely fail to meet its goals.
The diagram below (Figure 1) shows just how many budgets there are in a typical
organisation, and the complex interrelationship between them. What this shows is just
important it is for there to be a close relationship between budgets for the organisation to
be able to act as one and in line with its strategy.
Figure 1: Types of budget
Problems with budgeting

Some experts believe that setting fixed budgets creates problems for businesses, and that a
new approach should be taken, where budgets are updated as the business’s circumstances
change. They see there as being a number of problems with traditional budgeting:
• It is very resource-intensive, taking a lot of time and money to undertake the
budgeting process. For some companies, they spend more than half the year
working on the creation of budgets. Budgets can be incredibly detailed and require
the interaction and agreement of many stakeholders which could be seen as a waste
of time that could be spent on doing something that contributes more directly to the
bottom line.
• In fast-moving times, it can become irrelevant very quickly. If managers are expected
to lock down their budget once a year and work with it, that can create real
problems with dealing with market shocks, regulatory change, or new competitors.
• The budget - which should be central to the strategic success of the business - can
become a political tool. For example:
o When companies tie employee compensation to performance against the
budget, there can be a desire to make the budget too easy to achieve.
o Managers may also try to spend all their budget in one year or they risk being
told they 'don't need all that money' next year. It can also lead to a rush to
spend for fear of losing it and it can lead to quite a silo mentality where every
manager spends 'their' money without thinking about impacts on the wider
business.
You can read more, as well as some suggestions of how to use rolling forecasts as an
alternative to budgeting, here.
6 Discussion: Budgeting
Post your thoughts about the two approaches to budgeting covered in the unit by answering
the following questions:
1. Once you have prepared your personal budget would you throw it away and start
again next year? Why?
2. How can the budget help you to manage your personal affairs?Would you remember
to look at it again?
3. Now you know what creating a budget involves, can you identify two reasons why a
manager (who is not an accountant) would make use of the agreed annual budget
for their department. What do you think is most important to them?
4. Would it be useful for all managers to have an understanding of how budgets are
produced or can this be left to the accountants?
Block 9: Financial Accounting

Essential Reading
Weetman, P. Financial accounting: an introduction. (Harlow: Pearson, 2013) sixth

edition. Chapter 7: Published financial statements.
Atrill, P. and E. McLaney Financial accounting for decision makers. (Harlow:

Financial Times Prentice Hall, 2013).
Chapter 2: Measuring and Reporting Financial Position. This textbook chapter provides
more detail on the statement of financial position/balance sheet. Students seeking more
detail on how the financial statements work and are used will find this chapter helpful, but
should just read those components that relate to what is covered in this unit.
Chapter 3: Measuring and Reporting Financial Performance. This textbook chapter

provides more detail on the income statement. Students seeking more detail on how the
financial statements work and are used will find this chapter helpful, but should just read
those components that relate to what is covered in this unit.
Chapter 6: Measuring and Reporting Cash Flows. This textbook chapter provides more
detail on the statement of financial position/balance sheetStudents seeking more detail on
how the financial statements work and are used will find this chapter helpful, but should
just read those components that relate to what is covered in this unit.
Recommended reading
Ross, S. (2014) How Do Investors and Lenders Benefit From Financial Accounting?
https://www.investopedia.com/ask/answers/041015/how-do-investors-and-lenders-
benefit-financial-accounting.asp

University Press, 2014), Theme 1: Accounting for Capitalism.
making (New Jersey: John Wiley & Sons, 2003) Chapter 1: Introduction to accounting. Text
book chapter. Introduces the functions of accounting and compares MA and FA, thus useful
for a number of the accounting and finance blocks.
Budding, T., Schoute, M., Dijkman, A.; de With, E. The Activities of Management
Accountants: Results from a Survey Study
Management Accounting Quarterly; Montvale Vol. 20, Iss. 2, (Winter 2019): 29-37.
https://search-proquest-
com.gate3.library.lse.ac.uk/docview/2276828756?accountid=9630&pq-origsite=primo
Drake et al, ‘Who Uses Financial Statements? A Demographic Analysis of Financial

Statement Downloads from EDGAR’, Accounting Horizons, 31(3), pp.55-68. This journal
article looks at who tends to use financial statements, not just based on job title, but rather
demographic characteristics. They find that education level is the biggest factor, which may
have serious impacts for business practice and performance.
making (New Jersey: John Wiley & Sons, 2003) Chapter 1: Introduction to accounting. Text
book chapter. Introduces the functions of accounting and compares MA and FA, thus useful
for a number of the accounting and finance blocks.
Govindarajan et al 'Why Financial statements don't work for digital companies', Harvard
Business Review Digital Articles. 2/26/2018, pp. 2-6. To access this text, search for Harvard
Business Review using the online library A-Z journal list, then put the article's title into the
EBSCO search bar. This accessible article, aimed at businesspeople, suggests it is time to
rethink the traditional 3-part annual report for digital companies, because most of their
assets (people, knowledge, online ‘stuff’ are totally abstract and difficult to place a value
on).
Weetman, P. Financial accounting: an introduction. (Harlow: Pearson,

2013) Chapter 3: Financial Statements from the Accounting Equation. This
textbook chapter provides background to Chapter 7 of Weetman (one of the essential
readings for this week). Students who are struggling with the basics will find it helpful. (NB:
It is not as discursive as the exam requires (e.g., it doesn’t talk about the significance of
these records for the stakeholders, nor how their figures can be used to make ratios)).
2 The Purpose of Financial Accounting
2.1 Illustrating why we need financial accounts
HiProfile Limited, is a small sports car modifier based in Durham, in the north of England.
The company specialises in customising high-end vehicles, designed to appeal to younger,

affluent sports car owners with up-to-the-minute tastes. Customisations include wraps
(custom car colours applied as a transfer), changing the magwheels, and increasing the
power of the engines. The company has a team of highly skilled craftspeople who use their
skills to produce the highest standard of product.
The company premises in Durham comprises an office, a retail outlet, a factory, and
inbound/outbound stores. The company employs 46 workers; 24 of whom are skilled metal
workers, 8 are unskilled manual labourers (semi-skilled metal workers, stores people, etc.),
and the remainder are office / shop staff and managers.
In your response, consider our case study company, HiProfile Limited, and identify what you
consider to be its three most important user groups of accounting information from the list
below:
Government Investment Analysts

Competitors Suppliers
Community Representatives Managers
Employees Lenders
Owners Unions
In your response, you should:
- State the three groups who will be most interested in what the financial statements
contain
- Justify your selection and explain what kind of information they would be most interested
in.
- State if you think your answer would differ if the type of organisation were different, for
example, if it were a public sector organisation or a not-for-profit organisation.
2.2 Feedback: Why We Need Financial Accounts
It could be argued that any of the users of information are the most important, dependent
on circumstance. However, the most typical answer that could be given is that the three
most important audiences are Suppliers, Owners, Managers
Justification:
Suppliers would provide a line of credit to HiProfile. They would therefore want to know
how financially healthy their client is. They want to know how ‘liquid’ the client is. They
would want to know if HiProfile would be able to cover their debt in a timely fashion? In
other words, can they cover the money owed to their suppliers. An Income Statement
would be important to Suppliers, as this statement measures how profitable a business is.
The Owners of the Business, would want to look at the holistic health of the business, this
includes the Income Statement, Balance Sheet and Cashflow statement. Most importantly,
business owners would want to know how much cash the business has on hand, to cover
business overheads on a monthly basis, such as rent, salaries, inventory and alike.
Managers need to track the performance of their departments, and therefore make use of
budgets, cashflow forecasts, and other metrics to help make decisions and to motivate their
teams towards achieving organisational goals.
Would this differ if the type of organisations were different?
Yes, this would differ if the type of organisation were different. In the public sector,
government, community representatives and employees would be the main users of
information. The public sector is funded by government, who is accountable to their
employee and the community, since public funds obtained through taxes, are used to fund
the business.
2.3 What do financial accountants do?
The financial accountant prepares the financial statements consisting of the income
statement, balance sheet and cash flow statement.
These three statements need to be prepared in accordance with nationally-accepted

accounting principles and national corporate law.
Such adherence to national laws and regulation means that organisations based within a
country will have a format that will help stakeholders to understand and compare the
figures. These documents are created in a standardised way so that they can be read and
understood by those outside the company.
This is quite different to the work of the management accountant, whose accounting work is
focused on creating and analysing data for those inside the company. However, when a
financial accountant prepares statements that can be understood by those outside the
company, they also remain useful for those inside, too. For example, owners use financial
accounting information to ascertain the health of their company.
The management accountants that they employ use the data from the financial accounts to
provide further business insights to owners and their managers, too. For example, managers
and management accountants will use information from the financial statements to track
the relative performance of their department, to formulate appropriate budgets, to make
cashflow forecasts, and create other metrics to help with the running of departments and
the business as a whole.
The financial accountant’s role preparing the financial statements is compared to the role of
a management accountant below:
Management Accountant Financial Accountant

Primary use for Internal External
the data
Purpose Assist management in planning Assist management and
and controlling the business to shareholders in analysing the
make effective decisions position and performance of the
organisation.
Law No legal requirements Compliance with accounting
standard and Companies Act
Format produced Management discretion In accordance with accounting
standards
Scope Flexible, includes historical, Dictated by accounting
current and future information standards focusing on profits,
which can focus on specific parts assets, liabilities and cash flows.
of the business
Management Accountant Financial Accountant
Information Financial and non¬-financial Key Financial position and
Performance Indicators (KPIs) (e.g. performance focused
number of customers per hour)
Non-financial managers will need to work closely with a company’s financial accountants to
ensure that key information is made available to the shareholders. Stakeholders, including
managers and shareholders, can then use the financial statements to analyse the
performance and position of the firm and determine if corrective action is required.
Financial statements provide more aggregated information than the management accounts,
which can be useful for a manager when making strategic decisions. For example, they will
be equipped to make decisions about future finance required given the overall cash position
presented.
If we think about our case study organisation, HiProfile Limited, all of the user groups
identified - suppliers, lenders, customers, owners, competitors, etc. - are stakeholders. They
all require different kinds of financial information, and for different reasons. For example,
managers are use financial information to track the performance of their departments, and
make use of budgets, cashflow forecasts, and other metrics to help with the decision-
making process, as well as to motivate their teams towards achieving organisational goals.
Suppliers have an interest in the financial health of their clients, and would therefore like to
know how 'liquid' their client is. In other words, they would want to know if HiProfile would
be able to cover their debt in a timely fashion. Business owners would want to look at the
holistic health of the business, this includes the Income Statement, Balance Sheet and
Cashflow statement, Most importantly, business owners would want to know how much
cash the business has on hand, to cover business overheads on a monthly basis, such as
rent, salaries, inventory and alike. You saw these factors in the prior case study, too.
In sum, financial accountants help to present standardised financial information in the

prescribed forms of the financial statements to stakeholders. You will now learn more about
these financial statements and how they are compiled, as well as how the information
contained within them is of use to stakeholders.
2.4 Why do we need Financial Accountants
This article gives a nice, short explanation of the role that financial accountants play in
businesses.
https://www.investopedia.com/ask/answers/041015/how-do-investors-and-lenders-
benefit-financial-accounting.asp
3 Components of the Financial Report: Income Statements
3.1 The Income Statement
The income Statement
The income statement summarises the revenue earned and expenses incurred by a business
during a specific period. The difference between these two amounts indicate whether the
business has made a profit or a loss. This is, of course, critical information for a company.
Whether a profit or loss has been made, and the size of the profit or loss, will shape what
the company and its managers are able to do in the upcoming year.
For example, will there have been profit generated, which will allow the business to adopt a
growth strategy? Will they be able to employ more team members? Will the shareholders
be trusting that the company knows what it is doing because they have demonstrated
profitable business management?
Or will it be a year of tightening budgets to save costs, due to making a loss, or not making
enough of a profit? This might mean cutbacks in staff, a closer watch from shareholders, and
looking at ways to bring down overheads.
A senior manager will often be appraised on the contribution they are believed to have had
to the profit or loss of the company in the preceding year.
Format
Below is an example of an income statement for a manufacturing business. Note that

(expenses) are included in brackets, while income amounts do not have brackets.
ABC Limited
Income statement for the year ended 31 December 20.5

£
Revenue 500,000
Cost of sales (125,000)
Gross profit 375,000
Other income
Rental income 15,000
Commission income 20,000
Selling, administrative, and general expenses
Salaries and wages (8,000)
Telephone (1,000)
Insurance (1,000)
Operating profit 400,000
Interest income 1,000
Interest expense (2,000)
Profit before tax 399,000
Tax expense (160,000)
Net profit 239,000
3.2 Components
Components
The income statement consists of several components:
• Revenue: Revenue is the value of all transactions relating to a business’s core

activity, i.e. selling a product or delivering a service. For a travel agency, it will be all
the holidays that they sell. For a supermarket, it will be all the money that comes
through the tills. It includes the value of all transactions, regardless of whether cash
has been received yet. Any refunds granted for products returned are deducted from
the total sales to give the revenue figure.
• Cost of sales: Cost of sales is the expense that relates directly to the raw
materials, direct labour, or overheads used to manufacture products during the
financial period. For example, the raw materials for a business that manufactures
furniture include wood, nails, glue, etc. NB: A business that offers services instead of
selling products will not incur cost of sales, but will incur cost of services instead. So
for a travel agency, the cost of services will be costs incurred in creating the holidays
that they sell (direct labour, printing tickets and holiday packs, etc.)
• Gross profit: Gross profit is the difference between revenue and cost of sales, and
indicates how much profit a business has made before deducting its overhead
expenses (such as rent or salaries).
• Other income: This refers to money received for activities other than the main
activity the business is involved in. Examples include rental income received for a
building that is let to another party, or the profit made from the sale of an asset.
There is likely to be some subjectivity here for some businesses as to what counts as
the main activity. If you are a printing studio, for example, selling art prints for
people's walls, and you start to run classes to teach people how to do their own
printing - over time this may become a key revenue stream. Precisely when this
happens would be a subjective decision that an accountant may need to take,
following specific rules and guidelines set out by their own national accounting body
and corporate law.
• Selling, administrative, and general expenses: This refers to any expenses
that do not relate directly to the products sold, such as salaries for administrative
staff (labour that is not directly attributable to producing the goods or services you
are selling), building insurance, stationery (again, that is not directly attributable to
the goods being produced), bank charges, repairs to equipment, etc.
• Operating profit: Operating profit is the profit the business makes through its
day-to-day operations. It excludes interest and tax, as these expenses do not relate
to normal business activities, and they are, therefore, shown separately on the
income statement. It is an indicator of the business' potential profitability, since all
extraneous factor are removed, and all necessary operational expenses (i.e.
expenses absolutely necessary to keep the business running) are included in this
calculation.
Walmart Example of Operating Profit:
In 2018, Walmart Inc. reported an operating income of $20.4 billion. Total

revenues, which equalled total operating revenues, amounted to $500.3 billion. These
revenues came from sales across Walmart's umbrella of physical stores globally. The cost of
sales (or COGS) and operating, selling, general and administrative expenses, totaled $373.4
billion and $106.5 billion, respectively.
Operation Revenue [$500.3 billion] - Cost Of Good Sold (COGS) [$373.4 billion] - Operating
Expenses [$106.5 billion] = Operating Profit [$20.4 billion]
Net profit: Net profit is the profit that the business has made after all expenses have
been paid. This amount can be paid out to the owners of the business, or it can be kept by
the business to finance its activities. The amount will still, however, belong to the owners,
and will be included in the statement of financial position (or balance sheet).
3.3 Net Profit: The Bottom Line
Net Profit: also known as the bottom line
Net profit is commonly referred to as the “bottom line”. Every item included in the income
statement impacts the bottom line. If sales increase, the bottom line increases; if cost of
sales or operating expenses increase, the bottom line decreases.
Businesses try to improve their profit by increasing revenues, or by cutting expenses.
Cutting expenses is a short-term strategy, which is unlikely to be possible year on year. It

may be detrimental to long-term aims, for example, if maintenance of equipment is
reduced, leading to breakdowns and delivery delays
Increasing revenues by improving sales volumes or improving the brand to enable larger
profit margins provides a better long-term strategy
The two can be combined, for example, increasing spend on marketing, but keeping general
costs under control
A business manager should regularly engage with the idea that they may need to make
changes to bring about an improvement in the bottom line. They should be aware of
whether they are able to cut expenses in some way, or whether they can bring in an
additional source of income or to improve revenue. If you think back to HiProfile Limited,
the car customisation company in the earlier mini-case study - what actions could their
managers take to improve the bottom line?
4 Components of the Financial Report: Balance Sheet
4.1 The Statement of Financial Position or Balance Sheet
The statement of financial position/balance sheet
The statement of financial position (sometimes called the balance sheet) provides an
overview of a business at a particular date - for example, 31st January 1981. Stakeholders
are able to see a snapshot of the business' health at that point in time. This makes it very
different from the income statement and the cashflow statement, each of which analyses
the performance/measurement of flows over a period of time.
The statement of financial position shows how much the owners have invested in the
business, and the total assets and liabilities the business owns (i.e. the wealth the business
has accumulated). A manager can use this data to make business changes, for example, if
debt levels are higher than the expected % for the type of industry or activity, the business
can implement action to reduce the debt over the next few years.
There is a link to the Income Statement from the Balance Sheet. Profit or loss is taken from
the bottom line of the income statement and recorded on the balance sheet in the Retained
Earnings equity account. Retained earnings accumulate over the life of the business.
When a business operates at a profit, it increases in equity (is worth more)
When a business operates at a loss, it decreases in equity (is worth less)
Balance Sheet Format
The following is an example of a statement of financial position, based on the trial balance
included in the earlier notes. As you read through this, see if you can picture this as a
snapshot, taken on a very particular moment in the business' life. It would have been
different last week, and it would be different tomorrow. It's exactly how the business'
financial position looks on this very day.
Statement of financial position of ABC Limited as at 31 December 2018
£
Non-current assets
Property, plant, and equipment 454,000
Total non-current assets 454,000
Current assets
Inventory 20,000
Accounts receivable 5,000
Bank 30,000
Total current assets 55,000
TOTAL ASSETS 509,000
Non-current liabilities
Long-term loan 50,000
Total non-current liabilities 50,000
Current liabilities
Accounts payable 40,000
Total current liabilities 40,000
Owner’s equity
Share capital 180,000
Retained earnings 239,000*
Total owner’s equity 419,000
TOTAL EQUITY AND LIABILITIES 509,000
* Note that, in this instance, retained earnings equals the net profit calculated in the income
statement, as the company decided to keep profits for future use. Should a company decide
to pay out some of its profits as dividends, only the remaining amount will be included as
retained earnings.
Note: calculations will not be needed in assessments, you do need to understand what the
balance sheet represents and how managers can use it.
Components
The statement of financial position is divided into three main sections: assets, liabilities, and
owner’s equity.
Assets
Assets are the resources that are used in the running of a business. Examples
of tangible assets include machinery, vehicles, land and buildings, inventory, and cash.
However, assets can also be intangible, such as registered patents, internet domain names,
and licensing agreements.
For an intangible asset to be recorded, it needs to have a fair, established market value.
Brand equity could be listed if you have bought the brand from another company. But if it
has been developed in-house (by your own marketing team), then there is no way of
establishing fair value and it can't be listed. We will talk about this again in relation to
marketing later in this course.
An asset and an expense are very different to one another, and should not be confused:
• An asset retains its value over a period of time, and is already in the form of cash, or
can be sold again for cash. It might be a building, a piece of equipment, a patent, a
brand, and so forth. It is something that another company or individual may be
prepared to buy off you in the future.
• Expenses refer to resources that are consumed in the running of the business. They
might be salaries, utility bills, insurance, rent, or bank interest.
A vehicle, if owned, can be used repeatedly during business activities, and is therefore an
asset. But if it were rented, it would be an expense, because you could not sell it off at the
end of using it. Its petrol would also be an expense.
Assets are further categorised as either current assets or non-current assets:
• Current assets: These are assets that the business keeps for the short term, and that
are in cash form or expected to be sold or turned into cash within the next financial
year. Examples include inventory, bank, petty cash, and debtors (which are also
referred to as accounts receivable). They are called current assets because they can
be used imminently.
• Non-current assets: These are assets that the business keeps for the long term to
generate wealth, and that are not expected to be sold within the next year.
Examples include buildings and machinery. The money is locked into the item and it
would need to be sold off to be converted into cash. They are non-current because
the cash tied up in them cannot be used imminently. Therefore, long-term
investments where the money is locked in for a number of years are also non-
current assets.
A car dealer, for example, may have vehicles available on the floor for sale, but might also
have a delivery vehicle it uses in the course of its operations. The vehicles that are kept for
selling are inventory, and will therefore be recognised as current assets. The delivery vehicle
will be recognised as a non-current asset, as it is used in the daily operations of the
business, and is not meant to be sold in the short term.
Depreciation of assets
Not all assets retain their value indefinitely, and therefore the historical cost it was bought
at may no longer be a good indication of what it is worth. A vehicle, for example, decreases
in value over time due to wear and tear. Accountants provide for this decrease in value
through a process called depreciation. This means that the vehicle’s value is written down
over a period of time, and only the amount that the vehicle is actually worth is included in
the statement of financial position.
Inventory might also decrease in value due to damage, or because it has been replaced by
something better in the market. If the amount that a business can get by selling the
inventory in the open market is less than the historical cost of the inventory, inventory
should be recorded in the statement of financial position at the lower value.
Land and buildings, on the other hand, often increase in value over time. They appreciate in
value. These items are, therefore, usually revalued by businesses on a regular basis, and the
market value is included in the statement of financial position. There may be some
subjectivity as to what its market value is, and so a company looking to accurately reflect
the price in their statement of financial position will want to ensure a careful and fair
valuation.
Overvaluing an asset is just one of many ways in which companies can accidentally or
intentionally misrepresent items on their balance sheet. You can read more about famous
accounting scandals where items were overvalued or in other ways misstated on the
balance sheet here.
Stakeholders rely on balance sheets and other financial statements, to provide reliable
information. For listed companies this includes a third party audit to confirm the data
represents a fair view of the prospects of the firm in the Annual Report.
Investors are able to use the snapshot of financial position to compare performance with
other organisations or previous years to decide whether to invest or withdraw investment.
Managers need to be aware of how the data in the balance sheet might be interpreted by
investors and other stakeholders, and may need to take this into account when planning
organisational change. In the annual report there is the opportunity to explain changes to
equity, for example, as a planned reinvestment of retained profit. Consequently,
employees, suppliers, investors and other stakeholders can interpret the balance sheet in
the light of additional information about the nature of the investment.
4.2 Liabilities
Liabilities
Liabilities are the amounts the business owes to people or organisations they borrowed
from. Similar to assets, liabilities are also categorised as current liabilities or non-current
liabilities:
• Current liabilities: These are liabilities that are short term in nature, and that are
expected to be paid back within the next financial year. Examples include short-term
loans, bank overdrafts, and creditors (which are also referred to as accounts
payable).
• Non-current liabilities: These are long-term liabilities, which are not expected to be
paid back within the next year. Examples include long-term loans and mortgages.
A manager should carefully monitor the liabilities owed by an organisation to determine

whether they can be paid when required. If an organisation cannot pay its debts, it will face
legal action and this could result in liquidation – where a company ceases to exist and all
assets are sold to pay as many of the liabilities as possible. A recent example which you may
be familiar is Topshop, which collapsed early in 2021, unable to pay creditors a large
proportion of the money they were owed.
(Wildly different ways of reporting the figure of what was owed to creditors place the debts
between £51m - £1.1bn)
Owner’s equity
Owner’s equity (or shareholders' equity in the case of a publicly-held company) refers to the
amount of money that the owners or shareholders have invested in the business. It also
includes undrawn profits or retained earnings, which is the profit the business has made
over the years that it decided not to pay out to the owners. This money was instead
reinvested in the business to finance its activities, but it still belongs to the owners.
4.3 Balance Sheet
If the statement of financial position is completed correctly, total equity and liabilities will
be equal to total assets. The statement of financial position is, therefore, just a more
detailed representation of this idea. And this is why it is often referred to as a balance sheet,
because both sides should balance:
This idea is expressed in the Accounting Equation, which states the following:
Owner’s equity = Assets − Liabilities
It is called the Accounting Equation because it represents a basic principle that the books
need to balance. For every change to an asset account, there must be an equal change to a
related liability account.
It demonstrates that everything that is left in the business after debts have been paid
belong to the owners. It also shows that an owner’s stake in a business increases if assets
increase, and decreases if liabilities increase. Therefore, if you reshuffle the equation, it
reads as follows:
Owner’s equity + Liabilities = Assets

4.5 Conclusion
Conclusion
So far, you have been introduced to the two financial statements that a business manager
will engage with most often.
The income statement shows the amount of profit the business has made over a period of
time (such as a month or a year), while the statement of financial position (balance sheet)
indicates the wealth of the business at a particular point in time.
Each of these statements consists of different components, some of which may be within
the manager's control to change. Knowing how each function and department within a
business impacts the different components of the financial statements will enable managers
to make choices that could be to the financial benefit of the business in the long run.
5 Components of the Financial Report: Cash Flow Statement
5.1 The Cash Flow Statement
The importance of understanding cash flows
Imagine you are the newly appointed manager to your department. In order for your
department to run smoothly and efficiently, you need to buy a few assets, and maybe hire
one more staff member. You are not sure how much cash you will have available to use to
improve your department's efficiency. You want to ask your department head, but are
afraid to do so in case the business does not have enough money to spare for your
department's needs.
You remember that managers usually use financial statements to understand the financial
position of the business.
One of those statements is the cashflow statement (and this is the one we will now look at).
The cashflow statement offers a summary of cash flowing into the business and cash
flowing out of the business. It also tells us how well the company manages its cash. In other
words, it tells us how well the company is able to generate cash in order to meet its financial
obligations, such as paying its suppliers or its employees’ salaries, even though it is making a
profit. It is critical to have sufficient cash to be able to meet obligations.
As a manager, this knowledge is critical for funding projects, and for making sure that you
are not draining the company's financial reserves with your department's outgoings.
You decide to approach the accountant and ask him to review the cashflow statement in
order to ascertain whether or not there will be enough funds for your department's needs
that month.
The cash flow statement
The accountant explains that the cash flow statement, or statement of cash flows, provides
an overview of the cash movements of a business over a period of time. It also shows how
much cash the business has available at the end of a specific period. Measuring cash is
different to measuring profit; for example, profit may increase one year if a credit sale is
made, but cash may not increase until the following year when the customer pays.
A manager who focuses on profit growth and neglects cash could experience going concern
issues if the business is unable to pay their debts as they fall due. During the early days of
the pandemic (and ongoingly in some countries), there were concerns that
companies would not have enough cash to be able to meet their obligations. Governments
globally looked for ways to help companies bolster their cash to be able to meet their salary
bills, for example, as they would have run out of cash otherwise.
When cash generated/lost from operating, investing and finance activities is aggregated,
this will produce the change to the cash balance for the entire period. This will be the
equivalent to the change in the cash figure on the balance sheet from the prior year
compared to the current year. A manager will have to consider how to improve a cash
balance that is reducing, as this is not sustainable and could threaten the long-term nature
of the organisation. In the short term, a loan could be taken out; in the long term, cash-
depleting activities such as holding too much inventory needs to be addressed.
It is important, therefore, for managers to do a cash flow forecast to determine how much
cash the business has on hand before making decisions to invest or to purchase that new
asset.
5.2 What is a Cash Flow Forecast?
Take a look at this video that explains what a Cashflow forecast
https://www.youtube.com/watch?v=h0rcvlqUiTM&feature=youtu.beis.
5.3 Components of a Cashflow Statement
Components of a Cashflow Statement
What can you expect to find recorded on the Cashflow Statement?
The statement of cash flows is divided into three sections:
1. Cash flows from operating activities: These include transactions that form part of
the day-to-day running of the business. For example, cash receipts from customers
and cash paid to suppliers, employees, for rent, etc.
2. Cash flows from investing activities: These include transactions involving the
acquisition and disposal of non-current assets and investments. For example, buying
or selling a vehicle, or investing in another business.
3. Cash flows from financing activities: These include transactions involving long-term
borrowing and the owners of the business. For example, issuing shares, getting a
loan from the bank, or the repayment of loans
Implications for managers
As a manager, or a business owner, you would want to avoid a 'cash flow crisis'. This is a
situation where the business does not have enough cash available to meet its current
obligations, such as paying its suppliers or its employees’ salaries, even though it is making a
profit. It is critical to have sufficient cash to be able to meet obligations.
However, interestingly, having too much cash could signal a different sort of business
problem: it could indicate that the business should increase its investments as it is currently
holding cash which does not make money. Even a low risk investment will provide some
interest and stop the cash losing value relative to inflation. If the company can afford to tie
the money up for a longer period, they may want to look at a longer term investment or,
perhaps better, in using it to fund business growth.
The statement of cash flows aims to prevent a cash flow crisis or excess cash holding from
occurring, by providing business managers with information on the cash that is coming into
and leaving the business. Managers should be able to analyse the data provided by this
statement and change their behaviour if necessary. As such, the information from the cash
flow statement can be used by managers to make better, more informed business decisions.
Since the Cashflow Statement is compiled using other financial statements, such as the
income statement (which we learned earlier, looks at the business’s income and expenses)
and the balance sheet (which we learned earlier summarizes the business’s assets and
liabilities, as equity). External stakeholders such as investors and lenders would therefore
use the cashflow statement to evaluate the business’s financial health.
5.4 Compiling a cash flow statement: optional activity
Would you like to know how to create a simple Cash Flow Forecast? Here is a step-by-step
tutorial on how to do so yourself using Microsoft excel. This is an additional resource, and
not something that we expect you to be able to do as part of the syllabus. However, if you
are currently a manager, or expect to be one in the next couple of years, then bookmarking
this resource for your own skills building may be a good idea.
https://www.youtube.com/watch?v=C5PcUSmfOZU
5.5 Double Entry Bookkeeping
Part of the fantastic BBC series '50 things that made the modern economy' by Tim Harford,
this short podcast shows how Venetian merchants created double-entry bookkeeping and
how it lives on strongly.
https://www.bbc.co.uk/programmes/w3csv3gq
6 Exam Preparation: Answering Numerical Questions
6.1 Exam Preparation: Answering Numerical Questions
As you will have noticed by now, this subject has quite a lot of financial and numerical
content. However, the exam will not test you on your ability to be able to perform
calculations. Instead, we are much more interested in your ability to be able to discuss and
explain what particular calculations and numbers mean, and why they might of value to
managers.
For example, in the mock paper, we ask the following question in Section A:
• How is the quick ratio calculated? Why is it useful? (5 marks, 200 words max)
What we are interested here is that, firstly, you can state the equation and that, then, you
can explain why it's helpful (to a manager). So, this might be an answer:
The quick ratio is almost the same as the current ratio, but it measures whether or not a
business would be able to pay its short-term debt without having to sell its inventory. It is
calculated as follows:
(Current Assets – Inventory)/Current Liabilities
The quick ratio is usually expected to be at least 1:1, which means that the business should
be able to cover all short-term debt using its current assets, without having to rely on the
sale of inventory. A manager would be interested in this because it will show them if more
short-term assets (cash) are required to cover liabilities as they fall due. Inventory cannot
always be converted into cash quickly, which is why this is a handy ratio for business
managers to be aware of. If they find it is a lower than 1, a manager could then take steps to
improve the quick ratio, for example by encouraging the firm to offer debtors a discount if
they settle their debts early. (165 words)
Questions in Section C that focus on the financial and management accounting sections will
also be asking for you to engage not with the figures themselves, but with what the
calculations, approaches and frameworks can do for a business. This question is from the
mock paper and demonstrates one type of question you might expect:
• The financial statements are all an investor needs to know about a company to
decide whether to buy shares.’ Discuss this statement, using evidence from across
the syllabus to justify your answer. (25 marks, 600 words max)
Here, you will be able to draw on the learnings you have of the financial statements, and
what you have been taught regarding the purpose they serve to an investor. This question
also seeks you to draw on other aspects of the syllabus, showing that, whilst the information
found in financial statements is helpful (for example for measuring performance through
ratios) it is not a complete picture of health for the firm and other information should also
be considered (such as how staff are managed, the style of leadership, the culture, and so
forth).
In Section B, you might be examined in a wider way - not being asked to calculate, but you
might be asked to comment on a ratio or a figure - for example a quick ratio of below 0.81
(below 1) and whether a manager may need to do something about it (Yes).
However, whilst you will not be asked to undertake calculations in the exam, it is important
that you understand how calculations are done, hence us asking you to practise some as a
part of the Financial Accounting and Management Accounting modules. Becuase the
questions will often ask you to explain a particular accounting or finance method, ratio,
framework or concept, having undertaken the calculations and understood them will help
you to understand them and to talk about them.
7 Using financial data to create ratios
7.1 Financial performance indicators
Once the financial statements have been created, investors will likely be interested in
conducting further analysis on the data within them to consider the performance of the
company.
Financial data analysis allows current and potential investors use to appraise company
performance when they are making decisions about investment. (This is an added reason
why managers may be interested in analysing financial figures so that they can understand
how the investors see the company and can work to make the data more attractive,
financially, to the owners). In particular, the analysis of ratios can be very helpful to
investors, as it helps them to compare data across companies, settings and years. We will
look briefly at ratio analysis now. Rather than consider it in detail, we will provide a brief
insight into what investors might be looking at, to inform your understanding of what
managers may concern themselves with in order to keep investors happy.
(Companies and their managers will also be interested in these figures as they are a way to
understand how investors see them and a way to understand how they are performing. We
will consider them more from the perspective of the manager in the Performance
Measurement module towards the end of Core Management Concepts.)
8 Discussion
A company brings in £3m in revenue.
Have they done well?
What else may you need to know to be able to make an informed judgement?
Please discuss this with your classmates or on the VLE.

9 Ratio Analysis
10.1 Feedback on discussion forum exercise
Whilst £3m in revenue may sound excellent, you do not have a lot of information to go on
as to whether this is good or not.
In particular, you do not know:
-The size of the company (Are there 10 people or 1000?)
-The costs that have been incurred in obtaining that revenue (how much does the product
or service cost to produce? What are the fixed costs such as salaries, office rental, etc.?)
-What was the revenue last year and what they are forecast to be this coming year? (does
the timing of the sales reflect that you are actually counting lots of work that was won last
year and leave you with little work to win next year?)
-What is the industry standard for revenue per worked hour/per product sold/per year?
You will no doubt have thought of other questions, too.
If the costs incurred in achieving the revenue are minimal, and the costs of producing the
goods or services that have been sold are minimal, then this makes the £3m more exciting.
If the industry standard for a company of their size is much lower than the £3m, then this
makes it more exciting still. If the team comprises of only 3 people and they have therefore
made average revenue of £1m each, then this is impressive.
If the opposite of the statements above are true (e.g., it's a big staff, there are lots of costs
associated with creating the goods/services, and the industry standard is for much higher
sales per person/team) then this would not be very impressive.
What you are seeing here is that looking at one 'raw figure' does not give us enough to go
on to evaluate performance and would certainly not be enough for an investor to decide to
invest.
What they would like to be able to do is compare figures.
So, for example, what are the sales per person? What are the sales per person in our biggest
competitor? What are the costs per sale? How much of the sales revenue is costs versus
how much is profit?
What we need is the ability to combine figures into ratios. This is what we will now look at.
9.2 Ratio analysis
In the discussion forum above, you saw that a raw revenue figure of £3m does not tell us
enough for us to be able to say whether the company in question had done well. What we
would like to be able to do is compare figures so that we can work out what the sales are
per person, and compare those (if we can) to the sales per person of our biggest competitor.
We would like to understand the costs per sale. We would like to understand how much of
the revenue is going to be consumed by costs before we can turn a profit.
What we need is the ability to combine figures into ratios. This is what we will now look at.
Ratio analysis is a tool that investors (and managers) can use to help to
understand the numbers in the financial statements.
A ratio simply shows how much of one thing there is in comparison to another. For example,
how much profit there is per Apple shareholder, or what the costs are per smartphone
produced.
A financial ratio compares two related figures, usually both from the same set of
financial statements (Atrill & McLaney, 2008).
"Ratio analysis is a quantitative method of gaining insight into a company's liquidity,

operational efficiency, and profitability by studying its financial statements such as the
balance sheet and income statement....Ratio analysis compares line-item data from a
company's financial statements to reveal insights regarding profitability, liquidity,
operational efficiency, and solvency. Ratio analysis can mark how a company is performing
over time, while comparing a company to another within the same industry or sector."
(Investopedia, 2021)
There are various ways to classify ratios, but for the purposes of this module, we are
interested only in the following types and provide the following examples of each:
Profitability ratios eg: Gross Profit Margin, Return on Capital Employed
Efficiency or activity ratios eg: inventory holding period
Liquidity eg: Current Ratio, Quick Ratio
Investment eg: Price/Earnings Ratio
This unit will illustrate how to calculate a handful of ratios that interest investors. The
purpose is to help you as a student of management understand why these ratios are
important to investors and therefore why they are important to managers. You should be
able to explain what managers can do to 'improve' the ratios so that they are more
attractive to investors, too.
9.3 Profitability ratios
Profitability ratios
Profitability ratios are designed to analyse the recent profit focused performance of the
company (Atrill and McLaney, 2013). An investor will be interested in these as it indicates
the returns being achieved and therefore if historic investment decisions were correct.
Example of a profitability ratio: Gross profit margin
The gross profit margin shows what percentage of revenue is turned into profit. The profit
considered here is gross profit which excludes overheads and just deducts cost of sales
(direct costs). As not all costs are considered the gross profit margin is usually higher than
other margins.
Gross profit margin is important for an investor, and therefore a manager because they can
determine if the operations of the business are profitable and take action accordingly such
as make direct costs more efficient. Remember: the principal-agent relationship between
the principal (owner/shareholder) and the agent (in this case, manager) means that
investors could order managers to focus on improving the gross profit margin. They could
do this by increasing revenue or reducing the cost of sales.
Return on capital employed
Return on capital employed measures how effectively resources at the manager’s disposal
are being utilised to generate profit. For example profit of £1m is more impressive if the
initial investment was only £100K compared to £900K. This measure puts profit
performance into context.
An investor will be interested in this measure as it will allow them to assess if resourcing
decisions were correct and if decisions around the use of capital should be changed in the
future. For example, if a machine was purchased to produce a new product should this now
be sold because the product it is producing cannot be sold at a high enough price to make
an acceptable profit? The shareholders could collectively insist that the business makes this
change, or a manager may proactively choose to make it to improve the ROCE.
9.4 Liquidity ratios
Liquidity ratios
Liquidity ratios measure how much immediate cash and cash equivalents a company has in
order to pay their debts as they fall due. This is important to an investor because without
such short-term funds, the company will lose suppliers and may no longer be able to
operate.
Current ratio
The current ratio assesses the company’s ability to pay current liabilities (such as payable
amounts to suppliers) from their current assets (such as cash and receivables). The figure
represents how many times current assets would cover current liabilities. A company would
usually want this to be more than 2 or 3 times to ensure they always have the ability to pay.
A manager would be interested in this because it will show them if more short-term assets
(cash) are required to cover liabilities as they fall due. If a manager saw that the company
was struggling to pay current liabilities a bank loan could be requested. Failure to pay
current liabilities could force the company into liquidation.
However, an investor may wish to be careful to consider what current assets are made up
from. If there are non-liquid components such as slow-moving inventory then relying on the
current ratio may be incorrect. A manager may also want to look at the quick ratio detailed
below. It reminds us once again to be cautious when looking at ratios individually, or
without a wider narrative of what is going on in the business.
Quick ratio
The current ratio assesses the company’s ability to pay current liabilities (such as payable
amounts to suppliers) from their current assets (such as cash and receivables) but
significantly it excludes inventory from the current asset amount. This is because inventory
is seen as the least liquid (difficult to convert into cash) and therefore should be excluded
when determining how to pay current liabilities. The quick ratio is usually used for a
company especially illiquid inventory (such as a plane manufacturer). The figure still
represents how many times current assets (excluding inventory) would cover current
liabilities. A company would usually want this to be more than 2 times to ensure they always
have the ability to pay. Ratio benchmarks will always differ between industries, for example
an organisation with much power over their suppliers (such as supermarkets) may be
happier with a lower multiple. This is because they will have the power to quickly extend
credit terms with their suppliers.
A manager would be interested in this because it will show them if more short-term assets
(cash) are required to cover liabilities as they fall due. A manager may prefer to look at the
quick ratio rather than the current ratio if they thought significant illiquid inventory was
distorting the current ratio multiple.
9.5 Efficiency ratios
Efficiency ratios
Efficiency ratios analyse how well a company organises their liabilities and assets. An
investor will be interested in these measures because it may indicate that changes are
required to customer, supplier and inventory processes and affecting the cash available in
the business.
Inventory holding period
The inventory holding period is the number of days that inventory is held before it is either
sold, or used within the business (i.e. the inventory on hand).
Average inventories holding period (for one year) is calculated as follows:
(Average inventories held ÷ Cost of sales) x 365
Therefore, if a business has an average inventory of £15,000 and cost of sales is £45,000 the
inventory holding period will be:
(15,000 ÷ 45,000) x 365 = 122 days
An investor would want a business to turn inventory into cash quickly, so the shorter this
period is, the better. However, a very low number might indicate that the business is at risk
of running out of inventory.
If inventory is held for too long this is inefficient because there is a risk of obsolescence,
damage and the associated storage cost. If inventory is not held for long enough then the
company risks running out and the customers will purchase elsewhere.
A manager may wish to look at this in more detail, seeking to decide what the optimal
holding period is for their company. A manager may have to take corrective action such as
constructing a larger warehouse or ordering less stock in. For organisations favouring a lean
approach to inventory management this figure should be very low, since the aim is to
eliminate as much inventory (both parts for input and finished goods) as possible.
Inventory turnover varies between businesses, so there is no industry standard the business
should aim to achieve. However, a high inventory turnover indicates that a business is
controlling its inventory well, and is not buying too much stock. It also indicates that the
business’s sales function is efficient, and that it can sell most of the inventory bought.
9.6 Investment ratios
Investment Ratios
Investment ratios are important as they indicate the shareholder confidence in the company
and how it is run. A manager is interested in these because they should run the company for
the shareholders and should ensure that they are pleased with the decisions made.
The Price/Earnings ratio is often called the ‘P/E’ ratio and is interpreted as the number
pounds an investor is willing to pay for each pound of profit. A high P/E ratio would suggest
that the shareholders are expecting profit growth in the future and a low P/E would suggest
that the company is undervalued and it could be a good time to purchase shares. These are
useful indicators for investors when looked at in conjunction with other data. P/E ratios
should always be compared to historic trends and industry averages.
A manager would be interested in the P/E ratio as it provides an indication of shareholders’

expectations of the company. As the manager is an agent for the shareholder, running the
company on their behalf, an understanding of shareholder feeling is important. Remember,
as the agent for the principals, the manager should make decisions with the shareholder in
mind as they are the owners of the company.
9.7 Assessing the value of ratios for investors
Ratios have the benefit of allowing us to compare across company size. They provide a
standardized method which can be used to compare companies and industries. Using ratios
puts all companies on a relatively equal playing field. As a result, companies can be judged
on their performance rather than size, market share or sales volume.
Ratios go beyond the absolute numbers to reveal how good a company is at making a profit,
covering their debt, and using their resources well.
A large, well-established company, for example, could have 250 times the revenue of a
start-up. This would make the larger company seem much stronger when we look at the raw
financial data.
Analyzing the companies with ratios, however, may reveal that the smaller company
operates much more efficiently, generating considerably more profit per GBP of assets that
are employed.
Having this common language and understanding of ratios helps investors and managers to
evaluate the strengths and challenges of individual companies or industries. Managers can
use this information to evaluate performance and make decisions on what to change within
the company as a result.
However, analysing the company’s historic financial information cannot be undertaken in

isolation because there are other aspects of company performance that should be
considered by an investor. For example customer satisfaction may be slowly declining even
though revenue and profit are high. If an investor was to ignore this then the result in the
future decline of revenue and profit when customers eventually find an acceptable
alternative.
This was illustrated in the case of Blockbuster video rental where customers were
dissatisfied with having to go to the store to rent a movie and pay a late fee if they did not
return it the next day. Although Blockbuster had a healthy profit margin and revenue
growth for a number of years the managers ignored the underlying customer feedback in
the product they were offering. When an alternative to video rental came about, Netflix,
customers quickly switched and Blockbusters had to stop trading. If Blockbuster had
listened more to customer feedback rather than trusting the financials in isolation, they
could have launched their own online service sooner and avoided liquidation.
Financial figures can also be manipulated through accounting methods to provide an

inaccurate analysis of the business. For example, Tesco were recently found to be
overstating profit by £263M; if a manager had relied on these incorrect figures then poor
decisions would have been made. Such accounting misstatements are rare but are another
justification as to why a wider range of performance indicators should be considered. Other
actions that an investor, or manager, can take to assess the meaning of ratios will include
wider industry figures, events in the recent history of the company and statements in
annual reports. All of these can help to add context and meaning, as well as checking that
interpretations of figures seem reasonable.
Block 10: Bias and Decision Making

Reading - essential and recommended
Essential Reading
Boddy, Chapter 7: Decision Making. Provides a brief but comprehensive overview of this
topic
Kahneman, D (2012) Thinking, fast and slow. Chapters 1 & 2 provide an good introduction
to the key concepts related to short-cut thinking. The rest of the book is very illuminating
about how our minds work, if you are particularly interested in this topic, and have the time.
Huczynski, A.A. and Buchanan, D.A. (2014). Organizational Behaviour. Harlow: Pearson.
Chapter 20: provides additional depth to consolidate your understanding of the topic.
Lovallo D & Kahneman D (2003) Delusions of success: how optimism undermines executives’
decisions. Harvard Business Review, August Issue (https://hbr.org/2003/07/delusions-
of-success-how-optimism-undermines-executives-decisions) This article gives a real
insight into the effects of optimism on decisions, and expands on the content that is covered
in the unit.
Kahneman and Tversky, 1979,
Prospect Theory: An Analysis of Decision under Risk
This link provides more background about the experiments that were conducted to develop
the concept of Loss Aversion
Case Study: Should an Algorithm Tell You Who to Promote? By: POLZER, JEFFREY T.,
Harvard Business Review, 00178012, May/Jun2018, Vol. 96, Issue . An interesting example of using data to
reduce biases in a common business context.
2 Rational Decision Making
2.1 Rational Decision Making: Prescriptive Theories
Rational approaches to decision making assume decision makers are rational actors. One
example of the rational approach to decision making is outlined in utility maximisation and
the expected utility hypothesis in economics.
Managers make a rational choice based on the information generated. Utility maximisation
in economics suggests a decision process in which the individual decision maker:
• thinks of all conceivable actions

• assesses all the consequences of each action
• derives a utility for each action, retrieved from the decision-maker’s own
preferences
• computes the probabilities of all outcomes
• chooses the action
As in much traditional economic theory, the belief that people act rationally is taken as a
central assumption. However, given cognitive limitations of the human brain (Simon, 1960)
this type of decision making can only be applied to simple problems, where we really can
identify all actions, consequences and outcomes. So, this can work for repetitive decisions,
such as the mortgage example, where relevant data is known and available. Where
preferences are less clear, as in the honeymoon example, the rational approach to decision
making cannot be applied.
Imagine a simple example. You want to go out for dinner. You would make your decision by
producing a list of all possible restaurants, then ranking them in terms of factors such as
distance, quality and price, then compute your probability of satisfaction with all
combinations, then choose the restaurant.
Is this a realistic description of how decisions are made? Probably not. You might find that
when you phone for a booking they are fully booked. Time is a constraint on the decision
making process.
2.2 Bounded Rationality Descriptive Theories
Simon (1960) observed that managers make non-programmed decisions to deal with
situations that are new and so require a unique answer. In this situation, there are
difficulties with availability of data, it may be vague, unclear or open to different
interpretations.
Nonetheless, business decisions do get made. Simon developed a concept that takes
account of cognitive limits to rationality, 'Bounded Rationality'.
The example used by Simon is that of looking for a needle in a haystack. Does the actor
search until they find a needle, or then keep searching until they finds the brightest and
sharpest needle? Simon’s answer involves two key concepts:
• Satisficing behaviour. The actor searches until they find a satisfactory outcome,
rather than searching for the optimum outcome
• Bounded rationality. The actor cannot know how much longer the search for the
optimum will take, and hence whether it is worth it or not
Rationality is limited by processing and informational requirements. There are sets of

decisions that involve such complexity in both that rationality is affected, leading to
satisficing behaviour.
3 Stages in Decision Making
3.1 The Process of Decision Making
The process of decision-making includes identifying problems, opportunities and possible
solutions before settling on the one perceived to be best. A constant dilemma for managers
is how much to base decisions on quantitative, structured data; 'evidence' and how much to
rely on qualitative, unstructured ideas and hunches; 'judgement' (Boddy, 2012).
This links to two broad views of the decision-making process:
• rational and prescriptive – logical analysis of the decision task and the use of
deductive methods to derive the behaviour of rational actors (e.g. expected utility
theory in economics)
• descriptive – empirical, often psychological, seeking general principles to explain
observed preferences and actions (e.g. identification of heuristics and decision
biases).
The former is common in economics, where problems around decisions are modelled rather
than measured. The behaviour of decision makers in business can be measured against
some ‘optimal’ solution derived from mathematical logic.
In the discipline of business strategy, researchers are often concerned to understand why a
particular decision was reached in a particular case. This often leads to an additional
reliance on psychological and sociological factors; it is often empirical and descriptive.
This unit aims to illustrate how a manager can utilise appropriate decision types, linked to
whether the problem is routine and repetitive, or more complex and unusual.
3.2 Stages in Decision Making
A decision is a commitment to a particular course of action, through allocation of
resources. The scope is wide. It may be at government level, for example, deciding to
increase income tax. Or at the scale of local operations in decisions about order
quantities. We make many decisions at work every day, but some decisions may take
considerable time to arrive at.
Stages in Decision Making (Boddy, 2012)
1. Recognise a problem or opportunity

2. Set objectives
3. Set weight and decision criteria
4. Develop alternatives
5. Implement chosen alternative
6. Evaluate effectiveness of solution
Let's see how that plays out for a couple of examples:
Bank deciding whether to approve a mortgage:
1. Will the mortgagee be able to make the required payments?

2. Objectives may be found in the form of rules relating to a) income, b) reliability of
income c) value of property and d) amount being loaned
3. Most weight may be given to difference between c and d, then a, in the above
example
4. Approve/don't approve
5. Meets rule requirements = approve; fails rule requirements = reject
6. Check that rules are preventing property repossessions - monitor rate of mortgage
failures
This is a decision that can follow rational approaches, and provided the rules are
appropriate in terms of what is measured and the targets set, a computer could make the
decision as successfully as a manager.
A couple looking to book a honeymoon
1. Where to go, when to go (what will the weather be like), what type of holiday, how
much to spend, how long to go for, etc. It may be that each member of the couple
has (slightly) different preferences.
2. The objective is to have the most enjoyable and memorable holiday ever
3. Most weight may be given when to go, since the wedding date is fixed. Other factors
may be difficult to weigh up. Is a warm beach with snorkelling and turtles better
than a cruise visiting 8 Caribbean Islands? Is a 5* hotel required, or would money be
better spent on side trips? How near are local restaurants and bars or do we want
all inclusive? Cost may be a significant factor.
4. There will be a search that provides a short-list of options, and discussion compare
them leading to a potential decision.
5. One holiday is preferred, by balancing choices found in search.
6. Go online to book - the holiday may be available and cheaper, or available and more
expensive or it might be sold out. If the holiday is successfully booked, the pictures
online might have painted a misleading image of the hotel, you don't like your room
and the beach is really busy.
Let's hope in this case that the decision delivers a truly memorable experience that
they both enjoy, which is the desired goal of the decision, and is one of the possible
outcomes.
This is an example of a more complex decision, where there is little quantified data to
support the choice. It could not be easily made by a computer instead of the couple.
3.4 Group discussion: Decision about a New Store
You are manager of three branches of stores, and your area manager asks you to decide
whether to open a new store, by finding a suitable location for it, in an unfamiliar town as
part of the decision-making process.
1. Explain the stages in the your decision making to resolve this problem.
2. Can you make this decision on a rational basis?
3. Would you be able to confirm you had made the optimal decision?
Share your thoughts in the group discussion

5 Short Cut Thinking
5.1 The problems with assuming that people think rationally
In the 1970s, psychologists undertook research that began to demonstrate that people
make errors in reasoning that are both common, and predictable. In other words, different
people make the same sorts of errors as one another, time and again, as though our brain is
wired to be irrational.
These common errors result in people making sub-optimal decisions on the basis of these
errors. For example, a manager may choose someone to fill a job role because their smart
suit tricked the manager into thinking that the candidate was more qualified than they
actually were. Or they may considerably more likely to buy a new computer for the office
that costs £999 than something that costs £1000, because their brain sees (and anchors to)
the £900 rather than the £1000, making them think that they are spending much less than
they are. These examples may sound ludicrous but they are common. That is why marketers
make prices end in a 9 and one of the reasons why people wear suits to interviews. Just like
the rest of the population, managers are just as likely to make these predictable errors in
judgement.
These predictable errors are known as heuristics, biases, ‘rules of thumb’ or mental short-
cuts.
According to Daniel Kahneman (2012), one of the founders of research into heuristics and
biases, a heuristic is:
“A simple procedure that helps find adequate, though often imperfect, answers to difficult
questions”Our minds use these intuitive heuristic processes when engaging in problem
solving. However, certain heuristics have been proven to lead to systematic errors. These
systematic errors are called biases. These can lead to reasoning errors, in a systematic and
predictable way. The following sections illustrate some of the key heuristics and associated
bias managers encounter in their work.
Note on the exam
In this unit, you are being introduced to a range of biases, and some examples of where they
come in to play. For the exam, you may be asked to discuss biases and give examples. As
with other areas on the syllabus, we are keen to see you make use of your own examples, that
you have carried out research to find. We will be impressed if we see that you have done this
work as it shows independent thinking and synthesis – two higher level skills which provide
you with a much better chance of a grade at the higher end of the marking scheme.
6 Types of Bias 1
6.1 Anchoring
The anchoring effect occurs when an individual’s decisions are unduly influenced by an
anchor point or reference. There are two types of anchoring, with one being unconscious
and the other being more deliberate (Kahneman, 2012).
Anchoring by suggestion
Anchoring can occur unconsciously when a number acts as a form of suggestion. This may
be reasonable, when an initial estimate is the only information you have to work with, but it
is not reasonable to rely on it. The manager may be confronted with figures that are
completely irrelevant to the number to be estimated. In their initial work on anchoring,
Amos Tversky and Daniel Kahneman devised an experiment in which two groups were
shown a wheel of fortune, which was rigged to show a low number to one group, and a high
number to the other. The participants were asked to estimate how many African countries
were part of the United Nations. Participants in the low number group estimated a figure
closer to the low number and the high group were nearer to the high number (Tversky &
Kahneman, 1974). In this case, the number they had seen was irrelevant to the figure they
were asked to estimate and was generated by an apparently random device, but it still
influenced their thinking.
Anchoring by adjustment
Adjustment occurs after you are given an initial figure. You assess whether it is too high or
too low and adjust the figure accordingly. The error that creeps in is failure to adjust the
figure sufficiently. The initial figure holds the later estimate to a range that is close to the
initial figure (Kahneman, 2012).
A classroom experiment can illustrate this point, if one group is given a slip of paper stating
that an average lecturer's salary in London is £60,000 and the other group are given the
figure of £30,000. The groups need to decide what the lecturer in front of them is earning.
There will be a difference, as the first group will adjust downwards, but not enough to meet
the number given by the second group, who adjust upwards, but not enough. As they are
not aware they have been given different anchors, students are often surprised by the
difference in estimates, until both anchors are revealed.
One of many situations in which managers need to be aware of the anchoring bias is when
they are buying goods or services. If you see an office where the rent is £50,000 per month,
and then another where it is £7,500, the second seems very cheap. However, if the average
price of office rental in the area is £6,000, then it is still very expensive. Working out what
anchor to place in the mind of someone you are negotiating with, for example in a salary
conversation, can be a way to use the anchoring bias to your benefit (Markman, 2019).
6.2 Availability
Availability bias
The availability bias occurs when we think that examples of things that come readily to mind
are more representative of the situation than is actually the case. As such, it places an over-
emphasis on events or examples that we can recall easily.
For example: Which of the following do you think causes more deaths every year?
Shark attack
OR
Being killed by a vending machine
Most people will more easily think of shark attacks and so will assume they are most likely
to occur out of the two options. The reason is that your mind is using a shortcut (heuristic)
to come to an answer. You will have seen news articles about deadly shark attacks, and
these stay in your mind as something to avoid. One of the reasons that this occurs is
because your memory often refers to sources of information provided by the media when
you process information. News reports tend to focus on unusual events, and are more likely
to highlight a dramatic story about a shark in a tourist destination.
However, as you can see in this article, vending machines cause more deaths each year:
As a manager, when you are undertaking a yearly performance review, it can be very easy to
focus on what comes readily to mind about the person, but this may be information that is
particularly positive, particularly negative, or something that has happened very recently. As
such, the availability bias means that a manager is less likely to provide a well-rounded
appraisal of performance if they rely on their memory alone. As a manager, the availability
bias is particularly problematic because you will routinely be called on to make critical
decisions in the moment based on what you think you know. Mintzberg, Drucker and Garvin
all identified the important decision making roles that managers play. But are managers
acting in the moment equipped to counteract the availability bias, or are they being misled
by information that is easier to recall?
6.3 Overconfidence and optimism
Lovallo & Kahneman (HBR, July 2003), identify that a major reason for poor
decisions is the 'planning fallacy'. This is a tendency for people to systematically
underestimate the costs and overestimate the benefits of a proposal. A source of
this fallacy is the 'optimism bias': a human tendency to judge future events in a
more positive light than is warranted by experience. In a study of 1 million
students:
When asked to rate themselves in comparison to their peers, 70% of students said they
were above average in leadership ability, while only 2% rated themselves below average.
When assessing their ability to get along with others, 60% of students judged themselves
above the media, with only 6% below.
(Lovallo and Kahneman, 2003)
Our inherent optimism links into the overconfidence bias, which in turn affects our ability to
be self-critical with regard to how good our estimates are.
For example, chief financial officers were asked to make an estimate of returns on Standard
& Poor’s index over the following year. Based on 11,600 forecasts, the results showed that
financial officers had no ability to predict the short-term future of the stock market. At the
same time, they were asked to provide two additional estimates, a value that they were
90% sure would be too high and one that were 90% sure would be too low – giving an 80%
confidence interval in which outcomes outside that range would be surprises. This means
around 20% were expected to be surprises. However, there were far too many surprises,
their incidence was 67%, more than three times the expected amount. This illustrates that
Chief Finance Officers were grossly overconfident of their ability to forecast the market.
They were relying on information that came to mind.
Although participants were able to give a wider range to reduce surprises eg: there is an
80% chance of return next year being between -10% and +30%. This would increase their
likelihood of being right, but to accept a wide range is a confession of ignorance, which is
not acceptable for someone who is paid to be a financial expert (Kahneman, 2012).
Consequently, in business, overconfidence in experts (or non-experts) can lead to costly
consequences, such as investments that commit the firm to risks that should be avoided.
As a manager, overconfidence could be a problem in an exceptionally wide range of ways,

from thinking that you are a better leader than you are, to underestimating the time and
money needed to complete a project, to over-rating your performance in your appraisal. It
is a bigger problem for men on the whole, who are shown in a number of research papers to
be slightly more likely to fall prey to the overconfidence bias than women (Mishra and
Metilda, 2015; Lundeberg et al, 1994, Lenney, 1977)
7 Types of Bias 2
7.1 Loss Aversion (and Prospect Theory)
Loss aversion is a concept stemming from prospect theory, a piece of Nobel Prize for
Economics winning research by Daniel Kahneman (who is in fact a psychologist, not an
economist).
Loss aversion is defined as engaging in high-risk behaviour to avoid the experience of loss
relative to a reference point (Kahneman and Tversky, 1979). Put more simply, it says that we
are less likely to chase additional gains than we are to try to make up for losses. This is
related to our status quo bias, meaning that we prefer things to stay as they are. We are less
motivated to gain that which we never had than we are to try to hang on to what we
currently have or recently had. This one-minute video explains this brilliantly.
Keep the sentence ‘we value gains and losses differently’ as you view the graph below:
What the graph is showing is that when we deal with gains, we tend to be risk averse,
illustrated by the shallower curve above R. When we deal with losses, we tend to be risk
seeking, illustrated by the steeper curve below R.
Traditional economics suggests that £1 is £1. Whether it is £1 that we have just gained, that
we may gain, that we have lost, or that we may lose. Kahneman shows this is simply not
true: we value £1 that was once ours as being worth far more than £1 that has never been
ours (Kahneman, 2011).
We can see this in an experiment that Kahneman and Tversky ran in 1979, when they split a
group in half, asking one half Problem 1 and the other half Problem 2:
Problem 1: Which do you choose?
Get $900 for sure OR 90% chance to get $1,000
Problem 2: Which do you choose?
Lose $900 for sure OR 90% chance to lose $1,000
The research illustrated that in problem 1, a majority of respondents place a higher

subjective value of a gain of $900 than they do on 90% chance of getting $1,000. In problem
2, the subjective value is reversed and the majority prefer to take the chance of losing
$1,000 in the hope of avoiding a loss of $900.
This can be summarised as being risk averse in a situation of gains, but risk seeking when
evaluating losses, known as ‘loss aversion’. This effect can make managers turn down very
favourable opportunities, rather than risk losing a small amount of their departmental
budget. The potential pain of the loss overwhelms the brain’s processes and may prevent
the manager from making a rational investment.
In more general terms, it can make managers work hard to maintain the status quo, rather
than risking change. Research suggests that this desire to preserve the status quo may be
innate in primates, with captive capuchin monkeys demonstrating a similar tendency to
‘stick with what they have’ when given options to perhaps gain a little bit more or hang on
to what they have (Silberberg et al., 2008). We may be hardwired to maintain the status
quo, but when managers are being paid to take measured risks with owner’s money in order
to grow a business, this could be a problem.
7.3 Confirmation bias
When undertaking research, it is natural for us to seek confirmation of the view we already
hold. For example, when people are compiling a stock portfolio, they will often ignore
evidence which says that their choice of stocks will lead them to lose money, instead
focusing on the information which suggests they have made good decisions. It has become a
significant issue in contemporary society in a way that managers as good critical thinkers
and clear decision makers should be aware of, for example in the proliferation of fake news
and extreme ideologies such as the Alt-Right and anti-vaxx movements (Ebner, 2020). It is
important as a manager to be open to evidence which stands against your views, so that you
are able to view problems from a wide range of perspectives. It is a good reason, also, to
have a diverse team in place as they are more likely to bring wide-ranging views to
discussions and decisions.
Confirmation bias also extends to interpretation and recall of information that confirms
what we already believe to be true. We tend to mistrust sources that tell us otherwise. A
key problem with this bias is that we learn nothing, facts and information are found to
support our desired outcome and confirm our opinion. This further entrenches this view in
our mind.
Social media is often designed to show us what our past searches has shown we are
interested in, to point to information that reinforces what we have looked for in the past. In
wider society, this can lead to people with opposing views moving even further apart,
known as ‘attitude polarisation’ (Kuhn, 115-120). The groups have no interest in debate –
each group knows it is right, and they have the appropriate evidence to prove it.
For example, the Head of Sales in an engineering firm is convinced that investing in creating
a new app is the right way to improve customer engagement with the brand, but the COO
thinks that they need to be investing the money on to create a chatbot that can deal with
the vast number of potential customer enquiries received daily. They are both subject to
possible confirmation bias if they only seek out information and research which backs up
their perspective. For example, the Head of Sales finds and sends an HBR article to the
CMO that says that ‘Industrial companies need to give their customers a digital experience’.
The COO retaliates by sending over an article about the value of chatbots. Each then has a
choice if they spend time thinking about it, as to whether they look to confront their
confirmation bias by giving the evidence fair consideration, or whether they do not.
This article, Polarization, Fake News, and Confirmation Bias explains key points in
the current context.
7.4 The confirmation bias – reflection
When undertaking research, it is natural for us to seek confirmation of the view we already
hold.
Think about some research you have undertaken in the past few months, to help you make
a decision.
• For example, which brand of computer or phone to buy.

• Did you look only for confirmation of what you already believed or thought you
wanted to buy?
• If so, try to find some information that takes the opposite view.
• Does this change anything about your beliefs?
Post your thoughts about how you search for information about decisions you make on the
group discussion - is confirmation bias evident?
8 Debiasing
8.1 Debiasing Strategies: An Overview
There are a wide range of different debiasing techniques. The idea is that
individuals can use these techniques to outsmart biases that affect them, and
encourage their teams to use the same. Remember that asking big questions and
challenging ourselves in this way does not come naturally to us as humans. As Kahneman
said, ‘we are cognitive misers’ – because we don’t like difficult thinking and avoid it where
possible. So a manager will need to work hard on spotting the times that biases are creeping
in and find ways to outsmart them. Managers have a role to play in encouraging their teams
to do so.
Accountability: adopting accountability as a debiasing technique requires you to explain

your decision to others. People might be expected to work more competently if they want
to avoid embarrassment and impress others (Larrick, 2004). It forces you to explain your
decisions to others which can make you more careful in taking those decisions. However, it
can place excessive emphasis on justifying decisions which can mean that some people
double-down and become even more entrenched in their perspective.
Incentives: People can be offered incentives to counteract their biases, for example to take
more care over decision making and to show that they have considered a range of options
before taking an important decision, or have concentrated on accuracy of information in a
report over speed of compilation. However, it can be hard to identify precisely what should
be incentivised in order to reduce the bias.
Consider the opposite: Here, you should encourage yourself to identify reasons why your
conclusions may be wrong and what evidence there is that the opposite could be true. This
contrasts with our usual approach of looking for reasons to support a decision and hence
works well to reduce confirmation bias, overconfidence bias, and anchoring. However, it’s
hard to know how much contrary evidence should be considered and to recognise when this
is worth doing. If we are entrenched in our view, we may think it is ludicrous to consider the
opposite and a waste of time. Failure to find contradictory evidence is not a guarantee that
there is none, but if we don’t, it can make us even more confident in our original view.
Take the outside view: rather than focusing on our own data when deciding what to do, we
could take a wider lens and look at what others have done in a similar situation and what
has happened. By evaluating this bigger data set, it can shed light on internal processes and
help to identify risks associated with similar projects elsewhere. It can reduce
overconfidence, confirmation and anchoring biases amongst others. However, it uses
statistical methods, so needs reliable data and can be costly and time consuming as a result.
In situations of high importance, the effort may be worthwhile. For example, a movie studio
may want to work out if a film is a good investment, but they find it hard. If they focus on
how much it’s going to cost and what they predict it might make based on their previous
movies, they are taking an inside view. But if they look for similar movies across the sector
and what they made, then they have a much bigger data set that can inform their decision
on whether to make it or not. (Read more about this example here)
Training: Training can focus on general principles in relation to problems in decision

processes. The use of concrete examples helps to relate the principle to specific scenarios
and to make use of the principle automatic (Larrick, 2004).
Calibration can be included by providing regular feedback, which improves understanding of

weaknesses in forecasts. It helps by training staff to use more reliable methods to avoid
biases and avoid known problems such as the sunk cost fallacy. However, it involves
significant time and costs to develop and deliver effective training and feedback. One
interesting application of this approach is Virtual Reality debiasing training (for an example,
see here). Companies place their staff in settings where bias might kick in and train them to
see the world in a different way. This may have a significant positive impact on debiasing
recurrent interactions, such as recruitment interviews and appraisals, for example.
Do a pre-mortem: A pre-mortem is conducted at the planning stage of a project the process

involves imagining what might go wrong from the outset. This can mitigate overconfidence
and the planning fallacy (Kahneman, 2012). At the very early stages of planning, a pre-
mortem allows ideas and worries to be expressed that might otherwise be suppressed.
However, groupthink can undermine group decision-making. Additionally, external factors
can be hard to ascertain and interpret the effect of, and so even a pre-mortem may not
provide the benefits that are sought through this debiasing strategy. Read more about how
to do a project pre-mortem here).
Decision analysis and decision support systems: This is the use of prescriptive processes to
improve judgement, by breaking a complex problem into simpler sections (Bazerman &
Moore, 2013). Improves consistency in decision making and can be automated (or make use
of algorithms) for some aspects of regular decisions. Such an approach can make complex
problems easier by breaking them down, and can be used to develop automated models to
improve consistency. For example, tech could help companies to assess the strength of job
candidates by comparing qualifications, experience, skills, etc. as an initial way to prioritise
applications. However, it follows prescriptive decision-making processes and not all complex
problems can be reduced to routine analysis.
Group decision-making: Rather than making decisions on an individual level, encourage

people to make important decisions in a group. As you saw in the section on diversity and
inclusion in the unit on HRM, the interaction of team members from different backgrounds
and areas of expertise can benefit decision making. Gaining the ‘wisdom of the crowd’
can increase the number of diverse opinions, and make it more likely that blind spots will be
considered. It also makes it more likely that individuals will be forced to consider the
opposite. It can be used statistically, too, with estimates of future performance, etc.,
averaged across the group to gain insight. However, people may be unwilling to voice their
view for fear of criticism, and may be influenced by other group members (Groupthink).
Extra preparation can be used to gather individual contributions before the meeting is held
to reduce this risk, but it adds time to the process.
Summary
Whilst it is clear that people making decisions at work are susceptible to biases, or
systematic errors in reasoning, there are some tried and tested ways to decrease errors.
This may take additional time, so requires managers to plan the inclusion of debiasing
strategies within their work and that of their subordinates.
8.2 The most common biases in business
Read about the most common biases in business, and post any examples of these that you
have experienced on the group discussion.
9 Decision making and biases Quiz
Please attempt the quiz on the VLE
12 Recap and Summary
Financial measures have an important place in performance management, but should not
be the only indicators
The balanced scorecard argues that by combining performance measures underneath a

common bottom line, one achieves control
Critics of performance measurement point to set targets, and how they can be distorted so
that the aim of the measure is not being achieved, or be subject to 'running down’
Weaknesses in measurement undermine the effectiveness of performance improvement –

an expected outcome of monitoring
Block 11: LEADERSHIP & INFLUENCE
1 Reading: Essential and Recommended

1.1 Reading: essential and recommended
Essential Reading
Northouse, P.G. (2013) Leadership: Theory and Practice London: Sage. Chapter 1:
Introduction. Great summary of the main developments in leadership theory and
some of the strengths and weaknesses of each.
Yukl, G. (2019). Leadership in Organisations, Global Edition. Harlow: Pearson Education.

Chapter 1: The Nature of Leadership.
Kotter, John P. Harvard Business Review. Dec2001, Vol. 79 Issue 11, p85-97.
https://hbr.org/2001/12/what-leaders-really-do - How leadership is different to

management. Great article comparing leadership with management, and helpfully
discussing key areas of leadership which are common in leadership theory and practice.
Further Reading
Yukl, G. (2019). Leadership in Organisations, Global Edition. Harlow: Pearson Education.

Chapter 1: The Nature of Leadership.
Buchanan and Huczynski, Organizational Behaviour (Harlow: Pearson, 2013). Chapter 19:
Leadership. Textbook chapter providing a decent summary of the history and
contemporary issues in leadership and leadership theory from an Organisational
Behaviour perspective.
George, B., Sims, P., McLean, A.N., and Mayer, D. (2007). Discovering your
Authentic Leadership, Harvard Business Review, February. Seminal article looking
at Authentic Leadership theory.
Mullins, L. (2016). Management and Organisational Behaviour, 11th edition,

Pearson. Chapter 9: Leadership in Organisations. A very good chapter covering many
of the theories we look at – another way of reading about the same topics if you’d
like a different perspective. Shows how the leadership theories you are learning
about in this block are just some of the leadership theories and developments that
have occurred. A very helpful chapter if you are looking to expand your
understanding and develop further insights into leadership.
2 What is Leadership?
2.1 Introducing Leadership
"Leadership is the process of influencing others to understand and agree about what
needs to be done and how to do it, and the process of facilitating individual and
collective efforts to accomplish shared objectives." (Yukl, 2006: 8)
Leadership is a highly valued property in organisations today, seen to make the difference
between the success or failure of teams and, at the most senior level, whole organisations.
We glorify leadership in society, too, with it being seen to transform the world and inspiring
others to do the same (Fortune, 2019).
As such, organisations look for those with leadership ability because they believe that they
bring important qualities, skills or abilities to the organisations and can ultimately improve
the standing of the organisation.
This means that there is a great deal of research into the topic of leadership, not all of which
agrees on what makes a good leader; or whether and if so how a leader can be developed.
Some researchers treat leadership as a trait (something you are born with) or a behaviour,
some see it from the perspective of a relationship that needs work.
This block is going to treat leadership as a complicated process that has multiple
dimensions, theories and ideas – over which there is little agreement between researchers,
organisations and consultants. The likelihood is that we still haven’t definitively discovered
what it is precisely, that makes a leader good, or successful. However, the perspectives that
we will cover here will shed lots of light on what might help, or hinder, leaders. You will be
encouraged to take a critical perspective on the theories you encounter, looking at their
strengths and weaknesses in helping organisations and leaders to develop.
2.2 The Difference Between Leadership and Management Research
Task
Using a search engine with an image search function, carry out a search for images labelled
'Management'. Write short notes for yourself about these images. What do they tell you
about what management is and/or what managers do?
Now carry out a second image search, this type for images of 'Leadership'. Again, write short
notes for yourself about these images. What do they tell you about what leadership is
and/or what leaders do?
Compare the images you have found and the words you've written down. What does your
comparison tell you about the different ways that people portray management and
leadership. What do you think the differences are between management and leadership?
Activity feedback
The images that you found are likely to have followed these patterns:
Images of managers were likely to contain: Juggling tasks; smiling and looking confident;
computing to produce documents, spreadsheets and graphs; talking to people; very busy
Images of leaders were likely to contain: Team leading; reliant on team relationships;
strategic; climbing the mountain and reaching goals; setting the vision;
Comparison: Manager images are more concerned with day-to-day transactions, juggling
work and being very busy, while interacting with a range of people. Leader images link more
to overcoming challenges and meeting strategic goals.
You will find out more about the differences between managers and leaders as you progress
through this module.
2.3 The difference between leadership and management
Leadership and management are related. There are many leaders in organisations with
formal management responsibility, and many managers required to lead teams and
organisations.
In the context of this module, where our interest is in managers, we are primarily interested
in theories and research which allow us to think about leadership as something that
managers do, alongside the management tasks they are also required to do.
It is worth understanding key differences between leadership and management.
Leadership
A typical definition of leadership may be something like: “Leadership is a process whereby

an individual influences a group of individuals to achieve a common goal.” (Northouse,
2018).
Management
In contrast, management has a more practical bent, with Fayol’s early definition (1916)
suggesting that management is about planning, organising, staffing and controlling.
These functions are still reflective of what managers do today.
Comparison of leadership & management
We could compare Leadership and Management as follows:
Management produces order and Leadership produces change and

consistency movement
Planning and budgeting Establishing direction
Establish agendas Create a vision
Set timetables Clarify the big picture
Allocate resources Set strategies

Organizing and staffing Aligning people
Provide structure Communicate goals
Place people in roles Seek commitment
Establish rules and procedures Build teams and coalitions

Controlling and problem solving Motivating and inspiring
Develop incentives Inspire and energize
Generate creative solutions Empower followers
Take corrective action Satisfy unmet needs
Adapted from A Force for Change: How Leadership Differs from Management (pp 3- 8), by
J.P.Kotter, 1990, New York, NY: Free Press.
The aspects which are related to management are a little more concrete; the aspects which
are related to leadership are a little more relational and abstract: they are 'fuzzy'.
If you compare the descriptions of leadership and management above with the descriptions
that you created in your web search, do they largely agree?
Looking at this list, can you also think of:
• Someone you know who is both a leader and a manager?

• Someone who is a leader but without any formal management responsibility?
• Someone who manages but who doesn’t perform much of a leadership role at all?
There are plenty of all three types of people in most organisations, and so being able to see
how leadership and management can be combined, or can be undertaken separately, is
important.
Leadership as a function of management
In the context of this module, we are interested in leadership as a function of management

because we are interested in what managers do, and what concerns them. And so we are
interested in whether and how managers do leadership.
Google undertook research to understand what made a good manager, called Project
Oxygen. They found that, in the Google context, a good manager is:
• A good coach
• Empowers the team and does not micromanage
• Expresses interest in and concern for team members' success and personal well-
being
• Is productive and results-oriented
• Is a good communicator: listens and shares information
• Helps with career development
• Has a clear vision and strategy for the team
• Has key technical skills that help him or her advise the team
(Garvin, 2013)
As you can see from the bulletpoints above, good managers at Google are good at both the
practical elements of management, but also the more relational, abstract elements which
comprise leadership. You can read more about this study on Google's related Re:Work blog
posts and in this write-up in Harvard Business Review.
3 What Does Leadership Mean to You? (reflective exercise)
This reflection exercise is an opportunity for you to reflect on your own understanding and
experiences of leadership.
For this reflection, think back to a great leader you have worked with or worked for. It could
be at work, in a sports team, in a voluntary capacity, or in your community. It needs to be
someone you have personally been led by (as opposed to a famous leader such as Richard
Branson or Sheryl Sandberg).
• What was it, in your opinion, that made them a great leader?
• Did everyone find them to be a great leader?
• Did they have any weaknesses as a leader?
Hold on to these answers until the end of the module, when we will ask you to reflect on
the answers again.
4 Early Leadership Theories
4.1 Trait Theories
The first major research direction in business leadership research was Trait Theory. It
emerged in the 1920s and developed apace in the 1930s, trying to identify the
characteristics of leaders. Who were they? What traits were they born with? How could you
spot whether someone would make a great (or lousy) leader?
This was all about the individual leader: were they born with an ideal combination of
characteristics that would make them excellent as a leader? And, so, what was that list of
characteristics?
Numerous lists were produced over the years, and continue to be produced.
In more recent years, overwhelmed by the amount of new studies on what traits might
make a great leader, researchers have tried to produce meta-analyses. A meta-analysis is a
study that uses data from other studies and tries to extrapolate common patterns. These
meta-analyses have looked for patterns in the trait data, to try to identify common threads.
These meta-studies have shown that there are five that come up repeatedly:
1. Intelligence: a sense that leaders have a higher intelligence level than non-leaders
(as evidenced in research by Zaccaro at al. (2017)
2. Self-confidence: having a high level of certainty about one's abilities and skills. We
often see this characteristic in famous leaders, such as Steve Jobs, Elon Musk or Jeff
Bezos.
3. Determination: they are full of desire and drive to get the job done, and will get it
done. They are less likely to be put off by the scale of the challenge than others
might be.
4. Integrity: they are honest and trustworthy.
5. Sociability: they enjoy being sociable and as such, seek out pleasant relationships
and maintain them
However, there is no universal agreement on one conclusive list - some studies emphasise
some points more than others; don't cover all of the above; or have extra traits, too.
Taking a slightly different approach, Judge et al. (2002) performed a meta-analysis

on previous studies using the trait perspective of leadership. They organised others’
findings around the Big Five personality traits (extraversion; openness;
agreeableness; conscientiousness; and neuroticism). They found that leaders tend
to be high in extraversion, openness and conscientiousness, and low in neuroticism.
The fifth 'big five personality factor' - agreeableness - was found to be largely
irrelevant.
The trait theory is, however, fundamentally depressing for the business literature (as well as
the consultants and trainers who work in the area) because it implies that, no matter what
you do, your propensity for leadership is fixed. Firms’ efforts to develop leaders are limited
to their appropriate selection of staff. Also problematic is how difficult it has been for
researchers to agree on the list of traits that are desirable. These reasons make it
unsurprising that the literature turned away from the trait approach.
The subsequent development of leadership research reflects interests in an ever-increasing

array of organisational variables. They are chosen and tested in a (seemingly never-ending)
quest to identify what good leadership is, and how it may be developed or enhanced within
particular contexts.
Leadership theory thus turned towards behaviours that individuals could practise, and
therefore potentially improve upon. However, it was acknowledged that different
individuals might practise and thus perform them to different degrees.
Type of leadership theory Trait
Main proposition Leaders are born, not made
Key activities Trying to develop a list of traits that good leaders have
Example of theory Judge et al. (2002)’s meta-theory of leadership traits

1)Intuitively appealing
2)Lots of research to back it up: some traits really do make a

Main strengths
difference
3)Helps us to consider who the right people for leadership may be

1)Still hasn’t come up with a definitive list
2)Fails to take situations into account – being a good leader in one

Main criticisms setting may make you a terrible leader in another (and therefore
ignores country cultures)
3)Problematic for training and development

4.2 Leadership Traits Questionnaire (interactive task)
https://edge.sagepub.com/northouse8e/student-resources-0/leadership-questionnaires
If you want to have a look at a trait-based questionnaire - and maybe even have a go at
filling it out on yourself - then this is a free resource that you can make use of, with a simple
scoring mechanism.
Do you think that the result provides a good indication of who you are?
Do you think, if you asked others to fill it in, they would agree, or would their answers be
different? Why might that be?
4.3 Behavioural leadership theories
In contrast to trait theory, and as you have seen in the lecture, behavioural theories of
leadership emerged in the 1940s but gained more traction in the 1960s. They were focused
on what typical leadership behaviours are.
Researchers studying leaders at Ohio State University (1945) sent a questionnaire to leaders
and their subordinates. Their findings showed that there were two sorts of behaviours that
the leaders typically undertook:
• People-oriented behaviours
• Task-oriented behaviours
The research also found that both categories were independent of one another, and that
those leaders who are most effective possess a strong ability in both dimensions.
Blake and Mouton's research in the early 1960s corroborated this research, developing a
model which identified once more that leaders can help organisations to achieve their goals
through two elements, which align with the people-oriented and task-oriented behaviours
of the earlier behavioural research, too:
1. Concern for results
2. Concern for people
Concern for results relates to how a leader is concerned with achieving tasks. This could
range from policy decisions, to product development, to workload, to sales volumes
(Northouse, 2019).
Concern for people relates to how a leader pays attention to the people in the organisation
who are trying to achieve the organisation’s goals. This includes building ‘organisational
commitment and trust, promoting the personal worth of followers, providing good working
conditions, maintaining a fair salary structure, and promoting good social relations.’
(Northouse, 2019: 76).
They combined these elements into the Leadership Grid (originally called the Managerial
Grid).
By plotting scores from a reflective questionnaire on the grid, five major leadership styles
can be seen:
The five leadership styles Blake and Mouton discuss are:
• Authority-compliance management, which places the emphasis on the results –

focusing on task and process. People are treated as little more than tools to achieve
the result, and as such, the leader can come across as domineering and ruthless.
• Country-club management, which places emphasis on the people at the expense of
the task. They are agreeable and eager to help, and comforting and controversial. As
such this could be seen as an over-focus on people without any concern for results.
• Impoverished management, where leaders are unconcerned with both people and
results. They go through the motions but are ultimately disengaged. They might be
described as apathetic or indifferent.
• Middle of the road management, where leaders compromise – they give up some of
the push for production and some of the attention on what the employees need to
avoid conflict and arrive at some kind of easy equilibrium state. As such, this type of
leader ‘swallows convictions in the interest of progress.’ (Northouse, 2019: 78)
• Team management, where leaders have a strong emphasis on task and on the
interpersonal relationships that are relevant to their role. They do not avoid conflict,
or challenge, preferring to make priorities clear, get any problems out in the open,
and likely enjoy working.
These two broad categories of people-orientation and task-orientation continue to have

very wide currency in the leadership and management literature. They are used in the
analysis of teams and teamwork at the micro-level, and organisational culture at the macro-
level. They replicate in this literature the broad engineering concern for efficiency and the
human relations concern for work relations.
These two categories continue to have very wide currency in the management literature. A
focus on task reflects the concern of 'getting things done efficiently' that pervades scientific
management and engineering approaches to management. A focus on people reflects the
human concern that is inherent to the human relation approach to management.
Type of leadership theory Behavioural

Main proposition Leadership is a sum of task behaviours and relationship
behaviours
Key activities Identifying leaders’ current behaviours and helping them to
improve
Example theory Managerial Grid (Blake & Mouton, 1964)
Main Strengths 1)Shifts towards the idea that leadership can be developed
2)Provides a clear, easy to understand way to think about
and develop leadership
3)Wide range of studies have validated the idea that leaders
undertake two sets of behaviours (relational and task) in
their roles
Main Criticisms 1)Not clear whether/how the behaviours lead to improved
performance
2)Not clear when/how to juggle between task and
relationship roles and whether it’s always beneficial to be
high-high
3)Very focused on western cultures: different cultures may
prefer different leadership styles
4.4 Behavioural approaches: an example of extremes
An example will help to illustrate how the behavioural approach can help with leadership
development.
Imagine you are starting at a new company as part of a graduate recruitment programme.
The first hour of the first day is labelled in the programme as 'Orientation'.
For this orientation, you are split into two groups, as the intake is too big to be in just one
group.
You are in Group 1, being overseen by John, who is a member of the HR team. John enters
the training room, takes attendance, runs over what you will be covering today, and then
hands over to your department head, Barbara, so she can introduce herself. It all seems
quite cold and austere. You don't feel very welcome. There's no opportunity to introduce
yourself and there's no occasion to raise the fact that you still haven't received your starter
pack.
At break time, you speak to someone you know from university who's been placed in Group
2.
She says: 'Oh, that's not at all how it was for us. Our HR person, Sammy, came in, introduced
herself in detail, and then handed out the syllabus. She checked with all of us that we were
happy to be starting, and asked about our concerns. She took ages making sure we were all
feeling OK. But we didn't get onto the training about the processes we were supposed to be
there learning. So I still don't know what's expected of me at all. She ended up running over,
as well, and made us late to lunch.'
Reflection
• According to the Leadership Grid, what is John good at? What is he less good at?
• According to the Leadership Grid, what is Sammy good at? What is she less good at?
• If you could give them guidance on the ideal way to lead the first twenty minutes of
the day, what would you say?
Feedback
• John demonstrates high concern for result, according to the Leadership Grid. He
does not demonstrate any strength on the concern for people element of the
Leadership Grid. He is using an authority-compliance approach (1,9) which is a
problem because it ignores the human/people/relationship element of leadership
and may lead to alienating or demotivating staff at the expense of getting results.
• Sammy demonstrates considerable strength at the 'concern for people' elements of
leadership, according to the Leadership Grid. She does not demonstrate any strength
on 'concern for results' element of the Leadership Grid. She is using a country-club
style of management (9,1) which is a problem because it ignores the results element
of leadership and may lead to tasks being completed to a sub-standard and without
a close eye on resource optimisation.
• Each of them should look to improve the component they are weak on (Sammy
needs a higher concern for results, and John needs a higher concern for people). As
such they should both aim to manage in a Team Management style, which is 9,9 on
the Leadership Grid. Leaders who use a team management approach are showing a
high level of concern for both results and people.
5 Widening the lens
5.1 Matching leadership style to the situation (text)
The next development in leadership research addresses context. Contingency theories in
their various forms suggest sources of variation in leadership effectiveness based in the
power of the leader, the nature of the task to be completed and level of uncertainty in the
work situation. Contingency theories are incredibly diverse in the aspects of context they
choose to focus on. One of the more influential studies is called Situational Leadership II
(Blanchard et al., 1993). Situational Leadership II (SLII) is a model that focuses on the need
for different leadership in different situations (Blanchard et al., 1993).
SLII stresses that leadership is comprised of:
Directive leadership behaviours: these clarify what is to be done, how it should be done, and
who is responsible for doing it. They are often one-way, from the leader to the follower.
Supportive leadership behaviours: these involve two-way communication, which facilitate

and show social and emotional support to others
Followers are 'diagnosed' as falling into one of four types (along the bottom of the diagram,
referred to as 'developing levels'. They roughly correlate to how developed or experienced a
member of staff is in the particular field or role.
By assessing how much support and direction a follower needs, you can decide whether to
lead in a way that is:
Directing (high direction, low support) Here, instructions are given clearly on what to do and
how to do it.
Coaching (high direction, high support) Here, leaders focus both on communicating clear
goals and ways to achieve them, as well as meeting the socioemotional needs of the
followers.
Supporting (high support, low direction) Here, leaders need to focus less on specific goals,
but more on listening, praising, giving feedback and asking for input. A big focus is placed on
recognition and the social support that is given to followers.
Delegating (low support, low direction) Here, leaders offer less focus on both goals and on
meeting socioemotional needs. The leader generally lessens intervention, trusting followers
to manage their own goals and socioemotional needs.
Once follower needs are identified, the relevant leadership style can be selected.
Situational Leadership theory is praised for being simple to understand and prescriptive.
Once you understand how to diagnose followers' needs, it is easy to work out what you, as a
leader, should do. It also encourages leaders to be flexible in their approach - not just using
a 'one size fits all' approach to leadership.
However, situational leadership theory does face some criticisms. Firstly, only a few
research studies have set out to try to prove its approach and thus the lack of evidence that
'it works' empirically can be seen as a problem. A study of high school teachers in the US
found that newly hired teachers, who lacked competence but were high in commitment
levels (i.e., who were D1) had higher levels of performance and satisfaction under principals
with more structured leadership styles, but that teacchers with more experience were less
affected by the leadership style of the principals: it didn't have an impact on their
performance (Vecchio, 1987).
Secondly, it is not explained how followers move from one developmental stage to another,
nor, thirdly, how to measure a follower's commitment (competence is generally easier to
measure).
Additionally, contingency theories of leadership are criticised en masse because they still
place the emphasis on the leader as an individual, rather than taking into account the
audience. And because despite saying that leadership style depends on a range of factors,
they are usually limited to considering very few factors. For example, SLII ignores
demographic characteristics of leaders and followers.
Type of leadership theory Contingency
Main proposition Good leadership depends on context
Key activities Identifying that a particular leader or leadership approach
will be more or less successful, dependent on context
Example theory •Hershey & Blanchard’s Situational Leadership model
Main Strengths 1)Easy to understand, intuitively sensible and easily applied
2)Prescriptive (good for providing clear advice)
3)Encourages leaders to be flexible in approach
Main Criticisms 1)All focus on different factors – which to prioritise? How do
they work in combination?
2)Little explanation overall of why a particular approach will
lead to a particular effect.
3)Hard to apply in situations where you have a ‘mixed bag’
of factors.
5.2 Leader-follower approaches
Contingency theories opened up the possibility of a wider range of factors being important.
One of the factors that had been ignored until now was the follower. The idea that
leadership studies needed to think about followers and their relationship with the leader
seems very obvious when we say it now, but it took decades for this aspect to enter the
research field in any meaningful way.
Then, once the importance of the followers was considered, leader-follower relationships
became a common topic of study. Follower reactions to leadership and/or relationships with
leaders became significant dependent variables in understanding what effective leadership
looks like.
One of the prominent theories that first recognised the importance of the follower-leader
relationship is Leader-Member Exchange (LMX) theory. In its earliest form, LMX theory
believes that an in-group and an out-group form around a leader (Graen and Uhl-Bien,
1995).
Followers become part of the in-group if they get along well with the leader and are willing
to take on responsibilities within the leader's domain.
Subordinates who have less of a good relationship remain in the out-group, tasked only with
narrower formal responsibilities. As the theory developed, the emphasis switched to
recognition that good quality exchanges between leaders and their followers would lead to
higher individual and thus organisational performance, and then an interest in how to
encourage such exchanges (Northouse, 2013). In other words, it was no longer about an in-
group and an out-group as much as it was about encouraging good quality relationships
between leaders and their followers in order for the leaders to be more effective.
LMX is a well-researched theory, which not only describes what happens in successful (and
unsuccessful) relationships between leaders and their followers, but which also offers up
some suggestions on how to improve these relationships (for example, leaders should try to
be trusting and cooperative, and to offer employees decent opportunities to participate in
career-related exchanges).
However, its suggestion that there will be an out-group as well as an in-group runs counter
to ideas that work should be fair and just. In a working world which increasingly promotes
equality, the idea of needing an in-group and an out-group for leadership to function is
problematic, because it suggests division and inequality. It may also lead to dissatisfaction
and demotivation in those in the out-group which is less than ideal.
Also, whilst it welcomes in followers, it ignores all other elements of context. It doesn't look
at how other factors might shape and influence leader-follower relationships and thus
leader effectiveness.
Type of leadership theory Followership Theories
Main proposition Followership is an integral part of the leadership equation,
and affects how effective leaders are
Key activities Showing that leadership is best understood as a relationship
between leader and follower
Example theory LMX (Leader-Member Exchange) theory (Graen and Uhl-
Bien, 1995)
Main Strengths 1)Forces a whole new way for people to think about
leadership
2)Invites us to view leadership as a co-constructed process in
which followers and leaders share equally
3)Provides a set of basic prescriptions for what a follower
should or should not do to be an effective follower.
Main Criticisms 1)Its honesty about in-groups and out-groups runs against
the central idea of fairness
2)A risk that realising that in-groups and out-groups can lead
to effective leadership may encourage inequality by
promoting having in-groups and out-groups
6 New Leadership Approaches
6.1 Transformational leadership
In more recent years, leadership research has continued apace. The diverse range of
contemporaneous theories are loosely connected by their exploration of what it is that
makes people want to follow a leader, whether it is their ability to be transformative,
charismatic, authentic, or a ‘servant’ to their followers. A notable difference from earlier
works is a clear separation between formal position and leadership. Leadership is now
portrayed as something that can be performed independent of someone’s place in the
hierarchy. Anyone can be a leader, even if they do not have a formal management position.
Acknowledging the split between hierarchically-prescribed ‘management’ activities focusing

on monitoring/exchange versus those more people-based activities focused on affect is
Bass’ theory of Transformational Leadership (1985), which is by now relatively well-
established. Bass distinguishes:
Transactional leaders – motivate employees through an exchange process involving

rewarding and correcting. This is much more in line with what rational economic theory
suggests managers will need to do in order to negate some of the Principal-Agent problems.
Transactional leadership, done well, can help employees to meet expected outcomes.
Transformational leaders – motivate employees by adding idealized influence, inspirational

motivation, intellectual stimulation and individualized consideration to the mix. In so doing,
the theory suggests that they help employees to perform beyond expectations.
• Idealized influence: leaders act as strong role models for their followers. Followers
identify with the leaders, who usually have high ethical and moral standards. Leaders
provide vision and a strong sense of purpose, and followers emulate the leaders,
leading to the possibility of performance beyond expectations.
• Inspirational motivation: Leaders communicate high expectations to their followers,
inspirating them to align with the vision and mission of the organisation and in so
doing, they achieve more than they would if they simply acted in their own self-
interest.
• Intellectual stimulation: Leaders stimulate followers to use their intellect to be
creative, innovative and to challenge the beliefs of themselves, their leaders and the
organisation. Followers thus engage in problem solving and other improvement
initiatives.
• Individualised consideration: Leaders provide a supportive environment in which
they respond to the individaul needs and wants of followers. Leaders coach and
advise whilst also helping followers to develop their own skills - whether through
direction or delegation.
The reasoning behind the model is that if a leader can embrace these four elements, they
can improve employee commitment and, ultimately, performance.
However, Transformational Leadership theory is open to criticism. It once again focuses on a
one-way, leader-to-follower relationship. Thus, it encourages a ‘heroic leadership bias’,
where leaders are seen as the 'special sauce' which makes the differences between
followers being average and amazing. The followers become a cog in the machine, and
leaders who are strong and controlling and who are able to get the cogs moving are
glorified. But these types of leaders can be too controlling and force changes that are not of
benefit to the individuals or the company.
Type of leadership theory Transformational

Main proposition Leadership is a process that changes and transforms people
Key activities Distinguishing between transactional, laissez-faire and
transformational leadership; identifying what makes
leadership transformational
Example of a transformational Many people have written on Transformational Leadership,
leadership theory
but Bass (1990) and Bass and Avolio (1990) are the two key
papers we have looked at here
Main Strengths 1)Substantial evidence that it is an effective form of
leadership
2)Has intuitive appeal, reflecting what we say we want in
leaders today.
3)Advocates paying attention to follower needs and
concerns
Main Criticisms 1)Lacks conceptual clarity (e.g., what does ‘idealised
influence’ mean? Does it mean the same to you as it does to
me?)
2)Glorifies strong, controlling leaders who get stuff done but
they can harm companies if they push for negative changes
3)Does it actually transform people? Or is it just a way to get
results?
6.2 Opinion piece - do these 10 habits make a transformational
leader?
https://www.forbes.com/sites/blakemorgan/2019/02/25/the-10-habits-of-
transformational-leaders/?sh=1b44b43f343b
This article is an opinion piece, from a Forbes contributor. They believe that there are 10
habits which create a Transformational Leader. How do these habits relate to the 4
characteristics of transformational leaders that you have just learnt about? Do you agree
with the writer?
6.3 Authentic Leadership
Authentic leadership is another newer area of leadership research, focusing on whether
leadership is 'genuine' or 'real'. In recent times, upheavals in society around topics such as
9/11, COVID-19, populist politics and promotion of baseless ideas dressed up as science or
fact on social media (such as anti-vaccination and 5G propaganda) have led to a culture of
fear around fakeness and fake news. Anxiety and uncertainty prevail and as such, many long
for bona fide leaders who they feel they can trust, and who they believe are honest and
good (as opposed to just faking it).
It is this set of demands for trustworthy leadership which makes the study of authentic
leadership highly relevant and worthwhile.
There is, however, no single theory of authentic leadership, and nor are its roots originally in
academia. Rather, it emerged from a more practical body of work, particularly that by Bill
George, which creates a 'how to' of authentic leadership, coming from a training perspective
and focusing on real-life examples of what good authentic leadership looks like.
However, due to the traction that authentic leadership has in the business and leadership
press, and the attarctiveness of the idea, it is deemed worthy of academic attention, and so
now the social sciences are attempting to develop a robust theory of authentic leadership:
what is is, and whether it provides an advantage over other approaches to leadership.
If we focus on academic developments, we can look at the work of Luthans and Avolio
(2003), who developed a process-based model of authentic leadership:
Authentic Leadership (Luthans and Avolio, 2003, sourced from Northouse, 2015)
Walumba et al.'s (2008) research provided the four elements at the centre of the model:
• Self-awareness: Authentic leaders have self-understanding which they continue to
develop ongoingly. They use this to create a clear sense of who they are and what
they stand for. It gives them an anchor for their decisions.
• Internalised moral perspective: Authentic leaders can self-regulate their behaviours
and actions based on their own, well-developed moral standards and values (see
also Hougaard and Carter, 2019)
• Balanced processing: Authentic leaders have control over the extent to which they
allow others to influence them
• Relational transparency: Authentic leaders are open and honest in presenting their
true self to others.
Additionally, having a positive psychological approach – so having hope, confidence,

optimism, and resilience is a precursor to authentic leadership. So, too, is moral reasoning –
the capacity to make ethical decisions about issues of right and wrong.
Research also shows critical life events, such as transformational moments, significant
difficulties, or revelations help to develop authentic leaders. This is because such life events
provide opportunities for self-reflection, self-awareness and to practise self-regulation.
This process described above, over time, develops authentic leadership. It is a descriptive
theory, in that it does not tell leaders how to become authentic directly - or indeed whether
it is possible without a positive attitude or critical life event. However, anyone may be able
to work on their self-awareness, balanced processing, internalised moral perspective and
relational transparency.
Authentic leadership has been shown to have positive effects on followers. Authentic
leadership helps followers to thrive at work, as well as improving follower creativity
(Semedo et al., 2016). Authentic leadership leads to optimism and trust in followers, which
in turn leads to stronger work engagement (Stander et al., 2015).
Type of leadership theory Authentic Leadership

Main proposition Contemporary leaders who know themselves well and can
be their authentic selves in leadership roles, make good
leaders
Key activities Academics are working to establish a theoretical approach to
Authentic Leadership after it started in the training/self-help
world
Example of authentic leadership Luthans and Avolio (2003)
theory
Main Strengths 1)Speaks to people’s current desire for honest, transparent,
values-led, ethical leadership
2)Provides broad guidelines for those who want to become
authentic leaders
3)Early evidence suggests it improves follower performance
Main Criticisms 1)Not clear why morals are related to authenticity – appears
to be describing a different concept.
2)Not clear why positive psychological capacities are
included as an inherent component of authentic leadership
3)It is just early evidence of positive impacts on follower
performance – more research needed.
7 Which Idea Belongs to Which Theory (Quiz)
Please attempt this quiz question on the VLE
8 Comparing and Contrasting Leadership Approaches
(individual work)
8.1 Return to Your Discussion Post and Reflect
At the beginning of this Unit, you carried out a reflection on a leader that you thought was
great, and were asked to think about what it was that made them great.
Return to your reflection in the Discussion: What Does Leadership Mean to You? and look at
it in the light of what you have learnt in this unit. In relation to the leadership theories you
have learnt about, how would you now describe their leadership? Which model is most
helpful in this regard?
Block 12: Contemporary Marketing

Essential Reading
Brassington, F. (2013) Essentials of Marketing. Harlow: Pearson Education. Chapter 1:

Marketing Dynamics (this chapter is a great introduction to the topic of marketing, locating
it in history, and in the wider business context. It also briefly introduces the 4Ps and covers
the challenges of marketing in the globalised world. It is packed with interesting examples
that will be helpful for developing your understanding and which will be useful to you in the
exam).
Lewnes, A., and Keller, K.L. (2019). 10 Principles of Modern Marketing, MIT Review.
https://sloanreview.mit.edu/article/10-principles-of-modern-marketing/ A thought
provoking article on where marketing has recently been, and where it is going, packed with
interesting examples and ideas to use in the exam.
Further reading
Kotler, P. and G. Armstrong. Principles of marketing. (Harlow: Pearson Education Ltd, 2016)
sixteenth global edition [ISBN 9781292092492]. Large swathes of this textbook would be
very useful for you to read, but I would recommend picking out key topics from the
following chapters:
Chapter 8: Products, services and brands
Chapter 10: Pricing Strategies
Chapter 12: Marketing Channels
The chapters above all cover aspects of the marketing mix in more detail and will thus be
helpful for deepening your understanding.
Cole and Kelly, Management Theory and Practice (Cengage, 2015)
• Chapter 31: Product and Price. A clear textbook chapter on product and price from
the perspective of a manager (as opposed to the marketing department).
• Chapter 32: The Marketing Mix: Distribution. Textbook chapter on distribution from
the perspective of a manager (as opposed to the marketing department).
Dibb, S., Marketing concepts and strategies
Chapter 14: Marketing Channels. Textbook chapter providing descriptions and

detail on key channel decisions.
Chapter 19: Pricing. Textbook chapter, elaborating on the characteristics and role of
price, as well as a range of pricing objectives.
Brassington, F. (2013). Essentials of Marketing. Harlow: Pearson Education.
Chapter 5: Marketing Information and Research
Chapter 6: Product
Chapter 7: Price
Chapter 8: Place
The chapters above all cover aspects of the marketing mix in more detail and will thus be
helpful for deepening your understanding.
Piercy, N.F., Cravens, D.W. and Lane, N., 2010. Thinking strategically about pricing
decisions. The Journal of business strategy, 31(5), pp. 38-48. A journal article which makes a
strong case for thinking strategically about pricing, from an evidence base. Helpful for
arguing the necessity of pricing strategy.
Skouras, T., Avlonitis, G.J. and Indounas, K.A., 2005. Economics and marketing on pricing:
how and why do they differ? The Journal of Product and Brand Management, 14(6), pp. 362-
374. A tricky but valuable journal article, comparing and contrasting economic and
marketing approaches to pricing, in theory and in practice.
Dibb, S., Marketing concepts and strategies Chapter 1: The Marketing Concept. Textbook
chapter providing a quick tour of the major ideas within marketing.
2 What is Marketing
2.1 The need for marketing
The bottled water aisle in the supermarket is a perfect example of the power of marketing.
Water is, surely, just water? But if you were to look down the aisle in your local
supermarket, you would be likely to find an overwhelming array of different brands of
water. The picture below may help you to imagine a similar aisle in your own supermarket.
Bottled water in a supermarket aisle

Image sourced from
https://commons.wikimedia.org/wiki/File:Bottled_water_in_supermarket.JPG
If water in bottles is more or less the same as water in taps, and if all brands are more or
less the same as one another, then how do you differentiate? How do you encourage
people to buy your water over others? Is it simply a case of being the cheapest, or are there
other methods at your disposal?
This is where marketing comes in. Choosing what to sell (product), how much to charge for
it (price), where to sell it (place) and how to promote it to potential customers (promotion)
are the key elements of marketing that enables companies to engage with customers and
create a market for their products or services.
And so, that is why a mineral water manufacturer such as Highland Spring goes to such
efforts to distinguish its product from competitors:
"Highland Spring is a supplier of one such brand of bottled water. It is intent on bringing its
brand to life to make it stand out from its competitors, and it is doing so by injecting more
personality into the brand. This is necessary because of the difficulty in really distinguishing
one brand of water from another in the eyes of the consumer, and because the bottled-
water market is growing at a slower rate. According to Mintel (2009a), people are starting to
adopt the attitude that bottled water is ‘a bit of a con’ and to believe that it is no healthier
than tap water." (Brassington, 2013: 2)
Whilst this quote is now nearly a decade old, it makes an important point that still stands:
where products or services are very similar to one another, organisations routinely use
marketing to help to differentiate their products and services from one another. Even where
products and services in an industry are perceived to be quite different, marketing helps to
establish a market and thus find a customer base for a product or service. This might be
water, an airline flight, psychotherapy services, or swimming pool cleaning. It might be
office supplies, birthday cakes, or commercial refuse collection. Any service or product can
be marketed.
All managers will, in some way, be involved with marketing - whether it is a direct
involvement in terms of helping to decide on products, set prices, or organise promotion, or
whether it is a more indirect involvement, needing to appreciate and work with the
marketing decisions that have been made in the organisation more widely.
As such, having a good understanding of what marketing is can be hugely beneficial for the
practising manager, and this is why we spend this unit discussing it.
2.2 Primary functions of marketing
"Marketing is the management process responsible for identifying, anticipating, and
satisfying customer requirements profitably." (CIM, 2015)
"Marketing is the activity, set of institutions, and processes for creating, communicating,
delivering, and exchanging offerings that have value for customers, clients, partners, and
society at large." (AMA, 2017)
Above are two standard definitions of marketing, taken from the UK-based Chartered
Institute of Marketing, and the American-based American Marketing Association. They are
somewhat different in their construction, but have a number of areas on which they both
agree (Brassington, 2013):
• Marketing is a management process (and that is part of the reason why we are
interested in it within Core Management Concepts)
• Marketing identifies and anticipates customer requirements (this usually happens
through research)
• Marketing is about providing customers with what they want (which becomes
possible following market research)
• Marketing provides value to customers (and the AMA definition goes further to
embrace a wider range of stakeholders)
Two of marketing's primary roles, as stated above, are to identify customer needs, and then
aim to meet them. This is partly about identifying first who the customer is, and then
anticipating what they are going to want from the product or service you are looking to sell
to them. Once the customers, and their needs and wants, have been identified, companies
can act on this information and look to satisfy the needs and wants. They do this by
establishing a marketing mix for the product or service.
3 The Marketing Mix: Product & Price
3.1 Contemporary marketing practice
Marketing has, since its humble origins, developed into an important business function that
is very aware of its own status. Marketing as a discipline is very aware of its self-worth, as
well as being widely seen as strategic. It represents a way to organise business strategically
around the united principles of identifying and serving the needs and wants of customers.
The conventional way of teaching marketing practice for many years – both to
undergraduates and marketing practitioners – has been to start with focusing on the 4Ps:
product, price, promotion and place.
The basic theory of the 4Ps is that to market to your consumers, you need to provide a
product that they want at a price that meets their expectations of that product, available to
them in places they would expect to look and offered to them in the right way at the right
time (McCarthy, 1960).
(the above graphic is adapted from Chaffey and Ellis-Chadwick, 2019: Digital Marketing, 7th
edition. Harlow, UK: Pearson)
The 4Ps is still a relevant framework to use, even in the digital age. However, we do need to
update the way we think about each of the 4Ps to incorporate the changes that digital
developments have brought to our companies, their markets and thus the arenas of
marketing and marketing strategy. Therefore, in the following description and discussion of
the 4Ps, we will look at each ‘P’ in the context of the digital age.
Digital transformation has allowed the creation of new markets (e.g., online streaming
services), allowed companies to offer new services (e.g., online shopping), and to interact
with audiences in new ways (e.g., through social media channels such as Instagram). It has
also created a way for smaller, often more niche companies to compete with larger
businesses on a more level platform (e.g., a small furniture retailer being able to share the
competitive space with an enormous player like IKEA). Engaging consumers through a range
of online platforms is an ongoing challenge, but companies who successfully take advantage
of these opportunities reap the rewards. Many companies who started as small internet
players have become significant worldwide brands (ASOS, Amazon). Marketers who, early
on, were brave enough to take on the challenge of moving marketing into the digital
environment have had the opportunity to develop new skills and to use these new tools to
improve the standing and competitiveness of the company. (Chaffey and Ellis-Chadwick,
2019). And now, it is a prerequisite to have an online internet presence in order to prosper,
or even perhaps to survive at all.
We can see a range of different businesses and relationships to the digital transformation,
which means that as we look at the 4Ps, we need to think about the range of different ways
in which businesses – based on the type of business they are – might engage with each of
the Ps. Below are some example businesses. You may wish to think about the way in which
they are likely to use the internet as part of their business model:
• Bricks and mortar commerce with no online presence (e.g., local newsagents;
building supply yards)
• Bricks and mortar commerce with an online presence but which do not sell online
(e.g., restaurants)
• Transactional e-commerce businesses that are selling products or services online
(e.g., travel, retail, financial services)
• Relationship-building businesses that do not transact online but which use the online
environment to promote themselves (e.g., laser eye treatment; face-to-face personal
training)
• Businesses that sell direct through an e-commerce site (e.g., clothing, furniture,
building supplies) or through an online marketplace (e.g., Amazon or eBay)
• Companies that offer digital products (e.g., streaming services such as Netflix; digital
publishers)
We will now turn our attentions to each of the 4Ps in turn, looking at what they are, and
how our concept of them has been updated in line with the digital transformation of
businesses.
3.2 Product
You have already been introduced to the marketing mix – the 4Ps of Product, Price, Place
and Promotion. This is where we will now turn our attentions.
Product
Product within the marketing mix refers to the characteristics of a product: what it is, what
it does, and how. The answers to these questions have implications for the other ‘Ps’, as
decisions made about the product will affect price, place and promotion (this inter-
relationship is true for all of the 4Ps, in fact).
Product decisions will routinely be informed by market research where customers’ needs
are assessed and the feedback is used to modify existing products or develop new products.
The advent of big data (as discussed in Management Science) provides lots more
opportunities to discover customer insights and explore options for the product. For
example, an online retailer can look at all the searches on their website that return zero hits
for potential consumers and try to identify unfulfilled consumer wants. An online
supermarket might discover that its customers are regularly searching for ‘wheat gluten’ (a
product used to make vegan meat substitutes) and decide to stock it.
Product decisions can usefully be divided into decisions affecting the core product and the
extended product . The core product refers to the product purchased by the consumer to
fulfil their needs, while the extended or augmented product refers to additional services
and benefits that are built around the core of the product. For example, if you were to buy a
brand new car from a dealer, you would be likely to get warranties, guarantees and some
form of after sales service.
Digital technology has significant implications for the product element of the marketing mix.
For example:
• Providing further elements to the augmented product: for example, a book retailer
could provide reviews from customers of the books, online book groups, and
personal digital shopping assistants that use algorithms to recommend books based
on buying habits.
• Providing variations to the core product: digital business provides ways to vary the
characteristics of the core product. This may be by providing a digital altenrtaive,
such as offering a digital book as well as a physical one. Or it could be by combining
manufacturing tech with digital tech to offer mass customisation of goods, such as
Nike’s trainer workshop. Bundling products is common online also, and is another
way to sell products or services. For example, Amazon suggests book bundles
including books that customers are currently looking at.
• Allowing companies to conduct further research online. Online focus groups, social
media listening and web analytics (including big data) all help companies to assess
customers’ preferences. This can also help with the development of new products.
• New product diffusion. The internet allows ideas to gain traction and spread raipldy.
It is far from predictable which will ‘catch fire’ in this way, but marketers are often
working with this hope.
Firms should consider products in conjunction with one another, too. The firm’s set of
products may be seen as a portfolio and, like the financial portfolios we discussed in the
relevant unit, they will have revenue trends that are not correlated. This lack of correlation
is desirable, as products doing well can help the company to protect itself from the impact
of products that are simultaneously doing less well. Many firms measure product revenues
and profitability by year of product launch in order to monitor the portfolio performance
more closely.
Brand
A key element of product is brand. It originated in literally ‘branding’ items such as sweets
with a hot brand to stamp the name of the manufacturer on them, so they could be asked
for by ‘brand name’. It is as offline and online, enabling consumers to differentiate products
and services from different manufacturers.
For products, brand producers create a brand name and a brand image and then enhance
the product through additional features such as service, packaging and delivery. Different
brands will combine different features and customers can thus choose the brand’s product
that best suits their wants.
However, we now use the idea of brand to apply to all businesses. The American Marketing
Association yields the following broad definition of a brand:
“A brand is a customer experience represented by a collection of images and ideas; often, it

refers to a symbol such as a name, logo, slogan, and design scheme. Brand recognition and
other reactions are created by the accumulation of experiences with the specific product or
service, both directly relating to its use, and through the influence of advertising, design,
and media commentary. A brand often includes an explicit logo, fonts, color schemes,
symbols, sound which may be developed to represent implicit values, ideas, and even
personality.”
Online presence is increasingly important in shaping how we perceive brands, with

websites, apps and social media presence all altering how we interact with and thus
experience brands.
A range of brand elements contribute to brand equity:
Brand Elements, adapted from Chaffey and Ellis-Chadwick, 2019: Digital Marketing, 7th
edition. Harlow, UK: Pearson
The above brand elements contribute to brand equity, which can be seen as the brand
assets or liabilities that are linked to the brand. Any attempts to measure brand equity are
in essence attempts to measure the value of the brand to the firm. However, measuring
brand equity is far from scientific. You are trying to find the amount of your revenue that is
attributable to the brand itself. A simple way to think of this is by looking at market
differences in revenue between branded and unbranded products (for example, branded
and generic drugs). In the context of online marketing of a good or service, you could look at
the amount of revenue generated by selling your good/service as a non-branded product,
and as selling your good/service as a product under your brand. (With this technique, you
can see how it might be possible for a brand to be given a negative value, if you sell more
through the non-branded route to market compared to the branded one).
Looking on Brand Finance’s brand directory, you will find an up to date list of the 10 highest
valued brands: https://brandirectory.com/ At the time of writing, the top three were:
Amazon $220,791m (compared to total enterprise value of $1,570,000m)
Google $159,772m (compared to total enterprise value of approximately $1,077,000m)
Apple $140,524m (compared to total enterprise value of approximately $2,020,000m)
[figures from www.brandirectory.com and www.finance.yahoo.com on 25/11/2020]

3.3 Price
Price
The price element of the marketing mix is focused on the price policies that a company sets,
which are in turn used to set prices for products and services. These prices can be a
fundamental element of brand differentiation.
Let us compare, for a moment, the difference between the way that marketers and
economists treat price. In economics, price is set by the balance between supply and
demand. However, marketing argues that price can play a role in shaping demand, as it can
alter perceptions of the product/service and brand, as well as altering levels and types of
engagement in different market segments. As Ofir and Winer put it:
“Understanding price thresholds and willingness to pay is critical to marketing managers’

being able to price appropriately and not succumb to extreme pressure to drop prices”
(2002; p. 278)
As such, rather than just trying to find the price point where supply meets demand, price
can be used to reflect quality, generate sales or aggressively push the competition out of the
market.
Companies have a range of options for setting price:
Cost-plus pricing: Generally marketing does not advocate pricing on cost because it doesn’t
take the consumer’s wants and needs into account and how much they are prepared to pay
for a product. Costs merely set the floor of the minimum that the product could or should
be sold for. Pricing on cost (i.e. as low as possible) may be desirable as part of an entry
strategy to gain market share, if it is in the anticipation of future price rises away from this
threshold. However, the distinction between fixed and variable costs introduced above in
Chapter 8 is important. Where fixed costs are high and variable costs low, firms will discount
steeply at periods of low demand to spread the fixed costs over as much revenue as
possible; hotels and airlines are good examples, through their dynamic pricing models which
can be either automated through algorithms or applied by analysts in real time.
Target-profit pricing: The company aims to achieve a particular profit on a product over a
period of time and can thus flex the sales price to achieve this. Differential pricing can be
used in B2B (business to business) contexts, where a large number of units can bring down
the per-unit production cost significantly and thus create a breakeven point which is lower
and can justify a lower sales price. Discriminatory pricing can also be a useful strategy for a
company using target-profit pricing. Discriminatory pricing is targeting different market
segments at different price levels; for example, restaurant chains differentiating prices by
residential district, or cinemas charging more to midd-aged customers than to students or
senior citizens. retailers having ‘online’ and ‘offline’ prices. It is also possible to have
discriminatory pricing by streaming customers online. Airline companies (such as Ryanair)
and Uber use dynamic pricing models to generate maximum revenue and even-out supply
and demand. However, in other settings, it is becoming harder for companies to provide
differentiated pricing as it has been shown that it can reduce supplier confidence and
trust. A travel company received negative publicity for directing Mac users to more
expensive hotels (than other users) when they were booking holidays online. And an
insurance company purportedly charged higher premiums to those with a Hotmail email
account because they were seen to be ‘more risky’.
But if companies are keen to have price discrimination strategies, big data may be able to
help them. With a huge data set of thousands and thousands of similar past purchases,
sellers of, for example, travel insurance, or holidays, could look through their records and
find consumers who are very similar. They could see what they were prepared to pay for the
same product. And then they could charge the relevant rate for the product. This is called a
‘doppelganger search’ – looking for people who share characteristics (Stephens-Davidowitz,
2017). Again, whether this is ethical is another question, but it reminds us of the power that
Big Data can have for marketing.
Competition-based pricing: this approach is common online. Companies selling consumer

goods need to develop online pricing strategies that can hold up to price comparison
websites. If costs set the price floor, competition sets the price ceiling. Here, we can refer
back to Porter’s Five Forces. Where a given set of buyers account for a significant portion of
sales, and where they can also switch to other producers, consumer power will translate
quickly into price pressure. As an example, consider the retail food market in the UK. The
market is dominated by a small number of large supermarket chains, two of which are in-
person only; one of which is online only; and the rest of which are hybrids (both online and
in-person). For the producers of branded foods, the supermarkets control access to the
consumer; they set prices and they control the ways in which brands are presented in store
and online. In addition, for many standard items the ‘own brand’ offers consumers a low-
price alternative. Their buyer power is considerable. It may seem that, individually, end
consumers have little power, but they have almost no switching costs between
supermarkets, which thus offer ‘price match’ promises in the face of collective buyer power.
Interestingly, the COVID-19 crisis increased demand for online supermarket deliveries and it
became harder to switch between suppliers as they closed registration. In this market, the
supermarkets’ power increased and over the longer term may have reflected in higher
prices. Where competition is severe, differentiation of the product by adding or subtracting
features or attributes may be a suitable response in order to establish differentiation
between your brand and that of the competition.
Market-orientated pricing: this approach looks at the likely reaction of consumers to

changes in price. There are two major strategies here:
• Penetration pricing, which refers to a market entry pricing strategy in which low
prices are offered to build market share rapidly; for example, new newspapers or
magazines are offered at an ‘introductory’ price, or new online retailers offer
discount codes for all purchases in their first month of trading.
• Skimming pricing, also known as premium pricing, which attacks those parts of a
market where the highest prices may be charged; for example, new smartphones are
brought to the market by Samsung and Apple with a high price and these prices
subsequently fall as newer models are released. As such, Samsung and Apple are
continuously using skimming pricing to target those who want a top-of-the-market
phone, before dropping prices to appeal to a wider market segment. They repeat
this process again and again.
4 Using Data Science to Research Product & Price
In the Unit on Management Science, you learnt that data science (big data and algorithms)
is having a big impact on our ability to analyse, plan and create in line with what humans
want.
Choose a product or service that you know well. How do you think data science could help
its company to improve its product offering and/or the price it is offered at?
5 The Marketing Mix: Place & Promotion
5.1 Promotion
Promotion
The Promotion element of the marketing mix relates to the ways in which marketing
communications inform customers (and other, related stakeholders) about firms, brands
and products. Digital technology has altered how we communicate with one another, and
this is just as true for how we communicate with businesses and how they communicate
with us. In particular, the number of touchpoints (points of contact or interaction) has
increased dramatically. Thus, through the change in the ways in which businesses can
communicate with customers, and the number of times they can do so in a given period, the
internet has transformed the way that promotion has done dramatically. The concept of
promotion has thus changed dramatically since the advent of the internet. Elements of the
promotional mix and some examples of each could include:
• Advertising: traditional media, pay-per-click advertising, interactive display ads

• Selling: face-to-face sales, AI chatbot sales, affiliate marketing
• Sales promotion: Online and offline coupons and rewards
• Public relations: blogs, newspaper/magazine story placement, links, viral campaigns,
influencer outreach
• Sponsorship: Sponsoring events and services – both online and offline
• Direct mail: Targeted email campaigns (GDPR-compliant), mail-outs
• Exhibitions: Virtual and face-to-face exhibitions, conferences, seminars, webinars
• Word of mouth: Social marketing, viral marketing, affiliate marketing, face-to-face
word of mouth
If you think of a company that you know well, which of the advertising strategies above are
you aware of them using? Which others do you think they might use despite you not
knowing about it?
Improving the promotional blend
Metrics are critical in marketing, to assess the success of the approaches that have been
used and to allow adjustment where required. Having a sense of return on promotional
spend is critical for ensuring that a company’s resources are being optimally deployed (that
they’re using their time and money in the best way). In particular, they will want to see to
what degree each of their promotional channels is effective (meets objectives by delivering
required outputs and outcomes), and efficient (minimises resources and time needed to
achieve outputs and outcomes). In large companies, considerable budget will be put aside
for this type of activity.
5.2 Place
Place
The place element of the marketing mix relates to the way in which the product is
distributed to customers. Before the internet, place focused entirely on how to distribute
the product in order to it to meet the right customers, whilst simultaneously driving down
the costs of transportation and storage.
Now, in an online context, place becomes much more nebulous. For example, for a
cosmetics brand such as Clinique, it will need to think beyond its own website sales to third-
party websites, such as online pharmacies, beauty stores, as well as to offline retail
environments, such as department stores. In the online environment, success often
happens for retailers who are able to maximise their visibility on third-party websites that
are used by their target markets. As companies have the potential to reach the global
marketplace online, it is a challenge to adapt offerings for local markets, not least e-
commerce sites and the related texts and images which sit on them. But again, this may be
another important mechanism for increasing market share.
To dominate the online retail space, Evans and Wurster (1999) recommend focusing on:
Reach – Reach is how many customers a firm can connect with and how many products it
can offer them. Increase reach by increasing the number of platforms the firm is on,
engaging with intermediaries. In the case of Clinique, this would mean increasing the
number of third party websites it is on whilst bolstering its visibility in reviews.
Richness – This is the depth of detail collected about the customer and provided to the
customer. Increasing it allows better customer engagement which in turn will drive sales.
Internet sales also provide options for companies looking for different routes to market. The
internet has created a shift for companies who used to sell only through intermediaries
towards selling directly to customers. A shoe manufacturer such as Irregular Choice may at
one time have been limited to selling their products through shoe shops that they did not
own. However, the internet means that they can also reach their audience directly.
However, this can lead to channel conflicts, threatening distribution arrangements with
current partners.
There are four options available to companies in terms of whether and how to use the
internet as a channel:
• Companies communicate about their products but continue to sell them offline
• A distribution channel through which companies sell their products to intermediaries
• A distribution channel through which companies sell their products direct to
customers
• Any combination of the above three dimensions.
Brewdog is an example of a company that undertakes all three. A Scotland-based brewery,
Brewdog uses the internet to communicate with customers about its products but continues
to sell to those customers via its own, Brewdog-branded pubs. It also uses the internet as a
distribution channel through which it sells to intermediaries such as supermarkets. For
example, the M&S chain of supermarkets stocks its beer. And finally, it uses the internet to
sell directly to consumers, with a website which sells its beer alongside merchandise, beer-
based advent calendars, and even shares in the company.
6 Example: Amazon
6.1 What Do You Already Know About Marketing at Amazon?
For many of us, Amazon plays a considerable role in our lives. Now is a good moment for
self-reflection/confession.
It's 2.30p.m. on the day I'm writing this. Today, I have already bought a board game for my
daughter as part of her Christmas present, used Alexa to play the radio, a podcast and Liam
Gallagher's latest song, as well as to set a timer. I've visited Whole Foods to buy a
moisturiser (they are also owned by Amazon), received a package through the front door
which I didn't order from Amazon but has been delivered in Amazon packaging by an
Amazon courier. I'm looking forward to reading some of my new Robert Galbraith book on
my Kindle later (at 900 pages it's too heavy to carry around in hardback). And at some point
over the weekend, I'm bound to watch a movie or a series on Amazon Prime. They're
everywhere.
Somehow, despite the fact that I'm really not keen on them, and I still try to buy books from
my local bookshop, they have inveigled their way into my life.
Let's make an assumption for a moment that Amazon's success comes about, at least in
part, because they are very good at the 4Ps - they get the right products in the right places
at the right price and the right time.
Can you think of three examples of ways in which Amazon 'get it right' in terms of their
marketing and which may account for their significant value and success?
6.2 Background
You might not buy many books, but you’re bound to have heard of Amazon.
Background
Amazon, if you’re not already very much aware, is an American multinational company. It is
considered one of the ‘Big Five’ tech giants (alongside Facebook, Apple, Microsoft and
Google) and has gone from being an online marketplace for books in 1994 to being a retail
and tech behemoth. It straddles many industries, selling electronics, software, apparel,
furniture, clothing, food and toys, alongside plenty of other products. It sells a membership
service, in the form of Prime, and has brought smart-speakers, in the form of its Echo
devices, into many homes. Amazon regularly disrupts well-established industries through
innovation and being able to provide goods and services at scale. The book retail industry is
just one of many examples of an industry that Amazon has transformed, both through its
sales of books and its development of Kindle e-readers and the platform to sell e-books for
these devices.
It is perhaps not surprising, then, that over the last decade, no company has created more
jobs than Amazon. Amazon directly employs 840,000 workers worldwide. Globally, we
support nearly 4 million jobs in areas including construction, logistic and professional
services, and small and medium-sized businesses selling on Amazon (Amazon Annual
Report, 2019).
We are looking at Amazon in this case study because it’s a great example of a company that
uses the 4Ps in a very diverse range of ways, with a large tech presence and approach, as
well as selling tangible goods in tangible stores. We can use it to demonstrate how the 4Ps
need to be considered together, as well as giving some clear and specific examples of the
4Ps in practice.
NB: Amazon receives mixed press coverage – it is both the hero of online retail, but also
according to many exposes and much investigative journalism – a very challenging place to
work (particularly in the packing and sorting warehouses) and a behemoth that makes it
hard for smaller companies to compete. We are somewhat putting these debates to one side
for this particular exercise, having chosen Amazon precisely because they are so big that
they are an exceedingly useful case for demonstrating many elements and sub-elements of
the marketing mix.
7 Amazon Case Study: Product
7.1 Product
Amazon may have started off as a bookstore, but as we established above, it now sells
(almost) everything (there’s a book about Amazon called The Everything Store which is
about exactly this: It’s not complimentary about Amazon all the way through, and so there’s
some irony that you can actually buy on Amazon despite it being
critical. (And apparently there is a one-star review for it somewhere from his wife)
Some examples of Amazon’s products and services are shown below:
• Retail goods, selling goods directly

• Retail service, offering a retail platform to other vendors
• Amazon private label goods (eg Amazon echo, Amazon Ring, Amazon Kindle)
• Amazon Prime (membership subscription service with various benefits including free
express delivery, TV and music streaming service, and eBook access
• Amazon Web Services (on-demand cloud computing)
• AmazonFresh (online grocery store)
• Amazon Shipping Services (offering shipping to retailers not selling via Amazon)
As you can see from above, the Amazon online product range has expanded significantly
and diversified from the initial focus on books. Additionally, the company’s products now
include not just online retail, but also a variety of other products and services with a range
of ways of reaching consumers.
7.2 Question: Product (Open Response)
From Amazon’s initial market as a bookseller, it has expanded significantly. Using three
products as examples, how has Amazon used the skills and competences it built up in its
early days as just an online bookseller to drastically expand its product and service offering?
7.3 Feedback: Product
Feedback:
• Books were sold online, meaning that there was already an online platform from
which Amazon could use its brandname to sell a growing range of non-perishable
products.
• A logical development from books was eBooks, and then ereaders. Selling eBooks
provided a ready market for ereaders, and in particular for developing their own
Kindle e-reader. Amazon publishing, which creates eBooks, created more Amazon-
owned products.
• An express delivery service – whether paid for directly or via Prime membership,
allowed them to reach their market quickly. Prime membership became another
product offering.
• Excellence in logistics and high speed delivery opened up the possibility of online
grocery retail. Amazon Fresh could sell a range of perishable products as a result.
• You may have come up with a range of other ways that Amazon were able to use
their initial product offering to build up expertise and skills which allowed them to
make an impact in other product and service markets, too. The more diverse its
products and services become, the better insulated it is from failure in any one
market, and the higher the amount of money it has to use to expand into and
dominate a wider range of markets.
Amazon plays this wide product-range to its advantage, as it becomes in people’s minds ‘the
Everything Store’ that the book claims it to be. Amazon encourages this by offering Prime
subscriptions which, once you have them, further encourage you to use Amazon as you can
have most goods devliered within one working day. It has been well-publicised how
Amazon’s wide range of products and snese of them being a ‘one-stop shop’ whose
products come with the additional benefits of quick delivery, has increased their market
dominance in a wide range or markets during the COVID-19 pandemic.
7.4 Reflection (Open Response)
Amazon started as a bookseller, but over the past decades has expanded its reach into a
much, much wider range of industries. More than any of the other internet giants, they
straddle industries realising that engaging with customers in one way encourages them to
increase their customer base in other industries, particularly in the case of Amazon Prime
(subscription) members. As Amazon CEO Jeff Bezos said in 2016,
"We get to monetize [our subscription video] in a very unusual way," Bezos said. "When
we win a Golden Globe, it helps us sell more shoes." (Business Insider, 2016)
Create a list of industries - as broad as you can - of the industries you perceive Amazon to be
in.
7.5 Reflection Feedback
There are a wide range of possible options here and answers are likely to link to key
products:
• Retail goods and services from third parties = online – enables 3rd parties to sell to
wider audience
• Amazon private label goods (eg Amazon echo) = bricks and mortar and online may
be combined – primarily online, but may also sell in their own stores
• Amazon Prime = online - streaming service
• Amazon Web Services (AWS) = online = web based
• Amazon Publishing = online – wider access to publishing consumers and digital
content well suited to online channels
• AmazonFresh = online ordering for shopping delivery service (branded goods and
partnership with Morrisons) emphasis on speed of delivery – and is free for Prime
members
• Video Direct = online – streaming service
• Amazon Go = bricks and mortar – technologically advanced stores enabling
customers to check out automatically without queuing
Industries include:
Retail: bricks and mortar and online
Entertainment: streaming services
Web and publishing services: online services

8 Amazon Case Study: Place/Distribution
8.1 Place/Distribution
Amazon’s business is primarily organised around getting traffic to its website which then
drives sales of goods and services. These will include their own goods (such as Echo smart-
speakers, Kindle e-readers and Ring doorbells), goods that are sold from their warehouses
(such as books, clothes, homewares and food), and goods that are being sold by third-party
retailers (such as second-hand books, but also clothes and homewares). Amazon.com is a
mainly online business organization, but does also have a physical presence, through
its bricks and mortar bookstores and its Whole Foods Markets
The company has expanded its physical presence in recent years, utilising their core
competency in technology to streamline the purchasing experience. Amazon are now able
to sell this retail technology to other organisations too, as the following article
illustrates https://www.geekwire.com/2020/amazon-starts-selling-amazon-go-
technology-businesses/.
9 Amazon Case Study: Promotion
9.1 Promotion
Amazon uses the following promotion strategies to communicate with its target market:
• Advertising (primary means of promotion) includes use of affiliate program for

website owners to earn revenues by displaying links to products sold on
Amazon.com, to widen the market reach. Amazon successfully use pay-per-click, too
(you can read more about this below).
• Sales promotions (eg: discounts; special offers: Amazon prime customers get free
Amazon Go delivery)
• Public relations (enhancing brand image to enhance consumer perception of
Amazon)
• Direct marketing (to sell Amazon’s online services – a Business-to-Business (B2B)
context)
Amazon uses Big Data to target customers in variety of ways. Read this article to find out
what they could be doing with your data. The expansion of products and distribution
channels increases access to customer data. In addition, Amazon holds credit or bank card
details for many customers, enabling ‘one click’ check outs.
Amazon has also built a business in providing a platform for advertisers, using ‘sponsored’
adverts to prioritise search results.
Do a product search on Amazon, and you’ll notice products with a little “sponsored” label.
These are “sponsored” products, or keyword-targeted adverts (ads) that let advertisers
promote certain products. Advertising is sold through a cost-per-click, auction-based pricing
model, the higher the bid, the more likely the ad is to be displayed. Advertisers pay only
when their ad is clicked, and they set the maximum amount they’re willing to pay. These ads
can show up above, near or within search results, or even on product detail pages.
Other advertisers can use Amazon to for advertising, even if they’re selling products that
you can’t necessarily buy on Amazon, like insurance or a car. Adverts can take the form of
videos, images or product information.
Amazon are not only advertising, but gaining value from providing advertising
services. From a consumer perspective, a lot of the advertising doesn’t look like advertising,
it looks as if our search has found appropriate products.
The Amazon brand is strong, becoming the most valuable brand in 2019 (Marketing Week,
2019).
(source https://www.cnbc.com/2019/07/17/how-amazon-advertising-works.html)
9.2 Question (Open Response)
Explain the differences between Direct Marketing and Sales Promotions, in the
context of Amazon.
9.3 Feedback
a) Direct marketing identifies a target customer and makes direct contact to promote
Amazon’s online services
b) Sales promotions offer short-term advantages or financial benefits to stimulate demand

and increase sales
10 Amazon Case Study: Promotion
10.1 Price
Amazon uses low prices as a way of attracting customers to its e-commerce website and
product offerings. Nonetheless, given the variety of the company’s products, the following
pricing strategies are used:
• Market-oriented pricing strategy (primary strategy – comparison with competitor

pricing)
• Price discrimination strategy (different prices for the same product)
• Value-based pricing strategy (taking account of consumers’ perception of value)
Despite a perception that Amazon uses low prices to attract customers, the use of dynamic
pricing strategy means they are not always the cheapest at all times in all locations. In
fact, Amazon change prices astonishingly frequently. Business Insider (2018) notes that
Amazon raises prices on uncommon products, and then the most common products will
appear cheaper (which you will have seen referred to as an anchoring bias in the decision
making unit), so people will start to assume they have the best prices overall. Amazon are
very successful at applying consumer psychology and exploiting our cognitive biases.
10.2 Question 1: Price
How do Amazon use price as a tool to maximise their competitive advantage? Consider at
least two different strategies they employ.
10.3 Feedback 1: Price
Within their sales platform, price is used in the full range of ways:
• As a signifier to reflect quality (for example charging more for one type of kindle
than another, or for a hardback over a softback, or one brand of cereal over another.
• As a way to generate additional sales (e.g., through promotions, discounts or
bundling)
• To aggressively push the competition out of the market (e.g., showing how they are
selling below ‘retail price’ with the assumption being that they can sell cheaper than
the competition. This is called competition-based pricing, but may incorporate cost
plus approaches, which will set the floor for how low they can go.
• May also include cost+ approaches
10.4 Question 2: Price
Evaluate the ethics of selling goods at different prices in different locations. If you were
charged $10 more than a friend in a neighbouring country for a product that cost $34.99,
would you consider this fair? What might the impact on Amazon be if they are found to be
doing this?’
10.5 Feedback 2: Price
You might think it is fair if it reflects payment of taxes or additional transport costs
You might think it is unfair if it is because it is a very popular product, and searches show
that the price has been increasing regularly to take advantage of increased demand
The impact on Amazon is likely to be felt if customers decide to check prices against other
suppliers, no longer assuming them to provide the lowest cost products, this could lead to
loss of market share if Amazon prices are higher than competitors for particular products.
Sources include: http://panmore.com/amazon-com-inc-marketing-mix-4ps-analysis

Block 13: ORGANISATIONAL STRUCTURE
1 Reading: Essential and Recommended

1.1 Reading: essential and recommended
Essential Reading
https://hbr.org/2002/03/do-you-have-a-well-designed-organization
Boddy, D. Management. (Harlow: Pearson, 2014), Chapter 10: Organisation

Structure
Recommended Reading

University Press, 2014), Chapter 5: The Structuring of Organisations
Chandler, A. The visible hand: the managerial revolution in American business. (Harvard:
Harvard University Press, 1977) [ISBN 9780674940529], Introduction. This introductory
chapter from Chandler’s monograph was recommended for Block 1, too, but this time,
reading should focus on the evolution of the modern firm’s structure.
Cole and Kelly, Management Theory and Practice (Cengage, 2015) Chapter 3: Max Weber
and the idea of bureaucracy. This textbook chapter goes into more detail regarding
bureaucracy, which is a really important topic in management theory but which we only
have space to cover briefly in MN2177.
Jashapara, A. Knowledge Management (Harlow: Pearson, 2011). Chapter 6: The Learning

Organisation. This textbook chapter has a very good and detailed account of the
differences between knowledge types, Nonaka’s theory of such, and lots of useful examples.
Mabey C., et al, Organizational Structuring and Restructuring in Salman, G.,

ed. Understanding Business Organisation (London: Routledge, 2001). This textbook chapter
links strategic HRM, structure and strategy together in a useful way. It explores how choices
of organisational structure can lead to improved performance, and how these choices often
sit with key human resources choices which are located in the domain of HRM.
Mullins L., Management and Organisational Behaviour (Harlow: Pearson, 2007).
• Chapter 15: Organisational structure and design. This textbook chapter is

relevant in blocks 14 and 15, looking at key different factors a firm may need to take
a stand on, e.g., how much centralisation, bureaucracy, etc.
• Chapter 16: Patterns of structure and work organisation. This textbook chapter
looks at the contingency (Chandlerian ‘Structure follows Strategy’) approach to
structure and looks at the key factors which a firm may need to choose between.
Rosenfield R., and Wilson D., Managing Organisations (London: McGraw Hill,
1998), Chapter 12: Organisational Structure. A textbook chapter providing a clear
description of Chandler’s work alongside an outline of the type of design choices that need
to be made with regard to strategy and why they matter. Useful for Blocks 14 & 15.
2 Organisational Structure
2.1 What Do You Know About Organisational Structure? (Q)
Companies often use diagrams called organigrams or hierarchical charts or hierarchical
maps to describe their structure.
Have a look at the hierarchical maps below, showing one flatter structure, and one taller
structure. Try to think about how different it might feel to work in these different sorts of
organisation structures. Which would you prefer to work in? Why?
Now read on to learn, over the next few resources, what the advantages and disadvantages
are of each.
2.2 The relationship between strategy and structure
As you have seen in the previous units, contemporary organisations are in constant states of
change. Some of this is forced upon them; some of it is chosen. They will be looking to make
strategic choices that allow them to neutralise threats and take advantage of opportunities.
There is a close relationship between organisational strategy and organisational structure:
• Organisational strategy should be used to inspire and shape the future structure of
an organisation.
• Organisational structure will provide a set of limitations and suggestions for strategic
choices.
• A company will need to decide, in relation to a strategic choice, whether they are
prepared to make the level of changes internally that such a strategy will require.
As such, structural design choices need considering at various stages in the strategic work
that an organisation sets out to do.
The way that you structure your company to enable the pursuit of strategic objectives is a
key area of organisational design. Other design elements, such as recruitment, learning &
development, communication systems, IT, decision making practices, and appraisal systems
should then be brought into line with your chosen structure.
In order to effect change in your organisation, Willman suggests that a company will want to
ask itself six key questions:
1. Where should the organisation’s boundaries be?

2. How should work be divided and combined?
3. What are the lines of authority and communication?
4. How much bureaucracy do we need?
5. What should be the extent of centralisation?
We will look at each in turn, briefly outlining the key issues.

3 Key Structural Decisions: Setting the Organisation's
Boundaries
3.1 Where should an organisation set its boundaries?
Imagine you are a car manufacturer. Are you going to manufacture an entire car? Or will you
buy in engines that are ready-made?
And when you've finished making the car, will you sell it wholesale to a car retailer, who will
sell it in their showroom or on their website? Or will you sell it yourself by creating and
retaining ownership of car showrooms and/or retail websites within your own firm?
If you realise there is a gap in the market for another style of car, will you use your capability
to produce it, or leave it for someone else to discover that there is a gap in the market and
let them produce it? And what about if someone in the company suddenly has a great idea
for a new food supplement? Or a pen? Or an online counselling service?
These firm-market boundaries are central issues for the structure of a firm. Firms have to
decide how much of the possible work they will do, versus how much they won't do. If
they're not going to do it, then another firm in the market or in related markets will need to
do it instead.
Specifically, firms will be trying to work out:
-Should they create a product or service themselves, or should they buy it in? If they create
it themselves, they stand to gain a greater share of the revenue available in the industry.
However, they are also taking on a larger share of the risk. For example, if the car
manufacturer decides to create its own engines, it will only have to pay production costs,
and not the mark-up that an external company would put on it. They may be able to
produce the engine in house for £97, but if they bought it from another company, who
added a mark-up to ensure that they drew profit from the sale, they may have to pay much
more than £97. The company may even be able to sell the engines to other manufacturers.
Samsung sells its Super Retina edge-to-edge OLED screen to Apple,
making a profit by selling the tech to its rival.
However, both the car company and Samsung are taking on a greater share of the market
risk. If there is a sudden drop in demand for cars, or smartphones, then the car
manufacturer and Samsung will both be hit more significantly than they would have been
otherwise as they will have to absorb the impact of selling less units of their car/phone to
the market, as well as the engine/screen.
-Should they be very specialised in the market you produce in, should you create multiple
products and/or services in the same broad market, or should you create a product or
service anywhere you think you have a good idea? This is a question of how specialised you
wish to be. Specialisation often leads to greater economies of scale because you are expert
at producing units of a particular good and so have the expertise to deliver to the right
quality at a low price. However, it also means that you are not spreading your risk. A wider
product range can reduce risk as if one product or service performs badly, another may
perform well. In the recent pandemic, particular types of legal work grew, whilst others
contracted. Divorces increased, whilst real estate work decreased. Law
firms who were diversified across many work types had the ability to offset the downturn in
one market with an upturn in another - moving lawyers around to avoid having to furlough
them or make them redundant.
These questions of where to set your boundaries are related to the ideas of vertical and
horizontal integration.
Vertical integration
Vertical integration is moving backwards into the supply chain, or forwards into the
customer marketplace. In the case of the car manufacturer, moving backwards into the
supply chain might mean producing car engines instead of buying them from suppliers.
Moving forwards into the customer marketplace might mean opening your own showrooms
to sell your cars instead of selling them to another car retailer.
Advantages of such an approach are:
• Creates a ready-established buyer in the new market. If you decide to open a showroom,
you are can buy your own cars to sell on. If you decide to produce engines, you have at least
one customer (yourself!) ready to use the engines
• Can reduce costs of production/sales by cutting out a layer in the value chain. You are no
longer paying someone else's mark-up.
Disadvantages of such an approach are:
• You may be seen as making portfolio choices for investors that they do not want to make.
For example, if a shareholder wanted to invest in a car retailer, or a car engine
manufacturer, then they may prefer to make that decision for themselves rather than the
company making it for them.
• Resources stretched too thinly. As a manager, it may mean you have a higher workload
and your team does, too. Rather than excelling at a smaller number of tasks or being
comfortable with your expertise, you may be required to expand what you are doing to a
place that neither you or your team feel comfortable with.
• Brand name dilution/brand equity reduction. You may undermine the brand you have
worked hard to establish by expanding it too far. Many years ago, Cadbury's chocolate,
which is famous for its distinct purple logo, launched instant mashed potato. It was a total
disaster because everyone was convinced it was chocolate flavoured mashed potato! They
pulled the product quickly, relaunching it as Smash. Without intervention, it could have led
to ongoing brand confusion and potentially could have undermined the brand's equity in the
longer term.
Related Diversification
Related diversification is when a firm moves into an industry that has important similarities
to its existing industry. It enables the company to use existing resources and competencies.
For example, if a pie manufacturer began to produce gravy, it would use many of the same
production skills and sales channels.
Related diversification can occur when a company enters either complementary or

competing markets. A competing market move would be, for example, Honda's decision to
move from producing just cars to also producing motorcycles. A complementary market
move would be Dunkin Donuts selling coffee beans and instant coffee in the supermarket to
complement their doughnuts.
Advantages of related diversification are:
• Economies of scale and scope
• Sharing skills and competencies
• Leveraging a brand name
• Using shared marketing skills and knowledge
• Using sales and distribution capacity
Unrelated Diversification
This occurs when a company enters a market which has little or no relationship to current
markets. A company who are famous for this is Virgin, who have a range of brands, products
and services across an incredibly diverse portfolio of businesses, which are not heavily
related to one another including space travel, banking, train travel, radio, mobile phone
networks, holidays and gyms.
Advantages of unrelated diversification are:
• Growing the business
• Reducing risk by operating in various markets or product lines
• Refocusing the company (if there are concerns that it is drifting from being relevant to the
contemporary consumer)
• Defending against a takeover (by growing in size)
• Exploring projects of interest to the owners or executives (to maintain their interest and to
use their passion and expertise)
However, both types of horizontal diversification (related and unrelated) bring some
disadvantages:
• Unrelated diversification may be seen as making portfolio choices for investors that they
do not want to make
• In both scenarios, you may stretch your resources too thinly at the expense of a successful
business line
• Economies of scale and scope often don’t deliver what they promise
• Can dilute the original brand name
• Can reduce brand equity if new product/service fails
A note on outsourcing
The reverse of bringing activities in house is to outsource them. Outsourcing is the practice
of hiring a company or individuals to perform services or create goods that previously are
traditionally created in house. For example, instead of carrying out payroll in house, a
company may outsource this HR task to an outsourcing agency who specialise in payroll. Or
instead of dealing with complaints handling and customer service in-house, a company may
outsource this to an outside agency. Anything and everything can be outsourced - and
really, it's just another way of altering the organisation's boundaries, getting another
company to do some of the work that would normally be done inside the company. It's the
reverse of what we have been discussing above, where the company looks to do more.
But why would a company look to do less? The usual reasons are to save costs, by
borrowing expertise or labour from outside. IKEA is a good example of a company who
makes some bold boundary decisions. They carry out horizontal diversification frequently,
and perhaps most famously in owning forests which they use to fell trees to make some of
their furniture. However, they also outsource the production of many goods, too, such as
some of their rugs which are made by factories in India and the Indian subcontinent, making
use of less expensive labour and greater expertise.
Partnering with Other Companies
Another option - this one creating And, one final option is away from vertical and horizontal
integration altogether, and explores the possibility of working with other companies. The
question here is, can you be more successful if you work alone, or if you cooperate with
other organisations, for example setting up a joint venture, a partnership or an alliance of
some form? This is a question of deciding whether your resources alone are enough or
whether you would like to pool resources (money, expertise, brand awareness) with
another organisation. Either you are better together, or you each have a 'secret sauce' you
are willing to share with the other. High street fashion chain H&M often
collaborates with high-end designers for limited collections. These
designers have included Stella McCartney, Erdem, Versace and Jimmy Choo.
This makes money and increases brand recognition for the high-end designer, and increases
the reach, brand perception and selling power of the high street store. Both gain from the
temporary association with one another.
There are various types of arrangement, which can include:
Joint Ventures
These are contractual agreements between companies, often (but not always) executed by
setting up another company. Ionity is a joint venture involving BMW, Daimler, Ford, Hyundai,
Kia, and VW, which is building ultrafast electric-charging stations for automobile recharging
across Europe.
Strategic Alliances
A strategic alliance is an agreement to share knowledge, technology or a business

opportunity - but not necessarily formalised around a new project. The placement of
Starbucks branches in Barnes & Noble bookstores is a great example of a strategic alliance -
they agree to share customers who want access to both books and coffee at the same time.
This is an old idea, and one which both Barnes & Noble and Starbucks were willing to exploit
together.
Licensing
The right to exploit an invention or resource in return for a share of the profit. Disney are
renowned for their multiple licensing agreements with their imagery. As their Josh
Silverman, executive vice president, global product commercialization, Disney Parks,
Experiences and Consumer Products, was quoted as saying:
"Mickey Mouse is the No. 1 licensed character franchise in the world, and we continually
collaborate with the top brands and licensees in emerging spaces to create products and
experiences that help extend Mickey's brand and reach audiences of all ages...our recent
efforts have been focused on working with other brands who are considered 'true originals'
in their own right–other iconic brands that have rich histories–to share in the 90th
anniversary celebration of the 'true original' Mickey Mouse." (sourced from
https://www.licenseglobal.com/character/90-years-mickey-mouse on 19/03/2021)
Franchising
The right to exploit a business brand in return for a capital sum plus share of
profits/turnover. A search for franchise opportunities in London showed up that I could
open a Crepe restaurant, a branch of Subway, numerous cleaning franchises (office, home,
window), plumbing, pizza restaurants and so forth. If you look for your city, what can you
find?
To conclude - whilst these notes may make the process of integration and boundary setting
appear straightforward, it is anything but. These are large, strategic decisions which require
considerable thought and which it is hard to see if they will work or not. Senior managers
will often spend a great deal of time, effort and resources exploring these types of questions
to try to guarantee that they have made a good decision. Of course, there are never any
guarantees.
However, once these decisions are made, companies and their managers must then turn
your attention to organise your firm to deal with the boundaries you have created.
4 Key Structural Decisions: Designing the Hierarchy
4.1 How Should Work Be Divided and Combined? Division of Labour
Organisations have choices regarding how they divide and combine different tasks in order
to create job roles. At one end of the spectrum is an organisation with roles that are highly
undefined: everyone does a bit of everything. One person starts their own consultancy,
hires another, and they work side by side, without ever really having a conversation about
which projects belong to who. You can see how, after not very long, there is bound to be
replication of work, omissions, and mistakes. That is why this sort of situation, where there
is no 'division of labour' at all is very unusual. As soon as there is more than one employee,
it makes sense for people to begin to specialise so that it is clear on who is doing what, and
so that people can become more expert in their particular tasks.
At the other end of the spectrum is a role that is very highly prescribed. For example, in his
book Rivethead, Ben Hamper describes how his role is simply to fire rivets out of a rivet gun
into a particular piece of motorcar as it passes him on the moving production line. There is
very little discretion over what he does, other than that he can choose to go very fast and
build short breaks into his day between fast-working stints, or he can go slower, and work at
a steady rate without taking breaks. He is highly specialised in firing rivets, but it is simple
work in any case, and he soon becomes bored, and alienated, from the work that he does.
The division of labour is the process that sets the balance between these two ends of the
spectrum: integration and differentiation.
Division of labour is the separation of tasks to allow some degree of specialisation. The
higher the division of labour, the higher the specialisation.
Compare two burger restaurants.
(1) In McDonalds, tasks are highly specialised with one person in charge of burgers, another
in charge of fries, another waiting on the tills. This allows employee expertise to develop,
cuts down the amount of time needed to swap between tasks, and thus is often more
economically efficient (although if you refer back to Scientific Management, and the
example of the 'Rivethead' above, can you see what the downsides of such an approach
might be?).
(2) At a street food stall, the same person cooks the burgers and the fries and takes the
money. This may be more resource intensive but it could be a more satisfying job, for
example because the worker has ownership over a larger part of the production process and
is less likely to feel fed up. They are more likely to stay, reducing recruitment costs. And yet
if recruitment costs are low in McDonalds, then it is perhaps less of a problem. There may
also be a market for both the cheap, fast model of McDonalds and the more ‘artisan’ street
food model. However, when managers are thinking about its organisation’s structure, they
will want to pay attention to this sort of division of labour, with the key issues being short-
term versus long-term performance.
Division of labour brings two major advantages:
1. Task specialisation can increase skill, speed, accuracy and quality, which can in turn lead
to a reduction in costs
2. It can promote product improvement, as specialist workers come to understand their task
and how to make efficiency savings (you will have read about this in Management Science
under the section on Kaizen)
However, it also brings some disadvantages:
1. If the division of labour is done to the degree that the work becomes repetitive and
monotonous, it can lead to a increase in dissatisfaction and thus a decrease in productivity.
2. It can lead to workers feeling a sense of alienation from the products and services that
they are creating and in turn lead to a reduction in health & wellbeing of the workers.
To explain a little more about this sense of alienation, it was first described by Marx (1927).
If you are a master craftsperson, building a wooden chair from scratch, you are likely to feel
some sense of achievement when you create this chair. You are also involved in a process of
design and control over how you organise your work and the creation of your product.
However, if you are on a production line, only adding screws to the front two legs to attach
them to the seat, and you rarely see the finished good, you are going to feel less attached to
the good you are making. You have little control over the design of the product, nor your
working day. This can create feelings of alienation which are a detriment to mental health &
wellbeing, as well as an issue for companies who may find themselves with dissatisfied
workers.
A lower division of labour leaves scope for more freedom and control, but in so doing may
raise the per unit cost of production of a good or service. It may also leave more scope for
costly mistakes.
In settings where workers receive little training and are easily replaced, it may not be
perceived as a problem by an organisation for them to feel disenchanted with the work and
leave. However, where building up knowledge and skill is important, this will be more of a
problem. Additionally, there is increasing research showing the benefit of working with
generalists, who have been allowed to build up a wide range of skills and knowledge. They
are better at solving problems, making connections and originating fresh ideas.
It will be a case that organisations need to match their needs in terms of cost savings in the
short term with employee retention, engagement and possibly also creativity in the longer
term.
Departmentalisation
An additional choice that an organisation needs to make with regard to the dividing and
combination of work is how should jobs be departmentalised? Departmentalisation refers
to the process of groupgin activities and employees together who share common managers
and resources. Organisations have choices to make regarding how they organise these
groupings. Here are some common structures:
Functional Structures - functional structures group activities and people based on the
similarities in the type of work that they do. See the figure below for an example of this.
Each functional activity is grouped into a department, for example, Marketing, Human
Resources and Finance are all common departments. [insert diagram of function-based
organisational structure]
Divisional Structures - divisional structures split organisations into self-contained entities

based on what they create for the organisation. This might be based on the products or
services that they create; the region of the world that they operate in; or the customer
segment that they serve (you have learnt about customer segments in marketing). Examples
might be:
• Geographical structure - a geographical structure splits organisations into sub-units

based on geography. This could be at any level, from sub-national region (e.g., a UK-
wide estate agency may divide its business into the North of England, South of
England, Scotland, Wales and Northern Ireland) to global divisions, such as Europe,
Middle East, Asia, Africa, the Americas, and so forth. [insert diagram of geographical
structure]
• Product-based structure - a product-based structure splits organisations into sub-
units based on products that are being made. In the case of a home furnishings
company, this might be soft furnishings, dining furniture, outdoor furniture, and
small accessories. In a consultancy firm, this might be financial advisory, change
management, and business process reengineering. [insert diagram of product-based
structure]
• Customer-based structure - a customer-based structure splits organisations into
sub-units based on which sorts of customers they are selling to. In the example
below, imagine the company is selling handsoap. The retail sub-unit is selling the
handsoap to supermarkets, shops and web retailers who will sell it on; the industrial
sales sub-unit is selling it to gift set manufacturers, who are going to put the soap
into their own bottles and sell them as a part of a range of gift products; the
government sales is selling the handsoap to government to use in its buildings and
hospitals; and direct customer sales are selling direct to the end-user, perhaps
through the company's own web platform. [insert diagram of customer-based
structure]
Each division would be headed up by a divisional manager who would take responsibility for
their own resources and often investment decisions. This would be a more general manager
as they would have responsibility for a variety of different departments within the division.
Organisational managers/directors would still run the entire organisation and coordinate all
divisions. In such a structure, divisional managers have clear responsibility for their
own division. Divisional structures promote decentralisation, and the organisational
managers/directors may feel a loss of control as the divisions operate as autonomous units.
The role of a management accountant will be particularly important in supporting the

organisational managers/directors monitoring of these divisions. Such monitoring, through
performance measurement, is even more critical than in a functional structure, as divisional
managers have increased power and are almost managing their own separate business
unit. We will be looking directly at performance measurement in a later unit, and will
use the example of the divisional organisational structure there, to show situations
where good performance measurement is particularly critical.
Alongside the more straightforward organisational forms above, there is another form that
is somewhat harder to understand. Despite its complexity on the page, it is frequently used
by organisations and thus it is worthwhile taking the time to understand it.
The Matrix structure - in its purest form, a matrix structure is an organisational design that
combines two different types of structure, resulting in an employee having two managers
simultaneously. This can be seen in the figure below, where employees working in
temporary project teams contribute to specific projects. This structure has two chains of
command - one with the project manager at the head, and one with the functional director
at the head. The director of each function has authority through the horizontal chain of
command. The product manager has authority through the horizontal chain of command,
over staff who actually sit in the functional departments, but who have been assigned to
work on the product. Essentially, they have been 'lent' by their functional director to
participate in the cross-functional product group, with others from different functions, too.
[insert diagram of matrix structure]
The matrix structure is common in organisations which operate on a project basis.

Accountancy firms, law firms, advertising agencies, firms which develop new products, and
universities would all make use of the matrix form when working on projects. They take
advantage of the flexibility and combination of different knowledge bases at the cost of
complexity. In other words, it can be much, much harder to work and lead under a matrix
structure, as it's hard to know who is in charge, who you are answerable to, and for leaders
to lead without obstruction from other leaders. However, information sharing, skill sharing
and flexibility are so important in some settings that the staff are prepared to put up with
the problems for the benefit that a matrix can bring.
You will be able to think of other examples of companies using matrix structures as well. It is
important not to see the matrix structure as a replacement for a traditional hierarchy. This
hardly ever happens. Instead, it's far more common for organisations to make use of the
matrix structure by overlaying it on their more conventional hierarchy. Employees just have
one manager, and are just affiliated to one department, but they are 'lent' to projects for a
period of time.
5 Key Structural Decisions: Bureaucracy and Centralisation
5.1 How Much Bureaucracy Is Needed?
In a 2017 survey by Harvard Business Review, when 7000 readers were asked about levels of
bureaucracy in their organisation, the answers were not kind. It was seen as a 'blight' on
organisations that led to slow decision making, wasted time, caused internal political
disputes, created inertia and reduced innovation. (Hamel and Zanini, 2017). This is a fairly
typical view of bureaucracy in contemporary society. However, if we look at what
bureaucracy actually means, it is a 'rational type of authority...characterised by a
specialization of labour, a specific authority hierarchy, a formal set of rules, and rigid
promotion and selection criteria.' (Huczynski and Buchanan, 2014: 541). Therefore, if we
think about it in this way - not as an organisation type, but as a set of activities - then we can
see that the elements that describe bureaucracy are necessary to some extent in order to
ensure the smooth running of most organisations. As with many of the other structural
elements we have looked at so far, too much is a problem, but too little is a problem, too.
Typical bureaucratic elements are:
• Job specialisation - jobs are broken down into simple, routine, clearly defined tasks
• Authority/hierarchy - Positions are clearly organised within a chain of command
• Rules and procedures - Rules and procedures cover many aspects, and ensure
particular behaviour/s
• Documenting - decisions and activities are recorded to provide an organisational
memory that can be checked and referenced
• Neutrality - an impersonal, impartial application of uniform rules to everyone in an
unbiased way
• Formal selection processes - individuals are selected for their jobs/roles based on
qualifications
(based on Robbins and Coulter, 2009).
Being strong relative to other organisations in the above elements would make an
organisation appear to be more bureaucratic. Being less aligned to the above elements
would lead to a less bureaucratic organisation.
Whilst there are disadvantages (as stated above) in being overly bureaucratic, it should be
clear that some bureaucracy is of benefit to an organisation running smoothly and fairly.
The major strength of bureaucracy lies in its ability to standardise. Employee behaviour is
controlled through rule, regulation and the recording and checking of data. This means it is
predictable, and thus more manageable. Few resources have to be dedicated to decision-
making because decisions follow the established routines and procedures (Pfeffer, 1981).In
the context of workplaces that are increasingly concerned with equality and diversity, the
latter two aspects - neutrality and formal selection processes - currently have high value and
status across all organisations.
The elements, and their advantages and disadvantages can be summarised as follows:
Negative Negative
Positive
Characteristic consequences for the consequences for the
consequences
individual organisation
Too much
specialisation Job rotation harder
Efficient, predictable
Job specialisation prevents knowing or which reduces
working
caring about wider flexibility
problems
Employees can't
Clear who is in
Authority/hierarchy contribute to Errors can be hidden
command
decision making
Individuals
throughout the
Most appropriate Can reduce
company can be
person is promoted - opportunities to
Formal selection promoted to their
increases fairness innovate and impress
level of
and quality of work through novel means
incompetence (and
then get stuck there)
Recording
information can
Creates records not
become more Recorded precedents
Record keeping dependent on
important than stifle innovation.
individual memory
understanding its
value
Rules only define a

Employees know
Leads to delays, minimum level of
Rules and procedures what is expected of
stifles creativity performance, but
them
that becomes OK
Dehumanises - Employees start to

Reduces bias and difficult to respond see themselves as
Neutrality
creates efficiency to unique needs of little more than a cog
staff and clients in the machine
(Adapted from Huczynski & Buchanan, 2014)
In conclusion, bureaucracy - rather than just being a type of organisation - is a set of

practices that an organisation may subscribe to by degrees. They can be a little bureaucratic
or a lot, and if they are very bureaucratic then they may be referred to as a bureaucratic
organisation. Bureaucracy and bureaucratic practices bring advantages and disadvantages,
dependent on the extreme to which they are used.
5.2 What should be the extent of centralisation?
The senior leaders of organisations are required to decide which types of decisions are to be
made by who. In particular, they will need to decide on the degree of centralisation that is
applied to decision making processes. Centralisation is 'the concentration of authority and
responsibility for decision-making power in the hands of managers at the top of an
organisation's hierarchy.' (Huczynski & Buchanan, 2014: 530). In other words, it is the
degree to which decisions remain with the organisation's senior leaders. If the senior
leadership team insist on making a lot of decisions themselves, then the organisation can be
said to have high levels of centralisation. If they devolve decision making power to lower
levels of the organisation, pushing it down through the layers of the hierarchy, then there is
a low level of centralisation, which is also called decentralisation. Decentralisation is the
dispersion of power and authority from top managers down to operating units, branches,
and more junior managers.
Decentralisation has a number of advantages:
• Decision making and problem solving tasks that relate to lower levels in the
hierarchy can be made more quickly, rather than having to be sent up the hierarchy
for decision making and the desired approach being sent back down again for
action.
• This develops the decision making and problem solving skills of junior staff,
potentially increasing their sense of motivation and job satisfaction.
• Creativity, flexibility, and innovation are increased.
• The workload is spread more evenly across the organisation, freeing up more senior
management time for strategic planning.
However, Centralisation also brings advantages, too:
• Decisions that affect different functions or divisions are more likely to be made in a
uniform way.
• Fewer skilled (and therefore more highly-paid) managers are required
• Greater control and cost effectiveness over company resources is possible
• Less extensive planning and reporting procedures are required, because senior
managers have greater visibility and control over the organisation's activities.
As we have seen with the other structural factors, there is therefore a trade-off between the
advantages of centralisation, and those of decentralisation. A firm will want to settle on the
level of (de)centralisation that it appears may work for them. The above advantages and
disadvantages are related to three factors (Willman 2014):
Competence - if managers believe their subordinates are incompetent, they will want to
remove accountability and autonomy by centralising and taking back more power.
Cost - functions such as HR and Finance can be gathered at head office level more easily in a
centralised business.
Communication - lines of communication are tighter and more immediate in a business that
is centralised, particularly if that centralisation brings people into the same office space.
As such, the organisation must be designed with a consideration of the correct distribution
of decision-making responsibility.
6 Questions on Structure
Please attempt the Quiz on the VLE.
7 Common structural forms
7.1 Mintzberg's Structure in Fives
As we have seen in the previous notes, organisations have a variety of choices to make
when they are deciding how to structure themselves. Whether they have more or less
division of labour, whether they are more or less centralised, and the quantity of
bureaucracy they embrace would all be examples. It follows, as you are likely to be able to
see, that some of these factors are related. For example, if an organisation is very flat, it is
unlikely to be highly bureaucratic.
Mintzberg (1983) studied organisations to see if there were common combinations. He

found that there were. In fact, he was able to identify five structures that were extremely
common. These structures could be described in terms of their organisation of five standard
parts of the organisation:
The Five Parts of the Organisation (Mintzberg, 1983)
• Strategic apex- This element of sits at the top of the organisation and is comprised
of senior managers and directors. They define the organisation's strategy and
manage the organisation's relationship with the outside world, such as the needs of
its most powerful stakeholders – owners or government agencies, for example. This
apex could range from one entrepreneur to a large senior management team.
• Operating core - The operating core carries out the activities necessary to deliver the
organisation's products or services. It could be Ford’s assembly line workers, Nestlé’s
factory workers, a small medical technology company’s technicians, your bank’s call
centre workers, Virgin Holidays’ travel agents, and so forth.
• Middle line - this element provides the link between the strategic apex and the
operating core, and is made up of middle management. Its work is partly that of
interpreting the instructions of the strategic apex and translating it to be actionable
by the operating core. Simple, smaller organisations may not have a middle line at
all. As such, people on the middle line will need to communicate upwards in the
organisation and downwards, having a significant role in holding the organisation
together.
• Technostructure - this is made up of functional specialists, such as those in strategic
roles within Human Resources, Finance and Marketing. Mintzberg states that there
are several roles here. They use analytical techniques to improve organisational
practice and the work effectiveness of others. They also plan, deciding on outputs
and defining quality requirements.
• Support staff - they exist to provide support to all the other parts, operating outside
the core work flow. Again, these people will be spread around the organisation, and
might include payroll clerks, the IT help desk, the security team, mailroom workers
and canteen staff.
As you can see, although the strategic apex is at the top of Mintzberg's structure, and the
operating core is at the bottom, the middle section (middle line, technostructure and
support staff) is divided in a way that is not reflective necessarily of their precise position in
the hierarchy, nor of the team they are in. For example, there may be people from HR,
Finance and Marketing in both the technostructure (as planners and analysers) and in the
support staff (as payroll clerks, data entry technicians, and administrators).
The relative relationships of these five elements have a significant impact on the nature of
the organisation, and common combinations form a fivefold classification of organisations
(Source: Willman, 2014, derived from Mintzberg, 1983):
Generic structure models
Simple structure
Machine bureaucracy
Divisional form
Professional bureaucracy
Adhocracy
7.2 Mintzberg's Structure in Five - Key Aspects
The five structural types that Mintzberg identifies have key aspects which are outlined in
table below but which will now be discussed in more detail.
Organisational Method of
Key part of organisation Example
types coordination
Entrepreneur-led small
Simple structure Direct supervision Strategic apex
firm
Machine Standardisation of Large firm in
Technostructure
bureaucracy work processes manufacturing
Standardisation of Diversified multi-product
Divisional form Middle line
outputs firm
Standardisation of
Professional Large law or consulting
skills and Operating core
bureaucracy firm
knowledge
Operating core (with
Adhocracy Mutual adjustment e.g., a film-making firm
admin support)
Simple structure
The simple structure is highly centralised. The strategic apex - typically a chief executive or a
small, influential executive team, hold the power and exert control. Perhaps due to its
simplicity, however, the structure does not have to be as strict as the above description
would lead one to believe. Because such organisations are often small, they can be flexible
and informal. They lack technostructures, support staff and the middle line almost entirely
because they are small and have not yet grown to a size where these roles are properly
established. Also, because they are small with a small (possibly founding) team retaining
control, the culture is strongly defined and emanates from this team. However, the
downside of this is that one small change in the senior team can wipe out the control
mechanisms and cultural aspects that have until then been strongly established. A typical
firm with a simple structure would be a small, entrepreneur-led firm - which has perhaps
started with one founder and, whilst still using a simple structure, may grow to house a
small strategic team in the apex.
Machine bureaucracy
This structure is for a larger organisation - potentially much larger. It is doing a lot, and is
hungry for knowledge and control to make sure that its output is consistent and relevant. As
such, it relies heavily on a robust technostructure. Strategic planners and financial
controllers are influential and heavily present. This leads to multiple layers of management,
lots of formal procedures, and standardised production processes. It is not called a
bureaucracy for no reason - you will recognise many of the qualities described above from
the notes on bureaucracy. Due to much standardisation of process and output, the tasks
that the operating core perform can be very prescribed, with little individual discretion. The
machine bureaucracy is typified by large-scale car manufacturing plants.
Divisional Form
In the divisional form, lots of separate business units operate somewhat independently,
enjoying a high degree of autonomy. It often comprises several machine bureaucracies (as
the sub-units) within a single corporation. The middle line here has a strong controlling
influence, translating the demands of the small strategic apex into objectives of the
operating core. The technostructure plays an important role, sharing analyses and helping
with planning for the strategic apex, too. Warren Buffet's Berkshire Hathaway, or
the Virgin Group, would be well-known examples of the divisional form, albeit on a grand
scale.
Mintzberg's divisional form will remind you of the M-Form covered in an earlier unit. You
may remember that the M-form is characterised by market-based sub-units which operate
semi-autonomously. There is a high level of decentralisation to managers of these sub-units,
subject to the performance controls that were also discussed earlier on.
Professional bureaucracy
Another form of bureaucracy, but this time based on the standardisation of skills and
knowledge (as opposed to work processes). it relies on clear lines of authority and standard
administrative practices. However, due to the professional - and thus knowledge-based
nature of this sort of organisation, the practices may be built on standards set by law,
regulations or external bodies, such as professional bodies. A law firm, whose practices are
dictated by its country law as well as the codes of conducts of its professional bodies would
be a good example here. Schools, architecture practices, hospitals and accountancy firms
are all examples of professional bureaucracies, too.
Adhocracy
The adhocracy is quite a different type of structure to the others. Note the dotted lines
around the bottom half of the diagram. This is because the adhocracy is task- or project-
based and has to respond quickly and flexibly to changing demands. There is mutual
adjustment, and people demonstrate exceptional flexibility to change what they are doing
as a result of organisational change. These demands to change could be driven by external
triggers such as rapidly changing markets or by innovation, or an internal drive to do
something different (you will meet internal and external triggers for change in the unit
focused on Change). Formality is low, as the organisation changes practices and processes
based on a perceived change of need. Direct supervision and defined processes thus
become less important than in other organisational structures. Research and development
can be a primary driver of adhocracies, as typified by new technology industries, where
newly generated knowledge drives change. You can read about ten great start-up
pivots here.
If we were to relate the above structures to You can see, from the five structures above,
that each of them could be considered through the lens of the key structural questions
previously considered. We could consider how bureaucratic they are likely to be; the degree
to which labour is divided; what the lines of authority are, and so forth. As such, each comes
with its own advantages and disadvantages relating to that particular structural form. In a
later exercise, you will be asked to consider the opportunities and challenges presented by
each of these structural forms.
Mintzberg was, through this piece of work, also keen to show how organisations will often
pass through more than one of these structures as they go and change. In the upcoming
case of Innocent, you will be able to see some of these factors in play.
8 Common Structural Forms
8.1 Common Structural Forms (Discussion)
Organisational Method of
Key part of organisation Example
types coordination
Entrepreneur-led small
Simple structure Direct supervision Strategic apex
firm
Machine Standardisation of Large firm in
Technostructure
bureaucracy work processes manufacturing
Standardisation of Diversified multi-product
Divisional form Middle line
outputs firm
Standardisation of
Professional Large law or consulting
skills and Operating core
bureaucracy firm
knowledge
Operating core (with
Adhocracy Mutual adjustment e.g., a film-making firm
admin support)
Above, you have been given examples of some firms that fit each of Mintzberg’s five
organisational types, but can you think of other, specific companies that you know who
would? What about the companies that your families and friends work for? What about the
companies that you use every day, such as your favourite coffee shop, fashion label, your
property rental agency or your local gym? Can you find their organisational charts on their
websites, or can you make a good educated guess as to which structure they might have?
Can you find any confirming evidence anywhere?
9 Case Study: Innocent Drinks
9.1 Innocent Drinks: changing structure
Structure in Action: The Case of Innocent Drinks
As a company grows, it is likely to move from one organisation structure to another, and
face a range of different challenges. The case below draws in materials that relate to
structure and change, and presents the example of Innocent Drinks. If you are not familiar
with the company already, you can take a look at their website
here: https://www.innocentdrinks.co.uk/
Structure in Action: The Case of Innocent Drinks
As a company grows, it is likely to move from one organisation structure to another, and
face a range of different challenges. The case below draws in materials that relate to
structure and change, and presents the example of Innocent Drinks. If you are not familiar
with the company already, you can take a look at their website
here: https://www.innocentdrinks.co.uk/
Innocent Drinks Organisational Structure

The organisation started in 1998, when
three friends, Adam Balon, Jon Wright and
Richard Reed, attended a festival and sold
their homemade smoothies. They put two
At this stage, Innocent had only three
bins in front of their stands, with a sign
employees. They weren’t big enough to
above the stall saying ‘should we give up
have any formal organisational structure.
our jobs to make smoothies?’ One bin said
yes, one said no. More empty smoothie
bottles ended up in the ‘yes’ bin, and so
they quit their jobs to form a company.
They wrote their business plan eleven At this point, Innocent has owners and
times, and were turned down repeatedly by workers. It moves to what Mintzberg calls
the banks. They eventually found an ‘a simple structure.’
investor, and it took them nine more
months to come up with the name,
Innocent.
They sold their first three crates of

smoothies under the ‘Innocent’ brand in
April 1999, just across the road from where
they had their tiny office. It didn’t need to
be very big because it was still just a few of
them. A few months later, they employed
three more staff members.
They continue to expand, and get their first Innocent have thus made a key choice
supermarket trial in 10 branches of about where to set its boundaries. Rather
Waitrose. They go and buy their own than producing the smoothies in-house,
smoothies to ensure that they sell, and the they outsource to another manufacturer.
Innocent brand is rolled out across all This manufacturer is likely to have a
branches of Waitrose. The production of structure that is in line with Mintzberg’s
Innocent smoothies is outsourced, to machine bureaucracy, because they have a
companies with factories in places including large technostructure running the factory.
Wales and The Netherlands. Innocent are likely to be concerned about
the lack of control they now have over the
production process. However, because the
making of smoothies is a fairly
straightforward process (it could have as
few as three ingredients), quality and cost
assessments are likely to be relatively
simple.
A year later, Innocent are big enough to At this point, the principal-agent problem
move into larger premises in Shepherd’s will be becoming a bigger issue. It will be
Bush, London. They publish a recipe book, increasingly hard to monitor and control.
have an onsite test kitchen, launch delivery Innocent are well-known for having a
vans covered in fake grass, and they start a strong organisational culture and
charity, using 10% of their annual profits to encouraging work practices that are
do ‘good things’. They open satellite offices creative and autonomous. They appear to
in Dublin, Paris and Amsterdam. In 2006, operate under the idea that this is likely to
they reach 100 employees. create consummate cooperation and thus
reduce the agency problem. However, the
owners will be thinking carefully about how
they can measure the performance of the
satellite offices. They are likely to be using
RI, ROI and other measures to benchmark,
and to check how they are doing relative to
targets.
In 2009, Coca-Cola invests in Innocent. The relationship between Coca-Cola and

Initially, it is only an 18% stake. Then it Innocent appears to be quite
grows to 58% in 2010. And in 2013, Coca- ‘decentralised’: Innocent are being left to
Cola increase their stake to over 90%. The make their own day-to-day decisions. This
three owners stay on the advisory board, is likely to be in part because Coca-Cola
but stop the day-to-day running of the recognises the strong culture and huge
business. Both the Innocent website and amount of tacit knowledge that resides
the Coca-Cola website maintain the within Innocent. They are perhaps
position that Coca-Cola are quite ‘hands- conscious that they will undermine this
off’ in the running of Innocent, still culture, and thus undermine the brand, if
donating 10% of profits to their charity, The they become too involved. However, it is
Innocent Foundation. Coca-Cola presents likely that Coca-Cola will be monitoring the
itself as the ‘big brother’ in the relationship: performance of Innocent closely. They are
there in the background, but leaving likely to be using RI, ROI and other
Innocent to fight its own playground measures to benchmark, and to check how
battles. Coca-Cola already owns many they are doing relative to targets.
brands – some of which it has a closer
dealing with than others.
9.2 References
https://www.ft.com/content/0b01403a-7d0e-11e2-adb6-00144feabdc0
https://www.theguardian.com/business/2013/feb/22/coca-cola-full-control-innocent
https://www.innocentdrinks.co.uk/us/our-story#
9.3 Case Study Questions (Q)
Consider the following questions:
1. Should Innocent have kept the production of smoothies in house? Why/why not?
2. Why does a growth in size increase the need to measure performance?
3. Why do you think Coca-Cola chooses to let Innocent continue to run relatively
autonomously?
Case Study Feedback
1. In moving the production of smoothies to The Netherlands, Innocent are bound to be

worried about quality control. As soon as something is outsourced, quality control is
reduced. They do not have the same level of visibility over process. However, Innocent have
decided to do this to allow rapid high quality expansion, which would have been difficult
had they kept it in hour as they did not have the experience of manufacturing at scale. They
have no doubt chosen the factory carefully, and it is in their favour that smoothies have few
ingredients and are relatively easy to produce. On balance, you could have answered that
they should have done if they had a greater focus on quality and boutique production. But if
they wanted to expand and grow whilst maintaining quality, they would appear to have
made a good decision in outsourcing.
2. As a company grows in size, it becomes harder to see what is going on. The overview of
everything as an owner reduces because the hierarchy grows and the number of tasks
taking place in the organisation grows. It is hard to oversee everything. Therefore,
identifying metrics which provide a good measure of performance, and which the owner is
prepared to rely on, is critical. They are a way of monitoring from a distance, and can
provide a signal of things heading in the wrong direction, in order for them to be corrected.
However, measuring performance with numbers is not going to be sufficient alone, as the
numbers can leave out, or hide, a great deal.
3. Coca-Cola lets innocent run relatively autonomously because they have bought them for
their skill at producing well-branded, well-received smoothies. If Coca-Cola gets too
involved, they will risk turning them into a replica of themselves, and then they will not act
as a diversified business unit. Parent companies will have varying perspectives on how much
visibility, control and influence they would like to have over other businesses. But if the
brands of both are quite different, it can be important to maintain a distance so as not to
dilute or harm the brand or brand perception.
Summary
Both Mintzberg and Chandler surveyed the organisational landscape and found that
particular structural forms dominated. By categorising types of organisation, Mintzberg and
Chandler enable us to recognise the merits and demerits of a particular organisational
structure, recognising that any structure will be an ‘opportunity set’ (Willman, 2014) that
has an impact on what can and cannot be done by the firm. Despite recognising limitations
of each type of organisation they identify, neither Mintzberg nor Chandler equip us with
tools to think about how we might change the structure of an organization if we wish to. A
later unit picks up on this theme, exploring how an organisation might instigate and lead
change.
Block 14: Strategy & Strategic Management
Essential readings
Johnson, Whittington and Scholes, Exploring Strategy: Text and Cases (Harlow: Pearson,
2011). Chapter 1: Introducing Strategy. An introduction to what strategy is, what its purpose
is and key concepts in the field, such as strategic position, strategic choices and strategic
management.
Pearson, Chapter 9: Managing Strategy. A good summary of the strategy process. NB: you
will be covering key models in the upcoming units, so do not worry if you do not understand
it all right now. This reading should be giving you a sense of what strategic management and
the strategy process both entail.
Recommended reading
Boddy, D. (2014). Management, 6th edition. Chapter 8: Managing Strategy – Another view on
what strategy is from the perspective of the manager
HBR Ideascast episode on ‘Streamlinign your company’s
strategy’, https://hbr.org/podcast/2021/04/streamlining-your-companys-strategy This podcast will
provide a good introduction to the way that managers and management consultants talk
about strategy and what they are trying to achieve when they ‘do’ strategy. It’s very good
for covering the broad scope of what strategy is and can be.
Collis, D.J., and Rukstad, M.G., Can You Say What Your Strategy Is? Harvard Business Review.
Apr 2008, Vol. 86 Issue 4, pp. 82-90. Athens login required. Browse the online library's A-Z
of journals to find this article. This accessible journal article provides criticisms of strategy
in Blocks 12 and 13. Its key argument is that there is no point doing any work on strategy (or
HR strategy, or management science strategy, etc.) if workers aren’t able to verbalise it and,
as a result, act in line with it. Therefore, it’s a good overall criticism of the ongoing obsession
with strategy formulation (but not strategy practice) in much management literature and
practice.
https://hbr.org/2021/01/why-we-set-unattainable-goals - This article provides

guidance on setting sensible objectives
https://sloanreview.mit.edu/article/how-to-develop-strategy-for-execution/ - Ensuring that there is
a ‘fit’ between vision, organisation and so forth.
2 Introduction
2.1 Defining strategy and strategic management
Strategy, and the related concept of strategic management, are important topics to
managers. Whilst defining strategy precisely is difficult, the term is used to describe the
ways in which people decide how to organise major resources in order to enhance
performance of an organisation (Boddy, 2014). When managers do work that is labelled
strategic, they are usually undertaking activities which form a part of the strategic
management process. We can lay out this process as follows:
In this and the following units, we will be looking at the elements in the strategy process as
defined above. We will only touch briefly on evaluating results, however, as this will be
covered more extensively in the later unit ‘Performance Measurement’.
Managers of all levels are routinely engaged in work that can be labelled strategic. However,
the nature of this involvement will differ between those at different levels of the
organisation, and is likely to be related to different strategic elements as we descend the
hierarchy.
Corporate-level strategy: focused on the

overall direction of the organisation and how
to add value
Business-level strategy: focused on how

individual businesses can and should compete
in their particular markets
Functional strategies: concerned with how the

company elements (e.g., sales, marketing, HR,
IT, production) deliver effectively against the
corporate- and business-level strategies
Figure 2: levels of strategy, adapted from concepts in Whittington et al., 2020)

“Within organisations it is not just the preserve of top decision makers but middle and lower
level managers also have to understand their organisations strategic objectives and
contribute to them as best they can. Managers have to communicate strategy to their
teams, and will achieve greater performance from them the more convincing they are in
doing so. Because they are closer to the daily realities of the business, lower level managers
can be a crucial source of ideas and feedback for senior management teams. Being able to
participate in an organisation’s strategic conversation, engaging with senior managers on
the big issues facing them, is therefore often part of what it takes to win promotion.”
(Whittington et al, 2020: 18)
A top manager is likely to be focused on corporate-level strategy, and a junior manager on
the creation or execution of functional strategies. Managers at lower levels play a role at the
very least in making sure that strategies are executed.
However, as organisations increasingly devolve responsibility to middle- and lower-level
managers, they have a growing part to play in shaping the strategy. They are much closer to
the customers, the challenges, and the opportunities and so can be a critical source of
feedback, ideas and innovations for senior managers to listen to (Whittington et al, 2020). It
comes back to the idea that organisations should be willing and ready to give a voice to
employees across the organisation if they want to improve their effectiveness (Willman,
2014).
We can also see echoes of Mintzberg, Drucker and Garvin here.
Mintzberg sees managers as having leadership, as an entrepreneur and resource allocator,
again all of which clearly relate directly to aspects of strategy (Mintzberg, 1974). Drucker
(1973) suggests that key elements of the manager’s role should be to organise, set
objectives, and measure results. All of these speak directly to elements of the strategic
process. And Garvin talks about a manager having a clear strategy or vision for the team,
being a strong decision maker, and being results-oriented (2016). However you look at it,
managers of the late 20th and early 21st century have strategic work to do.
Alongside most managers in the organisation engaging in strategy, there are also specific
roles in larger organisations, and in consultancy practices, for those whose job it is to do
strategic planning and advisory work. For these people, their job is the strategy, rather than
strategic management being a part of their job (Whittington et al., 2020).
2.2 Where did strategy come from?
Whilst even the earliest factories were concerned with maximising value and plotting their
next moves, the field of business strategy in the form that we currently understand it did
not start to emerge until the 1960s.
All of the early approaches to strategy were characterised by the following.
Commitment to profit maximisation: the objective of strategy is to maximise long-term
returns and profits for the firm.
Separation of strategy conception from execution: senior managers are primarily concerned
to formulate strategies that others implement.
A prescriptive approach: for example, there are things that firms should and should not do.
In this sense, you can see how it was a natural development from the ideas that emerged
from scientific management and engineering approaches to management (Mintzberg et al.,
2005; Whittington, 2000). The idea was to take a rational planning approach to business, to
find the option that would maximise a firm’s profit, and then instigate strategies to allow
that to happen.
Today, strategy is a broader field, with a range of approaches which recognise that
businesses may not just have the objective of profit maximisation, but may have other
concerns instead, or alongside. For example, Tom’s shoes does not focus on profit
maximisation, instead gifting a pair of shoes to someone without a pair for every pair it sells.
Everlane’s business model is to provide more transparent pricing, reducing their profit
margin as a result.
You have also read already that many companies no longer see a distinct separation
between top managers undertaking strategy and junior managers and workers executing
this strategy.
And as you will see as you move through the next few units, the idea that there is one best
way to run a business in any circumstance is also challenged – with different models and
ideas suggesting competing approaches and businesses rarely aligning their strategy fully to
just one prescriptive model or approach.
The layout of the coming units
External
analysis
-Opportunities
Identify the Th t
Formulate Implement Evaluate
organisation’s
strategies strategies results
current
i i l Internal
analysis
-Strengths
W k
The upcoming units will tackle the strategic process in order, looking at:
• Mission, vision and values
• External analysis, primarily through the lens of Porter’s Five Forces
• Internal analysis, primarily through the lends of the Resource Based View
• Strategy formulation, looking at generic strategies, strategic direction and Porter’s
diamond
• Strategy implementation, looking at emergent strategy, who works with strategy,
and strategy practices themselves
By the end of the strategy units, you should have a good understanding of the strategy
process, what it entails, and how managers at all levels can and do contribute.
3 Strategy: Mission, Vision, Values & Objectives
3.1 What is Strategy for? Mission & Vision
A strategy should express a ‘clear and motivating purpose for the organisation.’
(Montgomery, 2008). This will likely include a profit-making purpose for companies, but will
not be limited to such. For all organisations – profit or not-for-profit alike – there should be
a sense of how the organisation makes a difference, and who they make that difference for
(ibid.).
There are typically four ways that companies define their purpose (Whittington et al., 2020):
Mission statement
Vision statement
Statements of Corporate Values
Objectives
We will cover the first two here, then break for a couple of exercises, and then return to the
points three and four in the subsequent notes.
Mission statement:
A mission statement sets out what an organisation is there to do. It usually expresses this in
terms that are simple and direct. The Ashridge College model suggests that a mission
statement should cover the following elements:
• Purpose – Why does the organisation exist? What does it aim to achieve for
• its stakeholders?
• Strategy – What resources, competences or strategy elements give the company an
advantage over its competitors?
• Values – What beliefs do owners, managers and employees share?
• Standards and behaviours – the policies and behaviours that underpin the
competences and value system
(adapted from Campbell’s Ashridge Mission Model, 1992)
Starbuck’s mission statement at time of writing was “To inspire and nurture the human
spirit – one person, one cup and one neighbourhood at a time.” (Starbucks, 2021). If we
look at this, we can clearly see:
• Purpose – they exist to inspire and nurture the human spirit
• Strategy – the resources they identify are coffee shops in neighbourhoods
• Values – they believe in the importance of nurturing and inspiring
• Policies – Making single cups of coffee in neighbourhood coffee shops allows them
to nurture and inspire individuals
Another way to get at why the company exists is to ask employees to start at a descriptive
statement of what they do and to keep asking ‘why do we do this?’ until you reach an
answer that reflects the deeper purpose. In their paper on the subject, Collins and Porras
use the example of workers in a gravel company realising that their mission is to ‘make
people’s lives better by improving the quality of built structures’ (Whittington et al., 2020,
citing the work of Collins and Porras, 1996).
Vision statement
This focuses on the future the organisation is looking to create. The question to ask is ‘what
do we want to achieve?’ (ibid.) At the time of writing, Coca-Cola had the following vision
statement:
“Our vision is to craft the brands and choice of drinks that people love, to refresh them in body & spirit. And
done in ways that create a more sustainable business and better shared future that makes a difference in
people’s lives, communities and our planet.” (Coke, 2021)
The purpose of a vision statement is to ‘enthuse, gain commitment and stretch
performance.’ (Whittington et al., 2020: 9).
In reality, many companies blend vision and mission statement, to create a combined
statement that they call the mission statement or vision statement regardless of its dual
function. This is because there is often little difference between the two. In fact, companies
may not need to be dogmatic about this difference in any case; the key function of one, or
both, is to create something that employees can stand behind, and that tells those outside
the organisation what matters here (Collins and Porras, 2016).
3.2 Evaluate Mission and Vision statements
Question 1: Analyse the Amazon mission statement using the Ashridge Mission Model:
We aim to be Earth’s most customer centric company. Our mission is to continually raise
the bar of the customer experience by using the internet and technology to help consumers
find, discover and buy anything, and empower businesses and content creators to maximise
their success.
Question 2: You will remember that Coke’s vision statement is

“Our vision is to craft the brands and choice of drinks that people love, to refresh them in
body & spirit. And done in ways that create a more sustainable business and better shared
future that makes a difference in people’s lives, communities and our planet.” (Coke, 2021)
In what ways is it trying to enthuse, gain commitment and stretch the performance of its
workers? Would it work for you?
Question 1 Feedback
• Purpose – they exist to help consumers find, discover and buy anything and
empower businesses and content creators to maximise success
• Strategy – the resources they identify are internet & technology
• Values – they believe in being the Earth’s most customer centric company
• Policies – continually raising the bar of customer experience
• You will remember that Coke’s vision statement is
• Enthuse – by linking the concept of the drink with making a difference in people’s
lives
• Gain commitment – a better shared future
• Stretch the performance of its workers – craft drinks that people love
Question 2 Feedback
• Enthuse – by linking the concept of the drink with making a difference in people’s
lives
• Gain commitment – a better shared future
• Stretch the performance of its workers – craft drinks that people love
3.3 Statements of corporate values & objectives
You will remember that there are typically four ways that companies define their purpose
(Whittington et al., 2020):
Mission statement
Vision statement
Statements of Corporate Values
Objectives
We have covered mission and vision statements already, and will now look at the latter two.
Statements of corporate values

These statements communicate what is important to a company and what they believe in.
They should describe core values which then guide the organisation’s strategy and how they
choose to do business and conduct their affairs.
To return to Starbucks, their values are stated as:
“With our partners, our coffee and our customers at our core, we live these values
• Creating a culture of warmth and belonging, where everyone is welcome.
• Acting with courage, challenging the status quo and finding new ways to grow our
company and each other.
• Being present, connecting with transparency, dignity and respect.
• Delivering our very best in all we do, holding ourselves accountable for results.
We are performance driven, through the lens of humanity.” (Starbucks, 2021).
Here, we are referring to core values, meaning that they hold for all employees at all times.
If the values that are important change based on the circumstances, then they are not core
values. Suggesting that everyone in a company should be innovative ‘except the
accountants’ suggests that these values are not core. Core values should trickle down from
the highest level of the organisation into everything that they do. For example, a barista at a
branch in North London should be creating a culture of warmth and belonging, just as the
CEO is focused on the same agenda in the work that they do.
Objectives
Objectives are specific outcomes that are to be achieved. Objectives are often financial, or
at the very least quantitative, for example:
• We will increase revenue threefold in the next eighteen months
• We will retain 25% more customers in the next five years
However, organisations are increasingly setting objectives that are not just driven by
quantitative business improvement, but are driven by making a contribution to society or
the environment. For example, in the case of Starbucks, they may have an objective to
increase the recyclability of their cups globally, to reduce the quantity of disposable cups
being sent straight to landfill. Coke state that they are actively looking to be a more
sustainable business, too, which may translate into their objectives.
A business will likely have one or more of these elements to provide direction, and to
provide a clear and motivating purpose. If business owners and their employees know why
the organisation exists and what it is trying to achieve, then a company can better begin the
strategy process, aware of what it is that their strategy work is looking to contribute
towards.
3.4 Objectives
Objectives are specific outcomes that are to be achieved. Objectives are often financial, or
at the very least quantitative, for example:
• We will increase revenue threefold in the next eighteen months
• We will retain 25% more customers in the next five years
However, organisations are increasingly setting objectives that are not just driven by
quantitative business improvement, but are driven by making a contribution to society or
the environment. For example, in the case of Starbucks, they may have an objective to
increase the recyclability of their cups globally, to reduce the quantity of disposable cups
being sent straight to landfill. Coke state that they are actively looking to be a more
sustainable business, too, which may translate into their objectives.
A business will likely have one or more of these elements to provide direction, and to
provide a clear and motivating purpose. If business owners and their employees know why
the organisation exists and what it is trying to achieve, then a company can better begin the
strategy process, aware of what it is that their strategy work is looking to contribute
towards.
3.5 Want to know your company values?
This opinion-piece by Bret Waters says that the best way to find out your company values is
to ask your team. Do you agree? Why/why not?
https://medium.com/startupsco/want-to-know-what-your-company-values-
are-ask-your-team-e7e12a338c
3.6 Use of mission, vision etc in not-for-profit organisations
Use of mission, vision, values and objectives in the charity and not-for-
profit organisations
The use of mission, vision, values and objectives extends into the charity and not-for-profit
organisations and many public service organisations also see a benefit to making a clear
statement of mission or vision, values and how these link to achievement of stated
objectives.
The UK Department of Health provides the following example:
Our vision is to provide world-class education, training and care for everyone, whatever
their background. It will make sure that everyone has the chance to reach their potential,
and live a more fulfilled life. It will also create a more productive economy, so that our
country is fit for the future.
Responsibilities
We are responsible for:
teaching and learning for children in the early years and in primary schools
teaching and learning for young people in secondary schools
teaching, learning and training for young people and adults in apprenticeships, traineeships
and further education
teaching and learning for young people and adults in higher education
supporting professionals who work with children, young people and adult learners
helping disadvantaged children and young people to achieve more
making sure that local services protect and support children
Our priorities
We’ll develop world-class education with the following principles:
ensure our academic standards match and keep pace with key comparator nations
strive to bring our technical education standards in line with leading international systems
ensure that education builds character, resilience and well-being
To be achieved through:
always remembering that in education and care, by far the most important factor is the
people delivering it – so we will strive to recruit, develop and retain the best
prioritising in all that we do the people and places left behind and the most disadvantaged
protecting the autonomy of institutions by intervening only where clear boundaries are
crossed
making every pound of our funding count
Read our single departmental plan to find out more about how we are performing against
our objectives.
Using this example, think about whether this covers all the elements you would expect to
see, and any differences you can identify in comparison to ‘for profit’ organisations.
Post your evaluation on the group discussion.
3.7 Post a mission/vision statement from a not-for-profit
organisation
Find a company, charity or not-for-profit organisation you like and post their mission
statement or vision statement (many organisations have only one or the other) on the
discussion group.
1. Analyse it using the Ashridge Mission Model.
2. If you were asked to improve it, what recommendations would you make?
Post your evaluations to the discussion group.
4 Strategy Quiz
Please attempt the quiz on the VLE
5 Summary
In this unit, you have begun to learn about strategy: what it is, who does it, and what it
comprises. In the next two units, you will expand this learning further, looking at specific
models that are used to understand strategic position, and to develop strategy.
Block 15: Strategic Analysis
Essential reading
2011).
Chapter 2: ‘Introduction’ and ‘PESTEL analysis’
Chapter 3: ‘Introduction’ and ‘Industry analysis’
Chapter 4: the whole of chapter 4.
These chapters introduce the key concepts that you will look at in this unit, including
PESTEL, Porter’s Five Forces, the Resource Based View and Dynamic Capabilities.
Recommended reading
Boddy, D. (2014). Management, 6th edition. Chapter 8: Managing Strategy. A summary of
strategic ideas aimed at the manager.
Pearson, Chapter 9: Managing Strategy. A good summary of the strategy process which you
should have already read for the previous unit. NB: you will be covering key models in the
upcoming unit, so do not worry if you do not understand it all right now. This reading should
be giving you a sense of what strategic management and the strategy process both entail.
Kiechel III, Walter. "The Management Century." Harvard Business Review, vol. 90, no. 11,
Nov. 2012, pp. 62-75. We’re suggesting you returnto this article again because you will now
be able to see how the idea of strategy fits into the broader picture of the management
century.
Porter, M.E. ‘The five competitive forces that shape strategy’, Harvard Business Review,
January 2008, pp.78–93. Browse the online library's A-Z of journals to find this article. This
article is an updated version of Porter’s original paper on the Five Forces.
Hales, G and Mclarney, C 2017. Uber's Competitive Advantage vis-à-vis Porter's Generic
Strategies. IUP Journal of Management Research, 16(4), pp. 7-22. This is one of many journal
articles which try to use Porter’s Five Forces to analyse an industry and in so doing, support
or critique the work of Porter. This article is quite supportive of the value of Porter in
analysing Uber, and therefore gives some interesting materials as examples for how to use
his theory. (NB: these are just one set of ideas on faults with the model – there will be
others who disagree or have other criticisms.)
Barney, J.B. Firm resources and sustained competitive advantage, Journal of Management
17(1) 1991, pp.99–120. This is a classic journal article on RBV and worth reading as it goes
into more detail than Block 13 is able to.
Barney, J.B. ‘Resource-based theories of competitive advantage: A ten-year retrospective on
the resource-based view’, Journal of Management 6(2001a), pp.643–50. This journal article
is a look back at the first ten years of RBV, seeing what a fundamental difference (or not) it
has made to the conception and practice of organisational strategy.
https://hbr.org/video/2226587624001/the-five-competitive-forces-that-shape-strategy - a
video of Michael Porter talking about his influential model
2 Introduction
2.1 External and Internal analysis: introduction
Once a company has an understanding of what its intentions are and where it is heading, it
can perform external and internal analyses. This is a way of understanding its strengths and
weaknesses (internally) and the opportunities and threats it faces (externally). It is a process
of establishing what the strategic position currently is and what it might be in the future.
There are countless tools available to perform internal and external analyses. The ones we
will consider here are far from comprehensive, but they are the most common and provide
an insight into the types of issues that other sorts of external and internal analyses might
also focus on and reveal.
2.2 Macro-environmental analysis: PESTEL
With regard to external analyses, key areas that need consideration are the opportunities
and threats that exist within the wider, ‘macro’ environment, and within the industry in
which the company is operating.
Macro-environment analysis
Organisations depend upon their macro-environments for their survival (Whittington et al.,
2021). In order to look at the factors which may be important to a business, we defined
environments in their widest sense. We thus include political, economic, social,
technological, and legal and ecological factors when we consider what is going on in the
environment. Large-scale environmental factors, or changes, can often seem too
complicated for managers to get a handle on. Issues can therefore sneak up on them until it
is too late to avoid the threats or opportunities that these issues pose.
Therefore, when we perform a macro environmental analysis, we are mainly seeking to spot
threats and opportunities so that we can minimise or seize them respectively. Therefore,
the model we will consider here, provides a way of categorising environmental factors
according to the six key types listed above: political, economic, social, technological,
ecological, and legal.
PESTEL analysis
The PESTEL framework is just one of many frameworks which organise environmental
factors into groupings. Within a PESTEL analysis, strategic analysts need to consider both the
market environment and the non-market environment. The market environment focuses on
those aspects of the environment which are involved in the economic activities in the
market in which the company or organisation in question is operating. This may include
customers, suppliers, and competitors. The non-market environment focuses on elements
which are not directly related to the economic activities of the market in which the
company is operating. They may, however, be loosely involved in such economic activities.
This may include government departments, campaign groups, the media, and non-
governmental organisations (NGOs). (Whittington et al., 2020).
Political
Legal Economic
PESTEL
Ecological Social
Technological
We will now consider each of the PESTEL elements in turn.
Political: the political aspect of the PESTEL analysis highlight the role of government and
other political factors and actors. In particular, this could include the role of the state, for
example as a regulator of businesses or even as a customer, supplier, or owner.
Economic: the macro environment is influenced by large scale, or macro, economic factors.
These will include exchange rates, tax rates, fluctuate in economic growth and so forth.
Understanding how issues such as exchange rates may impact the prices of supplies and the
relative price that foreign buyers are prepared to pay for products is an important aspect of
a PESTEL analysis.
Social: social factors can include demographics, geography, culture, and distribution of
wealth. These aspects of the society in which an organisation operates can have a significant
impact on supply and demand. They can also shape opportunities for innovation.
Technological: technologies are widespread and should be considered as such within a
PESTEL analysis. Key areas that a manager conducting a PESTEL analysis may want to
consider include new technology developments within and outside the industry in question;
typical research and development budgets; and patents which are relevant for the company
in question and its industry and related industries.
Ecological: here, strategic analysts are thinking about environmental issues and topics, such
as pollution, climate change, and environmental regulation. The impact of environmental
and ecological issues and therefore the need to consider them in a PESTEL analysis may be
based on how pressing they are; how seriously they are taken within the industry and
related industries; the personal values of the organization's leadership (whether these align
with the organisation’s values or not) and its organisational strategy.
Legal: Lastly, legal aspects cover a wide range including Labour laws, environmental laws,
consumer regulation, taxation, corporate governance rules, and competition law. Relaxation
of law can create new opportunities, but additional regulation on existing or new industries
can create fresh sets of challenges.
You can find a worked example of a PESTEL (or PESTLE as shown in the example) analysis in
the UK retail industry as at November 2020 here.
Advantages of a PESTEL analysis include its simplicity, and its focus on understanding the
wider business environment. It recognises the need for businesses to try to anticipate future
threats to be able to try to manage them, and future opportunities to try to exploit them.
However, it can be overly simplistic, putting complex data into six boxes and acting as
though that is sufficient. It can also be easy to generate too much data, and not be able to
see what is actually important. And, whilst it can reveal information that managers weren’t
aware of before, they can still overlook key issues that may not come to their attention
during the analysis. This problem can be compounded because having done the analysis,
managers can feel prepared for all eventualities, and as such, they can be complacent.
Therefore, macro-environmental analysis should be performed regularly, and managers
should aim to stay up to date with macro-environmental issues so that they can spot those
which could impact on their business. We will look at the idea of future thinking and trend
spotting in more detail in a later unit. When we do so, you will also engage with another
macro-environmental analysis tool: scenario planning.
For the moment, we will move on to look at the other element of external analysis: industry
analysis.
2.3 Industry Level PESTEL analysis for an industry of your choice
Carry out an industry-level PESTEL analysis for the airline industry, or for an industry of
your choice, using this template.:
Political
Political aspects to consider may include:
• Government policy
• Overseas political stability/instability
• Foreign trade policy & relationships
• Tax policy
• Employment laws
• Terrorism and military considerations
• Environmental laws
• Funding grants and initiatives
• Trade restrictions
• Fiscal policy
Economic
Economic aspects to consider may include:
• Economic Growth
• Interest Rates
• Exchange rates
• Inflation
• Disposable income of consumers
• Disposable income of businesses
• Taxation
• Wage rates
• Financing capabilities
Social
Social aspects to consider may include:
• Population growth
• Age distribution
• Health consciousness
• Career attitudes
• Customer buying trends
• Cultural trends
• Demographics
• Industrial reviews and consumer
confidence
• Organisational image
Technological
Technological aspects to consider may
include:
• Producing goods and services

• Emerging technologies
• Maturity of technologies
• Distributing goods and services
• Communicating with target markets
• Potential Copyright infringements
• Increased training to use innovation
• Potential Return on Investment (ROI)
Ecological
Ecological aspects to consider may include:
• The decline of raw materials

• Pollution and green house gas
emissions
• Promoting positive business ethics and
sustainability
• Reduction of their carbon foot print.
• Climate and weather
• Environmental Legislation
• Geographical location (and accessibility)
Legal
Legal aspects to consider may include:
• Health & Safety
• Equal Opportunities
• Advertising Standards
• Consumer Rights and laws
• Product Labelling
• Product Safety
• Safety Standards
• Employment Laws
• Future Legislation
• Competitive Legislation
Reflect on whether there are some aspects that are more difficult to evaluate than others
2.4 Industry Analysis
Industry analysis
We can think about any organisation as having different layers in its business environment.
You have already learnt about the microenvironment and engaged in macro-environmental
analysis in the form of a PESTEL analysis. We will now turn our attention to the industry and
competitor environments, in the form of industry analysis.
Industry analysis originates in the work of Michael Porter, who was for many years the
dominant academic in the field of strategy. He argued:
“The essence of formulating competitive strategy is relating a company to its environment.
Although the relevant environment is very broad, encompassing social as well as economic
forces, the key aspect of the firm’s environment is the industry or industries in which it
competes.”(Porter, 1980)
His research showed that some industries were more profitable than others, through a
combination of five forces. These five forces impact prices, costs and investment
requirements, and thus influence how easy it might be for a firm to earn a decent return in
that industry.
Threat of
new
entrants
Power of Competitive Threat of

suppliers rivalry substitutes
Power of
buyers
In detail, the five forces are as follows:

Threat of new entrants
These are factors which affect how easily a new player can enter the industry. The factors
include:
the need for economies of scale in order to be profitable
capital costs to enter the market
how restricted access is to distribution channels
the degree to which existing firms are benefited by subsidies and regulations
restricted access to essential inputs, such as raw goods needed to produce the goods
how loyal customers are to the firms already in the market
Competitive rivalry
Strong competitive rivalry lowers profitability, and occurs when:
there is low industry growth
there are many firms in the industry
market growth is slow
products are similar
exit costs are high
Power of Buyers
Where buyers look for lower prices or higher quality relative to the prices, they force down
profitability. Buyer power is higher when:
• buyers have lots of alternative sources of supply
• there are low switching costs for buyers
• the product or service is not deemed as essential by buyers
• buyers are motivated to seek lower costs because the product or service represents
a big yet essential spend to buyers
• buyers may realistically be able to produce the good or service in house
Power of Suppliers
When suppliers have more bargaining power, they drive up the cost of the goods and
services used by the industry in question to produce the goods or services for the industry.
Supplier power is higher when:
there are few suppliers
the cost of switching from one supplier to another is high
it is hard (or impossible) to substitute the supplier’s goods
the supplier could extend their business to compete in the industry in question
the customer is a small or infrequent purchaser
Threat of substitutes
Substitutes are products in other industries that can perform the same role or purpose as
the industry’s product or service. For example, coach travel may be a viable substitute to
train travel. Threat of substitutes is higher when:
buyers are willing to change their habits
buyers have low switching costs to the new category
the products or services deliver comparable or more reasonable benefits relative to costs
(c.f. Boddy, 2014; Whittington et al., 2020; Willman, 2014).
The greater the strength of the forces, the less profitable the industry is. The weaker the
forces are, the more profitable the industry is.
Firms will want the forces to be low in order for the market to have less competitive rivalry
and to be a more competitive place to play. A Porter’s Five Forces analysis always occurs at
industry level – never at the level of a company.
2.5 Industry analysis for Coffee Shop
Coffee Shop Industry in the UK
Prior to the global covid-19 pandemic, the popularity of coffee shops in the UK was
significant and growing. In 2018, the industry achieved a turnover of £10.1billion, growing
7.9% on the previous year (https://www.worldcoffeeportal.com/Latest/News/2019/UK-coffee-
shops-achieve-20-years-of-sustained-grow). At that point, there were 25,483 outlets, of which
8,149 were branded stores (e.g., Starbucks, Costa, Caffe Nero).
These trends point towards coffee shops overtaking pubs within ten years, in terms of
number of outlets and turnover, as the nation changes its socialising habits
(https://www.wholesalecoffeecompany.co.uk/blog/uk-set-to-have-more-coffee-shops-than-pubs-by-
2030/)
Branded coffee shops continue to seek out new outlets in a range of locations, including
high streets and out-of-town retail shopping. Their presence on the high street stands in
contrast to clothing and other high street retailers who have been forced to close their
doors recently (e.g., Topshop, Debenhams) due to falling sales and high property rent
charges.
Aside from this one third of the market is dominated by branded coffee shops, the
remainder is fragmented, with a large and broad range of independent traders who are able
to set up stores with minimal investment and only a small amount of training required.
However, coffee bean prices have fluctuated greatly in recent years, due to a handful of
factors including weather conditions, long-term increases in demand, and growing problems
including coffee rust fungus and climate change threats to pollinators
(https://www.forbes.com/sites/lanabandoim/2019/11/27/here-is-why-coffee-prices-are-going-
up/?sh=65e7eac810b1).
However, with the average customer more than willing to pay £2.70 or more for a cup of
coffee (the same price as it would cost to buy 100g of instant coffee that would make at
least 50 cups at home), there are high profit margins possible, as long as the coffee shops
can cover their staffing costs and rental overheads. Many coffee drinkers would argue that
instant coffee at home is inferior to the coffee they can buy from their favourite coffee
shop.
Requirements
Prepare a Porter’s Five Forces analysis for the coffee shop industry prior to the Covid
pandemic.
Feedback
The Porter’s five forces analysis needs to have been conducted at industry level – not
looking at an individual firm. Remember that the five forces model is always applied at the
level of industry.
Competitive rivalry
• The high number of coffee shops results in high competition.

• High fixed costs lead to high store rental charges which will increase ferocity of
competition as they have overheads to cover
• The industry’s good growth prospects will alleviate some of the pressure, as there is
a good number of customers to target.
Threat of new entrants

• Low costs of entering the market will make it easier for new entrants to set up
• There is some brand loyalty, which may be hard to displace and to gain a foothold
Threat of substitutes
• Spaces to socialise with drinks/food: pubs, restaurants, fast food outlets, other sorts
of cafés
• The need for a coffee or similar drink: instant coffee could be made at home; a
mobile coffee outlet may move near your shop, with small tables on the street
NB: it can be hard to establish precisely what is a substitute and what is inside the industry.
The best way to do this is to think about what the substitute offers that customers may visit
the focus industry to receive. Here, it’s spaces to socialise with drinks and food, as well as
the desire to drink coffee.
Power of buyers
• Easy to switch from one coffee shop to another, and switching costs are negligible
• Some brand loyalty slightly erodes the price sensitivity of customers and their
likelihood to switch. Choice of coffee shop can become force of habit. Preference
may be linked to range and type of food provided to consume with coffee e.g: lots of
vegan options.
Power of suppliers
• Employees (they are a supplier of labour) are low-skilled staff so they do not have
much power.
• Coffee growers appear to set the prices which are then passed on to the coffee
shops, suggesting that coffee shops do not have much power to set prices.
Governments may set minimum export prices, particularly if coffee is a key
commodity in their economy, for example, Ethiopia in March 2020
(source https://addisfortune.news/authority-sets-minimum-coffee-export-
price/).
Conclusion
• The market is a mixed bag; it is easy to enter but harder to gain a foothold. If a
foothold is gained, then assuming costs can be kept down, it is possible to make a
profit. The industry could be analysed, based on the evidence in the case, as
relatively attractive
2.6 Using Five Forces Analysis

For potential new entrants to an industry, they can ascertain how profitable they might
be. The conventional way this is done is in Figure 13.2. The axes are measured and positions
plotted; when the axes are joined, the larger the area, the more attractive the industry.
Threat of New Entrants
Threat of Substitutes Intensity of

Rivalry
Power of Suppliers Power of Buyers
For existing firms in an industry, it allows them to estimate the current profit possibilities in
the industry in question. They can also use the analysis to explore how they might change
the factors in the market to make it more profitable (Willman, 2014). A company could, for
example, look at how it can reduce the bargaining power of suppliers or buyers – either just
for them or for the industry as a whole. By showing buyers that their product is the market-
leader and available at a very good price, they may not be as exposed to the bargaining
power of buyers as other players in the market, for instance. They could build barriers to
entry, too – for example, Google’s search engine responses are a difficult barrier for a new
company that relies on online sales to overcome (Boddy, 2014).
Strategic responses may, however, include exiting the industry if they find it unprofitable
(or, in the case of a potential new entrant, being discouraged from entering at all).
Porter’s Five Forces and the idea of industry analysis that it ushered in, have been extremely
influential. However, it is worth mentioning several limitations, noted by a variety of critics.
Firstly, it is backward looking and reflective, providing only insights as opposed to
recommendations. We could say the same for PESTEL, and for the resource-based view
approach you are going to look at in relation to internal analysis. In a way, it seems an unfair
criticism, as these models are about reflection. However, you may ask why Porter did not
use his analysis of industry competitiveness to provide specific recommendations about
how to achieve improvements.
It also, increasingly problematically, assumes that bounded industries exist, distinct from
others. This is less and less true. Look at the publishing industry: should we include self-
publishing? Where do e-readers and their producers fit in? And, around the other way, how
do we classify companies as being in one industry, when increasingly they straddle many.
What industry would we put Amazon in? Tesla? Google?
Being able to identify a better strategic position is one thing, but being able to move the
company to occupy it is another. Organisations are complex entities, and it is not easy to,
for example, increase barriers to entry, reduce the bargaining power of suppliers, or the
threat of substitutes. If these were easy things to do well and get right, all firms would be
doing them. And finally, what happens when more than one company identifies a new spot
in the market that they would like to adopt, and a competitor identifies the same position?
What should happen then? The model doesn’t look at the dynamics of competition at all
(Willman, 2014).
One final area of oversight, but one which is significant for the work that we are going to
turn to next, is that Porter’s Five forces focuses so entirely on industry factors. As you have
just learnt, in treating companies as though they are chess pieces that can be moved around
to a different industry position, they are neglecting the complexity that is inside them,
which may make them more or less able to adopt a particular industry position. The
combination of resources, processes, people and culture that the firm is comprised of is
designed to operate in their current position in the market. It is not just a case of moving
them elsewhere – this ‘bundle of resources’ is central to the firm’s approach to the market
and how they are known to be. In overlooking this, Porter makes it sound far too simple to
move the organisation around. We need to take what goes on inside a company much more
seriously – factoring in what they do and how they do it. We have thought about the
opportunities and threats of the macro-environment and the industry that it is in; but we
need to consider more seriously the strengths and weaknesses inside the firm.
3 Using Five Forces Analysis
3.1 Using Five Forces Analysis
How might a manager use the information generated in a Porter’s Five Forces analysis to
improve its business?
You will need to develop a scenario outlining what the analysis indicates, and then how the
manager might act on it eg: supplier power is strong. Make links to topics you have
covered, to build your ability to synthesis information from different parts of the course.
4 Looking Inside the Firm
4.1 Inside Analysis
We have seen, through the macro environmental analysis and through the industry analysis
that the external environment provides a range of opportunities and threats for a business
and therefore its managers to deal with. However, in exploring the criticisms of Porter's five
forces, we have recognised that the internal environment of a company needs to be
considered too. you will be able to see, by considering the supermarket industry in your
own country, that supermarkets are far from standard. Some are more successful than
others. It is often not their characteristics of an industry environment which explain the
differences in performance of companies within that industry, but rather differences in
organisational resources and capabilities. Variations between companies in the same
industry and how they vary in the resources they have, and how they use those resources
will affect their success.
An internal analysis provides important information about a firm or organisation’s resources
and capabilities. “An organisation’s resource are its assets - financial, physical, human, and
intangible - that it uses to develop, manufacture, and deliver products to its customers.
They’re “what” the organisation has.”(Robbins and Coulter, 2021: 256). An internal analysis
should be able to identify organisational strengths and weaknesses.
Where resources are what a company has, capabilities are what a company does. Resources
and capabilities are typically related as the table below shows:
Resources: what we Capabilities: what

have we do
Machines, buildings, Physical Ways of successfully
raw materials, utilising machinery,
patents, databases, efficiency,
computer systems, productivity,
flexibility, marketing
vehicles
balance sheet, cash Financial ability to raise funds
flow, suppliers of and manage cash
funds flows, debtors,
creditors, etc.
managers, Human how people gain and
employees, use experience,
partners, supplier skills common
relationships, knowledge, build
customer relationships,
relationships motivate others and
innovate
Table adapted from Whittington (2021: 96)
This focus on the internal resources of the firm was initially proposed by Penrose (1959).
She maintained that firms can create economic value not due to mere possession of
resources, but due to effective and innovative management of resources.
“Unused productive services are, for the enterprising firm, at the same time a challenge to
innovate, an incentive to expand, and a source of competitive advantage. They facilitate the
introduction of new combinations of resources – innovation – within the firm.” (Penrose,
1959, p.85, c.f. Willman, 2014)
Penrose developed the idea that all firms have slack, or unused resources, that these
offer value-creating opportunities if recognised and exploited by managers.
These ideas were developed within the strategy discipline by Barney (1991) and became the
resource-based view (RBV) of the firm.
For Barney, resources are the tangible and intangible assets that a firm controls, which it
can use both to conceive of and to implement its strategies. They are of different types –
they can be financial, physical, human and organisational. He distinguishes capabilities – a
subset of the firm’s resources which are the assets that enable a firm to take full advantage
of the other resources it controls.
The resource-based view is a model that looks internally, arguing that sustained competitive
advantage requires unique resources and capabilities within the firm. Such resources might
include technological skills, teamwork capability, business processes, leadership, innovation
and organisation culture, as well as the sorts of factors in the table above. This is not a
conclusive list and managers may find, when analysing their own organisations, that
something else appears as a relevant resource.
4.2 VRIO Analysis
The essence of this approach is exploiting difference: the idea that apparently similar firms
may possess different bundles of resources which give them their essence and allow them
to compete.
For difference (often labelled heterogeneity in relation to RBV) to persist, the differences
must be Valuable, Rare, Inimitable (hard to copy) and Organised (VRIO).
For a resource to be valuable, it must create a product or service or value to customers
which allows the organisation to respond to opportunities or threats in the environment.
For example, it is no use for a company to have a resource that allows them to create only a
product or service that customers are not interested in or do not place any value on. It's also
important for the resources to be able to address opportunities and threats in the market
and the wider environment. For example, the UK bookstore Waterstones is able to compete
with online retailer Amazon because of the quality of its bricks and mortar book stores with
curated selections, expert booksellers, and an environment which customers appreciate,
stimulates sales. Additionally, the product or service needs to be provided at a cost that
allows the organisation to generate sufficient revenue and profit in order to survive and
hopefully thrive.
For a resource to be rare it needs to be possessed by only a few organisations in an industry,
well ideally only one. Common resources allow competitors to copy innovations quickly, but
if a resource is rare, competitive advantage is longer lasting. Patents and copyright help
companies to maintain rarity. Strong brands also create rarity, as only that company’s
product is perceived to fill the needs of the customer. Prime locations, staff capabilities, key
industry web addresses (such as www.diy.com) and business processes developed
overtime are all other examples of rare resources. Not everyone in the industry has them.
For a resource to be inimitable it must be difficult to copy. Inimitable resources and
capabilities are those that it is hard for competitors to imitate or substitute, either due to
the difficulty of doing so or the cost. Generally, it is unusual for competitive advantage to be
able to be explained by tangible resources in organisations, because generally speaking
these can be acquired (reducing rarity) or copied (reducing inimitability) over time.
However, capabilities in management, leadership, and so forth, can be much more difficult
and more expensive to imitate. Therefore, we could see how an IT system itself would be
easy to imitate. However, the capability to operate that system, to manage it, and to fully
deploy it would be far more difficult to imitate (Whittington et al., 2021).
There are three criteria that make resources and capabilities inimitable:
Complexity
What resources and capabilities are complex and involved lots of interlinkages, then it can
be really hard to imitate them. an example would be a furniture company with a strong
customer focus. This may not come just from the sales department, or the customer
services department, or production having a really good understanding of the customer’s
requirements for their furniture. It may instead come from the connections, the linkages
and the complexity of these elements taken together. Partnerships with other organisations
can also add complexity which it is hard to replicate. Apple has many links with app
developers, music labels, and even with Samsung who provide the high-tech glass for their
phone screens (an example of competitors becoming coopetitors in some parts of the
supply chain).
Causal ambiguity
It can be hard from an outside perspective for a competitor to identify that causes and
effects which underpin an organization's success. What has led them to where they are? If
you cannot figure out what has caused what, then as a company, you cannot attempt to
copy it. Rivals cannot replicate or reverse-engineer the resource. It is relatively easy to
reverse-engineer a physical device, it can be bought and taken apart to identify components
and how they connect, but this is much more difficult for less tangible processes. For
example, with Amazon, they made a number of wrong steps on their route to the Kindle.
Which of these were key to the success of the eventual device? Which need to be
replicated, and which can be ignored? These steps may not even be detectable to an
outside observer.
Culture and history

Rivals cannot replicate the historical sequence of events that a company has followed to
develop a resource. They have happened at a particular point in time, have led culture to
develop in a particular way, and will mean that the resource’s value is deeply embedded in
the culture and history of the firm. Many firms look to industry leaders and think, ‘we would
like to have their culture’ – recognising that it provides a great platform for that other firm
to exploit their resources. However, companies are often forced to recognise that they
cannot develop the same culture as they are a very different firm with a different history
and it would not work.
Organised
And finally, a company must be organised to take advantage of resources and support
capabilities. For example, the organisation’s structure, formal processes, control systems
and management must be organised in a way that supports and facilitates the maintenance
and, where relevant, further development of resources. Without this element, some of the
value of the resource will be lost.
The VRIO framework can be laid out graphically as follows:
Note how, as you move up the diagram, what the resource can give you becomes better. If a
resource isn’t even valuable, then you have competitive disadvantage. If it is valuable but
not rare, it leads to competitive parity, and so on. It is only when a resource is
valuable and rare and inimitable and organised that sustained competitive advantage
can be achieved.
However, a focus on internal capabilities can mean that important changes in the business
environment are not explicitly evaluated. It may be that being organised means that
horizon scanning, awareness of competitor activity and keeping in line with regulatory
changes are part of the organisation’s overall capability. There is no detail in the VRIO model
to ensure the external view is incorporated – what it means to be organised depends on the
organisation itself.
4.3 Reflection on identifying resources and capabilities
It can be difficult when looking at resources and capabilities to ascertain precisely where the
advantage lies. Is it in an IT system or the management of the IT system, or in the way that
the IT system allows the firm to codify knowledge?
Think about a place you have worked or studied, can you identify three resources or
capabilities the organisation had. Evaluate each of them using the VRIO framework. Can you
identify which of them would deliver sustained competitive advantage?
Post your thoughts on the discussion group.
4.4 Dynamic Capabilities
Barney’s idea that firms with similar resources might be organised differently and that this is
what can provide competitive advantage. However, these resources cannot be sustained
indefinitely. The market changes, and they will need to change. Competitors figure out how
to copy or better the resources. Organisations need to have the capacity to change. Teece et
al. (1997) developed the dynamic capabilities approach, where a dynamic capability is an
‘organisation’s ability to renew and recreate resources and capabilities that meet the needs
of changing environments.’ (Whittington et al., 2021: 116).
Teece suggests that there are three generic dynamic capabilities:
• Sensing, where organisations and their employees look for, analyse and exploit
opportunities in the market and more broadly. The UK supermarket industry sensed
the threat from online supermarkets.
• Seizing, where organisations address the opportunities they have sensed. This could
be the launch of new products or services; the use of new processes; or undertaking
new activities. UK Supermarkets such as Tesco seized the opportunity to launch their
own online supermarket.
• Reconfiguring, where renewal and reconfiguration of the business needs to take
place in order to take advantage of the new opportunities. In the UK, Tesco added
‘Stores’’ to their property portfolio, which were essentially warehouses where order
fulfilment staff would shop on behalf of customers who had placed orders online.
Whether these actions are sufficient for traditional supermarkets to survive the online retail
space which is increasingly dominated in the UK by online-only players, such as Ocado, or
whether they will need to undertake further ‘sensing, seizing and reconfiguring’ if they are
to survive remains to be seen. It appears the picture is similar in Europe and the US, too.
4.5 Applying internal analyses
Internal analyses, such as the Resource Based View and the model of dynamic capabilities
add a useful dimension to strategic analysis. In parts of the literature, Porter’s Five Forces
and the Resource Based View are assessed as alternative ways of doing strategy and often
presented as diametrically opposed. However, they are better viewed as complementary in
presenting different perspectives on the questions of who a company is, what they do, and
how they make money. The competence approach tends towards the conclusion that
industry does not matter at all, since products flow from competence application. In
contrast, Porter’s Five Forces suggests that industry is almost all that matters. The analyses
work well together, each offsetting the other’s weaknesses.
The internal view has much more value than Porter’s Five Forces or PESTEL when used with
companies that are not defined by industry boundaries. A manager would struggle to
analyse Amazon’s industry using Porter’s Five Forces or PESTEL, because Porter’s Five Forces
can only handle one industry at a time, and a PESTEL would become unwieldy if conducted
across multiple industries. Resource Based View can provide an organisation-level analysis
in a way that the external tools of analysis could not.
Internal analysis recognises the value of resources for a firm, and encourages firms to focus
on gaining and sustaining resources that appear to have value to them. It provides a recipe
for companies to follow when they are trying to ascertain what it is that makes them
attractive, or not, to customers.
Some have questioned whether anything original is being offered because surely this is just
saying that firms survive when they are good at what they do in a way that no other
companies are, because customers choose to shop with them over others (Amit and
Schoemaker, 1993).
Also, it reflects the idea that competitive advantage must be built and nurtured, where
Porter’s Five Forces treats competitive advantage as a one-shot move (Willman, 2014).
Success, under the RBV, depends on continuous renewal of advantages through
management activity (being organised to take advantage).
However, it can be difficult when looking at resources and capabilities to ascertain precisely
where the advantage lies. Is it in an IT system or the management of the IT system, or in the
way that the IT system allows the firm to codify knowledge? And is it because of the IT
system, or is the firm just very good at codifying knowledge because it was founded by an
ex-teacher and the idea of transmitting knowledge is at the heart of its culture?
RBV and the concept of dynamic capabilities also have the limitation of being tools that try
to make retrospective sense of success. It can be very easy to suppose, in hindsight, that you
have worked out what led to success. We could look at Amazon and say that it was Bezos’
dogged belief in being an ‘Everything Store’. Or we could say it was the people he hired, or
his reliance on data, or his desire to be totally customer-centric. We won’t ever really know.
If we are a manager in a company and we are assessing our own resources, we can only
hope that we understand what it is that is driving success. But of course, our perspective will
be just one interpretation of the facts. It will not provide us as managers with specific
guidance on how to increase the VRIO qualities of our resources.
4.6 HRM activities and VRIO
Thinking back to the Human Resource Management unit, you were introduced to Ulrich, and
the three core activities that he suggests the HR department can undertake.
• Shared Services
• Centres of expertise
• Business partnerships
Select an example practice from each type of core activity and evaluate whether this can be
considered Valuable, Rare, difficult to Imitate and whether the activity would enable the
organisation to be organised to exploit these capabilities.
Which of the core activities do you think is most aligned with providing sustained
competitive advantage to the organisation, if any?
Post your thoughts to the group discussion
6 Strategic Analysis Quiz
Please attempt the Quiz on the VLE
Conclusion
To this point, we have covered three major elements in the strategy process:
In this most recent section, we have explored methods of internal analysis. If we pair these
with external analysis at the level of industry and the macro-environment, we gain a
relatively well-rounded view of the firm’s environment. As a result of this, and in
combination with the mission, goals and stated objectives of the firm, the firm can begin to
make strategic choices, formulating strategies that fit with its mission, vision, values,
objectives, opportunities, threats, strengths and weaknesses. We will pick up on this in the
subsequent sections.
Block 16: Strategy Formulation & Implementation
Essential readings
2011). Chapter 7, Introduction and Generic Competitive Strategies – introduces Porter’s
Generic Strategies
Chapter 8, Introduction and Strategy Directions – Introduces Ansoff’s matrix
Chapter 13, Introduction, Deliberate Strategy Development and Emergent Strategy
Development – Introduces the contrast between deliberate and emergent strategy
development
Mintzberg, H. and Waters, James, A. (1985) Of Strategies, Deliberate and Emergent. Strategic
Management Journal 6(3) pp. 257-272. This article is an easy-to-read summary of Mintzberg’s
research into deliberate versus emergent strategies.
Rouleau, L. (2013). Strategy as practice research at a crossroads. https://www.cairn.info/revue-
management-2013-5-page-574.htm This article is complex at times, but the opening couple of
pages provide a nice summary of what strategy as practice research is interested in and
what its contribution is to our understanding of what strategy is and what managers are
doing when they say they are doing strategy.
https://www.forbes.com/sites/jordandaykin/2018/11/06/growing-and-expanding-your-
business/?sh=90e2d94d6a60 – an opinion piece on the value of Ansoff’s matrix, but useful
because it is packed with examples of companies who have used the four different
approaches.
https://hbr.org/2016/05/a-simple-way-to-test-your-companys-strategic-alignment - useful article on
how to test if your strategic fit is working.
https://sloanreview.mit.edu/article/how-to-develop-strategy-for-execution/ - Ensuring that there is
a ‘fit’ between vision, organisation and so forth.
Whittington, R. (1996). Strategy as Practice, Long Range Planning. 29(5), pp.731 – 735.
A short and to the point summary, presented within a journal but not itself a journal article,
that identifies the development of the ‘Strategy as Practice’ approach covered in this Block.
https://hbr.org/podcast/2021/04/streamlining-your-companys-strategy - this podcast covers all the
major strategic bases, in terms of the strategic process and strategic management, giving a
good insight into how people talk about strategy and what senior managers care about
when they do strategy.
Pearson, Chapter 9: Managing Strategy. A good summary of the strategy process which you
should have already read for the previous unit. This reading should be giving you a sense of
what strategic management and the strategy process both entail.
2 Formulating Strategy
2.1 Formulating Strategy
Formulating strategy
Once a company has ascertained its mission, vision, values, objectives, opportunities,
threats, strengths and weaknesses, it can begin to explore the strategic choices open to it, in
order to formulate strategies which fit the aims of the organisation.
Strategic choices relate to the analysis of strategic position. You have already explored ways
in which strategists can understand the macro environment, The industry environment, and
the internal resources environment. Having explored these issues, you now have a
foundation for considering strategic options and for thinking about which strategies may be
suitable for a business or to formulate. However, the question of a company’s position, and
the strategic choices that it can make have a heavy overlap. A leader may ideally want to set
a vision, see where they currently are, work out where they want to go, and then make a
strategic choice on that basis. However, leaders may also revisit the vision as a result of
analysis, or when making a strategic choice realise that more analysis needs to be
undertaken.
Therefore, when you are contemplating strategic choices as a manager or as a student on
Core Management Concepts, your choices are likely to feedback into your initial analyses of
strategic direction and position and perhaps change those as a result.
3 Competitive and Corporate Strategies
3.1 Business strategies
Business strategies focus on how to compete in a market. For example, a coffee shop will
have to make choices regarding product offering, interior design, and prices in light of its
own mission, local competition from other coffee shops, and an understanding of its
strengths, weaknesses, opportunities and threats. In a large company, this may require a
separate approach for different business units. For example, in the case of Inditex, the
company who owns Zara, Massimo Dutti, and Bershka amongst other brands, a separate
business strategy, in keeping, but distinct from the overarching corporate strategy, will be
necessary for each of the separate business units. In order to explore this further, we will
look at just one model which poses four generic competitive strategies, originated by
Michael Porter (1985).
Generic competitive strategies

Porter’s generic strategies take the stance that sustainable competitive advantage arises
from the selection of a generic strategy which best fits the organisation’s environment. He
suggests that the business should then be configured to take thorough advantage of the
generic strategy chosen.
Porter proposes that there are two fundamental means by which a company can achieve
competitive advantage. It can either have lower costs than its competitors. Or it can have
products and services that are differentiated from those of its competitor in ways that
customers value to such a degree that it allows the company to charge higher prices, to
cover the additional costs of the differentiation process. Porter argues that businesses have
a further choice to make: whether to focus on a narrow segment of customers, for example,
a particular demographic group such as the under 40s. Or to take a broad approach, such as
Skype where they target customers across a range of different demographic characteristics,
aiming to appeal to a number of different age groups.
The combinations of low cost versus differentiation and broad target versus narrow target
combined to form four different generic strategies: cost leadership, differentiation, cost
focus, and differentiation focus.
Cost leadership strategy

A cost leadership strategy is adopted by an organisation seeking to be the lowest cost
producer in the industry. For example, Ryanair are ruthless in their pursuit of providing
lowest-cost flights to consumers.
Whittington et al. (2020) identify four cost drivers that help a business to pursue a cost
leadership strategy, often done in combination to achieve maximum benefit:
• Input costs include labour or raw materials. You have explored these in some detail
in earlier units. Companies looking for low cost labour often seek cost savings by
offshoring production of some or all elements of their products or services. They
may also achieve it using flexible part-time contracts that only employ staff when
needed at minimum rates.
• Economies of scale look at how higher production levels generally decrease the
average costs of producing each unit. Again, you have looked at this in earlier units,
such as in relation to structure.
• Experience is a key source of cost reduction. The more experienced a company and
its staff are at producing a good or service, the cheaper they will be able to do it. The
reasons are the gain in labour productivity as staff learn to do things quicker and
cheaper, reducing overtime.
• Product and process design also influence cost. Efficiency can be designed in to a
product or service. For example, McDonald's design their kitchens to be highly
efficient workspaces. They use specialist equipment, such as a specific ketchup
squirter with six holes which enables optimally fast application of ketchup to a
burger (and ensures standardisation at the same time). You have learned about the
cost savings that can come from using the best tools for production and managers
improving process design in relation to Taylorism in an earlier unit.
Differentiation strategy
A differentiation strategy is adopted by a company looking to create tangible and intangible
product features that the customer is willing to pay more for. It involves uniqueness of
product or service in a way that is sufficiently valued by consumers to allow the company to
charge a premium price. For example, BMW in the automobile industry, Apple in the
smartphone industry, and Four Seasons in the hotel industry all differentiate themselves
sufficiently to charge a price that is higher than a cost leader would be able to charge. It is
not that all companies pursuing a differentiation strategy are at the top of that market with
regards to luxury, but rather that they provide tangible and intangible product features that
at the price charged the customer is prepared to pay for. So in the case of the automobile
industry, even brands such as Audi, Ford and Skoda charge more than a cost leader would,
what they offer a range of features that a customer is prepared to pay a premium for.
There are three primary differentiation drivers for companies to consider (Whittington et
al., 2021):
• Product and service attributes, where a product or service provides better or unique
features then comparable products. For example, the iPhone makes use of superior
technologies and design to attract customers.
• Customer relationships also provide a differentiating factor. The perceived value can
increase through after sales services, customer engagement, and high quality
distribution and payment services. Marketing and reputation also add to the
perception from customers that there is a strong relationship between themselves
and the company.
• Complements, which build on links between other products and services, can mean
that the perceived value of products can be enhanced when consumed with another
related product or service which complements the original product in comparison to
consuming the product on its own. Apple do an exceptionally good job of making use
of complements by encouraging iPhone users to make use of Apple music, Apple TV
and a range of Apple-only applications.
Focus strategy
A focused strategy utilises either cost leadership or a differentiation strategy to target a
narrow profile of market segments. This is also sometimes called niching. By taking a focus
strategy, a company targets a narrow segment and tailors its products or services to the
needs of that segment whilst ignoring others.
Cost focusers pick on areas where broader cost-based strategies struggle because it is hard
to satisfy a wide range of needs at the price. In the UK, supermarket Iceland which focuses
on frozen goods is able to take a cost focus strategy because it reduces the costs of having
to stock a wide range of goods and instead focuses primarily on frozen goods and
complements to those frozen goods. (Whittington et al., 2020)
Differentiation focusers look for specific needs that broader differentiators cannot meet.
Focusing on a specific or particular need allows specialist knowledge to develop and a strong
commitment to serving a small niche can improve brand recognition within the smaller
customer base as well as the loyalty of those same customers. An example would be a local
bookshop which knows the demographic in its neighbourhood well and is able to service
their needs, often knowing individual customers and their tastes.
3.2 Application of Porter’s Generic Strategies
As a firm, Porter’s generic strategies provide a reassuringly straightforward model to apply
to a business. By making two key choices, based on cost and size of target market, a
company arrives at a space in which to compete and a sense of how to compete when
there. In recognising that cost versus differentiation is a key choice that businesses need to
make, the model helps us to look at the competitive landscape in most industries afresh.
However, it is also problematic in its simplicity. In each market, cost leadership is available
for only the few, and for all the others, there is work to be done in terms of working out
what differentiation looks like for them. You may make this decision as a company, but then
have little sense of what comes next. Recognising, however, that you need to find a level of
service or quality of product that allows you to justify the price is a useful reminder. It is
again returning us to the notion that companies can only extract money from their
customers when they are providing something that the customers perceive a need or want
for and look to fulfil it.
This is just one example of a tool which can be used by a company to ascertain how they will
compete in their market. There are plenty of others, and a company seriously exploring this
topic would use a range, not just limit themselves to Porter’s Generic Strategies.
3.3 Corporate Strategy
in the previous section, you looked at how a business unit may adopt a strategy which helps
it understand how to compete in its market. We refer to this as competitive strategy. In this
section, we widen the lens to consider corporate strategy. Corporate strategy looks at how
an organisation as a whole adds value through each of its businesses. For example, in the
case of Amazon, they would consider how online retail, prime membership, Amazon prime
TV, Kindle sales, Amazon Web Services, and smart device production add value at the
corporate level.
Again, we can use a model based on a quadrant here called Ansoff’s matrix, which looks at
the choices available to an organisation regarding diversification of its existing products or
markets served.
It considers how existing or new products may be taken into existing or new markets,
creating four distinct corporate strategies as a result.
Market penetration
Market penetration occurs when a company focuses on increasing the share of current
markets with the current product or service range. for example, a sofa company may seek to
sell a higher number of units in existing markets through a holiday promotion.
Market penetration can be made possible through competing on price, increasing

advertising or spending more on sales promotions. For example, a breakfast cereal company
may advertise that they have reduced the sugar in their cereal by 30% to try to win a
proportion of customers from competitors in the space. The implications of market
penetration are that it could lead to greater market strength and better economies of scale.
however, it does not increase diversification in any meaningful way.
Product and service development
Product and service development occurs when organisations deliver new products to
existing markets. The degree of diversification can vary, for example only requiring small
modifications to Apple technology to move from the iPhone to the Apple Watch
(Whittington et al., 2020). More extreme would be to offer an entirely new product to an
existing market. For example, Kellogg's offering cereal bars when it had conventionally only
made cereal. Key ways to achieve product development include investing in research and
development and considering how to make use of existing distribution channels. For
product development to succeed the business should already have a good sense of who
their customers are and what they desire. The biggest risk here is that product failure may
damage the original brand.
Market development
Market development occurs when existing products are offered to new markets, with these
new markets typically being new geographical markets or new market segments. Companies
can make use of new distribution channels to reach new market segments, for example a
brewery shifting to selling direct to consumers instead of going via a traditional retail
channel such as a supermarket. In this space, because the market is new, market research
may be required to overcome the lack of market knowledge. In addition, customer
awareness may need to be generated in the new market through marketing initiatives.
Diversification
Diversification seeks growth in new markets and with new products, too. Diversification can
take 2 forms: related or unrelated diversification. You will recall that we considered
diversification in relation to organisational structure. To recap, related diversification
involves integrating activities in the supply chain or leveraging technologies or existing
competencies. In other words, related diversification is a form of diversification where
businesses expand their offering in ways connected to what they already offer. For example,
a company manufacturing heavy engineering vehicle sensors recognises an opportunity to
expand into car sector because of new regulations requiring tyre sensors on all new vehicles
in Europe.
Unrelated diversification occurs when there is no common thread between the Corporation
and the new business unit. We have looked at this in Organisational Structure, considering
the examples of Virgin and Berkshire Hathaway.
A note for the exam: You should aim to connect what you learned in strategy units with
structure units with regards to diversification. A question on Ansoff’s matrix would expect
you to be able to talk about diversification extensively by drawing in your knowledge from
the organisational structure unit.
3.4 Happy Cola: using Ansoff 's matrix
Happy Cola
Happy Cola was formed in 2017 by two friends who met at work, Bobbie Connolly and
Casper McSean. They used to brew cola to share with their friends, just for fun, but one day
a colleague asked to be their first investor and gave them £10,000 to start it as a business
enterprise. They decided to make the product organic and fair trade as well as using Stevia
to make it low in sugar.
They met with success quickly, and were awarded a contract to sell their product in the food
hall of a high-end department store with branches in London and Manchester.
As the product’s popularity grew, they were asked by a large pub chain, with pubs mainly in
rural and small town settings, if they could supply them, too.
In July 2018, they decided to advertise in Vogue, recognising that fashion-forward readers
may appreciate the low sugar drink.
Bobbie and Casper have also decided to capitalise on this event by investing in developing a
new website, to allow customers to order cola direct from them. They were inspired by the
success story of Brewdog, the beer company who had recently done the same. This sort of
approach tends to appeal to younger consumers than the market segment who currently
drink Happy Cola.
They have also decided to introduce a ‘hard’ version of the drink, cut with premium vodka.
They are assuming that it will be popular with their loyal consumers as well as helping them
to reach a new, younger market. In particular, they plan to sell it to festivals and concerts,
where pre-mixed drinks in cans are popular.
Use Ansoff’s matrix to explain how Happy Cola has expanded. Would you recommend any
further expansions to the company at this stage?
Feedback
Hopefully you spotted that the company have used:
Market penetration
Advertising in Vogue allowed them to penetrate the existing fashion-forward older market
Product development
Creating the new, ‘hard’ cola allows the Product development involves selling new products
to existing customers.
It also may allow them to reach new, festival and concert-going customers.
Market development
Moving into the pub market from the department store was a market development.
They have not used diversification, although they may choose to in the future. An example
of a related diversification may be selling snacks that go well with their drinks, or making
glasses to keep the drinks cold.
Unrelated diversification could be almost anything else. Happy Cola would only want to
consider unrelated diversification if this fitted with their expansion plans and their broader
strategy.
3.5 Application of Ansoff’s matrix
Ansoff’s matrix is again just one example of a model which helps organisations to
understand the issue at hand, in this case strategic direction. It is useful as it lays out options
before forcing managers and strategic consultants to consider the risks and benefits related
to moving in a certain direction. Managers can tie options to the aims of the company
overall, and see which of the options appear to be a good strategic fit. If a company wants
to keep in line with a mission that is quite narrow, it may not wish to consider unrelated
diversification at all. It may be keen to stay working with its current market and capitalise
there, and so strategies focused on moving into new markets would feel inappropriate.
However, as is often the case with strategic frameworks, they do not consider the moves
that competitors are making alongside the moves that the company in question is making. It
is harder to know what the right thing for a company to do is, based on Ansoff’s, because it
assumes that everything is static when this may not be the case. It also overlooks the
amount of work that may need to go into adopting any of these strategies, and so
considering them may be unrealistic for a business that is already overstretched.
Additionally, and not to be forgotten in relation to any strategic model – they do not have
predictive ability: they only allow you to analyse what is already known, not to figure out
what is going to happen next.
3.6 Strategic Fit & Conclusion
Strategic fit
Strategic fit relates to the degree to which an organisation matches its resources and
capabilities with the opportunities that are available in the external environment. these two
elements should come together in making a suitable choice of strategy.
Managers, as they make strategic choices, should be actively evaluating the strategic fit of
those choices. Strategic fit does not have to limit an organisation to playing in the same
market forever. However, a choice made to enter a different market, create a new product,
shift to a cost leadership approach, or a differentiation approach should be considered
seriously to make sure that the organisation is comfortable that this move represents a
good strategic fit with what they wish to achieve in the future, no matter how broad this is.
Strategic fit can also be used by a company looking to explore merger and acquisition
opportunities. In this case, the purchase would need to be evaluated in relation to its ability
to deliver against the strategic direction of the company that is looking to acquire it.
Conclusion
In this element on strategic choices, we have considered two simple models which
companies, their managers and their strategic consultants can use to inform their decision
making with regard to strategic choices. There are plenty more models, with management
consultants, economists and business school academics queuing up with their own
recommendations on how companies should consider their options and choose between
them. If you choose to study a Strategy model as part of your degree programme, you will
encounter many more.
However, the purpose here has been to give you a taste of this element of the strategic
process. We will now move on to the penultimate stage in the model we are using: strategy
implementation
4 Implementing Strategy
4.1 Strategy Implementation
The model that we have been working with, of the strategic process presents strategy
implementation as a stage in the process that is, from its appearance as a simple box, just a
part of the process. However, from the exercise you have just completed, you have seen
how tempting and appropriate it can feel for individuals to change their plans. Companies
are no different. Therefore, as we look at the process of strategy implementation, we are
also going to consider how this is not just a case of ‘putting a strategy into place’ and the
many ways in which all sorts of factors can get in the way.
External
analysis
-Opportunities
Identify the Th t
Formulate Implement Evaluate
organisation’s
strategies strategies results
current
i i l Internal
analysis
-Strengths
W k
The view of strategy that we have adopted so far here is that strategy is a deliberate
process, that emerges from a rational sequence of stages of planning. Senior managers, and
in some companies, managers and staff across the hierarchy, plan strategy on the basis of a
mission or vision. They gather information through internal and external analyses, and then
make strategic choices based on what appears to be a good strategic fit.
However, the reality of strategic work is that it is often not so tidy. Rather than first
conceiving and then executing an optimal strategy, research shows that strategy work in
real businesses rarely looks like this.
It is very rare for organisations to have a process which clearly separates conception from
execution. Usually, they work in a more ad hoc, reactionary way, meaning that mission
setting, internal and external analyses and strategic choices run alongside one another, with
reviews of each being kickstarted on an ad hoc and non-linear basis. Businesses don’t
conceive strategy in its entirety and then execute strategy in its entirety.
Whilst we perceive managers, and the organisations they run, to be systematic, if we study
them, we see that they are much more ad hoc than that. Rather, they do some planning
alongside some execution, change a few things, go back and do some more planning, and
never really have a neat and tidy process at all.
4.2 Emergent Strategy
Mintzberg (1978; 1985) is a key theorist here (the same Mintzberg that you have met
already in relation to managerial theory). He feels that the idea of a rational, top-down,
execution-follows-conception model of the strategy process describes only one aspect.
He distinguishes three types of strategy:
• Intended strategy designed by the top management team; this is primarily a rational
and planned approach.
• Realized strategy is that small subset of intended strategy that is implemented.
• Emergent strategy refers to the sets of decisions made by managers trying to work
within the intended strategy, but dealing with the real world and all of its ups and
downs, as well as their own biases and limits to their rationality.
This can be seen in the diagram above. Organisations begin with an intended strategy –
what they plan to achieve. But their realized strategy is not pointing in the same direction at
all. This is because emergent strategies have an impact on what was intended, and some
elements of strategy go unrealised.
A well-documented case (Pascale, 1984; Rumelt, 1996) of Honda’s success in the motorcycle
market in 1960s USA has been used to illustrate the importance of these three concepts.
Honda had the intended strategy of trying to make an impact on the US motorcycle market
by producing bikes that were as good quality as the leading brands but selling them at a
lower price. However, because motorcycles in the US are used in a different way to Japan,
the bikes weren’t fit for purpose. In the US, people wanted to be able to travel long
distances at high speeds, and the bikes leaked oil under these conditions. Their strategy was
failing.
However, alongside this strategy, they were importing a small amount of smaller bikes,
intended just for Honda sales staff to use to get them around, not for sale. However, one
Saturday, an employee of Honda took his bike into the LA hills to ride up and down the dirt
tracks. He had lots of fun, and invited colleagues along the following weekend to join him.
Soon, others were seeing them having fun and asking them where they could get the bikes
from. Then a Sears buyer asked if they could sell these smaller bikes via their catalogue.
Honda didn’t love the idea, but realised it might help to keep them afloat in the difficult US
market and so agreed.
Honda soon realised that this was a much better revenue stream, and thus a much better
strategy, than their intended strategy. They instead recognised that they should be
following this emergent strategy and embrace the small bikes as their official strategy.
Later interviews with those involved suggested that the small motorcycles that were the
basis of success unexpectedly became popular, particularly in California, with people such as
surfers who had not owned bikes before, and were sold through sports stores not
motorcycle dealerships. Success came from capitalising quickly on an unexpected
development.
Honda’s intended strategy may have been to produce bikes as good as the leading US
brands, but at lower prices. However, they ended up embracing the sales of their smaller
bikes as a much better revenue stream, and thus strategy, than the large US-style bikes.
We can see, through this case, an example of a ‘good strategy’ not necessary being the
intended strategy; we as managers may need to be ready for other options to emerge.
Sticking doggedly with what was planned if other possibilities are suggesting themselves
may be bad business practice. A company and its managers will need, in a situation such as
this, to decide whether to go with what emerges. In this case, it made good business sense
to do so.
Cases such as the one above remind us how important it is for managers to be open to the
possibility of a strategy emerging from an unlikely direction. Whilst strategizing on the
future of the firm, managers should not lose sight that there will be other options they have
not considered, which may emerge to be significant business opportunities in the future.
As Mintzberg’s work on emergent strategy, and the case on Honda demonstrate, there is a
degree of chance and ‘ad hocness’ to all strategy work.
The role of middle managers

To pick up on just one of these themes, as it is particularly significant for this module. It is a
common assumption that strategy is performed by top managers. However, middle
managers play important roles in the strategy process in a range of ways (Whittington et al.,
2020):
Making sense of strategy – middle managers have to explain the strategy to junior
members of the organisation, making sense of it for themselves and for others. There are a
crucial bridge between the different layers.
Adjustment – If a strategy is created, and then deployed, circumstances may change which
require a change in strategy implementation approaches, or even a change in the strategy
itself. For example, in the early days of the pandemic, middle managers in many businesses
found themselves with no strategy to work to as the rules of the market had changed, and
needing to work towards emerging aims.
Information source – middle managers have knowledge and experience of business realities
in a way that senior managers often do not which may impact current strategy
implementation and the development of future strategy.
4.3 The Practice of Strategy
The idea of emergent strategy has come about through a more general interest in
understanding how strategy (and other types of work) really happen. This field has been
labelled ‘strategy as practice’ and has led to some interesting findings, amongst which have
been:
• Strategy is a political process and the deliberate strategy that is often decided on
may be as a result of lots of infighting and jockeying for position at the senior level
(Pettigrew, 1985).
• Middle managers and front-line workers can choose to embrace or reject top-down
strategies in the work that they do, thus reinforcing or blocking the strategic work of
the company (top-level strategic work, can and do choose whether to execute, block
or subtly alter strategies that are told to them by senior managers, meaning that the
functional level strategies and below are not fully grounded in the strategic planning
of the senior managers (Balogun, Best and Le, 2015)
• Strategic tools, such as those we have looked at in the strategy units you have
studied, have been shown to become constraining and habitual, limiting the thinking
of managers at strategy workshops (Johnson et al., 2010).
In addition, there are decisions and actions being taken on a day-to-day basis by managers
around the organisation, which will have an impact on strategic outcomes. To use the case
of a hi-tech research company, the Product Safety Manager (PSM) will be aware of changes
to regulation that the organisation needs to comply with (such as electro-magnetic-
compatibility of equipment). Senior managers do not have the technical knowledge to
evaluate changes to process that need to be made to comply. The PSM is likely to
recommend changes, which may be discussed with functional colleagues, and be left to
implement them. This would all be invisible, provided it is compliant and the manager has
successfully achieved the strategic aim of enabling goods to be shipped freely in the EU.
However, if the company gets fined for failure to comply, then this failure of emergent
strategy would be brought to light. Reputation might be damaged, and products would need
recall. Should senior management have taken a more active role?
4.4 Conclusion
In the past three units, you have learnt about the strategic management process. In this
unit, we have focused on how to formulate and implement strategy, looking at strategic
choices at company and corporate level. We also looked at the differences between
intended and realised strategy, and the role that strategy-as-practice research plays in
helping us to understand strategy as a process that real people undertake, and which is thus
complex and political.
Managers at all levels have a significant role to play in strategy development and
implementation, and you have seen this in relation to most stages of the strategy process in
these units. You have only one more element of the strategy process to consider, regarding
evaluation. You will look at this idea of performance measurement in more detail in a later
unit.
4.6 Changing planned strategic outcomes
The ‘Strategy as practice’ perspective reveals how intended strategy can be altered by those
lower in the organisation. This may improve strategic outcomes, prevent them from
occurring or change the nature of the outcome. Reflect on an experience at work or in
relation to a planned social activity. Consider the following questions:
• Did you ever make suggestions that changed the way the plan was implemented?
• Did you have knowledge that made change a sensible option?
• Were outcomes ever frustrated as other participants rejected and undermined the
plan?
• Did you formally agree the change, or just do it a different way, but no-one else was
aware of it?
Feel free to add any additional questions that are relevant to your reflection.
Post your thoughts and experiences to the discussion group.
5 Changing strategic outcomes
5.1 Changing strategic outcomes
The ‘Strategy as practice’ perspective reveals how intended strategy can be altered by those
lower in the organisation. This may improve strategic outcomes, prevent them from
occurring or change the nature of the outcome. Reflect on an experience at work or in
relation to a planned social activity. Consider the following questions:
• Did you ever make suggestions that changed the way the plan was implemented?
• Did you have knowledge that made change a sensible option?
• Were outcomes ever frustrated as other participants rejected and undermined the
plan?
• Did you formally agree the change, or just do it a different way, but no-one else was
aware of it?
Feel free to add any additional questions that are relevant to your reflection.
6 Formulating and Implementing Strategy Quiz
Please attempt the quiz on the VLE.

Block 17: Managing Risk

Essential readings:
Kaplan, R S & Mikes, Anette (2012) MANAGING RISKS: A NEW FRAMEWORK, Harvard
Business Review. Jun2012, Vol. 90 Issue 6, p48-60. Provides an interesting overview of risk
practices, which highlights some of the difficulties organisations face when managing
different types of risk
Porter, Michael E.; Kramer, Mark R. CREATING SHARED VALUE
Harvard Business Review. Jan/Feb2011, Vol. 89 Issue 1/2, p62-77.
The article argues that a shared value approach reconnects company success with social
progress, creating value for the firm and for society. Argues that even if the view of Milton
Friedman that 'the sole responsibility of the firm is to make profit', this can best be achieved
by creating shared value.
Recommended Reading
Hutter B M (2005) 'Ways of Seeing': understanding risk in organisational settings, Chapter 3

in Organisational Encounters with Risk, Eds: Hutter B & Power M. Provides additional
insight into the different ways organisational actors perceive risks.
Sizing Up Your Cyberrisks. By: Parenty, Thomas J., Domet, Jack J., Harvard Business
Review, 00178012, Nov/Dec2019, Vol. 97, Issue 6
This article uses one of the key risks that organisations face to illustrate how several aspects
of how ideas from across core management concepts come together to evaluate cyberrisks.
Power M (2004) The Risk Management of Everything This provides a critical evaluation of
the impact of the increasing use of Risk Management in a wide range of institutions. It
questions the benefits of this increasing use of formalised risk management approaches.
Sucher, S & Preble M (2017) CASE STUDY: FOLLOW DUBIOUS ORDERS OR SPEAK UP? AN
INTERN CONTEMPLATES WHETHER SHE SHOULD COMPROMISE HER VALUES FOR A
JOB Harvard Business Review. Jul/Aug2017, Vol. 95 Issue 4, p139-143. A good example of
the dilemma staff face about whether to 'whistleblow' and the potential consequences for
them if they do. Should they do the ethical thing or prioritise career progress?
2 What is Organisational Risk
2.1 Introduction to Risk
When we hear the word risk, we are inclined to view it as negative. ‘It would be risky to take
on that new client – they are notoriously bad at paying’ would be an example of the way
that managers typically express the idea of risk in their conversations and thought
processes. Risk comes about, in the way that we typically think about it, as a result of
something going wrong.
However, the reality is that organisational risk is more complicated than this, because in a
business context, risk can be defined as:
In business, risk means that a company’s or an organization’s plans may not turn out as
originally planned or that it may not meet its target or achieve its goals. (Corporate Finance
Institute, https://corporatefinanceinstitute.com/resources/knowledge/finance/business-
risk/)
Thus, there are risks that come about from not taking action as much as from taking action.
So, for example, what business might you miss out on by not taking on that new client?
What are the consequences of doing nothing?
Risk management attempts to balance threats and opportunities that organisations face:
• Threats are the risks that an organisation will not prosper and survive in the long
term
• Opportunities need to be exploited in order to remain competitive. The risks of
missed opportunities need to be taken seriously.
The International Standards Organisation (ISO, 31000) links Risk Management with ability to
thrive:
• Organizations that manage risks effectively are more likely to protect themselves
and succeed in growing their business.
In other words, in the organisational context, risk management processes can be

conceptualised to include context, risk identification, assessment and risk treatment.
2.2 Why worry about Risk Management in Organisations?
Risk management relates to reducing negative events and grasping opportunities to enable
the company to thrive in the long-term.
The biggest risk is that a company will fail. The UK Office of Statistics provides
information on births and deaths of UK organisations:
Between 2018 and 2019 the number of UK business births has increased, moving from
370,000 to 390,000, a birth rate of 13.0% in 2019 compared with 12.7% in 2018.
The number of UK business deaths increased from 311,000 to 336,000 between 2018 and
2019, a death rate of 11.2% compared with 10.7% in 2018.
In relation to start-up companies, Eisenmann (HBR, May-June 2021) suggests that two-
thirds never deliver positive returns to investors and that these failures also take a toll on
the economy and society.
These figures illustrate how frequently organisations fail, and risk management aims to
reduce the likelihood of business closure.
Data from National Center on Charitable Statistics reveals that approximately 30% of non-
profits fail to exist after 10 years, so this problem is not confined to profit making
organisations. Many charities and government organisations have also adopted business risk
management approaches.
2.4 Understanding risk
This section will show how risk is a highly subjective construct, in a number of ways. Before
it does, we need to define subjective. Subjective means that different people see the same
situation in different ways. For example, holidays. You may see time off work as a great
opportunity to rest, relax and see friends. Your colleague may see it as a waste of time and
prefer not to take their holiday. The answer to the question of whether holidays are good is
subjective: it depends on who you ask. And their answer will depend on the situation, and
the context. Who they are, and what their circumstances are at the time of you asking them
will both affect their answer. We can now apply the concept of subjectivity to risk, and show
how our view of risk is subjective: it depends on who we are, and what is happening in the
organisation and to us at the time.
Firstly, how an organisation identifies risk is tied to both internal and external goals. The
key here is to make sure that risk is focussed on what the organisation aims to achieve. So,
internally, we might identify the risk of a key team of workers joining a competitor - we
might respond my designing long term bonuses at completion of an important project.
Externally, we might be aware of changes in government regulation, this has been
particularly relevant to the car industry, with increasing pressure to move away from diesel
and petrol vehicles. Any automotive manufacturer that has not responded to these external
signals may find they are unable to sell newly launched models in 2030.
So, we need to be aware of changes in our environment, and a PESTEL analysis, introduced
in the strategy modules, might be of value to consider areas of concern. We also need to be
aware of internal factors that could have potential for growth (link to RBV) or might limit
ability to grow, we might identify a need for new capabilities either through internal
development or recruitment.
“It is not the strongest of the species who survive, nor the most intelligent; rather it is those
most responsive to change.” - Charles Darwin
Opinions and values influence ways of seeing and measuring outcomes. What is considered
acceptable changes, too. This means that risks aren’t ‘objective’ but are socially constructed
(Hacking, 1999). In practical terms, this means that different departments will have very
different views of what their key threats and main opportunities are because the people in
them have different values and opinions: the facilities department may have new Health &
Safety requirements demanding attention, while the IT department is very concerned about
improving security to prevent a data breach. Changing social pressures also influence
internal views, for example, recycling and reduction of energy have become areas of
opportunity for Facilities departments, as customers place greater emphasis on this aspect
of business.
Risk perception is iterative: over time, we reassess them based on the circumstances which
surround them. If it was fine today, then we assign a slightly lower level of threat to that
risk, and then over time we come to believe a familiar activity is no longer a significant risk,
regardless of any statistical evidence. Consequently, as individuals balance the rewards and
dangers (Adams, 1995) we may underestimate familiar risks. For example, we feel safe
driving our cars, but may find flying scary, even though statistics show that flying is the safer
option. In the USA, over the last 10 years, passenger vehicle death rate per 100,000,000
passenger miles was over 9 times higher than for buses, 17 times higher than for passenger
trains, and 1,606 times higher than for scheduled airlines. Other comparisons are possible
based on passenger trips, vehicle miles, or vehicle trips, but passenger miles is the most
commonly used basis for comparing the safety of various modes of travel. This statistic will
leave you unmoved if you drive regularly and find flying scary. You can see heuristics at work
here, you have experience that tells you driving is safe, and the availability bias helps to
recall news stories of plane crashes.
Similarly, businesses may be well aware of regulatory risks eg: changes to corporate
governance, but may not be so conscious of how any reporting that is added will be
interpreted by key stakeholders. For example, in the UK, reporting now requires declaration
of the ratio of senior management pay to the lowest paid employees, in firms over 250
employees. It is yet to be seen whether a high ratio is favoured by investors, or a low one by
their customers. Not all measures will be interpreted in the same way by different groups,
adding complexity to understanding the outcome of a change.
This is all made more complicated by the notion that our knowledge of risks is not static;
our knowledge changes over time as risks emerge (Berry et al, 2005). At one time,
companies were not aware of the potential disruption volcanic ash could have on air
transport, so it was not considered a threat. Since the disruption caused by an Icelandic
volcano in 2011, this is regularly considered by firms that rely on airline passengers or air
freight. This again emphasises awareness of changes in the business environment. We are
likely to see similar with regard to Covid-19, as a range of companies factor this potential
risk into their operating model.
2.5 PESTEL analysis
Risk identification requires:
intimate knowledge of the organisation
understanding of the market in which it operates
the legal, social, political and cultural environment
an understanding of strategic and operational objectives
Using a PESTEL analysis is a structured approach to evaluating external influences that may
impact on an organisation’s future performance.
PESTEL Term Examples

P Political tax policy, government stability, environmental legislation
E Economic interest rates, growth prospects, labour costs
S Socio-cultural demographics, values in society, levels of education
T Technological new service delivery method, new patents, new production
equipment using AI, state of infrastructure
E Environmental climate change, water resources, energy supplies
L Legal employment law, company law, business regulation
Source: Boddy (2012)
In Strategy, you conducted a PESTEL analysis of a macro-industry. Return to this completed

PESTEL analysis and review it in terms of risks. Which of the factors you identified appear to
pose the biggest risks?
It is easy for managers to be so busy with many different activities (Mintzberg, 1975) that
there is benefit to using a formal framework to think about different aspects of the
business, forcing them to slow down and take stock. This may well represent the kind of
activities that Drucker (1974) would see managers doing.
2.7 Differences in departmental risk identification (individual work)
Why might two different departmental managers disagree about the greatest risk an
organisation faces? Think about a University, and you will realise there are many different
departments. For example, IT department, HRM, Student Services, Schools (headed by
academics), Finance Department, Public Relations and Marketing, Facilities (responsible for
Health & Safety), Catering, Union Bar
Select three different departments, and identify two risks that part of the organisation may
be concerned about. Compare the risks you have identified. Are they the same?
Post your thoughts about differences in risk perception to the discussion group.
Feedback
Departments have their own focus and concerns, so they will focus on risks that link to their
own activities eg: HR and updated diversity reporting legislation and Marketing need to
update approaches to include online advertising; IT will be concerned with hacking and
online security risks; facilities management will be concderned with the health and safety of
the building, and whether it facilitates the business’ practices.
5 Assessing risk
5.1 Assessing risk
Once risks have been thought about and identified, organisations will shift their focus to
deciding which risks to give more urgent attention to. This usually focusses on threat
reduction, because opportunities will be managed within strategic activities. (Whilst the risk
of not seizing an opportunity is important from the perspective of fully understanding risk,
risk practices in companies tend to focus on negative aspects of risk, i.e., the threats).
• Traditionally risks are assessed as a multiple of severity and likelihood

• Scales are typically 1 to 5 (with 1 being low and 5 being high)
• Some organisations use words (low, medium, high) instead of numbers
A typical scoring grid is shown below.
This approach enables organisations to focus action on those activities expected to deliver
the most value to the organisation.
Action would be focussed on those risks that have scores in the red zone, while those in the
green can be ignored at present. Amber indicates a need to monitor and check that the risk
is not approaching red status.
5.2 How to Assess Risk
Risk Assessment: Data and the type of risk
Risk assessment requires the ability to analyse threats and opportunities to see how likely or
severe they may be. There is often a trade-off here, severe storms happen less often, for
example. In the business context, interest rate rises of more than 10% have been extremely
rare, but 3% is more likely to occur.
The nature of business risk prevents easy calculation of known probabilities, so much of the
analysis relies on estimation by managers (which may be affected by biases). Some types of
risk can make use of historical data to enable quantitative analysis:
• Health & Safety assessments may make use of accident data

• Actuarial assessments; insurance premiums calculated using historical data
• Financial measures e.g. Internal Rate of Return (IRR), Value at Risk (VAR)
• Statistical analysis requires knowledge of the data distribution to be valid
For other types of risk there is a lack of statistical data to analyse, so the manager's opinion
and interpretation are even more important:
• Reputation: Secondary risk linked to other risk sources eg: VW cheat device (a
secondary risk, since the primary risk was the cost of replacing the devices with
compliant ones, but damage to reputation was of greater concern)
• Personnel change: New management approaches can be identified as a threat to
some parts of the organisation or to particular products and services
• External environmental change: Particularly difficult to predict for public sector
organisations, but also a challenge for private sector before new regulation is fully
interpreted and implemented
Overall, this undermines the usefulness of numbers in the evaluation of risks, the key
benefit is thinking through the different aspects. It may identify areas where more
information is needed to make an evaluation, and this can improve decision-making in
relation to particular risks. You may, however, want to reflect on your learning with regard
to decision making and bias, and consider whether any biases are likely to have an impact
here.
5.3 Data and the type of risk
Risk assessment requires the ability to analyse threats and opportunities to see how likely or
severe they may be. There is often a trade-off here, severe storms happen less often, for
example. In the business context, interest rate rises of more than 10% have been extremely
rare, but 3% is more likely to occur.
The nature of business risk prevents easy calculation of known probabilities, so much of the
analysis relies on estimation by managers. Some types of risk can make use of historical
data to enable quantitative analysis:
• Health & Safety assessments may make use of accident data

• Actuarial assessments; insurance premiums calculated using historical data
• Financial measures e.g. Internal Rate of Return (IRR), Value at Risk (VAR)
• Statistical analysis requires knowledge of the data distribution to be valid
For other types of risk there is a lack of statistical data to analyse, so the manager's opinion
and interpretation are even more important:
• Reputation:the primary risk was failure to comply with regulation (requiring new
devices to be fitted), but class actions by dissatisfied customers have increased the
costs, and reduced customer loyalty.
• Personnel change: New management approaches can be identified as a threat to
some parts of the organisation or to particular products and services
• External environmental change: Particularly difficult to predict for public sector
organisations, where government set aims and targets, but also a challenge for
private sector before new regulation is fully interpreted and implemented. What
will new regulations require organisations to do? How much will it cost?
Overall, this undermines the usefulness of numbers in the evaluation of risks, the key
benefit is thinking through the different aspects. It may identify areas where more
information is needed to make an evaluation, and this can improve decision-making in
relation to particular risks.
6 Managing Risk
6.1 Managing Risk
Managing Risk
The purpose of identifying and assessing risks is to identify actions for managers to take to
reduce the chance of threats occurring. This is similar to the need for formulated strategy to
be implemented; risk assessment is of no benefit unless changes can be made to reduce
identified concerns. But we cannot address all risks at once, so the scoring mechanism
enables actions to be prioritised.
Risk Appetite: Which threats to focus on?
Scoring risks enables managers to select those that are assessed as posing a significant
threat in terms of the combination of likelihood and severity. To enable managers to treat
the identified risks using 'management by exception' (Drury, 2013) the organisation can
decide on its 'risk appetite'. What magnitude of risks are they prepared to accept, and which
are they very keen to avoid? What is the tolerable risk score for impact x likelihood?
The diagram shows how risk appetite can be set in relation to how likely it is or the scale of
the impact the potential risk may have. This can be set at different levels for example, in
relation to financial risks and Health & Safety (H&S) risks. The firm and its managers may be
willing to speculate on a potential high gains investments, but very unwilling to risk the
death of any employees or customers.
Reputation is a key concern that could increase the size of the yellow area in the diagram,
and draw more threats into the ‘action’ zone. For example, smaller losses incurred as a
consequence of fraudulent activity can have a more adverse impact on a bank’s reputation
than much larger lending losses incurred in the normal course of business. Consequently,
financial institutions often set a much lower risk appetite (eg risks scoring above 10) for
fraudulent or unethical activity which could seriously damage their reputation, whilst a
similar size loss related to a lending decision scoring may need to pass the threshold of 12
before action would be taken.
Acceptable Risk
Risk appetite is closely linked to what the organisation regards as acceptable risk. What is
interpreted as acceptable is influenced by external groups that interpret organisational
information, such as investors reading the annual report. How much risk is the company
prepared to take on in the pursuit of possible (but never guaranteed) rewards?
The outputs of the risk assessment process may be designed with stakeholders in mind
(Clarke, 1999). For example, risk registers are commonly produced by large organisations,
public services and charities, signalling that the senior managers are acting in the interests
of the principles (and society) to manage risks. Key risks may be outlined and actions
explained in the annual report for listed companies.
Risks that are deemed acceptable do not need management attention. Management by
exception enables a focus on those risks above the acceptable risk threshold.
This can be a complicated process, despite sounding quite straight forward. Firstly, it can be
hard to establish a single value for acceptable risk across all projects, functions, business
units and managers. Secondly, it is hard to place financial values against many risks. What
would be the financial value of a recession? A fresh pandemic? The CEO quitting? And
finally, it’s hard to reconcile a wide range of different views on which aims are most
important. Different owners and managers, as well as other stakeholders (government,
insurance provider, suppliers) will have differing perspectives on this.
However, most managers will not get bogged down in the detail, the discussions about
identified risks will help to decide which of them to focus on. If risks relate to different
department roles, then different managers will be looking at threats that relate to their
tasks and expertise. For example, the HR manager will be aware of proposed changes to
employment legislation, and considering how the company should adapt processes to
ensure compliance.
When we think about what managers do, in the majority of meetings decisions are made
that will contribute to reducing risks eg: getting a project back on track to complete on time;
or to pursuing opportunities eg: approval to invest some retained equity in automating part
of the production process.
6.2 Treating risk
There are four broad approaches to reducing risks that are most commonly adopted:
Reduce (or Treat) = This strategy seeks to reduce the risk probability or its impact by taking
early action to reduce the occurence of the risk to an acceptable limit. This is an area where
core management concepts proves valuable, the broad range of topics enables a wide range
of possible actions to be available for evaluation.
Risk mitigation may take the form of implementing new processes (for example, using
Management Science to analyse why customers are returning goods), undertaking more
preliminary work (for example, asking the management accountant to prepare additional
forecasts in relation to varying sales levels) or selecting new distribution channels (the
marketing manager may be asked to provide a plan). Risk mitigation can also include
changing conditions so that the probability of the risk is reduced, by adding resources (HRM
may be tasked with finding appropriately skilled temporary assistance, the line manager will
provide ‘on-the-job’ training) or agreeing a new delivery time with the customer (a senior
manager may get involved to smooth things over, particularly in a small firm).
Avoid (or Terminate): Risk avoidance is deciding to make changes that will eliminate the
activity. For example, risks associated with use of hazardous chemicals at work can be
avoided by preventing those chemicals being ordered and used, once the risk treatment has
identified alternatives and processes that work to replace them. A divisional organisation
may decide to sell one of the divisions if it wants to avoid compliance costs in a particular
region.
Transfer: Risk transfer is seeking to move the consequence of a risk to a third party together
with ownership of the response. Transferring the risk does not eliminate it, it simply gives
another party responsibility for its management. This is the most effective way of dealing
with financial risk exposure and can be by a contract to another party or by payment of a
premium in the case of insurance. However, it is not so effective if customers view you as
the supplier. For example, you outsource the cafeteria in your university to a third party, all
goes well, they pay to occupy the site and the university administrators have less to
administer. You arrive at work to find that several students are reporting food poisoning,
and it is in the press the following morning. Which organisation do you think the students
will hold responsible? Whilst costs associated with the incident can be passed to the third
party, the reputational damage may reduce applications for next year’s courses, for
example.
Insurance costs can be high for some risks, so organisations need to be able to effectively
treat risks to avoid these costs. The following page outlines some options for reducing
insurance costs, which include improving security (physical and online) and the
development of management systems to support health & safety and environmental
policies, for example:
https://www.morganclark.co.uk/about-us/blog/how-to-reduce-business-insurance-costs/
Accept (or Tolerate): This strategy indicates that the business has accepted the risk and no
action is required (assessed as falling in the green zone of the assessment grid).
6.3 Portfolio Management
One of the common examples of risk management is spreading the risk across a portfolio of
activities, businesses, or shares.
We have seen in the previous example how, if we hold just one business, we are highly
subject to fluctuations in demand. If we hold a single share, we would siilalry be highly
affected by fluctuations in share price. If we hold two businesses or two shares, however,
who are impacted differently by external factors and which thus do well or badly at different
moments in the market, we are better protected from the dips in both. Although, it is to be
noted that we are also protected from gains in both, too.
To what degree, however, can the risk be removed? It would be rare to find two businesses
or shares that perform entirely oppositely. Whilst ice creams and umbrellas may usually sell
at quite different moments, a day with sunny showers may bring in customers who want
both. The day that schools break up for the holidays will likely bring customers whether it is
raining or not.
However, as long as the investments' return profiles differ to at least some degree, then risk
will be reduced. The degree to which it is reduced will differ dependent on just how
different the return profiles are.
In addition to buying shares, investors can also consider putting capital into different ‘asset
classes’. These can also reduce risk within a portfolio, for example:
Bonds (fixed interest). High risk bonds may default.
Property (returns linked to rental value or sale proceeds)
Commodities (value varies: examples; gold, oil, wheat)
Cash (modest risk free return, investment should aim to outperform this)
The following graph illustrates how a commodity, gold, varies in relation to a stock index,
reducing risk in the same way as diversification in the type of shares purchased.
Investors looking to invest across a range of different shares or businesses may be looking to
achieve what is called a balanced or diversified portfolio.
We have looked at the concept of diversification in Core Management Concepts a number

of times already, in both Strategy and Structure units. However, those areas both focused
on unrelated business diversification and did not fully elaborate on why the diversification
approach is a risk management strategy. You can also see more clearly now why we made
the point that the approach of unrelated diversification could be making portfolio choices
for investors that they do not want to make. This will in part be because you are making
choices with regard to the risk that they are taking on, as opposed to allowing them to make
those decisions themselves. We also did not explore how this idea of diversification could
also apply to shares.
To add a little more with regard to shares and the nature of risk reduction:
Initial diversification of share-holdings to from one share to many should provide substantial
reduction, removing the likelihood of peaks and troughs in performance and thus managing
risk. However, risk reduction typically slows after 15-20 investments have been combined.
This is because the new shares do not have a significant impact on the profile of the overall
portfolio in the way that the addition of a share in a less diverse portfolio would.
It is important to note that, when we talk about reducing risk, it is only non-market risk (also
called non-systematic) risk that is reduced. That is the risk that comes from an individual
share. Market-wide risk, which is the risk that affects the whole economy, is not reduced.
For example, the global recession that hit during 2020 could not have been avoided through
a diversified share-holding because it was systematic and thus hit the whole economy.
6.4 Scenario Planning
"At the very moment when the present least resembles the past, it makes little sense to
look back in time for clues about the future" (Scoblic, 2020, HBR).
The following summarises key points from Scoblic's article (Learning from the future, HBR,
July-August 2020) to provide an overview of the development and use of scenario planning.
Scenario planning began in the early 1970s, building on the work of Herman Kahn. Scenarios
were devised to aid Shell oil company to prepare for changes in the market as the oil-rich
nations Middle-East began to form an alliance. As a result, Shell was better able to manage
the impact of the OPEC oil embargo in 1973 than its competitors. These exercises marked
the beginning of scenario planning as a strategic tool for managers.
Scenario Planning uses stories about alternative futures to challenge assumptions and
widen perceptions of the present. The process does not attempt to predict the future, but
aims to explore possible changes in the environment to inform strategic decision-making.
Guidelines for organising a scenario planning exercise:
Invite the right people (participants who have significantly different organizational
roles, points of view, and personal experience. Also need representatives of the three
powers necessary for any effective conversation about strategy: the power to perceive, the
power to think, and the power to act).
Identify assumptions, drivers, and uncertainties. (Separate transactional

actors, which you can influence or control, from environmental forces, which you cannot.
How might those forces combine to create different possible futures? What assumptions
are being made?
Imagine plausible, but dramatically different, futures (Good facilitators can

both prime the imagination and maintain the guardrails of reality.)
Inhabit those futures (Strive for an immersive experience. Creating “artifacts from the
future,” such as fictional newspaper articles or even video clips, often helps challenge
existing mental models)
Isolate strategies that will be useful across multiple possible futures (eg:
What should we be doing now that would enable us to operate better in different
scenarios? Look for commonalities, single them out, and identify plans and investments that
will make sense across a range of futures)
Implement those strategies (eg: a formal system in which managers have to explain
explicitly how their plans will advance the firm’s new strategies)
Ingrain the strategies (a process that continually orients your organization toward the
future while keeping an eye on the present)
The use of scenario planning is not limited to private companies, but is also used by
governments and not-for profit organisations. Read the following article to see how a
staged scenario is used to prepare for a possible major terrorist incident in London:
https://www.bbc.co.uk/news/uk-33315691
The cost of staging large scale scenarios is high, but important lessons can be learned. It can
be hard to imagine all the practical difficulties from a round table discussion.
6.6 Organising a festival - risk treatment
You are working for a small organisation that is planning to run their first music festival,
along the lines of Fuji Rock Festival, Roskilde, Coachella, WOMAD, with a main stage and
three side stages, food and drinks stalls and ethical goods for sale. The company is thinking
about whether to include fair-ground rides. Festival goers can pitch tents.
Read about insuring a festival and think about whether the firm would to take all the
offered insurance? Would it make a difference to ticket price?
You might also think about any other ways that you might reduce the risk of making a loss
or suffering damage to your reputation.
Add your thoughts to the discussion group

8 How would you reduce risk?
8.1 How would you reduce risk?
Imagine that you own a business making gelato that you sell, by the scoop, from your ice
cream shop on a busy London high street. It does very well on sunny days, but its business
on wet or cold days is a problem. Because you are based in the UK, where the weather is
unpredictable, each year you fear that there will be more wet and cold days than you are
used to and you will not have enough money to cover your costs.
How would you reduce risk?

9 Risk Feedback
9.1 Feedback: How would you reduce risk?
Feedback:
The seemingly easiest solution might be to live frugally. You spread your spending out to
cover your costs throughout the year, keeping some in reserve for months that may be
particularly rainy. However, when your shop is quiet on a wet or rainy day, you are not so
busy, either. You have spare capacity to do something else with your time which may help
you to manage your risk better. You could sell hot chocolate on cold days, umbrellas on
rainy days. Or you could do something totally different, using downtime to knit fashionable
scarves to sell in a boutique run by your friend.
This question is looking for ways to spread risk and manage risk levels by doing so.
Essentially, this small business owner may end up with a ‘portfolio’ of products or services
that they offer in order to manage the risk of downtimes in the sale of ice creams.
10 Reputation and Risk: Social Responsibility
10.1 Reputation and risk: social responsibility
A key area of concern for organisations today is what they need to do with regard to social
responsibility. Even if you hold the perspective that the moral imperative for a company is
to make money for shareholders, companies who do not engage or who engage in the
‘wrong’ way according to public perception run the very real risk of damaging their
reputation. An organization's performance in relation to the society in which it operates and
to its impact on the environment has become a critical part of measuring its overall
performance and its ability to continue operating effectively (ISO26000, 2010).
Organisations are being encouraged to go beyond legal compliance, because risk to
reputation suggests they may need to take social responsibility seriously.
HSBC bank outlines this concern about reputational risk in their 2016 annual report:
• Reputational risk is the risk of failure to meet stakeholder expectations as a result of

any event, behaviour, action or inaction, either by HSBC itself, our employees or
those with whom we are associated, that might cause stakeholders to form a
negative view of the Group. This may have financial or non-financial effects, resulting
in a loss of confidence or have other consequences.
• Appropriate consideration of potential harm to HSBC’s good name must be a part of
all business decisions
10.2 Elements of social responsibility
Social Responsibility (ISO26000) Core Subjects
According to ISO26000 (2010), the areas that companies may want to focus on when looking
to be broadly socially responsible are:
Labour Practices – how people are treated, including health and safety, working hours, and
compensation.
Human Rights – how the company engages with human rights issues that affect it and its
industry
The environment – how the company impacts the environment, or may do in future
Fair operating practices – designing business processes to ensure fair operating outcomes
Consumer issues – how consumers are treated when they engage with the products or
services that the firm produces. What protection can they expect in the case of something
going wrong? Will they be given a voice in their relationship with the company?
Community development – how the company engages with, and is a positive force within,
its communities, whether it is just one community or many and whether they are physical,
online or both.Indeed, failing to do so has, in recent years, created reputational damage to a
number of companies:
Organisational governance: Satayam,
Human rights: G4S posts £148mn profit despite ‘countless’ human rights scandals
Labour practices: Nike, Primark, Boohoo
Environment: BP, Rio Tinto
Fair operating practices: Kobe Steel falsifying quality data, Shell admits bribery &
corruption
Consumer issues: O2 Charged for overcharging customers, VW cheat device, Apple slowing
down old phones
Community development: Berkeley homes not creating as many social housing properties
on its new build estates as elements of the community believe they should.
Alongside the immediate impact of these ‘scandals’ on reputation, being socially responsible
has been shown to have a tangible impact on brand perception (Bianchi et al., 2019). As a
manager, not engaging with CSR appears to represent a real risk. Companies who choose
not to engage should be sure of what is at stake.
10.3 CSR measures and reports to stakeholders
In order to demonstrate to shareholders and stakeholders that social responsibility is being
taken seriously, there is a need for additional reporting.
This can include:
• Safety records: Number of workplace injuries, which may include customers

• Carbon footprint: energy use in the workplace, business travel and hotel stays
• Recycling activities: what is being recycled, and how
• Diversity: use measures covering recruitment, promotion and/or redundancy
• Equal Pay: https://www.independent.co.uk/life-style/women/gender-pay-gap-equal-
pay-women-paid-less-motherhood-a8856121.html
• Whistle-blowing activities: can be difficult to measure, zero reports in a whistle-
blowing system may signal it is difficult to use, or that there have been no issues to
report. Where activities have been flagged the key thing is to monitor
implementation of actions to correct the problem, and report progress.
• Environmental reporting: Annual Reports, newspapers, adverts (eg: Elvive
shampoo – all packaging now recycled – strong environmental performance can be
used in marketing)
The Rio Tinto Annual Report 2020 provides an example of the type of data reported:
When things do go wrong, this can lead to a need to publicly apologise to regain public and
community trust and reduce the likelihood of shareholders selling stock. Managers will have
a significant role to play in this, helping the company to regain trust in the eyes of the public
and community. Consider this statement from Rio Tinto on the destruction of Juukan Gorge.
However, as a CEO or manager in charge, CSR data is a requirement in addition to traditional
financial reporting measures. This can be a significant additional cost to business, for
example, to report CO2generated by the business to achieve a Carbon Neutral rating, it is
necessary to calculate how often workers arrived by car, how far they came and how large
the engine was. There is additional scope for scrutiny by stakeholders, and this type of
reporting is often known as ‘triple bottom line ’.
10.4 The rise of the ethical investor
Traditionally ethical investors avoided companies involved in alcohol, tobacco, gaming and
weapons. In recent years, their concerns have expanded to include other aspects of social
responsibility, such as environmental records and workplace standards. For example,
criticism of Deliveroo regarding their dismissal of workers’ rights had a significant impact on
their share price.
Investors have a choice of using ethically screened funds, with this growing in popularity as
an investment strategy, with some evidence that such an approach may mean an above-
average return for your money (and some evidence that they may not).
Reputational damage can impact on willingness of investors to continue to hold shares, or

buy new ones, and may put off ethical investors and investment houses. A firm interested in
making it into ethical investment funds will have to be very careful regarding their
performance. Moreover, corporate decisions of all firms with regard to CSR malpractice may
be scrutinised by shareholders, particularly when problems come to light.
11 Ethical decision making
11.1 Ethical decision making
When making business decisions, profit is usually evaluated. In the case of not-for-profit
organisations, it may be a case of evaluating 'Value-for-Money' and improvements to
performance.
But, is this enough? As a minimum, business managers need to think about:
Consequences of the decision:
• Is it profitable? A key factor in analysis of future investments – but can only be fully
assessed by looking at more than the financial data. This is often where decision
making has stopped in the past.
• Does it align with corporate values? If the organisation is committed to improving
the environment, an investment that would destroy an ancient woodland would
create problems if activists highlight this activity. This has become a stronger
dimension of decision making and strategizing. You will recall from the strategy
modules that firms need a strategy which aligns with their values, and their ethical
and moral values will be part of this.
Impact on rights
• Legal: All assessments need to consider whether the decision is legal, and
whether higher standards will be applied in areas that do not have, for
example, strong consumer rights legislation.
• Fair: does the decision treat stakeholders fairly. Link to fair operating
practices, for example, are customers being charged more than they should
for services and are labour practices delivering equal pay and encouraging
diversity
• However, an ethical decision framework suggests decision makers also need to
employ 'sniff tests'. Sniff tests are informal reality checks of an idea (in this case,
perhaps a project) which uses common sense. They are less process-based than
conventional business decision making advocates, and instead more about how you
feel in relation to a particular decision.
This ‘sniff test’ framework suggests stepping back after the preliminary decision to think
about how it would look to other people and whether you are happy that the decision
doesn’t ‘smell bad’.
The framework suggests we should think about a wider range of inputs, for example:
• How would I feel if this decision was publicised in the newspapers? Front page of a
major daily – how did VW engineers feel about the cheat device decision?
• Has anything important been overlooked? Have we forgotten to think about the
impact on the community around the planned warehouse development?
• Is information available to support the decision? Take the outside view could be
useful here – what information should be available – have legal issues been
considered?
• Is there evidence that stakeholders have been considered? Have we focussed too
much on shareholder interests?
• Are there any alternatives that should be considered? In the case of the VW cheat
device, an alternative would be to redesign and retest the device
• Does this seem right to me? Am I happy to allow a product that is dangerous to be
shipped to meet planned deadlines? Would it be OK if it was safe, but the quality is
not as planned?
• Would my parents be proud of my decision? You may have a key member of the
family whose opinion is important to you – this can help move away from the
company culture back to the family/society culture to interpret what is right or
wrong.
11.2 Conclusion
Managers need a good sense of what risk is, and more specifically what the risks are for
their organisation or business unit. This is not to say that they will be able to, or will want to,
avoid all risk, but rather that understanding that risk is a natural part of business practice.
They are accountable, with regard to risk, to the business owners, particularly as
stakeholders such as shareholders, customers and wider society are increasingly able to
access data about an organisation’s financial, ethical and legal performance. Managers need
to understand what risk is and how they can work with their own risk appetites and
perceptions, and those of the organisation more generally to make appropriate decisions.
11.3 Using sniff tests - would they work? (individual work)
Select one of the scandals listed below, and think about whether the organisation could
have benefitted from using ethical decision making.
Select one of the scandals, and outline how the decision could have incorporated sniff tests,
using the questions provided in the unit.
Labour practices: Nike,
Fair operating practices: Kobe Steel falsifying quality data
Consumer issues: VW cheat device, Apple slowing down old phones
Post your evaluation to the discussion group.

Feedback
• How would I feel if this decision was publicised in the newspapers? All of these
decisions could have benefitted from consideration of this question. When these
stories did break, connective action was evident in the case of Nike ‘united students
against sweatshops’, Kobe Steel is facing potential legal action, VW share prices fell
around one third just after the scandal and Apple were fined $27m by European
regulators.
• Has anything important been overlooked? Does this action align with our corporate
mission might have been a good place to start, identifying whether this decision
could undermine strategic aims.
• Is information available to support the decision? Take the outside view could be
useful here – have legal issues been considered? It appears that the risk of litigation
and fines were largely overlooked.
• Is there evidence that stakeholders have been considered? Have we focussed too
much on shareholder interests? Customer interests were not evident in these
decisions. Those recommending ethical decision making would point to the impact
on shareholder interests ultimately, in the cost of fines, lower share prices or
disaffected customers.
12 Managing risk Quiz
Block 18: Future Thinking
Reading - essential and recommended
Essential readings
https://hbr.org/2020/07/learning-from-the-future
A megatrends report, either:
EY’s pdf: https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/megatrends/ey-

megatrends-2020-report.pdfThis is the one that we cover in the syllabus
Or:
KPMG’s interactive report (read

online): https://home.kpmg/xx/en/home/insights/2015/03/future-state-2030.html An
alternative set of megatrends, this time derived from research by KPMG
Further readings
2011). Chapter 2: Macro-environment analysis, but only sections on Scenario Analysis and
PESTEL: A recap on PESTEL, and a textbook-style summary of Scenario Planning
https://hbr.org/2010/11/leading-in-a-vuca-environment
https://hbr.org/2010/11/leading-in-a-vuca-environment-1
https://hbr.org/2010/12/leading-effectively-in-a-vuca
https://hbr.org/2011/01/leading-effectively-in-a-vuca-1: Four short articles talking about

the impact of leading in a VUCA environment, written by an ex-military strategist. Focused
specifically on what managers and leaders should do to cope with VUCA features.
https://www.forbes.com/sites/christianstadler/2021/03/17/how-will-megatrends-affect-
your-business-learning-the-bain-futures-method/?sh=97e3fd064b28 – a great thought
leadership piece, looking at how managers can work with megatrends data to inform their
own managerial practice
https://www.listennotes.com/podcasts/the-leadership/028-the-adaptive-dna-graeme-
SgTkA5x9VOH/ episode of the Leadership Enigma podcast with a futurist, who talks about
how to spot trends and what to do as a leader once you spot them
https://www.ted.com/talks/alison_sander_megatrends_5_tips_on_the_art_and_science_of
_trend_tracking#t-4624 – a talk by a trendspotter talking about why it’s relevant to spot
trends, and how businesses can use them to ‘stay ahead of the curve in a highly uncertain
world’.
https://onezero.medium.com/nike-and-boeing-are-paying-sci-fi-writers-to-predict-their-
futures-fdc4b6165fa4 - this is an extension article, talking about an approach that some
companies have used, to engage science fiction writers to help predict their future. It has
something in common with both the ideas of megatrends, and scenario planning, and makes
for an interesting read.
2 Introduction
2.1 Introduction
Contemporary managers have to operate in environments defined by their volatility,
ambiguity, complexity and uncertainty (VUCA). Whilst they cannot predict the future, there
are nonetheless tools and lenses that can help managers deal with managing in such a
complex operating environment.
Some tools and techniques that you have learned already (and that this unit will serve to
recap) will come in useful for managers who are trying to deal with the challenges of
operating in an environment which is constantly changing and characterised by a high
degree of uncertainty and complexity. There are also additional tools, such a scenario
planning, which come in useful for managers trying to factor uncertain futures into the
reality of their daily management and business practices.
This unit will now proceed by considering the challenges of operating in a VUCA
environment, before thinking specifically around particular large-scale factors which may
impact decisions made by firms and their managers. Finally, the module will explore how
scenario planning and a range of other tools that you have already learned about in core
management concepts can come in useful for managers engaging in future thinking and
looking to deal with potential opportunities and threats in their work.
2.2 Managing in a VUCA world
"At the very moment when the present least resembles the past, it makes little sense to
look back in time for clues about the future" (Scoblic, 2020, HBR). If we are at a point where
change is more rapid than ever before, why would we base our decisions for the future on
what has happened in the past?
Managers have always had to engage with real business problems, but the speed of change
has grown significantly since the start of the industrial revolution (Deloitte Consulting, 2017).
In particular, the environments that a manager might meet seemed to be more volatile,
uncertain, complex, and ambiguous[sw1] [KB2] than ever before. We refer to this as a VUCA
environment, taking the first letter of each word to create this abbreviation.
In more detail, we can now look at each of these elements and the impact that they may
have on the work of managers.
Volatility: changes occur much more often than before and they are unpredictable. What is
going to change and how is not certain. It impacts managers, as it can be hard to make
decisions and feel confident in them, because everything may yet change.
Uncertainty: It is hard to predict the future, partly because we don’t understand what is
going on, but partly because no one knows what will happen. It impacts managers, because
it is hard to predict what might happen in the future and yet our staff often look to us for
this certainty.
Complexity: Many different factors affect what happens, and the relationships between
them are difficult to unpick. The more connected we become to each other, and the more
entangled countries, supply chains and networks are with one another, the bigger this
challenge becomes. Complexity makes a manager’s role hard, as what appears as a simple
problem on the surface can often turn out to be a lot more complicated, and with many
more stakeholders than it first appeared.
Ambiguity: It’s unclear what’s real, it’s easy to misread a situation, and there’s a lot of
subjectivity which means that you may interpret an event or action differently to someone
else. As a manager, you will often be excepted to take a position on an issue. For example, is
working from home a good idea. However, with the amount of research and information
that is available on almost every topic, often coming to conflicting conclusions, it can be
really hard to reach a conclusion confidently.
As a manager, these factors are of concern because, not only do they affect your work, but
they affect the attitudes and behaviours of your people. These VUCA elements can have a
number of impacts on teams and individuals:
• They can cause anxiety as people feel they are not fully informed, and struggle to
make sense of what they are told.
• They can reduce motivation as it becomes unclear what someone is working for or
how they should work.
• They can mess up planned change, both for firms (e.g., diversification) and
individuals (e.g., career moves)
• They can require lots of re-training, re-structuring, re-strategizing, and cultural
change, all of which have significant impacts on resources
• They increase the chances that bad decisions will be made as ‘knowing enough’
becomes so much harder
• They paralyze the ability to make a decision, in case we have ‘missed something’ and
because of the excess of information available.
• They can make the organisation itself seem like a VUCA environment
2.3 Is the scope and speed of change increasing?
Read this extract from Henry Mintzberg’s blog:
We live in times of great continuity
15 October 2015
“Actually, it’s “We live in times of great change.” Ever heard that? Or more to the point,
have you ever heard a speech by a CEO, management consultant, or management professor
that did not begin this way?
When you dressed this morning, as you buttoned buttons, did you say to yourself: “If we are
living in times of such great change, how come we are still buttoning buttons?” After all, the
modern version of the button has been around for seven centuries. And when you were
driving to one of those speeches about living in times of great change, did you notice that
the technology under the hood of your car was probably the same as that used in the Model
T Ford (an internal combustion four-cycle engine)?
The men who deliver such speeches wear ties. Do you know why? Not to keep their necks
warm. It’s because such people have always worn ties. They, like the rest of us, are living in
times of great continuity.”
Mintzberg draws attention to a discussion of the pace of change in 1868:
“Few phenomena are more remarkable, yet few have been less remarked, than the degree in
which material civilization—the progress of mankind in all those contrivances which oil the
wheels and promote the comfort of daily life—has been concentrated in the last half
century. It is not too much to say that in these respects more has been done, richer and more
prolific discoveries have been made, grander achievements have been realized, in the course
of the 50 years of our own lifetime than in all the previous lifetimes of the race. It is in the
three momentous matters of light, locomotion and communication that the progress
effected in this generation contrasts surprisingly with the aggregate of the progress effected
in all generations put together since the earliest dawn of authentic history.” (This is from the
magazine Scientific American—in 1868.)
© 2014, 2015 with minor editing, by Henry Mintzberg
Think about how much has changed in the organisations you have been familiar in the past
20 years. Do you agree that the pace of change is accelerating? Add your thoughts, and
reasons for them, on the discussion group.
3 Spotting Trends
3.1 Spotting trends
A key task of a manager is to keep up to date with the factors that are not necessarily
impacting now, but which may have an impact in future. PESTEL is one tool which allows
this, but often it can be hard to know, as a manager which sources to examine in order to
select the most relevant PESTEL factors to include in the analysis. To stay one step ahead of
the curve as managers, we need to become better at predicting future trends in a VUCA
environment. The goal should be for managers to plan for possible future scenarios instead
of having to resort to ad hoc defence and damage limitation strategies.
We need to ask questions such as: how will trends, patterns, opportunities and threats
evolve in the coming years? What will the next threats for this firm be? What should the
future look like as a result?
Overlapping dynamics of political developments, societal changes and technological
advances make these predictions exceedingly difficult.
One tool that the business world is increasingly relying on are studies into ‘megatrends’. But
what is a megatrend?
3.2 3D Printing Activity
There are always changes in technology that will need organisations to think about how
they can use them. Read the following articles to familiarise yourself with the use of 3D
printing.
Printed house
Physical warehouse
These examples of 3D printing of houses and smart warehouses which print goods that are
ordered before shipping them, if they are out of stock of something illustrates how this
technology could introduce significant changes to the workplace.
Activity
Consider a scenario where most people will be able to print household goods such as plates,
glasses and cooking utensils, car parts, storage boxes etc at home within 5 years. If you
were run a delivery company how would this scenario play out?
Identify 2 changes you would consider recommending to the CEO of the company to
address this change in the environment.
Post your ideas to the discussion group.

Feedback
Possible ideas include:

Buy high quality 3D printing technology to produce items that are large and unlikely to be
produced at home
Consider partnership: identify which current customers deliver large parts that could be 3D
printed - could parts be delivered more quickly to the customer by working together?
Review the type of products that you currently deliver, how many of them may be
substituted by this technology? Use 5F analysis to evaluate the threat.
Review other technology which could reduce delivery costs and increase profit margins to
hedge against a drop in business eg: use of drones
3.3 Megatrends
“Megatrends are macroeconomic…forces that are shaping our world, and our collective
futures in profound ways. The implications of these forces are broad and varied, and they
will present us with both tremendous opportunities to seize—as well as extremely
dangerous risks to mitigate.” (Thomas Modly, PwC Global Leader, Government and Public
Services Sectors, 2016)
Previous megatrends that have had a significant impact on our lives have included
electricity, the automobile, the internet, the rise of the factory system, at least two waves of
the women’s equality movement, and nuclear armament.
What are the current megatrends that may impact the world of tomorrow, and which
managers should be aware of?
Interestingly, much of the research on this topic comes from the world of management
consultancy. This is because their clients will routinely ask them to help them to develop a
better understanding of what is going on in the wider world and explore how it is likely to
impact their firm. As such, PWC and EY produce regular reports on Megatrends.
In EY’s most recent report (2020), it identifies eight megatrends, but says that this is not an
exhaustive list. It says that each of them comes about as a result of a combination of these
four forces: globalisation, technology, changing demographics and environmental shifts. We
will now consider each of the eight factors that they believe are our rising megatrends at
this point in time. We will consider these only briefly – they only represent the perspective
of one management consultancy practice at one point in time (although based on robust
research). We will also present some ways in which managers might use information about
each megatrend in their work, so you can see why it is important to be aware of trends, spot
which ones might affect your industry, and build defences or responses to it into your
management practice.
Decarbonization – it has become imperative to find ways to reduce the global carbon
footprint. We are creating too much carbon through fossil fuel usage and as such, heating
up the planet. As a manager, being aware of the climate crisis and recognising this as
a serious threat to business operations is seen to be critical. For example, how can companies
reduce their own carbon footprint and ensure that they are compliant with climate law?
How should companies plan for global warming changing the nature of their business in the
upcoming period? How can companies embrace opportunities to be more climate conscious
and improve their own business practices as a result, for example cutting out inefficiencies
or using (cheaper) renewable energy?
Techonomic cold war – there is a drive to dominate global technological infrastructure by
companies and states.’ The stakes are high; significant economic benefit and power may
accrue to those who shape these technologies…[which may be why] government are
intervening in these technology domains — and not just with traditional tariffs and quotas[.]
The US has banned specific foreign (mostly Chinese) companies. China has indicated it may
retaliate in kind. There are reports of increased scrutiny of Chinese scientists working in the
US. Russia has banned smartphones, computers and smart televisions that are not pre-
installed with Russian software, even announcing plans to set up its own alternative to
Wikipedia. And the US military has banned service members from using Chinese-made social
media platform TikTok amid growing concerns about security risks.’ (EY, 2020: 34) As a
company in the tech industry, the opportunities and threats are clear. But it also makes
cyber and information attacks a problem for states, companies, political parties and activist
groups as other states, companies, political parties and activist groups use them as a
weapon to further their power and undermine the power of others. Companies are at real
and increasing risk of cyber attacks. In 2017, the WannaCry virus shut down the computer
systems of the NHS (the UK’s National Health Service), Deutsche Bahn (Germany’s main
train provider) and other state-owned bodies. Deepfakes and disinformation are becoming
easier to undertake, too. Data breaches are commonplace. As a manager, the need for
robust cybersecurity is significant, not just to protect data, but to guard against
disinformation targeted at the firm or that the firm may fall prey to. Imagine a deepfake
made of a CEO of a leading car manufacturer that says ‘we don’t care about safety, we care
about profit.’ If you were a manager of a car hire company looking to buy cars from such a
manufacturer, how would you check if this video was real or fake? If you are the CEO in
question, how can you prepare your company for the risk of this sort of deepfake?
Managers will want to ask themselves how they are preparing for the cybercrimes of
tomorrow, such as deep fakes and disinformation.
Behavioural economy – We reveal more about our hopes, desires and fears to our
smartphones than to our friends or family (Stephens-Davidowitz, 2017) and those who can
gather and crunch this data stand to benefit significantly from these insights. The expression
‘data is the new oil’ has become a way of saying that this data about ourselves that we give
away everyday allows companies to codify, analyse and benefit from this data that we leak
out about ourselves. Applications for this technology are huge. Nudging has been used to
increase compliance with covid-19 lockdown rules, encourage people to sign up for Amazon
Prime, and to prompt consumers to make particular choices from a restaurant menu. One
example of how this might develop in the future is affective computing, which makes use of
behavioural data sets to create AI that can recognise human emotion and respond to it. An
application might be a sales avatar: “Imagine a salesperson avatar that can simultaneously
maintain eye contact with hundreds of customers while modifying her accent, choice of
words and tone of voice based on data about each customer’s preferences.” (EY, 2020: 41).
Governments and companies already use this information to shape behaviours, for example
through nudging, which uses behavioural insights to prompt humans into taking particular
actions. The impact for companies and their managers is significant, with consumers
preferring to interact with companies who use their data to ‘empower and engage’ with
them rather than ‘exploiting and alienating’ them (EY, 2020: 42). There will be increasing
legislation in this area, too, and complying with it will be an added challenge for managers.
Synthetic media – this relates specifically to the falsification of information through the
manipulation of audio, video or text to change its meaning or context. ‘Consider that a 2011
video of consumers apparently swarming a grocery store in a suburb of Amsterdam to stock
up because of the novel coronavirus went viral. Although the video is real, it has been taken
out of context and in a time of heightened anxiety, could stoke unnecessary panic. Now
imagine the consequences if a speech or interview with a CEO was similarly edited to have
them admitting to dangerously low stocks of groceries.’ (EY, 2020: 46). A range of
techniques are under exploration and development to restore trust, including digital
watermarking and the use of blockchain to prove the ‘provenance’ of a file, as well as digital
forensics, used after a breach, to see if a file seems legitimate or fake. AI might be used to
look for inconsistencies in lighting, pixilation, writing tone, or even eye-blinking patterns in a
video. As a manager, being aware that you might be the subject of, or sent, synthetic media,
is critical. You can use ‘slow thinking’ (Kahneman, 2011) - really interrogating what you have
been sent to see if it is likely to be real, and basic digital forensics, to try to reduce your
chances of being tricked by synthetic media. You will want to consider how to train
employees and customers to be savvy in trying to spot synthetic media, too.
Future of thinking: Our embrace of technology is changing the way that we think. We are
addicted to our smartphones, with the average millennial in Britain checking their phone
150 times a day. Assuming we are awake for 16 hours, that’s an average of once every 6
minutes and 24 seconds. Our engagement with social media has polarised our thinking,
particularly with regard to politics (Ebner, 2020). Our ability to think critically (for example, to
decide what is true or false) has significantly dropped. As an academic, you would once have
trusted me to try to tell a version of truth that is based on credible evidence – my PhD
would have been a badge of my veracity. However, because we all find it harder to work out
what is true and what is false, this has undermined your trust in people like me. On the flip
side, trust may be placed in sources that support what people already think is true
(confirmation bias) and despite lack of evidence to support claims, critical appraisal is not
considered necessary in such cases. Then as managers, you will need to develop your own
critical thinking skills as well as finding ways to prompt that in your staff. You will need to
manage a workforce with shrinking attention spans and high social media distractions? We,
as individuals and managers, also need to consider what the next generation of technology
is likely to do and how it will shape our ability to think in future.
Work and life unbounded: Monday to Friday, 9 – 5 work is diminishing. The boundaries
between work and home are less than they have been for over a century, and Jack Ma (of
Alibaba) and Elon Musk (of Tesla) both strongly advocate for workers to be ‘at work’ for far
more hours than the conventional 40 hours that full-time work once represented. The
presence of smartphones at work reduces the gap between work and leisure, too, with
personal issues more likely to come to work with us, and our work more likely to go home
with us in the form of emails and messages from colleagues and clients on our phone. The
French have introduced a law on the ‘right to disconnect’, meaning that companies cannot
expect workers to be ‘on’ all the time. Home working patterns have been accelerated by the
pandemic and as a result, office workers are likely to spend more time at home after the
pandemic than they did before. Companies will need less office space, workers gain back
their commuting time (although possibly use it to put in more hours of work). Alongside,
feelings of loneliness and disconnection grow for some. Retirement is no longer something
that happens to all of us by our mid-60s, but rather something that some look to embrace in
their 30s whilst others push back until their 70s or even 80s. It is hard to see where these
patterns will settle in the medium to long term, if indeed they will. Education is no longer
something to be completed at the beginning of a working life, but rather something which
allows the transition from one career to another, as career becomes ‘a project of the self’.
Managers and their firms have much to explore and unpack here, around who works, how
and when and what impact it has on productivity for example. How do you put to good use
25 year olds who want to retire at 40 with no dreams of becoming board members? And
what about 67 year olds who would like to work for another 15 years for the fun of it? How
do you create workspaces and experiences that can cope with some workers in the office
whilst some are at home (or rather, anywhere except the office)? Here's an article that Dr.
Katie Best wrote for her leadership blog, reflecting on how leaders can influence remotely,
giving advice on just one element of this megatrend. You can see that, in relation to 'work
and life unbounded', there is a great deal for managers and leaders to do.
Microbiomes – microbiomes are the microorganisms present in a particular environment,
for example the human gut or the sea floor of the Marianna Trench (the deepest part of the
ocean). The more we are able to analyse microbes and microbiomes through advanced
technology, the more we are able to harness the power of microbes. We have already made
use of them in the production of wine, cheese, insulin and antibiotics for years, decades or
millennia. However, we are seeing myriad additional ways we can use them, for example in
fighting climate change (e.g., turning CO2 into carbon neutral or carbon negative
products), reducing plastic waste or promoting crop robustness through encouraging good
microbes in the soil. There’s growing recognition of the role that the microbiome of the
human gut plays in human health, reducing chances of cancer, food allergies, type II
diabetes and Parkinson’s disease, for example. Thus, being able to engage in a mindset
where microbes have important roles to play in the ongoing development of society is a
mental leap that managers should try to take. Are there any innovations in your industry or
related industries that could be improved through innovations at the microbial level? This
might range from employee health to innovations in your production processes or the
delivery of your services.
Synthetic biology – or ‘synbio’, ‘is an interdisciplinary science that uses an engineering
approach to biology to design and build functions in cells. At the heart of synbio are tools for
reading and writing DNA, the code that drives cell operations. The synbio approach also
standardizes biological parts and systems to copy, change and scale genetic innovations
much more quickly than legacy genetic engineering methods.’ (EY, 2020: 70). This is possible
because DNA sequencing is much cheaper and quicker than it was; machine learning can
crunch DNA data to identify ‘ideal’ combinations, editing tools can ‘snip’ and combine new
genes, and ‘biofoundries’ can copy or tweak genetic designs. This combination of
innovations can lead to personalised therapies based on one’s own DNA sequencing, can
optimise food production, and can detect DNA in an environment and thus work out which
pests are blighting a field of crops. DNA technology is complicated, but can ultimately lead
to innovations in supply chains, materials, manufacturing and business models. Managers in
related sectors will need to explore whether and how this might have an impact on their
business. For those in sectors which currently feel unrelated, they will need to consider how
this is likely to change.
3.4 Reflection – megatrends
What is a megatrend? Give an example of a current megatrend, with a short explanation or
example, on the discussion group.
Which of the megatrends appearing in the discussion do you think will have the biggest
impact on the industry you are in, or plan to join after graduating? Why?
Can you find another ‘megatrend’ (perhaps identified by a different consultancy practice or
individual) online that you also think may be relevant for your industry? Why? How?
Feedback
“Megatrends are macroeconomic…forces that are shaping our world, and our collective
futures in profound ways. The implications of these forces are broad and varied, and they
will present us with both tremendous opportunities to seize—as well as extremely
dangerous risks to mitigate.” (Thomas Modly, PwC Global Leader, Government and Public
Services Sectors, 2016)
Examples
Decarbonization
Techonomic cold war
Behavioural economy
Synthetic media
Future of thinking
Work and life unbounded
Microbiomes
Synthetic biology
You may also have chosen a megatrend that is not featured in the EY report but which
appears in another report, such as resource scarcity or accelerating urbanization (both of
which feature in the PWC megatrends work, for example).
3.5 Conclusion
The idea here is not that you, as a management student or manager stick doggedly to this
list of factors for the long-term. Rather, you should stay abreast of what is happening in the
global world and identify which factors are likely to have an impact on your industry, firm or
work in the short, medium, long or very long term. Doing so will allow you to create
strategies and approaches which look to work with these megatrends or other factors and
shape business decisions today around the impacts of tomorrow.
At the heart of work of managers and leaders is figuring out how these megatrends will
impact the work of your organisation, team, stakeholders and yourself.
You will notice, at the root of these eight megatrends are the broader forces we mentioned
earlier, of technology, globalisation, demographics and environment. Staying on top of what
is happening with regard to these broader forces would be a better strategy than obsessing
specifically over the eight megatrends listed above, which represent the (albeit well-
informed) opinion of just one management consultancy practice.
4 How Will You Keep Up To Date?
4.1 Discussion
How will you as a management student and/or a manager stay up to date with what is going
on?
Dr. Best, who is writing this, at time of writing, tries to do the following to help with future
thinking:
• Listen to a short (but entertaining) news podcast every weekday, e.g., The Smart
Seven or The Times Morning Briefing
• Listen to at least one more detailed ‘behind the news’ podcast a week, e.g., Tortoise
Media or Guardian Long Reads
• Listen to any business podcast series that catch my imagination, e.g., ‘We Crashed’
• Read every issue of Harvard Business Review
• Reads the transcripts of Ted talks that she’s sent to look at. (She finds this quicker
than watching them – she’ll only watch them if there’s something really relevant she
wants to see the person present on)
• Scan email newsletters from HBR, Medium and 2 – 3 other news outlets to see what
is happening and if there’s anything I need to be paying attention to
• Not shy away from things I don’t understand by reading about them. In the past
twelve months, I’ve read books on Blockchain (for the 4th time, as I keep forgetting
the nitty-gritty of how it works); Social Extremism & the dark web (e.g., learning
what 4chan, 8chan, QAnon and redpilling mean); nudging to make the world fairer
for women; why we should all be generalists; a business biography about Jeff
Bezos/Amazon; the story of Theranos.
• Reads up on trends and megatrends when articles come along
What will you do to stay on top of trends and megatrends?
5 Scenario Planning
5.1 Scenario Planning
If we look at the business of today, it is not dealing with just one complexity, but many. This
will not change in the future. As such, when we look at future trends, we should not limit
our scope to just one future possibility at a time. Instead, we will want to look at a range of
plausible scenarios for the world in which a business will be operating.
Scenario planning is based on this approach. It began in the early 1970s, building on the
work of Herman Kahn at Shell. Scenarios were devised to aid Shell oil company to prepare
for changes in the market as the oil-rich nations Middle-East began to form an alliance.
What would the future look like? Was it possible to predict just one future, or would it be
better to predict many, and then try to design a strategy for now that might be robust
enough to deal with any of them?
‘Scenarios offer plausible alternative views of how the macro-environment might develop in
the future, typically in the long-term. Thus scenarios are not strategies in themselves, but
alternative possible environments which strategies have to deal with. Scenario analysis is
typically used in conditions of high uncertainty, for example where the environment could
go in several highly distinct directions.’ (Whittington et al., 2020: xxxx).
As a result of scenario planning, Shell was better able to manage the impact of the OPEC oil
embargo in 1973 than its competitors. These exercises marked the beginning of scenario
planning as a strategic tool for managers.
Scenario Planning uses stories about alternative futures to challenge assumptions and
widen perceptions of the present. The process does not attempt to predict the future, but
aims to explore possible changes in the environment to inform strategic decision-making.
The process has a number of stages:
• Invite the right people to participate: companies will want participants who have
significantly different organizational roles, points of view, and personal experience.
Also need representatives of the three powers necessary for any effective
conversation about strategy: the power to perceive, the power to think, and the
power to act.
• Identify a small range of big-scale factors that may play out in the future, e.g.
megatrends, or factors you have identified in a PESTEL analysis (perhaps deepfakes,
or increased government intervention, or synbio may be important for your
sector/firm). A Porter’s Five Forces Analysis can help here, too.
• Imagine plausible, but dramatically different, futures: don’t just extrapolate from
present trends – push the envelope of plausibility for 5, 10, 20 years. Those with
experience of running scenario planning and related exercises say that this is the
most difficult stage of the process, and good facilitators can both prime the
imagination and maintain the guardrails of reality.
• Inhabit those futures: futures Strive for an immersive experience. Creating artefacts
from the future such as fictional newspaper articles or even video clips, often helps
challenge existing mental model. Try to immerse yourself as much as possible. Giving
the scenarios names can also help, e.g. ‘everything is mayhem!’, ‘Big Brother’,
‘Happy times’, etc. This is also known as the ‘exploration’ stage.
• Isolate strategies that will be useful across multiple possible futures: What should
we be doing now that would enable us to operate better in different scenarios? Look
for commonalities, single them out, and identify plans and investments that will
make sense across a range of futures. This is also known as ‘exploitation’ – making
use of information in the present that might come to bear in the future.
• Implement those strategies: Encourage use of what’s been found, building support
and a new language about the future. It should be a formal system in which
managers have to explain explicitly how their plans will advance the firm’s new
strategies. Here, you may want to make use of the business improvement and
strategic choice models that you know, as well as leaning on skills of leadership,
change management and performance measurement.
• Ingrain the process: a process that continually orients your organization toward the
future while keeping an eye on the present. Iterate scenario planning, and measure
success through performance measurement, for example.
5.2 Use of Scenario Planning
The use of scenario planning is not limited to private companies, but is also used by
governments and not-for profit organisations. Read the following article to see how a staged
scenario is used to prepare for a possible major terrorist incident in London:
https://www.bbc.co.uk/news/uk-33315691
An article in HBR also showed how the Coast Guard was well-prepared to deal with the mass
evacuation of Manhattan during 9-11 because it had prepared for a similar possibility
through scenario planning and so was ready to act (Scoblic, 2020).
The cost of staging large-scale scenarios is high, but important lessons can be learned. It can
be hard to imagine all the practical difficulties from a round table discussion and this allows
ideas and issues to be bottomed-out and explored:
‘The point of scenarios is more to learn than to predict. Scenarios are used to explore the
way in which environmental factors inter-relate and to help keep managers’ minds open to
alternative possibilities in that future. A scenario with a very low likelihood may be valuable
in deepening managers’ understanding even if [it is never likely to occur].’ (Whittington et
al., 2020: 480)
Advocates (Van der Hejden, 1996) say that scenario planning is excellent for discouraging
managers from relying on one world view. In this sense, it can be used as a debiasing
method, encouraging a firm to consider a range of perspectives. However, it is very time
consuming and costly when done properly, which can put off many people (Boddy, 2014).
5.4 Scenario Planning exercise
You may wish to have a go at scenario planning yourself. If so, choose a company or not for
profit you are very familiar with and undertake the stages in the notes and lecture. It is hard
for us to set a specific question here, as the choices are endless and the situation changes all
the time. It is, for the same reason, hard to give generic feedback. But if you work through the
stages you have been told about, then you will gain a better understanding of scenario
planning in practice.
5.5 Conclusion
This unit has covered key themes with regard to future thinking, as well as encouraging you
as a manager to remain engaged in the wider world, rather than becoming blinkered and
over-focused on your particular role and organisation. As you head towards the end of Core
Management Concepts, you may now feel more prepared to engage with the sorts of topics
that managers who take a broad view of their work are able to engage with, and to see how
the tools and techniques you have learnt on this module so far would serve useful purposes
in helping businesses to adapt to wide-scale change.
6 Future Thinking Quiz
Please attempt the quiz on the VLE.

7 Exam Preparation: finding examples
7.1 Exam Preparation: finding examples
On this module, we look very favourably on students making use of examples that are not
directly used in the notes. For example, if you were going to do a 4Ps marketing analysis, we
would be more impressed if you were to perform one that was not based on Amazon. If you
were going to do an analysis of structural change, we would prefer examples that were not
Innocent Smoothies.
This is to encourage you to engage more substantially with the topics by looking for
examples outside of the core syllabus.
There are a number of places that you can look for examples. Some of my (Katie's) preferred
places are listed below.
1. Business coverage on news and magazine websites
The main news sources that I rely on for business examples are:
The Guardian: you can look in general, or search for a particular topic, e.g., 'Trade Unions' or
'Diversity and Equality'
BBC News business: as above, you could look at the general business coverage, or narrow
down on a particular business topic, such as 'the sports industry'
I also make use of more specialist business outlets, such as:
Forbes: they have great coverage on most strategy and HR topics, including motivation,
corporate strategy, marketing, etc.
Medium: has some free-to-post (less good) and curated (much better) content, and has
some excellent edited magazines, such as Inc (focused on scaling a business), The
Entrepreneur's Handbook, Marker (mainstream business writing that is very digestible),
and Forge (personal professional development)
2. Mainstream academic writing
For the purposes of this module, pure academic journal articles are probably too detailed.
However, there are plenty of places with engaging coverage of academic research including:
Harvard Business Review and HBR.org: in my personal view, these are the best resource for
this module, with highly varied coverage across the syllabus. Search for almost any topic we
have covered and you will find a wealth of materials packed with examples. If you are a
young professional or soon to become one, you may also enjoy their newsletter, Ascend,
aimed at your demographic.
MIT Sloan Review: the paywall on this highly regarded university-based magazine comes
and goes, but it's fantastic if you can access it for strategy coverage, again, packed with
brilliant examples.
LSE Business Review: LSE puts together this great business review once a week. Sign up to it
because you want to, not because you feel you have to, but you will find it full of useful
examples and interesting research, much of which meshes with this module's syllabus.
The Conversation (this link goes straight to the business coverage): A free to access
publication written by academics but in journalistic style. Worth checking for interesting
updates and examples on a semi-regular basis.
3. Podcasts
Some which I think have a lot of content particularly relevant to this module are:
HBR Ideacast: podcast episodes with HBR writers, academics and guest article writers,
talking through the lead HBR articles. Often a more engaging and insightful way to learn
about key topics than just reading through them.
Tim Harford's 50 things that made the modern economy: you will have seen this podcast
referenced a few times in this module. It is full of interesting business examples and themes,
for example looking at how factories have changed society. Or how Google has. Or how the
credit card, or fast food franchise, or spreadsheet has. They are all less than 12 minutes per
episode, and packed with interesting examples.
Business Wars; If you are particularly interested in a specific industry or company (and their
rivalry with other companies), this podcast takes an in depth look into their relationships,
their industries and their ways of doing business. It is fantastic for thinking about the topics
of strategy, change and leadership.
Some longer series which talk about specific businesses or industries:
WeCrashed: this podcast looks at the rise and fall of WeWork, the hotdesking company that
got overvalued due to a lot of market hubris and some big marketing. It's packed with
interesting examples relating to marketing, strategy, conflict and culture.
Sneakernomics: this podcast explores the trainer industry, taking a wide view and once
again covering strategy, leadership and change.
4. Movies
Movies about businesses can be very interesting and a great way of engaging with examples
without having to work too hard! Some that I have really enjoyed and which you might find
helpful:
The Founder: the story of the rise of McDonalds. Where it came from, and how it came to
stand for a particular type of Taylorism and consumerism is fascinating. It's a great movie
with Michael Keaton in the leading role.
American Factory: this docu-movie looks at what happens when a Chinese company take
over an American factory. It's packed with conflict, resistance, unionisation, culture,
strategy, leadership, future thinking and change management. From 40 - 60 minutes in, you
can watch a snapshot of the movie which covers almost all the themes in this module. It's
brilliant, funny at times, sad at times, and really engaging. It's made by Michelle and Barack
Obama's production company, Higher Ground, with really high production values.
Sherpa; Another movie-length documentary, this time with a strong focus on conflict,
resistance, unionisation and leadership. It explores the challenges in the relationship
between the tour leaders on Mount Everest, the tourists, and the Sherpas.
The Smartest Guys in the Room: this movie focuses on how Enron collapsed, with a strong
focus on the financials and the leadership dimensions of the firm and its auditors. It is both
entertaining and really informative.
5. Business biographies
Biographies of businesses, or business people, are great for examples. Some that I've read
recently that I've really enjoyed and have made good use of:
The Everything Store: this book focuses on the rise of Bezos and Amazon, and is really well
researched and documented. It's quite old now, and I would recommend only the first half
which contains the genesis story of the business. How did Amazon come to be? What role
did Bezos play? What is their culture and how might it have helped Amazon to become so
big? You will find answers to these questions and more.
Uncanny Valley: this is a first-hand account of a woman who works in Silicon Valley and finds
it somewhat lacking in terms of gender equality. She talks a lot about company culture, how
hard you are expected to work, and how formulaic it all is. It's not directly attached to any
specific module, but if you have not worked in a tech company and would like to read an
interesting tale about it, this is a good one to go for.
Shoe Dog: this honest account of the rise of Nike by its founder, Phil Knight, is both
spectacularly entertaining and packed full of examples. Management accounting, culture,
conflict, change, leadership, marketing and strategy are all brought to life. You will also learn
a lot about Nike (and Onitsuka Tiger) which you did not know before.
7.2 Find examples
Go to 2 - 3 of the resources that I have pointed you towards, or others that you think may
be helpful, and find ways you could use examples in your revision notes and answers.
7.3 Exam preparation: using examples
Your examples will come in useful for answering questions which ask directly for examples:
Section A - on some questions, we will ask you to 'give an example':
• What is the division of labour? Give an example of a work setting where division of
labour is used extensively.
Section B - on some questions, we will ask you to justify your answer with the use of
examples:
• How could adopting a more Tayloristic approach help Company Y to improve their
output? Give an example of another setting in which Taylorism helps to improve
output.
Section C - we will regularly ask you to make use of examples:
• Give two examples of situations in which it may be challenging to classify costs.
Critically evaluate the role that Activity-Based Costing can play in cost classification.
With each of these, you can integrate your example into your answer.
It will also help you in Section C in particular, where you may be able to use the space that
the longer-form essays allow to add examples to explain and justify your responses to the
questions:
• Critically assess the strengths and weaknesses of Porter’s ‘Five Forces’ framework.
• What is scenario planning? Discuss its utility to a practising manager.
With both of these questions, you are not directly asked for examples. However, you can no
doubt see that there is some value in using examples to help answer each of them. You will
be able to show your understanding of both Porter's Five Forces, and scenario planning, if
you use examples. In line with this unit on Future Thinking, you should now try to think of
how you would use examples in an answer to the question:
What is scenario planning? Discuss its utility to a practising manager.
Some feedback will be given on the next page of notes.

7.4 Feedback on finding examples exercise
The scenario planning question is practically calling out for an example of how a company
would use scenario planning in practice. If you were to lay out the key stages of scenario
planning, you could use a company to explain how this model might work for them.
For example, you could pick Coca-Cola, and say that some of the issues they may be focused
on could be:
• Severe interruption to the water supply
• Further backlash against obesity
• Laboratory manufactured sugar substitutes
• Synbio leading to a cure for obesity or diabetes
Etc.
When they create futures which are combinations of these, you could briefly make up the
name of one, e.g., 'Diabetes-free but no water to drink!'
Or, if you happened to have done some research on scenario planning, you may have found
more detail on the work done by Shell with regard to scenario planning and be able to
elaborate on that.
(NB: We would be less impressed by information on the US Coastguard, as this is covered in
detail in the notes and essential reading)
Block 19: CULTURE & CHANGE

Essential Reading
https://hbr.org/2012/07/cultural-change-that-sticks
Huczynski, A.A., and Buchanan, D.A. (year t.b.c.) Organisational Behaviour (most recent
edition you can get access to). Chapter on 'Change'.
Further reading
Nahavandi, A. (2014). The Art and Science of Leadership. Harlow: Pearson Education.
Chapter 9: Leading Change. This chapter is a good summary of the key themes and topics
covered within this unit. If you are struggling with any of the key themes, this chapter will
help.
Yukl, G, and Uppal, N. (year t.b.c.). Leadership in Organisations (most recent edition you can
get access to). Chapter on 'Leading Change and Innovation'
https://www.cimaglobal.com/Documents/ImportedDocuments/48_Change_Management.p
df
https://www.forbes.com/sites/grantfreeland/2018/07/16/culture-change-it-starts-at-the-
top/?sh=69555a3236c2
The Visual MBA, Chapter 14, the general manager's role (particularly the graphics on
change)
https://hbr.org/2007/03/what-it-means-to-work-here
https://hbr.org/2021/02/wfh-doesnt-have-to-dilute-your-corporate-culture
2 Culture
2.1 Organisational culture
Organisational culture is a set of social norms that govern the behaviour and attitudes of
members of a group, and that older members of a group pass culture on to younger
members. Even more precisely, culture can be defined as “a pattern of shared basic
assumptions learned by a group as it solved its problems of external adaptation and
internal integration, which has worked well enough to be considered valid and, therefore,
to be taught to new members as the correct way to perceive, think, and feel in relation to
those problems” (Schein, 2010:18).
Shein says that there are three levels of culture in an organisation, that we can look at if we
wish to understand what culture is:
Artifacts - these mark the surface level of the culture. They are the visible elements of the
culture and can be seen or noticed by an outsider to the organisation. These can include:
• Physical artifacts such as office spaces, desks, uniforms, website designs

• Language, such as how employees address each other and slogans, special
expressions or abbreviations, and modes of communicating.
• Stories and myths circulating among the staff, that show what counts as heroic or
rewarded behaviours, what should happen in particular situations, and what
happens if you make a mistake around here.
Artifacts are visible, but not necessarily easily understood or observed by everyone alike. An
observer needs to be careful that they do not make assumptions about a culture based on
visible artifacts. For example, a very strict uniform could be a sign that a supermarket is very
rigid about process. But it could also be a sign that they are very keen on equality and it is a
way for all employees to appear the same. These are two very different interpretations of
the same artifact and would lead to significantly different conclusions. Moneypenny offer
virtual assistants, and one might think that this was work which needed head-down
concentration on a connection with someone who is potentially thousands of miles away. It
might thus be a surprise that they have designed an office that has a treehouse in the centre
of the reception area, and lots of breakout spaces. They say that they want a space that
appeals to outgoing, happy, fun-loving people as they are in line with the company's values
of offering upbeat, helpful, friendly, outgoing PAs to their clients.
Values (also sometimes referred to as espoused values) are the company's declared set of
values and norms. They reflect the shared opinions on 'how things should be'. It doesn't
necessarily mean that everyone always acts in line with these values, but they help
organisational members classify situations as 'in line with the values' and therefore
culturally desirable, or 'out of line with the values' and therefore culturally undesirable. The
founder of Southwest Airlines, Herb Kelleher, was famous for replying to proposals from
colleagues with the phrase, 'low cost airline', reaffirming the value of affordability. They
could then consider for themselves if what they were suggesting was in line with that
value (Burkus, 2014).
Assumptions (also referred to as Shared Basic Assumptions) are "the beliefs and behaviours
so deeply embedded that they can sometimes go unnoticed. But basic assumptions are the
essence of culture, and the plumb line that espoused values and artifacts square themselves
against." (Burkus, 2014). Zappos, the shoe retailer, believes that providing outstanding
service will lead to loyal customers in the long-term, meaning that if they are out of stock of
a particular shoe, Zappos salespeople will send the customer to a rival for the shoe. This is a
very strongly customer-centric approach - a basic assumption around which the company
operates. Other basic assumptions might gravitate around factors such as creativity &
innovation; learning; process excellence; cost-leadership; results-driven approaches, and so
forth.
Describing an organisational culture
In order to describe an organsiation's culture, we can make use of the Competing Values
Framework (Quinn and Rohrbaugh, 1983; Hartnell et al., 2019).
It measures culture along two axes:
• flexibility & discretion vs. stability & control

• internal focus & integration vs. external focus & differentiation
It thus creates a quadrant with four distinct culture types, which speak of different
organisational values:
A clan organisation has a high level of internal focus and integration, and a high level of
flexibility and discretion. This means that there is a strong dimension of engagement and
collaboration in the organisation, and a strong focus on people development. They tend to
have friendly working environments and place an emphasis on teamwork. Examples might
be family businesses or tech start-ups.
An adhocracy organisation has a high level of flexibilty and discretion, and a high level of
exteral focus and differentiation. Their aim is to create, often through innovation and
adaptation. They have a dynamic work evnironment which feels very entrepreneurial.
Examples might be an advertising agency or a design studio.
A hierarchy organisatoin has a high level of internal focus & integration as well as high levels
of stability and control. They are very formal, and focused on efficiency. A government
department is a very good example here.
Market organisations are focused on competing. They have a high level of external focus &
differentiation, as well as stabiilty and control. They are results-focused and want to win
market share. Banks, insurance companies and mobile network operators would be good
examples of this type of business.
It is also important to note that companies can have elements of all types within them,
eitehr because they have a ragne of subcultures, or because they sit nearer the middle of
one or both spectrums. So, for example, Accenture (the consulting fimr) has a strong
reputation for being competitive (market), but also for people development (clan). Some
departmetns are more focused on delivering dstandardised consultancy services (hierarchy)
where others have a focus on much more bespoke work (adhocracy)
2.2 A Strong Culture
A strong culture
A strong culture can be defined as a “high degree of consistency among organizational

members in terms of their shared belief structures, values, and norms” (Ashkanasy &
Jackson, 2001:400). This might mean that they sit clearly in one quadrant of the Competing
Values Framework and everyone is in agreement around this.
One can assess strength not only on whether the beliefs are widely and consistently held
throughout the organisation, but also on whether they are intensely held (Sørenson,
2002:72). Whether a culture has developed to this degree can depend on several factors:
• Length of time the group has existed: The longer the shared history of a group’s
members, the more likely they are to have a strong culture. An organisation might
not have an overall culture due to not having existed for very long, or due to its
members frequently changing.
• Intensity of the group learning experience: The culture of a combat unit, for
example, might be particularly strong because of the intensity of their shared
experiences. The same principle applies to other groups; if the shared experiences
are intense, then the culture might be particularly strong. An organisation’s
employees might have made it through a particularly tough year, for example, and
the adaptations they needed to survive might have become integral to the
organisation’s culture.
• Mechanisms by which learning occurs: Different ways of imparting knowledge might
create a greater or lesser impression on a student or employee, affecting whether
they remember and implement the knowledge or not. For example, receiving on-
the-job mentoring can be more powerful than formal training (Schein 2010:56).
• Strength and clarity of the beliefs of the group’s founders and leaders: The clarity
of the beliefs of the group’s leaders, and the strength with which they hold them,
can affect the extent to which these beliefs get diffused among the group members.
(Schein, 1990)
Advantages of a strong organisational culture
An organisational culture that is strong in the sense described in the previous section can be
construed as an asset. It has been linked to “job satisfaction, commitment, job proficiency,
and long tenure of employees” (Ashkanasy & Jackson, 2001:400).
Job proficiency can be enhanced due to the clarity surrounding the organisation’s goals and
practices, less uncertainty about the proper course of action, and less debate about what is
in the firm’s best interests (Sørenson, 2002). Increased commitment, motivation, and
performance are also likely if employees feel that their actions are freely chosen (Sørenson,
2002). In other words, employees may personally take on the values and norms of the
organisation’s culture, and so when they act in accordance with those values and norms, it
feels like freely chosen action.
A strong culture can also help to differentiate organisations from their competitors, and it
creates stability within the organisation (Schein, 2010).
To summarise, a strong organisational culture has the following advantages:
• High job satisfaction

• Increased employee commitment and motivation
• Job proficiency
• Long tenure at the organisation
• Differentiation from competitors
• Stability
Disadvantages of a strong organisational culture
Organisations with strong cultures are good at responding to incremental changes in their
environment. Incremental changes allow these companies to adapt their well-established
competencies and procedures to meet the small changes in their environment, without
having to alter any of their fundamental assumptions or beliefs. Problems can emerge,
however, when strong-culture organisations have to respond to fundamental or
discontinuous changes in their environment (Sørenson, 2002). To successfully adapt to
drastic changes, organisations have to discover alternative ways of doing things and develop
alternative mission statements. In other words, they need to engage in “exploratory
learning” where they seek out alternative ways of doing things. However, strong-culture
organisations might not be good at exploratory learning, for the following reasons:
• Greater difficulty recognising the need for change: Strong-culture organisations are
defined by members who share common beliefs. Sometimes members hold these
beliefs intensely, which means that they have a particular understanding of the
world and their organisation’s role. This could make them slower in detecting and
accepting radical changes in the environment.
• Less access to individuals with alternative points of view: One source of exploratory
learning is individuals who hold beliefs that are different from the organisation’s
beliefs. But strong-culture organisations might have fewer individuals of this sort,
and they might be less willing to foster these individuals’ beliefs or accept their point
of view.
• Less likely to foster subcultures: Subgroups within an organisation might start to
develop alternative beliefs, which can be a good source of exploratory learning.
However, subcultures might be less likely to develop and persist in strong-culture
organisations, as they might not encourage or accept alternative beliefs.
(Sørenson, 2002)
As Karl Weick (1985, quoted by Sørenson, 2002:77) puts it, “[a] coherent statement of who
we are makes it harder for us to become something else”.
Besides the difficulty with adapting to change, a strong organisational culture can also make
mergers more difficult, as mergers might require the joining of different cultures (Chatterjee
et al., 1992). Also, an organisation might attract and retain similar types of employees,
leading to less access to alternative and potentially enlightening points of view (Bradley-
Geist & Landis, 2012). Finally, it could lead to undesirable behaviour, such as people hiding
unethical behaviour out of a sense of loyalty.
Therefore, a strong organisational culture has the following disadvantages:
• Can make adapting to radical changes in the environment difficult

• Can make mergers more difficult
• Can attract and retain only similar types of people
• Can unintentionally lead to undesirable behaviour
2.3 Why do you think a strong culture can be a problem? (Q)
In the previous text page, you have heard that a strong culture can create the following
problems amongst others:

Give a short explanation as to why a strong culture could lead to each of these problems.
Would you consider the problems big enough that a company should try to avoid having a
strong culture? Or would you still recommend having a strong culture?
Feedback:
If a culture is strong, it will be quite sticky. As such, it can be hard to get an organisation with
a strong culture moving. The culture, in being strong, is also usually quite rigid and it is hard
to enact change.
If a culture is simultaneously strong, and idiosyncratic (different to other cultures), then it is

more likely to clash with cultures in organisations with which it merges. Because strong
cultures struggle with change, those in the strong culture are likely to be resistant to
changing in line with the other, merging culture.
If a culture is strong, it can be off-putting for anyone who doesn't fit the mould. It can be
very easy to see in advance of applying, as well at application, interview and new joiner
stages, whether or not someone is a good cultural fit. As such, diversity can be discouraged.
As diversity, well-managed, is a critical resource for organisations looking to be competitive
market leaders, a strong culture can be harmful in this regard.
Would you consider the problems big enough that a company should try to avoid having a
strong culture? Or would you still recommend having a strong culture?
Hopefully, you will have answered this question in quite a balanced fashion. A strong culture
is desirable in many ways, for example, because it reduces the need for tight control and
management, it can help to build a strong brand in the marketplace, and it can entrench
desirable behaviours. It can also create the following advantages:
• High job satisfaction

• Increased employee commitment and motivation
• Job proficiency
• Long tenure at the organisation
• Differentiation from competitors
• Stability
However, this may be at the expense of being able to change, welcome diversity, and
merging with other organisations. It may also create problems with fostering subcultures,
which can help with diversity and exploratory learning. On the whole, a strong culture is
likely to be a positive attribute, but organisations will need to keep in mind the downsides
and look to their managers and leaders to keep potential negative ramifications of having a
strong culture in check.
3 Leading & Managing Change
3.1 Organisational change
The word ‘change’ is common in organisations, because change itself is common in
organisations. It has become typical to say that ‘change is constant.’
Identifying a need for change
Organisations are required to keep changing if they are to keep up with global
developments in economics, politics and technologies, as well as changes in legislation,
demographics and a whole host of other surprises.
There are often triggers for change, such as:
External triggers:
• Economic and trading conditions change

• Technological disruption and new technologies
• Changes in tastes, behaviours, values or requirements in society and/or customers
• Activities and innovations of competitors
• Legislation and government policies
• Mergers and acquisitions elsewhere in the market
• Shifts in local, national and international politics
Internal triggers:
• New product/service innovations

• Appointment of new senior managers or a new management team
• Inadequate skills and knowledge, requiring retraining
• Low performance, low morale, high stress, or high staff turnover
• Office/factory relocation, closer to suppliers/customers
These lead organisations to drive change forward to try to increase performance or offset
future problems (Huczynski and Buchanan, 2017).
In most cases, change is meant to do good, or prevent problems. But even when this is the
case, it still routinely brings about problems of its own. In particular, it can create feelings of
uncertainty, fear, grief, anxiety, dislike, anger and suspicion among employees.
3.2 Identifying the scale of change required
Not every change in an organisation will require large-scale change - as you can see from
figure 1, organisational change can happen on a large or small scale, and can have different
end results in mind. It may be difficult to distinguish between realignment and
transformation, and because of this, the end result of change is usually better described as a
continuum rather than as discrete.
If an end result of realignment is needed, this generally does not involve a substantive
rethink of the organisation’s assumptions, beliefs and business model. Comparatively, an
end result of transformation involves a significant redefinition of mission, business model,
culture and/or its structure and processes. A realignment has a greater focus on efficiency
and profitability, whereas a change on the larger scale of transformation goes beyond this
to challenge an organisation's assumptions and beliefs (what we have previously called
culture).
Scale of change (Balogun and Hope-Hailey, 2004)
The senior management team and other organisational change agents need to be aware of
this distinction as transformations require a greater change capability and significantly more
investment.
Whilst it is all on a sliding scale, and somewhat subjective, in order to understand that
change can happen at varying degrees of magnitude and the organisational impacts be
different as a result, classifying the scale of a change can be helpful.
If it is incremental change, and involves only realignment as opposed to full transformation,
we can see that as adaptation. Adaptation is the most frequent form of change that we are
likely to see as it's on a small scale and involves fine tuning to allow it to adapt in continuous
small ways to the external environment. An example might be changing the version of an HR
platform following IT updates. There are small changes, but nothing radical, and it's not a
whole new system, but the same system with some new, better-developed features.
Reconstruction involves significant change within the organisation within a short time
period. The organisation maintains its business model, culture, structure etc. but important
operating approaches might change. Reconstruction can involve a fresh approach to a
problem in order to address a crisis. For example, businesses who had to upskill on online
sales as a result of the Covid-19 pandemic were engaging in a turnaround strategy to
address a crisis.
Incremental change but which is transformational gradually, over time, creating 'evolution'.
This might be a gradual transformation, through training, new systems, and a few new
members of managerial staff, to a customer services function to move it away from 'dealing
with complaints' to 'proactively dealing with customers' over the course of a 3-year period.
There is never a day when a lot changes, but it's a mindset and process shift gradually and
unobtrusively over the three years. ‘Organisational ambidexterity’ is required, because the
organisation tries to balance what it is currently doing with an eye on a gradually changing
future. Whilst research doesn't specifically look into this issue, because of the need to
balance the present objectives against future objectives, organisational evolution could be
considered as a difficult type of change.
Revolutionary change involves a rapid and significant strategic and cultural change in the
organisation that impacts culture, strategy, business models, structure and challenges
fundamental attitudes and beliefs (the culture). The organisation needs to be ‘reinvented’,
often due to competitive pressures. IBM's fundamental changes from a computer supplier
to a consultancy company were revolutionary, and as a result of losing the market to other
players. They had to have revolutionary change, or they may have collapsed.
We will now turn our attention to purposeful, large-scale culture change. That would be
everything in the Revolution category. However, as we have discussed, scale and end result
of change should be considered on a sliding scale, and as such you may wish to consider
some changes that are more evolutionary, adaptive or reconstructive within this, too.
3.3 Instigating change
Instigating change is always a challenge, albeit to varying degrees of difficulty. Large-scale
change requires particular attention because it clearly has enormous impacts on the
organisation, because it affects a large number of people (who may feel negatively towards
the change and fear or resist it), and it will likely require an element of culture shift.
If culture is essentially a set of shared assumptions (values, ways of doing things, etc.) then
these existing assumptions need to be unlearned and replaced with new beliefs in order to
effect a large-scale change that impacts culture.
Phases of culture change
This model of change has been developed by psychologists as a basic explanation of change
in any human system, including organisations (Lewin, 1947; Schein, 2009).
Unfreezing
According to Lewin, the first stage of change requires the organisation to accept that change
is necessary. This will involve leaders and managers breaking down the existing ways of
doing things (status quo) and showing why these can't continue. Therefore, key to this is
showing either why the current way can't continue, or showing that a new way is so much
better that it renders the old way obsolete. This will be easiest to do if leaders have facts
and figures to back up their approach (Kotter, 1995). This may be poor financial results, poor
customer feedback, or a threat of takeover on the horizon. Or they may be a clear and
compelling set of reasons why it's realistic to believe that another way of doing things will
drive better results.
This first part of the change process is usually the most difficult and stressful for those
involved. When you start to challenge the organisation's way of doing things, everything
suddenly becomes off balance. Processes that the organisation has 'believed in' seem
suddenly problematic and outdated, for example. This can evoke strong emotions in people
who are not ready to move on.
You are creating a controlled crisis, which forces people to seek a new equilibrium that
seems relevant and as though it can support the organisation in the future.
To break it down a little more, this process of unfreezing involves three specific elements:
disconfirmation, survival anxiety, and psychological safety (Schein, 2009).
Disconfirmation
Disconfirmation calls into question your organisation’s success. It can be a realisation that
sales targets are not being met, customer approval ratings are low, or other goals or ideals
are not being reached. The organisation might not know (yet) what the source of the
problem is, but it knows that things are not going as planned (Schein, 2009).
We can use the example of IBM, which underwent a radical change from a technology seller
to a tech consultancy giant, to explore the elements of Lewin's unfreeze-change-refreeze
model. In relation to disconfirmation, Gerstner - who was the incoming CEO at the time of
IBM's change - helped unfreeze the senior management of IBM by providing them with
disconfirming data in a dramatic way that shook them out of their comfort zones. In his
1994 speech to the senior management, he presented two charts showing how IBM had lost
market share and how it had scored poorly on customer satisfaction levels. He did this
dramatically, vehemently relaying how they were being beaten by other companies, saying
that they were “getting [their] butts kicked in the marketplace”, and making it clear that
those other companies were responsible for employee retrenchments at IBM. He also
presented photos of rival CEOs and statements from them ridiculing IBM. This was partly to
introduce his personality to the senior management, but also to shake them out of their
complacency. He made sure that they were exposed to, and would remember, the
disconfirming data (Gerstner, 2003:203-207).
Survival anxiety
Survival anxiety occurs when the challenging data is connected to important goals or ideals.
It is the sense that unless the organisation changes, something bad will happen to the
organisation or its members, like the company losing financial viability or long-term
sustainability. It will not survive. And this makes workers anxious. At this point, people
might start to deny the validity of the disconfirming data or argue that it is irrelevant, rather
than immediately realising the need for change. Part of this denial can be caused by learning
anxiety – the sense that beliefs or behaviour cannot be changed without losing something
valuable, like self-esteem or group identity (Lewin 1947; Schein, 2009). Again, the example
of Gerstner above shows that people were shaken by his clear sense that they were being
beaten by others, and things needed to change or else they would fail.
Psychological safety
Members need to feel psychologically safe if they are going to be brave enough to try new
things. They need to know that they can try and fail without being made to feel bad or their
position being at risk. They need to feel that it's possible to change without losing too
much.
It's OK to try new things and to fail at them. This is part of the learning process. The leader
needs to create this sense of psychological safety. Providing role models which show how to
do it, a motivating positive vision, and formal training that reduces the likelihood of failure
will all help (Kotter, 1995; Schein, 2009; Edmondson, 2014). In particular, giving employees
to learn the new skills and behaviours that are required will help them to envision a new
future that they can safely inhabit without threat of exposure or failure.
Changing
Once the organisation has moved past the unfreezing phase (i.e. the need for change has
been accepted and anxiety has been lessened), the changes need to start taking place. In
practice, this means that the new behaviours which are required to effect the cultural
change need to be learned. Another way of putting it is that change needs to be enacted
through people's repeated performance of their new tasks.
People can be coerced into changing their behaviour, but this is not particularly effective: as
soon as rewards or punishments are removed, they will likely fall back into old routines.
The focus needs to be, instead, on them learning the new behaviour and entrenching it in
the way that they do things so that it becomes the norm. This can just be through repetition
and practice. It can also be through imitating and identifying with role models who are
already using these behaviours. In this sense, leaders and their early followers have
important roles to play in guiding the way.
Louis Gerstner outlined the exact behavioural changes that he was looking for at IBM, and
then communicated those to the company (Gerstner, 2003:205-206). He also established a
senior leadership group of three hundred people, for employees who demonstrated that
they were committed to changing the culture and who took the responsibility to lead.
Inclusion in this group was not automatic, regardless of seniority, and members were re-
evaluated annually. As he put it, he “wanted living, breathing role models – regardless of
their place on the organizational chart or the number of people underneath them”
(Gerstner, 2003:208).
Individuals can also learn by figuring out their own solutions through assessing their
environment and testing suitable ways of navigating it. The leader must still be clear about
the ultimate goals being pursued. However, the best way for people to reach that goal
might be to find their own way.
For example, managers at IBM may have tried various ways to engage with clients under the
new business model until they found approaches which worked for the clients and which
won them praise from their senior managers. They may have had a sense of what was going
to work from watching and copying their senior managers in their new approach to clients.
In this sense, the leader of an organisation can choose which of these mechanisms to
encourage by which they model, and which they positively reinforce when workers try them
out.
Refreezing or internalising
The final step in the change process, after learning a new behaviour, is to freeze or
internalise this new behaviour. It will only be internalised as a stable part of members’
behaviour if it meets the approval of important members of the employees’ work and social
groups (Schein, 2009), and produces good results for group members and the organisation
(Schein, 2010).
Whether the new behaviour produces good results for the organisation will depend on
whether the leaders correctly diagnosed the initial problem and recommended the right
behaviour in response. Whether it produces good results for employees will depend on how
leaders react to employees who adopt the new behaviour, such as by rewarding them. The
organisation can also cement the new behaviour by selecting new candidates who reflect
the desired beliefs and values.
In his first speech to IBM’s senior management in 1994, Gerstner stated the following:
This is going to be a performance-based culture. I am personally involved in filling all the

new key jobs in this company, because I’m looking for people who make things happen, not
who watch and debate things happening.
(Gerstner, 2003:205)
Gerstner was relying on the selection of new members to help him create a new culture at
IBM.
If the endorsed behaviour does not produce better results, it can serve as disconfirming
data in the future, potentially helping to initiate a new change process (Schein, 2010).
3.4 Reflection: Experiencing change (Individual Work)
Can you think of a time when a company you know - either because you work there or a
friend/family member does - has undergone change? Can you recognise one or more of
Lewin's stages of change in the process that you saw?
3.5 Practical changes to reinforce cultural change
Degrees of culture change
Culture change need not always be drastic. It can be a small adaptation or evolution
(Balogun and Hope-Hailey, 2004). If the required changes are small, there should be less
learning anxiety. Remember that learning anxiety tends to be caused by a sense that
something valuable will be lost by taking on the new learning. If the changes are small, they
are less likely to challenge people’s self-esteem or identity. The smaller the cultural change,
the less leadership is likely to be needed to effect it.
One way to implement smaller changes is to focus on specific parts of the organisation’s
systems. For instance, if there are small changes to the organisational structure, it can
encourage people to alter their behaviour without requiring them to unlearn too much. A
company that wants a stronger focus on product development could promote the head of
Research & Development to director level, and ask them to feed in to strategic direction
setting. Through this change, incremental changes in strategy may be achieved, and the
culture could shift towards being marginally more innovative in the field of product
development than it was before.
Practical changes to reinforce cultural change
Cultures are reinforced in various ways, and these reinforcement mechanisms can be a
point of resistance when attempts are made to change the culture (Schein, 2009; Schein,
2010). You should be aware of, and adapt, these reinforcement mechanisms if you want
them to reinforce the new culture rather than the old culture. However, the relevance of
each reinforcement mechanism will depend on the change that is being attempted.
Organisational design and structure
Organisational design and structure, in this context, refers to the way the organisation is
divided into units, such as product lines and areas of responsibility. People can be attached
to these divisions even if they are not optimal, such as if they were built around particular
personalities rather than the needs of the tasks.
This structure can reflect certain assumptions, and so it can reinforce a leader’s beliefs, even
if that leader has left the organisation. It can, therefore, be a source of resistance to change
(Schein, 2009; Schein, 2010). Changing structures can be a way to instigate cultural change.
Systems and procedures
For employees, the daily routines and processes of work are highly visible parts of an
organisation (Schein, 2009; Schein, 2010). These are the things that add structure to their
working life. As they are highly visible, they can be structured around the leader’s
assumptions to make those beliefs and values clear to employees. However, they can also
be important sites of resistance, and need to be changed to fit in with new desired cultural
norms and ways of doing things.
Rites and rituals
Rites and rituals – such as certain types of getaways or induction ceremonies – can have
significance if they are carried out regularly, but the meaning of rites and rituals might not
always be clear (Schein, 2009; Schein, 2010). They can be a way to reinforce beliefs - not
only old beliefs, but also new ones. If an organisation is looking for a more customer-
focused culture, then introducing an 'employee of the week' section on the intranet
homepage with the emphasis being on someone who has provided excellent customer
service, will help to reinforce this cultural change.
Design of physical space
The physical design of an organisation can be used to reinforce certain beliefs (Schein, 2009;
Schein, 2010). For example, whether an organisation uses open plan offices or lots of quiet,
private work areas can reflect different assumptions about work and interaction with
colleagues. Physical design will only reflect the beliefs of an organisation’s leaders if the
physical space is actively managed to do so (Fayard and Weeks, 2011). Thus, the physical
space has the potential to be a mechanism by which old or new cultures are reinforced.
Stories about important people and events
A culture can be reinforced by stories about important people or events in the

organisation’s history. These can be told to teach important lessons, or they could be myths
that capture something that is thought to be relevant or important (Schein, 2009; Schein,
2010). It is possible, however, for these messages to be distorted or highly distilled, so their
meaning might get changed or be unclear. This potential lack of clarity can affect whether
they reinforce a particular culture or not.
3.6 Leading Change: Quiz
3.7 Conclusion
If large-scale culture change is necessary, the unfreeze-change-refreeze model can be a
helpful framework for a leader to implement it. Someone who is implementing culture
change should also pay attention to the other mechanisms that help to reinforce an existing
culture, such as organisational design and structure, systems and procedures, rites and
rituals, the design of the physical space, and stories about important people and events.
These mechanisms reinforce culture to varying degrees, and when they do, they can either
work against change by reinforcing the old culture, or they can be a means to reinforce the
new culture. These are things that leaders should pay attention to, given how organisational
culture embodies beliefs and values that can affect the point of view and behaviour of an
organisation’s members.
4 Discussion: Organisational Change
4.1 Discussion: Organisational Change
Carry out an internet search for articles on organisational change - what are the common
pitfalls and challenges that organisations seem to fall into?
What does your research show you are the solutions commonly recommended?
How do they relate to the theories you have learnt in this Unit?
5 Case Study: All Change
5.1 Case study: All Change
Please read the 'OfficeStyle case study.
Consider the following questions:
1. Identify internal and external triggers for change within the case.
2. What could have been done to improve refreezing efforts?
3. What would Brian need to consider when making the decision to outsource or
develop an internal capability?
4. How does Brian initiate the unfreezing process?
5. Why do you think that the organisation might be finding it difficult to implement a
matrix management structure, and embed long-term change?
6. Do you think the choice of Susan to lead the change initiative was a good choice?
Explain your reasons.
Bring your notes to the live session, so that you are ready to contribute to the discussion
Case Study
OfficeStyle Case Study
OfficeStyle is a design-led office furniture company, that supplies office furniture to design-
led organisations and those with design-forward client spaces. The company has been
established since 1964, when it was one of the first to important Scandinavian office
furniture to the UK market. Today its range includes ergonomic desk chairs, modern desks,
office lights and reception furniture. They are increasingly producing items which are
bespoke, working with UK-based manufacturers and designers to deliver unique pieces to
clients with very particular specifications. Due to their strong design element, they have a
loyal customer base including architect practices, advertising agencies and law firms, the
latter who are looking to fit-out their client meeting spaces. OfficeStyle make the most
profit on bespoke and fashionable or statement furniture, but recent changes in the
business environment have reduced spending on furniture for company offices, since many
workers have switched to working from home.
OfficeStyle has a culture developed around design values. People are very much aligned to
their functions and proud of being professional members of those teams. Historically,
OfficeStyle have recruited people who are narrow specialists rather than generalists. The
design team are an influential group, and sometimes production and delivery find it difficult
to get their concerns heard. There is sometimes conflict between teams working in
different departments, with each blaming the other when deliveries are delayed.
The need for change has become clear to Brian Alcott, the managing director, who
recognises the potential to sell stylish office furniture for the home office market. They have
started to explore this market, but realise that to succeed they will need to strengthen their
online presence, and review the make-up and structure of the organisation. In particular:
• This new market would require more compact office furniture for home-offices, with
many people working from home, without suitable or attractive office furnishings.
• It would involve a switch for the sales team, from talking to large companies,
corporate interior designers and facilities teams towards speaking to individual
customers who are looking to fit out their home offices.
• It would lead to the need for a higher number of smaller value sales, compared to
the large corporate contracts that they are used to.
Brian has communicated the changes he hopes to make, and the challenges he perceives.
The vision he has shared has included colours that can be personalised to suit interiors,
lightweight materials and smaller designs. He has also highlighted the risks of doing
nothing, citing plenty of competitors who are likely to go out of business because their sales
have plummeted.
The director of sales has also suggested expanding the range of task lighting into lighting for
home filming for, e.g., YouTube channels to help design-led organisations stay in touch with
their clients and contribute to thought leadership in the 'working from home' space.
OfficeStyle can also promote ergonomic chairs and adjustable desks as a benefit in the long
term to reduce the risk of repetitive strain injuries for employees,
Susan Jones had recently been recruited as director of information systems, a role created
to speed up the order processing system and improve customer service, and this change
was in the process of being implemented. Brian asked Susan about developing a website to
enable the firm to reach online customers. Susan agreed that it would be a great idea, and
could build on the new information system to get additional value from it, but that
additional staff time would be needed, and they did not have the appropriate skills inhouse.
Brian needed to decide whether to outsource the website development or to recruit a new
specialist within the firm.
However, their biggest problem in trying to reach individual customers and to carve out a
market there was the length of time taken to fulfil an order, and errors in order processing,
leading to additional delays for customers. Correcting errors was also having an impact on
variable costs and reducing profits.
Susan decided that it would be helpful to gather some data to find out what was causing
problems and where they were occurring. Staff were asked to attend a process mapping
workshop and, with the help of a consultant, to map the workflow for the order process,
from outset until filled orders were despatched. They used lots of post-it notes on lots of
whiteboards to map it all, with everyone able to fill in their understanding of the process,
and lots of discussion until consensus was reached. This day-long workshop helped a lot, in
that it highlighted a number of unnecessary activities that were making the process from
order to receipt to fulfilment too slow for the average home buyer. Problems included:
• paperwork being lost between departments

• errors in typing order numbers, which sometimes resulted in double
fulfilment of orders
• A general ‘silo’ mentality, with each department frustrated with each other
department for not talking to them enough and thus not flagging problems,
discussing issues, or sharing learning.
• An apparent lack of understanding between design and production
departments leading to products that are stylish but difficult to produce
• The same lack of understanding making the use of standardised approaches
difficult and adding delays into the process.
These problems were likely to be of greater concern when serving the home office market:
whilst corporate clients may be prepared to wait 35 days for an order to be fulfilled, those
looking to buy equipment for their home office were typically looking for their equipment to
arrive within a week or less. Shorter processes would reduce time and remove opportunities
to make mistakes.
Armed with this information, Susan presented the findings to Brian, who agreed on the
need for significant changes to be made and authorised Susan to re-engineer the process.
Susan knew that, despite having the support of Brian, commitment would be needed from
the functional heads and their managers. The change plan would need cross-functional task
forces, each examining a different aspect of the change, which was going to difficult when
all the departments were so bad at talking to each other. Each of the functional heads, and
their managers, were asked to participate in at least one of these teams, to increase their
involvement and to build relationships across functions as well as, importantly, wide-
reaching support for the change programme.
As functions began to work together, discussing the problem from different perspectives
and meeting key customers to understand their needs, there was a sudden, increased
understanding of why the change was necessary.
The functional managers started to put aside their own functional concerns and cooperate
to find ways for the processes to be more efficient and reliable, regardless of whether they
had increased or decreased scope/control in the overall process as a result. They recognised
that this was necessary if the company was to survive. They had begun to see their
competitors file for bankruptcy and they did not want to find themselves in the same
position in six months or less.
Each cross-functional change team reported progress to Susan, who provided a short
summary each week at a meeting with Brian and the all functional managers. If any of the
heads or managers opposed a suggested change, Brian made it clear that these decisions
had his full support, and anything that he deemed unnecessary resistance to change would
not be welcome.
A few weeks in, a recommendation was made, which Brian approved, of new integrated
sales and customer relationship management software to enable better management of
orders from start to finish, and which also acted as the website interface which customers
used to place electronic orders, while also improving the invoice process and inventory
control.
The ordering process included the following stages:
Payment Production
Order Returns &
processing or Sourcing Packing Despatch
placed Refunds
& invoicing of goods
Susan was responsible for implementing the change, but due to increased buy-in from the
functions, this was not as hard as it might have been otherwise. In addition, Susan realised
that the HR Manager (Alan) could provide additional support and training for staff to
strengthen the implementation. She arranged to see Alan and they agreed to deliver a
series of internal sessions to explain the changes and how it would impact on the work they
would be doing, with additional detailed training linked to specific functional needs.
OfficeStyle was taking small steps to a better future. However, many of the problems that
continued led back to its structure. It was emerging as the source of many of the company’s
problems. It was a very traditionally structured hierarchical organisation, and
communication between departments was identified as a source of process errors and
delays.
Brian
Managing
Director
Head of Head of Head of

HR Manager Head of sales Head of Design
Production finance logistics
Furniture Lighting Machine Clearning and Manager: Financial

Sales managers Design Packaging Despatch
Production production supplier consumables Management Accounting
(x3) manager (x4) Manager Manager (x 2)
Supervisor supervisor management supplier Accounting Manager
Furniture Lighting
Sales team Admin Admin 4xmanagement 1xfinancial Furniture Fork lift truck
Chairs (x2) production production
(x12) assistant assistant accountants accountan packing (x8) drivers x4)
team (x45) (x15)
Desks, cabinets Machinery

Drivers (x10)
(x3) packing (x6)
General
Lighting (x1) Despatch clerk
packing (x3)
Blinds and
window
coverings (x.5)
Figure x: Existing structure at OfficeStyle
So, in addition to making changes to the process, Brian decided that it would be a good time
to review the organisational structure. He asked James, the HR Manager for advice about
what could be done. James explained that in a previous organisation, the hierarchical
structure was strengthened by use of matrix teams, based around key products. This
encouraged cross-functional team work, facilitating communication, and reducing problems,
as each team became aware of why other departments had particular requirements from
each process.
A matrix structure was introduced based on 3 key product groups:

a) In house designed office furnishing
b) In house design lighting
c) Sourced and supplied goods, including automated blinds and office machines
Updated organisation chart to include IT and web development, whilst cleaning and
consumables products were no longer being supplied.
Brian
Managing Director
Packing &
IT & Web Production
HR Manager Sales Manager Deisign Manager Accounts Manager Despatch
Development (x2) Manager
Manager
4xmanagement
Furniture
Machine supplier accountants Packaging Despatch
Web sales (x2) Chairs (x2) Production
management 1xfinancial Manager Manager
Supervisor
accountan
Furniture
Desks, cabinets Furniture packing Fork lift truck
Sales team (x8) production team
(x3) (x8) drivers x4)
(x45)
Lighting Machinery
Lighting (x1) Drivers (x10)
production (x15) packing (x6)
Blinds and
General packing
window coverings Despatch clerk
(x3)
(x.5)
Within this structure the following Matrix Organisation was established around the key
product areas:
Sales Design Production Packaging Web/IT Accounts

In-house office X X X X X X
furnishing
In-house lighting X X X X X X
Sourced goods X X X X
Within a year the company had eliminated some of the steps required to process and fulfil
an order, and the average days required had been reduced to 15, but this was still longer
than several competitors. In addition, existing customers welcomed the change to a more
modern way of doing business, enabling online ordering and seamless invoicing. It seemed
that a lot of people working at home wanted their office to look good, since it would be
seen by their customers. It was also functional and more comfortable to work in, so
improved efficiency.
However, although Brian’s vision for OfficeStyle was proving popular with customers, the
change to matrix structure had not been as successful as he had hoped: departments still
tended to keep to themselves, and silos kept occurring that impeded the process flow
across functions. Short-term, the change had improved the order process, and the website
was attracting customers, but the hoped for long-term benefits of involvement in the
project had not succeeded in reducing anxiety about change, making it difficult to embed a
culture that supported long term improvements.
Block 20: Performance Measurement

Essential readings:
Boddy, Chapter 17: Controlling & Measuring Performance. This chapter will provide a good
overview of ways to measure performance and consolidate your understanding of this topic
The Five Traps of Performance Measurement. By: Likierman, Andrew, Harvard Business
Review, 00178012, Oct2009, Vol. 87, Issue 10. This recaps key points about problems with
performance measurement, providing examples of Return on Investment (ROI) and gaming.
Kaplan R S & Norton D P (2007) Using the Balanced Scorecard as a Strategic Management
System, Harvard Business Review. Jul/Aug2007, Vol. 85 Issue 7/8, p150-161. This provides
examples of use of the scorecard to link to strategic objectives and will help to clarify how
the measures can be designed
Triggle N (11 March 2019) NHS signals four-hour A&E target may end, BBC. Explains why
the A&E target is being changed, targets have not been met, and current measures take no
account of how ill someone is. Good explanation of why design of measures is important if
improvements in service are to be achieved
2 An introduction to performance measurement
2.1 An introduction to performance measurement
As we have seen in the earlier units, managers are expected to:
• Control and coordinate business operations, staff members and projects

• Make evidence-based decisions
• Take corrective action when there is a problem
• Operate their departments in line with organisational strategy
• Instigate effective organisational change
• Optimise staff performance, through work organisation, hierarchy, structure and
motivation
When managers take action in the ways that are listed above, they hope that their actions
are going to be of benefit to the organisation. They are working on behalf of the owners, to
whom organisational performance is critical. And so being able to gather data on
performance, analyse it, and take corrective action, are also critical.
The data gathered can take many forms - and we will be looking at some of these forms in
this unit, including data gathered for use in a balanced scorecard.
We will also be looking at the problems with trying to measure performance and how the
data can be notoriously slippery: we end up measuring something different to that which
we wanted to measure, and those elements that are really important to the business may
be too hard to even try to measure in the first place. We will explain these concepts in more
detail later.
However, no matter what it is we choose to measure, the process is largely the same,
focusing on creating measures that enable control:
Figure 1: The Control Process (Boddy 2014: 595)

As a manager, we need to know what we are aiming for, so that we can work out what valid
performance measures may be. These could be set at corporate, divisional, or local level.
Then we need to measure the performance. Once we have done so, we can compare it with
the target or standard that has been set. Where we spot an opportunity or threat to future
performance, we can act to correct the deviation or change the objectives.
A personal example from Dr. Katie Best:
Alongside working for LSE, I run a small consultancy practice, focusing on leadership - Katie
Best Associates. I always set my objectives September to September, as I usually end up
using a couple of hours on my summer holiday daydreaming about what I want to achieve in
the next year. In 2020, this took place in the decidedly unexotic location of a Caffe Nero in
Weymouth (due to covid restrictions on travel overseas). For the year 2020 - 2021, I decided
to focus on my social media presence as a great way to generate leadership coaching clients.
As such, I set myself the target of having 250 followers on my LinkedIn company page by
September 2021. However, it turned out it was easier to gain followers than I expected, and I
had achieved this by January 2021, and so I adjusted my target to 1000 followers by
September 2021. I
On the flipside, I was supposed to have a first draft of the first few chapters of the book I am
writing to a publisher by September 2021. Due to the pandemic and needing to do more
homeschooling than I was expecting, I have pushed this out to December 2021.
My target of three new large projects from corporate clients turns out to be realistic - I'm on
target to achieve this by September 2021.
You will note that the examples above are non-financial. Companies will also likely set
financial targets regarding the amount of revenue or profit they would like to generate, the
maximum costs they would like to incur, or the dividends that they would like to be able to
pay to shareholders.
There are endless targets that organisations can set themselves - financial and non-financial,
and thus a very wide range of ways that companies can seek to measure their performance.
2.2 Reflection on your control mechanisms
You will hopefully remember that, earlier in Core Management Concepts, we thought about
how management is not just a role in an organisation, but also a universal human activity.
We get things done, using our resources and the help of other people.
Part of management is controlling what we do, measuring it, and taking corrective action.
Figure 1: The Control Process (Boddy 2014: 595)
In your work life, your home life, or your university life, think of an example of a control
process that you undertake. It could relate to your finances, your academic targets, or a
work objective.
Apply the four stages of the control process to your example.

2.3 Feedback on reflection
Hopefully, as you reflected on the control process that you use, or have used, in your work,
home or university life, you will have been able to see all four stages in operation.
You will also have had the opportunity to reflect on how good you are at adjusting your
targets when you find that they are too easy or too difficult.
3 Quantitative performance indicators
3.1 Quantitative calculations to measure performance
Internal process and performance measurement:
A manager with an interest in performance is usually interested in a combination of the

following elements (Boddy, 2014, cf. Slack, 2010):
• Cost (what something costs to make; what it can be sold for; labour costs; business
running costs)
• Quality (customer satisfaction; customer returns; defects; disputes)
• Speed (delivery time; throughput)
• Dependability (promptness of delivery; time between failures)
• Flexibility (options available; functionality)
They will often try to quantify these performance elements so that they can have
quantitative targets created which they can compare current and predicted performance
against with the intention of control.
Financial performance measurement:
We saw in the unit on Financial Accounting that financial analysis is a key tool for investors
to understand business performance and to help them make investment decisions (where
to invest and how much) and governance decisions (which business decisions to influence
and how in their role as owner).
In much the same way, financial analysis is of interest to managers looking to understand
their local, divisional or organisational-level performance. However, they will have access to
a wider range of data: not just external figures, but also the business' management
accounts.
Common financial calculations that managers may use to measure performance include:
• Revenue growth - how much the revenue has grown, year-on-year

• Profit margins - ratios such as gross profit margin or net profit margin, to inform
them how profitable the business is and if anything needs to change
• Changes in profit/costs year-on-year/month-on-month
• Revenue per product/service/store/employee
• Divisional performance measures (e.g., ROI - we will consider this shortly)
Additionally, managers may be interested in measuring their competitive position:
• Average cost/profit per unit

• Average selling price per unit
• Market share (size and value)
• Revenue growth in comparison to the whole market or a notable competitor
Such calculations will help a manager to understand their position relative to previous
periods of time, competitors, and other divisions. In other words, it provides grounds for
comparison.
3.2 Using ROI to measure performance in divisionalised firms
As organisations get larger, there is an increasing need for management to decide on ways
to monitor progress and performance across the organisation. In decentralised
organisations (which you learned about in the unit on Organisational Structure), this is
particularly important and can provide a way to measure against planned targets or against
the performance of other divisions. A common measure used is Return on Investment.
Return on Investment (ROI)
This is a popular method of assessing the profitability of divisions and will be used to
illustrate advantages and disadvantages of this approach to monitoring performance.
ROI = (Divisional profit ÷ Divisional investment) x 100%
Divisional investment might be referred to as assets employed.
Both profit and investment definitions need to be clear and applied to all divisions to enable
comparison. So, it could be total assets or net assets, but whichever is chosen needs to be
clearly stated and used consistently across all divisions.
This measure combines profitability and efficiency in the use of assets and is a useful
measure to compare divisions against each other, and performance over time.
However, ROI has some drawbacks. If it is used as a primary measure of performance for
divisional managers it can lead to behaviour that is not consistent with the interests of the
business overall - the agency problem. If a manager is faced with a potential investment
that will yield 20% per year over a minimum of 5 years, but if the ROI of his division is
currently 30%, then this investment opportunity would be rejected. The company would
forego the opportunity for the division to contribute well above the 16% required by Head
Office, because it would appear that divisional performance has declined. This is
particularly likely to be the case if the manager is given incentives linked to the ROI value for
the division.
It can also make divisional managers reluctant to invest to replace equipment and maintain
the buildings, since these costs would reduce ROI.
A problem with ROI is that divisional managers are likely to focus on short-term divisional
performance at the expense of the longer term.
3.3 Benchmarking
A manager will likely be interested in comparing how they are doing relative to others. This
may be other divisions in the same firm; competitor firms; or their own company across
time periods.
Companies can undertake:
Internal benchmarking:
Internal benchmarking is focused on comparing the performance measure in question (e.g.,

profit, earnings per employee, etc.) against last year, or between branches, or divisions, or
geographic regions. A manager might choose to compare their branch of a travel agency to
the most profitable branch in the company, to see how their performance stacks up.
Advantages of internal benchmarking are that it's low cost, quick, and generally easy to do.
It encourages information sharing across the organisation and creates a common language
of what good practice looks like.
However, if the firm is doing badly across the board, comparing internally can just foster the
same mediocrity that has been present. It can also create too strong a feeling of
competitiveness within the firm, rather than favouring collaboration.
External benchmarking:
External benchmarking is focused on comparing the performance against competitors,

industries, or sectors. It is useful for comparing like processes, getting to know your
competitors better, and setting and planning goals. However, data can be hard to come by
and companies will need to make sure that they only gather it in ethical ways that are
defensible in law. Industrial espionage is a serious crime with significant penalties!
It can be a useful result of a partnership with another firm in the industry, and sharing data
could be used as a way to beat out other competitors (and be seen as a form of co-
opetition).
Despite benchmarking against competitors potentially increasing performance by creating

the feeling of stiffer competition, why would a company just want to keep up with the
competition, as opposed to beat it? It can thus lead companies to set their sights too low
(Taylor, 2007). Evidence shows it leads to limited performance improvement for this very
reason, so finding the data may not be worth the effort.
External benchmarking with an organisation that is excellent in its field, even if that is very
different, can improve performance. Doctors at Great Ormond Street, London, made use of
Formula 1 expertise to improve patient transfer from operating theatres. In both situations,
the need for speed must be balanced against the importance of absolute precision. Read
this article to find out how they did it.
Functional benchmarking:
Comparing performance across the same function regardless of industry. For example:
• How quickly can a company pack a parcel?

• What sort of customer satisfaction scores are customer service teams across
industries getting?
• How well are other office-based organisations with around 5000 employees doing at
reducing their carbon footprint year on year
Functional benchmarking provides information on trends in this sort of functional activity

and because it is helping with exploration outside of the immediate industry and towards
'best in field', it is more aspirational.
However, it can be difficult to apply learnings to the company if they have a very different
organisational culture or way of operating. It is important that the manager can visualise
what needs to be done in order to adapt the 'best practices' that they have witnessed.
In sum, benchmarking, combined with financial data, is a useful tool for managers, as long
as its problems are weighed up with its benefits.
4 Problems with Performance Measurement
4.1 Problems With Performance Measures
All approaches to performance measurement have been found to have some weaknesses.
This section will outline some of the key concerns that managers need to be aware of.
There are a number of mechanisms for distorting measurement results that we can observe
in a wide range of organisations (Meyer & Gupta, 1994, supported by sources cited below):
• Ratchet effects refer to the tendency for the people who set the targets (perhaps
senior managers in this case) to base next year’s targets on last year’s performance.
‘A wise director fulfils the plan 105 per cent, but never 125 per cent’(Nove 1958, p.
4). If you fulfil a plan 125%, there may be an expectation that you will match or
better the performance next year.
• Threshold effects put pressure on those performing below the target level to do
better, but also providing a perverse incentive for those doing better than the target
to allow their performance to deteriorate to the standard and more generally to
crowd performance towards the target (Bird et al., 2005).
• Output distortions occur when attempts to achieve particular targets result in
intended consequences on other aspects of the business. For example, focussing on
production or service volume, but not measuring number of customer returns or
complaints may reduce overall quality of goods or services. We can see an example
from the perspective of your student journey, too: if you were in a class and were
told that you would be measured entirely on participation, you may no longer put
any effort into exam prep, as it will not help you to achieve the target that has been
set for you.
• Positive learning results in performance improvement eg: the department manager
has improved key processes to reach the target of reduced staff turnover, and so the
data on performance does not provide any useful insight.
• Perverse learning is reflected in appearance but not the fact of improvement - eg:
NHS diverting patients into a ‘pre-assessment unit’ prior to starting the A&E 4 hour
waiting time helps achieve the target but does not address the issue it was
introduced to combat; long patient waits (Bevan & Hood, 2006)
• Sample selection means that high performers are selected and low performers
excluded eg: universities selecting departments for Research Evaluation, excluding
those that may lower the overall score and reduce allocation of research funding
from government
• Suppression of difference means that, if measures expose persistent differences in
performance outcomes are suppressed eg: if managers can't explain the persistent
difference in a particular measure between divisions, and may be criticised as a
result, then this measure may favoured for removal when metrics are reviewed.
Many of the problems with performance measures above relate to the idea of gaming.
Gaming refers to the way that people may choose to ‘game the system’ if they know what
the system is. In the case of performance measures, this means that as soon as people know
that they are being measured, they will alter their behaviour to try to achieve what the
system expects of them.
The economist Charles Goodhart stated his eponymous law: ’Any observed statistical
regularity will tend to collapse once pressure is placed on it for control purposes’ because
actors will change their conduct when they know that the data they produce will be used to
control them (Goodhart 1984, p. 94).
A manager will be interested in the idea that performance measures become less effective
and/or can be gamed for a number of reasons. Firstly, they will want to reflect on whether it
is affecting their relationship with the performance measures that have been set. Perhaps
they are trying less hard on a target because they are better than the average on the target
and so there is no need to work so hard (threshold effects) or they may not want to make
next year’s target so difficult by working hard (ratchet effects). Or perhaps they are focusing
on meeting sales targets at the expense of providing good customer service (output
distortions).
They will also want to ascertain whether targets that they have set for their teams are
creating any such gaming effects which may have a detrimental impact on the department
or the business more generally. Being aware of such will be important for helping to prevent
counterproductive activities from their teams. However, managers will want to guard
against adding more and more performance measures over time, which can feel like a
logical solution, in order to make it very clear what is expected. What can happen is that
those subject to the performance measures end up overwhelmed by them and unclear on
what it is most important for them to achieve (Willman, 2014).
Thus, there are good reasons for organisations to use a range of different performance
measurements and to replace them over the course of time. This is common in the use of
the Balanced Scorecard measures. This is known as the ‘use it and lose it’ principle in
performance measurement.
Should managers trust the numbers?
It can be tempting, as a manager, to assume that if a target is met, that all is well and no
further action is required. However, this human tendency to ‘trust in the numbers’ can lead
us to overlook problems that may still be hiding behind figures that on the surface look
good. Here follows three reasons why managers should be careful not to place too much
trust in the numbers (Holmstrom and Milgrom, 1991).
For example, the performance targets may have been met, but only because attention has
been so focused on the performance targets that unacceptably poor performance has
occurred in areas where performance is not measured. Employees will focus on the
activities they are rewarded for and ignore the others – so you must be careful to reward
the right things. The following example makes the problem clear: “In the US, “report cards”
provide data on the performance of cardiac surgeons and cardiac wards. A study found a
most unwelcome consequence: doctors resisted operating on the severely ill and favoured
surgery for patients who might not even need it. A healthy patient is a strong candidate to
thrive after heart surgery, no?” (Harford, 2014).
Or, performance targets may have been met but in principle only. For example, a bus driver
may be rewarded for being on time but have driven too fast and not stopped for
passengers. Or managers meeting budget constraints by scrimping on training and
development for staff, leading to high staff turnover that is then costly for the company to
deal with. (see more great examples of hitting the target but missing the point here).
Or, there may have been a failure to meet the performance targets, but this has been
concealed in strategic manipulation of data. For example, exploiting definitional ambiguity,
or fabricating data. You may work in a fast food restaurant and have a target for returning
customers. If a customer ‘returns’ to the till after they have eaten their burgers to order and
pay for ice cream, they are a returning customer only in the loosest sense of the definition –
but if you chose to count it, your performance would certainly look better.
Consequently, even if a manager thinks they are looking at data which tells them that their
team has met their targets, they cannot fully trust this. Good practice would drive them to
consider whether there is likely to be anything about the numbers which should be
questioned. Good practice would also tell them to seek further information – ideally
qualitative – to confirm what the numbers seem to be telling them (Harford, 2021).
Conclusion
There are thus significant problems with performance measures which managers need to be
aware of. Some of these can be solved by combining performance measures that are very
different, so that the business can see itself from a range of perspectives and thus gain a
more nuanced insight into its performance. Even then, the performance measures can still
individually, and in combination, be exploited and gamed, as well as reducing in
effectiveness over time. For example, the balanced scorecard argues that by combining
performance measures underneath a common bottom line, one achieves control. However,
all performance measurement approaches set targets for managers, and they can be
distorted so that the overall aim of the measure is not being achieved, or be subject to
'running down'. It is constantly challenging for managers to overcome performance
measurement problems.
5 The Balanced Scorecard
5.1 The Balanced Scorecard
The Balanced Scorecard
When commentators look at firm performance, they are often critical of the short-termism
that companies often adopt. looking at performance management and measurement, It is
often suggested that organisations assess performance on too much of a financial short-
term basis.
Short-term financial goals (such as ROI and RI) may encourage short-term behaviour such as
cutting training costs to achieve higher profit. Divisional managers may also ignore strategic
goals and manipulate accounting data all with the aim of achieving their yearly targets.
The balanced scorecard approach aims to address these problems with a longer-term and
broader approach to performance evaluation, when compared to some traditional financial
models. Financial measures still exist within the balanced scorecard approach but this
appears alongside other non-financial performance indicators such as innovation and
learning (see Kaplan and Atkinson, 1998, pp.367–80).
1. The Balanced Scorecard
1.1. Building a balanced scorecard
The balanced scorecard is built around four perspectives which have a long-term emphasis
(Kaplan and Norton, 1992).
• Customer perspective
How can we create value for customers so they have a reason for using our
organisation?
This could be anything a customer might care about for example:
functionality, price, quality, delivery times, after care, relationship building
A divisional company such as Starbucks may want their regional managers to consider the
look and feel of their stores and how this can be improved so customers feel welcome. An
indicator might be how often customers return, or their loyalty to the business. Another
indicator might evaluate how many new customers have been through the doors this
month.
• Internal
How can we improve the internal processes in our organisation to make them more
efficient? This may include use of new technology, and may extend beyond the
delivery point to include post-sales service support, for example.
• Starbucks may want to consider how drinks are produced and how orders are taken
so quality drinks can be produced more quickly for waiting customer. The Balanced
Scorecard indicators can be linked to rewards. For example, divisional managers may
be rewarded if improvements to a process can be successfully implemented.
• Innovation and learning
Are our staff being properly trained and supported to deliver and excellent service
for our customers?
•
o Includes human capital, infrastructure, technology and organisational culture

o Indicators include employee satisfaction and measurement of training
activities (both external courses and internal knowledge sharing)
o Does existing technology and culture support learning and growth?
• Starbucks will have a set training programme that all staff will go through – a
divisional manager could be assessed on how many of their staff has completed the
required training. If one of the Starbucks coffee shops finds a new more efficiency
and reliable way to deliver high quality food or drink to customers, technology can
be used to share this knowledge with other branch managers. It is important that the
culture supports improvement implementation. Some organisations have problems
with staff who resist changes that are 'not invented here' or staff may say 'we have
always done it this way, and our customers like it'. Indicators will link to internal
process views, with ability to use the financial perspective from different areas to
identify branches that are not performing as well as others.
• Financial (stakeholder perspective)
Are we creating long-term shareholder wealth? The balanced scorecard will
emphasise long-term financial growth – a loss or reduction in profit in one year is
acceptable if there is a clear pathway to long-term profit growth.
•Important to note that accounting data is not overlooked – financial information
remains important
•Organisations can choose which accounting/financial data to include within the
scorecard
•It is possible to include ROI, or other standard accounting measures within the
Scorecard
• Starbuck could have a range of long-term financial indicators such as revenue, profit
and cash growth.
The scorecard has been designed to balance decision making by focusing on the
interrelationship between the differing competitive pressures facing the organisation and
stimulating continuous improvement. This will benefit the organisational managers because
they can ensure the organisation will survive and be profitable in the long-term. It will also
provide them with a clear monitoring and control system to achieve this. This will also
benefit divisional managers as they will have time to improve the business, take risks and
make investments without having to achieve short-term goals
•Companies can add further dimensions of their own linked to strategic aims
•For example the Veolia performance wheel reflects their aim to be a sustainable recycling
company
Illustration
To illustrate further what a balanced scorecard looks like, we will use the example of South
West Trains. The organisational manager would set up the following balanced scorecard for
a divisional manager (maybe looking after a particular train route):
Customers:
• % trains running on time/cancelled

• Number of trains running per hour between destinations - especially at peak times
• Cleanliness levels
• Seat availability
Internal:
• Staff attendance rates

• Number of customer training days per annum per staff member
• Average time taken to process ticket enquiries/applications
• % of trains in full working order
• % of trains delivering to advertised timetable, levels of refreshment etc
Innovation and learning:
• Investment in new rolling inventory

• Investment in extra passenger facilities (e.g. internet onboard)
• Number of staff trained in relation to new equipment or facilities
Financial:
• Profit levels
• Revenue growth %
• Revenues by activity (e.g. tickets, refreshments etc)
• Cost control vs. budgets
• % of overall journeys taken by South West Trains.
As can be seen from the above a divisional manager has a broad range of targets that will
encourage a variety of different behaviours – not just financially focused. Even though many
of the targets are non-financial they are often still quantitative; this will allow the
organisational managers to objectively assess performance.
The 4 perspectives of a standard Scorecard (Kaplan & Norton)
5.2 The Explainer: The Balanced Scorecard (HBR)
A good overview of what is included in a BSC, with examples
https://hbr.org/video/3633937148001/the-explainer-the-balanced-scorecard
5.3 Building a Balanced Scorecard
Building a balanced scorecard
This study provides a contrast to the use of measures by South West Trains, in which
indicators are focussed on operational performance. SMRT extends the use of the Scorecard
beyond day-to-day performance monitoring to support long-term aims of the organisation.
The aim is provide you with a broad view of possible options for measures that can be used
in a balanced scorecard, before you have a go at designing one yourself.
• Case Study: Singapore Mass Rapid Transit use of Balanced Scorecard

SMRT Corporation Ltd (SMRT) is a public transport service provider. Our primary
business is to manage and operate train services on the North-South Line, the East-
West Line, the Circle Line, the new Thomson-East Coast Line and the Bukit Panjang
Light Rail Transit. This is complemented by our bus, taxi and private hire vehicle
services.
We have set our core values to be Integrity, Service and Safety, and Excellence. SMRT
is committed to provide safe, reliable and comfortable service for our commuters.
Vision
Moving People, Enhancing Lives
Source: https://www.smrt.com.sg/About-SMRT/Our-Identity
You might want to go to Tripadvisor to see what their customers are saying about them -
this is another useful way for companies to access data that can be used in a balanced
scorecard
A study by Rahman and Chin (see reading list) illustrates how SMRT adopted use of the
Balanced Scorecard and the material that follows summarises some key points from the
study. The following provides a selection of the indicators used to measure performance.
Customer Perspective
Themes Example Indicators

User satisfaction & social ·Accessibility, connectivity & travel
coherence time
·Affordability
·Level of service & comfort
·Safety enhancement
Environmental protection ·Impact on local air pollution
·Noise control
·Sustainable waste management
Social coherence includes the provision of transport facilities that are desirable and
beneficial as well as affordable for the commuters. The vision is to develop a more people-
centred transportation system, focussing on integration of services, for example buses from
residential areas linking to MRT stations. Affordability focuses on developing an equitable
fare structure based on distance travelled, regardless of the number of transfers made on
the journey. The measures selected make managers think about what is considered
equitable, for example, to support their overall aims. For example, customer feedback on
levels of service and comfort are reviewed, and have been seen to improve over time.
The selected measures enable a focus on things that matter to the customer, and facilitate
improvements. For example, safety enhancement initiatives undertaken cover a wide range
of schemes including motorcycle safety, pedestrian safety, identification and improvement
of black spot locations, installation of crash cushions at high-risk locations to reduce injury
severity, ‘Enhanced School Zone’ design to improve traffic safety around schools and
installation of real-time speed display signs.
The meaning of environmental protection is broad, as the example measure illustrate. Air
pollution and disposal of waste are easily identified as environmental concerns for which
the use of metrics can improve outcomes. However, we may not identify noise pollution as
a key concern, unless we lived near a bus station, for example. Singapore has set the noise
limit for residential apartments as 55-65 decibel (dBA) range. The noise levels near the MRT
stations are higher. According to LTA, at that time the train noise was within 80-85 decibels.
As more trains-trips are added to MRT lines, the noise level increases near MRT stations,
with SMRT receiving complaints from residents.
Overall, the identified indicators illustrate a need to understand what is important to your
customers, in order to develop appropriate measures.
Financial Perspective

Revenue & economic ·Revenue enhancement
enhancement
·Management of mobility and travel
demand
Effective cost management ·Efficient cost distribution and cost control
·External cost savings
Revenues from urban transport are generated in the form of taxes and toll roads, but these
go to government, so are not entirely dedicated to SMRT revenue. For example, to purchase
a vehicle in Singapore, owners pay a hefty sum comprising import duties, registration fees
and a Certificate of Entitlement (COE). The balanced scorecard can help management
identify areas for revenue enhancement, and to justify additional expenditures linked to
other areas, such as noise reduction.
Urban mobility is a key component of economic development, and travel demand has
increased over time. Singapore’s housing estates are developed in a way that includes their
own shopping centres, food courts and easy connection to nearest regional centres, aiming
to reduce both number and length of motorised travel. This shows how for a transport
provider the actions of a key stakeholder (government) can be important. Organisations
may try to influence such stakeholders, and use of data, such as the Balanced Scorecard, can
be persuasive.
Cost management can often be associated with internal cost-cutting rather than
experimenting with innovative services solutions. As an example of cost-saving innovations,
bus operators invest in fleet management systems which enhance the efficiency of
operations to reduce cost reducing the effort to achieve service efficiency.
External costs include accidents to users. Singapore government’s initiatives to improve

road safety majorly include identification and improvement of black spot locations,
installation of crash cushions at high-risk locations to reduce injury severity, ‘Enhanced
School Zone’ design to improve traffic safety around schools, increasing motorcycle and
pedestrian safety, installation of real-time speed display signs, installation of Platform
Screen Doors at MRT stations above the ground to promote safety of commuters. Again, the
close relationship with government is evident in actions taken to address these type of
costs.
Process Perspective

Management of transport ·Promotion of public transport
modes
·Facilitation of non-motorised
transport
·Integration among passenger modes
·Promotion of car sharing

Deployment of Smart ·Electronic fare collection
Technologies
·Electronic road pricing
·Advanced traveller information
Recent policies to improve and promote bus services include peak hour bus lanes, full day
bus lanes, priority at signalized junctions, and mandatory give way to exiting buses from bus
bays.
In order to encourage commuters to cycle from housing estates to public transport nodes
currently most of the MRT stations and bus interchanges are equipped with bicycle parking
facilities. MRT and buses now also allow foldable bicycles on board during off-peak periods.
To ensure more seamless and convenient for commuters, there has been a deliberate move
towards integrating rail and bus services through coordinating network, physical facilities,
fares, information and time- scheduling and enhancing accessibility and interconnectivity.
MRT stations are closely linked to bus stations through well designed walkways for the
convenience of commuters.
Car sharing is beneficial for reducing congestion and pollution, as well as social and
economic perspectives. For a city state country like Singapore, a good public transport
coupled with effective car sharing practices can be a long-term sustainable move for urban
transport. Some mass traffic generators, e.g., shopping malls, commercial complexes,
schools etc. also have their own shuttle services to be used for shared transportation
purpose of clients and students. There is a need to further enhance the culture of car
sharing practices through government planning, initiatives and subsidization
Smart fare collection increases the efficiency and accuracy of transport transactions and
enhances commuter travel experience. Smart technologies include not only public
transportation on-board and off-board fare payment, but also parking charge payments.
All MRT stations are equipped with video surveillance systems, smart ticketing systems and
electronic display of real time train arrival information. Traffic signals are fully automated.
Learning & Growth Perspective

User behaviour, feedback • Awareness & Education
and adaptation • Public participation
Research & Innovation • New innovations &

practices
The objective of the learning and growth perspective is to identify the areas the of internal
process perspective that need further update, improvement and enhancement through the
practice of managing user behaviour, ensuring user participation and feedback and adapting
with dynamic changes and needs as well as conducting cutting-edge research and
innovation.
Awareness building mainly involves environment, safety and security and sustainable traffic
attitudes. The necessary awareness is often deployed through web portals, information
booklets, consultation and education, on-station and on-board displays etc. In order to build
environmental awareness, LTA and NEA work closely with other partners to educate fleet
operators and vehicle owners on causes of excessive emissions and other environmental
issues [76]. To raise safety awareness, Traffic Police organizes various safety and education
campaigns.
In raising security awareness among commuters PTSC broadcasts on-board videos regarding
potential security risks in MRT services and raises commuter vigilance and security
awareness. Information on potential security hazards and effective reporting are also
written inside public buses that attracts commuter attention. Equipped with a simulated
train station, a theatre, multimedia stations and other innovative gadgets the LTA Gallery
also provides awareness among commuters on sustainable traffic attitudes.
Community relations departments and feedback units are established and public meetings
are hold to explain and advocate policy and to engage in focus group discussions. Engaging
the community to transport decisions is one of the government’s priorities
The Balanced Scorecard provides a holistic assessment framework for different aspects of
sustainability to identify strengths and weaknesses, enabling action to improve.
Activity
Think about a company you are interested in.
Build your own Balanced Scorecard:
• Using the standard four categories, can you identify a suitable measure to use for
each?
• How would data be gathered
• How could data be used by managers?
• Do you think any additional categories would be relevant for the type of organisation
you have chosen?
Prepare your outline Balance Scorecard, and thoughts about how it would be implemented
and used to the Live session, where these ideas will be discussed.
5.4 Additional Resource: Tesco KPIs
Tesco has been using a balanced scorecard for almost 20 years
The old balanced scorecard, internally branded as the Steering Wheel, was too complex for
staff to handle, with more than 40 different metrics
Launched “The Big Six”, a new set of principles more focused for staff
Visit this resource to see an example of a much reduced set of metrics, derived from a more
complex set of Balanced Scorecard measures.
The chosen measures are still a combination of financial and non-financial, following the
BSC approach:
1. Sales
2. Profit
3. Cash flow
4. Customers recommend us and come back time and again
5. Colleagues recommend us as a great place to work and shop
6. We build trusted partnerships
5.5 Case study - Singapore Mass Rapid Transit (SMRT)
• Case Study: Singapore Mass Rapid Transit use of Balanced Scorecard
SMRT Corporation Ltd (SMRT) is a public transport service provider. Our primary
business is to manage and operate train services on the North-South Line, the East-
West Line, the Circle Line, the new Thomson-East Coast Line and the Bukit Panjang
Light Rail Transit. This is complemented by our bus, taxi and private hire vehicle
services.
We have set our core values to be Integrity, Service and Safety, and Excellence. SMRT
is committed to provide safe, reliable and comfortable service for our commuters.
Vision
Moving People, Enhancing Lives
Source: https://www.smrt.com.sg/About-SMRT/Our-Identity
You might want to go to Tripadvisor to see what their customers are saying about them -
this is another useful way for companies to access data that can be used in a balanced
scorecard
A study by Rahman and Chin (see reading list) illustrates how SMRT adopted use of the
Balanced Scorecard and the material that follows summarises some key points from the
study. The following provides a selection of the indicators used to measure performance.
This study provides a contrast to the use of measures by South West Trains, in which
indicators are focussed on operational performance. SMRT extends the use of the Scorecard
beyond day-to-day performance monitoring to support long-term aims of the organisation.
Customer Perspective

User satisfaction & social ·Accessibility, connectivity & travel
coherence time
·Affordability
·Level of service & comfort
·Safety enhancement
Environmental protection ·Impact on local air pollution
·Noise control
·Sustainable waste management

Social coherence includes the provision of transport facilities that are desirable and
beneficial as well as affordable for the commuters. The vision is to develop a more people-
centred transportation system, focussing on integration of services, for example buses from
residential areas linking to MRT stations. Affordability focuses on developing an equitable
fare structure based on distance travelled, regardless of the number of transfers made on
the journey. The measures selected make managers think about what is considered
equitable, for example, to support their overall aims. For example, customer feedback on
levels of service and comfort are reviewed, and have been seen to improve over time.
The selected measures enable a focus on things that matter to the customer, and facilitate
improvements. For example, safety enhancement initiatives undertaken cover a wide range
of schemes including motorcycle safety, pedestrian safety, identification and improvement
of black spot locations, installation of crash cushions at high-risk locations to reduce injury
severity, ‘Enhanced School Zone’ design to improve traffic safety around schools and
installation of real-time speed display signs.
The meaning of environmental protection is broad, as the example measure illustrate. Air
pollution and disposal of waste are easily identified as environmental concerns for which
the use of metrics can improve outcomes. However, we may not identify noise pollution as
a key concern, unless we lived near a bus station, for example. Singapore has set the noise
limit for residential apartments as 55-65 decibel (dBA) range. The noise levels near the MRT
stations are higher. According to LTA, at that time the train noise was within 80-85 decibels.
As more trains-trips are added to MRT lines, the noise level increases near MRT stations,
with SMRT receiving complaints from residents.
Overall, the identified indicators illustrate a need to understand what is important to your
customers, in order to develop appropriate measures.
Financial Perspective

Revenue & economic ·Revenue enhancement
enhancement
·Management of mobility and travel
demand
Effective cost management ·Efficient cost distribution and cost control
·External cost savings
Revenues from urban transport are generated in the form of taxes and toll roads, but these
go to government, so are not entirely dedicated to SMRT revenue. For example, to purchase
a vehicle in Singapore, owners pay a hefty sum comprising import duties, registration fees
and a Certificate of Entitlement (COE). The balanced scorecard can help management
identify areas for revenue enhancement, and to justify additional expenditures linked to
other areas, such as noise reduction.
Urban mobility is a key component of economic development, and travel demand has
increased over time. Singapore’s housing estates are developed in a way that includes their
own shopping centres, food courts and easy connection to nearest regional centres, aiming
to reduce both number and length of motorised travel. This shows how for a transport
provider the actions of a key stakeholder (government) can be important. Organisations
may try to influence such stakeholders, and use of data, such as the Balanced Scorecard, can
be persuasive.
Cost management can often be associated with internal cost-cutting rather than
experimenting with innovative services solutions. As an example of cost-saving innovations,
bus operators invest in fleet management systems which enhance the efficiency of
operations to reduce cost reducing the effort to achieve service efficiency.
External costs include accidents to users. Singapore government’s initiatives to improve

road safety majorly include identification and improvement of black spot locations,
installation of crash cushions at high-risk locations to reduce injury severity, ‘Enhanced
School Zone’ design to improve traffic safety around schools, increasing motorcycle and
pedestrian safety, installation of real-time speed display signs, installation of Platform
Screen Doors at MRT stations above the ground to promote safety of commuters. Again, the
close relationship with government is evident in actions taken to address these type of
costs.
Process Perspective

Management of transport ·Promotion of public transport
modes
·Facilitation of non-motorised
transport
·Integration among passenger modes
·Promotion of car sharing

Deployment of Smart ·Electronic fare collection
Technologies
·Electronic road pricing
·Advanced traveller information
Recent policies to improve and promote bus services include peak hour bus lanes, full day
bus lanes, priority at signalized junctions, and mandatory give way to exiting buses from bus
bays.
In order to encourage commuters to cycle from housing estates to public transport nodes
currently most of the MRT stations and bus interchanges are equipped with bicycle parking
facilities. MRT and buses now also allow foldable bicycles on board during off-peak periods.
To ensure more seamless and convenient for commuters, there has been a deliberate move
towards integrating rail and bus services through coordinating network, physical facilities,
fares, information and time- scheduling and enhancing accessibility and interconnectivity.
MRT stations are closely linked to bus stations through well designed walkways for the
convenience of commuters.
Car sharing is beneficial for reducing congestion and pollution, as well as social and
economic perspectives. For a city state country like Singapore, a good public transport
coupled with effective car sharing practices can be a long-term sustainable move for urban
transport. Some mass traffic generators, e.g., shopping malls, commercial complexes,
schools etc. also have their own shuttle services to be used for shared transportation
purpose of clients and students. There is a need to further enhance the culture of car
sharing practices through government planning, initiatives and subsidization
Smart fare collection increases the efficiency and accuracy of transport transactions and
enhances commuter travel experience. Smart technologies include not only public
transportation on-board and off-board fare payment, but also parking charge payments.
All MRT stations are equipped with video surveillance systems, smart ticketing systems and
electronic display of real time train arrival information. Traffic signals are fully automated.
Learning & Growth Perspective

User behaviour, feedback • Awareness & Education
and adaptation • Public participation
Research & Innovation • New innovations &

practices
The objective of the learning and growth perspective is to identify the areas the of internal
process perspective that need further update, improvement and enhancement through the
practice of managing user behaviour, ensuring user participation and feedback and adapting
with dynamic changes and needs as well as conducting cutting-edge research and
innovation.
Awareness building mainly involves environment, safety and security and sustainable traffic
attitudes. The necessary awareness is often deployed through web portals, information
booklets, consultation and education, on-station and on-board displays etc. In order to build
environmental awareness, LTA and NEA work closely with other partners to educate fleet
operators and vehicle owners on causes of excessive emissions and other environmental
issues [76]. To raise safety awareness, Traffic Police organizes various safety and education
campaigns.
In raising security awareness among commuters PTSC broadcasts on-board videos regarding
potential security risks in MRT services and raises commuter vigilance and security
awareness. Information on potential security hazards and effective reporting are also
written inside public buses that attracts commuter attention. Equipped with a simulated
train station, a theatre, multimedia stations and other innovative gadgets the LTA Gallery
also provides awareness among commuters on sustainable traffic attitudes.
Community relations departments and feedback units are established and public meetings
are hold to explain and advocate policy and to engage in focus group discussions. Engaging
the community to transport decisions is one of the government’s priorities
The Balanced Scorecard provides a holistic assessment framework for different aspects of
sustainability to identify strengths and weaknesses, enabling action to improve
Question 1
1. Choose one measure from each perspective and link it to SMRT’s goals. If it doesn’t
link well – what does that mean?
2. Choose 4 indicators and explain how they could improve performance, linking them
to the associated perspective
Question 2
Review the different themes identified in the case, can you identify three indicators that
relate to more than one theme or perspective?
Is that a problem?
Question 3 Reflection
Looking at the case overall, what impact would it have to stop using the BSC and rely only
on financial aspects impact on improvements for customers and employees?
• New innovations & practices

• Choose one measure from each perspective and link it to SMRT’s goals. If it doesn’t
link well – what does that mean?
• Choose 4 indicators and explain how they could improve performance, linking them
to the associated perspective
Question 3: Reflection
Looking at the case overall, what impact would it have to stop using the BSC and rely only
on financial aspects impact on improvements for customers and employees?
5.6 Develop a Balanced Scorecard for a company of your choice
Think about a company you are interested in.
Build your own Balanced Scorecard:
• Using the standard four categories, can you identify a suitable measure to use for
each?
• How would data be gathered
• How could data be used by managers?
• Do you think any additional categories would be relevant for the type of organisation
you have chosen?
Prepare your outline Balance Scorecard, and thoughts about how it would be implemented
and used to the Live session, where these ideas will be discussed.
5.7 Evaluation of the BSC
How Useful is the BSC
77 per cent of organisations report that their balanced scorecard is extremely or very useful
75 per cent of organisations use the balanced scorecard to influence business actions
Of the 64 per cent of organisations that have refreshed their balanced scorecard, the
majority – 71 per cent – did so during the previous 12 months
The balanced scorecard is used by both small and large organisations: 61 per cent of
respondents had less than 500 employees, and 9 per cent had over 10,000 employees
The BSC Is Widely Used in Different Sectors
You may find this link to example cases useful
Critical Evaluation of the Balanced Scorecard
Advantages
Encourages a long term approach by:
• Taking different stakeholders views into account

• Reporting data regularly, so managers can see trends and react more quickly to
changes
• Tailoring metrics to align with aims
Disadvantages
• Focusing on a particular metric could adversely impact on other areas of

performance
• Reporting is often not appropriate, linked to ability to control and take action;
metrics should only be shared with those who can use them
• Unable to compare tailored BSC metrics for different companies with each other
Summary
A combination of measures enables different stakeholder perspectives to be evaluated and

improved based on regular use of indicators
Widely used, in a diverse range of organisations
Measures may become less useful over time
Organisations can design their own BSC elements and include different measures linked to
aims (consequently measures are not comparable with other companies)
5.9 Robert Kaplan talking about the reasons underlying the BSC
https://www.youtube.com/watch?v=oNy8kupW8oI
6 Performance Measurement Quiz

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Block 1: Why Do We Need Management

1 Reading - essential and recommended

Reminder of the context:

The purpose of incentives is

Monitoring is a control mechanism Monitoring acts as a control Monitoring can

Contemporary studies of management continue to borrow from social sciences and

Two ways of conceptualizing management (Boddy, 2014)

To motivate is also about interaction, but it purposeful: it is focused on encouraging

• Developing people, including him/herself

Category Role Activity Example from a workspace

Informational Monitor Seek and receive Receive proposals from designers,

Disseminator Forward Share information with others to

Spokesperson Represent the unit Meet with designers to explore

Leader Direct and motivate Influence team to use new

Liaison Maintain links in Stay in touch with designers to

Decisional Entrepreneur Initiate new Offer tours to clients of the new

Disturbance Deal with crises, Deal with delay in building plan

Resource Decide who gets Divide up budget for new

Negotiator Represent unit Work with senior managers to

(Based on Mintzberg, 1973; 1990, and Boddy, 2014)

Likely to include activities from Drucker or Mintzberg:

May include Garvin

Motivating & Communicating

Developing people, including him/herself

5.1 What do managers do ?

Category Role Activity

Informational Monitor Seek and receive information, scan reports, maintain

Disseminator Forward information, send memos, make phone calls

Spokesperson Represent the unit to outsiders in speeches and

Interpersonal Figurehead Perform ceremonial and symbolic duties, receive

Leader Direct and motivate subordinates, train, advise,

Liaison Maintain links in and beyond the organsiation

Decisional Entrepreneur Initiate new projects, spot business development

Disturbance Deal with crises, take corrective action, resolve

Resource Decide who gets resources, as well as schedule,

Negotiator Represent unit during union negotiations, and defend

(Based on Mintzberg, 1973; 1990, and Boddy, 2014)

People doing the work

Of particular interest to organisations in the intervening decades has been developing

It also makes a useful contribution to our understanding of management more generally,

Peter Drucker: Father of Post-War Management Thinking. A clear summary of Drucker’s

Henry Mintzberg: Management Thinker. A clear summary of Mintzberg’s work, showing

Gilbreth in about 1916

3.1 Maslow’s hierarchy of needs

Hierarchy of Ways that Ways that they Implications for

Esteem Recognition, Approval of Recognise

Belongingness Relations with Acceptance by Build strong

Safety Safe work, job Freedom from Create a work

Physiological Basic salary, Food, oxygen, Ensure payment

Self- Opportunities for Opportunities for Finding ways to provide

Esteem Recognition, Hard to offer Actively look for

Belongingness Relations with Feeling dislocated Build in online coffee

Safety Safe work, job Job security Encourage people to talk

We can lay this out as follows:

(c.f. Huczynski and Buchanan, 2014)

5.1 Job Design

Skill variety Degree to which Management Burger flipper in a

Task identity Degree to which the Social media Assembly line

Task significance Degree to which the Nurse; teacher; Cleaner in a

Autonomy Degree to which the University lecturer; Waiter in a café;

Feedback Degree to which you Building site It is possible to

Providing shared services.

Reflection: Individual work